Business context and reporting period
Marathon Patent Group, Inc. (Nasdaq: MARA; now identified in the request as MARA Holdings, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The company reported cryptocurrency mining revenue and described its business as mining digital assets while continuing to harvest value from remaining intellectual-property assets.
Financial results and liquidity
| Metric | Q2 2020 | Six months 2020 | Comparable 2019 |
|---|---|---|---|
| Revenue | $286,161 | $878,648 | $355,765 quarter; $586,459 six months |
| Cost of revenue | $740,483 | $1,893,724 | $498,588 quarter; $1,007,228 six months |
| Operating loss | $1,791,233 | $2,883,035 | $740,597 quarter; $1,725,506 six months |
| Net loss | $2,161,196 | $3,219,127 | $565,880 quarter; $1,610,742 six months |
| Basic and diluted loss per share | $(0.13) | $(0.26) | $(0.09) quarter; $(0.25) six months |
Cost of revenue exceeded revenue in both periods: the resulting gross loss was approximately $454,000 for Q2 and $1.02 million for the six months. Cash used in operating activities was $2.09 million for the six months, versus $1.47 million in 2019; cash used in investing was $4.70 million, while financing provided $6.87 million. Cash at June 30 was $775,119, compared with $692,963 at year-end. Working capital was $4.9 million, versus a $358,577 deficit at December 31, 2019.
Total assets were $10.72 million and total liabilities $1.06 million at June 30. Current assets were $5.82 million against current liabilities of $929,000. The balance sheet showed $62,500 of long-term note payable, no convertible notes outstanding, and $154,702 of lease liabilities. The company reported an accumulated deficit of $108.8 million.
Material changes versus prior comparable periods
- Q2 revenue declined 20% year over year, while six-month revenue rose 50%. Management attributed revenue primarily to cryptocurrency mining.
- Cost of revenue increased 49% for Q2 and 88% for the six-month period. Compensation and related taxes rose substantially, including stock-based compensation; total operating expenses increased 90% in Q2 and 63% for the six months.
- Net loss widened to $2.16 million in Q2 and $3.22 million for the six months. Q2 other expense included a $364,832 loss associated with conversion of convertible notes.
- Common shares outstanding increased from 8.46 million at December 31, 2019, to 24.53 million at June 30, 2020, primarily reflecting ATM sales, note conversion, and share-based compensation.
Outlook, risks, contingencies and unusual items
- Going concern: Management stated that accumulated losses, operating cash burn, and uncertainty about meeting revenue and profit projections raise substantial doubt about the company’s ability to continue as a going concern. It may need further financing or strategic alternatives; additional equity could dilute shareholders, and financing is not assured.
- Subsequent financing: An offering that closed July 28, 2020, generated approximately $6.9 million gross and $6.3 million net from 7,666,666 shares. The underwriter’s representative also received warrants for 536,667 shares at $1.125 per share.
- Mining investment and execution: The company paid approximately $4.2 million toward 1,660 Bitmain S19 Pro miners and recorded this as a deposit at quarter-end. It expected 660 units in mid-August and the remaining 1,000 in Q4; management projected aggregate hashing power of 294 PH/s once installed. Separately, 700 MicroBT M305+ miners were delivered in June and were producing bitcoin. These delivery, installation, hosting and performance expectations are forward-looking.
- Operating conditions: The company suspended production using its S-9 miners under a May 11 hosting agreement addendum. Bitcoin’s block reward halving occurred May 12, 2020; bitcoin prices, mining rewards, network conditions, energy efficiency and hosting costs could affect results. Management said COVID-19 had minimally affected day-to-day operations to date but could not predict its ultimate impact.
- Nasdaq listing: Nasdaq had notified the company of a minimum-bid-price deficiency. The filing said the company believed it had regained compliance by August 6, 2020, after ten trading days above $1.00.
- Legal and controls: The Feinberg litigation remained pending, with motions to dismiss the amended complaint awaiting court rulings; damages sought were unspecified. Management concluded disclosure controls and procedures were not effective and described a material weakness in internal control over financial reporting.
Important facts for investors to verify
- Whether the miner purchases were delivered, installed, hosted and producing at the expected capacity, and the realized cost and profitability per unit of mining output.
- Cash needs and operating runway after the July offering, including whether further financing is required and its potential dilution.
- Actual bitcoin production, sale proceeds, bitcoin prices and the effect of the May 2020 halving on mining economics.
- Progress in remediating the disclosed material weakness and any subsequent developments in the Feinberg litigation or Nasdaq listing status.
- How much revenue and expense arose from mining versus intellectual-property activities; the filing does not provide a clear, complete revenue split.