On August 21st, ParkerVision (NASDAQ:PRKR) announced that it had amended the patent infringement claim it filed on May 1, 2014 against Qualcomm (NASDAQ:QCOM) and HTC (OTC:HTCKF) to also include Samsung (OTC:SSNLF). ParkerVision's decision to add Samsung to the lawsuit was among the oddest actions we've seen in many years. A basic tenet of patent law is that the patentee can only collect royalties on its product once - a principle called Patent Exhaustion, or First Sale Doctrine. Hence, if a Qualcomm chip in a Samsung phone is found to infringe on a ParkerVision patent, ParkerVision can either collect a royalty from Qualcomm or a royalty from Samsung, but not from both. After all, ParkerVision's patented technology was only used once - in the manufacturing of the infringing chip. The sole benefit that ParkerVision would gain from suing Samsung as well as Qualcomm is that ParkerVision can prove direct infringement against both, rather than needing to prove indirect infringement against Qualcomm in order to collect a royalty from Qualcomm. While this benefit sounds nice, it is largely theoretical, because it would be a simple step for ParkerVision to collect royalties from handset manufacturers if it could prove that prior lawsuits found that the chips being used infringed on ParkerVision's patents.
While the upside of adding Samsung to its lawsuit is relatively limited for ParkerVision, the downside is significant: it likely destroys the licensing business that the company hoped to develop. ParkerVision has historically asserted that it would make money in two ways - first through consensual agreements in the form of component sales and licensing agreements, and second through litigation. Our prior articles have correctly predicted that ParkerVision would be unsuccessful in its litigation against Qualcomm. We now believe that adding Samsung to this new lawsuit has effectively shut off the other route to ParkerVision making money - that of consensual licensing. By suing Samsung, ParkerVision has sent the message to all technology companies that even taking a meeting with ParkerVision could land you in the defendant's chair.
By adding Samsung to its list of defendants, ParkerVision continues its practice of suing companies with which it had prior negotiations. We know from the first lawsuit that Qualcomm had met with ParkerVision to discuss a possible partnership. This negotiation fell through, and years later, Qualcomm found itself in the defendant's chair. HTC's relationship with ParkerVision is not quite as obvious to the casual observer. HTC Corporation was co-founded by Cher Wang. Cher Wang also happens to be the co-founder of VIA Technologies, which helped establish VIA Telecom. Starting in 2009, ParkerVision worked with VIA Telecom in trying to get ParkerVision's products out into the market place. As can be seen by the $0 in ParkerVision's revenue column, this collaboration never amounted to anything. In March 2013, there was a key change in the relationship between ParkerVision and VIA Telecom. This is outlined in ParkerVision's Q1 2013 10-Q, which states, "We have also devoted substantial resources to the development of RF products that interface with VIA Telecom Inc.'s ("VIA's") baseband processors. In March 2013, we entered into a development agreement with VIA for the development and support of drivers between VIA's baseband products and our RF chipsets and the ongoing support and maintenance of the custom interfaces between our products. We anticipate that we will pay VIA an aggregate of approximately $1.3 million under this agreement in 2013, provided that VIA meets all of the future development milestones specified in the agreement..." This statement exhibits how in March 2013, the new development deal called for ParkerVision to start paying VIA Telecom. This new relationship, which turns VIA from a partner into a vendor, likely makes ParkerVision more willing to alienate VIA Telecom. Evidence that the relationship with VIA Telecom has turned frosty since the lawsuit can be seen by looking at the conference call transcripts. Jeff Parker used to be very willing to speak about working with VIA Telecom. As recently as the Q1 2014 call, Jeff Parker said, "Our relationship with Via Telecom continues, and we are working together to complete the interface of our RF chipsets to their latest CDMA baseband processor, which appeals to the broader global market." ParkerVision seemingly made no reference to VIA Telecom in its second-quarter conference call, which is the first time in many quarters that VIA Telecom was not mentioned. It seems logical to conclude that the VIA Telecom relationship has been effectively destroyed since the filing of the lawsuit.
As of last week, Samsung has suffered a similar fate. While Jeff Parker never explicitly mentioned Samsung, Samsung's name has been mentioned as a potential customer in both conference calls, as well as in analyst reports. For instance, the following exchange took place on ParkerVision's Q3 2013 conference call.
"My second question, I am not sure if you are going to be able to answer this or not, but I might as well ask it, I was one of the ones that attended the entirety of trial and during trial it sounded like you had activity with both Samsung and Microsoft. I was wondering if you could give us any comments or details there?"
Jeff Parker replied:
"I can only say this. When I'm a witness on the witness stand, under oath and I am asked questions, I want to answer those absolutely truthfully. Outside the courtroom, I'm going to have to defer back to non-disclosure agreements we have in place and certainly respect those. I think all I can really say to you is if you were there and you heard a little bit about some of the conversations we're having with certain companies, that's a nice advantage. As I mentioned to you guys on this call, we are pursuing conversations with a number of companies. Michael, because you were there, you might have a little bit more visibility into who some of those are, but I can't really make further comments on that right now."
Jon Hickman at Ladenburg Thalman has mentioned Samsung in his reports on several occasions. For example, on October 25th, 2013, he wrote: "Additionally, deployment of its RF transceiver chip set with its OEM partner Samsung (SSNLF, $1,450.00, Not Rated) is likely in the very near-term." Likewise, on May 5th, 2014, he wrote: "Additionally, we are modeling for a modest amount of business from its partnership with Samsung and VIA Telecom to utilize ParkerVision's transmitter technology in mobile devices for the Asian market place." This was not the first time that Samsung was mentioned in this context in a Ladenburg Thalman report. Similar sentences appeared in Ladenburg Thalman reports that were issued on March 18th, 2014 and April 22nd, 2014. We find it hard to believe that either Michael Cohen or Jon Hickman picked Samsung to mention at random. Now that ParkerVision has made it clear that even meeting with it could result in a lawsuit, we cannot understand why anyone would even take a meeting with the company for a potential licensing deal.
When Samsung declined to license ParkerVision's technology, it demonstrated that companies are not going to simply pay ParkerVision to go away. On the Q2 2014 call, Jeff Parker said the reason why the lawsuit on May 1 was not served was because it was thinking about adding defendants. Was Samsung added as a defendant because it ultimately did not license anything from ParkerVision? It's certainly possible. It appears likely that ParkerVision went to Samsung and threatened to make Samsung a defendant in this lawsuit. It probably didn't take too long for Samsung to look at the evidence and determine that it had not infringed, and that rather than encourage patent trolls, it would take ParkerVision on in court.
Our current fair value for ParkerVision is $0.28 per share, which is almost 80% below the current price. This valuation is based on our estimate that ParkerVision ends the year with $13.8 million in cash. To get to $13.8 million in cash, we assume that ParkerVision burns $4 million in cash in both the third and the fourth quarter, approximately the same amount as it did in the second quarter. We then put a 2x multiple on the cash to get our valuation. However, it is important to note that the $4 million cash burn that we saw in the second quarter could represent a trough. The company is going to have much higher cash expenses going forward, due to escalating legal fees for the appeal in the first lawsuit. ParkerVision will also need to pay attorneys to fight the IPR filings by Dr. Mike Farmwald and RPX Corp. (NASDAQ:RPXC), and to litigate the most recent lawsuit against Qualcomm, HTC, and Samsung. We also expect a slew of new IPR filings from Qualcomm, HTC, and Samsung on the patents asserted in the second case that ParkerVision will need to defend itself against. Therefore, ParkerVision will likely need to raise cash again before filing its 10-K, so it can avoid having to put a going concern warning in its SEC filings. This will mean even further dilution for long-suffering shareholders.
Disclosure: The author is short PRKR.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.
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