Eran Zur, managing director of Fortress Investment Group LLC’s (FIG) intellectual property finance group, has made a dramatic about-face since co-founding RPX Corp. and serving as president of the defensive patent aggregator.
While San Francisco-based RPX has been trying to teach its subscribers how to to minimize the patent troll problem by studying the litigation and settlement tactics of non practicing entities, Zur and Fortress have been investing in NPEs and effectively financing litigation.
Since Zur joined New York-based Fortress in February 2013, the firm has made investments in at least six penny stock patent assertion companies that some critics would call patent trolls including most recently an $11 million debt and equity financing for SITO Mobile Ltd. (SITO) on Oct 6 and a $11 million equity and debt financing for Inventergy Global Inc. (IVTG) on Oct. 2.
Other patent assertion companies Zur’s IP finance group has invested in include Document Security Systems (DSS), Netlist Inc. (NLST), Crossroads Systems Corp. (CRDS), and Andrea Electronics Corp. (ANDR).
Fortress, which had assets under management of $63 billion as of June 30, 2014, has a lot of money to back patent assertion companies.
“I am not familiar with any of these entities they’ve invested in but since trolls use shells it’s not surprising,” said Lee Cheng, chief litigation officer of Newegg Ltd., an online electronics company that has developed a reputation for battling trolls to the mat.
“Investors in patents and IP are not trolls—they can facilitate trolling if the entities and patents they are investing in are asserted in an abusive manner,” he said.
“Not all NPEs are trolls, and conversely just because a patent asserter is not an NPE does not mean they are not a troll,” he added.
Cheng said there are absolutely legitimate assertions of patents by both operating companies and NPEs.
He said patent trolling only occurs “when poor quality, probably invalid patents are asserted, patents are asserted in ways that overreach or technically valid patents are asserted and may even be infringed but where damages demanded are far, far in excess of the value the patent provides to the alleged infringers or society.”
Sanam Haidery, a spokeswoman for Fortress, said Zur declined to be interviewed for this story.
Prior to joining Fortress, Zur was the founder and managing partner of Koru Ventures, which ran an asset based fund that provided capital through patent backed loans, from Aug. 2012 to February 2013.
He worked at RPX from May 2008 until Aug. 2012. Previously, he was owner of Hoffman & Zur, which offered licensing negotiation services, for more than 6 years from January 2002 to May 2008.
For nearly 4 years from May 1998 to January 2002, he was a partner at Patentit, where he was in charge of aspects of the Lemelson Medical, Education & Research licensing program dealing mainly with the food and beverage, textile, container, tobacco, medical devices and retail industries.
“I don’t think they’re focused on the patent troll debate at all, they’re focused on risk reward,” said Rob Kramer, managing director of Altitude Capital Partners in New York, who worked at Fortress for about 13 months in 2003 and 2004.
“Fortress is a sophisticated investor across all asset classes,” Kramer said. “This is just another asset class for them.”
Kramer said he doesn’t know Fortress’s Zur, but that his “getting hired was their entry into the business in a more meaningful way.”
The most important question about Fortress’s investments in patent monetization companies “is what’s the fundamental value of the patents,” he said.
“The structure I’ve seen them use is a loan with warrants. They’re setting up to earn a 15% to 20% return. The devil is in the details about how it works out.”
Kramer said he’s not surprised that Fortress is investing in penny stock patent companies with market values from $10 million to $50 million.
“No, those companies don’t have any other meaningful access to capital,” he said. “This is a substitute for equity for them.”
Kramer said he would be surprised if Fortress wasn’t making similar investment in private companies as well.
“Fortress is a financial animal. They’re pure and simple trying to make money. They’re not trying to build companies or create jobs,” said Chris Marlett, CEO of MDB Capital Group, a Dallas-based IP focused boutique investment bank.
Marlett said that because of its size and record as a public company Fortress has a classier reputation than some other financiers of patent assertion companies such as Hudson Bay Capital Management’s Yoav Roth.
Roth “is not a bad guy, he’s a tough guy,” Marlett said. “He doesn’t care about new businesses or creating jobs. His investors pay him to make money. To some degree, Fortress is the same way, though Yoav will invest in things that Fortress won’t.”
For his part, Marlett described the companies in which Fortress has invested as “opportunists.”
Of the six, he said only Crossroads Systems focuses solely on bringing infringement suits based on patents it developed. He said the rest may have developed some patents but acquired most of the others that they use in their litigation strategy.
“The companies that go to Fortress, deserve Fortress. Birds of a feather flock together.”
Jersey City, N.J.-based SITO Mobile, a mobile media solutions provider, on Oct. 6 announced that it secured a $10 million credit facility backed by its intellectual property portfolio and a $1 million equity investment from Fortress.
As part of the investment, SITO Mobile will issue 2.62 million new shares of common stock to Fortress at 38.17 cents each, which represents the trailing 30-day average closing price.
Shares of SITO Mobile currently trade at about 28 cents and have traded between 25 cents and 70 cents over the past year.
“The Fortress entity we dealt with is primarily a credit fund so it was mostly debt,” said Jerry Hug, SITO Mobile’s CEO. “We felt it was the ideal scenario for us given that we feel our stock is undervalued and our IP portfolio is isn’t fully understood.”
The debt structure of the investment provided the best opportunity to monetize SITO Mobile’s IP portfolio without diluting shareholders, Hug said.
James Palmer, a managing partner in Fortress’s office in San Francisco, first approached SITO Mobile a couple months ago, Hug said.
Zur’s friendship with SITO Mobile director Peter Holden cemented the investment.
Both Zur and Holden, who also is a senior vice president at IPValue, are listed as No. 17 and No. 21, respectively, in the July/August issue of Intellectual Asset Management magazine’s top 40 IP deal makers.
“Eran and Peter connected,” Hug said. “It was really a great pairing of capital and value creation."
One of the best things about Fortress being knowledgeable about IP, “is that they took the time to understand our operating business,” he said.
“We’re unique compared with some of the other companies they’ve invested in,” he said. “We have an operating business that’s growing quickly in the mobile technology space. Most of their other investments have been in pure play patent monetizers.”
Hug said currently 95% of SITO Mobile’s revenue comes from its mobile technology operating business only 5% from its IP portfolio.
“The goal is clearly to derive more value from the IP portfolio. We view it as an enormous opportunity for us. In the near term it should be able to mirror or our operating business in terms of revenue.”
Joe Beyers, the CEO of Inventergy, said in an email “we are pleased that the Fortress investment represents a vote of confidence in Inventergy and our IP assets from an experienced and well respected firm with good expertise in the IP technology and business arena.”
Beyers said he worked with Fortress’s San Francisco office and described the firm’s representatives “as very professional in their engagement.”
He said the Fortress team did an extensive amount of technical and business due diligence.
“They have very good internal IP professionals who thoroughly scrutinized our IP assets and our IP business opportunity,” he said.
“We believe that they are looking at the mid to long term prospects,” he added. “We believe they will be a good financial backer who may be a source of additional capital to enable us to effectively capture new business opportunities.”
To be sure, Beyers had reason to be pleased because the financing prevented him from having to once more dip into his personal fortune to keep Inventergy’s business afloat.
Campbell, Calif.-based Inventergy was down to just $484,175 in cash and cash equivalents as of June 30, 2014.
Shares of Inventergy are currently trading at about $1.33 and have traded between $1.22 and $14.98 over the past year.
To be sure, although investments from Fortress start out with much fanfare, they aren’t always so welcome in the end.
In July 2013, Netlist Inc., a provider of high performance memory solutions for the cloud computing and storage markets, announced that it closed new credit financing for up to $15 million from an affiliate of Fortress.
The company said it needed the money to support the ongoing development of its product and patent portfolios covering next generation server and storage systems.
"The strategic financing from Fortress underscores the untapped value of our extensive IP portfolio," said Netlist CEO, C.K. Hong in a statement. "Working with the team at Fortress, we are focused on fully maximizing the investments we have made in our advanced memory products and leveraging our patent portfolio to the benefit of our shareholders.”
Fourteen months later, Netlist was forced to announce the resignation of two of its directors Alan Portnoy and Claude Leglise, attributing the departures at least in part to their “disagreement with the company’s strategic and financing plans.”
Netlist’s Hong declined to comment on the resignation of the directors and the financing from Fortress.
Neither Portnoy nor Leglise responded to requests for comment.
Shares of Netlist currently trade at about 81 cents and have traded between 53 cents and $2.41 over the past year.
Document Security Systems in February 2014 contracted to receive a series of advances from Fortress affiliates.
Rochester, N.Y.-based DSS raised $2 million from Fortress affiliates in exchange for a promissory note in the amount of $1.79 million, fixed return equity interests in the amount of $199,000, and contingent equity interests in the amount of $10,000, to each of the investors, and in return received $2 million to be used by the company to meet its working capital and intellectual property monetization funding needs.
If DSS achieves certain milestones it will receive an additional $1 million from Fortress in exchange for a promissory note in the amount of $900,000 and fixed return equity interests totaling $100,000.
The company is entitled to receive another $1.5 million in funding from Fortress in exchange for a $1.35 million promissory noted and $150,000 in fixed return equity interests if it achieves other milestones.
The initial advance note and first and second milestone notes will bear interest at a rate per year equal to the applicable Federal rate on the unpaid principal amount thereof.
The notes are also subject to a make whole amount calculation, which will result in an effective annual interest rate of approximately 4.23% for the term thereof, assuming no prepayments.
The company has the option to pay accrued interest when due on the notes, or elect to capitalize the accrued interest, adding it to the principal thereof.
The company agreed to apply any proceeds it receives in connection with the monetization of certain patents to the payment of the notes, the fixed return interests, and the contingent interests in a so-called pay waterfall.
Shares of DSS currently trade at 53 cents and have traded between 46 cents and $2.46 over the past year.
In July 2013, Crossroads Systems, a global provider of data archive solutions, said it secured a $10 million credit facility backed by a portion of its intellectual property portfolio, from an affiliate of Fortress.
Crossroads CEO Richard Coleman Jr. declined to comment for this article.
In the press release announcing the deal, he said Crossroads was “pleased that Fortress recognizes the untapped value of our IP. Crossroads has a proven record of generating IP revenue, recognizing more than $60 million in license fees.”
Coleman added that the Fortress financing was an important component of Crossroads' previously announced strategy to access capital through the monetization of our patent portfolio, and underscores the value of our extensive IP portfolio."
Fortress’s Zur said in the same release that "Crossroads has demonstrated a history of successful intellectual property creation and Fortress is excited to help fund Crossroads' future growth."
As a condition of the credit agreement, Crossroads will issue to Fortress 1.45 million warrants to purchase common stock. The warrants are exercisable at an initial conversion price of $2.0625 each, subject to anti-dilution adjustments.
National Securities Corp., a wholly owned subsidiary of National Holdings Corp. (NHLD), acted as an advisor to Crossroads Systems on the transaction.
Jonathan Rich, the head of investment banking at National Holdings, declined to comment.
Shares of Crossroads currently trade at around $2.77 each. They’ve traded between$1.03 and $3.71 over the past year.
Andrea Electronics, a developer of hardware and software microphone technologies, said in February 2014 it sold a portion of its future intellectual property revenue for $3 million to AND34 Funding LLC, which is affiliated with Fortress.
The Bohemia, N.Y-based company also secured a $4 million credit facility backed by a portion of its IP portfolio from the affiliate of funds managed by Fortress.
Douglas Andrea, Andrea Electronics’ CEO, didn’t return a phone call seeking comment.
Shares of Andrea Electronics currently trade at 7 cents and have traded between 4 cents and 15 cents over the past year.
To reach the reporter responsible for this story please call Dan Lonkevich at 707 318-7899 or email him at email@example.com