MARA Holdings, Inc. (then Marathon Patent Group, Inc.) — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The filing is by Marathon Patent Group, Inc.; it describes a patent acquisition, licensing, and enforcement business. The company reported owning 381 patents and patent rights and ten patent applications.
Financial performance and position
Amounts are in U.S. dollars. Comparisons are with the corresponding 2014 period unless otherwise noted.
| Metric | Q2 2015 / June 30, 2015 | Comparable period / prior year-end |
|---|---|---|
| Revenue | $1.369 million for the quarter; $5.463 million year to date | $3.825 million and $6.605 million, respectively |
| Operating loss | $8.567 million for the quarter; $14.866 million year to date | $0.316 million and $0.597 million, respectively |
| Net loss | $4.503 million for the quarter; $9.284 million year to date | $0.318 million and $0.599 million, respectively |
| Loss per common share | $0.32 for the quarter; $0.67 year to date | $0.14 and $0.17, respectively |
| Operating cash flow | $(5.592) million year to date | $2.400 million provided |
| Cash | $1.487 million | $5.083 million at December 31, 2014 |
| Current assets / current liabilities | $4.106 million / $23.567 million | Net working capital was $(19.461) million, versus $(14.262) million at year-end |
| Notes payable, net | $33.002 million total: $17.394 million current and $15.608 million long-term | Compared with $21.963 million at year-end |
| Total liabilities | $47.748 million | $36.533 million at year-end |
Changes, outlook, and significant matters
- Revenue fell 64% in Q2 and 17% year to date. Management attributed the decline to lower patent monetization revenue. Licensing revenue remained concentrated and largely one-time; management warned that revenue may vary substantially between periods.
- Cost of revenue rose 120% in Q2 and 186% year to date, with management citing enforcement expenses, experts, and litigation counsel for current and upcoming trials. Patent amortization also increased substantially following portfolio acquisitions.
- Q2 included a $766,498 impairment of Clouding patent assets and a $2.304 million non-cash gain from reducing the related earn-out liability, based on revised expectations for timing and probability of proceeds. The company also recorded a $3.328 million quarterly income tax benefit and $5.816 million year-to-date tax benefit.
- For the six months, investing cash outflow was $20,668 and financing cash inflow was $2.014 million. Financing included Fortress proceeds and repayments of acquisition-related and convertible debt. Cash declined by $3.595 million overall.
- The January 2015 Fortress financing included $15 million of senior secured notes, bearing cash interest at LIBOR plus 9.75% with an additional 2.75% paid in kind. The notes are secured by a first-priority lien on most company assets and are subject to a $1 million minimum unrestricted-cash covenant. A separate covenant requires at least $15 million of monetization revenue over four specified fiscal quarters; the filing says revenue booked in the first two quarters was $5.463 million.
- Management said it was assessing whether available cash was sufficient and might need additional capital. No specific revenue or earnings guidance was provided. The filing disclosed ineffective disclosure controls as of June 30, 2015, citing a limited internal audit function.
- Subsequent to quarter-end, the company entered a July 16 forbearance agreement with MedTech Development: the note maturity was extended to October 1, 2015, interest began accruing from May 13, and the company agreed to issue 200,000 restricted shares and make certain mandatory prepayments.
- The company is defending a former vendor’s contract, unjust-enrichment, and fraudulent-inducement claims, which it considers without merit. The filing also says the first $3.5 million payment under the BATO patent purchase had not been made pending possible amendments. Risk Factors are listed as “None,” despite the operating, liquidity, covenant, litigation, and control matters described in the filing.
Important facts for investors to verify
- Whether the Fortress revenue and minimum-cash covenants were met, waived, or otherwise addressed, and the company’s liquidity and financing needs.
- The full debt schedule, interest burden, maturity terms, and status of the MedTech forbearance and BATO purchase obligations.
- How much future revenue depends on a small number of patent licenses, and the collection and recoverability of receivables, including the $375,750 indemnification claim.
- The assumptions supporting the Clouding impairment and earn-out revaluation, and the realizability of the $10.257 million deferred tax asset.
- Progress in remediating ineffective disclosure controls and the status and potential exposure of the Dominion Harbor litigation.