Business context and reporting period
Marathon Patent Group, Inc. (formerly American Strategic Minerals Corporation) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. The company was a development-stage patent licensing and monetization business, acquiring patent portfolios and pursuing licensing and enforcement. Its former minerals and real estate activities were discontinued; all remaining real estate was sold during the first nine months of 2013.
Financial results and liquidity
| Metric | Three months ended Sep. 30, 2013 | Nine months ended Sep. 30, 2013 |
|---|---|---|
| Revenue | $710,500 | $2,235,479 |
| Gross profit / margin | $307,487 / about 43% | $1,547,841 / about 69% |
| Operating expenses | $1,349,426 | $4,124,249 |
| Operating loss | $(1,041,939) | $(2,576,408) |
| Net loss | $(935,320) | $(2,351,355) |
| Basic and diluted loss per share | $(0.18) | $(0.54) |
| Cash used in operating activities | Not provided for quarter | $(947,344) |
At September 30, cash was $5.86 million, working capital was $6.12 million, total assets were $11.89 million and total liabilities were $403,216. The balance sheet reported no conventional borrowings; the $500,000 CyberFone acquisition note had been repaid in June. Cash increased from $2.35 million at December 31, 2012, chiefly reflecting equity financing. The company raised approximately $5.75 million net from stock sales during the nine-month period. Patent intangible assets were $3.22 million and goodwill was $2.14 million.
Changes versus prior comparable periods
- Revenue was zero in both the three- and nine-month periods of 2012. 2013 revenue included $1 million of noncash revenue for patents received under a settlement and license agreement.
- Nine-month net loss narrowed to $2.35 million from $6.45 million; quarterly net loss narrowed to $935,320 from $1.90 million. Management attributed improvement mainly to patent-related gross profit and lower operating expenses.
- Nine-month operating expenses declined 20% year over year, while patent amortization of $860,657 was newly incurred in 2013. The nine-month gross margin was boosted by the noncash patent settlement.
- Discontinued operations contributed income of $263,460 for the nine months, including $206,596 gross profit from real estate sales and a $168,216 gain related to a mining-lease assignment, partly offset by other expenses.
Outlook, risks and unusual items
- Management said available resources were expected to cover at least the next 12 months under current plans, but also disclosed substantial doubt about the company’s ability to continue as a going concern, citing cumulative development-stage losses of about $9.4 million, continuing operating losses and dependence on future profitability or financing. Patent-business revenue was not sufficient to fund ongoing operations, and further financing could dilute shareholders.
- The company acquired CyberFone Systems in April for $500,000 cash, a $500,000 note (repaid in June) and 461,538 shares valued at $2.28 million. CyberFone held U.S. and foreign patents; its service provider retained a contingent participation in recoveries.
- The company reported high customer concentration: five customers generated about 88% of nine-month revenue, and three customers accounted for all accounts receivable. Receivables were $330,000 at quarter-end.
- Management concluded disclosure controls were ineffective at September 30 because of limited internal resources and insufficient levels of transaction review. It described remediation steps but gave no assurance they would be timely or adequate.
- After quarter-end, the company acquired four U.S. patents for 150,000 restricted shares valued at $718,500. The filing provides no quantitative earnings or revenue guidance.
Most important facts for investors to verify
- Whether patent licensing and enforcement generate recurring, collectible cash revenue, given the $1 million noncash settlement and customer concentration.
- Cash runway and financing needs against the going-concern warning; assess potential dilution from future capital raises and equity awards.
- Patent portfolio monetization prospects, acquisition-related participation obligations, and the assumptions supporting patent and goodwill carrying values.
- The filing’s investing-cash-flow presentation is inconsistent: the cash flow statement reports $795,033 used, while MD&A describes investing cash flows as provided. Confirm against the filed financial statements.
- Whether management remediated the disclosed ineffective controls and whether subsequent filings clarify any control or reporting weaknesses.