Business context and reporting period
Marathon Patent Group, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. Its business was acquiring patents and monetizing them through licensing and enforcement. The filing identifies the issuer as Marathon Patent Group, Inc.; investors should verify the relationship to the requested company, MARA Holdings, Inc.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue, 2017 / 2016 | $0.369 million / $34.350 million | $0.447 million / $36.409 million |
| Operating loss (income), 2017 / 2016 | $(2.929) million / $14.010 million | $(5.738) million / $9.105 million |
| Net income (loss) attributable to common shareholders, 2017 / 2016 | $(2.201) million / $7.906 million | $(5.807) million / $4.013 million |
| Basic EPS, 2017 / 2016 | $(0.10) / $0.53 | $(0.28) / $0.27 |
| Operating cash flow, 2017 / 2016 | Six months: $(7.115) million / $13.125 million |
Revenue fell 99% year over year in both comparison periods. Cost of revenue exceeded revenue in 2017, producing negative gross results of approximately $0.655 million for the quarter and $1.033 million for the six months (calculated). The filing provides no formal forward guidance.
At June 30, cash was $1.096 million, current assets $2.305 million, and current liabilities $10.999 million, resulting in an $8.693 million working-capital deficit. Total assets were $14.101 million, total liabilities $25.149 million, and total equity was negative $11.049 million. Notes payable totaled $17.122 million before unamortized discounts; $5.622 million was classified current. Six-month investing cash outflow was $0.004 million and financing cash inflow was $3.212 million. Cash declined $3.903 million from year-end 2016.
Material changes versus the prior comparable period
- Revenue shifted from substantial one-time license settlements in 2016 to markedly lower license and royalty revenue in 2017. Two licenses represented about 72% of Q2 2017 revenue; the company warned that revenue may remain concentrated and highly variable.
- Operating results moved from profit to loss despite lower operating expenses. The company attributed this primarily to lower revenue and higher direct costs as a proportion of revenue.
- Operating cash flow swung from $13.125 million provided to $7.115 million used for the six-month period.
- Cash fell from $4.998 million at December 31, 2016. Working-capital deficit improved by $6.226 million, largely because Fortress debt principal payments were deferred and more debt was classified long term.
- Common shares outstanding increased from 18,552,472 at December 31, 2016 to 23,257,472 at June 30, 2017; equity offerings and warrant issuance contributed to financing and potential dilution.
Outlook, risks, contingencies, and unusual items
- Going concern: Management said available cash and receivables might not fund operations for the next 12 months, raising substantial doubt about the company’s ability to continue as a going concern. It may need new capital, strategic alternatives, or to curtail operations; financing could dilute shareholders or require relinquishing technology rights.
- Debt and liquidity covenant: Fortress debt bears interest at LIBOR plus 9.75%, includes a revenue-sharing interest, and is secured by company assets and certain subsidiary interests. The agreement requires at least $1.25 million of unrestricted cash and cash equivalents; reported cash at quarter-end was $1.096 million. The filing text does not clearly state whether the covenant was breached, waived, or otherwise satisfied.
- Subsequent Fortress restructuring: On August 3, 2017, the company agreed to transfer certain IP to Fortress-controlled special purpose entities. The revised payment waterfall prioritizes expenses, debt repayment, Fortress advances and fees, and other specified payments; thereafter, proceeds are split 55% to Fortress and 45% to the company. Review the agreement’s full economic and control implications.
- Listing and dilution: Nasdaq granted an extension to October 17, 2017 to regain compliance with its $2.5 million stockholders’ equity requirement. A proposed exchange of warrants for 2,394,000 common shares required shareholder approval. A separate August exchange converted a $500,000 note and interest into Series D preferred shares, initially convertible at five common shares per preferred share.
- Litigation and portfolio: The company reported 11 patent infringement cases as of June 30, plus a separate lawsuit naming the company and Clouding Corp. and an arbitration with a law firm. Germany litigation required $0.376 million in court bonds. Patent monetization outcomes, litigation timing, and portfolio value are uncertain; no 2017 impairment was recorded, versus patent and goodwill impairments in 2016.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective, citing a material weakness in the financial close and reporting process, including insufficient segregation of duties and evidence of review.
- Leadership: Erich Spangenberg resigned as an employee on August 3, 2017 and continued as a consultant. Two directors resigned on August 13 and were replaced.
Most important facts for investors to verify
- Confirm issuer identity and reconcile the filing’s share counts: 23,257,472 shares at June 30 versus 24,257,472 reported outstanding as of August 9.
- Determine current liquidity, covenant compliance, and the company’s ability to fund operations through the next 12 months, including any subsequent financing.
- Review the August Fortress restructuring, including IP transferred, fees and advances, revenue waterfall, and impact on proceeds available to the company.
- Track Nasdaq equity compliance and the approvals, completion, and dilution effects of the warrant and preferred-share exchanges.
- Assess license concentration, litigation progress, patent life and recoverability, and whether future monetization supports the carrying value of intangible assets.
- Monitor remediation of the material weakness and review subsequent financial reporting for improved controls.