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I have an interest incubators and ground floor private start-ups and public companies.
  • XG Technology - When The Perceived Intangible Becomes Tangible - Part II 5 comments
    May 30, 2014 12:13 AM | about stocks: XGTI, IDEA, VRNG, GSVC, SVVC

    Like the Space Shuttle, xG Technologies (NASDAQ:XGTI) is on the Launch Pad and have yet to start their main thrusters. Consider the following from Zacks Research:

    "A patent doesn't give an inventor the right to use his invention. Rather, it excludes others from making, using or selling the invention and thus provides two ways for the inventor to realize patent value. Pfizer decided to profit from the patent for Viagra by excluding all companies and creating a monopoly for what would become the fastest-selling drug ever. When Philips and Sony agreed on a compact disc technology standard and patented it, they profited by licensing the technology to other companies. Regardless of the way companies profit from patents, they are true assets to a company that represent real economic value.

    Intangible Assets

    You can see and touch tangible assets, such as a building or a piece of equipment. A patent, however, is intellectual property, also called an intangible asset. Other intangible assets include a company's brand, trademarks and copyrights. In 1975, intangible assets represented about 17 percent of the value of the Standard and Poor's 500 companies. In 2009, they accounted for more than 80 percent of the value of the S&P, according to Ocean Tomo, an intellectual capital investment bank.

    Monetizing Patents

    Many companies monetize their patent assets by licensing them to other companies, including competitors. Microsoft, for example, owns patents on technology included in a competing product -- the Android operating system. Each year, Microsoft earns more money from licenses on these patents than it earns from sales of its own Windows mobile operating system. However, companies sometimes have to rely on lawsuits to enforce their patents and collect license fees from companies that infringe upon the patents.

    Lack of Accounting Standards

    After Microsoft paid $1 billion in 2012 to purchase 800 patents from America Online, investors discovered the real value of AOL's patent assets and AOL's stock rose by 43 percent. Before the sale, investors weren't aware of the value of AOL's patents because accounting standards in the United States don't include the value of patents or other intangible assets on a company's balance sheet. Unless a patent was obtained through an acquisition, shareholders, potential investors and even board members and company executives might not be fully aware of the value of a company's patent portfolio.

    Value of a Patent

    Many factors are considered when estimating the value of a patent, including how important the patent is, the size of the market for related products and services, the number of years left in the patent and the number of other patented products and services in the same area. The most common method arrives at a patent's value from one of three economic analyses: the amount the company might pay for the patent if it didn't have it, the amount the company could get if it sold the patent or the amount of money the company expects the patent to bring in over its lifetime."

    Additional points regarding valuing patents, Bitcoin or start-ups as assets include:

    A key part of valuing a patent is to obtain a value of the invention in question. It does not make good business sense to obtain a patent on an invention that will not result in a suitable return for the inventor. Because patents are intangible assets, it is often difficult to assign a monetary value to them. The most common patent-valuation method is the economic-analysis method.

    Economic Analysis

    The economic-analysis valuation method has three approaches: cost, income and market.

    Cost Approach

    This approach states that a patent's value is the replacement cost - the amount that would be necessary to replace the protection right on the invention. The replacement cost of an item refers to the amount of money that would be paid, at the present time, to replace the item. If an inventor has an item that he or she has patented, the patent's value would be the amount of money required to replace that invention. A prospective client would not be willing to pay more for a patent than the amount he or she would have to pay to obtain an equivalent protection right.

    Income Approach

    This method looks to future cash flows in determining valuation. It states that a patent's value is the present value of the incremental cash flows or cost savings it will help provide. When a company or individual develops a product that has the potential to be patented, the underlying hope is that the patented product will cause an increase in sales, or at least be a cost-saving measure in the company. This approach states that the patent's value is the current cash value of these future benefits.

    Market Approach

    This methodology involves determining what a willing buyer would pay for similar property. In other words, the patent's value is the value of similar patents or patented products that have been sold and purchased before. Two things must be in place for this approach to be used for patent valuation:

    • Existence of an active market for the patent, or a similar one
    • Past transactions of comparable property

    Look for similar values for the following items when looking for comparable patents:

    • Industry characteristics
    • Market share or market share potential
    • Growth prospects

    Both businesses and investors must be able to account for a patent's value. After all, new inventions and innovations often keep companies on top. As intangible assets, patents present a challenge in terms of valuation, but they can be pivotal in determining a company's success."

    A company or individual might invest in what many consider and perceive to be "intangible" assets. These might include assets such as Bitcoin as an alternative currency, property, start-ups (as in the case of Y-combinator, Invent Ventures, Inc. (OTCQB:IDEA), Chancellor Group (OTCQB:CHAG) or BoostVC) or, in the case of xG Technology, patents potentially worth billions.

    In the case of companies such as xG Technology, Vringo (NASDAQ:VRNG), Spherix (NASDAQ:SPEX), Y-Combinator, Invent Ventures, Inc. (OTCQB:IDEA) or the Chancellor Group (OTCQB:CHAG), a single M&A offer, or path to IPO, can convert the perceived intangible asset of one of it's holdings, to the tangible, overnight. Hidden in the portfolios of some of these investment companies could be large billion dollar start-ups as we seen with GSV Capital Corp. (NASDAQ:GSVC), First Hand Technology Value Fund (NASDAQ:SVVC), Y-Combinator or BoostVC (which also heavily invests in Bitcoin and alternative currency start-ups). These companies remain acquisition targets and their value compounds if they have decent patent approaches and portfolios or hold large interest in alternative currencies. In the future we may see a lot of M&A activity as these companies vie for one another's patent portfolios due to identifying unique license-to-patent arbitrage opportunities.

    Disclosure: I am long XGTI.

    Additional disclosure: I'm also long Bitcoin

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Comments (5)
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  • MrDAx
    , contributor
    Comments (3) | Send Message
     
    Again the same thing, SPEX ended up in red , shares diluted , director resigned. This is the way all these patent companies are going to end
    30 May 2014, 08:46 AM Reply Like
  • piperjaff
    , contributor
    Comments (73) | Send Message
     
    Author’s reply » I recommend you cover your short position
    30 May 2014, 09:02 AM Reply Like
  • hancharou
    , contributor
    Comments (18) | Send Message
     
    Don't want to be a pumper.
    But IP for LTE worth holding for medium to long period.
    30 May 2014, 09:52 AM Reply Like
  • Roger California
    , contributor
    Comments (8) | Send Message
     
    xG's problem is that nobody thinks their IP is worth anything, in spite of xG telling us it's worth many many times their market cap.

     

    Perhaps they should make the Walnut Hill and Haxtun equipment (which they delivered six months ago) "meet certain technical specifications" so they no longer have to classify that revenue as deferred. If they did so, and actually demonstrated the performance they claim, they'd have the world pounding on their door.

     

    Can we expect them *ever* to bring this equipment up to snuff? Can we expect them to deliver on the rest of that $35 million backlog (some of which is going on two years old)? Or is this just more of the shenanigans of the last ten years?
    8 Jun 2014, 01:24 PM Reply Like
  • Medscape
    , contributor
    Comments (43) | Send Message
     
    How much of this did you copy from the 2009 Investopedia article "Patents Are Assets, So Learn How to Value Them"? Whole paragraphs appear to have been lifted verbatim.
    7 Nov 2014, 05:52 PM Reply Like
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