mara - january 20, 2015 sample

MARATHON PATENT GROUP (MARA)

January 20, 2015

David Hoff Founder

[email protected]

Redefining Patent Monetization

IP HAWK

David Hoff [email protected]

@theiphawk http://theiphawk.blogspot.com

I am long MARA. I have not been paid to prepare or disseminate this report by Marathon or any company discussed. All information has been obtained from

public sources. All opinions are my own. Please consult a financial advisor before making any financial decisions. All dates in the report are subject to change.

Following the early successes of VirnetX (VHC), Augme Technologies, and most recently Vringo (VRNG), there was a boom in

patent monetization reverse mergers in 2012 and 2013 in which over a dozen new ventures were formed. Within this group,

Marathon Patent Group is by far the most compelling investment; furthermore, the company is also the most attractive of all the

sub $500mm market cap companies in the entire IP space. Management has kept the company’s share count low while executing

strategic capital raises to acquire several high quality portfolios from larger operating entities. In 2013 and 2014, Acacia

(ACTG), under new leadership, made a strategic shift towards focusing on fewer portfolios with higher value targets and larger

monetization potential. For the diversified NPEs, the strategy is clear: quality not quantity. In just the last few years, the patent

litigation landscape has evolved dramatically and will surely continue to do so in the coming years. Looking at the changes thus

far, it is ever apparent that only foundational high quality IP assets will stand the test of time. In a very short time, Marathon has

emerged as a diversified NPE that has proven its ability to generate quarter-over-quarter growth on its baseline licensing

business as well as acquire portfolios with nine-figure damage numbers. The growth in the baseline business can easily justify

the company’s current enterprise value as it continues to keep costs low and realize margins in the range of 50-55% of gross

revenues. Investors should focus on the robust pipeline of major catalysts and value creation events beginning this month and

continuing at least through 2016. We believe that shares are extremely compelling at these levels. Our near team price target is

100% higher than current levels and shares could reach $20.00 - $30.00 in the longer term.

Thoughts From the Hawk

Key Data

Price $7.60

TTM Revenue $24.06mm

Enterprise Value $104.3mm

Shares Outstanding 13.64mm

Shares Fully Diluted 19.56mm

Float 9.35mm

52 Week Range $2.78-9.73

3 Month Avg. Volume 113,724

• 70% Insider and Institutional ownership: Aligned interests

with shareholders

o Erich Spangenberg is the largest shareholder with

2.3 million shares

o Tight capital structure with low float

• 94 current defendants

o 64 defendants currently scheduled for Markman

Hearings in 2015

• Diversified patent portfolio

o Risk is spread across multiple technologies and

targets

• Scalable business with low operational overhead: ~$900,000

per quarter

• Profitable with strong earnings leverage

• Dynamic Advances trial in 1st half of 2015

o RPI v. Apple (IPR denied)

• Current German injunction against Stryker

o Expected near term settlement

• Expected patent acquisitions

• Opus analytics: SaaS model

o Still early but potential for enterprise level

adoption

Key Facts and Value Drivers

mailto:[email protected]


https://twitter.com/TheIpHawk

http://theiphawk.blogspot.com/

Strategy

Marathon Patent Group is very different from the other smaller cap patent monetization companies in its space. Perhaps the

most defining distinction is the company’s ability to monetize several high quality portfolios. The business model and

valuation is supported by consistent cash flows that have and will continue to be realized by asserting their patents in

various courts around the world and leveraging incremental legal developments into patent licenses and settlements. Instead

of shooting for the moon with $500mm jury verdicts, Marathon is able to negotiate license and settlement agreements at

significant discounts, which still yield $10-$50mm returns depending on the portfolio. As Marathon’s patents make their

way through various court systems and secure favorable rulings along the way, the company’s negotiating leverage will

increase which will lead directly to Marathon striking agreements.

IPNavigation Relationship

Marathon has a unique relationship with IPNavigation in which IPNav helps source and monetize patent assets. IPNav’s

founder Erich Spangenberg is Marathon’s largest shareholder and many of IPNav’s former employees have joined

Marathon in leadership positions. While this will certainly increase the company's headcount and overhead, the internal

growth will likely reduce the company’s net expense as it will not need to outsource as much work to IPNav and other third-

party vendors.

Who is Erich Spangenberg?

Erich is one of the most successful patent licensors in the world, having filed suit against nearly 2,000 companies and

generated over half a billion dollars in licensing and settlement revenue on behalf of his clients. At the end of 2014, Erich

resigned as IPNav’s head of business, presumably to spend more time working with Marathon.

Source: Company Presentation


January 20, 2015

David Hoff Founder

[email protected]


IP HAWK









Ticker Company Name Market Capitalization 3 Month Return 6 Month Return 12 Month Return 24 Month Return

Mark

et

Cap

> $

50

0m

IDCC Interdigital, Inc. $ 1,941,091,584 27.9% 11.7% 75.6% 20.8%

TSRA Tessera Technologies,

Inc. $ 1,792,606,976 25.5% 52.7% 72.9% 102.0%

ACTG Acacia Research

Corporation $ 827,492,736 12.3% -1.1% 16.8% -34.8%

RPXC RPX Corporation $ 739,499,712 -5.2% -21.7% -19.9% 38.3%

AVERAGE $ 1,325,172,752 15.1% 10.4% 36.4% 31.6%

Mark

et

Cap

< $

50

0m

PCO Pendrell Corporation $ 354,873,920 -7.6% -24.9% -27.3% 4.7%

VHC VirnetX Holding

Corporation $ 274,022,624 14.8% -65.8% -72.7% -84.3%

UPIP Unwired Planet, Inc. $ 111,849,288 -41.2% -53.9% -32.9% -22.9%

MARA Marathon Patent

Group, Inc. $ 109,878,296 13.4% 45.8% 179.4% 68.2%

PRKR Parkervision, Inc. $ 99,082,560 -8.9% -21.5% -80.3% -47.2%

FNJN Finjan Holdings, Inc. $ 56,782,188 -0.8% -38.3% -55.2% -57.8%

PPRO Patent Properties, Inc. $ 47,705,616 -11.5% -23.3% -35.4% -6.1%

VRNG Vringo, Inc. $ 46,587,688 -38.7% -85.7% -84.1% -84.8%

SPEX Spherix, Inc. $ 28,895,562 -6.5% -39.9% -88.3% -84.2%

ITUS Itus Corporation $ 25,956,010 -37.0% -60.1% -36.7% -38.6%

INVT Inventergy Global, Inc. $ 18,212,326 -50.0% -73.5% -89.5% -60.0%

DSS Document Security

Systems $ 16,024,243 -50.0% -73.7% -85.6% -87.3%

WDDD Worlds, Inc. $ 15,012,051 -8.8% -13.6% 3.3% -35.1%

AVERAGE $ 92,683,259 -17.9% -40.6% -38.9% -41.2%

Patent companies with market caps under $500mm have struggled over the last two years, except for one.

Source: Bloomberg




January 20, 2015

David Hoff Founder

[email protected]

Sector Analysis

IP HAWK










January 20, 2015

David Hoff Founder

[email protected]

Past Financials and Future Estimates

IP HAWK



1) A portion of net recoveries will be owed to subsidiaries owned by Erich Spangenberg.

Note: 2015E EPS based on fully diluted share count

2013

Q1 2013 Q2 2013 Q3 2013 Q4 2013 2013

Revenues $0 $1,524,979 $710,500 $1,182,892 $3,418,371

Non-GAAP Net Income -$367,603 -$518,120 -$167,950 -$998,970 -$2,052,643

Non-GAAP EPS -$0.05 -$0.06 -$0.02 -$0.11 -$0.24

Shares Outstanding (Basic)

7,006,730

8,498,240

10,455,680 10,979,204

Non-GAAP Net Income

Margin 0.00% 0.00% 0.00% 0.00%

Q2 2013 includes $1M in non-cash revenue

Q3 2013 includes $700K in non-cash revenue

2014

Q1 2014 Q2 2014 Q3 2014 Q4 2014 (e) 2014(E)

Revenues $2,780,000 $3,825,000 $13,455,472 $4,000,000 $24,060,472

Non-GAAP Net Income $854,100 $1,177,000 $6,888,814 $1,230,850 $10,150,764

Non-GAAP EPS $0.08 $0.11 $0.60 $0.09 $0.88

Shares Outstanding (Basic)

10,979,186

11,016,646

11,500,500 13,580,000

Non-GAAP Net Income

Margin 30.72% 30.77% 51.20% 30.77%

Basic Licensing 2015

Q1 2015(e) Q2 2015(e) Q3 2015(e) Q4 2015(e) 2015(E)

Revenues $4,800,000.00 $5,520,000.00 $6,348,000.00 $7,300,200.00 $23,968,200.00

Non-GAAP Net Income $1,488,000.00 $1,711,200.00 $1,967,880.00 $2,263,062.00 $7,430,142.00

Non-GAAP EPS $0.08 $0.09 $0.10 $0.12 $0.38

Non-GAAP Net Income

Margin 31% 31% 31% 31% 31%

High Value Litigation

Dynamic

Advances Signal IP TLI Germany TPS

Germany

Medtech Celgene Total Estimates

Damages $150,000,000 $1,500,000,000 $75,000,000 $100,000,000 $100,000,000 $500,000,000

Settlement Estimates $25,000,000 $20,000,000 $15,000,000 $15,000,000 $20,000,000 $25,000,000

Non-GAAP Net Income

Estimates $10,000,000 $8,000,000 $6,000,000 $6,000,000 $8,000,000 $10,000,000

Non-GAAP EPS $0.51 $.41 $.31 $.31 $.41 $.51 $2.46

(1) (1)





I use Non-GAAP EPS by backing out non-cash expenses such as patent amortization and stock-based compensation. I believe

the Non-GAAP number provides a more reasonable metric to evaluate earnings being driven to shareholders. Patent

amortization tripled from 9/30/2013 to 9/30/2014, and it will remain an increasingly growing expense as the company

continues to acquire additional patent portfolios.

For baseline licensing revenue, I used a 15% quarter-over-quarter growth rate, which is reasonable considering the combination

of existing licensing portfolios, upcoming Markman Rulings and, if necessary, jury trials. As the company acquires additional

portfolios, I feel comfortable that it will be able to sustain such growth. To be clear, there will certainly be bumps along the

way. Marathon is in the patent monetization business, and should therefore never be managed to meet quarterly expectations.

There will be timing issues with patent settlements that will result in some quarters missing expectations while others exceed.

With time, results may smooth out and become more predictable.

The proposed high value litigation settlements are conservative estimates in worst case scenarios using inflated discounts. As

the company continues to successfully defend IPR proceedings and win Markman Rulings, the applied discounts will decrease,

thus increasing the nominal settlement figures. Investors won’t know the exact proposed damages number until the jury trial is

held. I use a 40% margin on the high value litigation as it is a good midpoint between the basic licensing margin of 31% and

when there is a high value settlement such as in Q3 2014 with Clouding IP.

With a trailing P/E of 11.20 times 2015 basic licensing + high value litigation, MARA should be a $20.00-$30.00 stock. I feel

confident on the P/E multiple because of managements ability to continue refreshing the portfolio pipeline.

IP HAWK





January 20, 2015


Valuation Analysis





Dynamic Advances (RPI) v Apple is a monetization program included in my high value litigation, which should be the first

real test for my model. The patent application was filed by Rensselaer Polytechnic Institute (RPI) on May 16, 2002 and claims

priority to a provisional application filed May 19, 2000. The patent was granted on February 13, 2007 after a examination at

the US Patent Office. The patent was assigned to Dynamic Advances on December 16, 2011 and asserted against Apple on

October 19, 2012. The complaint alleges that iPhone 4S, iPhone 5, iPad with Retina Display, iPad Mini, and iPod Touch

infringe the patent through the use of Siri.

Apple filed for Inter Partes Review (IPR) at the Patent Trial and Appeal Board (PTAB) on 10/21/2013 to review the '798

patent. The PTAB decided on 4/15/2014 to not institute review because the information presented did not show that there was

a reasonable likelihood that Apple would prevail with respect to at least one claim of the ‘798 patent. Apple further filed an

additional two IPRs on 1/3/2014. Both of these reviews were decided to not be instituted on 6/12/2014 due to the one year time

bar. The patent office uses a lower standard to review and invalidate patents using the broadest reasonable interpretation

standard (BRI). District Court’s use a higher standard to invalidate patents under Philips, which should present a challenge to

Apple at an eventual trial.

A Markman hearing was held on April 14, 2014 and a Markman order was issued on June 12, 2014. The opinion was very

strong for MARA with nine disputed terms construed. One term was net neutral, six terms agreed with MARA’s proposed

constructions. Two terms agreed with Apple’s constructions. I expect a trial to be scheduled for the first half of 2015, although

it might be pushed to early Q3 2015.

IP HAWK





January 20, 2015


Dynamic Advances v Apple

US Unit Sales

2012 2013 2014 Total

iPhone 50.8M 52.6M 59.2M 162.6M

iPad 20.4M 24.9M 23.8M 69.1M

iPod Touch 12.3M 9.2M 5M 26.5M

258.2M

US Sales = 35% Total Unit Sales

Through discovery, a MARA damages expert will propose damages theories to calculate a per unit royalty for infringement of

the ‘798 patent. I estimate a royalty range of $.25 to $1.00 to be proposed. We believe a fair estimate to be $150M.

Units 258.2 258.2 258.2 258.2

Per Unit $0.25 $0.50 $0.75 $1.00

Damages $64.6M 129.1M 193.65M 258.2M

Conclusion: The Dynamic Advances v Apple is one of many potentially lucrative monetization programs MARA is currently

pursuing. A settlement should be highly accretive to the company and shareholders. Securing legal decisions should increase

the settlement likelihood and decrease the discount MARA is willing to resolve the case before it gets to trial.





David Hoff Founder

[email protected]

IP HAWK



Q4 Analysis

Estimating quarterly revenue from non-recurring patent settlements has historically been very challenging for investors. Q4 2014

will not be any different. There were a number of settlements/dismissals in the Clouding IP and Selene portfolios, which should

be covered by the RPX agreements signed on September 30, 2014. CRFD Research and Relay IP also signed agreements with

RPX In Q1 2014, but due to timing issues they should not be covered under the RPX agreement. I am not expecting a repeat of

Q3 2014 $13.5M number.

Q4 Highlights

• October 13, 2014 - Completed a $5.5mm financing and an acquisition of three medical device portfolios: OrthoPhoenix, TLIF

and MedTech Development

• October 22, 2014 - Filed new lawsuits against Apple, Amazon, Box, Dropbox, Google, and SugarSync in the Vantage Point

portfolio

• October 27, 2014 – Announced a Markman hearing scheduled for January 20, 2015 in the TLI Communications portfolio

• November 3, 2014 – Received a favorable first instance ruling in the MedTech v. Stryker case in Germany

• December 1, 2014 – Started the enforcement of an injunction against Stryker in the MedTech portfolio in Germany

• December 3, 2014 – The PTAB denied institution of the IPR filed by BrainLab AG and Varian Medical Systems against

Sarif’s ‘725 patent. A joint dismissal was filed to terminate the IPR proceeding



Settlements & Dismissals

Selene

• HP 10/15/14

• Linkedin – 10/15/14

• Dell – 10/16/14

• Verizon – 10/17/14

• Oracle – 10/20/14

• McAfee – 10/21/14

• Monster Worldwide – 11/17/14

• Extreme Networks – 11/20/14

• Rackspace – 11/26/14

• Cisco – 12/2/14

Clouding IP

• HP – 10/22/14

• SAP – 10/22/14

• Amazon – 10/23/14

• Rackspace – 10/30/14

• Citrix – 11/4/2/14

• CA Tech – 11/14/14

• Verizon – 11/21/14

Vantage Point

• Pantech – 11/11/14

• Viewsonic – 12/10/14

• LSI – 12/24/14

CRFD Research

• AT&T - 10/3/14

• Akamai -12/8/14

TLI Communications

• Richmond Camera Shop – 12/11/14

• Ludiciom Inc – 12/11/14

TLIF

• Aesculap – 11/3/14

• LDR Holdings – 11/18/14

Relay IP

• Adtran - 10/9/14

January 20, 2015


Fourth Quarter Review






Source: Company Presentation




January 20, 2015

David Hoff Founder

[email protected]

Key Court Dates Timeline

IP HAWK







Investments which have a significant reliance on the legal system carry different risks than traditional operating

companies. Predicting the outcome of complex patent litigation is very difficult for investors. Litigation losses will

happen along the way at the patent office or at the court level. By taking a diversified portfolio approach any losses

should be mitigated.

The learning curve for patent investments is steeper than most investment classes and there is very little coverage of the

sector or investments by the mainstream investment community. Marathon along with other companies in the sector

need to continue to educate investors and analysts.

Quarterly results could not meet expectations, due to timing issues, deal flow, or legal decisions.

Patent reform failed in 2014, but there should be a renewed effort to pass new legislation in 2015. The impacts are

currently unknown at this time.




January 20, 2015

David Hoff Founder

[email protected]

Risks

IP HAWK








January 20, 2015

David Hoff Founder

[email protected]


IP HAWK



Patent Portfolio Break Down





Disclosure: I, David Hoff, own stock in MARA and ACTG. I have no plans to buy or sell any stock

within the next 72 hours. I wrote this report myself, and it expresses my own opinions. I have no business

relationship with any company whose stock is mentioned in the article.

DISCLOSURE:

The information contained herein is not intended to be investment advice and does not constitute any form of

invitation or inducement by David Hoff to engage in investment activity. Neither the information nor any

opinion expressed constitutes a solicitation for the purchase or sale of any security. Securities, financial

instruments, strategies, or commentary mentioned herein may not be suitable for all investors and this material is

not intended for any specific investor and does not take into account an investor’s particular investment

objectives, financial situations or needs. Any opinions expressed herein are given in good faith, are subject to

change without notice, and are only current as of the stated date of their issue. Prices, values, or income from any

securities or investments mentioned in this report may fluctuate, and an investor may, upon selling an investment

lose a portion of, or the entire principal amount invested. Past performance is no guarantee of future results.

Before acting on any recommendation in this material, you should consider whether it is suitable for your

particular circumstances and, if necessary, seek professional advice.

FORWARD-LOOKING STATEMENT

This report may contain certain forward-looking statements and information, as defined within the meaning of

Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and is subject to

the Safe Harbor created by those sections. This material contains statements about expected future events and/or

financial results that are forward-looking in nature and subject to risks and uncertainties. Such forward- looking

statements by definition involve risks, uncertainties and other factors, which may cause the actual results,

performance or achievements of mentioned company to be materially different from the statements made.

COMPLIANCE PROCEDURE

Content is researched, written and reviewed on a best-effort basis. However, we are only human and are prone to make

mistakes. If you notice any errors or omissions, please notify me at [email protected].

NO WARRANTY OR LIABILITY ASSUMED

David Hoff is not responsible for any error which may be occasioned at the time of printing of this document or

any error, mistake or shortcoming. David Hoff has not been compensated for this report. No liability is accepted by David

Hoff whatsoever for any direct, indirect or consequential loss arising from the use of this document. David Hoff

expressly disclaims any fiduciary responsibility or liability for any consequences, financial or otherwise arising from

any reliance placed on the information in this document. David Hoff does not (1) guarantee the accuracy, timeliness,

completeness or correct sequencing of the information, or (2) warrant any results from use of the

information. The included information is subject to change without notice.


January 20, 2015

David Hoff Founder

[email protected]


IP HAWK







mara - january 20, 2015 sample

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