Patent Properties' (PPRO) CEO Jonathan Ellenthal on Q2 2014 Results - Earnings Call Transcript

Aug.12.14 | About: Walker Innovation (WLKR)

Patent Properties, Inc. (PPRO) Q2 2014 Earnings Conference Call August 12, 2014 4:30 PM ET

Executives

Kara Jenny - Chief Financial Officer

Jonathan Ellenthal - Vice Chairman and Chief Executive Officer

Jay Walker - Executive Chairman and Lead Inventor

Analysts

Operator

Greetings and welcome to the Patent Properties, Incorporated second quarter 2014 earnings results. (Operator Instructions) I would now like to turn the conference over to your host today, Ms. Kara Jenny. Thank you. You may begin.

Kara Jenny

Thank you, and good afternoon. By now, everyone should have access to our earnings announcement, which we released prior to this call. These documents may also be found on our website at patentproperties.com.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements based on management's expectations, estimates and projections as of today. The forward-looking statements in our discussion are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict and which could cause actual results to differ materially from those expressed or implied in the forward-looking statements.

These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact the future operating results and financial condition of Patent Properties, Inc.

We disclaim any intentions or obligations to update or revise any forward looking statements, except to the extent required by applicable law. Also our discussion today may include references to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measure can be found on our website at patentproperties.com.

I would now like to introduce Jon Ellenthal, Vice Chairman and CEO of Patent Properties, Inc.

Jonathan Ellenthal

Thank you, Kara. Good afternoon, and welcome to our second quarter 2014 earnings conference call. I am here with our Executive Chairman, Jay Walker; and our new CFO, Kara Jenny, both of whom will participate in the call and be available for the Q&A portion of the call.

Jay and I will take a couple of minutes to discuss the latest on the United States Patent Utility and our recent patent enforcement efforts. Kara, will then take us briefly through the second quarter financials and will leave plenty of time for Q&A.

Since we last spoke to you in May, our work on United States Patent Utility and it's no fault licensing service continues to progress, and we remain on track to launch the utility in the fourth quarter of 2014.

Let me turn the call over to Jay, to remind everyone of the problem we're working to address.

Jay Walker

Thank you, Jon. The utility is designed to address a giant economic problem that freezes most patent owners and millions of American operating companies out of the patent licensing market. This is a problem that not only affects the non-participants in the market, but also limits the growth and competitiveness of the U.S. economy.

Simply stated, today we're stuck with a court-enabled licensing system that just doesn't scale efficiently. The transaction cost of having legal arguments about patents, a prerequisite for a licensing deal are simply too high for the vast majority of patent owners and operating companies to afford.

Patent owners struggle to generate a fair return on their investment and creating new ways to solve problems. And all but a few operating companies lack even a basic patent plan for their businesses. The consequences of a non-functioning patent licensing marketplace become even more problematic, as our economy completes its transformation from an industrial-age model that valued physical assets to an information-age economy that is driven by intangible assets, including patents.

The numbers are stark. According to published reports, 95% of patents fail to generate even a single dollar of licensing revenue. What's more, this lack of marketplace activity comes at a time when American businesses are under constant pressure to improve products and processes to compete in a global economy. The bottomline is American businesses dramatically underutilize IP access, and that huts everybody. Forrester Research estimates the total waste at $1 trillion every year.

The public launch of the United States Patent Utility will offer a new option, an easy and affordable way for patent owners and operating companies to make deals that leave both parties better off, without any of the arguments or lawsuits and related expenses that keep most entities out of today's market.

The utility is designed to balance the needs of all parties in a new bargain, one that is a 100% voluntary. No one will be legally compelled in anyway to participate. With the Utility, patent owners can receive their very first dollars of licensing revenue, while operating companies will be able subscribe to an entire package of patent benefits that will help them understand and reduce risk, tap into useful third-party solutions and keep tabs on competitors.

Now, I'll turn things back over to Jon.

Jonathan Ellenthal

Thanks Jay. I'll share some details on how the utility will work. Rather than assessing licensing prospects and litigation risk with expensive human experts, the utility will rely on a commercially scaleable standard of statistical probability to identify patents that have the most in common with a particular product line. Statistical relevance is a commercially rational substitute for a legal analysis for most parties, particularly those that are left out of today's market.

The Utility will use big data software and analytics to assess litigation risk, product-to-patent relevancy and patent-to-patent comparisons, and create a no-fault package of 100 to 500 patents that are statistically relevant to a company's product lines. This is a classic case of using technology to serve customers that could not be affordably served by human experts.

For one low monthly fee, subscribers will secure licenses to packages of statistically relevant patents, reduce financial exposure with legal fee warrantees that defray some of the cost of a legal defense in the event of a patent dispute, and improve decision making with fully customized information reports that help subscribers understand the risks and opportunities in their patent environment on an ongoing basis.

While pricing is still being finalized, we expect subscribers will be able to access the utility services for a low monthly fee between $1,000 and $2,000. Over time, we expect the utility will build an attractive, predictable, recurring revenue stream, as more and more companies see the clear benefits of subscribing to our services.

We believe a simple, voluntary and affordable system, like the utility will offer, will increase the number of patents that get licensed into our economy, where they can create commercial and social benefits for all parties. While we approach the launch of the utility, we have ramped up our visibility in the media. Jay has been front and center on CNBC, Bloomberg, Fox Business and other major media and was discussing the current issues in the IP space and building further awareness for our solution.

We also continue to meet with leaders in the IP industry and stakeholders across the system to build pre-launch support. We're eager for the utility's launch and we look forward to providing updates to our shareholders on future calls.

Moving on to our own patent portfolio. We are currently engaged in 23 litigations to enforce our patents. We continue to expect to file additional lawsuits over the next few months and identify potential licensees across multiple industries. As we have stressed on previous call, litigation activities play out over a long period of time and visibility is limited.

Over time, we expect to see revenue generated from current defendants, new defendants involving previously asserted patents and new defendants involving patents that have not yet been assertive. In addition, when the utility launches some of our patents, those that are not appropriate for legal enforcement will be listed in the utilities catalog, thereby making them eligible to receive revenue from no-fault licensing.

As I noted on our prior call, we continue to believe our IP has significant value and can be leveraged to create substantial long-term shareholder value. We have a strong history of creating IP value and we will remain flexible in terms of how we ultimately monetize our portfolio.

We have the capital and willingness to take any case to its ultimate outcome and core, though we remain open to settlements, licensing arrangements and asset sales, just as we've done in the past. In addition, we are willing to consider ways to convert existing defendants into supporters of the new licensing platform, if we determine doing so creates more long-term shareholder value.

Finally, I would be remised if I didn't officially welcome aboard our new CFO, Kara Jenny, who has been with us now for a couple of months. Kara has significant financial, operational, strategic and public company expertise, having previously spent over 13 years at Bluefly.com. We are thrilled to have her at Patent Properties and her addition only strengthens our overall management depth.

And now, I'll turn the call over to Kara, who will discuss our second quarter results.

Kara Jenny

Thanks Jon. I'll touch upon our second quarter results briefly. During the quarter, we could not generate any net revenue versus $200,000 of net revenue generated by licensing fees in the prior period. As we mentioned previously, revenue is expected to fluctuate from quarter-to-quarter based on resolutions to our enforcement actions, until we introduce our patent licensing assistant at which time we expect to start building more predictable recurring revenue.

Total operating expenses for the second quarter were $4.3 million versus $1 million in the prior-year period. Significant components of that are as follows. Other legal and consulting expenses for the second quarter of 2014 were $746,000 compared to $328,000 in the prior-year period, mainly attributable to the number of active patent infringement and licensing cases and the nature of the fee arrangements as compared to contingency basis.

We expect other legal and consulting expenses to continue to fluctuate period-to-period in connection with upcoming trial-base and our current and future patent development licensing and enforcement activities. Compensation and related benefits expense increased by $1.7 million for the period. The increase included $519,000 in connection with amounts accrued for severance, due to the company's former executive as well as $493,000 of non-cash stock-based compensation expense.

Professional fees increased by approximately $439,000. And software expenses increased by approximately $200,000 related to services provided to us in connection with the launch of the new utility. Net loss for the second quarter of 2014 was $4.2 million, and net loss of per share was $0.20. From a liquidity standpoint, as of June 30, 2014, we had $19.9 million in cash and working capital of $18 million and no outstanding debt on our balance sheet.

Now, I'll turn the call back over to Jon.

Jonathan Ellenthal

Thanks, Kara. To conclude, we are coming into the homestretch of development of utility and expect to launch in the fourth quarter. We believe the utility will provide an efficient and scalable way for owners and users to use previously frozen patents to improve products, create jobs and improve competitiveness.

For our shareholders, we expect the Patent Utility to generate predictable recurring revenue from our subscription-based pricing model. And we continue to believe that our own in-house creative portfolio has substantial long-term value.

We remain well-capitalized and have the flexibility necessary to execute our business plan. And monetize our portfolio of intellectual property. As we get that to launch, what we believe will be a game changing product for Patent Properties.

And with that, I thank you for your time. And would like to open up the call for Q&A. Operator?

Question-and-Answer Session

Operator

(Operator Instructions)

Jonathan Ellenthal

Since there are no questions, I would like to thank everybody for joining us today. And we look forward to sharing our third quarter results with you later in the year. Thank you.

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