MARA Holdings, Inc. (then Marathon Patent Group, Inc.) — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a quarterly report; the filing’s figures compare full-year 2015 with full-year 2014. The company acquired patents and monetized them primarily through licensing and litigation.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $18.98 million | $21.40 million |
| Cost of revenue | $16.60 million | $11.79 million |
| Gross profit and approximate gross margin | $2.37 million; 12.5% | $9.62 million; 44.9% |
| Operating loss | $(25.68) million | $(6.21) million |
| Net loss | $(16.94) million | $(1.88) million |
| Cash from operating activities | $(2.96) million | $4.46 million |
The 2015 net loss attributable to common shareholders was $16.94 million, or $1.19 per share, versus $3.15 million, or $0.16 per share, in 2014. The 2014 common-shareholder loss includes a $1.27 million deemed preferred-stock dividend; the filing’s EPS disclosures are inconsistent, and should be checked against the audited statements.
At year-end, cash was $2.56 million, working capital deficit was $12.17 million, total assets were $47.23 million, total liabilities were $34.55 million, and stockholders’ equity was $12.68 million. The filing cites $23.61 million of indebtedness outstanding, net of discounts. Operating cash flow turned negative year over year; investing cash use was $0.06 million and financing cash provided was $0.51 million.
Patent amortization was $10.83 million. The company recorded a $5.79 million impairment of Clouding IP patent assets; goodwill impairment was zero, compared with $2.14 million in 2014. Interest expense rose to $4.25 million from $0.54 million. A $6.14 million gain from reducing the Clouding earn-out liability partly offset other expenses.
Material changes versus 2014
- Revenue fell 11%, which management attributed to delayed trials and monetization and the absence of a single large license recorded in 2014.
- Direct costs of revenue increased 41%, while other operating expenses increased 77%; the resulting operating loss widened substantially.
- The five largest 2015 licenses contributed about 62% of revenue, down from about 88% in 2014. Revenue nevertheless remained dependent on a small number of largely one-time licenses.
- Cash declined from $5.08 million to $2.56 million. Patent intangible assets, net, declined from $43.36 million to $25.46 million.
- The company raised $20 million of original principal in secured Fortress notes during 2015, in addition to other financing arrangements, and repaid substantial acquisition and convertible debt.
Outlook, risks, contingencies, and unusual items
- Management said it was uncertain that existing cash and receivables would fund operations for at least 12 months if projections were missed or conditions worsened. Elsewhere, it said cash, licenses entered into before filing, and expected operating cash flow were expected to fund operations through at least March 2017. Additional financing might be needed; availability and terms were not assured.
- The Fortress debt is secured by company assets other than intellectual property and includes restrictive covenants. The filing also describes a revenue participation right after specified monetization proceeds and debt repayment. Debt service, refinancing, and covenant compliance are material risks.
- The company reported 34 patent enforcement actions, including proceedings in the United States, Germany, and France. It said patents from nine portfolios were subject to inter partes reviews. Litigation expense, delays, adverse validity or infringement decisions, and changes in patent law could impair monetization.
- Patent revenue is unpredictable and concentrated. Five licenses generated about 62% of 2015 revenue, and management expected future revenue to remain variable and reliant on a relatively small number of licensees.
- The company terminated the Bridgestone patent purchase arrangement in November 2015 and reversed associated notes payable and patent assets. Its proposed business combination with Uniloc was terminated in February 2016.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end, citing material weaknesses in internal audit resources and segregation of duties. The external auditor gave an unqualified opinion on the financial statements but did not audit internal control effectiveness.
- Potential dilution includes outstanding options, warrants, preferred stock, and convertible notes. The filing estimated full conversion and exercise could increase shares outstanding by about 6.25 million from the March 2016 share count.
Most important facts for investors to verify
- Reconcile the filing’s differing revenue figures ($18.98 million in the audited statements versus $19.00 million in MD&A) and 2014 EPS/net-loss presentations.
- Review debt balances, maturities, interest, security, covenants, and the Fortress proceeds-sharing terms, along with the company’s cash runway and financing needs.
- Assess the status, cost, and likely outcomes of the enforcement cases and inter partes reviews, including the effect of trial delays on license revenue.
- Examine assumptions behind the Clouding patent impairment and earn-out revaluation, and the recoverability of deferred tax assets.
- Track remediation of the disclosed internal-control material weaknesses and quantify potential dilution from securities outstanding.