MARA Holdings, Inc. annual report, FY2016

Business context and reporting period

This is Marathon Patent Group, Inc.’s Form 10-K for the fiscal year ended December 31, 2016, filed April 4, 2017. It is an annual report, not a standalone 2016 fourth-quarter report. The filing describes a patent acquisition and monetization business; it does not provide a clear set of Q4-only financial results. The company reported owning 515 patents and economic rights to more than 10,000 additional patents at year-end.

Financial results and liquidity

Revenue rose 93%, primarily from Dynamic Advances and Orthophoenix licenses. The five largest licenses generated about 97% of 2016 revenue, versus 62% in 2015. The filing’s MD&A gives 2015 revenue as $18,997,794, while the audited statement of operations reports $18,977,794; the source contains this discrepancy.

2016 operating expenses included $12.0 million of patent impairment and $4.3 million of goodwill impairment, both non-cash. Patent amortization was $7.5 million. Other income and expense was a net expense of $1.7 million, including $3.1 million of interest expense. A full valuation allowance on deferred tax assets contributed to an income tax expense of $11.5 million and the larger GAAP net loss. Management’s supplemental non-GAAP measure showed $8.0 million of earnings for 2016 versus a $6.8 million loss in 2015; the company cautions that this measure is not a substitute for GAAP results or cash flow.

Year-end cash was $5.0 million, compared with $2.6 million a year earlier. Working capital was negative $14.9 million, worsening from a $12.2 million deficit. Total debt, net of discounts, was $17.8 million, with $13.2 million classified as current; stockholders’ equity was a deficit of $9.3 million. Investing activities used $3.7 million, mainly for patent acquisitions; financing activities used $4.0 million.

Changes, outlook, risks, and unusual items

• Revenue growth improved the operating loss, but the GAAP net loss increased year over year, driven in part by impairments and the tax valuation allowance.
• The auditor and management identified substantial doubt about the company’s ability to continue as a going concern, citing recurring losses and negative working capital. Management said existing cash and receivables might not fund operations for the next 12 months and that additional financing or strategic alternatives could be needed. No quantified revenue or profit guidance is provided.
• On January 10, 2017, the company amended and restated its Fortress financing. At restructuring close, principal and accrued PIK interest were $20.1 million. The arrangement includes revenue-sharing rights, restrictive covenants, and a minimum unrestricted-cash requirement of $1.25 million; interest-only payments run through January 2018, followed by scheduled principal amortization.
• After year-end, the company raised approximately $1.3 million gross by selling 750,000 shares in an at-the-market offering. It also terminated four employees and all six employees at its 3D Nano subsidiary on March 15, 2017.
• Material business risks include uncertain timing and success of patent licensing and litigation, concentration of revenue among a few licensees, evolving patent law, and financing needs. The filing reported seven patent enforcement lawsuits at year-end and inter partes reviews involving patents from nine portfolios.
• Disclosure controls were ineffective as of year-end because of a material weakness in the financial reporting and close process, including insufficient segregation of duties and evidence of review. The filing also discloses legal disputes involving Symantec and a law firm; outcomes and potential financial effects are not quantified here.

Important facts for investors to verify

• Reconcile the 2015 revenue discrepancy between MD&A and the audited statements, and confirm any quarter-specific figures from the relevant quarterly filing.
• Review the going-concern disclosure, cash needs, financing availability, debt maturities, Fortress covenants, and the effects of revenue sharing.
• Assess the sustainability and collectability of large, one-time license revenues, including the unusually high 2016 revenue concentration.
• Evaluate patent portfolio impairment assumptions, litigation and review outcomes, and potential contingent payments or legal costs.
• Track remediation of the material weakness and consider potential dilution from outstanding options, warrants, preferred stock, and debt-related securities.