Marathon Patent Group's (MARA) CEO Doug Croxall on Q3 2017 Results - Earnings Call Transcript

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Marathon Patent Group, Inc. (NASDAQ:MARA) Q3 2017 Earnings Conference Call November 27, 2017 4:30 PM ET

Executives

Jason Assad - Investor Relations

Doug Croxall - Founder and Chief Executive Officer

Frank Knuettel - Chief Financial Officer

Charles Allen - Director of Global Bit Ventures

Analysts

Phil Koprowski - TCS

Andrew Pipa - ZMP Trading

Brett Reiss - Janney Montgomery Scott

Operator

Welcome to Marathon Patent Group's Investor Update Conference Call [Operator Instructions].

At this time, I would like to turn the conference over to Jason Assad, Investor Relations with Marathon Patent Group. Please go ahead.

Jason Assad

Thank you, Operator. Good afternoon, and welcome to Marathon Patent Group's Investor Update Conference Call. With us today are Marathon's Founder and Chief Executive Officer, Doug Croxall; and Chief Financial Officer, Frank Knuettel. In addition, Charles Allen, Director of Global Bit Ventures, will be joining us for the Q&A portion of this call.

Before I turn the call over to management, please remember that certain statements contained in this release are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements contained in this release relate to, among other things, the effect of the global economic downturn on technology companies; the ability to successfully develop licensing programs and attract new business; rapid technological change in relevant markets; changes in demand for current and future intellectual property rights; legislative, regulatory and competitive developments addressing licensing, enforcement of patents and/or intellectual property in general; and general economic conditions. They're generally identified by words such as believes, may, expects, anticipates, should and similar expressions. Readers should not place undue reliance on such forward-looking statements, which are based upon the company's beliefs and assumptions as of the date of this release.

The company's actual results could differ materially due to risk factors and other items described in more detail in the Risk Factors section of the company's filings and reports with the Securities Exchange Commission, copies of which may be obtained at www.sec.gov. Subsequent events and developments may cause these forward-looking statements to change. The company specifically disclaims any obligation or intention to update or revise these forward-looking statements as a result of changed events or circumstances that occur after the date of this release, except as required by applicable law. Finally, this conference call is being webcast. The webcast link is available on the Investor Relations section of our website at www.marathonpg.com.

With that, I'd like to now turn the call over to Marathon CEO, Doug Croxall. Doug?

Doug Croxall

Thanks, Jason, and thank you, everyone, for joining us this afternoon to discuss Marathon Patent Group's Investor Update Conference Call.

We'll be handling this call a little differently than those in the past. Because of the recent announcement in which Marathon had disclosed that it had entered into agreements, which are intended to lead to the acquisition of Global Bit Ventures Incorporated following satisfaction of a number of conditions, including shareholder approval to acquire 100% ownership of Global Bit Ventures Inc., a digital asset company that secures the block chain by mining crypto currencies, we want to allow appropriate time to answer questions.

While today, we're clearly somewhat limited in discussing certain specific anticipated aspects of the contemplated transaction of Global Bit Ventures, we will do our best to try to accommodate. For this reason, Charles Allen will be joining us during the Q&A part of the call to answer general questions about the digital asset mining market.

With the increasing difficulty landscape facing the patent monetization market, we previously expressed our intent to review alternative business directions with the goal of enhancing shareholder value. To position the company to be able to pursue other alternative business opportunities required considerable work to be accomplished to reduce the company's existing debt obligations. As such, Marathon entered into an agreement with DBD Credit Funding, which resulted in the retirement of 100% of our long-term debt as well as provided an arrangement with DBD for three of our patent portfolios.

Under the restructuring agreement, Marathon's existing debt obligation of approximately $16 million was assumed by a newly formed entity controlled by DBD. Marathon was released from further obligation for the debt as well as the funding of all actions related to the transferred portfolios. The transaction was approved by a vote of our shareholders, and the elimination of debt on our balance sheet is expected to be reflected in our annual report since the transaction closed in the fourth quarter.

The restructuring agreement not only allowed for the elimination of the DBD debt but also provides the possibility, under certain circumstances, that Marathon may receive a 30% net revenue share once DBD recovers its costs, certain management fees, repayment of debt amounts and premiums, among other things. The three portfolios transferred were Magnus IP, Traverse Technologies and Dynamic Advances. The company retains ownership of its remaining portfolios but has reduced outlays associated with enforcing many of these portfolios in recognition of the changing patent landscape.

Separately, the company entered into an agreement with investors for $5.5 million of convertible debt financing to help fund strategic alternative and other business pursuits, closing on which is subject to several conditions. The company received approximately $5.5 million in proceeds from its recent offering of securities, of which approximately $3.4 million remains in escrow pending satisfaction of a number of conditions, including approval of the investors to release the funds.

The result of the aforementioned agreement with DBD to reduce the operating cash burn, combined with the new investment, resulted in a strengthened balance sheet with fresh capital, positioning Marathon to consummate the recently announced transaction involving Global Bit Ventures. Additional information on the aforementioned events is available in the company's previous Form 8-K and other filings.

We believe taking advantage of new technologies bring a potential evolution in digital transactions conducted on block chains is a desirable pursuit for the company that has the potential of enhancing shareholder value. Recent reports indicate that the crypto currency market as of 2017 is over $242 billion, up from $17 billion in recent years. The primary drivers of this growth include increased worldwide demand for accumulation of digital assets, large new funds entering the market and, to a degree, expected adoption of block chain and crypto currency financial and other industry transactions.

On November 2 of this year, Marathon announced that it had entered into a definitive purchase agreement to acquire 100% ownership of Global Bit Ventures Inc. Global Bit Ventures currently owns 1,000 GPU mining servers capable of 250 gigahash per second of mining power for the mining of ether on the ethereum block chain. Over the past few weeks, 700 servers were installed. Of those servers, 300 servers are running and producing revenue while the remaining 400 servers are expected to be generating revenue imminently. The final 300 servers will be assembled and installed and are anticipated to come online shortly. In addition to the 1,000 servers capable of mining ether, Global Bit Ventures plans to add 14 petahash per second of ASIC hashing servers for the mining of bitcoin. Global Bit Ventures operates in a robust and low-cost data center infrastructure with significant capability for expansion.

The contemplated combination, upon completion, would represent one of the only NASDAQ-listed publicly traded pure plays. Specific highlights of the transaction include: robust infrastructure in place, including 1,000 servers with 250 gigahash per second of processing power capable of mining ethereum with a significant capability for expansion; planned addition of 1,300 Bitmain ASIC mining servers capable of mining 14 petahash per second; state-of-the-art cryptocurrency mining facility located in Canada with a cool climate, stable jurisdiction and low energy costs; and accretive transaction expected to result in cash flow positive with gross margins initially expected but subject to market forces of approximately 80%. A balance sheet with no debt and cash flow will be used to purchase additional mining servers and grow operations. We look forward to the closing of the acquisition of Global Bit Ventures in the next few months.

That concludes my prepared remarks. With that, I would now like to turn the call over to Frank, our CFO, for a brief overview of our 2017 third quarter financial results. Immediately after, we will open up the call for an extended Q&A section. Frank?

Frank Knuettel

Thanks, Doug. Looking back at our recently announced third quarter results, we booked approximately $163,000 in revenues for the three months ended September 30, 2017, as compared to approximately $610,000 in revenues for the three months ended September 30, 2016. We generated the revenue for the third quarter with considerably lower cost of revenues and other operating expenses, which totaled approximately 4.1 million for the three months ended September 30, 2017, as compared to approximately 10.3 million for the three months ended September 30, 2016.

More important than the financial results to the most recent quarter, however, we instituted a number of major initiatives to reduce expenses and outstanding indebtedness. Included in this is the reduction in staffing compensation, cancellation of the DBD indebtedness, cancellation of the remaining convertible debt associated with the October 2014 debt issuance, cancellation of the oil and gas portfolio indebtedness and the buyout of a significant amount of our accounts payable at a discount.

Cancellation of the DBD indebtedness was the most meaningful of these initiatives and involve the cancellation of approximately 16 million of outstanding debt as well as all revenue share obligations. In return, the company-assigned the DBD 3 of the company's portfolios and receive the revenue share payable to Marathon from those 3 portfolios after certain future revenue and cost thresholds are met.

As a result of the debt reduction efforts, we were able to remove all of the historical financing debt from our balance sheet with the only remaining debt being the convertible note we entered into in August of this year in the amount of 5.5 million. At the same time, operating costs have been reduced considerably with such costs being phased in during the fourth quarter of this year. We ended the third quarter of 2017 with unrestricted cash totaling 0.1 million and restricted cash totaling 3.9 million as compared to unrestricted cash of 5 million as of December 31, 2016.

Turning to capitalization. As of September 30, 2017, we had approximately 7.8 million weighted average basic shares outstanding versus approximately 4.6 million weighted average basic and diluted shares outstanding as of December 31, 2016. Looking forward to the announced merger with GBV, we expect to issue approximately 127 million shares of common stock pursuant to the terms of the merger agreement, whereby Marathon's existing shareholders will own 19% of the fully diluted ownership of the combined entity.

In addition, we expect to be filing a Form S-4 pursuant to proxy filing and shareholder meeting. We expect the shareholder meeting to occur during the first quarter of 2018, at which time Marathon shareholders will, among other standard proxy items included in annual meeting, has the right to vote on the merger agreement with GBV.

Thank you all for your attention. Operator, you may now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Phil Kopiarowski, TCS.

Phil Koprowski

[Indiscernible] deals you worked, the divesting of the debt and the proposed deal you're working with GBV, are you able to give us any kind of guidance on what type of revenue forecast or when you might be able to breakeven on the deal with GBV assuming it goes through as planned?

Doug Croxall

We'd love to give you that guidance, but we simply cannot do that at this time.

Operator

Our next question is from Scott Norrison, who's an investor.

Unidentified Analyst

Can you inform us how many employees Marathon currently employs total, full time and part time?

Doug Croxall

We have three current employees with Marathon at this time.

Operator

Our next question is from Andrew Pipa, ZMP Trading.

Andrew Pipa

My question is I'm looking at your press release regarding your Global Bit Ventures acquisition, and I see that you're going to transfer 126 million shares of your current company to purchase this company. My question is the following. I'm doing the math and seeing that the stock trade is near 6.5, and you're then effectively paying over $700 million for Global Bit Ventures. I'm wondering, and I know on the call you didn't provide any guidance as far as cash flow except that you would be cash flow positive, but $725 million worth of stock sounds to me like a very large sum of money, and if you could further elaborate on why you're spending so much money acquiring this company.

Doug Croxall

So we can't really get into the discussions of projected revenue and breakeven and cash flow and earnings potential. We're going to be filing the S-4 relatively soon, and I think things will start to be transparent as to the value that we're -- that Marathon is getting in the GBV transaction. But at this point, it's just we're -- we really kind of hands -- our hands are really tied about what we can say to that effect.

Andrew Pipa

Can I give a follow-up?

Doug Croxall

Yes, go ahead.

Andrew Pipa

So you say currently 300 servers are up and running, and you're going to be a pure play. I'm still trying to wrap my hands around the fact that you're going to be paying this exorbitant sum of money. And I know you can't give any revenue guidance or cash flow guidance or anything of that sort, but as a shareholder of the company, I'm scratching my head as to trying to see where the value is really going to be. And if you can provide any guidance whatsoever just -- it's just -- it's hard for me to comprehend. And then -- and I see when the announcement was made back in November, the stock was roughly $1 a share, and now it's moved to $6.5. So I'm wondering if there's a possibility of rethinking the amount of shares that you're going to use.

Doug Croxall

Yes. No, we're not -- so thank you for the follow-up. We're -- number one, we're not going to comment on what the share price was then, what the share price is now or why the share price may have moved or why it had moved so late after the announcement. And again, I'll just reiterate that we see tremendous value in what we're buying and what the market has to offer going forward, and I think that'll become apparent to the shareholders when the S-4 is filed.

Operator

So our next question comes from [Genile Smith], [Destiny Glam Beauty].

Unidentified Analyst

I basically just wanted to get -- I'm just investing my money into the stock. I read up on it, but I just wanted to just get a description of what it is exactly that the company does and what it has to offer. And when I did read on it, I did see something about patents. So I just want to -- just to get a little bit more confident in what I'm putting my money towards.

Doug Croxall

[Genile], this is Doug. So I would strongly encourage you to read our SEC filings and our investor presentations that are available on our website. Marathon Patent Group has traditionally been in the business of patent licensing. The company that we're buying, Global Bit Ventures, is in a different business, and that is the business of digital assets and crypto currency mining. They're very different businesses with very different risk and reward profiles. And so I would encourage you to do a bit of reading to continue to learn about Marathon and Global Bit Ventures.

Operator

Our next question comes from Brett Reiss with Janney Montgomery Scott.

Brett Reiss

The companies that are doing similar things to the Global Bit Ventures, how many GPUs do they have?

Doug Croxall

So this is Doug. I've got Charles Allen on the line with me as well. I don't know if, though, that information has been made available. I'm not sure what other companies you're referring to. Charles, do you have any knowledge about some of the competitors on what GPUs power they have?

Charles Allen

There are obviously a lot of other competitors in the space. With respect to public companies, where that information is available for us to research, it's limited. There's one company in Canada -- listed in Canada on the TSX. The ticker is HIVE. I don't recall off the top of my head what the -- what their current number of servers they have and processing power. I could go look it up, but I don't think they're online with a lot of their equipment. So a lot of it is just plans. On the private side, companies that own the business just typically do not disclose their operations. So we don't really have color on who are the major players in the private market. They tend not to make themselves available.

Brett Reiss

Mr. Allen, are you going to be mining bitcoin as your cryptocurrency or another cryptocurrency that will compete with bitcoin?

Charles Allen

So we are currently running 300 servers that are online. We have 700 installed. As Doug mentioned, those servers are GPU-based servers. So they're currently mining ethereum or ether, which is the token on ethereum's blockchain. We plan to add 14 petahash of ASIC servers, application specific-integrated circuits, which could mine on bitcoin's blockchain. Both of those are ASIC and GPU-based servers, can also mine on other digital asset blockchains in addition to bitcoin and ethereum. So those are possibilities as well.

Brett Reiss

Now do you purchase these servers? Do you lease them? How does that work?

Charles Allen

So we purchase the servers, and on the GPU side, we are having them custom-assembled. The servers that mine bitcoin's blockchain or ASIC servers are typically off the shelf. There's one major company in the space called Bitmain, which is the major supplier of ASIC servers right now. The GPU-based ones you have to basically custom build and configure software yourself.

Brett Reiss

Mr. Allen, how long the company were attempting to -- your company were attempting to purchase, how long have you been doing this? How long has the company been in existence?

Charles Allen

Doug, can we answer that? I don't know if that's been publicly disclosed.

Doug Croxall

Yes. Brett, I think that information is kind of specific to GBV, and I think we'll want to wait for the S-4 to come out. It'll all be in the S-4. I mean, Charles, if you want to talk about your history, your bio, I think that's fine. But specific to GBV, I'd prefer that, that information to be disclosed through the S-4 SEC.

Brett Reiss

Tell us a little about yourself, Mr. Allen.

Charles Allen

So I've been in the mining business starting in late 2014. I'm the CEO of BTCS, the first public company in the space. And we entered the bitcoin mining space back in the end of 2014 and grew that business from about 30,000 in revenues to, on a trailing basis, just under 1 million. And the market was different at that time. I think the market is much better today than it was then. The price of bitcoin was, around that time, hovering about $200 U.S. per bitcoin. Ethereum was about $7 during that time frame. So the market is very, very different than it was then. So it's a space I've been in for quite some time.

Brett Reiss

And what attracted you to do this potential deal with Marathon? Were you in discussions with anyone else?

Charles Allen

When we were approached by -- with this opportunity, it seemed like it was a good fit. So we decided to move forward.

Operator

[Operator Instructions] Our next question comes from Nick Callibris, who's an investor.

Unidentified Analyst

I had a question for the acquisition of the company you guys are purchasing. Is there a formula based on how you guys are acquiring it with the share price is -- on a certain date? Is it a weighted average or a certain day period? Or is that undisclosed?

Frank Knuettel

It was associated and then predicated on a fixed exchange ratio of shares, and that fixed exchange ratio will remain constant or is expected to remain constant.

Unidentified Analyst

But with this rising share price now, how does that affected you? I know you can't get into particulars, but I know, typically, it's worked on a weighted day average from a certain date to a certain date or to -- I just find it kind of unbelievable that you guys are going to issue with the amount of shares, unless it's a fixed dollar amount, which then the actual issuance of shares will be altered now, right? I assume that the stock price will be tanking now. I haven't really checked. But based on this conference call, doesn't look too positive. But any guidance or any follow-up on that you can give me?

Doug Croxall

No, I mean, the agreement is the agreement, and we can't go into it.

Unidentified Analyst

I know. But for the 126 million shares, that stands as is? Is there a certain date that, that was agreed upon? And what day it takes this up? You know what I mean?

Doug Croxall

Yes, I understand. It's subject to shareholder approval so it takes effect when the shareholders affirmatively vote to close the transaction. I cannot predict when that will be. We have an SEC process we have to go through. So we're expecting it to occur sometime in January or February. It could take longer. It's just subject to things that are outside of the Marathon and GBV's control. And until you have a chance to see what we're actually buying by reading the S-4, it's really hard to make a determination as to whether we're under or overpaying for something.

Operator

Our next question comes from Craig Greenberg, who is an investor.

Unidentified Analyst

Congratulations on your acquisition plans. My question is simply given that I thought I heard there will be about 18% of the combined company in the hands of the Marathon investors and the outstanding shares, at this point, is around 6.8 million, how do we wind up with an additional, I don't know, 15 million or 17 million or 18 million shares? What is the mechanism for that? And how is that calculated? Or maybe I'm missing something.

Frank Knuettel

So one update is as of the filing of our Q a little more than a week ago, we had 8.7 million shares of stock outstanding. The difference from there is related to all the convertible instruments, which include convertible debt that we entered into in August of this year as well as warrants entered in the December of 2016 financing, among others, and stock options issued to employees, consultants, et cetera. So the difference between the current outstanding number of shares and the totality is related to the convertible instruments.

Unidentified Analyst

So is the totality approximately 23 million or 24 million shares and we're at 8.7 million? So then my next question would be with the convertible debt, what is the -- how is the conversion price determined and foreign investors who own it able to convert it on an ongoing basis?

Frank Knuettel

They are able to convert on an ongoing basis, and it's convertible predicated on the formula embedded in the note agreement itself, which was filed with the SEC and is dependent on the market price or a fixed floor.

Unidentified Analyst

So is there a maximum amount of shares that could actually be -- or I should say, a minimum number of shares that may be created as a consequence of that financing? Could that be available without mine taking it out?

Frank Knuettel

So there's -- turning the equation the other way, there is a maximum number of shares. Theoretically, the minimum number of shares is a variable that declines as the price would potentially increase. So the higher the stock price, the lower the rate.

Unidentified Analyst

So could you tell me? I guess maybe after the call I could find -- you could -- or perhaps direct me to the right documents for -- to be able to read and get a handle on. I guess my next question is related to the timing of the merger, which I believe you mentioned was several months away because it requires approval by both boards and I guess other requirements. Now this all will be in your S-4. Can we have some estimated time when the S-4 will be available? Is it a month, a week or two months? Do you have any sense? Because the information, the financials about the block chain company aren't available. Will all of that be available at that time so that we can better understand the valuation process and what the [progress] is going forward? Yes.

Doug Croxall

Craig, this is Doug speaking. Yes, we've been working on the S-4 around-the-clock, including through the holiday and holiday weekend. We hope to have that on file imminently. I mean, again, it's a little bit outside of our total control as we have auditors and attorneys and boards reviewing everything that we do. But our anticipation is that we'll have the S-4 on file sometime in the next two to three weeks, roughly, could take longer, could be shorter. And then depending on how -- what kind of review we get from the SEC, we hope to have a shareholder vote, which should be the final approval, sometime in either January or February, preferably.

Unidentified Analyst

Will you do have a PowerPoint available at the time when you do the filing for the investors to understand this better? Or I guess, you don't know at this point.

Doug Croxall

I mean, we'll have the S-4. We have in -- we have a presentation on Global Bit Ventures that I believe is on web page, so you can certainly download that as well. And we'll keep the investors and the public market informed of other material developments as they occur.

Unidentified Analyst

I guess the last thing, I would just make a suggestion on the wish list that when you do file, the company files the S-4, perhaps you arrange for another conference call so that investors can ask questions and get better clarification.

Operator

Our next question comes from [Josh Kadeef], who is an investor. Please proceed with your question.

Unidentified Analyst

In the November 2 press release, there's a stat, and I think you guys repeated it today, that said that GBV currently owns 250 gigahash per second of mining power. I'm just trying to square that with the stuff I'm looking at online. It looks like the base Bitmain Antminer S9, which has a hash rate of 13 terahash per second, which is I think 50 times that 250 gigahash per second, costs less than $2,000. So I'm trying to figure out how your entire server load totals 250 gigahash per second. Am I misunderstanding something there?

Doug Croxall

I think you're confusing the two different -- we have 1,000 servers that will be mining ether. And then we have planned addition of 1,300 servers that will be mining bitcoin. So I think you're confusing the 250 gigahash, which is for -- those -- that's the GPUs that are mining ether. You're confusing that 250 gigahash per second with what we're going to eventually add on the bitcoin side. Charles, do I have that correct?

Charles Allen

So the bitcoin mining servers, the Bitmains are quoted in terahash per second. And that's how you get to the -- I think there are about 14 terahash per second for each Bitmain S9, and that adds up to the 14 petahash for the bitcoin. And the 1,000 servers that are GPU servers are approximately 250 megahash per second, which adds up to the 250 gigahash per second. Hopefully, that provides you some clarity.

Unidentified Analyst

Sure, sure. So you're basically talking about 1,000 of the bitcoin miners and 1,000 of the ether miners. So how much do the ethereum miners -- what's the value of those? What's the cost of those?

Charles Allen

So it's actually 1,000 of the ethereum miners and should be approximately 1,300 of the bitcoin miners, that's the planned addition. The 1,000 we currently own, of which 700 are installed as of today and 300 are running. So I don't think we've disclosed the costs associated with those. So I don't think we can do that on this call. Doug, unless you disagree.

Doug Croxall

No, we can't get into that kind of minutia, unfortunately.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back over to Doug Croxall for closing comments.

Doug Croxall

I'd like to thank everybody who has been supportive in following Marathon Patent Group. We're very excited about what we have in front of us with Global Bit Ventures. We've been working around-the-clock to try to get the transaction closed as quickly as possibly. We will provide more information when available, and we look forward to talking to you in the future. Thank you.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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