Rational Patent Exchange CorporationBuy Pitch

Michael YuanVedant Suri

• Business Overview

• Investment Thesis

• Qualitative Analysis

• Valuation

• Risks & Catalysts

• Conclusion

Agenda

• IPO in May 2011

• Headquarters: San Francisco

• 138 employees; projected 150 by year end

• Clients include eBay, Apple, Google, Cisco

• 10% of open market activity

Business OverviewRPX is a defensive patent aggregator, providing patent risk management for clients on a subscription basis

Financial Data

Price 13.25

52 week low 13.06

Market Cap 776.77m

Revenue (FY 2013)

237.5m (+16.8% YoY)

Net Income (FY 2013)

40.78m(+4.7% YoY)

Business Overview

• Purchases patents on open market, then licenses to members to protect against litigation

• Non-Practicing Entities (NPEs): Patent trolls

• Members: Subscription basis. Average of 2.5 year contract

• +90% renewal rate

1900 avoided litigations. 575 dismissal negotiations

$13b in direct costs caused by patent trolls

Business Overview

• Interested in creating more efficient, transparent market

• Unparalled data accumulated

• Free search for patent & litigation data. Marketplace setting rather than court (huge legal costs)

• $1m average patent defense. $2.5m for full defense

Business Overview

• Growing insurance business: Deal with Lloyds. Recently purchased PatentFreedom & insurance wholesaler

• Targeted to SMEs - most vulnerable to patent trolls

• Recently started offering to startups

• Addressable market of 5800+ companies

Policy Details• $50,000 - $500,000 + retentions• Up to $10m coverage

• $7,500-$10,000 for startups• Up to $1m coverage

Insurance Business

Investment Thesis

1. Strong Fundamentals• $317m in cash & short term investments – 40% of market cap.• Declining debt – currently none.• Subscribers pay annual fee in advance – predictable flow of cash.

2. Undervalued by Market • Market has reacted to slow insurance growth. High volume of insider selling• Recent patent rulings • Reproduction cost of patent portfolio + cash & short term investments greater than EV• We believe that these have already been priced into RPX’s current share price

Investment Thesis3. Attractive Growth Potential

• Out of 6300 companies sued by NPEs between 2011-13, only 184 were clients of RPX• Insurance business poised to grow:

• Deal with Lloyds and purchase of PatentFreedom build infrastructure & expertise• Only have 38 clients in 5800+ addressable market

4. Unparalleled Data as Significant Competitive Advantage• First mover advantage. 6 years’ expertise and $830m of patent purchases

• Data will greatly assist in underwriting & pricing of insurance business• Insights are strong value proposition to potential clients• Free release of data earns trust by proving commitment to transparency

5. Network Effect• Gains more value the more members it acquires

• Pooled data & access to patents

Internal AnalysisGrowth Potential

• 6286 potential clients in addressable market for core business• 300 clients in prospect pipeline

• $1.3m average revenue from subscription• 150 additional clients within 5 years (pace of last year’s additions)

• $97.5m in additional revenue over 5 years

Internal AnalysisGrowth Potential

• 5811 potential insurance clients in addressable market• 2079 in prospect pipeline

• $200,000 average per policy• Assume 10% conversion of prospect to sale => $41.6m potential revenue over 5

years

Internal AnalysisInsurance Business

• Unique competitive advantage:• Huge data on patent trolls allows it to underwrite & price effectively• First to offer “A” policy for patent litigation

• Purchased PatentFreedom & an insurance wholesaler and struck deal with Lloyd’s

• Need to gain expertise & infrastructure before scaling up

• Insurance important to growth of company

Internal AnalysisGrowth Potential

Sensitivity Analysis for Core Clients

10% Conversion Rate $39m potential revenue

20% Conversion Rate $78m potential revenue

30% Conversion Rate $117m potential revenue

Sensitivity Analysis for Insurance Clients

5% Conversion Rate $20.8m potential revenue

10% Conversion Rate $41.6m potential revenue

20% Conversion Rate $83.2m potential revenue

Internal AnalysisClient Trust

• Market leader in data & transparency• Free reports & searchable data reduces costs,

even if not member with RPX

• Gained trust of clients• IPRs on behalf of certain companies• +90% renewal rate• Former client that left RPX signed on again in

recent quarter

Positive reputation in B2B context could lead to word-of-mouth driving future growth. Could target more of addressable market & more easily prospect potential clients

External AnalysisTrends in NPE Litigation

• NPE activity at record high• 67% of all patent litigations

• Patent litigation cases tend to drag on. Companies wishing to avoid this pain point would be well served with RPX’s service

External AnalysisFrustrating Progress in Patent Reform

• Patent Reform Act in 2007• America Invents Act of 2011• Innovation Act of 2013• Recent attempt to reform in 2014

• Collapsed after pressure from pharmaceutical companies

Yet NPE activity has persisted. Difficulty enacting reform in government. Complicated by interest groups.

Quantitative AnalysisComparable Company AnalysisCompany Price Market Cap EPS P/E

Acacia 16.33 825 m -$1.80 -

Vringo 0.99 91.1m -$0.49 -

Spherix 0.92 25.7m -$11.02 -

RPX 14.40 776.8m 0.64 22.61

Company Members Scope Activity

Allied Security Trust 28 members 25,000 patents seen by members annually

Members contribute to fund

Open Innovation Network

600 licensees 850 patents owned Members commit to Linux OS

RPX 184 clients 2000 patents purchased

Members take advantage of network; subscription

Quantitative AnalysisDCF

Quantitative AnalysisDCF (20.7% Implied Upside)

Quantitative AnalysisDCF

Quantitative Analysis – Base Case

Quantitative Analysis – Bear Case

Quantitative Analysis – Bull Case

Risks & Catalysts

Risks Catalysts

• Future political reform decreases utility of RPX’s service

• Subscription fees based on client’s operating results; economic downturn could hurt RPX’s revenue

• Technological advance might make RPX’s patents obsolete too quick

• Next earnings report might show strength in growth of insurance business, impressing investors

• Could see another impressive deal in the near future, such as the one conducted with Lloyds. Or purchase of company like PatentFreedom

• Patent reform could be favourable, as with 2011 America Invents Act

Rational Patent Exchange CorporationBuy Pitch

Michael YuanVedant Suri