Marathon Patent Group Eyes Bitcoin Deal to Weather Financial Woes

  • United States
  • 12/04/2017
  • Bloomberg Law

Patent-licensing company Marathon Patent Group Inc. is looking to expand into the volatile digital currency business in a bid to reverse its falling fortunes.

Marathon said Nov. 28 it would issue 127 million shares, versus 8.7 million outstanding as of Nov. 14, to fund a plan to grow beyond its struggling core business of licensing and litigating patents.

The company announced Nov. 2 it will acquire Global Bit Ventures, which uses servers located in a facility in Quebec to validate blockchain transactions. Blockchain is a public online ledger used for verifying and recording transactions that’s at the heart of digital currencies such as bitcoin and Ethereum.

The news sent Marathon shares down over 40 percent after reaching a nine-month high of $6.51 on Nov. 27. The stock slid even as the price of bitcoin is rallying at a record high and poised to break above $10,000.

The GBV business model is a far cry from Marathon’s traditional business of acquiring patents to monetize them through licensing and litigation. It is a digital asset company that mines cryptocurrency by using multiple, powerful computer servers to unlock code by trial and error in a digital currency transaction, such as a person buying a cappuccino with bitcoin. For each transaction code unlocked, a miner earns the right to record the transaction and newly minted currency.

Recent case law and new patent regulation have made it more challenging for companies such as Marathon that license and litigate intellectual property assets to earn a predictable revenue stream. That is pushing Marathon and others, such as Quarterhill Inc., to dip their toes into new businesses to generate revenue.

For the three months ending Sept. 30, Marathon posted total revenue of $163,000, down 74 percent from the same period a year earlier. It also reported total debt obligations of $22 million. In August, the company said it would eliminate a $16 million debt owed to Fortress Investment Group LLC by designating the handling and monetization of three of its patent portfolios to the New York-based alternative-asset manager. The three portfolios hold more than 70 patents out of Marathon’s total 293.

The company’s business model primarily relies on patent litigation-related settlements, and the GBV deal allows it to move in a different direction, Bloomberg Intelligence analyst Matt Larson said.

“Past efforts to monetize in a pure licensing-style deal have fared very poorly over the last five years,” Larson said. “This could be Marathon’s recognition that it is necessary to transition to businesses offering products or technical solutions rather than relying on a pure patent monetization strategy.”

Marathon shareholders will vote on the GBV deal at a shareholders meeting in the first quarter of 2018. The transaction would give existing shareholders 19 percent of the fully diluted ownership of the combined entity, according to a company statement.

Lack of Deal Details

Having divulged few deal details, Marathon left investors questioning its latest move to turnaround its business.

On a Nov. 27 call with investors, Marathon executives declined to provide details on the price at which it would issue the shares at a fixed price and other terms. CEO Doug Croxall told investors the “accretive” transaction would lead to a balance sheet with no debt and cash flow.

“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,” an investor said on the call. “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.”

When another investor questioned about how long GBV has been in existence, the executives told investors more details would be “apparent” in a regulatory filing they expect to file shortly.

Nevada State public records show that GBV was registered in August this year. A search of Patent and Trademark Office assignment records show that GBV doesn’t have any patents or patent applications assigned to it. There is an 18-month delay before the patent office publishes new applications. Marathon did not respond to a Bloomberg Law request for comment.

Volatile Business

Digital currencies are far from mainstream as big retailers are yet to adopt them. They have generated a flurry of interest despite uncertainty around how the up-and-coming digital currency market will pan out.

“The market is generally optimistic about cryptocurrency, use of blockchain, and the future of financial transactions,” Larson said. “But nobody has a crystal ball to know which technology will take off and which will get left behind.”

Amid this uncertainty, Marathon is investing in servers that are required to make digital currency work.

GBV currently owns 1,000 GPU (graphics processing unit) servers rated at 250 gigahashes per second to mine digital currency on the Ethereum blockchain network, Croxall told investors on the call. Of those, 300 servers are up and running, and the rest will be installed shortly, he said. GBV plans to add an unspecified number of 14 petahashes per second ASIC (specialized hardware known as application specific integrated circuits) hashing servers for the mining of bitcoin.

To contact the reporter on this story: Malathi Nayak in Washington at mnayak@bloomberglaw.com

To contact the editor responsible for this story: Mike Wilczek at mwilczek@bloomberglaw.com

https://biglawbusiness.com/marathon-patent-group-eyes-bitcoin-deal-to-weather-financial-woes/