Marathon Digital Holdings, Inc. (MARA) Q4 2014 Earnings Report, Transcript and Summary

Greetings and welcome to the Marathon Patent Group, Fourth Quarter 2014 and Year End Results Conference Call. At this time all participants are in a listen-only mode. A questions-and-answer session will follow the formal presentation. [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 fourth quarter 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 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 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 and future 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 forms 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 can give no assurance that its 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 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 discussion 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 inactive licensing campaigns. We continue to focus on building a diverse set of patent assets and now have assets that cover 14 distant areas of technologies, including approximately 49% of which our 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 that 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 trails. In 2014 Marathon’s subsidiaries had only two markman hearings, no U.S. trails and two infringement trails 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 U.S. trials covering six defendants, and six German trails covering 12 defendants. We believe the current markman and trial schedule for 2015 has a 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 with we welcomed IPNav veterans Umesh Jani and Rick Sanchez. Umesh and Rick are both experienced IP intake and licensing specialist 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 Chernicoff 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 investments. Before concluding my prepared remarks, I want to quickly update you on Opus Patent Analysis Platform, our propitiatory IP analysis offering. During Q3 we announced the commercial launch of Opus. We are 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 for Marathon. In summary, I am 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 and highly scalable propitiatory 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 your year-end financial results.

Thanks Doug. As Doug mentioned earlier, the company continued to aggressively expand its operations into 2014 with commencement of additional informant actions and the acquisitions of nine additionally 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 broader array of technologies and end markets. With the increased scope of the company’s business revenue increases by approximately $18 million or 526% to $21.4 million in the year ended December 31, 2014 compared to $3.4 million of 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 increasing number of patent portfolios acquired that were already being enforced or with which we commenced enforcement campaigns shortly after acquisitions. 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 non-occurring, non-exclusive non-assignable licenses. Direct costs to 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, non-contingent legal fees, costs associated with patent enforcement and licensing advisors and in some cases, contingent payments to 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 good will, in this case the impairment in the third quarter of the good will 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 increase 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 good will 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 our 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 equivalent 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 the 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.

Thank you [Operator Instructions]. Our first question is from Michael Latimore of Northland Capital.

Yes, thanks a lot guys. Great year you guys. I guess a couple of questions around some of your patent. I think few of your patents are not in litigation yet. So we assume that those will eventually end up in litigation or are those falling a path that may be don’t require litigation?

No all the assets that we own will be used in licensing, whether that’s through litigation or outside of litigation, so it’s difficult. I think we got about 70 assets that are in different stages of litigation. So pretty much what you see that’s in litigation is what we intent 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.

Got it. 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 sort of final catalyst to reach a settlement let’s say?

Yes so, currently there is an injunction in Germany against Stryker and we are constant conversation with all of defendants about settlement, and I know that in mid-June the Nullity hearing, which is the second trial essentially of validity is to occur. We received the preliminary non-binding 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. But as we get closer to that data we should see some more activity.

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

Yes so Dynamic Advances versus Apple. Discovery is closed, I think as of this past Sunday. They had a conference next Tuesday. I don’t know if the judge is going to set the trial date to that point. He certainly could. Summary judgment motion will be heard mostly likely in May.

Okay, good. Thanks a lot. Good luck this year.

Thank you.

Thank you. The next question is from Jim McIlree of Chardan Capital. Please go ahead.

Yes, 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 send 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? Is 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 we are 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 earning out and then the rest of it went where, that’s – I’m trying to figure that out as well.

So yes, it was collected and part of it was dedicated towards repayment of a portion of the clouding earn out 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 the acquisition of numerous portfolios during the year.

Okay, great. Thank you.

Sure.

Thank you. [Operator Instructions] The next question is from Jon Hickman of Ladenburg Thalmann. Please go ahead.

Hi, thanks for taking my questions. What’s the fully diluted share count at the end of the quarter and the end of the year?

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 that share count?

So we used the weighted average, which is the standard convention and there is 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?

So 13.9 million is the year end fixed number of shares as of 12/31/14. The weighted average number of shares takes into account the average number of shares throughout the course of the – and the convention for the difference between basic and fully diluted is whether or not you had a GAAP profit. I mean there’s more details to it, but that’s the basic definitive sort of parameter and because we had a GAAP loss, for us there was no difference between basic and diluted.

Okay. So if I’m not mistaking, you have announced a couple of settlements. I mean you didn’t give me 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…[Cross Talk] I’m sorry, what?

We had a very active Q1.

Okay. Then could you give us a little more color on Opus. I know you launched it in Q3, can you say anything about what’s happened since then?

I mean, we did a redesign; we’ve done kind of a version two 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. Look, it’s still relatively young, less than six months I guess, but we’ve been pretty active with it, but there’s nothing to report of material basis from a revenue standpoint, but we’re definitely growing it, we’re definitely putting resources both human and dollars behind it to grow it and we’ll keep you abreast as things start to unfold.

Okay, I think that’s it from me. Thanks.

Thanks John.

Thank you. The next question is from David Hoff [ph] a Private Investor. Please go ahead.

Hi Dough. 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 topic. Are you seeing an increase in I guess interest or deal flow coming down the pipeline with a lot of uncertainties in the assets?

The deal flow had 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 to our advantage frankly, but I have no idea what Washington DC will ultimately decide or not decide and I don’t think there is anything on the table right now that actually harms Marathon’s business at all. I mean 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’re seeing just as much if not more. I think there’s probably fewer buyers in the market right now and because of that we’re hopeful that we can continue to be the price setter when pricing the assets that we acquired as opposed to a price taker. But right now things are 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 you signed the agreements. Is that something we can model throughout 2015 where you have the 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 is…

I understand.

But as far as looking out through the rest of 2015, I think we talked – my prepared remarks talked about the number of markman hearings, the number of trials. We have a lot of catalysts that typically drive the revenue in a patent licensing and patent litigation company and 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 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 pre trial motions may not go the defendants 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 still looks like there’s significant amount of trials that are scheduled. So I would imagine 2015 is a material I guess leap in revenue over 2014. We could also expect the same thing in 2016, is that about right?

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 or 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 from me. Thank you.

Sure.

Thank you. The next question is from Amit Dayal of H.C. Wainwright. Please go ahead.

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 or trials coming up. Could you walk us through how you are situated to deal with costs around these events coming up?

For the most part are the costs leading into markman and to trial are either contingency based, the vast majority are contingency based, meaning we’re 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 and lets capture it in our cost of goods sold. 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 basically just from a dollar value point into kind of getting this in the hands of potential users.

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

Perfect. Thank you guys.

No problem.

Thank you. The next question is from Michael Latimore of Northland Capital Markets. Please go ahead. Mr. Latimore your line is live.

Sorry about that. Yes, so in the first quarter you’ve announced some settlements. I guess have you announced all the settlements that have occurred in the first quarter?

No. So let me just talk generally about how settlements work. Often times we’re 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’re limited as to what we can say, both by request of the defendant and often times by our own internal strategy. So I would say for the most part we have announced almost all, maybe not quite all of the settlement in Q1. Typically another good way to look at it is to see the dismissals that they don’t always recur right at the time of settlement, but usually within 30 days of settlement we’ll 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 often times I’m limited by confidentiality provisions in the settlement agreement itself.

And then just as you look at your – there’s a team you have in place there. Are there any other areas of expertise you looked at this year or do you feel like you have kind of your internal management in place?

No, I think we’re 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’ll 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 the ten times increase in revenue; it’s not how the model works. So there’ll be some areas, but for the most part we got a really great core team of experts and individuals and we’ll continue to work with those guys and if we have to add or if we see an area to add, we definitely will.

Okay, great. Thank you.

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’ve talked to kind of offline and I want to thank all those who’ve supported us through 2014. 2014 was the first full year of operations for the company and we couldn’t be more pleased with the annual results and I know a lot of recent calls I’ve received and we’ll probably receive will be focused on why was Q4 not as big as we had hoped and the business that we’re in is really not a quarterly business, it’s an annual business, and there is very little difference between signing an agreement on September 30 or signing an agreement on October 1, except whether its reported in Q3 or Q4. So I would encourage everyone to look at this company on an annual basis. We report our 10K. 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 are ahead of us. We have a lot of the big marquee or home run 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.