Confidentiality Hiding The Likelihood Of Profitability For Marathon Patent Group

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 |  About: Marathon Patent Group, Inc. (MARA)
by: Greg Miller

Confidentiality of legal settlements is hiding a lucrative opportunity for investors in Marathon Patent Group (NASDAQ:MARA). The company is debt free with enough cash to last three years, maintains a low cash burn rate, and is generating high margin revenue that could turn the company profitable this year. With a tiny float and shares down 30% from last month's highs, Marathon Patent Group is the safest, fastest-growing company in the patent monetization sector. I believe this to be one of the lowest risk trade setups in the stock market, and I have very specific expectations for this stock: I am long from $5.50 per share and think shares will easily increase 18% by the end of the year to the institutional warrant strike price. By 2014, I expect at least a 50% return and would not surprised to see 100%. Because I benefit from a low float of just 2.7 million shares, these returns could even arrive within a few weeks.

Moreover, Marathon Patent Group has already announced seven settlements since May, and we do not know the precise dollar amount of these confidential agreements. The company announced $1.5 million of second quarter revenue - its first quarter of revenue ever - and shareholders do not know which of those seven settlements are included in that revenue figure. Confidentiality could be hiding current profitability, and even if it is not currently profitable, I think the company will likely become profitable within a few months, as I explain in this article.

  • Enterprise value of $24.8 million
  • 77.6% of shares spoken for
  • Tiny float of 2.7 million shares
  • Could be profitable this year
  • Debt free with no near-term dilution risk
  • Enough cash to last three years
  • Institutional investment at $5.20 per share (just 4% below market)
  • Warrants at $6.50 per share (18% above market)

(All figures in this article are split-adjusted.)

Four IP Portfolios

I published my first article about Marathon Patent Group on April 30 when it was trading in the $4 range. The next day, the company disclosed that it wanted to acquire a revenue-generating patent that had already earned $39 million from 97 agreements with ongoing lawsuits against 64 additional defendants. This press release discreetly projected revenues up to $25 million ($39MX64/97). As this figure was worth twice the company's market capitalization at the time, shares understandably rallied 50% higher for a while, but the company did not finalize the acquisition within the 45-day timeframe. By late June, shares returned to the $4 range.

Personally, I am proud of Marathon Patent Group for not purchasing this patent. Although it certainly sounded exciting, the cost of the acquisition would have been $6 million, which would have required all of its cash plus debt. If it was really worth $25 million, it would have looked like a brilliant business move in hindsight, but if it failed, the company would have gone bankrupt. I prefer management to not bet the farm on a single, long-shot idea. Although they turned down this $6 million acquisition, this enabled them to acquire 55 other patents, diversifying their business and demonstrating shareholder responsibility.

So today, Marathon Patent Group owns four patent portfolios: Sampo, CyberFone, Relay and Bismarck.

  1. Sampo

    Marathon Patent Group acquired its first revenue-generating patent portfolio, Sampo, on November 20, 2012. This portfolio is generating revenue from legal settlements as of July 18, 2013 and July 23, 2013.

  2. Relay

    Marathon Patent Group acquired its second revenue-generating patent portfolio, Relay, on April 16, 2013. This portfolio is generating revenue from legal settlements as of July 25, 2013.

  3. CyberFone

    Marathon Patent Group acquired its third revenue-generating patent portfolio, CyberFone, on April 22, 2013. This portfolio has been generating revenue from legal settlements over the past 19 months. At the time of acquisition, CyberFone had already won 32 settlement and license agreements for a total $15.5 million in revenue, averaging $484,000 per settlement. Since acquiring the portfolio, Marathon Patent Group has announced four additional settlements: May 8, June 6, July 10 and July 31. Because CyberFone is such a reliable portfolio, I agree with John H. Ford's analysis of this portfolio using mathematical averages: "Marathon paid about $3.5 million for about $8 million in potential future settlements."

  4. Bismarck

    Marathon Patent Group acquired the only patent portfolio that is not currently producing revenue, Bismarck, on May 30, 2013. IP Navigation Group, a strategic partner and investor that has monetized over $620 million from intellectual property, is working with Marathon Patent Group to monetize the Bismarck patents.

In summary, Marathon Patent Group owns three revenue-generating patent portfolios (Sampo, CyberFone and Relay) and one additional portfolio (Bismarck). Altogether, the company now has 55 patents forming the basis of 33 active lawsuits against 42 defendants, providing a diversified revenue stream from a mixture of reliable portfolios for "base hits" and speculative lawsuits with "home run" potential.

Profitability from these portfolios could be a current or near-term reality, although settlement terms are almost always confidential. Shareholders have to be patient and wait for quarterly earnings reports to know exactly how much the company is generating.

Patents Are Big Business

The patent monetization sector attracted investors interest last year due to a "banner year for patent infringement litigation," according to PricewaterhouseCoopers. From 2011 to 2012, patent lawsuit filings jumped 29% and patent applications increased 7.8%. Courts awarded the three largest patent infringement damages of all time in 2012, exceeding $1 billion apiece.

Despite the rapid growth of patent monetization over the past couple years, I have been warning investors to stay conservative with their investments in the sector. Many stocks in the sector are overvalued. For example, I wrote about The Hysteria of Vringo on April 8, 2012, and Vringo (NASDAQ:VRNG) has returned 20% less than the S&P 500 to date. (At its lowest point since my article, Vringo lost as much as 40% of its market capitalization.)

Marathon Patent Group is one of the only patent monetization stocks that is undervalued. It benefits from broad sector growth and has already proven its ability to generate substantial revenue from patent licensing and litigation, yet it is so young that very few people know about it. Its first revenue announcement ever arrived just three months ago: May 8, 2013. It nevertheless owns 55 patents, has 33 active lawsuits, and has already received $1.5 million in revenue. It also works closely with two of the five biggest patent privateers in the world: Acacia Research Group (NASDAQ:ACTG), IP Navigation Group, MOSAID Technologies, Intellectual Ventures and General Patent Corporation.

  1. Marathon Patent Group acquired a patent from MOSAID Technologies and is currently generating licensing revenue from it.
  2. IP Navigation Group's founder and CEO is a lead investor in Marathon Patent Group at a split-adjusted price of $5.20 per share with 50% warrant coverage at $6.50 per share.

Risks

Like any smaller company within its first year of operations, Marathon Patent Group poses risks and is not appropriate for all investors. It trades on the bulletin board, which is known for having large price swings and less liquidity than larger exchanges. It is partly due to this benefit that I was able to acquire shares so cheaply (in my opinion). Although I am long, I understand that Marathon Patent Group could continue declining in price for any or no reason; an inherent risk of bulletin board stocks is their occasionally inexplicable lack of liquidity.

Additionally, intellectual property companies are known for large price swings and high levels of volatility. Vringo, as an example, went from the $1 range to the $5 range to the $2 range before settling in the $3 range. I expect future volatility for Marathon Patent Group, and although I am confident the movement will progress to the upside, there are no guarantees in trading.

On a fundamental level, although a vast majority of shares are backed by cash and real assets, as I explain below, if the company fails to generate sufficient revenue from its licensing and litigation campaigns, shareholders could end up disappointed. Although I see no reason to doubt the acumen of CEO Doug Croxall (who personally monetized tens of millions from patents owned by Firepond) and investor Erich Spangenberg (who personally earns a $25 million salary from patent monetization), no revenue projections carry 100% certainty.

Why I Love My Shares At $5.50

I could not be happier with the price of my shares. At $5.50 per share, I am just 4% above the $5.20 price at which $6 million of institutional investment came into Marathon Patent Group, including millions from Erich Spangenberg's IP Navigation Group, the most desirable investor in the world for a patent monetization company (see this New York Times profile). I am also 18% below the $6.50 strike price of warrants held by these investors, which is an obvious and near-term target for partial profits.

I also own shares in a very cheap company with plenty of assets and no near-term dilution risk. Marathon Patent Group raised $6 million at $5.20 per share this month, which is enough to last three years at a cash burn rate of $400,000 per quarter. If shares decline further, I would be delighted to buy more shares at a cheaper price than Erich Spangenberg.

With a low cash burn rate around $400,000 per quarter (much of the $1,584,766 Q2 expenses were one-time), no debt, $6.4 million in cash, 5.3 million shares outstanding, $11.3 million in stockholder's equity, and $1,524,979 in second quarter 2013 revenue with 50% gross profit margins, Marathon Patent Group could become profitable as soon as this year. A slight increase in revenue over the next few quarters could reveal immediate profitability.

Of Marathon Patent Group's current $29 million market capitalization...

  • 22% is cash ($6.4 million)
  • 12% is future CyberFone settlements ($8 million)
  • 43.6% insider owned ($12.6 million)*

* As of July 16, 2013 when there were 5,066,062 shares outstanding, directors and executives owned 13.72% and other millionaire investors owned 32.18%, totaling 45.9% insider ownership. By August 14, the number of shares outstanding had increased slightly to 5,333,822, so assuming no insiders have sold since July, that 45.9% should be reduced by 5%, equaling 43.6% current insider ownership.

A staggering 77.6% of shares are essentially spoken for, and the float is only 2.7 million shares. I hope these numbers communicate my enthusiasm and the uniquely low risk profile of this company.

Conclusion

Marathon Patent Group is a low float stock with a tight capital structure, no debt, lots of cash, high insider ownership, world class investors, and plenty of catalysts from 33 active lawsuits against 42 defendants for double or triple digit shareholder returns by 2014. It is already generating healthy revenue from three of its four patent portfolios, and any of its ongoing or soon-to-be-announced licensing or legal campaigns could surprise investors with an enormous settlement or legal judgment. Even if it fails to hit any home runs whatsoever, the steady performance of its portfolios even by averages should reward investors with 50-100% returns by next year.

I expect to easily earn 18% by the end of the year as Marathon Patent Group rallies toward the warrant strike price of $6.50 per share. I expect to earn 50-100% by next year as the company either turns profitable or continues to increase revenue exponentially from its baseline $1.5 million in Q2 2013, which was the company's first quarter of revenue ever and therefore not indicative of its potential.

Disclosure: I am long MARA. 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.