MARA Holdings, Inc. — 2017 Q1 Form 10-Q Summary
Filing identity: The supplied filing is for Marathon Patent Group, Inc., for the quarter ended March 31, 2017. It describes a patent acquisition and monetization business; it is not filed under the name MARA Holdings, Inc.
Business context and reporting period
The company acquired patent rights and sought to monetize them through licensing and infringement litigation. At quarter-end, it reported owning 345 patents and having economic rights to more than 10,000 additional patents. The unaudited statements compare the three months ended March 31, 2017 with the same 2016 period.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $78,137 | $2,059,676; down 96% |
| Cost of revenue | $451,762 | $2,639,976 |
| Gross loss (revenue less cost of revenue) | $373,625 | $580,300 |
| Operating loss | $2,809,688 | $4,916,019 |
| Net loss attributable to Marathon common shareholders | $3,606,646; $0.19 per share | $3,893,413; $0.26 per share |
| Operating cash flow | $(4,668,501) | $113,169 |
| Cash at period-end | $493,452 | $4,998,314 at Dec. 31, 2016 |
| Working capital | $(8,102,423) | $(14,939,584) at Dec. 31, 2016 |
| Total liabilities | $25,418,010 | $27,575,577 at Dec. 31, 2016 |
| Notes payable, net of discounts | $16,351,814 | $17,832,509 at Dec. 31, 2016 |
| Total stockholders’ deficit | $(11,526,625) | $(9,287,142) at Dec. 31, 2016 |
Q1 2017 investing cash outflow was $2,097 and financing cash inflow was $167,292. Patent amortization was $705,958, versus $2,025,899 a year earlier. The company recorded no income tax benefit in Q1 2017, compared with a $2,025,048 benefit in Q1 2016. The prior-year tax benefit and lower amortization and enforcement costs contributed to the period comparisons; the filing’s non-GAAP reconciliation reports a Q1 2017 loss of $2,423,244 versus $2,359,650 in Q1 2016.
Material changes and management commentary
- Revenue fell sharply because Q1 2017 revenue was primarily recurring Medtech royalties, with no newly issued settlement and license agreements reported; Q1 2016 included one-time license revenue.
- Management attributed lower operating costs mainly to reduced patent amortization and consulting expense, no 2017 impairment charge (versus $373,195 in Q1 2016), and lower trial-preparation costs. Compensation expense increased 5%.
- Cash declined by about $4.5 million, reflecting operating cash use, German litigation court bonds, payments of accrued expenses, and increased prepaids. The working-capital deficit improved largely because the Fortress debt restructuring shifted near-term principal obligations to long-term liabilities, not because the deficit was eliminated.
- The January 2017 Fortress restructuring provided for a 12-month interest-only period followed by principal repayment over 30 months. The senior secured notes carried interest at LIBOR plus 9.75%, were secured by company assets, and included a minimum unrestricted-cash covenant of $1.25 million.
Outlook, risks, contingencies, and unusual items
- Going concern: Management said available cash and receivables might not fund operations for the next 12 months, raising substantial doubt about the company’s ability to continue as a going concern. It may need additional financing, strategic alternatives, or operating reductions; financing could dilute shareholders or require giving up technology or market rights. No quantified revenue or earnings guidance is provided.
- Listing risk: Nasdaq notified the company on April 17, 2017 that it failed the $2.5 million minimum-equity requirement. It had until June 1, 2017 to submit a compliance plan; acceptance or eventual compliance was not assured.
- Subsequent financing: On April 21, 2017, the company closed an offering of 3.8 million shares at $0.70 and warrants for 2.28 million shares at $0.83. Gross share proceeds were $2.66 million before fees; the filing reports a placement-agent fee of $150,733 and additional agent warrants.
- Debt payoff proposal: A May 11, 2017 agreement allowed potential repayment of DBD/Fortress borrowings by August 15, 2017, at approximately $15.76 million plus accrued interest and 5% of specified gross revenues over the following 12 months. If not completed by the deadline, existing debt terms would remain in effect.
- Revenue and litigation risk: Management warned that revenue depends on a small number of potentially irregular, one-time licenses and may vary substantially between periods. The company reported 15 patent cases: seven in the United States and eight in Germany. It also disclosed a Symantec lawsuit and an arbitration over legal fees, both of which it planned to defend.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective because of a material weakness involving insufficient segregation of accounting duties and control-review evidence. Management described remediation steps but did not report that the weakness had been remediated.
Most important facts for investors to verify
- Reconcile the revenue disclosures: the statements and MD&A report Q1 2017 revenue of $78,137 and no new license revenue, while a note’s revenue-concentration table appears to show a $1.9 million Signal IP license for 2017. The filing text does not provide a clear reconciliation.
- Assess the company’s near-term liquidity, ability to meet the $1.25 million minimum-cash covenant, and whether post-quarter financing was sufficient to address the stated going-concern uncertainty.
- Confirm the status of the Nasdaq compliance plan and continued listing, and whether the proposed DBD/Fortress payoff was completed by its deadline.
- Review the debt’s security, interest burden, maturities, required payments, and revenue-sharing obligations, including the effect of any payoff or restructuring.
- Monitor patent monetization results, case outcomes and costs, potential dilution from shares and warrants, and remediation of the reported material weakness.