[Editor's Note, September 19: This article has been revised since original publication, as the author has modified the content]
The tendency of companies seeking patent monetization to rely on a limited number of patents makes investing in the intellectual property (IP) industry risky. One company might have found a more stable and effective way to undertake this monetization: Marathon Patent Group, Inc. (NASDAQ:MARA). MARA can offer investors relatively low-risk exposure to the booming IP market, and here's why.
A Quick Look at the Company
MARA serves a range of patent holders from independent inventors to Fortune 500 companies. The company operates in two main ways. The first involves consultation. It provides advice and services to clients that are looking to monetize their own patents. The second focuses on patent acquisition. The company's wholly owned subsidiaries acquire patent portfolios, which they then seek to monetize.
Many companies rely on licensing revenues from individual patents. MARA's management had the opportunity to do just this, reporting in May this year that it executed a purchase agreement for a patent that to date had generated $39M in licensing revenues. The downside was the purchase was going to burn through MARA's entire cash holding. In the end, the company did not purchase the patent. Instead, MARA acquires portfolios that include a number of patents to reduce its reliance on individual patents.
There is also another side to the company's strategy that serves to differentiate it from IP industry participants that have attracted negative press in recent years. In March this year, MARA announced the establishment of its IP Research and Services center at the University of Arizona Science & Technology Park in Tucson, Ariz. It is effectively a think tank of engineers, IP lawyers, and strategists, with two main functions. The first is in providing revenue generating consultation to inventors and businesses that hold patent portfolios. The second is an advisory role to MARA. The center enables MARA to evaluate the potential income capability of patents it is looking to acquire. This aids the company in taking an expertly informed approach to its portfolio expansion.
The company has 471,154 options outstanding at a weighted average exercise price of $5.89, and 628,489 warrants outstanding at a weighted average exercise price of $6.69 as of June 30, 2013. Fully diluted market capitalization at these two prices would be $32.51M and $43.12M, respectively.
The company's business model closely matched that of MARA's current model, rooted in providing services to help businesses monetize patent portfolios. For the three months ended March 31, 2004, the company generated $599K in revenues. For the same period in 2007 the company generated $25M in revenues. This year, during the same period ACTG reported revenues of over $76M. Over this nine-year period the company's stock price rose to a high of $46, and currently sits at $22.85. This is not to suggest that MARA's stock will reach these levels, nor is it intended to imply such exponential revenue growth might be replicable; it is simply intended to illustrate the scalability of the company's revenue model.
One of the most interesting aspects of MARA is its strategic partnership with the aforementioned IPNav. IPNav Capital, founded by Spangenberg, co-led a June financing round in which MARA raised $6M. This ownership spawned a somewhat mutually symbiotic relationship between the two companies. In effect, IPNav sources and executes patent monetization opportunities on behalf of MARA. This benefits both MARA, through licensing revenues, and IPNav Capital, through increasing the value of its holding.
When Croxall joined MARA, he brought with him a portfolio comprising three patents and one open application that belonged to the now wholly owned subsidiary of MARA, Sampo IP LLC. On March 21, 2013, the company started to seek monetization of this portfolio, and announced that Sampo had filed infringement suits against, among others, Sony Computer Entertainment America LLC, Siemens Energy, Inc. and Dell, Inc. In May of this year, the company announced it had filed infringement suits against, among others, Avon Products, Inc., Starbucks Corporation, Hewlett-Packard Company, and Alcatel-Lucent USA, Inc. Later that month the company filed further suits against Ambit Energy Holdings, LLC, HomeAway, Inc., Hoover's, Inc. and Ristken Software. Results quickly followed: On July 18, 2013, and July 23, 2013, MARA reported it had reached licensing agreements with two leading technology companies in relation to its Sampo portfolio. The other suits are ongoing.
In April, MARA announced that another of its subsidiaries, Relay IP, Inc., had acquired patent 5,331,637 from MOSAID Technologies. Patent '637 is a highly regarded multicasting patent, cited by over 254 other patents owned by the vast majority of the world's leading tech companies. The company filed infringement suits throughout May against a number of companies including Sprint, Cisco and Thomson Reuters, and then an additional 10 defendants in June. Again quick to produce results, on July 25, 2013, the company announced its first licensing agreement in relation to patent '637 with another leading technology company.
The third and largest acquisition to date was MARA's acquisition of its now wholly owned subsidiary, CyberFone Systems, LLC. With the acquisition came an interest in an already revenue generating portfolio of 10 U.S. patents, 27 foreign patents, and one patent pending. This revenue generation serves to reduce investment risk and will give MARA a steady source of funding as it seeks expansion. To date, the company has secured four further licensing agreements associated with the portfolio.
Finally, at the end of May, MARA's subsidiary, Bismarck IP, acquired three domestic and 10 international patents and patent applications from Siemens. This Bismarck portfolio is not currently generating revenue. On Sept. 13, the company filed an S-1 with the SEC, the prospectus of which detailed the sale by selling stockholders of up to 1,739,319 shares of the company's common stock. The offering is priced at $5.90 a share; the latest close for MARA stock was $5.96.
MARA has so far been extremely quick in turning its patent suits around. Both the Relay IP and Sampo portfolios started to generate revenue within three months of filing the infringement suits, and this suggests that the coming months could prove fruitful for the company. A number of Relay and Sampo suits filed throughout May remain outstanding, and historic turnaround indicates that the announcement of further licensing agreements might be just round the corner. The company's next earnings report is due in November, which will serve to shed light on the financial implications of the agreements.
The company's CEO is Doug Croxall. Croxall joined MARA from LVL Patent Group, where he was chairman and CEO. Prior to LVL he was also the CEO and chairman at Firepond for six years. While at Firepond Croxall took the company private, and partnered with the IP giant IPNav to monetize its patent portfolio. The portfolio generated $90M in licensing revenues between 2004 and 2009.
The COO is James Crawford, who is highly experienced in the digital media, technology and software arena. He was a founding member of Kino Interactive, LLC, a developer of enhanced communication software and digital media solutions. He is a named inventor on several internet technology patents pending with the United States Patent & Trademark Office.
Doug Bender is SVP of Engineering and IP Development. He is effectively in control of the company's IP portfolio. Prior to joining MARA, Bender served as Senior Vice President - Engineering & IP Development at Augme Technologies where he performed a similar role.
Finally, Nathaniel Bradley serves as leader of the company's IP Research and Services Center, which is covered in the "strategy" section of this article. In this role Bradley heads a team of engineers, inventors, and research specialists performing a variety of IP related activities. Bradley is the named inventor on five issued tech patents, and is the named inventor or co-inventor on more than 80 tech patents pending. Prior to joining MARA Bradley has been involved in the expansion, reduction to practice, mass commercialization and enforcement of a number of Internet-related technology patents.
The major risk for investors when considering MARA stock is the IP industry itself. There is currently a lot of uncertainty surrounding the future of the industry. In June 2013, the Obama administration announced imminent reform that, if implemented, might make it difficult for companies that seek patent monetization to operate. So far, there have been a number of legislative recommendations made by both the Obama administration and U.S. representatives that could affect MARA's business model.
One such recommendation that poses a threat to MARA is bill HR845, known as the SHIELD Act ("Saving High-tech Innovators from Egregious Legal Disputes"). SHEILD suggests that in patent dispute cases the plaintiff should be responsible for the defendant's legal fees. For a company like MARA, which relies on pre-trial licensing agreements, this could be damaging. If defendants are no longer responsible for their own legal fees there would exist no incentive to avoid trial. The extent to which the suggested reform will affect the industry remains unclear.
In all, the industry in which MARA operates is booming. MARA's strategy within this industry is unique, and the rapid monetization of its growing portfolio suggests its strategy is also effective. For investors looking for exposure to the IP industry not wanting to risk their capital on a "flip of the coin" patent trial outcome, MARA might be a wise choice.