Marathon Digital Holdings, Inc. (MARA) Q3 2015 Earnings Report, Transcript and Summary

Greeting and welcome to the Marathon Patent Group Third Quarter 2015 Results Conference Call. [Operator Instructions] As a reminder this conference is being recorded. I’d now like to turn the conference over to Mr. Frank Knuettel, CFO for Marathon. Thank you Mr. Knuettel, you may begin.

Thank you, Operator. Good afternoon and welcome to Marathon Patent Group's 2015 third quarter results conference call. With us today is Marathon’s founder and Chief Executive Officer, Doug Croxall. Before we provide a summary of the third quarter results, 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 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 in general and general economic conditions. Our Annual Report on Form 10-Q, recent and forthcoming quarterly reports on Form 10-Q, recent current reports on Forms 8-K and 8-K amendment 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 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 marathonpg.com. With that, it is now my pleasure to turn the call over to Marathon's Founder and CEO, Doug Croxall.

Thank you, Frank, and thank you everyone for joining us this afternoon to discuss Marathon Patent Group’s financial and operational results for the third quarter of 2015. I’ll begin today’s call with an overview of the company’s performance and review of our operational highlights for the third quarter. Frank will follow by providing additional details on the Company’s financial results. We will then open up the call to your questions. Revenues for Q3 totaled $6.4 million, up 368% sequentially from $1.4 million in Q2. Third quarter 2015 results represent our second highest quarterly revenues to date. We generated revenue from a total of 11 license agreements. Since inception in November of 2012, we have now generated revenue from 16 of our 21 subsidiaries. For the third quarter, we reported a non-GAAP loss of $88,000. During the third quarter, we incurred numerous one-time costs totaling more than $1.5 million, the majority of which were related to Bridgestone versus TRW trial in Delaware and advisory and legal cost related to the merger with Uniloc. We expect to see a drop in our direct cost of revenues as a percentage of total revenue in Q4 and going forward. The nature of our business will often times result in expenses not lining up with revenue in a particular quarter. We continue to focus on expanding our patent portfolio. We recently acquired a portfolio of international assets that we believe reads on the automotive industry. We have commenced our licensing campaign in Germany and while I’m precluded from specifically commenting on these activities, we do believe this portfolio represents a sizable near term revenue opportunity for the company. We expect to be in a position to discuss both the patent assets and monetization activity before the end of this calendar year. Like the previous two quarters in 2015, our revenue in the third quarter continued for the most part to be generated from patent assets that I previously characterized as singles and doubles. In the quarter, we had one U.S. trial, four infringement trials in Germany, two of which we have already received - seen favorable preliminary indications and are waiting a final ruling. For the remainder of 2015, our German subsidiaries have two infringement oral hearings and one expected final infringement decision. We believe there are multiple large revenue opportunities that may monetize before year end, given this belief, we continue to expect 2015 revenue will meet or exceed 2014 annual revenue. I’d now like to specifically discuss the status of certain of our portfolios starting with Dynamic Advances. Dynamic Advances is the case against Apple was filed in the Northern District of New York on June 3, 2013. On June 26 of this year, the District Court had the motion for summary judgment hearing. We are waiting the Judge’s ruling on these motions. We are expecting to hear from the Judge any day now at which time we also expect the Judge will assign the trial date. The signal IP portfolio covers automotive, communication and passenger safety system. Currently, there are 12 active defendants. To-date, we have executed four settlement and license agreements within this portfolio. We continue to move toward our first trial date of March 15, 2016. Subsequent trials are set for every 60 days after the first scheduled trial. As with all litigation, our trial dates are subject to change. Our CRFD portfolio covers inter-device session transfer. Currently there are four active defendants Hulu, Spotify, Netflix and Dish Network. The portfolio has 13 settlements to-date with a possibility of adding new defendants. We are waiting the final determinations from the PTAB on the IPRs that have been filed against this portfolio and we expect to receive those ruling sometimes in the April 2016 timeframe. Our clouding portfolio covers cloud computing and cloud storage technology. Currently there are two active defendants EMC and VMware. The portfolio has 23 settlements to-date with a possibility of adding new defendants. We are waiting the final determination from the PTAB on the IPRs that have been filed against that portfolio and we expect to start receiving those rulings over the next two to three months. Our OrthoPhoenix portfolio covers bone treatment, bone cavity creation. Currently there are three active defendants in the United States, Stryker, Dfine, Wright medical. The portfolio has six settlements to-date with a possibility of adding new defendants. We are waiting the PTAB determination on four pending IPRs. We expect to receive those rulings later this year. Additionally, the Markman hearing on this case is scheduled for December 3 of this year. A related portfolio to Orthophoenix is the MedTech portfolio which is our European assets and it covers bone treatment and bone creation just in different jurisdictions though. Currently there are seven active defendants. The portfolio has five settlements to-date with new enforcement campaigns expected. In April 2016, MedTech will have the infringement appeal hearing against Stryker as well as the infringement first oral hearing for Joline, Pan Medical and Signus. TLI has a portfolio with German patents, covers the organization of digital images received from a mobile device. Currently, there are 10 active defendants. This portfolio has one settlement to date with new enforcement campaigns expected. TLI has an active upcoming calendar including a December 10 expected announcement of the court’s infringement decision against Yahoo's Flickr Service and a possible injunction. Additionally, on December 10, TLI infringement - first oral hearing against Twitter and Pinterest. On March 10 of 2016, TLI will have the infringement second oral hearing against Google. Also on that same day, we will have the first infringement oral hearing against Yahoo’s Tumblr service and Instagram. Later in the year, on April 28, TLI will have a second infringement oral hearing against Facebook. The U.S. portfolio named TLI is awaiting the federal circuit oral hearing date. One additional item that I want to discuss on this call is the TPMS portfolio. Bridgestone has settled litigations with both TRW and with Schrader. We recognized a portion of the settlement revenue in our third quarter and the remaining revenue will be booked in our fourth quarter. As a result of the Schrader TRW settlement with Bridgestone, Marathon’s subsidiary IP Liquidity and Bridgestone have mutually agreed to terminate the patent purchase agreement. As a result of the termination of the PPA, Marathon will reduce its debt by $10 million in the fourth quarter. In summary, I’m generally pleased with Marathon's third quarter 2015 revenue result. The majority of the one-time cost associated with the Bridgestone Schrader and Bridgestone TRW trials which significantly impacted operating result in both Q2 and Q3 are now behind us. It is important to note that we inherited the non-contingent cost and fee structure in the Bridgestone enforcement action which was a deviation from our business model. Virtually, all of our other cases have cost and fees largely contingent with the outcomes of monetization effort. So you can expect to see the expense side of our P&L fall back in line with our low OpEx high earnings leverage model. I’d now like to talk about the proposed merger with Uniloc. We expect to be filing a form S4 for the proposed transaction within the next two to three weeks. As noted on our previous call, we believe the merger of Marathon and Uniloc will add significant scale to the business model and create one of the largest and most experienced publicly traded patent licensing Company. On an unaudited pro forma basis and at the time of the announcement of the proposed transaction, the combined companies have generated approximately 93 million in licensing revenue over the past 30 months of operation and approximately 37.5 million in licensing revenue over the last 12 months. Together, we currently have 119 active defendants and 101 scheduled trials through 2017, an average of about one trial per week. Additionally, there are as many as 150 companies that we believe infringe on our combined patent assets that we can pursue as monetization opportunities. One of the greatest attributes of combining the companies will be the enormous increase in patent assets and litigation diversification as well as the frequency of trials and monetization initiative. We expect this increase in litigation frequency will impart or levitate the prospects of having any given quarter producing smallish revenue. Additionally, Uniloc’s proprietary, quantitative and qualitative patent analytics platform gives our team a professional, highly effective tool to identify and acquire extremely high quality patent assets. That concludes my prepared remarks. With that, I’d now like to turn the call over to Frank, our CFO for detailed look in our third quarter financial results. Frank?

Thanks Doug. As Doug mentioned earlier, we are pleased to report strong sequential revenue growth in the third quarter revenues totaling $6.4 million, up significantly from revenue in the second quarter of this year. The growth in revenue was driven by the issuance of larger one-time, non-recurring licenses to 11 different entities and their affiliates and these one-time licenses accounted for 97% of the company’s revenue in the third quarter. Direct cost of revenue in the Q3 2015, was approximately $4.0 million or 63% of revenue as compared to direct cost of revenue in Q2 2015 of approximately $3.9 million or 282% of revenue. Direct cost of revenue includes both contingent and non-contingent payment, the patent enforcement council and patent enforcement advisors and inventors. During Q3 2015, the company incurred approximately 900,000 of non-contingent legal expenses associated with the Bridgestone litigation. The company reported other operating expenses in Q3 2015 of approximately $5.5 million, a 10% decrease as compared to other operating expenses of $6.1 million in Q2 2015. Included in other operating expenses for Q3 of 2015 was approximately $630,000 in non-recurring professional fees associated with proposed merger with Uniloc and the litigation with Dominion Harbor which was subsequently settled on October 30 2015. Total operating expenses in Q3 of 2015 include non-cash expenses totaling approximately $3.8 million including $2.9 million in patent amortization expenses and approximately 900,000 in non-cash stock compensation and fee expense. In Q3 2015, the company reported a GAAP net loss of $3.8 million or $0.26 per basic share compared to a GAAP net loss of $4.5 million or $0.32 per basic share for Q2 of 2015. Non-GAAP net loss for Q3 of 2015 was $88,000 compared to a non-GAAP net loss of $4.5 million for Q2 2015. A reconciliation of GAAP to non-GAAP financials can be found in both the financial tables at the end of our third quarter results press release issued earlier today as well as in the quarterly report filed today on Form-10Q with the SEC. We ended the third quarter of 2015 with cash and cash equivalent totaling $3.4 million, as compared to $1.5 million at the end of the prior quarter. As of September 30, 2015 we had $14.4 million weighted average basic shares outstanding. Thank you for all of your attention. We now like to open the call to your questions.

[Operator Instructions] Our first question comes from the line of William Gibson from ROTH Capital Partners. Please go ahead with your question.

Is there a little more color you could share on the Bridgestone Schrader settlement? Did that happen after the close of the quarter and is that what is behind your confidence in your guidance?

Let me answer what I can answer – and what I can’t because of confidentiality I’ll explain why. Yes, the settlement happened after the quarter. Yes, it is partly the reason that we have confidence in the rest of the year and other than that there is not much more color I can provide unfortunately Bill. As you know, these are highly confidential strict NDA confidentiality provision so that is as much as I can go into.

I can appreciate that. I would like to just ask a little bit about the Dominion Harbor and what was going on there?

Again pretty strict confidentiality on that as well. We [indiscernible] with the former licensing group that we had hired a couple of years ago to help in some licensing activities. And that was a result of - about a year-long pre-arbitration settlement discussion.

Yes. One last thing and I’ll turn it over to someone else. You rattled through quite a few of these subsidiaries really quickly. In terms of what are sort of the three that you think could - as monetization opportunities this year?

Let's see here. TLI, we have discussions with a lot of these companies all the time but TLI is interesting, we have the decision on Yahoo/Flicker infringement will be December 10. And so that's a pretty big impetus. If we win and there is an infringement finding we will have the opportunity to put an injunction in place. When the court will allow that injunction to be put in place will be determined on December 10. But typically that’s a pretty big motivation for companies to seek license agreement. Some of the new cases that I referred to in Germany that read on the auto industry which we will issue sometime in December more information about those assets we actually believe that those are going to start producing revenue fairly soon as well. And clearly we have a lot of [indiscernible] in the signal IP cases, we’re only four months away from trial starting; we just finished three days of mediation with 11 of the 12 defendants, last week, so there is quite a few things on the horizon – on the near term horizon.

Okay. Actually I promised no more questions, I do have a quick one. Were those new assets purchased in the fourth quarter?

Yes.

Okay. Thank you.

Thank you. Our next question comes from the line of [David Hoff] [ph], a Private Investor. Please go ahead with your question.

Hi Doug, very good quarter. It's great to see after quarter two. I guess my question is on the acquisition pipeline, it seems like it’s still a buyer’s market and deals can basically be done with very little cash outlays. Is this something you’re still looking at even with the Uniloc merger kind of refreshing your pipeline?

No, absolutely. Our European automotive assets that I just referenced in my question with Bill is the perfect example, I can't get into the specifics but it was very, very attractive opportunity. Fit our skill sets both in the industry and in the jurisdiction that we are bringing [indiscernible] and we see a lot of opportunities – it's not a matter of how many opportunities that we see, it's a matter of the quality of the opportunity and with things in the United States and frankly with the development of the European Patent Court in Europe and our gaining expertise in Germany and other jurisdictions in Europe. We are really focused on developing that pipeline both domestically but more importantly internationally. So, we do see a lot more opportunities and so far it is still a buyer's market.

Okay. My next question might be little tough, I can understand if you can't answer it. We still haven’t really seen an eight figure deal or one of the large settlements from the triples or homeruns but meanwhile we are seeing really good developments at the patent office and in court. Is that something that we are just – it's not really a delay, it's trying to get market rates; there was another public patent entity that basically said the same thing, that deals were on the table but instead of stuffing the quarter full of below market deals it's better to stay patient. Is that a similar dynamic that you’re seeing?

I think it is. If we wanted to hit the bed on some of these we could but frankly we will be doing our investors a disservice. So we are patient. Sometime that patience is rewarded. Often times we have to be patient, we are obviously waiting to see what the Judge in the Dynamic Advances cases will rule on the summary judgment motion. So we are not going to do anything until after we see that and even then we may not do anything until we get to trial. But this is unlike other businesses where you have a competitive selling situation and a single buyer. Our customer doesn’t buy – isn’t going to get a license to Dynamic Advances from someone else, they can only get that license from us. So if we don’t settle with a particular defendant in a particular quarter that settlement hasn’t gone away, it just been moved out. So, we haven't lost anything per se, we are just moving things to a point where we think that the settlement amount fits with what we believe we fairly deserve.

Okay. That’s a fair answer. This is last question I guess relates to the German MedTech with Stryker. I know it was delayed a handful of months. Is that something - again with my other question, should we see – could we possibly see better market rates and the deal finally done if somebody’s IPRs make it through on a really good [Markman opinion] [ph] is issued?

It’s a balance of risk reward, right. As our asset is de-risked because IPRs are instituted or claims survive or frankly and what happened in Germany is the - the Judge moved the appeal to March or April, whatever the date is now, and that was Stryker's appeal over the infringement decision against Stryker. So as far as I am concerned that appeal can be moved off into infinity. Our injunction against Stryker remains in place and will stay in place. So it doesn’t bother us one bit frankly, and like you stated, when we de-risk the asset we believe that there is a requisite reward that should come over time. And so as we move through the Markman, we move through some of the PTAB’s decisions and as we move through potentially other jurisdiction that we have reads on Stryker we think that we’ll see – we’ll get closer to the settlement date potentially and typically that helps with the settlement amount as well.

Okay. That’s it for me. Thank you.

Thank you. [Operator Instructions] our next question comes from the line Mike Latimore from Northland Capital Markets. Please go ahead with your question.

Great, thanks yeah, very nice quarter there. I guess Doug on this new international asset you mentioned, can you give a little more color may be baseball terminology about kind of what the opportunity is there and then is the confidence in the near term revenue more associated with the trial date or further activity? A – Doug Croxall: So the new assets - so we are pursuing a slightly different strategy with these new assets. We have requested a preliminary injunction against the defendants, there is seven named defendants, I’m not going to name who they are, but we have requested the German court issue a preliminary injunction again. It's a slightly different path than the traditional infringement claim followed by two world hearings and then if you win you get an injunction we’re going slightly different route and the characteristics of this case allow us to pursue that route, you don’t always have that opportunity but this particular time we do so that’s the choice that we made. We expect in two to three weeks will have some indication from the court as to whether they will issue the PI or not and we think that the tremendous influence and motivation for the automobile manufactures to sit table and discuss a like with opportunity. Again I want to say first, second week of December we should be through some critical dates and which will be in a position to more openly discuss the assets, the potential licensees and that process that we’re going through. And yeah, these would all fit aggregately fit into a number header spot.

Okay, excellent. And is this one or the deal more or a less share or is it - there were some upfront premier? A – Doug Croxall: No upfront and read share and generally I mean - I can’t get into the specific terms but generally speaking majority of the net revenue will flow to Marathon subsidiary that count the assets.

Okay, sounds great. And then it does sound like obviously you are looking at a number of assets but I guess post merger with in Uniloc, I guess Uniloc's history has been a little bit more internal development. So does that change the strategy next year do you focus a little more on internal development or do you still have the same kind of cadence that are based on the patent acquisition front? A – Doug Croxall: I don’t think it's in either/or I think it's both. I mean they definitely have developed the lot of their internal assets. We think that there is a lot of development that can occur with our existing portfolio with some of the open applications that we currently already own in Marathon. So we continue to pursue both internally development strategy, as well as kind of an outside acquisition strategy. I don’t think - it’s not a situation where you had to be either/or. One typically allows you to generate revenue faster when you buy something that’s already developed. You can generally develop revenue quicker and time to money is an important elements in our business and the internal development of assets with Uniloc is done quite well that's just a different path but it’s also a lower cost path and it takes a little bit more patient but we’ll embark upon both strategy. It's one of the reasons the company emerging make a lot of sense to feel.

And then should we assume that kind of – gross margin if you take out the 900,000 that’s kind of the normalized gross margin think about going forward. What should we think about, sort of normalized gross margin at this point?

Thank you. We’re returning through our gross margin estimates that we had discussed prior to the last couple of quarters noting that the fixed expenses associated with the Bridgestone representation against TRW and Schrader were definitely scaling the results of the last couple quarters. The each - underlying that representation ran its course with the settlement of both cases and will not impact our Q4 results and going forward results.

Okay. And I just think that you said that as part of the TPMS structured negotiation, you will see reduction of debt by $10 million in the fourth quarter, is that what you said?

That’s what I said. That’s correct.

Okay. Can you just give a little more color on that? How does that come about or structure go out I guess?

Well we terminated the patent purchase agreement. So the payment in that no longer exists. So therefore the debt will no longer exist.

Okay. Good. Thanks a lot, good luck.

Thank you.

Thank you. Our next question comes from the line of Matthew Campbell from Laridae Capital. Please go ahead with your question.

Good afternoon gentlemen. Mike just stole my question, it’s nice to see that $10 million debt retire that's great to hear and good work on the quarter that’s all I have.

Okay. Thank you, Matt.

Yes.

Thank you. Our next question comes from the line of Hugh Cohen from Applied Financial Research. Please go ahead with your question.

Hi, I am on a similar theme here, with the $10 million retirement of debt in the fourth quarter, just a couple of questions related to that, well first of all maybe obvious, but just want to be clear that’s going to count as $10 million worth of revenue that was applied to that debt and as you’re saying then there was also no associated cost because that asset has already been cost, can you comment on that?

Sure, so there is two sides to the equation. There is the extinguishment of the debt side, which would be a $10 million other income item. So it will fall down below the operating profit line. So it will not be a revenue line item. Correspondingly, there will be a write down in the value of those assets obviously because those are going off the books as well. At the same time there will be a recognition of the difference between the two, which will be a net income item that we’re finalizing right now. But equal to the amortization expenses taken from the time of the purchase to date of the settlement. So there will be an extinguishment of debt, write down or elimination of some assets related to that debt and then a net gain associated with the amortization that's already been expensed in prior quarters.

Just as a follow-up, was this counted all towards -- it was supposed to be revenue I guess towards the line of credit, but was supposed to get in revenue number every year was discounted all towards that or no it’s falling below the line?

It’s falling below the line and will not count towards the revenue target and just as an FYI this year that revenue target applies.

How close are we still?

Well that’s a very clever question Hugh. Obviously, looking at Q3, Q2 and Q1 I think we’re right around 12 and we feel pretty comfortable that we’re going to be just fine meeting that number with where we are already in Q4.

Thank you.

No problem.

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I would like to turn the floor back over to management for closing comments.

Okay. Thanks again for joining us today. We look forward to speaking with you again next quarter.