MARA Holdings, Inc. quarterly report, Q3 FY2015

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, 2015. The filing identifies the registrant as Marathon Patent Group, Inc.; this differs from the request metadata’s company name, MARA Holdings, Inc. The business acquired patent rights and sought to monetize them through licensing and enforcement. At quarter-end, it reported 369 U.S. and foreign patents and patent rights, plus ten patent applications.

Financial Results and Liquidity

Revenue less cost of revenue, before patent amortization and other operating expenses, was approximately $2.41 million (37.6% of revenue) in Q3 2015 versus $7.87 million (58.5%) in Q3 2014; for the nine months it was approximately negative $0.32 million (negative 2.7%) versus $11.61 million (57.9%). These are derived figures.

• Cash flow: Operating activities used $2.92 million in the first nine months of 2015, compared with $3.23 million provided in the prior-year period. Investing activities used $0.02 million; financing activities provided $1.27 million. Cash declined to $3.41 million from $5.08 million at December 31, 2014.
• Liquidity: Working capital was negative $21.06 million at September 30, versus negative $14.26 million at year-end 2014. Management said it was uncertain that existing cash and receivables would fund operations for the next 12 months and might need additional capital or strategic alternatives.
• Debt and obligations: Notes payable, net of discounts, totaled approximately $33.26 million ($19.38 million current and $13.88 million long-term). Total liabilities were $50.91 million. The Fortress senior secured notes carried interest at LIBOR plus 9.75%, with 2.75% paid in kind; the notes were secured by a first-priority lien on substantially all company assets, subject to stated exceptions. The company also had a $1.00 million revenue-sharing liability and a $6.55 million Clouding IP earn-out liability.
• Other balance-sheet items: Accounts receivable rose to $2.33 million from $0.22 million. Net intangible assets were $43.75 million; stockholders’ equity was $15.67 million, down from $24.25 million at year-end.

Material Changes Versus the Prior Comparable Period

• Revenue fell 52% year over year in Q3 and 41% for the first nine months, primarily due to fewer one-time patent licenses. Operating results shifted from income to losses in both comparisons.
• Patent amortization increased to $8.51 million for the nine months, from $2.87 million, reflecting portfolios added in late 2014 and 2015. Enforcement costs also increased, including expert costs and litigation counsel fees for current and upcoming trials.
• Interest expense for the first nine months was $3.59 million, compared with negligible expense in 2014. The period also included a $0.65 million debt-extinguishment loss and a $0.77 million patent impairment charge. A $2.90 million gain from remeasuring the Clouding earn-out partly offset expenses.
• Five licenses generated 87% of Q3 2015 revenue; one-time licenses accounted for approximately 97% of quarterly revenue and 94% of nine-month revenue. The company said revenue may remain highly variable and concentrated among a small number of licensees.

Outlook, Risks, Contingencies, and Unusual Items

• The Fortress agreement required at least $15 million of monetization revenue over four specified fiscal quarters and minimum unrestricted cash of $1 million. The filing reported $5.46 million of revenue over the first two quarters of the covenant period—less than half the amount required for the full period—and disclosed the shortfall as a risk.
• The company had entered a business combination agreement with Uniloc and Marathon Group SA. Closing was expected in Q1 2016, subject to shareholder approvals, third-party consents, listing and other conditions; the transaction was not completed as of this filing.
• Subsequent to quarter-end, the company and Bridgestone terminated the patent purchase agreement. The filing said the patents’ book value and the associated $10 million debt would be removed from the balance sheet. The company also agreed to settle Dominion Harbor litigation for $250,000 cash and 300,000 restricted shares.
• Patent enforcement and licensing outcomes, trial costs, revenue concentration and timing, ability to obtain financing, debt covenants, patent useful-life and impairment estimates, and the realization of deferred tax assets are material risks. The company reported a $6.30 million income tax benefit for the nine months despite its net loss.
• Management concluded disclosure controls were ineffective as of September 30, 2015, citing a limited internal audit function. It said it was developing improvements but could not assure timely or adequate implementation.
• The filing’s non-GAAP reconciliation contains apparent conflicting figures: narrative text gives Q3 and nine-month 2015 non-GAAP losses of $1.89 million and $8.30 million, while the table gives $0.09 million and $6.50 million. The filing text does not provide a clear reconciliation of this discrepancy.

Important Facts for Investors to Verify

• Confirm the issuer’s identity: this filing is for Marathon Patent Group, Inc., not MARA Holdings, Inc.
• Review the Fortress covenant calculation, revenue definition, compliance status and consequences of any shortfall, alongside cash needs and financing availability.
• Verify the non-GAAP reconciliation discrepancy and the underlying reported and adjusted results.
• Assess the status and economics of the Uniloc transaction, the post-quarter Bridgestone termination, and the Dominion settlement, including share dilution and cash commitments.
• Evaluate the concentration and repeatability of licensing revenue, pending enforcement matters and trial-related spending, and the assumptions supporting patent values and deferred tax assets.