MARA Holdings, Inc. (then Marathon Patent Group, Inc.) — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Financial statements are unaudited. The filing describes a transition from patent monetization toward cryptocurrency mining; the proposed merger with Global Bit Ventures (GBV) had not closed as of the filing.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $239,967, including $199,582 from cryptocurrency mining | $78,137; increase of 207% |
| Cost of revenue | $267,709; gross loss of $27,742 | $451,762 |
| Operating loss | $1,858,132 | $2,809,688 |
| Net loss attributable to common stockholders | $2,402,820; $0.16 per share | $3,606,646; $0.76 per share |
| Operating cash flow | Used $3,650,422 | Used $4,668,501 |
| Investing cash flow | Used $6,050,629, primarily for mining equipment | Used $2,097 |
| Cash and cash equivalents | $5,367,963 at March 31 | $14,948,529 at December 31, 2017 |
| Working capital | $1,649,706 | $7,378,110 at December 31, 2017 |
| Debt | $1,959,105 of convertible notes before $345,256 discount; all classified current | $4,053,948 before discount at December 31, 2017 |
Gross margin was approximately negative 11.6%. Operating expenses declined 25% year over year, but professional fees increased 89% and general and administrative expense increased 128%. The net loss included a $1.945 million noncash debt-discount amortization charge and a $1.453 million noncash gain from the change in fair value of warrant liabilities.
Material changes and notable items
- The company purchased 1,400 Antminer S9 machines for $5.10 million and capitalized approximately $695,000 in installation costs. Mining began shortly after installation at a 26,700-square-foot Quebec facility leased through November 2022. Equipment is depreciated over two years.
- Cash fell by $9.58 million during the quarter. In addition to operating cash use, investing outflows included approximately $5.80 million for mining equipment and $250,000 for patent rights.
- Shares outstanding increased from 12.48 million at December 31 to 19.33 million at March 31, reflecting debt and preferred-stock conversions, service issuances, and other share issuances. The filing reports 20.58 million shares outstanding as of May 17.
- The company acquired patents from XpresSpa for $250,000 cash and 250,000 shares valued at $960,000; it also issued shares valued at $278,750 for consulting services connected with the acquisition.
- On April 3, 2018, the amended GBV merger agreement reduced the proposed consideration from 126.7 million to 70 million parent common shares and extended the outside closing date. If the merger did not close by August 9, 2018, or shareholders rejected it, the parent was to issue 3 million shares to the company to reimburse GBV costs.
- In April 2018, the company issued 1.2 million shares for debt conversions, reducing notes payable by $960,000.
Outlook, risks, and contingencies
- Going concern: Management stated that substantial doubt existed about the company’s ability to continue as a going concern. It was uncertain that available cash would fund operations for the next 12 months. Management said additional financing or strategic alternatives might be needed; financing could be unavailable or dilute shareholders.
- Business and revenue uncertainty: Mining revenue was new and limited in the quarter. The company warned that cryptocurrency prices and mining economics are volatile; changes in digital-asset values, network difficulty, equipment efficiency, or power costs could materially affect results. Patent-licensing revenue may also be irregular and depend on a small number of transactions.
- Legal matters: The company disclosed a settlement with Symantec for an undisclosed amount. A securities and related fraud lawsuit filed by Jeffrey Feinberg and trusts named the company and certain officers and directors; the company said it intended to defend the claims. It also reported five patent infringement cases in Delaware.
- Related-party and compliance exposure: A $588,864 uncollateralized related-party note receivable was fully reserved. The company said certain advances to a related party might implicate Sarbanes-Oxley Section 402 and that it had not determined whether a violation occurred.
- Financial reporting controls: Management concluded disclosure controls and internal control over financial reporting were not effective, citing a material weakness and the risk that material misstatements might not be prevented or detected timely.
- Accounting and valuation: Digital currencies were carried at fair value, with subsequent gains and losses recognized in current income; management noted the absence of definitive accounting guidance for cryptocurrency mining. Warrant liability depended on Level 3 inputs and valuation assumptions.
Most important facts for investors to verify
- Whether the company had sufficient liquidity or obtained financing after the stated going-concern warning.
- Whether the GBV merger closed, and the final share issuance, terms, and dilution implications.
- Mining output, realized revenue, operating costs, equipment utilization, and the effect of digital-asset prices and network conditions.
- The status and potential financial exposure of the Feinberg case, patent litigation, and related-party matters; the Symantec settlement amount is not disclosed in the filing text.
- Whether management remediated the material weakness in financial reporting controls.
- The filing reports both “large accelerated filer” and “smaller reporting company” checkboxes as selected; investors may wish to verify the company’s filer classification.