Business Context and Reporting Period
This Form 8-K Current Report was filed by Marathon Patent Group, Inc. (the "Company") on February 3, 2015, reporting events occurring on January 29, 2015. The Company, a patent monetization firm, entered into a series of material definitive agreements with DBD Credit Funding, LLC ("DBD"), an affiliate of Fortress Credit Corp., to secure financing for asset monetization, acquisitions, and debt repayment.
Key Financial Metrics and Transaction Terms
- Debt Financing: The Company issued Senior Secured Notes with an original principal amount of $15,000,000 (the "Initial Note").
- Interest Rate: The Notes bear cash interest at LIBOR plus 9.75% per annum. An additional 2% per annum applies during an Event of Default.
- Payment Structure: Interest is paid monthly, with 2.75% per annum paid in-kind (PIK), increasing the principal balance.
- Maturity: The Initial Note matures on July 29, 2018. Additional notes, if issued, would mature 42 months after issuance.
- Equity Components: The transaction included the issuance of 134,409 shares of Common Stock and a five-year warrant to purchase 100,000 shares at an exercise price of $7.44 per share.
- Revenue Stream: DBD received a right to a portion of monetization net revenues after the Company receives $15,000,000 in such revenues and repays the Notes.
- Collateral: The debt is secured by a first-priority lien on substantially all Company assets (excluding Orthophoenix, LLC) and includes a pledge of subsidiary interests.
Material Changes and Covenants
The filing details a significant change in the Company's capital structure through the incurrence of new senior secured debt. Key covenants and conditions include:
- Liquidity Covenant: The Company must maintain minimum unrestricted cash and cash equivalents of $1,000,000.
- Revenue Covenant: The Company must generate Monetization Revenues of at least $15,000,000 for each of the four fiscal quarters commencing December 31, 2014.
- Cash Collateral: Within 30 days, the Company must open a cash collateral account where all revenue is deposited, subject to a control agreement governing disbursements.
- Debt Repayment: Proceeds are designated to repay existing debt, specifically the 11% convertible notes issued in October 2013, and for general working capital.
- Lock-Up Agreements: DBD and certain major shareholders (the "Spangenberg Holders") entered into lock-up agreements restricting the sale or transfer of their shares for 12 months or until the Note Obligations are paid in full.
Outlook, Risks, and Unusual Items
Expansion Rights: The Company has the right to require the purchase of an additional $5,000,000 in Notes upon achieving certain milestones. Fortress Credit Corp. may, but is not obligated to, fund up to an additional $30,000,000 on equivalent terms.
Risks and Contingencies:
- Default Risk: Failure to meet the revenue or liquidity covenants could trigger an Event of Default, increasing the interest rate and potentially accelerating repayment.
- Asset Control: The Company granted a Patent License Agreement to DBD, providing DBD with rights to license certain patents solely upon an acceleration of Note Obligations.
- Unregistered Securities: The equity securities issued were sold to accredited investors under Section 4(a)(2) and Regulation D exemptions and are not registered under the Securities Act of 1933.
Financial Data: The filing text does not provide specific values for the Company's current revenue, profit, cash flow, or total debt balance outside of the new $15,000,000 obligation.
Investor Verification Checklist
- Verify the Company's ability to meet the $15,000,000 quarterly monetization revenue covenant starting Q4 2014.
- Confirm the status of the repayment of the October 2013 11% convertible notes using the new proceeds.
- Review the specific milestones required to trigger the additional $5,000,000 note issuance.
- Assess the impact of the cash collateral account on the Company's operational liquidity and working capital flexibility.
- Examine the full text of the Security Agreement to understand the scope of assets pledged, specifically regarding the exclusion of Orthophoenix, LLC.