IP Market Development - Chicago

Transcript IP Market Development - Chicago

The Evolving IP Market

An Inventors Walk Down Wall Street

James E. Malackowski April 2013

DISCLAIMER: THIS PRESENTATION WAS PREPARED BY REQUEST FOR EDUCATIONAL DISCUSSION PURPOSES ONLY AND DOES NOT NECESSARILY REPRESENT THE VIEWS OF OCEAN TOMO, LLC, ITS AFFILIATES, CLIENTS, EMPLOYEES OR EXECUTIVES.

USE IS BY PERMISSION OF THE AUTHOR ONLY. SELECTIVE DATA OR IMAGES TAKEN OUT OF CONTEXT MAY BE MISLEADING TO A SUBSEQUENT AUDIENCE OR TRIER OF FACT.

What’s Happening Now?

The Big Picture

Opportunity Behind The Headlines -- Nortel

Nortel Auction Generates 3x Expected Price, Bonds Get Par + Accrued Subs Turn Out to be an Even Better Bet

  Ocean Tomo valued the senior bonds when they were trading in the 70’s Based on Ocean Tomo’s valuation, hedge fund clients generated significant returns on both the seniors and the subs 5

ALU IP Collateralized Debt (Liquid)

900 800 700 600 500 400 300 200 100 0 2005 2006 2007 2008 2009 2010 2011 2012 6 6 ALU IP Portfolio (# patents and Average IPQ Score)

Going Private - Mosaid

Private Equity / Venture Capital Investing

Private Companies With Strong IP Are More Likely to Get Additional Funding And Less Likely To Go Bankrupt Patent Filings in 5 Years Before First VC Investment Yes No Patent Filings in 5 years Before and 5 Years After First VC Investment Yes No No. of VC Investment Rounds VC Duration (years to next funding) VC Incubation (years from first round to last) First Round Investment ($mln.) 4.44

1.59

5.68

15.93

3.39

1.22

2.79

11.21

4.12

1.54

4.79

17.17

3.40

1.22

2.61

12.28

Total VC Investment ($ mln.) Probability of Going Public (%) 153.36

67.39

101.46

14.81

129.12

68.15

88.01

14.54

Probability of Bankruptcy (%) 3.47

10.12

3.22

9.50

Observations 1,466 8,295 1,501 8,601

Thomson VentureXpert database for the 1976-2005 period. See Cao, Jerry X. and Hsu, Po Hsuan (2010), Patent Signaling, Entrepreneurial Performance, and Venture Capital Financing, forthcoming, 31.

Shareholder Activism – Motorola Mobility

Strategy Change of Control Transactions Parties

MMI / GOOG

Situation

On heals of successful Nortel patent auction Carl Icahn demands sale or break up of the company.

Status

Deal announced for GOOG to buy MMI for $12.5 bln. Deal close by year end. Focus on US and European antitrust issues.

“Motorola is activism at its best and we applaud management and the Board for acting so responsibly.”

- Carl C. Icahn 8/15/11 9 9

Shareholder Activism - AOL

    Starboard is an activist who became one of the largest shareholders of AOL On Feb 24, 2012, Starboard publicly wrote the Board:  AOL owned a robust portfolio of extremely valuable patents that had gone unrecognized and underutilized  Starboard believed that AOL’s patent portfolio could produce in excess of $1 billion of licensing income if appropriately harvested and monetized  AOL’s inaction … was alarming … the Company’s most valuable patents would expire worthless On March 13, 2012, CEO Tim Armstrong stated at an investor conference that: “... AOL’s patent portfolio,

it’s beachfront property…it’s basically extremely

valuable.” On Apr 9, 2012, AOL announced the sale of its patent portfolio to Microsoft for $1.056 billion in cash.

Shareholder Activism - AOL

We cannot find one instance prior to our February 2012 letter in which Mr. Armstrong had ever publicly made reference to, or commented on, AOL’s valuable patent portfolio.

– Starboard Value L.P., May 25, 2012.

IP Event Trading – Litigation

Strategy Parties Situation Status IP Litigation Outcomes

VHC v. AAPL, et al VHC is for patent infringement On April 25, 2012, Judge Davis issued a preliminary Markman order signaling VHC has a strong case.

Fundamental Long/Short Trades

Tesla (TSLA) / Ford (F) / General Motors (GM) – IP data helped identify proprietary battery technology as the key to first mover advantage and safety advantage. The trade was long TSLA/ short F/GM and a basket of auto suppliers to hedge out Beta. Generated 100% relative returns; initiated 5/11. 13

U.S. Equities – OTP v. SPX

Manager Performance

January 2007 - January 2012 Single Computation 130 120 110 100 90 80 70 Guggenheim Ocean Tomo Patent (NAV) SPDR S&P 500 (NAV) 60 50 15% 10% 5% 0% Dec 2006 Jun 2007 Dec 2007 Jun 2008 Dec 2008 Jun 2009 Dec 2009 Jun 2010 Dec 2010 Jun 2011 Jan 2012 Cumulative Excess Return vs. Market Benchmark

Annual Excess Ret.

OTP Performance v. SPX (1/07 to 1/12) Cumulative Excess Ret.

1.47

7.88

Tracking Error 3.6

14  The graph at left shows the five year performance of a portfolio of 300 stocks picked using quantitative IP valuation tools v. the S&P 500  The portfolio is composed of stocks representing all market caps and styles and, therefore, does not exhibit those biases  As the IP index has consistently outperformed the S&P 500  Capturing that outperformance or “alpha” across a family of investment strategies results in superior risk adjusted and absolute returns relative to the market.

U.S. / China 200™ Patent Index

 The graph at left shows the five year performance of a portfolio comprised of the top 100 companies that own the most valuable US patents relative to their book value and 100 companies that have the most valuable Chinese patents.

 The portfolio is composed of stocks representing all market caps and styles and, therefore, does not exhibit those biases  Over the five-years of back testing, the U.S. / China 200™ Patent Index has outperformed its’ benchmark the MSCI World Index by 2922 basis points.

How Did We Get Here?

IP Historical Evolution

High Royalty Licensing Defensive Cross Licensing Competitive Litigation Congress Low 1 st Generation 17 1.

Period of Feudal Lords

IP Historical Evolution

High Royalty Licensing Public Auctions Defensive Cross Licensing Bowie Bonds Patent Pools Competitive Litigation Congress Low 1 st Generation Web Portals Contingent Counsel 2 nd Generation 1.

Period of Feudal Lords 2.

Rise of the Intermediary 18

IP Historical Evolution

High Royalty Licensing Public Auctions Defensive Cross Licensing Bowie Bonds Patent Pools Competitive Litigation Congress Low 1 st Generation Web Portals Contingent Counsel 2 nd Generation

Equity Indexes Activists IP Event Trading Privateers Going Private

Period of Feudal Lords 2.

Rise of the Intermediary 3.

Age of the Golden Rule 3 rd Generation (Part 1) 19

What Can We Expect Next?

IP Evolution Continued

High

Changing Numbers (Accounting, Reporting and Damages) “Taxation Economy” Traded Exchange (IPXI) Regional Centers Risk Management Sovereign Funding

Low 3 rd Generation (Part 2) 21

IP Evolution Continued

High

Changing Numbers (Accounting, Reporting and Damages) “Taxation Economy” Traded Exchange (IPXI) Regional Centers Risk Management Sovereign Funding

Low 3 rd Generation (Part 2) 22

Risks

Unintended secondary consequences of legislative or judicial reform; one-way judicial ratchet Continued dilution of “power to exclude” (e.g. ebay; ITC; essential patents) Concentrated foreign sovereign ownership and management of IP rights; lacking U.S. policy Misconceived financial reporting requirements 5.

10.

Single-sided corporate attitude to monetization Exhaustive “wait and see” attitude Unchecked shareholder activism and litigation Failure of risk markets to develop Failure to attract liquidity providers Public failures due to false expectations 23

Risks

10.

Kodak

  Jan. 18, 2012 – Kodak valued its patent portfolio at $2.2 to $2.6 billion in motion filed by Kodak Notwithstanding EK’s declared intent to sell 1,100 patents on July 22 nd , stock has continued downward 25

Risk Management - Patent Royalty Trust™

Select Products / Technology Areas Fairness Opinion Insurance Establish Trust “Interpleader” Notice (optional) License Execution and Payment

IP Evolution Continued

High

Changing Numbers (Accounting, Reporting and Damages) “Taxation Economy” Traded Exchange (IPXI) Regional Centers Risk Management Sovereign Funding

Low 3 rd Generation (Part 2) 27

Sovereign Funding

    

Activity

Europe Fund (France Brevets) designed to create new economy infrastructure which favors inventions (EU 50 million) Taiwanese Fund to acquire IP to assist local companies Japan Fund targeted investments in life-science IP Korea Fund to promote local IP rights (USD 403 million reported) LESI Global Technology Impact Forum received Delegations from Turkey, China, Singapore, the Philippines, UAE and Hong Kong      

Impact

P-LEC defense Manufacturing cost advantage Recycled and managed primary research funding Protect domestic industry Export judicial burden Next generation “cartel” 28

IP Evolution Continued

High

Changing Numbers (Accounting, Reporting and Damages) “Taxation Economy” Traded Exchange (IPXI) Regional Centers Risk Management Sovereign Funding

Low 3 rd Generation (Part 2) 29

Regionalization

Regional Service Center

U.S.

Regional Service Center Regional Service Center

EUROPE

IP Central Market Regional Service Center

PAN-ASIA

Regional Service Center 30

IP Market Plans

IP Evolution Continued

High

Changing Numbers (Accounting, Reporting and Damages) “Taxation Economy” Traded Exchange (IPXI) Regional Centers Risk Management Sovereign Funding

Low 3 rd Generation (Part 2) 32

Changing Numbers

     FASB 141/142 IP to fill the “GAAP” now in U.S. and Germany at a minimum IP reporting in Hong Kong (HKSE Feb 2012 Guidance) Changing damages accounting / Daubert patchwork quilt Expanding efforts towards global ratings now in U.S., Europe and across Asia 33

Ratings

Taxation Economy

      Growing expectation / consent to pay IP “tax” Low per unit effect across all products Catalyst to greater IP based reporting Consistent with planned IP exchange models Decomposition of cross licenses True Governmental taxation starting with cross border affiliate entities 35

IP Evolution Continued

High

Changing Numbers (Accounting, Reporting and Damages) “Taxation Economy” Traded Exchange (IPXI) Regional Centers Risk Management Sovereign Funding

Low 3 rd Generation (Part 2) 36

IP Exchange – U.S. Efforts Accelerating

The Intellectual Property Exchange International (IPXI) is the world’s first financial exchange that facilitates non-exclusive licensing and trading of intellectual property (IP) rights with market-based pricing and standardized terms. The result is an exchange that operates under two core principles: transparency and efficiency. IPXI invites all IP market participants to consider membership.

IPXI – Unit License Right™ Contracts

USP X,XXX,137 A / B / C

GENERAL DESCRIPTION: PATENT(S): FIELD OF USE: RESTRICTIONS: ISSUER RIGHT TO USE: UNIT BASIS: TOTAL OFFERED QTY: OPENING: OFFERING TERM: TERM OF LICENSE: IPXI PRICE BANDING:

INITIAL OFFERING (TRANCHES)

U137A: 10 million ULRs U137B: 10 million ULRs U137C: 30 million ULRs

FOLLOW-ON OFFERINGS

Unlimited 50 million ULRs USP X,XXX,137 A / B / C Valve Seat Insert USP X,XXX,137 and continuations, continuations-in-part and foreign counterparts. All All secondary sales through IPXI Yes including all subsidiaries Each ULR covers one automotive or light truck engine 50 million license units offered in 10 unit lots Dutch Auction (50% minimum quantity and price) 3 years Until consumed + / - 20% $0.50 per unit $0.75 per unit $1 per unit Deemed Market Price 38

IPXI – Patent Value Indexes

Humanitarian Marketplace Development

Campaign Name Mobility in Romania Q Drum Licensing & Mfg Light to Atauro Check-Out a Light Drinks are on Me Water to Rural Nigerians Make Some Noise Vietnam Smarter Cooking India Take a Load Off (Q Drum) What Knowing Can Do What's Cookin' When a Child is Born Female Entrepreneurs School Empowerment Catalog Page 8 9 10 11 12 13 14 15 16 17 18 19 20 21 MFC Issued: Ask $ 5,000 $ 8,000 $ 8,662 $ 10,963 $ 12,633 $ 4,948 $ 18,137 $ 4,187 $ 8,812 $ 6,245 $ 15,835 $ 10,773 $ 5,000 $ 5,000 135,600

INVENT FOR HUMANITY / KOPERNIK MARKETPLACE

Beginning Investment $ $ $ 795 $ 189 $ 336 $ 1,794 $ 11,001 $ 753 $ 1,095 $ $ 673 $ 560 $ $ IFH Directed Investment $ $ $ $ $ $ $ $ $ $ $ $ $ 5,000 $ MFC Allocated: 5,600 IFH MFC Allocation 400 400 400 400 400 400 400 400 400 400 400 400 400 400 MFC Conversion: MFC Price Conversion $ 100 $ 100 $ 100 $ 100 $ 100 $ 100 $ 100 $ 100 $ 100 $ 100 $ 100 $ 100 $ 100 $ 100 0.2500

Total Funding $ 100 $ 100 $ 895 $ 289 $ 436 $ 1,894 $ 11,101 $ 853 $ 1,195 $ 100 $ 773 $ 660 $ 5,100 $ 100 Funding Goal: $ 124,195 IFH Dir Invest: $ 5,000 MFC Purchases: $ 1,400 IFH On-site Funding: $ 6,400 Total Funding: $ 23,596 40

The Evolving IP Market: A 30 year overnight success (more or less).

Revolution

Ocean Tomo Overview

Ocean Tomo History

1987 1988 1993 1999 2002 2003 2004

Organized first national practice to offer Intellectual Property valuation opinions at a time when the Big-8 accountancies refused to address this growing asset class.

Co-founded first dedicated, full-service Intellectual Property consultancy offering advice on valuation, litigation damages and tax.

Created first integrated Intellectual Property strategy consulting group offering Intellectual Property Quality Management services to large Fortune 500 clients.

Founded first private equity advisory partnership to originate large-scale investments based on underlying Intellectual Capital.

Creation of first scaled investment banking practice, in partnership with leading Wall Street firm, dedicated exclusively to patent based structured finance.

Created nation's first integrated Intellectual Capital Merchant Banc™ firm.

Ocean Tomo acquired interest in PatentRatings.

Ocean Tomo History

2005 2006 2008 2009 2010

Created nation's first private equity and debt fund to invest in growing companies with strong Intellectual Property.

Successfully established a Live Public Auction Marketplace for Intellectual Property rights.

Created the nation’s first index based on the value of Intellectual Property. The Ocean Tomo 300® Patent Index launched in September on the American Stock Exchange.

Created The Intellectual Property Exchange International (IPXI) the world’s first financial exchange with an Intellectual Property focus.

Created Patent Bid-Ask, the first and only voice brokerage and online marketplace for Intellectual Property.

Created OTI, the first and only comprehensive source of global Intellectual Property based market information that combines a free global patent search with timely and actionable market intelligence.

Created PatentMarking.com, the first and only online platform designed for the management of patent marking data.

James E. Malackowski

200 West Madison, 37 th Floor Chicago, IL 60606 (312) 327-4410 Ph [email protected]