MARA Holdings, Inc. (historical registrant: Marathon Patent Group, Inc.) — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter report. The company was then primarily a patent-licensing business and was beginning a strategic shift toward digital-asset mining; the proposed merger with Global Bit Ventures (GBV) had not closed as of the filing date, April 16, 2018.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $519,622 | $36,629,276 |
| Cost of revenue, including patent amortization | $3,470,847 | $26,517,477 |
| Operating loss | $(14,183,490) | $(15,583,614) |
| Net loss attributable to common shareholders | $(31,333,569) | $(28,665,024) |
| Basic and diluted loss per share | $(4.80) | $(7.55) |
| Net cash used in operating activities | $(10,808,483) | Net cash provided: $10,172,607 |
- Revenue fell 99% year over year as the company recorded far fewer large patent licenses. Cost of revenue exceeded revenue, producing a gross loss of about $2.95 million; a meaningful gross margin comparison is therefore not applicable.
- Operating expenses were $14.7 million, including $2.5 million of patent impairment and $0.2 million of goodwill impairment. Patent assets had no carrying value at year-end.
- Other expense was approximately $17.3 million, driven chiefly by a $21.9 million non-cash increase in the fair value of warrant liabilities, partly offset by a $11.9 million gain on extinguishment of Fortress debt and other gains. Net loss increased despite a smaller operating loss.
- Cash and cash equivalents were $14.95 million, versus $5.00 million a year earlier. Working capital was positive $7.38 million, compared with a deficit of $14.94 million in 2016. Financing activities provided $20.45 million in the audited cash-flow statement.
- Year-end liabilities included $1.76 million of net current notes payable and a $1.79 million warrant liability. Total liabilities were $7.67 million; stockholders’ equity was $7.39 million.
Material changes and business developments
- Management entered into a merger agreement with GBV in November 2017 to pivot toward mining bitcoin and potentially ether while continuing to harvest remaining patent assets. The merger remained pending; the April 3, 2018 amended agreement provided for 70 million shares for GBV shareholders, subject to closing conditions.
- In October 2017, the company transferred three patent portfolios to a DBD-controlled special-purpose entity in exchange for cancellation of its Fortress-related obligations. The company retained a 30% economic interest, subordinated to DBD’s recovery, but no control over those patents.
- The company sold or assigned several subsidiaries and patent interests during 2017 and reduced staff to three full-time employees at year-end. It reported four patent enforcement actions as of December 31, 2017.
- After year-end, the company acquired cryptocurrency mining equipment and assumed a five-year Quebec data-center lease at annual base rent of about $120,150 plus tax. The 1,400 miners were installed and mining began in March 2018.
Outlook, risks, contingencies, and unusual items
- Management believed cash, revenue, and receivables would fund operations for at least 12 months from April 16, 2018, but cautioned that revenue was uncertain and additional financing or strategic alternatives might be needed if projections were missed.
- Key mining risks include digital-asset price volatility, mining economics and equipment performance, electricity and hosting availability, cybersecurity and irreversible loss of coins, exchange and custodian risk, and evolving securities, commodities, money-transmission, and tax regulation. The filing warns that cryptocurrency holdings could create Investment Company Act compliance risk.
- The company disclosed a material weakness in internal controls over financial reporting—insufficient segregation of duties and evidence of review—and concluded disclosure controls were ineffective at year-end.
- A $2.15 million litigation liability was recorded. A shareholder lawsuit filed in March 2018 alleged securities-law and common-law claims related to a 2016 private placement; the company said it would defend itself. A separate Symantec settlement in March 2018 resolved disputes for an undisclosed amount.
- Management reported no going-concern opinion for 2017, while acknowledging future losses or reduced working capital could raise substantial doubt. The filing also describes potential dilution from convertible securities, warrants, equity plans, and the proposed merger.
- The filing’s MD&A gives financing cash inflows of $29.45 million in one passage, while the audited cash-flow statement reports $20.45 million. The audited statement amount is cited above; investors should reconcile the discrepancy.
Important facts for investors to verify
- Whether and on what terms the GBV merger closed, the final share issuance, and resulting dilution.
- Actual mining capacity, uptime, power costs, hosting arrangements, and revenue compared with management’s expectations.
- Cash burn, financing needs, debt and warrant obligations, and the reconciliation of the cash-flow disclosure discrepancy.
- Progress in remediating the material weakness and any subsequent changes in financial reporting controls.
- Outcomes and potential costs of the Feinberg litigation and other patent-related matters; the Symantec settlement amount is not disclosed.
- Whether remaining patent assets and the DBD-controlled portfolio produce recoveries, and the company’s ability to meet its stated liquidity outlook.