In horse racing and golf, there are “horses for courses.” Meaning, a horse’s running style is suited to a particular track condition, and a golfer’s style of play is suited for a particular course. It’s no different in corporate finance: some CFOs are suited for a particular type of company.
That appears to be the reason for a CFO shift at Finjan, an intellectual property (IP) licensor that went public in June 2013. With the mission of building a tiny private company into a bigger one that can operate in the public arena now accomplished, Finjan’s Shimon Steinmetz says, it’s time for him to move on. He stepped away from the CFO post on Nov. 10, though he’ll remain at the company for a few months to advise his replacement.
“I enjoy putting the trains on the track more than keeping them running,” he says. “If you look at a company’s life-cycle continuum from early stage to public, things change. The availability of financing and development of the capital structure are on the same continuum, and so are management style and expertise. I’m going to go back to where my skill sets are a match for an earlier point in the life cycle.”
Steinmetz, who previously had been an investment banker, notes that he’s particularly suited for using alternative methods for going public, as he did with Finjan.
Taking a Shortcut
Finjan started as a developer of cyber-security software that launched in 1997 and eventually racked up $65 million in venture funding. But the company remained small and, in 2009, it sold off its operations and went dormant. It retained, however, the IP — a portfolio of patents for detecting and preventing malware in computer servers — that had supported the operations.
Since then, Finjan has generated income by settling patent-infringement lawsuits. In 2012, for example, it took in $77.4 million through that means, net of legal costs, allowing it to post net income of $51.0 million, according to Finjan’s first 10-K filing last March. In 2013 that take fell to just $1 million.
But Finjan’s future growth efforts will focus on licensing IP; in September it announced its first revenue event since going public, an $8 million licensing deal. That was 15 months after the board hired Steinmetz and the CEO, Phil Hartstein, to set up a public company for that purpose, devise its structure, define the company’s market differentiation and build it out around that vision.
Part of the plan was to go public as soon as possible, in order to register existing investors’ shares in the company so that they could be traded. The quickest path to that goal was a reverse merger, but even that wasn’t fast enough for Finjan. Typically a reverse merger involves acquiring a shell company — one that’s publicly held but has no operations. But doing so, when the goal is to be listed on a national exchange, subjects the buying entity to a 12-month “cooling off” period during which the exchange monitors its financial filings and satisfies itself that there are no fraudulent activities.
Instead, Finjan elected to pursue a reverse triangular merger. In such a deal, an acquiring company creates a subsidiary that buys a publicly held company that does have operations, which then absorbs the sub. Finjan’s target was Converted Organics, an organic fertilizer company that had been delisted and was trading in the over-the-counter market. The company was renamed Finjan Holdings, of which Finjan Inc. and Converted Organics of California are wholly owned subsidiaries. The company announced its intention to sell the latter the same day Steinmetz stepped down.
The transaction was completed on June 6, 2013, making Finjan a public company. That launched a race against time. Because Finjan’s tradable public float was more than $75 million, the company was classified as an accelerated filer and had to make a mid-August deadline for filing Sarbanes-Oxley-compliant financials with the Securities and Exchange Commission.
Speaking of the four-month period in which the deal was worked out and closed and the financial disclosures were prepared, Steinmetz says, “We had a lean-and-mean focus and there were many sleepless nights. It was ‘ready, fire, aim.’ It was a Herculean task, really. We probably should have prepared a little more for the regulatory issues, but we got it done.” One reason it was so challenging: the entire company consisted of Steinmetz, Hartstein and one other person.
The company did not issue shares immediately upon going public because it had enough operating capital to get started, Steinmetz notes. Immediately prior to going public Finjan had almost $90 million in the bank. It issued $60 million of that as dividends to its investors and went public with the remaining $30 million. The company then set about completing all the steps needed to achieve a listing on NASDAQ, which happened this past May.
A Fledgling Asset Class
Finjan’s intention is not just to license the existing cyber-security IP, but also to buy other companies with IP assets and license those as well. It hasn’t made any such acquisitions yet, and doing so could require an infusion of capital. By press time, though, the company hadn’t issued any new shares since going public, and its stock hadn’t performed as well as it would have liked, with a share price of $2.51 (after opening at $15.00 on August 22, 2013, following a 1:12 stock split). Market capitalization stood at $52 million, roughly half of its high-water mark.
Still, Steinmetz says he’s confident that the company’s future is bright. “Intellectual property is an emerging asset class in today’s market, but it’s a misunderstood asset class,” Steinmetz says. “What is a patent? What is its value and how do you extract that for shareholders? How do you license it and enforce it? It’s interesting that while the market values technology companies like any others, for their operations, it’s a rule of thumb that 80% of a tech company’s value actually comes from its intellectual property.”
IP is emerging “as an M&A thesis, a market-defense thesis and an investment thesis,” he adds. An M&A example: When Google paid $12.5 billion for Motorola Mobility in 2011, it wasn’t looking to get into the cell-phone business (which it sold to Lenovo last month) but rather wanted Motorola’s library of patents that had not yet been commercialized. A market-defense example: the series of back-and-forth, patent-infringement lawsuits between Apple and Samsung. An investment example: the number of companies banking on IP licensing is growing. Qualcomm, which licenses computer-chip designs, may be the best known, but along with Finjan there is a host of small upstarts, like Veringo and InterDigital.
What metrics will Finjan look at to gauge the company’s success? “At this point I have to defer to the analyst community,” says Steinmetz. “There really is no standard yet for this asset class. Some may look at price per patent — so, if you are managing 50 patents and are valued at $100 million, your average is $2 million. Others may be looking at licenses completed per quarter or the sales being generated in industries addressed by your patents.”
Finjan’s employee count is up to 13, still a startlingly low number for a company with its market capitalization. After going public Steinmetz and Hartstein hired some licensing, investor relations and finance professionals and have used contractors for anything that doesn’t require year-round staff, like preparing Sarbanes-Oxley disclosures. Steinmetz’s replacement at Finjan is Michael Noonan, previously a finance chief at both Sky Petroleum and Forgent Networks.
Steinmetz, looking to orchestrate more complex transactions, has his eyes wide open when it comes to reverse mergers. “Historically there are challenges, because there is not necessarily a broker-dealer or any kind of concerted investor relations effort telling your story,” he says. “So going public is just the beginning of a much longer process. There’s a lot of legwork on the other end.”