Business context and reporting period
Marathon Patent Group, Inc. (the registrant named in this 2014 filing; formerly American Strategic Minerals Corporation) reported for the quarter and six months ended June 30, 2014. Its business was acquiring and monetizing patent rights through licensing and enforcement. This is a historical filing and does not describe the company’s current business.
During the quarter, the company reported five patent license agreements and continued acquisitions that expanded its patent portfolio. It reported 128 U.S. and foreign patents, five open applications, and contract rights to 10 patents at June 30.
Financial performance and condition
| Metric | Three months ended June 30, 2014 | Six months ended June 30, 2014 |
|---|---|---|
| Revenue | $3.82 million | $6.60 million |
| Gross profit / margin | $2.07 million / 54% | $3.74 million / 57% |
| Operating loss | $0.32 million | $0.60 million |
| Net loss | $0.32 million | $0.60 million |
| Net loss available to common shareholders | $1.59 million | $1.87 million |
| Basic and diluted loss per share | $0.29 | $0.34 |
Common-shareholder losses include a $1.27 million deemed dividend associated with the Series A preferred stock’s beneficial conversion feature. Revenue was up 151% for the quarter and 233% for the six-month period versus 2013. Gross margin declined from 81% in the prior-year quarter; the filing attributes the larger revenue base to growth in patent monetization.
For the six months, operating cash flow was positive $2.40 million, investing cash outflow was $5.10 million, and financing cash flow was positive $5.59 million. Cash rose to $6.50 million from $3.61 million at December 31, 2013. Current assets were $7.23 million and current liabilities $6.23 million; the filing reports working capital of approximately $1.00 million. Net intangible assets increased to $19.53 million from $6.16 million.
The balance sheet reports $5.06 million of notes payable at June 30, 2014. Total liabilities were $6.23 million. The filing’s discussion also describes $6.0 million in acquisition notes and gives inconsistent maturity dates; see investor verification items below.
Material changes versus prior comparable period
- Six-month revenue rose from $1.52 million in 2013 to $6.60 million in 2014; the prior-year six-month period had no first-quarter revenue.
- Six-month operating loss narrowed to $0.60 million from $1.53 million, despite higher operating expenses, principally reflecting improved gross profit.
- Patent amortization rose to $1.39 million from $0.48 million, and consulting fees rose to $0.76 million from $0.18 million. Six-month operating expenses included $2.63 million of non-cash expenses.
- The company completed acquisitions of Dynamic Advances, IP Liquidity, and Sarif Biomedical in May, and Selene Communication Technologies in June. Patent purchases and related acquisitions drove the increase in intangible assets and investing cash outflow.
- A May private placement generated approximately $6.50 million gross proceeds and issued Series A preferred shares and warrants; acquisitions also involved Series B preferred shares and acquisition notes.
Outlook, commentary, risks, and unusual items
Management provided no numerical revenue or earnings guidance. It expected cash on hand to fund current operations at least through October 2015, while cautioning that operating changes could require earlier financing. Management also warned that revenue could be highly variable because it expects a significant portion to come from one-time licenses to a relatively small number of entities. Two licensees accounted for 98% of second-quarter revenue, and one licensee accounted for all accounts receivable at quarter-end.
Acquisition sellers may receive contingent payments under a proceeds-sharing agreement: no payment at recoveries of $10 million or less, then stated sharing rates of 40% or 50% at higher recovery tiers, capped at $250 million. The company also reported an 8% annual dividend on Series A preferred stock, payable quarterly beginning January 31, 2015, and potential dilution from preferred conversions, warrants, and equity compensation.
Management concluded disclosure controls were not effective at June 30 because of limited internal resources and lack of multiple levels of transaction review. Other risks include patent monetization uncertainty, patent impairment and expiration, reliance on outside patent monetization support, acquisition-related obligations, and the possibility of needing additional capital. The filing reported no material pending legal proceedings against the company. Subsequent to quarter-end, Nasdaq approved the listing and trading began July 28, 2014.
Most important facts for investors to verify
- Reconcile acquisition-note balances and maturity dates: the balance sheet shows $5.06 million, while other disclosures cite $6.0 million of notes; maturity is stated as September 30 in one section and October 30 elsewhere.
- Review the precise proceeds-sharing tiers and calculation base in the acquisition agreements, including how “net recoveries” and the $250 million cap apply.
- Assess revenue concentration, recurrence, collection timing, and patent portfolio monetization prospects; current-period licensing revenue is not necessarily repeatable.
- Confirm potential dilution and preferred-stock obligations, including the 8% Series A dividend, conversion terms, warrants, and outstanding options.
- Track remediation of ineffective disclosure controls and any funding needs relative to management’s stated cash runway.