As previously reported, enterprise blockchain startup Symbiont filed for Chapter 11 bankruptcy protection on December 1. Recent legal filings indicate that there are two potential investors. The legal documents also reveal the massive legal costs incurred in fighting a lawsuit that resulted in Symbiont receiving a payment of $53 million from IPREO, owned by IHS Markit.

Symbiont is backed by Citi, Nasdaq Ventures, and Broadridge, among others, and has several big-name clients, including Vanguard. It is advancing several capital markets projects, including a spread solution for foreign exchange forward contracts and a mortgage servicing platform.

On the day of the bankruptcy filing, a guaranteed loan of $2.3 million was to be repaid to LM Funding. Symbiont obtained the loan in December 2021 after Symbiont won a lawsuit against IPREO, but did not receive payment due to an appeal. In late December 2021, a $53 million settlement was agreed to and paid in favor of Symbiont. However, LM Funding did not repay and there was no cash left when the loan came due this month.

As the main secured party, LM Funding wants to take control of its collateral with Symbiont’s software as its main asset. Therefore, he made a court filing that revealed several matters. First, that Symbiont “claimed to be entertaining two term sheets to provide funding.”

The massive costs of litigation

He also included Symbiont accounts showing the enormous cost of fighting litigation. As of the end of 2021, Symbiont had borrowed $20.7 million in litigation funding and owed another $8.7 million. Even more shocking was an interest expense of $14.6 million for 2021. The interest costs of funding pretrial litigation can be punitively high. At best, half of the lawsuit settlement likely went to interest and legal costs, and possibly much more.

And that’s aside from the distracting factor of a startup doing major litigation.

In its filing, LM Funding is dissatisfied with the fact that $4.1 million in payments went to insiders during 2022 before repaying the loan, alleging that payments were made to insiders and unsecured creditors in the 90 days prior to bankruptcy. He asks where the $53 million went, although it is clear that much of it went to pay off the debt. The lender claims that the bankruptcy filing is a delaying tactic.

That said, the company was pretty wasteful, losing about $20 million a year before litigation costs in 2020 and 2021. It spent about $14 million a year on “technology costs” instead of capitalizing them as intellectual property. Revenue decreased from $4.6 million in 2020 to $2.5 million in 2021 and less than one million in 2020. The Chief Revenue Officer salary in 2022 was more than 70% of the company’s revenue.

Meanwhile, in the past month, two major blockchain business projects have been 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 CEO of BNY Mellon writing an opinion piece in the Financial Times. There was also relatively good news for the banking sector, as the final Basel III crypto asset rules are more palatable than previous proposals.