Marathon Digital Holdings, Inc. (MARA) Q2 2014 Earnings Report, Transcript and Summary

Greetings, and welcome to the Marathon Patent Group Second Quarter 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kimberly Esterkin of Investor Relations. Ms. Esterkin, you may begin.

Thank you, operator. Good afternoon, and welcome to Marathon Patent Group's 2014 Second Quarter 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 and 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 effects of the global economic downturn on technology companies, the ability to successfully develop licensing programs and attract new business, rapid technological change in relevant markets, changes in demand for current and future intellectual property rights and legislative, regulatory and competitive developments addressing licensing and enforcement of patents and/or intellectual property and general economic conditions. Our annual report on Form 10-K, recent and forthcoming quarterly reports on Form 10-Q, recent current reports on Forms 8-K and 8-K/A and other SEC filings discuss some of the important 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 the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that it is -- expectations will be attained. The company undertakes no obligation to update any forward-looking statement whether as a result of new information, future events or otherwise. In addition, certain of the financial information presented in this call represents 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 link is available in the Investor Relations section of our website at www.marathonpg.com. With that, it is now my pleasure to turn the call over to Marathon Patent Group's Founder and CEO, Doug Croxall. Doug?

Thanks, Kim, and thank you, everyone, for joining us this afternoon to discuss Marathon Patent Group's financial and operational results for the second quarter of 2014. I will begin today's call with an overview of the company's performance and a review of our operational highlights for the second quarter of 2014. Frank Knuettel, our Chief Financial Officer, will follow by providing additional details on the company's financial results. We will then open up the call to your questions. I'm very pleased with our second quarter financial results, particularly our accelerating quarterly revenue and non-GAAP net income performance. At the top line, revenues of $3.8 million were a record for a single quarter, up 38% sequentially and 151% year-over-year. In addition, we achieved non-GAAP profitability for the second quarter in a row. Our non-GAAP net income increased from $854,000 last quarter to $1.2 million this quarter, up 38% sequentially. Our non-GAAP earnings per diluted share increased 37% from $0.16 per diluted share last quarter to $0.21 per diluted share in the second quarter of 2014. The second quarter was productive for Marathon. Key highlights include revenue generated from a total of 5 license agreements across 12 licensees. Since inception in November of 2012, Marathon has now generated revenue from 7 of our 11 subsidiaries. Marathon subsidiaries added an additional 29 defendants across 3 subsidiaries. Marathon acquired 3 companies with active patent portfolios and acquired 1 additional company with revenue rights associated with 2 active patent portfolios. The successful completion of a $6.5 million gross equity financing; the expansion of our strategic relationship with IPNav, including the unveiling of Opus Analytics; and subsequent to the end of the quarter, we received approval for uplisting to NASDAQ, truly an important milestone for our company and for our shareholders. In terms of settlements and licensing activities that occurred during the second quarter, the company's wholly-owned subsidiary, CRFD Research, executed a license agreement with RPX, thereby licensing 8 defendants. As you may recall, CRFD Research filed a lawsuit against a total of 17 defendants during the first quarter of 2014, leaving approximately half of the defendants active in the licensing campaign. We're pleased with our early results related to the CRFD portfolio as we were able to generate meaningful revenue within 4 months of commencing the licensing campaign. In addition to CRFD Research, we also reached licensing agreements with 4 defendants during the quarter related to our IP Liquidity Ventures, CyberFone Systems, Vantage Point and Selene Communication Technologies portfolio. An overview of the patents and the covered technology in each of these subsidiaries can be found on our website www.marathonpg.com During the second quarter, we added 29 new defendants. Specifically, Signal IP filed 15 new enforcement lawsuits against automotive OEMs; Selene Communication added 12 new defendants, 2 of which subsequently settled in the second quarter; and Sampo filed enforcement lawsuits against 2 defendants in the software and social media sectors. With these new 29 lawsuits as of June 30, Marathon subsidiaries have 82 active defendants. We continue to be very focused on expanding Marathon's patent portfolio. In May, as previously mentioned, we acquired 3 companies, each with active patent portfolios as well as 1 additional company with revenue rights associated with 2 active patent portfolios. All of the acquired patent portfolios are in various stages of monetization and cover diverse fundamental technology in areas including life sciences, natural language processing, automotive-related sensors, search query, network intrusion detection and protection and medical device technology. Many of the patent assets are well into the monetization process, which significantly reduces risk, eliminates upfront expenses and reduces the time to revenue. We anticipate the patent assets we acquired will contribute meaningfully to Marathon's future revenues. To fund the May acquisitions, we deployed $5 million in cash, 391,000 of restricted shares of the company's convertible B preferred stock and agreed to make additional deferred cash payments up to $6 million as well as potential earn-out payments based on the net revenues realized by Marathon in excess of its investment and expenses associated with the acquired assets. To fund the June purchase of Selene Communication, we deployed $50,000 in cash and issued 100,000 shares of restricted common stock. The 3 patent portfolios and revenue rights associated with the 2 additional patent portfolios were acquired from entities advised by IPNav. IPNav is acting as the licensing adviser for these assets and has continued to advise Marathon after the closing. To help fund these acquisitions, we completed a $6.5 million gross equity financing during the month of May. Marathon continues to benefit from our long-standing strategic relationship with IPNav. During the second quarter, we announced that Marathon acquired the rights to license and sell a commercial version of a proprietary IP analytics system developed for IPNav. Branded Opus Analytics, we expect to introduce a commercial version of this analytical tool in early September, with the feature set and a price point that IT professionals and others, including financial professionals, will find attractive relative to the other offerings currently in the market. We will provide updates on our progress with Opus in future Marathon calls. Also during the quarter, Marathon entered into a multiyear agreement with IPNav, which will provide Marathon with access to additional funding and acquisition opportunities. Pursuant to the terms of the agreement with IPNav, Marathon has the right of first refusal to review and acquire or invest in qualified IP assets. In addition, Marathon has the right to participate in any IP-related financing undertaken by IPNav Capital. We believe the preferential purchase rights and co-funding option will provide Marathon with an exciting pipeline of opportunities to continue to acquire valuable patent assets. Subsequent to the end of the quarter, we were notified of our approval for the uplisting of our common stock to The NASDAQ. Uplisting to the NASDAQ is a significant milestone for Marathon that should provide the company with greater visibility in the marketplace, help generate interest from a broader base of institutional and retail investors and improve the liquidity in the trading of our common stock. I believe our NASDAQ listing will result in increased shareholder value as we continue to execute our strategic growth initiatives. In summary we have built a robust, highly scalable, proprietary patent monetization platform that gives us the capability to manage multiple concurrent licensing campaigns without substantial additions to overhead. We have developed [Audio Gap] the foundation upon which we can continue to grow for the remainder of 2014 and beyond, but also the wherewithal to become the most successful patent acquisition and monetization company in the world. That concludes my prepared remarks. With that, I'd now like to turn the call over to Frank Knuettel, our new CFO, for a detailed look at our second quarter financial results. Since joining Marathon in mid-May, Frank has hit the ground running. With over 15 years of experience as CFO at multiple public and private technology firms and relevant experience monetizing patents through licensing enforcement, Frank is the perfect fit for this position and will play a key role in supporting our growth and business development initiatives.

Thanks,Doug. As Doug mentioned earlier, we are very pleased to report a strong second quarter with revenues totaling $3.8 million, up 151% from $1.5 million in the prior year period and up 38% from $2.8 million in the first quarter of 2014. The growth in revenue was driven by an increase in patent enforcement activities. Five licensing settlement agreements with a total of 12 licensees accounted for our revenue during the quarter. Moving down the income statement. Direct costs of revenues for the quarter, which include contingent payments to patent enforcement counsel, licensing advisers and previous patent owners, along with noncontingent costs, principally, legal fees and costs associated with technical experts, associated with enforcing our patent rights and entering into settlements and license agreements, totaled $1.8 million; an increase of approximately $1.5 million from the second quarter of 2013 and an increase of approximately $0.6 million from the first quarter of 2014. The increase in direct costs of revenue relative to the first quarter can be attributed to both the significantly higher level of patent enforcement activity in the quarter and higher revenues generating larger contingency payments to counsel and advisers. Gross profit for the second quarter totaled $2.1 million or 54% of revenues, up 67% from $1.2 million or 81% of revenues in the year-ago time period and up 24% from $1.7 million or 60% of revenue in the first quarter of 2014. Going forward, we expect gross profit to range from 45% to 55%. Operating expenses for the second quarter, including amortization of patents, compensation and related taxes, consulting and professional fees and G&A, were $2.4 million compared with $2.1 million in Q2 2013 and $2.0 million in Q1 2014. Our operating expenses for the second quarter of 2014 relative to the second quarter of 2013 rose 16%, which is a result of noncash expenses related to the amortization of patents, which almost doubled from $0.5 million last year to $0.9 million during the second quarter of this year and an increase in cash-based expenses, offset by a decrease in noncash equity compensation of $0.3 million. Net of noncash items, our operating expenses increased $130,000 during the second quarter of this year relative to the second quarter of 2013. Compared to the first quarter of 2014, our operating expenses increased 22%. Included in this was an increase in noncash patent amortization expenses of $0.5 million and an increase in cash-based expenses, offset by a decrease in noncash equity compensation of $0.1 million. Net of noncash items, our operating expenses increased $77,000 during the second quarter this year relative to the first quarter of this year. In addition, as a result of our uplisting to NASDAQ at the end of July, we incurred a onetime listing fee of $50,000 and will have ongoing annual fees in the same range to maintain our listing. From a GAAP perspective, we show a net income loss and have no meaningful tax obligations. For the second quarter, we reported a GAAP net loss of $1.6 million or a loss of $0.29 per share compared to GAAP net loss of $0.8 million or a loss of $0.19 per share in the year-ago period and a GAAP net loss of $0.3 million or a loss of $0.05 per share in the first quarter of 2014. Included in the GAAP net loss for this quarter is a $1.3 million onetime noncash expense resulting from the beneficial conversion feature associated with the issuance of the Series A preferred stock. On a non-GAAP basis, net income for the quarter totaled $1.2 million or $0.21 per share compared to a non-GAAP net income of $0.5 million or $0.11 per share in the second quarter of 2013 and a non-GAAP net income of $0.9 million or $0.16 per share in the first quarter of 2014. The improvement in net income can be attributed to a higher level of growth in revenues and an increase in expenses. Our ability to restrict the growth in our operating expenses while experiencing considerable growth in revenue demonstrates the leverage in our operating model. As a reminder, a reconciliation of our GAAP to non-GAAP financials can be found in today's earnings press release and 8-K filed with the SEC. Before opening the call to your questions, I'd like to take a moment to explain our cash flow in the second quarter. We ended the second quarter of 2014 with cash and cash equivalents totaling $6.5 million as compared to $3.6 million at December 31, 2013, and $5.4 million at the end of the previous quarter. This figure includes $6.4 million in net proceeds raised through the issuance of 1,023,579 units with each unit comprised of 1 share of the company's Series A preferred stock, which is convertible into the company's common stock at a fixed price of $6.50 and a 2-year warrant to acquire 0.25 shares of the company's common stock at an exercise price of $7.50 per share. The Series A automatically converts if the closing share price exceeds $9.25 in 4 of 8 consecutive trading sessions after the shares have been registered. In the second quarter of 2014, we generated $0.6 million in cash from operations as compared to cash used in the amount of $0.5 million in the second quarter of 2013. Cash used in investing totaled $5.1 million for the quarter compared to cash used in investing in the amount of $0.6 million in the year-ago period. During the quarter, as Doug mentioned, Marathon acquired 3 companies, each with active patent portfolios as well as 1 company with revenue rights associated with 2 additional patent portfolios. We are very pleased to continue to generate sufficient cash to fund our current and working capital requirements. As of June 30, 2014, we have weighted average shares outstanding of 5.5 million shares and 8.9 million shares on a fully diluted basis, taking into account Series A and B and outstanding options and warrants. Thank you for all of your attention. We'd now like to open the call to your questions.

[Operator Instructions] Our first question comes from the line of Mark Argento from Lake Street Capital Markets.

Just a couple of high-level questions. The model you have set up here with the relationship with IPNav seems to give you guys some decent scalability in terms of the number of portfolios that you could run. Could you talk about the number of portfolios like active portfolios you have right now? And then given kind of your cost structure and infrastructure, how many -- could you double the number of portfolios you currently have, call it, under management or in-house? And what's the scalability of the model the way you guys were thinking about it?

Mark, this is Doug. So the way we look -- we don't -- we look at it as subsidiaries versus portfolios. So we have 11 active subsidiaries that are in different stages of licensing campaigns. So a year ago, we had 3, and we've actually reduced overhead from last year to this year, slightly. So we've essentially quadrupled the asset base that we had. Could we do the same going forward? I don't know. Probably we'll have a couple of people come aboard, but we think we have a lot of scalability. We think we have a lot of operating leverage because of the relationship that we have, not just with IPNav, but with some of the litigation firms that we work with. So clearly, there's a lot more room to run. But how far that goes, I couldn't say specifically.

And Frank, I think in your prepared remarks you talked about gross margins in the kind of 45% to 55% range, I believe. Is that off -- is that gross margin off of the gross settlement or licensing dollar amount? Or what -- when we think about how you recognize revenues, are you recognizing gross or net? Or how does that work?

So to answer your question, the gross margins are based on the gross value of the licensing and settlement agreements from which we have our normal cost of goods sold associated with our litigation counsel, advisers and experts.

So any contingent payments or back-end payments to the original IP owner or anybody that IPNav or anybody that had a contractual obligation to some of that money? Is that coming out of the cost of goods? Or is that already [ph] net on the revenue line -- to the revenue line?

That's all coming out of the cost of goods.

Got you. Okay. All right. And then last for me, in terms of kind of the strategy again. 3 portfolios, now 11 and it looks like a fairly diversified portfolio. You're not necessarily just limiting yourself to 1 vertical. Do you see the model as, obviously, a multi-vertical model? I mean, would you do med tech? Would you get into some areas that you might not have exposure to right now? Or are you going to kind of limit it to the verticals that you currently have exposure?

So this is Doug. So yes, I know we, obviously, evangelized diversification within the asset class at every chance that we get. And so Sarif is actually a microsurgery technology, so we're already kind of got a toe in the water, if you will, on the med tech side. We're going to continue to diversify in as many verticals that make sense. We're agnostic to the verticals. We're not agnostic to the quality of the patents. But we also look to diversify kind of at the time at which we make the investment, at the time at which we buy the asset. So often times, we'll find patent assets that have never been enforced or licensed before. So those are, obviously, attractive from a risk/reward standpoint. Also, we try to mitigate some of the risks by picking up assets after they've been through different milestones within the enforcement or litigation life cycle. So one of the assets we bought in May was a company called Dynamic Advances. It's a patent that was invented by a professor -- 2 professors actually at Rensselaer Polytechnic Institute. We bought the patent after it had survived a couple of IPR challenges at PTAB and before the market enrolling [ph] had come out. And we're so far very pleased with that purchase, and we're hopeful that it will yield a nice return in the future. So yes, to answer your question, continue to diversify across different industry sectors, diversify across the amount and the type of patents that we're going to invest in as well as the time at which we make that investment.

Got you. Last question, more of a housekeeping question. Frank, I know you had mentioned in your prepared remarks fully diluted share count. Could you just -- do you mind just giving me that number again and what's the basic number as well?

Sure. So the weighted average number is 5.5 million, and the fully diluted is just short of 9 million shares including the Series A, B outstanding warrants and unexercised options.

And on an as-converted basis, would that result then in the cash coming to the company? Or are those kind of cashless exercise or something [ph]?

I can't -- the trends in the warrants and options provide for cashless exercise, I can't state what the intent of the investors would be when they do exercise it [ph]. So potentially, but they do provide for a cashless exercise as well.

Our next question comes from the line of Amit Dayal from H.C. Wainwright.

Just a few follow-up questions to the previous one. Could you break down revenues: settlement versus licensing? If that's possible, if you provide that color.

All of the revenue is associated with settlement and license agreements. So it is what it is, 100% settlement and license agreements.

Okay.

So just to follow up on Frank's comments, so there were no license agreements that were a result of non-litigation. So they all came from some party that was previously a defendant.

Okay. Understood. And any particular subsidiary that accounts for a larger portion of revenues right now?

We have not disclosed the breakdown of the specific revenues associated with the subsidiaries.

Okay. Understood. And in regards to your Opus launch happening early in September, could you provide us with some additional color on what the potential business model around that can be? Is there any material revenue expectation that we should be associating with that in the near term or maybe putting it out for further -- by 2015, et cetera?

Yes, so this is Doug. So the pricing model is going to be along the lines of a SaaS pricing model. It's hard to predict the acceptance that the product will have, or the service will have, in the 2 markets that we're going to approach. So it's tough to give you kind of any sort of guidance on that. Hopefully, at some point in the future we have enough subscribers that it becomes quite easy to provide that guidance. The 2 markets that we're really, primarily, going after is clearly the IP professional market, which we kind of define as IP attorneys, inventors, different licensing executives, et cetera. But we're also targeting the service to the IP investor or the financial professional to help them understand what has been pretty difficult asset class to really ascertain value. So again, it's tricky to predict what will happen from an acceptance standpoint, but hopefully in another couple of quarters we'll be able to give you a good basis of where we are and where we hope to be.

Understood. And just last on potential acquisition plans for the rest of 2014. Are we still in the market to, potentially, get involved in opportunities that might come up, or are we done for the year?

No, we're always buyers as long as it's a value buy. So we clearly say, "no" to more things than we say, "yes" to. But we're constantly assessing opportunities, and we're constantly having opportunities be provided to us for that assessment. So we don't have anything that I can say, definitively, but we are always looking for good investment opportunities in the asset class.

Our next question comes from the line of Blair Abernethy from Cantor.

Just a couple of things. On the 82 active defendants, are these across all the -- all of your portfolios -- or your subsidiaries, rather? Or is there a degree of concentration amongst a couple of them?

It is across all of our 11 active subsidiaries and clearly, we have some that have -- we have 1 that only has 1 defendant, and we have another that has, I think, approximately 22 defendants and it's pretty evenly spread across the rest. And actually our -- on our web page, we break down each subsidiary in kind of a high-level overview of the patents as well as the list of the patents as well as the list of the active complaints. So it's not -- we're not trying to hide that from anyone. It's just -- it's available for you to see, but that's how it breaks down.

Okay. Great. And just on the Dynamic Advances, I wonder if you could just update us on the situation there. And how big or how many potential defendants are there?

So let me give you a quick kind of update. We are -- the next kind of major litigation milestone is a status conference sometime in mid to late September. The trial date has not been set, but we expect it will get set sometime either at that conference or shortly thereafter. If I had to guess, it's probably going to be sometime late Q1 or Q2 next year. But again, it's not up to us. And then as far as how many potential licensees, we really don't give a lot of guidance as it relates to that, Blair. We are focused on the party that we're in suit with, which is Apple. And beyond that, we have a pretty good feeling on who else will need a license. But clearly, we can't get into who those people are, who those companies are at this point.

Our next question comes from the line of Hugh Cohen from Applied Financial Research.

I was wondering if you can present some color for me on the difference between the GAAP and the non-GAAP. You mentioned that there was a $1.3 million expense associated with the exercise of the Series A preferred stock. That sounds to me like it's the exercise of the warrants at a price that was above the exercise price. Is that correct?

It's actually a deemed dividend associated with the beneficial conversion feature valuation of the unit itself, which combines a convertible Series A preferred and the warrant. So it is below the line, impacting our earnings per share, onetime, nonrecurring, noncash expense associated with the fair value analysis of the beneficial conversion feature itself, as opposed to anything associated with the exercise of the conversion or any associated warrants.

Was that basically -- if I have it wrong, tell me. Was that basically a [indiscernible] because the stock went up -- stock price went up?

It's really just the fair value analysis of the conversion feature itself as the preferred was issued at a slight discount to the conversion ratio. So it's really just an accounting charge associated with the feature -- the fair value analysis of the feature.

It was on the date of issue, not the date of exercise?

That's correct. There has been no exercise of the warrants associated with the Series A.

And what is -- then that was $1.3 million, you said, of the difference. What's basically the rest of the difference then, of the GAAP versus the non-GAAP? If you can...

Sure. That's in simple [ph] categories. One is the amortization of our patents, which was about $0.9 million, and the other is equity-based compensation to employees, nonemployees and consultants, which was about $0.6 million.

And you're focused on the non-GAAP for what reasons?

It's really just a comparison to investors to provide them an understanding of the components of our expense structure that are noncash or therefore, also non-GAAP, I guess, and to give them a sense of the underlying cash-based expenses associated with operating the company as we continue to progress.

The amortization of the patents of $0.9 million, is that a cash expense or is that a stock expense?

Neither. It's a noncash, non-equity-based expense. So we amortize the purchase cost of the patents over the useful lives of the patents on a straight line basis, and that number represents the quarterly pro rata straight line basis of the noncash charges associated with the amortization.

I understand. But typically, when you buy the patents, are you buying these for cash, for stock, for a combination of the 2? What -- typically, how are you buying the patents?

It varies. So for example, with respect to the acquisition of Selene in June, it was a combination of cash and common stock. With respect to the entities and assets acquired at the beginning of May, it was a combination of cash, Series B preferred and notes issued, notes payable. So it varies from acquisition to acquisition, and it can be any one of a number of different -- or including a number of different methods.

Now in the last quarter, I think it was, you raised more money for the acquisition of more patents. Is that the business plan that if more patents do become available, you'll raise more capital in the markets?

So -- this is Doug. We -- yes, we actually specifically, raised capital for the assets. And so if we see something that we think provides accretive value to the shareholders and we can get a capital rate done that maintains that, then we'll certainly explore that option. But again, we don't have any specific plans right now. But yes, we're pretty active and looking at patent assets and opportunities. And to the extent we need to go back to the market to raise capital, we will. Clearly, the goal is to be successful enough with the revenues we generate, that we can self-fund acquisitions going forward. And that's what we're striving towards. We clearly don't have to raise money, at least not at this point, to pay salaries and overhead. And that's been the primary objective of management is to not have to do that, and we're going to continue to, hopefully, keep the company on a positive EBITDA basis.

Last question. For the Apple litigation, is that also in the 45% to 55% margin that you would anticipate, assuming there was a payoff?

Yes. We don't get specific on each subsidiary or each previous patent owners, maybe. But generally speaking, we kind of use that percentage across all of our portfolios.

[Operator Instructions] Our next question comes from the line of Joey del Huffe [ph], a private investor.

I had a couple questions here. One, Doug, I know early in the year you guys had some corporate presentations on your website that referenced, at the time, your patent portfolio, again, at that time, for the next 3 to 5 years would amount to around $100 million in revenue. And since then, that hasn't been included in the presentations. And then just wondering if you have any commentary on any significance of that removal of that item?

Yes, so that hasn't changed. We still feel the same -- we still feel that those assets are going to generate that amount of revenue in that time period. What has changed is that we've added a lot more assets. We've added obviously more defendants, and I've added a new CFO. So we're, clearly, going to do the same thing. If we have to, update guidance and probably, provide more high level kind of 3- to 5-year guidance, but we will not do that until, probably, November, December time frame. But the only reason that it hasn't been included is because there's been personnel and assets that have made it difficult to update.

Okay. Okay. And you gave a little update on the Apple litigation. Would you mind doing something similar for the Celgene lawsuit?

That's pretty far out in the future, and I think Markman is scheduled for about a year from now and trial probably 2 years from now. So there's really not much update to give on that.

Okay. Okay. And last thing is, I've read some commentary in the press regarding, I guess, the EU or certain European countries moving to some sort of unified patent litigation court system or something along those lines. And I know -- I've seen Erich Spangenberg in various interviews, really, I guess, in favor of a move like that, it would accelerate, I guess, litigation and monetizing patents and so forth. And just wondering if you had any commentary on that or when we might see some movement in that area, or what your general outlook is with regard to Marathon in relation to your European patent monetization.

Yes, so I think approximately half of our patent assets are actually in foreign jurisdiction, meaning they're not U.S.-based. They're some other countries. So clearly, we have an eye towards markets outside of the United States, and we don't -- we can't and we won't get specific on who we think we're going to be in suit with in the future. But I share the same enthusiasm that many others in my industry share with what's happening in Europe and specifically in Germany. So I suspect that on one of our future quarterly calls, you'll have an update regarding that opportunity.

And when you say half of -- roughly half of the patents are in non-U.S. jurisdictions, of the 82 defendants that you guys mentioned, I assume nearly all of them, except, I don't know, maybe a few, are based in the U.S. court system. Is that correct? I know you have kind of a higher profile automotive one overseas. But beyond that, is there any real, I guess, Europe-based litigation ongoing on at the moment?

Nothing that -- nothing right now. Everything is in the U.S.

Okay. And any timing on any EU unified patent court system developments there? Or is that just sort of your entering in purgatory somewhere and we'll know, I guess, same time you guys know anything there?

No, I don't think it's in purgatory. It's just not something that we can give guidance on.

Our next question comes from the line of Ryan Parker from EquityBrief Capital Management.

My first question was with regard to the IP liquidity venture portfolio. And what is the status of the tire pressure monitoring system litigation?

So it's ongoing. It's difficult for us to give any sort of guidance on that because the confidentiality -- very strict confidentiality agreements that we have on that particular case. But all I can tell you right now is that it's ongoing.

My other question was, I guess, would be for -- one for Frank. I was -- I'm trying to understand how -- exactly how the earn-outs work on assets that were acquired back in May. And just hypothetically, if there was a $50 million settlement, I know that it scales up to $10 million earn-out [ph] payout, at [ph] all on the first $10 million. And I think from $10 million to $40 million, I believe the payout is 40%, and when it's over $40 million, it's 50%. Is that net of legal expenses? And is that -- and also, is that for each portfolio? Or is that for all of the portfolios that were acquired in combination?

It's aggregated across the 3 portfolios that were acquired, and it is net of all related expenses to the licensing campaign of the enforcement action.

Okay. So if we had, say, a $20 million settlement and 20% of that was actually paid out to attorneys, so that would be $4 million, and that would leave $16 million left and that would basically be booked -- or the first $10 million will be booked as gross profit and then another -- the next $6 million will be subject to the 40% cost of goods sold?

Right. The first $10 million is not subject to any sharing, so you're correct in your characteristics.

There are no other questions in the queue. I'd like to hand the call back over to Doug Croxall for closing comments.

All right. Well, just wanted to say thank you to all the shareholders who have supported us here to date, and thank you for those who called in. And we look forward to speaking with you again at the end of our third quarter. Thank you.

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