(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
In the investing community, few things can get an investor's attention faster than hearing the word "Reverse Split". This is typically because reverse splits are more often than not associated with small penny stocks that typically lack a profitable business plan. They are usually the result of a failure to create shareholder value and done out of necessity. The genesis of almost all reverse splits is a need to have a higher stock price so that a struggling company can sell more shares to stay afloat, or so that it may maintain its current exchange listing status. The major exchanges like Nasdaq and the New York Stock Exchange require that company's stock price maintain a certain price level.
Investors also often have a tough time understanding the simple math behind a reverse split. The reality and their perception often differ because while they often don't like the thought of their position size being reduced, reality is that the net value of the shares owned remains constant. Whether you own 1000 shares at a $1 dollar or 100 shares at $10 dollars after a 1-10 reverse split, the net value of your investment is still $1000 dollars.
With all the negative perception of reverse splits, there are those rare situations where a company can affect one out of opportunity versus traditional desperation.
Case in point, on Friday afternoon Marathon Patent Group (MARAD.OB) announced a 1-13 reverse split of their common shares. No surprise as the company shareholders had approved it months earlier. The company's proxy filing clearly explains the company's intent.
Our board of directors is submitting the Reverse Stock Split to our stockholders for approval with the primary intent of increasing the market price of our Common Stock to enhance our ability to meet the initial listing requirements of The NASDAQ Capital Market and to make our Common Stock more attractive to a broader range of institutional and other investors.
The company's shares ended up almost 7% on 2X normal volume Friday. For the week, the company's shares were up 22% on almost 4X normal volume. Much of that interest could be due to recent settlements in IP cases they have filed, with the latest one being the first monetization for their Sampo portfolio after just 4 months since having initiated the licensing campaign. The company now has concurrent multiple licensing campaigns helping to form a revenue baseline that should already have them close to profitable. As they add additional high quality assets, no doubt through their partnership with IPNav, they should be able to continue to scale aggressively while maintaining diversification of timing and size of revenue, something virtually no other NPE can offer investors.
Chart courtesy of stockcharts.com
Marathon has uniquely eliminated the binary risk which usually characterizes most publicly traded patent enforcement companies.
So what does Marathon Patent do? In simple terms they are an asset monetization company, the asset is patents. A good analogy would be an oil company that owns leases on land. Until someone drills on the property the true value is not yet known. In the oil business there are really two types of oil prospectors. Those who drill the deep high cost/high reward wells in new locations and those that drill lots of wells in known areas that are not expensive and likely to hit but individually will never be huge. These types of drilling are best described by companies looking for elephant fields in the middle of the ocean compared to companies like Northern Oil and Gas (NOG) that are drilling hundreds of wells per year in the Bakkens. NOG hits on close to 100% of the wells they drill and each adds to revenues and profits, but no single one of them is going to be a company maker or breaker.
Marathon monetizes Intellectual Property assets. Just like in the oil and gas business there are really two types of players in this market. There are those companies like VirnetX (VHC) and Vringo (VRNG) who have a few cases that could have huge gusher like outcomes, and then there are companies like Marathon Patent Group that have proven intellectual property who are essentially drilling numerous predictable, long lived and more likely to hit smaller wells. Inevitably Marathon too may go after one of those gushers, but if and when they do, they will not be subject to the binary risk of their peers, having already built a strong foundation of both revenues and profits.
Marathon now has four patent portfolios; Three of the four have generated settlements over the last year. Much of this has been detailed in recent SA articles: Marathon Patent Group: An Intellectual Property Stock Ready For The Future and Investor-Friendly Patent Monetization: A Marathon, Not A Sprint. The only change since those articles is Thursday's press release telling of the first settlement on the Sampo portfolio. This is obviously very significant because not only does it generate revenue but it validates the IP for future cases.
So when does a reverse stock split make sense? It makes sense when you have a small company like Marathon Patent Group, a company that offers investors a repeatable business cycle with exponential growth, strong underlying fundamentals, proven producing assets and a highly scalable business plan. With low overhead and tremendous earnings leverage that should increase as operating cash flow funds new patent acquisitions and additional licensing campaigns, institutional investors could soon flock to the name. Marathon affecting their reverse split opportunistically opens the door to the approximate 80% of the investment community previously precluded from investing in the company while trading on the OTCBB. Marathon Patent Group now has both a capital structure and currency more commensurate with both the company it has become and the fundamentals that underlie it.
The reverse stock split will reduce the number of shares of issued and outstanding common stock from 65,858,810 pre-split to approximately 5,066,063 million post-split.
Some good examples of companies that have done very well after a reverse split are American International Group (AIG) and Coeur Mining (CDE). Both had more than doubled within months of doing reverse splits and serve as good examples of companies who have seen dramatic increases in shareholder value because of it.
It's my expectation that Marathon Patent Group will soon enough follow in the footsteps of companies like these whose ultimate value was strategically unlocked at the hands of a well timed and well executed reverse split.