Filing summary
Entity and period: The filing is a Form 10-Q for the quarter ended September 30, 2016, filed November 14, 2016. The registrant named in the filing is Marathon Patent Group, Inc., not MARA Holdings, Inc. The filing describes an intellectual-property acquisition, licensing, and patent-enforcement business.
Financial performance
| Metric | Three months ended September 30, 2016 | Nine months ended September 30, 2016 | Comparable 2015 period |
|---|---|---|---|
| Revenue | $43,113 | $36.45 million | $6.41 million quarterly; $11.87 million nine-month |
| Operating loss | $10.74 million | $1.63 million | $3.09 million quarterly; $17.95 million nine-month |
| Net loss attributable to common shareholders | $6.27 million; $0.42 per share | $2.26 million; $0.15 per share | $3.75 million and $0.26 per share quarterly; $13.03 million and $0.92 per share nine-month |
| Operating cash flow | Not provided separately | $11.21 million provided | $2.92 million used |
| Cash at period end | $1.29 million | $2.56 million at December 31, 2015 |
For the quarter, revenue fell 99% year over year and the company recorded no new licenses. Nine-month revenue rose 207%, primarily from larger one-time licenses by the Dynamic Advances and Medtech subsidiaries. Nine-month operating results also improved versus 2015, but the quarter’s operating loss widened. Patent impairment charges were $5.53 million for the quarter and $6.53 million for the nine months; patent amortization was $6.02 million year to date.
Cash provided by operations included substantial noncash adjustments, including amortization, impairment, and stock compensation; it should not be read as equivalent to recurring operating profitability. Investing activities used $3.56 million, mainly for patent acquisitions. Financing activities used $8.91 million in the cash-flow statement, largely for debt repayments.
Balance sheet, debt, and liquidity
- Total assets were $38.70 million, down from $47.23 million at December 31, 2015. Intangible assets, net, were $19.55 million; deferred tax assets were $11.92 million.
- Total liabilities were $26.33 million. Notes payable, net of discounts, totaled approximately $17.60 million: $11.14 million current and $6.46 million long-term.
- Current assets were $2.51 million against current liabilities of $17.30 million. Management reported a working-capital deficit of $14.79 million, versus $12.17 million at year-end 2015.
- Cash was $1.29 million, down from $2.56 million. The Fortress debt agreement requires at least $1.00 million of unrestricted cash and cash equivalents, among other covenants.
Business developments, outlook, and risks
- The company reported 519 U.S. and foreign patents or patent rights and 21 patent lawsuits across the United States, Germany, France, and Italy. Its portfolio included acquisitions in cellular, internet-of-things, battery, LED, and other technologies.
- In August 2016, a jointly owned entity entered an agreement with a Fortune 50 company involving monetization of more than 10,000 patents. The company consolidated the entity as a variable interest entity; the agreement includes a $1 million payment at closing, a further $1 million due by year-end 2016, quarterly minimum payments beginning in 2017, and a 50% split of net licensing revenue.
- Management said revenue may remain highly variable because it expects continued reliance on one-time licenses to a relatively small number of counterparties while pursuing a recurring-revenue model. No quantified revenue or earnings guidance is provided.
- Management was uncertain that available cash and receivables would fund operations for the next 12 months. It said additional capital may be required; financing may dilute shareholders, and insufficient funding could require operational cutbacks or arrangements that relinquish technology or market rights.
- The company recorded a $1.95 million quarterly gain from remeasurement of the Clouding IP earn-out liability, a noncash fair-value item. It also reported foreign-exchange losses.
- Management concluded disclosure controls were ineffective at September 30, 2016, citing a limited internal audit function. It was developing improvements but gave no assurance they would be completed timely or prove adequate.
Investor verification priorities
- Confirm the registrant and security identity: this filing names Marathon Patent Group, Inc., while the request identifies MARA Holdings, Inc.
- Review the Fortress debt balance, repayment schedule, collateral and covenants, including the minimum-liquidity requirement and compliance status.
- Assess the company’s cash runway and funding needs in light of the $14.79 million working-capital deficit and management’s stated uncertainty about 12-month funding.
- Validate the timing, collectability, and economics of patent monetization agreements, especially the concentrated, one-time license revenue and the PG Technologies arrangement.
- Examine the assumptions behind the $6.53 million year-to-date patent impairment and the Clouding earn-out fair-value gain.
- Reconcile the cash-flow statement’s financing outflow of $8.91 million with MD&A, which reports $8.98 million, and confirm the precise amount.
- Track remediation of the disclosed ineffective controls and developments in the company’s patent litigation.