The Nashville Files - Cash-Strapped Technology Small-Caps Hold Patent Sales

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Cash-Strapped Technology Small-Caps Hold Patent Sales

January 14, 2009

Small-cap technology companies from Silicon Valley to Israel, struggling to raise enough money to survive amid the credit crisis, are selling prized patents to stay in business. VocalTec Communications Ltd. Chief Executive Officer Ido Gur said he needed to sell 15 of the Israeli company’s 22 inventions to raise money to market its main Internet phone software. Irvine Sensors Corp., whose infrared camera technology is used by the U.S. military, and TurfTrax Plc, a U.K. owner of patents for monitoring horseraces, are also selling or considering a sale of rights to stem a slump in revenue.

“I needed the money,” said Gur, 40, who agreed to become CEO on condition that VocalTec, which reported $5.8 million in 2007 revenue, would dispose of its consumer phone patents to focus on sales to clients such as Deutsche Telekom AG. “I would be able to recover VocalTec only when I had cash in hand.”

Developers who once imagined spending years to build businesses that would create multiple products or tap many markets now find they need to scale back their ambitions. Applications for intellectual property transfers in the U.S. climbed 20 percent in the second half of 2008 to 199,699 from a year earlier, data compiled by the Patent and Trademark Office show. In the U.K., the number of requests rose 41 percent.

“They can essentially raise cash without diluting existing investors,” said Andrew Ramer, managing director of the transaction practice at Ocean Tomo LLC, a Chicago-based merchant bank that auctions intellectual property collections for smaller businesses and individuals . “Selling their patents and keeping a license back allows companies to have their cake and eat it, too.”

Bigger Deals

In addition, companies are selling their more valuable rights, according to Patrick Snow, managing director at London- based Iceberg Transactions Ltd., which was founded in 2005 to help sell patents for clients mainly in the U.S. and Europe.

A collection of patents typically sells for several hundred thousand dollars, according to Snow. In the second half of 2008, Snow has seen a “particularly spike” in transactions, as well as deals worth several million dollars, he said.

Unavailable credit led to a decline in sales and the need to turn intellectual property into revenue, TurfTrax Chairman Adam Mills said. The Salisbury, England-based company, which is seeking ways to develop its tracking technology for the military and security industry, reported a 13 percent drop in first-half revenue to 58,000 pounds ($84,000).

‘More Secure’

Costa Mesa, California-based Irvine Sensors, whose optical technology is used on satellites and missiles, agreed last month to dispose of some patents to Aprolase Development Co. for as much as $9.5 million. Irvine had previously licensed a chip- stacking technique to International Business Machines Corp., which set a record last year for U.S. patents awarded, according to data from IFI Patent Intelligence provided by IBM.

“This new path is much more secure,” said CEO John Carson, adding he’s willing to give up the rights because the alternatives for making money from patents -- litigation and licensing -- lead to higher costs and more uncertain income. “This type of deal is particularly sweet because the proceeds go straight to your bottom line.”

Irvine Sensors, which files about 20 patents annually, forecasts a profit for the year through September after reporting a net loss of $22 million last year, Carson said.

AT&T, Sony

Most patent holders are technology companies. About 43 percent of the 60 stocks on the Ocean Tomo 300 Patent Growth Index belong to the technology and telecommunications industry, while biotech and pharmaceutical businesses account for 32 percent. The companies, which include Microsoft Corp. and Apple Inc., are chosen based on the estimated value of their intellectual property.

The MSCI World Information Technology Index lost 44 percent last year, the third-worst performance after financial stocks and raw-materials suppliers. This year, the index is down 2.4 percent, compared with an 11 percent drop of the MSCI World Financials Index.

AT&T Inc., Sony Corp. and Royal Philips Electronics NV are among technology companies that have announced thousands of job cuts in the past two months.

The firings may buoy patent sales as the workers are often “higher-skilled” with ideas to sell, according to Matt Dixon, a lawyer at IP21 Ltd. who serves on the council of Britain’s Chartered Institute of Patent Attorneys.

Still, technology companies that are struggling to stay afloat, particularly those that have been forced to file for bankruptcy protection, may have to sell their intellectual property cheap because they have less bargaining power, or haven’t used it and don’t realize its potential, according to Marija Danilunas, a partner at Dewey & LeBoeuf LLP.

Depleting Cash

“Watch out for venture capital buying the patents of companies that have gone bankrupt,” said London-based Danilunas, who has been advising on patent transactions for 21 years. “They’ll take advantage of bargains.”

Shares of VocalTech have jumped 11 percent on the Nasdaq Stock Market since the beginning of this year, after falling 78 percent in 2008. They added 2.3 cents to 20 cents yesterday. Irvine Sensors, which slumped 98 percent in 2008, closed at 30 cents yesterday.

After reaching a licensing agreement that gives the company future access to the patents it sold, VocalTec wants to spend the proceeds on research, marketing and expanding its 65-person workforce, CEO Gur said. Herzliya, Israel-based VocalTec posted a first-half net loss of $3.8 million and was depleting its remaining $2 million in cash before the patent sales, which generated $15.4 million for the company.

“To tell whether it would survive or not is a big question,” Gur said.

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