Business context and reporting period
This is Marathon Patent Group, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2018, filed November 13, 2018. The filing predates the company’s later name, MARA Holdings, Inc. The company reported one operating segment, digital currency blockchain, and described a strategy of cryptocurrency mining alongside monetization of remaining intellectual property assets.
The proposed merger with Global Bit Ventures (GBV) was terminated in June 2018. The company issued GBV 3,000,000 common shares as a termination fee, valued at $2.85 million.
Financial results and liquidity
| Metric | Three months ended September 30, 2018 | Nine months ended September 30, 2018 | Comparable 2017 period |
|---|---|---|---|
| Revenue | $338,672 | $1,267,141 | $162,713; $609,650 |
| Operating loss | $(1,495,041) | $(7,661,078) | $(3,916,979); $(9,655,378) |
| Net loss attributable to common stockholders | $(1,340,457) | $(8,419,922) | $(6,677,486); $(12,484,925) |
| Basic and diluted loss per share | $(0.06) | $(0.42) | $(1.06); $(2.24) |
| Operating cash flow | Not presented quarterly | $(6,258,045) | $(14,805,104) for nine months |
Mining generated $338,672 of Q3 revenue and $1,200,171 for the first nine months; the remaining nine-month revenue was other revenue. Cost of revenue was $1,132,570 in Q3 and $2,331,909 for nine months, exceeding revenue in both periods. The filing does not provide a clear gross-margin percentage.
At September 30, cash and cash equivalents were $3,188,780, down from $14,948,529 at December 31, 2017. Current assets were $3,841,062 and current liabilities were $1,474,289; management reported working capital of approximately $2.4 million. Nine-month investing cash outflow was $5,501,719, primarily reflecting $5,251,719 in mining equipment and installation costs. There was no financing cash inflow in the period. Total liabilities were $2,473,395; the balance sheet reports $999,106 of convertible notes as long-term debt.
Material changes versus the prior comparable period
- Revenue rose approximately 108% in both Q3 and the nine-month period, largely because cryptocurrency mining began in 2018. Mining costs, including equipment depreciation, substantially exceeded mining revenue.
- Net losses narrowed versus 2017, while operating losses also decreased. The prior-year periods included significant patent amortization, impairment, compensation expense, and other items.
- Cash declined by $11.8 million during the first nine months of 2018. The company also reported no financing cash proceeds, compared with $11.1 million of financing cash inflows in the first nine months of 2017.
- Common shares outstanding increased from 12,477,781 at year-end 2017 to 25,519,940 at September 30, 2018. Issuances included debt conversions, preferred-stock conversions, shares for services and patent rights, and the GBV termination fee.
Outlook, risks, contingencies and unusual items
- Going concern: The company reported an accumulated deficit of approximately $97.7 million, a nine-month net loss of approximately $8.4 million, and operating cash use of approximately $6.3 million. Management said substantial doubt existed about the company’s ability to continue as a going concern and that current cash might not fund operations for the next twelve months. It may need to raise capital or consider strategic alternatives; additional equity financing could dilute shareholders.
- Mining investment and operating risks: The company acquired 1,400 Antminer S9 machines and leased a 26,700-square-foot Quebec facility through November 2022. Mining equipment is depreciated over two years. Management noted uncertainty in estimating useful lives amid rapid technological change; mining revenue is also exposed to digital-asset prices, network conditions, and operating costs.
- Debt and accounting detail: The convertible notes bear 5% interest and mature December 31, 2019 following an extension; $999,106 remained outstanding, with $132,390 of accrued interest. The filing’s debt note labels the full $999,106 as a current portion, while the balance sheet presents it as long-term. The filing text does not reconcile this classification clearly.
- Litigation: The Feinberg case was pending a motion-to-dismiss hearing scheduled for January 15, 2019, with discovery stayed. A separate shareholder lawsuit by Tony Ramirez alleging a proxy-solicitation violation had been filed, and defendants had not yet responded.
- Financial reporting controls: Management concluded disclosure controls and procedures were not effective and described a material weakness that could allow material misstatements to go undetected. It said it would pursue segregation-of-duties procedures where feasible.
- Non-recurring and post-period items: The $2.85 million GBV termination fee was recorded as an operating expense. After quarter-end, the company entered employment agreements with its CEO and CFO and granted or agreed to grant substantial options, including 5,000,000 options to the executive chairman/CEO and 200,000 to the CFO, at a $0.58 exercise price.
- Revenue measurement: Mining rewards were recognized as revenue at the average U.S.-dollar spot price when earned. The company noted there was no specific definitive U.S. GAAP guidance for digital-currency mining and that future authoritative guidance could require a policy change.
Important facts for investors to verify
- Confirm the company’s historical identity and reporting context: this 2018 filing is under Marathon Patent Group, Inc., not the later MARA Holdings, Inc. name.
- Reconcile the debt classification difference between the balance sheet and the debt note, and confirm the outstanding principal, accrued interest, conversion terms, and maturity.
- Assess cash runway and funding needs against management’s going-concern warning, mining operating costs, and planned capital requirements.
- Evaluate whether mining operations can generate revenue sufficient to cover cost of revenue, including depreciation, power, and facility costs.
- Review the potential dilution from the increased share count, convertible notes, equity incentive plan, and post-period executive option grants.
- Monitor the two disclosed lawsuits and the remediation of the reported material weakness in financial reporting controls.
- Note a small revenue discrepancy: the financial statements report Q3 revenue of $338,672, while MD&A states $338,673.