Reaping The Spoils Of Litigation

Jul.26.13 | About: Marathon Patent (MARA)

(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

For this company, "judgment day" is something to monetize.

The litigious nature of contemporary society can be a millstone for some companies, but a downright windfall for others. Going to court -- once a contingency to be dreaded -- has become a business model.

An exemplar of this trend is Marathon Patent Group (MARAD.OB), an Alexandria, VA-based patent licensing company serving a broad array of patent owners from Fortune 500 companies to independent inventors.

As an observer of emerging small cap opportunities, I could not help but notice that this has been a busy month for Marathon.

Marathon and its subsidiaries provide clients legal services that allow them to reap financial and strategic returns on their intellectual property rights. Marathon buys up patent assets, partners with the patent holders and turns these patent portfolios into actual revenue by implementing patent licensing campaigns.

Marathon's portfolio consists of 18 patents in the United States and 37 internationally. The company compensates the patent seller by either providing an upfront payment or by giving the patent seller a percentage of the revenue produced from licensing activities, or a combination of both.

The world is increasingly awash in patents. According to a 2012 report from the World Intellectual Property Organization, patent filings worldwide reached 2.14 million in 2012, an increase of 7.8 percent over 2011 -- the second year in a row in which filings exceeded 7 percent growth.

In 2013, the United States Patent & Trademark Office estimated that the worth of intellectual property to the US economy is more than $5 trillion.

And IP litigation has evolved into big business. According to PricewaterhouseCoopers' 2013 Patent Litigation Study, 2012 was a "banner year for patent infringement litigation." There were 5,189 patent litigation filings in 2012, a 29 percent increase over the previous year. The median damages award overall between 1995 and 2012 was $5.5 million. The median damages award in 2012 alone jumped to $9.5 million.

The outright pirating of technology is rampant, giving birth to a cottage industry of so-called "patent trolls," whereby companies legally lock up certain technologies with the intention of suing companies that purposely (or inadvertently) infringe on their patents.

This phenomenon is stoking fears that the growing propensity for patent lawsuits is curtailing innovation. No one is accusing Marathon of being a patent troll, but it certainly has good company when it comes to filing lawsuits. IP litigation has evolved into a mainstream industry.

Marathon first identifies emerging and promising trends in the technology sector and then pinpoints the "early adopters" that hold core intellectual property that's vital to these growing markets.

Marathon has racked up a string of patent successes and is on the verge of profitability, making it a great play on these trends, but only for aggressive investors who are patient.

Marathon scoops up these coveted assets with the assistance of its partner IP Navigation Group, which has generated over $620 million in licensing revenues for its clients. Together, these two partners continue to forge successful acquisition deals that generate cash flow.

On July 10, Marathon announced that its wholly owned subsidiary, CyberFone Systems, LLC, had entered into a license and settlement agreement with a payment terminal company.

Marathon's CyberFone subsidiary holds claims that bestow the right to practice certain data processing, telecommunications and financial transactions.

This July 10 agreement is significant to investors because CyberFone has a proven history of generating revenue, posting 35 settlement and license agreements so far. Many companies such as Marathon that are involved in IP litigation tend to enter into license agreements "on spec" with another entity that has no track record of tangible revenue generation; that's not the case between Marathon and CyberFone.

As more incidents of alleged infringement unfold, Marathon continues to enforce its CyberFone portfolio against additional defendants.

Historically, the average settlement for CyberFone has been in the $470,000 to $500,000 range, with an average 1.7 settlements a month for the last 16-18 months.

But Marathon isn't standing still. On July 23, Marathon announced that its wholly owned subsidiary, Sampo IP, LLC, had entered into a license and settlement agreement with a large technology company, covering claims related to communication devices for distributed groups.

This is the second agreement for Sampo's portfolio in recent weeks. Marathon announced its first licensing and settlement agreement on the Sampo patents on July 18. Sampo launched its licensing campaign in March and continues to initiate enforcement of alleged infringement.

On July 25, Marathon announced that its wholly owned subsidiary, Relay IP, Inc., had entered into a settlement and license agreement with a leading technology company regarding technology that enables multicasting on Internet protocol networks. The Relay IP settlement and license agreement is the third one that Marathon has announced within the past three weeks.

Marathon now currently has three active licensing campaigns: CyberFone Systems, Sampo IP and Relay IP. CyberFone is the only Marathon portfolio with historical revenue generation, with $15.5 million in gross recoverables to date.

Marathon's three significant announcements in one month, in a legal field where big events tend to get spaced out over time, shows that Marathon is gearing up for a busy year with potentially huge gains for those who invest early.

Since Marathon's licensing campaign first began nearly 20 months ago, the company's patent portfolio has produced 35 settlement and license agreements. Ongoing infringement continues, and the CyberFone portfolio is currently being enforced against additional defendants.

Navigating a Risky Playing Field

Investors should always keep in mind that patent enforcement is fraught with risks. The practice can require years of expensive litigation and sufficient cash flow and cash reserves to sustain claims in court.

Moreover, litigation can ride a roller coaster of unexpected twists and turns, producing interim results that generate volatile stock price movements. Despite the best predictions, a judge's decision is sometimes anyone's guess.

And yet these perils of IP investing can be successfully navigated by those with experience and expertise who are willing to properly perform due diligence. To the victors go the outsized spoils.

On June 3, Marathon received $6 million in subscriptions for units in a privately subscribed offering at $0.40 per unit. The financing was led by IPNav Capital, which was founded by Erich Spangenberg, one of the pioneers and major players in the IP monetization industry sector. Spangenberg also is a major shareholder of Marathon.

Marathon now plans to use the proceeds from the June offering to continue acquiring strategic IP assets, including revenue-producing patents and portfolios.

Marathon currently is debt-free, with $7 million in cash on its balance sheet. In the meantime, the company is able to draw on the talents and deep pockets of its shrewd managers, who boast considerable experience in IP litigation.

Shareholders who control sizable minority stakes include Eric and Audrey Spangenberg of IP Navigation Group; large capital fund Hudson Bay Capital; Jeffrey Feinberg, former hedge fund manager and also a former partner at Soros Fund Management; and Barry Honig, another well-regarded investor in fledgling companies.

IP litigation companies typically lack the cash on hand and management expertise of Marathon. In a field characterized by very thinly capitalized start-ups, Marathon boasts a legal-savvy leadership that also can tap large sources of financing. Through their stock ownership in Marathon, they also have "skin in the game." Notably, since 2003, Marathon partner IP Navigation Group has earned more than $500 million for its clients.

As more patents enter Marathon's pipeline and get monetized, the company should edge its way closer to a profit. For aggressive investors with the fortitude to withstand the vicissitudes of the legal system, Marathon Patent Group could provide a big payday.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.