Back in January I covered the case of Internet Patents Corporation (PTNT, formerly INSW). Internet Patents, then known as InsWeb, had sold its operating business to Bankrate (RATE) in October for $65 million. The stock jumped some 42% on the news, drifted downward, and then rose another 8% on January 11th when the company announced a $5/share special dividend.
The question, as I noted in my earlier piece, was just how much cash PTNT would wind up with -- and how many shares would be outstanding, given the company's existing stock option plan. On Monday the company filed a 8-K with the SEC, updating its share count to 7.06 million, with 823,000 options still outstanding with an exercise price below $8.25. (The stock is trading at $8.09 Friday morning, as I write this.) It also promised an additional update "on or about" February 15th.
Thus, using the new share count and the pro forma balance sheet included in a previous 8-K, we can start to see that any potential upside to PTNT has likely been squeezed out by option exercise and Uncle Sam. PTNT has, on a pro forma basis (including the effect of the Bankrate sale, but excluding fourth quarter results), $70.2 million in current assets, nearly all in cash and short term investments. Subtract the company's $6.8 million in liabilities and the net cash balance comes to $63.4 million.
At the 7 million share count, the net cash balance comes out to just under $9/share. But, if we assume that the below-$8.25 options will still be exercised, share count increases to 7.88 million, and our net cash drops to $8.05 per share - below its current trading price.
The issue going forward is what type of business Internet Patents intends to run. In October, the company announced its future plans:
Following the closing, InsWeb will retain a portfolio of e-commerce and online insurance distribution patents, intends to focus its efforts on licensing its patent portfolio, and is expected to continue as a public company.
Should this come to pass, it means two things for PTNT shareholders: first, additional distributions are unlikely; and secondly, the company will burn cash in 2012 (as it did in the fourth quarter of 2011). In the most recent 10-Q, the company announced that it expected no revenue for the fourth quarter and "at least a portion" of 2012, until the licensing business gains traction.
How much cash will the company burn? It's hard to say. Most of the company's employees moved to Bankrate in conjunction with the asset sales, but three executives will still earn nearly $1 million combined in base salaries for 2012. Total expenses should still be low, but given that the company will have net cash in the range of $25 million after the special dividend, even a couple of million annually makes a difference. In even the best-case scenario, the cash burned in the five quarters from October 1, 2011 through the end of 2012 will likely equal to amount of cash realized from option exercise over the past few weeks.
The problem now with the PTNT story is that the margin of error is gone. Taxes from the sale -- surprisingly, given the company's hefty net operating loss carryforward (NOL) balance -- were $5 million, and it appears that final share count will be toward the high end of the expected range. Given the cash burn and the degree of difficulty involved in building the licensing business, the stock seems fairly valued. Come the ex-dividend date on Wednesday, PTNT will trade around $3.10 per share, with a market capitalization roughly equal to its net cash balance. There may also be some selling pressure on the thinly traded stock, as dividend capture traders and employee stock option holders cash out following the special payout. Given the lack of an established business, and the uncertainty in "monetizing" the company's five patents, a valuation equal to net cash seems reasonable. But "reasonable" doesn't appear to be enough.
(Thanks to reader Mark Geurts for pointing me to some of information in this piece.)