From mara board
POSTED BY Dan LonkevichPOSTED ON SATURDAY, SEPTEMBER 20TH, 2014
Microcap financier Barry Honig was an early backer of patent investing companies such as Vringo Inc.and has invested in many others thanks to his 74-year-old father, a forensic accountant, who introduced him to the business.
About five years ago, Honig’s father Alan Honig introduced him to a client, who was a professor of radiology at the Weill Medical College of Cornell University in New York and an attending radiologist at Columbia University’s New York-Presbyterian Hospital. The doctor was considering possible ways to reduce taxes he was paying from royalties from an MRI and angiography invention that was commercialized by General Electric Co. and other leading MRI companies.
“GE and all the major MRI companies were infringing on his invention,” Honig, 43, said in a telephone interview from his office in Boca Raton, Florida.
The doctor was set to receive royalties of $5 million to $10 million a year until 2028 from the licensing of the invention. After being introduced to the doctor, Honig set about designing a way to reduce the tax hit and monetize the revenue stream through an investment vehicle that would compensate the doctor for the net present value of the royalty stream.
“The royalties were to run to about $100 million, but the tax laws in New York for short term capital gains were changing,” Honig said “He would have had to pay the federal government and the state and city of New York” a significant portion of his income stream.
The idea was that Honig “would acquire the royalty stream at a discount, the net present value of $100 million, which would have been about $40 million to $50 million,” he said.
The doctor would get the advantage of a one time tax on a smaller sum at a lower rate and Honig would get the future royalties.
“That’s how I got into IP investing,” Honig said. “We never set it up. A lot of scientists don’t want to take the risk, or are less motivated by money. He didn’t want to do it.”
Honig’s father Alan confirmed the story. Both he and his son declined to name the client.
But after that, Honig was struck by the possibilities of investing in IP as an asset class.
“I started looking for an IP monetization investment opportunity and that’s when Vringo was set up,” he said.
Honig started backing Vringo when it was just a private ring-tone company and before it reverse merged with a public shell in 2007 to get into the patent monetization business.
He provided startup capital for the private company and introduced it to other investors.
With additional backing from investment managers Hudson Bay Capital Management and Iroquois Capital LP, Vringo started buying portfolios of patents and seeking licensing revenue from infringers through privately negotiated settlements or infringement actions.
New York-based Vringo had early successes eventually winning a $30.5 million award and a 3.5% royalty stream that could have been worth hundreds of millions of dollars against AOL Inc., Google Inc. and others.
The award was reversed and the patents invalidated on Aug. 15 by the Court of Appeals for the Federal Circuit. Vringo has said it will seek an en banc appeal before the full Federal Circuit, though IP lawyers and experts say such a review is unlikely to succeed.
Shares of Vringo fell 72% after the Federal Circuit’s ruling invalidating the company’s patents for obviousness. Vringo shares closed at $1.04 on Friday, Sept. 19, giving the company a market value of $96.25 million.
Honig also is president of GRQ Consultants Inc., an investment vehicle. He has sometimes taken seats on the boards of private companies as he did when he became co-chairman of Interlock Inc. and ChromaDex Corp. Both eventually went public.
In December 2011, Honig helped Interclick, an Internet media company, sell itself to Yahoo! Inc. for $280 million. He also helped rescue 5 to 1 Holding Corp., another Internet media company that was facing bankruptcy, sell itself to Yahoo! for $32 million.
While Honig says he has made significant money investing in patent assertion companies over the past five years, he’s lately soured on many of the players and sees only Marathon Patent Group andInventergy Global Inc. as long term investments.
“I’m not going to invest long term in the IP space again,” Honig said. “I’m betting on Erich Spangenberg and Doug Croxall.”
“I’m the largest outside investor in Marathon” after Spangenberg, the IP Navigation Group founder, and Croxall, Marathon’s CEO.
Marathon is set up to protect businesses, large corporations and the small inventor and to have more of a long term business plan, he said.
Besides seeking licensing revenue Marathon recently announced a new analytical service to allow customers to evaluate patents. It expects the service to be a revenue source.
Marathon’s OPUS Patent Analytics service was jointly developed by Spangenberg and Croxall.
Marathon has produced “a terrific IRR (or internal rate of return) for investors,” he said.
“Looking down the road I feel very confident it could be a $50 stock and a market value of $360 million,” he said.
Shares of Marathon are closed Friday, Sept. 19 at just $13.63 each, giving the company a market value of just $78.32 million. The shares have been as high as $16.40 and as low as $4.42 over the past year.
Marathon “could be the next Acacia,” he said, referring to Acacia Research Technology Corp., the research company founded by Bruce Stewart and refined as a patent assertion company by Paul Ryan and Chip Harris.
Acacia’s strategy of partnering with patent owners and applying the legal and technology expertise of its management has generated more than $1 billion in revenue and returned more than $630 million to its patent partners.
To be sure, Acacia shares have come down significantly from their all-time high above $46 a share in 2011 and closed Friday at just $17.02 each. They have traded between $12.23 and $23.37 over the past year.
Honig also has a very large long term position in Inventergy, the patent assertion company founded by CEO Joe Beyers, who previously spent 34 years in IP licensing for Hewlett Packard Co.
He owns 1,248,565 shares of common stock of Inventergy or a 5.22% stake, according to an Aug. 8, 2014 securities filing.
Beyers has assembled a team of former licensing professionals and IP lawyers who he hopes will give it the credibility to reach settlements more easily with licensees.
“Joe Beyers is a rockstar,” Honig said. Inventergy has “a long term business strategy. They’re not the typical patent trolling company. They have partnerships with tech companies.”
To be sure, Inventory’s new rub on the old patent assertion business model so far has yielded no results despite discussions with 20 possible infringers.
Inventergy shares closed up 14 cents at $1.94 a share on Friday, Sept. 19.
For his part, Honig describes companies like Vringo, VirnetX Holding Corp. and ParkerVision Inc., which have been good sources of trading profits for him, as “one trick wonders.”
All three have come down from all time highs in part because of dilution from the conversion of preferred stock issued to investors.
Indeed, shares of VirnetX soared to an all time high of $40.47 in 2012 after the Zephyr Cove, Nevada-based company reached a $200 million settlement in May 2010 with Microsoft Corp. of an infringement action stemming from patents that secure communications on next-generation mobile-phone networks.
But on Monday Sept. 15 VirnetX was dealt a sting blow when the Court of Appeals for the Federal Circuit threw out a $368.2 million royalty award against Apple Inc. The award had been handed down by the U.S. District Court in the Eastern District of Virginia in connection with a lawsuit alleging that Apple’s Virtual Private Network, or VPN, on Demand and FaceTime applications infringed patents VirnetX bought from Science Applications International Corp. in 2006.
While the appellate court found evidence of infringement, it ruled that the trial court erred in both its instructions to the jury, in allowing expert testimony from a VirnetX witness and in how the royalty was apportioned.
VirnetX shares plunged $6.62, or 45% to $8.82 the day of the ruling and have since then traded lower. They closed on Friday at $5.39 each.
Honig said he’s done well investing and trading in and out of stocks like VirnetX, though most long term investors have fared poorly.
“It’s been a strong stock at times. Had its ups and downs, but it’s meant terrible returns for long term investors.”
“When you look at companies like VirnetX, Vringo and ParkerVision, they’re like lottery tickets,” he said. “It’s David versus Goliath, a high risk, high reward model.”
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