For many companies, patent lawsuits are a curse. For Spherix (NASDAQ: SPEX), they're a lifeblood.
Headquartered in Tysons Corner, VA, Spherix monetizes intellectual property (IP) through lawsuits and licensing revenue.
Spherix boasts a hefty portfolio of technology patents. Most of these patents were developed at Nortel Networks and Harris Corporation (NYSE: HRS), relating to industries such as wireless communications, pharmaceuticals, life sciences, and sports supplements.
This year, investors have been getting in line to profit from the lawsuit bonanza by purchasing shares in IP firms. Spherix is poised to reap huge financial windfalls - and experience a concomitant jump in its stock price - if judges go its way.
Spherix placed its biggest bet ever in March, when it filed a lawsuit against Cisco Systems (NASDAQ: CSCO) for the infringement of 11 patents Spherix acquired last year from Nortel, a bankrupt telecom.
Cisco is dominant in technologies that make the extended corporate enterprise possible; it's also a pioneer in creating computer defenses along the extended outreaches of these "virtual" empires.
With total revenue in fiscal 2013 of $48.6 billion, Cisco is one of the biggest suppliers of Internet-based networking products. The company's routers and switches are pervasive in offices, classrooms and government offices around the globe.
Spherix alleges that the patent infringement represented a "vast majority" of Cisco's more than $43 billion in sales of routers and switches in the United States over the five years ended July 27, 2013.
Representing Spherix in the Cisco litigation is the national law firm Cozen O'Connor, which employs a small army of 600 attorneys in about two dozen cities around the world.
If Spherix wins against Cisco, the victory would constitute a serious payday for Spherix and its shareholders.
The Digital Battlefield
In 2012, the United States Patent & Trademark Office estimated that the worth of intellectual property to the US economy is more than $5 trillion.
The brazen pirating of proprietary technology has reached epidemic proportions in the digital age, spawning a growing number of companies that legally lock up certain technologies with the intention of suing other companies that purposely (or inadvertently) infringe on their patents.
IP lawsuits are a battlefield, with often-mammoth sums at stake. According to the World Intellectual Property Organization, the annual global IP licensing market has mushroomed from $2.8 billion in 1970 to roughly $200 billion today.
Depending on the amount of money at risk, patent litigation ranges from a median cost of $650,000 to $5 million.
This trend is stoking fears that the proliferation of patent lawsuits is exerting a chilling effect on innovation and only serves to line the pockets of lawyers. Some critics use the pejorative term "patent troll" for companies such as Spherix. Nonetheless, IP litigation is now big business and it has graduated to the mainstream. Moreover, many inventors have come to value IP companies as commercialization platforms for their patented breakthroughs.
As it gears up for the fight, Spherix has more arrows in its quiver than just Cisco. As mentioned above, within Spherix's portfolio are several patents developed by Harris, an international communications and information technology company.
For its full fiscal year 2013, Harris generated revenue of $5.11 billion. The Harris patents cover radio frequency communications, integrated network solutions and government communications systems in the military and homeland security. These are all growing areas, as aerospace enjoys resurgence amid global recovery.
In March, Spherix also announced that it had acquired for $4 million a suite of patents in mobile communications from IP licensing company Rockstar Consortium. The patents cover a wide range of telecom and mobile devices.
Founded in 1967, Spherix now has a market cap of $11.6 million. The company still operates at a loss, but potential revenue from pending lawsuits and its growing portfolio of patents look highly promising.
in March, Spherix announced that it had closed a private placement of common stock and warrants that netted $4.4 million. With this working capital on hand, the company should have the wherewithal to further develop its portfolio and also pursue litigation to fruition.
The potential upside with this stock is great. Cisco has enormous coffers and a victory by Spherix would likely reap a substantial sum, immediately boosting the stock. But even if Spherix loses against Cisco, its other patents (notably those developed by tech giant Harris) are intrinsically valuable. What's more, the respective markets of Spherix's patents, such as telecommunications, continue to post fast growth.
The caveats shouldn't be ignored. Lawsuits are unpredictable, in length and cost; operating capital could run out; and rulings could go against Spherix. However, if you're an aggressive investor looking for a play on the IP litigation boom, this company is worth considering.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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