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It’s about the money

Post-License Monitoring and Support:Performance and Revenue Enhancement Strategies

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Debora R. Stewart, CPA, CFF

Managing DirectorInvotex Group

Judy Ann Byrd, CPA, CFF, CIRA

DirectorInvotex Group

December 16, 2009for Technology Transfer Tactics

Presenters

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Agenda

▼ Why monitor licensee performance and payment

▼ When it’s appropriate to conduct desk audits and site audits

▼ Best practices in license agreement compliance

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It’s about the money

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Why license?

▼ Nonprofit institutions often license to benefit the public▼ If that were the only purpose, then you

would license your technology for free▼ For-profit enterprises license for a

profit▼ Shareholders aren’t be very eager to

invest for zero or negative returns

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Question:

How would your CFO feel if the Accounts Receivable department…

▼ allowed customers discounts against company policy

or ▼ allowed customers to pay less than they

owed because he didn’t want to “rock the boat” by asking the customer to explain themselves?

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Audit Deficiencies / Percent Misreported Invotex 2008 Cumulative Findings

19 %Properly Reported

27% fell in Over 100%

Underreported!

3% in the 50-99%

10% in the 25-49%

14% in the11-24%

8% in the6-10%

19% fell in1-5%

Underreported

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Audit Deficiencies / Underreported Revenue $ Impact of the 81% Invotex 2008 Cumulative Findings

License Interpretation51%

Underreported Sales 21%

Disallowed Deductions 7%

Royalty Rates 4%

Math Errors 5%

Unreported Sublicenses 8%

TransferPrices 2%

Unreported Benchmarks 2%

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Audit Deficiencies / FrequencyFrequency of the 81% Invotex 2008 Cumulative Findings

0% 10% 20% 30% 40% 50% 60%

• Underreported Sales

• Rate Errors

• Math Errors

• Sublicenses

• Benchmarks

• Transfer Prices

• Interpretation Issues

• Disallowed Deduction

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Why have a royalty compliance program?

▼ Maximize revenue negotiated ▼ Maintain a good Licensee relationship ▼ Ensure compliance / clarify ambiguity in

Agreement▼ Send a message of intent to protect

rights ▼ Benchmark performance / industry /

project revenue▼ Manage fiduciary duty▼ Exemplify proactive philosophy

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Goals of a Well Run License Management System

Your goals – whether they are managed internally or with the assistance of outside support – are to:

▼ Identify,▼ Control, and ▼ Maximize

the potential of all licenses.

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Options to Maximize Running Royalties

▼ Cash & File▼ Compile & Analyze▼ Desk Audits▼ Full On-Site Audit

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Option 1: Cash & File

▼ Benefits:▼ Time efficient▼ Illusion that you have a good

relationship▼ Illusion that you have accurate

reporting

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Option 2: Compile & Analyze

▼ Verify timely receipt of payments and reports▼ Check reports for math errors▼ Prepare basic analytics on reported detail,

including trend graphing and ratio analysis▼ Analyze report for signs of misreporting –

“red flags”▼ Call Licensee and thank them for the report▼ Compile quarterly summary report for

management purposes

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Option 2: Compile & AnalyzeCosts and Benefits

▼ Cost▼ Approximately 8-10 personnel hours to

set up enter historical info and prepare quarterly charts / graphs / analysis, 1-4 hours per period thereafter

▼ Benefits▼ Cursory check - spots minimal errors▼ Provides framework for discussion with

Licensee▼ Provides feedback to management on

activity

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Option 3: Desk Audit

▼ Compile and analyze, checking for math errors, performing trend and ratio analyses

▼ Review publicly available information through internet searches, press releases, quarterly reports, industry data

▼ Analyze report for signs of misreporting – “red flags”▼ Speak with Inventor to gain insight into recent

industry changes, Licensee products, etc.▼ Framework to discuss report and questions arising

from analyses with Licensee▼ Bill and collect interest on late payments▼ Identify and prioritize Licensee for on-site audit▼ Compile quarterly summary report for management

purposes

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Option 3: Desk AuditCosts and Benefits

▼ Costs▼ Approximately 20-40 personnel hours

▼ Benefits▼ Builds on and generates more assurance than

compilation▼ Research performed provides greater

understanding of Licensee’s business and industry▼ Deeper analytics illuminates more inconsistencies▼ Aids in prioritizing licenses requiring more

attention▼ Provides focus / streamlined procedures for

compilations

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Option 4: Site Audit

An audit verifies if a Licensee is complying with the license/contract, including payments, research milestones, advertising or any other clause that allows itself to be tested by an independent party

▼ Builds on desk audit procedures▼ Visit Licensee offices to

▼ Interview▼ Observe supporting documentation, inventory and operations▼ Investigate transactions and record keeping

▼ Bill and collect underpayments and interest ▼ Compile quarterly summary report for management purposes

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The Audit Process

1. Choose an auditor2. Decide who to audit (your auditor can

assist with this decision)3. Inform the Licensee of the audit4. Transfer knowledge to auditor5. Let auditors do their thing

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Choose an auditor….

▼ Who will represent you in the manner that you prefer

▼ Who understands that a license agreement is a partnership not an adversarial proceeding - they need to do a thorough investigation while making sure the relationship remains positive

▼ Who uses a dedicated team that specializes in technology license audits

(if your auditor is good – they will find all that there is to find without jeopardizing your

relationship with your Licensee)

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Decide who to audit

▼ Good rule of thumb is to consider audits of licenses generating over $100,000 in running royalties per year

▼ Review royalty bearing licenses for red flags

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Red flags:there may be errors in the royalty report if…▼ CHANGES OCCURRED

▼ The person preparing the royalty report is new or not familiar with the license agreement

▼ New products were launched▼ Selling licensed product in new territories▼ New manufacturing facility opened▼ Licensee was acquired or merged with another

company▼ Licensee changed its accounting system▼ Licensee is having financial difficulty▼ Royalty reports are late or arriving later each

period▼ Licensee’s sales of the covered product are not

keeping track with the industry

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Inform the Licensee of the audit

▼ Send a letter to all licensees that you are implementing an overall compliance program to remain consistent with best practices in licensing

▼ Send specific letter to audit candidates of your choice to initiate an audit through the chosen auditor

▼ Include the auditor’s contact information in the letter and let the candidate know that the auditor will be contacting them

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Transfer knowledge to auditor

▼ Supply auditor with license agreement and amendments, royalty reports, and other correspondence that may be helpful

▼ Schedule a meeting / call with auditor to ▼ inform them of any background

information▼ Introduce inventor or person with

technical info

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Outcomes

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Most Common Errors Discovered

▼ Interpretations of your license agreement that had not occurred to you▼ Combination products that aren’t or

percent not based on economic value▼ Price averaging▼ Foreign sales that aren’t▼ Purchaser (OEM) says they don’t have to

pay▼ Cash v. Accrual▼ Didn’t “sell” just received “service” revenue▼ Distributors

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Intangible outcomes of audit

▼ Revamp license language in light of audit findings

▼ Educate internal staff about license language for future licenses

▼ Increase incidents of desk audits▼ Expand compliance efforts, look to

more licenses, and potentially expand audits

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Advice - Communicate with the Licensee

▼ Need open lines of communication at various levels▼ Decision maker▼ Person preparing royalty report

▼ Develop and distribute a Licensee questionnaire annually▼ Who calculates royalties due?▼ Do they have the agreement?▼ What procedures are performed in calculating

royalties?▼ Is a second review performed?▼ Etc.

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It’s about the money

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Speakers

Debora R. StewartManaging Director(410) 824-0141dstewart@invotex.com

Judy Ann ByrdDirector(410) 824-0142jbyrd@invotex.com

Invotex Group1637 Thames Street

Baltimore, MD 21231

www.invotex.com