MARA Holdings, Inc. (then Marathon Patent Group, Inc.) — Form 10-Q
Reporting period: Quarter ended September 30, 2014; filed November 12, 2014. The filing identifies the registrant as Marathon Patent Group, Inc., a patent monetization company. Financial statements are unaudited. The company acquired and monetized patents through licensing and enforcement; this is a historical 2014 filing, not a report on the company’s later bitcoin-mining business.
Financial performance and position
| Metric | Three months ended September 30, 2014 | Nine months ended September 30, 2014 |
|---|---|---|
| Revenue | $13.46 million | $20.06 million |
| Gross profit / margin | $7.87 million / approximately 58% | $11.61 million / approximately 58% |
| Operating income | $4.21 million | $3.61 million |
| Net income | $3.52 million | $2.92 million |
| Net income available to common shareholders | $3.52 million | $1.65 million |
| Basic earnings per share | $0.61 | $0.52 |
- Cash flow: Nine-month operating cash flow was $3.23 million, investing cash outflow was $6.88 million, and financing cash inflow was $5.59 million. Cash increased by $1.95 million to $5.56 million.
- Liquidity: At September 30, cash was $5.56 million, accounts receivable was $10.51 million, current assets were $16.41 million, and current liabilities were $14.34 million. Reported working capital was $2.06 million.
- Debt and obligations: Current notes payable totaled $6.06 million; the Clouding IP earn-out liability was $13.12 million, of which $2.15 million was current. The filing says acquisition notes originally due September 30, 2014 were extended to March 31, 2015, with extension fees paid October 10.
- Assets and equity: Total assets were $53.49 million, including $33.51 million of net intangible assets; total liabilities were $25.31 million and stockholders’ equity was $28.18 million.
Changes versus the prior comparable periods
- Third-quarter revenue increased from $0.71 million in 2013 to $13.46 million in 2014; nine-month revenue rose from $2.24 million to $20.06 million. The company attributed the increase to growth in patent monetization.
- The company moved from operating losses of $1.04 million for the 2013 quarter and $2.58 million for the 2013 nine-month period to operating income in 2014. Net results likewise improved from losses to income.
- Cash from operations improved from a $0.95 million outflow in the first nine months of 2013 to a $3.23 million inflow in 2014. Patent acquisition spending drove investing outflows higher than in the prior period.
- Patent amortization increased with portfolio growth. In the quarter, a $2.14 million goodwill impairment related to CyberFone reduced earnings; the company cited released defendants and revised recovery expectations.
Outlook, commentary, and risks
- Management said September 30 cash was sufficient to fund current operations at least through October 2015, but warned that operating changes could require earlier additional capital. This estimate preceded the subsequent financing and acquisition activity described below.
- No specific revenue or earnings guidance was provided. Management cautioned that licensing revenue is typically based on one-time agreements with a relatively small number of counterparties and may vary substantially between periods. Five licenses generated all third-quarter revenue, and two counterparties accounted for 99.6%.
- Two licensees represented all accounts receivable at quarter-end. The balance sheet reports $10.51 million of receivables; the filing also says receivables, less taxes and transaction fees, had been received. The timing and reconciliation of those statements should be checked.
- Acquisition-related contingent payments may be substantial. For certain acquired IP, seller payments are based on recoveries and can reach an aggregate cap of $250 million; Clouding and TLI agreements also provide for revenue-sharing arrangements.
- Subsequent events included a $5.55 million convertible-note financing, bearing 11% annual interest and due in 2018, and an October acquisition with $1 million cash at closing plus a $9 million note payable in installments, in addition to contingent participation payments.
- Series A preferred stock carried an 8% annual dividend based on $6.50 per share and conversion rights. The filing describes potential shareholder dilution from preferred conversion, warrants, options, and equity compensation.
- Management concluded disclosure controls were not effective at September 30, 2014 because of limited internal resources and insufficient levels of transaction review. Management stated remediation was being developed but gave no assurance it would be timely or adequate.
- A former vendor filed a breach-of-contract, unjust-enrichment, and fraudulent-inducement complaint in August 2014. The company denied the allegations and said it would defend the case.
Important facts for investors to verify
- Whether the $10.51 million quarter-end receivable was collected, when it was collected, and whether customer concentration remains high.
- The status, maturity, and cash cost of acquisition notes and other debt, including the subsequent 11% convertible notes and the $9 million acquisition note.
- Expected recovery assumptions supporting patent valuations and the CyberFone goodwill impairment, as well as contingent seller-payment and revenue-sharing terms.
- Progress in remediating ineffective disclosure controls and the outcome of the former vendor litigation.
- How much of reported earnings reflects repeatable licensing economics versus the $1.48 million tax benefit, non-cash items, and one-time license settlements.