Business context and reporting period
This is Marathon Patent Group, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2013; the filing identifies the registrant as formerly American Strategic Minerals Corporation, not MARA Holdings, Inc. The company described itself as a development-stage patent licensing business, pursuing patent acquisitions and licensing while exiting its former mining and real estate activities.
Financial performance and position
| Metric | Three months ended June 30, 2013 | Six months ended June 30, 2013 |
|---|---|---|
| Revenue | $1.525 million | $1.525 million |
| Gross profit / margin | $765,000 / approximately 50% | $765,000 / approximately 50% |
| Operating loss | $820,000 | $1.534 million |
| Net loss | $810,000; $0.19 per share | $1.416 million; $0.37 per share |
For comparison, Q2 2012 revenue was zero and net loss was $1.587 million; first-half 2012 revenue was zero and net loss was $4.546 million. First-half 2013 operating expenses fell 31% year over year, largely reflecting lower consulting expense; Q2 expenses rose sharply as compensation, professional fees and consulting costs increased.
At June 30, cash was $6.391 million, working capital $6.670 million, total assets $11.749 million and total liabilities $424,000. Current liabilities consisted principally of accounts payable and accrued expenses; the $500,000 CyberFone acquisition note had been repaid June 21. The balance sheet reports no remaining note payable. Six-month cash used in operations was $693,000; investing activities provided $176,000, including proceeds from real estate sales; financing activities provided $4.555 million, including $5.055 million of net stock-sale proceeds. Cash increased $4.037 million.
Material changes and unusual items
- Reported revenue included $1.0 million of non-cash revenue: a customer transferred three U.S. patents and related rights in settlement of a licensing agreement. Patent-enforcement activities accounted for all reported revenue.
- The April CyberFone acquisition added a portfolio of 10 U.S. patents, 27 foreign patents and one pending patent. Consideration included $500,000 cash, a $500,000 note subsequently repaid, and 461,538 post-split shares; the purchase-price allocation included $1.136 million of intangible assets and $2.144 million of goodwill.
- The company sold its remaining real estate properties during the first half, recording $209,596 gross profit in discontinued operations. First-half discontinued operations contributed $118,253 of income.
- A $5.2 million gross common-stock-and-warrant financing closed May 31. A 1-for-13 reverse split became effective July 22, after quarter-end. The filing also reports $800,000 of additional unit financing in August.
- A proposed TQP acquisition agreement was terminated after the required trigger financing was not completed.
Outlook, risks and contingencies
Management provided no formal earnings or revenue guidance. It estimated available cash would support current operating expectations for at least the next 12 months, but stated that revenue was insufficient to fund ongoing operations and that future operations depended on obtaining financing. The filing reports substantial doubt about the company’s ability to continue as a going concern, notwithstanding management’s near-term cash estimate; additional financing could dilute shareholders, and failure to obtain it could require curtailment or cessation of operations.
- Revenue and receivables were highly concentrated: three customers generated approximately 100% of first-half revenue, and one customer represented all accounts receivable at June 30. Receivables were $250,000.
- Management found disclosure controls ineffective because of limited internal resources and inadequate multiple-level transaction review. It said remediation was being considered, with no assurance of timely or adequate implementation.
- Reported contractual obligations totaled $1.609 million, primarily legacy uranium lease and royalty commitments, despite the company’s decision to discontinue mining activities. The filing’s descriptions of these commitments warrant review.
- CyberFone recovery-sharing payments may become due after licensing or enforcement recoveries reach $4 million; the payment percentage is not clearly stated in the filing text provided.
- The May financing included registration-statement obligations and potential cash liquidated damages of 1% of an investor’s purchase price every 30 days for specified registration or reporting failures, subject to stated exceptions.
- Patent-related intangible assets and goodwill totaled approximately $4.646 million and depend on future licensing performance and management’s impairment estimates.
Important facts for investors to verify
- Confirm the registrant’s identity and corporate lineage; this filing is for Marathon Patent Group, Inc., not a company named MARA Holdings, Inc.
- Assess how much of patent revenue was cash versus non-cash, and whether the reported customer settlements and licensing receipts recur.
- Review customer concentration, collection of the $250,000 receivable and the licensing economics and contingent payments associated with CyberFone.
- Reconcile the stated $1.609 million of contractual obligations with discontinued mining operations and the underlying lease and royalty agreements.
- Track cash burn, subsequent financing, potential equity dilution, and progress addressing the going-concern and disclosure-control concerns.
- Review post-quarter share-count and reverse-split disclosures; the filing reports 5,333,822 shares outstanding as of August 14, 2013.