As previously reported, enterprise blockchain startup Symbiont filed for Chapter 11 bankruptcy protection on December 1. Recent legal filings indicate there are two potential investors. The legal papers also reveal the massive legal costs incurred in fighting a lawsuit that resulted in Symbiont receiving a $53 million payout from IHS Markit-owned IPREO.
Symbiont is backed by Citi, Nasdaq Ventures and Broadridge, amongst others, and has several big name clients, including Vanguard. It is progressing several capital markets projects, including a solution for margins of FX forward contracts and a mortgage servicing platform.
On the day of the bankruptcy filing, a secured loan of $2.3 million was due to be repaid to LM Funding. Symbiont took out the loan in December 2021 after Symbiont won a lawsuit against IPREO, but had not received the payout because of an appeal. At the end of December 2021, a settlement of $53 million in Symbiont’s favor was agreed and paid. However, LM Funding was not repaid, and no cash was left by the time the loan became due this month.
As the primary secured creditor, LM Funding wants to take control over its collateral with Symbiont’s software as the main asset. Hence it made a court filing that revealed several matters. Firstly, that Symbiont “claimed to be entertaining two term sheets to provide funding.” (Update: Symbiont secures interim financing).
The massive litigation costs
It also included Symbiont accounts that show the massive cost of fighting litigation. By the end of 2021, Symbiont had borrowed $20.7 million in litigation funding and owed a further $8.7 million. Even more shocking was a $14.6 million interest expense for 2021. Interest costs of litigation financing before judgment can be punitively high. At best, half of the lawsuit settlement likely went on legal and interest costs, potentially far more.
And that’s apart from the distraction factor of a startup conducting major litigation.
In its filing, LM Funding is unhappy that $4.1 million in payments went to insiders during 2022 before repaying the loan, and it alleges that payments were made to insiders and unsecured creditors in the 90 days prior to bankruptcy. It asks where the $53 million went, although it’s clear much of it went towards repaying debt. The lender asserts that the bankruptcy filing is a delay tactic.
That said, the company was fairly spendthrift, losing around $20 million a year before litigation costs in 2020 and 2021. It expensed around $14 million a year in ‘technology costs’ rather than capitalizing them as intellectual property. Revenues declined from $4.6m in 2020 to $2.5 million in 2021 and less than a million in 2020. The salary of the Chief Revenue Officer in 2022 was more than 70% of the firm’s revenues.
Meanwhile, in the last month, two major enterprise blockchain projects were shut down. They were the ASX CHESS post-trade blockchain and the Maersk IBM TradeLens shipping initiative.
Nonetheless, many in the capital markets sector remain bullish on digital assets, with the BNY Mellon CEO penning an opinion piece in the Financial Times. There was also relatively good news for the banking sector, with the final Basel III crypto-asset rules being more palatable than previous proposals.
