MARA Holdings Inc (MARA) 2014 Q4 法說會逐字稿

Greetings and welcome to the Marathon Patent Group fourth-quarter 2014 and year-end results conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Mr. Jason Assad, Investor Relations for Marathon. Thank you. Mr. Assad, you may now begin.

Thank you, Operator. Good afternoon and welcome to Marathon Patent Group's 2014 and 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 our prepared remarks responses to questions may contain forward-looking statements. Words such as may, will, expect, intend, plan, believe, seek, could, estimate, judgment, targeting, should, anticipate, goal, and variations of these words and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those implied by such forward-looking statements, due to a variety of factors including, but not limited to, the effect of the global economic downturn on technology companies, the ability to successfully develop licensing programs and attract new business, rapid technological change in relative markets, changes in demand for current future and intellectual property rights, and legislative regulatory and competitive developments, addressing licensing and enforcement of patents and/or intellectual property in general and general economic conditions.

Our Annual Report on Form 10-K, recent and forthcoming Quarterly Reports on Form 10-Q, recent current reports on Form 8-K, and 8-K amended, and other SEC filings discuss some of the potential risk factors that may affect our business, results of operations, and financial conditions.

We undertake no obligation to revise or update publicly any forward-looking statements for any reason, although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, they give no assurance that the expectations will be attained. The Company undertakes no obligation to update any forward-looking statements whether as a result of new information, future events, or otherwise.

In addition, certain 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 call is being webcast. The webcast is available at the Investor Relations section of our website at MarathonPatentGroup.com.

With that, it's now my pleasure to turn the call over 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 financial and operational results for the fiscal year ended 2014. I will begin today's call with an overview of the Company's performance and a review of our operational highlights. Frank, our CFO, will follow by providing additional details on the Company's financial results. We will then open up the call to your questions.

In 2014, we increased the number of patent assets and the number of licensing campaigns. We started 2014 with 118 patents across nine portfolios of which four were in active licensing campaigns. We ended 2014 with 378 patents across 19 portfolios, of which 16 are in active licensing campaigns. We continue to focus on building a diverse set of patent assets and now have assets that cover 14 distinct areas of technology, including approximately 49% of which are patents covering foreign jurisdictions.

We generated approximately $21.4 million of revenue in 2014, up from approximately $3.4 million revenue in 2013. We now have 12 portfolios and have generated revenue up from three in 2013. Of the portfolios that have generated revenue, six have generated a net positive return, which means those portfolios have returned capital in excess of the cost to acquire the assets and the cost to enforce the portfolio.

One of our primary objectives at Marathon is to maximize profitability. In 2014, the Company reported non-GAAP net income of approximately $4.2 million or $0.36 per common share versus a loss of approximately $300,000 or $0.03 per common share in 2013. These results demonstrate the operating leverage in our business model.

Our revenue in 2014 was generated without the benefit of major catalysts such as Markman hearings and trials. In 2014, Marathon subsidiaries had only two Markman hearings, no US trials, and two infringement trials in Germany. However, in 2015, we have already had three Markman hearings covering 31 defendants.

For the remainder of 2015, our subsidiaries have an additional seven Markman hearings, covering 25 defendants, along with three US trials covering six defendants and six German trials covering 12 defendants. We believe the current Markman trial schedule for 2015 has the potential to be a significant revenue catalyst for our Company.

In 2014, Marathon, through its wholly-owned operating subsidiaries, acquired nine portfolios totaling 260 patents and patent rights. In November, we further bolstered our team when we welcomed IP [Nav] veterans, Umesh Jani and Rick Sanchez. Umesh and Rick are both experienced IP intake and licensing specialists as they augment Marathon's ability to maximize the return on our expanding IP portfolio in an efficient and cost-effective manner.

We have also recently added two new members to the Board of Directors, Rich Chernikov and Dirk Tyler. Both Rich and Dirk have experience in intellectual property licensing and development, as well as experience in M&A and private equity investing.

Before concluding my prepared remarks, I want to quickly update you on Opus Patent Analysis platform, our proprietary IP analysis offering.

During Q3, we announced the commercial launch of Opus. We're excited about the opportunity to bring this valuable resource to the broader intellectual property and investment community, which we believe will also generate potential source of recurring revenue from Marathon.

In summary, I'm very pleased with Marathon's fiscal 2014 results. While it was by all accounts a good year, we believe our best days still lay ahead. We believe that we have successfully built a robust, highly scalable, proprietary patent monetization platform that gives us the capability to manage multiple concurrent licensing campaigns without substantial additions to our overhead. We believe that we have not only developed a foundation, upon which we can continue to grow for the remainder of 2015 and beyond, but also the wherewithal to become one of the most successful patent acquisition and monetization companies in the world.

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. As Doug mentioned earlier, the Company continued to aggressively expand its operations in 2014 with the commencement of additional enforcement actions and the acquisition of nine additional patent portfolios, raising the number of patents and patent rights to 378 as of December 31, 2014, from 118 as of December 31, 2013. These nine new portfolios span a broad array of technologies and end markets.

With the increased scope of the Company's business, revenue increased by approximately $18 million or 526% to $21.4 million in the year ended December 31, 2014, compared to $3.4 million revenue for the year ended December 31, 2013. The increase in revenues in 2014 versus 2013 resulted from existing patent portfolios reaching more advanced stages of enforcement, as well as an increasing number of patent portfolios acquired that were already being enforced or with which we commenced enforcement campaigns shortly after acquisition.

Revenues from five licenses from five different subsidiaries of the Company accounted for approximately 88% of the Company's revenue for the year ended December 31, 2014, versus five licenses all from the same Company subsidiary accounting for approximately 62% of the revenue for the year ended December 31, 2013. Substantially, all the revenue in 2014 was derived from the one-time issuance of nonrecurring, nonexclusive, nonassignable licenses.

Direct cost of revenue for the year ended December 31, 2014 and December 31, 2013 amounted to $11.7 million and $1.0 million, respectively. For the year ended December 31, 2014, this represented an increase of $10.8 million or 1,132%. Direct costs of revenue include contingent legal fees, noncontingent legal fees, costs associated with patent enforcement and licensing advisors, and in some cases contingent payments of sellers of patents we have acquired. Other operating expenses of $15.8 million and $6.2 million for the years ended December 31, 2014, and December 31, 2013 respectively.

This represented an increase of $9.7 million or 158% in 2014 versus 2013. These expenses primarily consisted of amortization of patents, compensation to our officers, directors, and employees; professional fees and consulting fees, and general overhead incurred in connection with the day-to-day operation of our business.

In addition, it also included costs related to the impairment of goodwill -- in this case the impairment in the third quarter of the goodwill associated with Cyberfone, one of our oldest portfolios. Operating expenses for the years ended December 31, 2014 and December 31, 2013 included non-cash operating expenses totaling $11.0 million and $3.2 million, respectively.

In 2014, more than half of the non-cash operating expenses related to patent amortization expenses. This increased results from the significant number of patents and patent portfolios we have added in 2014, during which the Company acquired ownership of or contractual rights to nine patent portfolios. The remainder of the non-cash operating expenses consists primarily of equity-based compensation and consulting expenses and the loss of the impairment of goodwill previously mentioned.

For the year ended December 31, 2014, net income per common share on a non-GAAP basis was $0.36 per common share versus a non-GAAP loss of $0.03 per common share for the year ended December 31, 2013. The improvement in the non-GAAP earnings per common share can be attributed to a 526% growth in patent licensing revenue in 2014 versus 2013. Excluding direct costs of revenue, other cash operating expenses rose 63% from $3.0 million to $4.9 million in 2014.

Before opening the call to your questions, I would like to take a moment to explain our cash flows for 2014. We ended the year with cash and cash equivalents totaling $5.1 million as compared to $3.6 million at December 31, 2013. For the year ended December 31, 2014, we generated $4.5 million in cash from operations as compared to cash used in operations in the amount of $1.5 million for the year ended December 31, 2013. Cash used in investing totaled $7.9 million for 2014 compared to cash used in investing in the amount of $3.0 million in 2013. As mentioned previously, we acquired nine new portfolios during 2014 underlying almost all of the cash used for investment purposes.

We are very pleased to continue to generate sufficient cash to fund our current and working capital requirements. As of December 31, 2014, we had approximately $5.1 million of cash and cash equivalents compared to approximately $3.6 million at December 31, 2013. As of December 31, 2014, we had approximately 11.7 million weighted average basic shares outstanding.

Thank you all for your attention. Operator, you may now open the call for questions.

(Operator Instructions) Mike Latimore, Northland Capital Markets.

Yes, thanks a lot. Great year, you guys.

Thank you.

Just I guess a couple questions around some of your patents. I think a few of your patents are not in litigation yet. Should we assume that those eventually end up in litigation or are those following the path that maybe don't require litigation?

Not all the assets that we own will be used in licensing, whether that is through litigation or outside of litigation. So it's difficult -- I think we've got about 70 assets that are in different stages of litigation. So pretty much what you see that's in litigation is what we intend to have in litigation. There might be a few that we haven't used yet. But for the most part, the active assets are the active assets.

And then maybe could you give a little update on the Stryker process here? How do you see that playing out? What could be the final catalyst to reach a settlement, let's say?

Yes, so currently there is an injunction in Germany against Stryker and we are in constant conversations with all of our defendants about settlement. And I know that in mid-June, the nullity hearing which is the second trial essentially on validity is to occur. We've received the preliminary nonbinding opinion on both the 260 and the 765 patent, which we released a press release about a month ago on.

We are very, very bullish on the 260, which is the patent that we've actually enforced the injunction against Stryker. And I suspect that, as we get closer to that date, we should see some more activity.

Got it, okay. And then just any update on when you think there might be a trial in the Dynamic Advances and also are there summary judgment motions going on there as well?

Yes, so Dynamic Advances versus Apple, discoveries closed I think as of this past Sunday. We have a conference next Tuesday. I don't know if the judge is going to set the trial date at that point. He certainly could. Summary judgment motions will be heard most likely in May.

Okay. Good, thanks a lot. Good luck this year.

Jim McIlree, Chardan Capital.

Good afternoon, thanks. I'm trying to understand why there is a negative gross margin in Q4.

So, the way we do our expenses is that we recognize them at the time they are incurred and we acquired a couple of portfolios in the second half of the year that, unlike many of our portfolios, had fixed dollar fees associated with them and we recognized those in the fourth quarter.

Got it, okay. And then the Fortress $15 million, what was the use of that cash? Was it just sitting on the balance sheet now or have you retired some of the debt?

No, it's -- we haven't announced anything. We are working feverishly to get something completed. We had hoped to have it done before this call, so I would just ask everyone to be patient. And, obviously, if we're going to put a line in place and draw capital down, it's because we see a very good use for that money.

Okay, great. And then the receivable -- the $10 million receivables that you had at the end of Q3, I'm assuming that was collected. Part of it goes to the Clouding earn out and in the rest of it went where? I'm trying to figure that out as well.

So, yes, it was collected. And part of it went -- part of it was dedicated towards repayment of a portion of the Clouding earnout with the balance of it staying on the balance sheets for Marathon, and being used for both general corporate purposes and repayment of acquisition debt incurred in acquisition of numerous portfolios during the year.

Okay. Great. Thank you.

(Operator Instructions) Jon Hickman, Ladenburg Thalmann.

Hi. Thanks for taking my questions. Could you -- what's the fully diluted share count at the end of the quarter and the end of the year?

The fully diluted share count at the end of the quarter and at the end of the year is 13.9 million.

Okay, so since you reported profitable operations, why didn't you use fully -- why didn't you use that share count?

So we used the weighted average, which is a standard convention, and there's a sub convention for basic and fully diluted. In that we had a GAAP loss, there is no difference between basic and fully diluted on the weighted average perspective.

Okay, so could you repeat that? 15.9 million?

So 13.9 million is the year end fixed number of shares as of December 31, 2014. The weighted average number of shares is -- takes into account the average number of shares throughout the course of the year.

Yes, okay.

And the convention for the difference between basic and fully diluted is whether or not you had a GAAP profit. There's more details to it, but that's the basic definitive parameter and because we had a GAAP loss for us, there was no difference between basic and diluted.

Okay. So if I'm not mistaken, you have announced a couple of settlements -- you didn't give any dollar figures, but you have had a couple of settlements here in the first quarter of 2015. Am I correct in that?

Yes, that's correct.

Is it more than two?

I don't recall how many we've announced, but yes, I believe it's more than two.

Okay, and then, could you -- I'm sorry, what?

We've had a very active Q1.

Okay. Then could you give us a little more color on Opus? I know you launch in Q3. Can you say anything about what's happened since then?

We did a redesign, we've done kind of a version 2 launch. We're still building our subscriber base. We've been in communications with other third-party software and software as a service offering to talk about potential marketing arrangements.

So it's -- look, it's still relatively young, less than six months, I guess. But we've been pretty active with it and -- but there's nothing to report of a material basis from a revenue standpoint. But we are definitely growing it, we are definitely putting resources, both human and dollars behind it, to grow it. And we will keep you abreast as things start to unfold.

Okay. And I think that's it for me, thanks.

David Hoff, a private investor.

Hi, Doug. Phenomenal 2014, really the only company that really had a good 2014 under $200 million market cap.

Two quick questions. Patent reform is obviously the hot button topic. Are you seeing an increase in interest or deal flow coming down the pipeline with a lot of uncertainty in the assets?

The deal flow has -- the opportunity haven't decreased at all. We're still seeing a lot of opportunity to acquire IP. So I think the uncertainty of which version of patent reform, if any, gets adopted actually probably plays into -- plays to our advantage frankly. But I don't -- I have no idea what Washington, DC will ultimately decide or not decide.

I don't think there's anything on the table right now that actually harms Marathon's business at all. I think it probably harms smaller inventors and probably universities and some other business models that are not ours.

But from a deal flow perspective, we as seen just as much if not more. I think there's probably fewer buyers in the market right now. And because of that, we are hopeful that we can continue to be the pricesetter when pricing the assets that we acquire as opposed to a pricetaker.

But right now, things is still progressing at a pretty good clip.

Okay, that's basically about what I've been seeing as well. My second question kind of relates to quarter one and, looking at the rest of the year, I'm modeling roughly about $3.5 million to $3.8 million in quarter one 2015 revenue. Basically, you had a number of catalysts, very good things happened at Markman opinions, and IPRs and -- designed the agreements.

Is that something we can model throughout 2015? You have a trial calendar on your website and as certain things hit, is there a reasonable expectation that there's agreements right behind it?

Yes, so a couple of things. I can't comment on your own model and what you see (multiple speakers) --

I understand.

But as far as looking out to the rest of 2015, I think we talked -- my prepared remarks talked about the number of Markman hearings, the number of trials. We had a lot of catalysts that typically drive the revenue in a patent licensing and patent litigation company. In 2015 -- throughout 2014, we really set up 2015 to be a fairly significant year.

So, I think the way that you model is probably pretty accurate. There's a lot of reasons that defendants settle. Some of the time and probably a majority of the time, it's because of an adverse ruling in a Markman proceeding or an inability to get a patent tossed on summary judgment or pretrial motions that may not go the defendant's way, and all of those things tend to strengthen the plaintiff's position and the asset that the plaintiff is using against the defendant. And so, as we move through the calendar year 2015, we fully expect and we've already been seeing some of those positive things happening.

Okay. It also looks like 2016 will also be set up. Not as many Markman hearings, but it looks like there is a significant amount of trials that are scheduled. So, I would imagine 2015 is a material -- I guess, leap in revenue over 2014. We can also expect the same thing in 2016. Is that about right?

Yes, well -- all I can tell you is that when you looked at this Company a year ago, we did not have nearly the asset base for the 2015 calendar set up as we did at the end of the year. And so, it's incumbent upon us to continue to find, negotiate, and acquire those opportunities that will continue to see 2016 and beyond. But I think that, frankly, what we did in 2014 is pretty good guidance for what we plan to do in 2015, 2016 and beyond.

Okay, that's it for me, thank you.

Amit Dayal, HC Wainwright.

Thank you. Congratulations, guys. Most of my questions have been asked. Just one question around the cost side of things, you have a lot of Markman hearings coming up, trials coming up. Could you walk us through how you are situated to deal with costs around these events coming up for you?

For the most part are -- the costs leading into Markman into trial are either contingency-based -- I would say the vast majority are contingency-based, meaning we are not incurring any litigation costs until there's a settlement.

The expert fees -- or the expert costs that you typically pay going into Markman and into trial, obviously that's an out-of-pocket cost that we have. That's captured in our cost of goods sold. It's not -- it would be hard for me to give you an absolute number because we don't know exactly what those costs are until we get closer to incurring them. But for the most part, those are all going to be contingency costs anyway.

All right, perfect. And then just touching on the Opus side of things, are we allocating more resources this year just from a dollar value point of view into getting this in the hands of potential users?

Yes, from a market -- from a development and user interface development, we definitely allocated resources and from a marketing perspective, we have in the past and we are going to continue to do that in the future and probably more so throughout the summer and fall.

Perfect. Thank you, guys.

Mike Latimore, Northland Capital Markets.

So, in the first quarter, you have announced some settlements. Have you announced all the settlements that have occurred in the first quarter?

No. So, let me just talk generally about how settlements work.

Oftentimes, we are not permitted by the defendant to announce an actual settlement and a license agreement. The vast majority of the time, however, we are, but we are limited as to what we can say both by requests of the defendant and oftentimes by our own internal strategy.

So I would say for the most part, we have announced almost all -- maybe not quite all of the settlements in Q1. Another -- typically another good way to look at it is to see the dismissals. They don't always occur right at the time of settlement. But usually within 30 days of settlement, we will have all the parties dismissed.

But for the most part, we certainly try to announce everything that we can. We know it's important to the investment community because they typically look at that as a revenue-generating event and I clearly want to be as transparent as I can. But oftentimes, I am limited by confidentiality provisions in the settlement agreement itself.

And then, just as you look at your -- the team you have in place there, are there any other areas of expertise you look to add this year do you feel like you have your internal management in place?

No, I think there is -- we are actually -- there's actually a couple of areas that I think we might add some headcount to. We haven't announced anything yet but we're actually in conversations with one party right now, and so hopefully we will have something to announce relatively soon.

But we came through 2014 with pretty much the same team we have right now and while we work incredibly hard, we do have operating leverage within the existing headcount. And we don't have to -- I don't have to grow the headcount tenfold in order to achieve a 10 times increase in revenue. It's not how the model (technical difficulty).

So there will be some barriers, but for the most part, we've got a really great core team of experts and individuals, and we will continue to work with those guys. And if we (technical difficulty) if we see an area to add, we definitely will.

Okay, great. Thank you.

Thank you. We have no further questions at this time. I would like to turn the floor back over to management for any closing remarks.

So I just want to thank everyone for calling in and for supporting the Company. Many of you I have talked to off-line and I want to thank all those who supported us through 2014.

2014 was the first full year of operations of the Company and we couldn't be more pleased with the annual results. And I know a lot of the recent calls I've received and will probably receive will be focused on well, why was Q4 not as big as what we had hoped and the business that we are in is really not a quarterly business, it's an annual business. And there's very little difference between signing an agreement on September 30 or signing an agreement on October 1 except whether it's reported in Q3 or Q4.

So, I would encourage everyone to look at this Company on an annual basis. We report our 10-K -- we are an annual company. We drive the revenues throughout the year. 2014 was a great year, 2015 is going to be a better year. We have many catalysts ahead of us, we have a lot of the big marquee or homerun-hitting portfolios ahead of us. It's going to be a very fun Q2, Q3, and Q4 and I look forward to talking to everybody in May. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.