MARA Holdings, Inc. (then Marathon Patent Group, Inc.) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. The filing is by Marathon Patent Group, Inc.; it describes a patent acquisition and monetization business at period-end. Financial statements are unaudited. Share and per-share amounts reflect the one-for-four reverse split completed October 30, 2017.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $162,713 | $43,113 | $609,650 | $36,452,551 |
| Operating loss | $(3,916,979) | $(10,739,792) | $(9,655,378) | $(1,634,394) |
| Net loss attributable to common shareholders | $(6,677,486) | $(6,274,410) | $(12,484,925) | $(2,261,542) |
| Basic loss per share | $(1.06) | $(1.67) | $(2.24) | $(0.61) |
- Q3 revenue rose 277% year over year from a very low comparison; nine-month revenue fell 98%. 2017 revenue came from a one-time technology access license and Medtech royalties, rather than the substantial one-time patent licenses recorded in 2016.
- Direct costs of revenue were $64,836 in Q3 and $1.544 million year to date. This implies gross profit of about $98,000 for Q3 but a gross loss of about $935,000 for the nine-month period.
- Operating expenses were lower year over year, notably patent amortization and impairment. Nine-month patent impairment was $723,218, versus $6.525 million in 2016. Compensation increased, partly due to costs associated with cancellation of executive employment agreements and employee termination provisions.
- Other expense was $2.468 million for Q3 and $2.675 million for the nine months. Nine-month unusual items included $1.520 million loss on sale of companies, $283,237 loss on debt extinguishment, $1.915 million warrant expense and a $768,200 gain from remeasuring the Clouding IP earn-out liability.
- At September 30, total assets were $12.692 million, total liabilities $21.925 million and stockholders’ deficit $9.233 million. Net patent and other intangible assets were $7.590 million.
- Reported notes payable, net of discounts, were $15.582 million, all classified current; the debt note lists $15.881 million of senior secured principal and $5.072 million outstanding on the 2017 convertible notes. These balances reflect different presentation and discounting; the filing’s debt table reports $21.954 million of future minimum principal payments.
- Cash and restricted cash totaled $4.042 million, including just $122,172 unrestricted cash and $3.920 million restricted in escrow. The company reported an unrestricted working-capital deficit of approximately $20.263 million.
- Operating cash outflow was $14.805 million for the nine months, versus $11.214 million of operating cash inflow in 2016. Investing activities provided $2.765 million, mainly from patent dispositions; financing activities provided $11.067 million, mainly from equity and convertible-note issuances. Cash and restricted cash declined by $956,424.
Material changes, outlook and risks
- Going concern: Management said existing cash and receivables may not fund operations for the next 12 months and disclosed substantial doubt about the company’s ability to continue as a going concern. It may need to raise capital, pursue strategic alternatives, curtail operations or give up technology or market rights; additional financing may dilute shareholders.
- Debt restructuring: On October 20, 2017, after quarter-end, the company transferred the Dynamic Advances, Magnus and Traverse patent portfolios to DBD in exchange for cancellation of its indebtedness and obligations to DBD. The transaction materially changes the debt position reported at September 30.
- Portfolio transfers: The company sold Munitech to GPat in September. After quarter-end, it assigned its interest in PG Technologies and more than 10,000 related patent economic rights to Luxone, removed associated liabilities and debt, and retained a revenue share on future portfolio earnings.
- Strategic shift: On November 1, 2017, the company agreed to acquire Global Bit Ventures, a cryptocurrency-mining business, in exchange for 126,674,557 common shares. Closing was subject to conditions, including shareholder approval. The filing provides no quantified financial forecast or formal guidance for this proposed business.
- Funding covenant: The DBD agreement included a minimum-liquidity covenant of $1.25 million in unrestricted cash and cash equivalents. Reported unrestricted cash was $122,172 at quarter-end; the filing does not clearly establish covenant compliance at that date. Much of the cash balance was restricted in escrow, and management said release of escrow funds was uncertain.
- Legal and controls: The company reported five patent-infringement lawsuits in Delaware and disclosed separate Symantec litigation. A securities-related case brought by Jeffrey Feinberg was dismissed at the plaintiff’s request in November 2017. Management also described a material weakness in internal control over financial reporting; it reported no material changes in controls during the quarter.
- The company’s patent monetization model depends on licensing and enforcement outcomes, which can be irregular and concentrated among a small number of agreements. No revenue from newly issued patent licenses was recorded in Q3 2017.
Important facts for investors to verify
- Whether the DBD debt cancellation closed as described, which obligations were extinguished, and the company’s resulting debt, liens and revenue-sharing commitments.
- Whether escrowed cash became available and whether the company met liquidity covenants; also its near-term funding needs and progress addressing the going-concern uncertainty.
- The closing status, shareholder approval, share issuance and dilution implications of the Global Bit Ventures acquisition.
- The terms and economics of the Luxone revenue share, the DBD portfolio transfer and other post-quarter portfolio dispositions.
- The basis and resolution of the disclosed material weakness, and any subsequent developments in litigation or contingent liabilities.
- The filing reports 8,747,931 common shares outstanding as of November 14, 2017, while the proposed GBV consideration is 126,674,557 shares; verify the applicable share-count and transaction terms in subsequent filings.