MARA Holdings, Inc. quarterly report, Q2 FY2016

Business context and reporting period

This is Marathon Patent Group, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2016, filed August 15, 2016. The filing is not for MARA Holdings, Inc.; the issuer named in the filing is Marathon Patent Group, Inc. The company acquires and monetizes patent rights, primarily through licensing and enforcement.

Key financial metrics

At June 30, cash was $7.16 million, current assets were $9.85 million, and current liabilities were $14.94 million, producing a working capital deficit of approximately $5.09 million. Total liabilities were $28.95 million. Notes payable, net of discounts, totaled approximately $17.82 million, down from $22.61 million at December 31, 2015. Stockholders’ equity was $17.99 million.

Changes versus prior comparable periods

• Q2 revenue rose from $1.37 million in 2015 to $34.35 million in 2016; six-month revenue increased from $5.46 million to $36.41 million. Management attributed the increase mainly to large one-time licenses by Dynamic Advances and Medtech.
• Q2 and six-month operating results shifted from losses of $8.57 million and $14.87 million, respectively, in 2015 to income of $14.01 million and $9.11 million in 2016. Net results likewise shifted from losses to profits.
• Six-month operating cash flow improved from cash use of $5.59 million in 2015 to cash generation of $13.12 million in 2016. Cash increased by $4.60 million from year-end, despite patent purchases and debt repayments.
• Patent and website amortization fell to $3.99 million for the first half from $5.63 million. The company recorded $0.99 million in patent impairment and $83,000 in goodwill impairment in the first half of 2016.

Outlook, risks and unusual items

• Revenue was highly concentrated: five licenses generated approximately 99% of Q2 2016 revenue; Dynamic Advances alone accounted for 72%. Nearly all first-half revenue came from one-time licenses. Management cautioned that revenue may remain highly variable while the company pursues a recurring-revenue model.
• Management stated it was uncertain whether available cash and receivables would fund operations for the next 12 months. If projections are not met or conditions deteriorate, the company may seek additional financing or strategic alternatives; financing may dilute shareholders or require relinquishing rights.
• The Fortress secured notes bear cash interest at LIBOR plus 9.75%, with 2.75% annual PIK interest. They are secured by substantially all company assets, subject to stated exceptions, and include a $1 million minimum unrestricted-liquidity covenant and a monetization-revenue covenant.
• In June 2016, a subsidiary agreed to buy 221 Siemens cellular-technology patents for $1.15 million cash plus future payments of $1.00 million and $750,000. After quarter-end, the company disclosed a $250,000 cash purchase of 86 Siemens IoT patents and a strategic relationship involving approximately 10,000 patents.
• The filing reports that disclosure controls were not effective as of June 30, 2016, citing a limited internal audit function; management said it was developing improvements but gave no assurance of timely or adequate implementation.
• The filing disclosed a $2.4 million contingent payment related to a 2014 agreement to an employee or entities in which the employee has an interest; the employee became an employee after the agreement was entered into.
• Patent-enforcement litigation is part of the business model. The company reported 18 lawsuits as of June 30, 2016 and had $2.38 million posted as court bonds.

Important facts for investors to verify

• Confirm the issuer and ticker: this filing is for Marathon Patent Group, Inc., not MARA Holdings, Inc.
• Assess whether the unusually strong revenue and earnings are repeatable given the reliance on one-time licenses and a small number of counterparties.
• Review liquidity needs, debt balances, Fortress covenants and the company’s stated uncertainty about funding operations for 12 months.
• Evaluate the collectability and commercial potential of patent assets, impairment assumptions, litigation outcomes and required court bonds.
• Review remediation of ineffective disclosure controls and the details and accounting treatment of the $2.4 million contingent payment.