Marathon Patent Group, Inc. (NASDAQ:MARA)
Q4 2015 Results Earnings Conference Call
March 30, 2016, 4:30 PM ET
Jason Assad - Investor Relations
Doug Croxall - Chairman and Chief Executive Officer
Frank Knuettel - Chief Financial Officer
Michael Latimore - Northland Capital
William Gibson - ROTH Capital Partners
David Hoff - Private Investor
Joseph Pratt - Stifel Nicolaus
Hello and thank you for standing by. Welcome to the Marathon Patent Group’s Fourth Quarter and 2015 Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded.
At this time, I’d now like to turn the conference over to Jason Assad, Investor Relations with Marathon Patent Group. Please go ahead, sir.
Thank you, operator. Good afternoon and welcome to the Marathon Patent Group’s 2015 year-end results conference call. With us today are Marathon’s Founder and Chief Executive Officer, Doug Croxall; and Chief Financial Officer, Frank Knuettel.
Before I turn the call over to management, please remember that certain statements contained in this release are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements contained in this release relate to, among other things, the effect of the global economic downturn on technology companies, the ability to successfully develop licensing programs and attract new businesses, rapid technological change in relevant markets, changes in demand for current and future intellectual property rights, legislative, regulatory and competitive developments addressing licensing and enforcement of patents and/or intellectual property in general and general economic conditions.
They are generally identified by words such as believes, may, expects, anticipates, should and similar expressions. Readers should not place undue reliance on such forward-looking statements which are based upon the company’s beliefs and assumptions as of the date of this release. The company’s actual results could differ materially due to risk factors and other items described in more detail in the Risk Factors section of the company’s annual report filed with the SEC, copies of which may be obtained at SEC.gov.
Subsequent events and developments may cause these forward-looking statements to change. The company specifically disclaims any obligation or intention to update or revise these forward-looking statements as a result of changed events or circumstances that occur after the date of this release, except as required by applicable law.
In addition, certain of the financial information presented in this call references non-GAAP financial measures. The company’s earnings release which was issued this afternoon, and is available on the company’s website, presents reconciliations to the appropriate GAAP measure and an explanation of why the company believes such non-GAAP financial measures are useful to investors.
Finally, this conference is being webcast. The webcast link is available on the Investor Relations section of the website at www.marathonpg.com.
With that, it’s now my pleasure to turn over the call to Marathon’s Founder and CEO, Doug Croxall. Doug?
Thanks, Jason, and thank you everyone for joining us this afternoon to discuss Marathon Patent Group’s operating results for the fiscal year ended December 31, 2015. I will begin today’s call with an overview of the company’s performance and a review of our operational highlights. Frank Knuettel, our CFO, will follow by providing additional details on the company’s financial results. We will then open the call to your questions.
Most would agree that 2015 was a challenging year for patent licensing companies and Marathon was not immune to the effects this had on our operating environment. This reinforces my belief that the more challenging the operating environment, the more valuable our team become, having over 50 years of collective patent licensing experience.
As a testament to this, notwithstanding the difficult environment, loss of the patent infringement trial in June of 2015 and delays in some of our high profile cases, our year-over-year revenue fell only marginally. And importantly, we have a full docket of cases going into trial in 2016.
We ended 2015 with 329 patents across 19 portfolios, 16 of which were the subject of licensing campaign during the year. Currently, we have nine active licensing campaigns and as such they cover 14 distinct areas of technology. About half of these patents cover foreign jurisdictions.
Additionally, one very positive aspect to the headwinds in the industry is that prices for patent assets have softened, which we view as an opportunity. As an important part of our overall business strategy, we remain opportunistic [for potential] acquisitions.
We generated approximately $19 million of revenue in 2015, slightly down from approximately $21.4 million revenue in 2014. While we were highly confident we would better last year’s revenue, we had a number of last-minute matters that arose late in 2015 that affected some of the licensing negotiations. We concluded it was in the best interest of the company and shareholders to remain deliberate and allow additional time to finalize these license agreements.
We now have 15 portfolios that have generated revenue. Seven portfolios have generated net positive cash flow in excess of their cost to acquire and enforce the portfolio. Our revenue in 2015 was primarily generated without reliance on what we believe could be our largest revenue opportunities, all of which are either currently in trial or have trial dates set for later in 2016 or early 2017. These include trials in our Dynamic Advances, MedTech, TLI Communications, and Signal IP portfolio.
Earlier this week, we announced the launch of our IP commercialization platform which complements our existing patent licensing business. We were fortunate to partner with HP on our first portfolio company, 3D Nanocolor Corp. The IP exclusively licensed by 3D Nano is the result of years of research and development at HP and it is an advancement of HP’s leadership in microfluidic technology.
3D Nano is commercializing HP’s technology that targets the multi-billion dollar commercial smart glass and window market. The EK film technology is an optical switching film using electronically-charged ink that can be applied to glass surfaces to enable dynamic control of color and contrast. This novel disruptive technology can be applied to both new and existing windows, offering improved color options, energy savings and immediate switching response.
Importantly, manufacturing and production cost of 3D Nano EK film are substantially lower when compared to the current leading smart window technology. 3D Nano will be managed by Tim Koch and James Douvikas, two former HP senior engineering and business development leaders, who are both closely involved with the development of the technology while at HP. We intend to explore opportunities for 3D Nanocolor to grow this company as a standalone business that may in the future be spun off to our existing shareholders.
In summary, 2015 was a building year for Marathon. In just our third full year of operation and against a challenging environment, we made progress in advancing our largest revenue opportunity towards expected resolution in 2016, receiving many positive rulings, strengthening our cases along the way.
We have successfully built a robust highly scalable proprietary patent monetization platform that gives us the capability to manage multiple concurrent licensing campaigns. I believe this foundation provides us with the opportunity to become one of the world’s most successful patent acquisition and monetization company.
That concludes my prepared remarks. With that, I would now like to turn the call over to Frank, our CFO, for a detailed look at our year-end financial results.
Thanks, Doug. Revenue decreased by approximately $2.4 million or 11% to $19.0 million for the year ended December 31, 2015, compared to $21.4 million of revenue for the year ended December 31, 2014. The decrease in revenues in 2015 resulted from slower time to monetization of the company’s patent portfolios resulting from trial delays in a number of the company’s higher profile cases, an increase in IPR filings against the company’s patent and the absence of a single large license agreement as the company experienced in 2014.
Revenues from the five largest licenses accounted for approximately 62% of the company’s revenue for 2015 as compared to 2014 in which the five largest licenses accounted for approximately 88% of the company’s revenue. Substantially all of the revenue in 2015 was derived from the one-time issuance of nonrecurring, non-exclusive non-assignable licenses.
Direct cost of revenues in 2015 and 2014 amounted to $16.6 million and $11.8 million, respectively. For 2015, this represented an increase of $4.8 million or 41%. Direct cost of revenue includes contingent and non-contingent legal costs, technical and damages experts, and other legal and consulting fees, data management costs and other related expenses.
Direct costs of revenue for 2015 were higher than 2014 due to a fixed fee engagement agreement with a law firm that represented one of the company’s subsidiaries in two United States trials, an increase in enforcement activity in Germany and to a lesser extent France, and preparation for a significant number of trials in both the United States and Germany in 2016.
Other operating expenses increased 78% in 2015 to $28.2 million as compared to $15.8 million in 2014. These expenses primarily consisted of amortization of patents, general expenses, compensation to our officers, directors and employees, professional fees and consulting incurred in connection with the day to day operations of our business.
In addition, other operating expenses included an impairment of patent assets in the amount of $5.8 million in 2015, offset partially by an impairment of goodwill in the amount of $2.1 million in 2014.
For 2015, non-cash operating expenses were $20.8 million and represented almost 74% of total other operating expenses. For 2014, non-cash operating expenses were $11.0 million. The year-over-year increase primarily results from the increase in patent amortization expenses arising from the significant number of patents and patent portfolios we have added over the last 18 to 24 months as well as the $5.8 million patent impairment charge previously mentioned.
The remainder of the non-cash operating expenses consists primarily of equity-based compensation and consulting expenses and the loss in the impairment of goodwill also previously mentioned.
For the year ended December 31, 2015, net loss per common share on a non-GAAP basis was $0.48 per common share compared to net income per basic share on a non-GAAP basis of $0.36 for the year ended December 31, 2014 and net income per diluted common share on a non-GAAP basis of $0.29 for the year ended December 31, 2014. Our non-GAAP reconciliation removes noncash items, with the largest generally being patent amortization, which we believe is a more accurate indicator of our true profitability.
Before opening the call to your questions, I’d like to take a moment to touch on our balance sheet and cash flow for 2015. We ended the fourth quarter of 2015 with cash and cash equivalents in the amount of $2.6 million as compared to cash and cash equivalents in the amount of $5.1 million at December 31, 2014.
Additionally, during the fourth quarter of 2015, we reduced our total indebtedness by approximately $10.7 million relative to September 30, 2015. In 2014, we generated $4.5 million in cash from operations as compared to cash used from operations in the amount of $3.0 million in 2015. Cash used in investing totaled $7.9 million for 2014 compared to cash used in investing in the amount of $0.1 million in 2015.
Thank you for all of your attention. Operator, you may now open the call for questions.
[Operator Instructions] And our first question comes from the line of Mike Latimore from Northland Capital Markets.
On the IP commercialization strategy, can you just elaborate on that a little bit, just want to get a better sense of the synergy here, are you able to leverage some of your patent acquisition contacts to get interesting technologies in the door? And then how do you think about the – from a financial perspective, what are some of the parameters you looked at when you consider IP commercialization opportunity? Does it have to have revenue within a certain amount of time or [how accretive, that sort of thing] just a little bit more on the strategy there would be interesting.
We’re in a number of conversations with universities and corporations that have pretty significant R&D spend and oftentimes that R&D spend turns into commercial opportunities that stay within, for example, certain corporations. And oftentimes, it turns out that that R&D spend is going to generate the next billion dollar division, but it’s still something that we think is attractive.
So in our daily conversations with both patent sellers and with potential licensees, we explore those opportunities. Since our announcement on Monday, we’ve had a number of parties reach out to us to express their desire to work with us over the future. So we’ll continue to expand that kind of marketing initiative, if you will.
What we primarily look for in these commercial opportunities is something that is obviously supported with a heavy, strong IP strategy. Obviously, Frank nor I nor anyone else at the company are experts in Electro-kinetic Film technology. But thankfully, Tim and Jim who came from HP are. And so one of the things we look for is not just a good IP strategy, but a team that can actually develop that strategy and execute upon that strategy.
And obviously we’re looking for a lot of the same things that anybody would look for in these opportunities. Large market opportunity, low cost or some advantage over what might already exist in this space and obviously when you have a strong patent portfolio, you will be able to lock out any other entrants from your space, unless they are either buying the product or paying a license to use that product.
So we really view this – if you look at the lifecycle of a patent being 20 years, on the monetization, our traditional business, we’re usually buying patents that are about halfway through their lifecycle. In this business, we’ll be acquiring IP that is at the beginning of their lifecycle. And the rationale to that is that we’re not likely to buy portfolios in the monetization side of the business unless there are already products being made and sold, which is where the damages and the eventual licensing revenue is derived.
So in the commercialization part of the business, we’ll be buying assets at the onset of their lifecycle and hopefully we will be the only one in the market that is selling, making or using a product that is covered by this IP. So that’s kind of the front end strategy. And the back end strategy, look, we may see one great opportunity a year, we may see five in a single quarter. Our goal is not to deploy capital like a traditional venture capital firm is.
Because we have a level of expertise in the patent asset, we can quickly assess who else is out there, what other assets are out there that we think would need to be acquired or merged into our wholly owned sub. And at some point, we want that to be on its own whether it’s private or floated into a separate public vehicle. The board of that subsidiary will make that decision, but I want everyone to understand that we’re not going to deploy capital in the traditional sense that a VC firm does.
On the Dynamic Advances RPI trial is coming up, I believe there was some expert witness testimony that gave a potential damages range [supporting the expert witness]. If I recall, was that for just a specific time frame, didn’t cover the whole life of the patent or something like that, is that fair to say?
Yes. So there were two methodologies that were deployed which derived two different ranges and those ranges cover past damages. And that covers past damages from the time that our patent was incorporated into what I think was the iPhone 5, or maybe 4s. And it runs up into I think September of 2014, I believe or 2015 true up, from the beginning of the infringement period until the trial starts. And that does not obviously include any forward royalty rates or forward damages.
And just last on TLI and then on MedTech, if the processes that play out there I guess in your favor, but also under a normal kind of timeframe, could you see revenue from that litigation this year or would it be more likely 2017 for both TLI and MedTech?
I mean it’s hard to say, right, even if you – obviously if you win a trial, it doesn’t necessarily mean you’re going to get paid after that trial is concluded. So the parties have to come to an agreement on a reasonable license payment. So we’re really not – it’s really difficult to say whether it’s going to be this year or next year.
But typically, our experience has been that as you lead up to trial, usually that drives settlements and if you win a trial, and even in some cases when you lose a trial, it typically drives settlements right after that, right after that trial occurs. So I would say if you look at trials in early to the – the first half of 2016 tends, not always, but tends to drive revenue in that same kind of period, give or take a quarter. And trials that are set out in 2017, you should probably expect that revenue is driven closer to the trial date in that period.
And our next question comes from line of William Gibson from ROTH Capital Partners.
One of the things I noticed is in your Signal IP trials, four were dropped. So I assume there are potentially settlements there and does that lead to the likelihood of others being settled without going through the whole court process?
I’m not in the minds of the defendants or the attorneys for the defendant, but typically, look, and this is a unique situation, we had six defendants in what we call the Track 1 cases that are scheduled to start mid-April in the Central District of California. We still haven’t been given the sequencing of defendants, which defendant would go first. But if you’re – most of the defendants were hoping that they probably wouldn’t be first and now when you have fewer defendants, your probability obviously increases that you’re going to be first or second.
So I think the rule of thumb is that more parties settle, then go to trial and that rule of thumb certainly would apply here. What effect it has, it’s hard for me to tell you without giving you information that I simply can’t give you, but I think the rule of thumb probably applies.
I guess one of my main questions is and I know you won’t be able answer it, but I’m going to ask it anyway, the probability of a settlement in Dynamic Advances versus battling it through the court system?
As we say to most defendants, the decision to settle is really theirs. We put what we think is a reasonable set of terms on the table and if it meets their expectations and we usually seek settlement. Obviously, Bill, you’re right, I cannot answer that question; I couldn’t handicap it even if I had a crystal ball. But when you’re this close to trial, you tend to get to trial. But I just can’t – I can’t tell you. I just don’t know what the other side is thinking.
In terms of your debt obligations, it’s probably a Frank question, what’s the cash payout this year, can you share that? Or expect to cash payout?
We’ve not disclosed that. But we have two primary outstanding obligations. One is the obligation to Fortress, which has a principal balance of just a bit over $20 million and which is now amortizing over, effectively at this point, the next 27 months, [started] amortizing in January on a 30-month basis.
And then the other component is a couple of million dollars, just under $3 million of acquisition debt related to the MedTech portfolios, which is due prior to October and has certain accelerators contained in it based on revenue from various portfolios. So I can tell you that the MedTech acquisition debt will be paid off, approximately 35% or 40% of the principal balance of the Fortress debt will also be amortized this year.
Our next question comes from the line of [David Hoff], private investor.
Two quick questions. I’m just trying to get an idea of acquisitions. Looking more to do a deal like HP, which is more of a commercialization, are you still looking for patents and patent portfolios and kind of an idea what exactly you’re looking for?
We get lots of opportunities on a monthly, quarterly basis. We’re not actively searching for commercialization opportunities per se; a lot of those come just through conversations on acquiring patents for monetization, that’s exactly how we got the 3D Nano asset. So we are definitely in the market to acquire and continue to add to our existing asset base for monetization purposes.
And when and if other commercialization opportunities come up, we’ll put it through the same process that we did 3D Nanocolor. So we’re in the market; we’re constantly making offers, sometimes our offers are accepted and sometimes they’re not. We’re very, as we’ve always been, price sensitive.
And maybe this is not specifically your question, David, but we get a lot of times, do you think that the market is turning, do you think that the pendulum is “swinging back the other way.” And I will say this that the more challenging the environment is, the more you are a price setter when acquiring these assets as opposed to a price taker.
So we see a lot of opportunities. And if the expectation from the seller meets our expectations, then we will definitely move on those assets. So we’re in the market. We’re constantly looking and we hope to have some announcements in the near future.
Portfolios you are looking at, are you looking at a mix that has litigation outstanding or kind of starting from scratch? You know, basically what I see is the current portfolios are kind of hitting the end of, I would say, their lifecycle, I know you could probably file against additional defendants, but the process has to be restarted and you really can’t have a one or two-year process where you’re not even in claim construction, you’re fighting the IPR battle.
I hear you. So we’ve always been pretty good at acquiring a diversified portfolio, so both US and foreign assets, both assets that are in different technology fields with different revenue characteristics and frankly assets that are at different stages of their own lifecycle.
So we’re very keenly aware that we’ve done quite a bit of licensing in the existing portfolio. We do have what we think is still ways to go with a lot of our portfolios on licensees that we have not approached yet. And a lot of the assets that we’re looking at, some are what I would call Greenfield never been licensed and some are in fact already in different – in various stages of the litigation or licensing lifecycle.
[Operator Instructions] Our next question comes from the line of Joe Pratt from Stifel.
I just want to make sure somewhere in some blogs that was posted that you’d had four the Signal settlements, is that correct?
We have dismissed or told the court we were in the process of settling and dismissing with four Signal defendants. That is correct.
And how many more Signal defendants are there?
I believe there are six. Two more in what we call – actually three in what we call Track 1 in Central District of California, those cases are to start in mid-April. And then there will be another case on the second defendant about 60 days when that case, first case concludes. And then the third and final defendant in Track 1 will go 60 days after the second case.
And then we have two defendants in what we call Track 2 Central District of California, Hyundai and Toyota, and we have one defendant in Eastern District of Michigan and that’s Fiat Chrysler. And I believe Fiat Chrysler is scheduled to go to trial June of next year and the Toyota and the Hyundai case has been stayed pending final determination on the IPRs that we should get some time in October of this year.
And you never disclose how much of the settlement was for just in effect tickets punched in with the cash at the end of each quarterly SEC filing period?
Well, as you can imagine, we’re somewhat restricted by the defendant in what we can disclose through the settlement and license agreement. However, on a quarterly basis, we do disclose some of the larger settlements in the subsidiaries that those settlements came from. So there will be some level of disclosure in our Qs and K. But unfortunately we can’t say XY company settle for Z dollars on [this date]. We’re just simply not allowed to do that.
So currently you are in the process of settling those four, are there any other in the March quarter that are in the process of being settled?
Joe, I’d love to tell you that, but I simply can’t. Those are privileged and very confidential conversations. So as I tell everybody, we’re always open to discussions with defendants or potential licensees about licensing our patents and we keep our lines of communication open at all times.
There are no further questions at this time. I’d now like to turn the conference back over to management for any closing remarks.
Thank you everyone for dialing in and standing by the company. We’re very excited about 2016, very excited about our trial dates in April, May, June and the fall of this year. And look forward to our earnings call in mid-May. Thank you.
Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your time and participation. You may disconnect your lines at this time and have a wonderful rest of your day.
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