Notes
to Unaudited Consolidated Condensed Financial Statements
NOTE
1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization
Our
historical business is to acquire patents and patent rights and to monetize the value of those assets to generate revenue and
profit for Marathon Patent Group, Inc. (the “Company”). With the increasing difficulties experienced in the patent
monetization space associated with judicial and legislative changes over the last couple of years, the Board of Directors of the
Company began to consider alternate business to enter into during the summer of 2017. Following an analysis of a number of different
options, on November 1, 2017, the Company entered into a proposed merger agreement with Global Bit Ventures, Inc. (“GBV”),
which is focused on mining digital assets. The Company has since purchased our cryptocurrency mining machines and established
a data center in Canada to mine digital assets. Following the merger, the Company intends to add GBV’s existing technical
capabilities and digital asset miners and expand our activities in the mining of new digital assets, while at the same time harvesting
the value of our remaining IP assets.
On
January 1, 2018, our Board adopted the 2018 Equity Incentive Plan, subsequently approved by the stockholders on March 7, 2018,
pursuant to which up to 10,000,000 shares of common stock, stock options, restricted stock, preferred stock, stock-based awards
and other awards are reserved for issuance as awards to employees, directors, consultants, advisors and other service providers.
All
share and per share values for all periods presented in the accompanying consolidated financial statements have been retroactively
adjusted to reflect the 1:4 Reverse Split which occurred on October 30, 2017.
Going
Concern
The
Company’s condensed consolidated financial statements have been prepared assuming that it will continue as a going concern,
which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As
reflected in the condensed consolidated financial statements, the Company had and accumulated deficit of approximately $91.7 million
at March 31, 2018, a net loss of approximately $2.4 million and approximately $3.7 million net cash used in operating activities
for the three months ended March 31, 2018. These factors raise substantial doubt about the Company’s ability to continue
as a going concern.
Based
on the Company’s current revenue and profit projections, management is uncertain that the Company’s existing cash
will be sufficient to fund its operations through at least the next twelve months from the issuance date of the financial statements,
raising substantial doubt regarding the Company’s ability to continue operating as a going concern. If we do not meet our
revenue and profit projections or the business climate turns negative, then we will need to:
●
|
raise
additional funds to support the Company’s operations; provided, however, there is no assurance that the Company will
be able to raise such additional funds on acceptable terms, if at all. If the Company raises additional funds by issuing securities,
existing stockholders may be diluted; and
|
|
|
●
|
review
strategic alternatives.
|
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Principles of Consolidation
The
accompanying consolidated condensed financial statements have been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have
been condensed or omitted pursuant to such rules and regulations. These consolidated condensed financial statements reflect all
adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly
the financial position, the results of operations and cash flows of the Company for the periods presented. It is suggested that
these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and the notes
thereto included in the Company’s most recent Annual Report on Form 10-K. The results of operations for the interim periods
are not necessarily indicative of the results to be expected for the full year ended December 31, 2018.
MARATHON
PATENT GROUP, INC. AND SUBSIDIARIES
Notes
to Unaudited Consolidated Condensed Financial Statements
Use
of Estimates and Assumptions
The
preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates made by management include, but are not limited to, estimating the useful lives of patent assets,
the assumptions used to calculate fair value of warrants and options granted, goodwill impairment, realization of long-lived assets,
deferred income taxes, unrealized tax positions and business combination accounting.
Significant
Accounting Policies
There
have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2017
Annual Report other than the adoption of the Financial Accounting Standards Board (FASB) Accounting Standard Updates (ASU) 606,
Revenue from Contracts with Customers
and the accounting for digital assets and crypto currency machines.
Segment Reporting
Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing
performance. Our chief operating decision–making group is composed of the chief executive officer and chief financials (“CODM”).
The Company currently operates in the Digital Currency Blockchain segment. The Company’s Crypto-currency Machines are located
in Canada and the Company has employees only in the United States and views its operations as one operating segment as the CODM
reviews financial information on a consolidated basis in making decisions regarding resource allocations and assessing performance.
Digital
Currencies
Digital
currencies consist of crypto-currency denominated assets such as Bitcoin and are included in current assets. Digital currencies
are carried at their fair market value determined by an average spot rate of the most liquid digital currency exchanges. The digital
currency market is still a new market and is highly volatile; historical prices are not necessarily indicative of future value;
a significant change in the market prices for digital currencies would have a significant impact on the Company’s earnings
and financial position.
Crypto-currency
Machines
Management
has assessed the basis of depreciation of the Company’s Crypto-currency Machines used to verify digital currency transactions
and generate digital currencies and believes they should be depreciated over a 2 year period. The rate at which the Company generates
digital assets and, therefore, consumes the economic benefits of its transaction verification servers are influenced by a number
of factors including the following:
|
●
|
the
complexity of the transaction verification process which is driven by the algorithms
contained within the bitcoin open source software;
|
|
●
|
the
general availability of appropriate computer processing capacity on a global basis (commonly
referred to in the industry as hashing capacity which is measured in Petahash units);
and
|
|
●
|
technological
obsolescence reflecting rapid development in the transaction verification server industry
such that more recently developed hardware is more economically efficient to run in terms
of digital assets generated as a function of operating costs, primarily power costs i.e.
the speed of hardware evolution in the industry is such that later hardware models generally
have faster processing capacity combined with lower operating costs and a lower cost
of purchase.
|
The
Company operates in an emerging industry for which limited data is available to make estimates of the useful economic lives of
specialized equipment. Management has determined that a two year diminishing value best reflects the current expected useful life
of transaction verification servers. This assessment takes into consideration the availability of historical data and management’s
expectations regarding the direction of the industry including potential changes in technology. Management will review this estimate
annually and will revise such estimates as and when data comes available.
To
the extent that any of the assumptions underlying management’s estimate of useful life of its transaction verification servers
are subject to revision in a future reporting period either as a result of changes in circumstances or through the availability
of greater quantities of data then the estimated useful life could change and have a prospective impact on depreciation expense
and the carrying amounts of these assets.
MARATHON
PATENT GROUP, INC. AND SUBSIDIARIES
Notes
to Unaudited Consolidated Condensed Financial Statements
Revenue
Recognition
The
Company recognizes revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned
when there is persuasive evidence of an arrangement and that the product has been shipped or the services have been provided to
the customer, the sales price is fixed or determinable and collectability is probable. Our material revenue stream is related
to the mining of digital currencies. In consideration for these services, the Company receives digital currencies which are recorded
as revenue, using the average U. S. dollar spot price of the related crypto-currency on the date of receipt. The coins are recorded
on the balance sheet at their fair value and re–measured at each reporting date. Revaluation gains or losses, as well as
gains or losses on sale of digital currencies are recorded as a component of cost of revenues in the statement of operations.
Expenses associated with running the crypto-currency mining business, such as equipment deprecation, rent and electricity cost
are also recorded as cost of revenues.
There
is currently no specific definitive guidance in U.S. GAAP or alternative accounting frameworks for the accounting for the production
and mining of digital currencies and management has exercised significant judgement in determining appropriate accounting treatment
for the recognition of revenue for mining of digital currencies. Management has examined various factors surrounding the substance
of the Company’s operations and the guidance in ASC 606,
Revenue from Contracts with Customers
, including the stage
of completion being the completion and addition of a block to a blockchain and the reliability of the measurement of the digital
currency received. In the event authoritative guidance is enacted by the FASB, the Company may be required to change its policies
which could result in a change in the Company’s financial statements.
The
Company recognizes revenue under ASC 606,
Revenue from Contracts with Customers
. The core principle of the new revenue
standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following
five steps are applied to achieve that core principle:
●
Step 1: Identify the contract with the customer
●
Step 2: Identify the performance obligations in the contract
●
Step 3: Determine the transaction price
●
Step 4: Allocate the transaction price to the performance obligations in the contract
●
Step 5: Recognize revenue when the company satisfies a performance obligation
In
order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services
in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition
of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met:
|
●
|
The
customer can benefit from the good or service either on its own or together with other
resources that are readily available to the customer (i.e., the good or service is capable
of being distinct).
|
|
●
|
The
entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract (i.e., the promise to transfer the good
or service is distinct within the context of the contract).
|
If
a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods
or services is identified that is distinct.
The
transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised
goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable
amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
●
Variable consideration
●
Constraining estimates of variable consideration
●
The existence of a significant financing component in the contract
●
Noncash consideration
●
Consideration payable to a customer
Variable
consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount
of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently
resolved.
The
transaction price is allocated to each performance obligation on a relative standalone selling price basis.
The
transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point
in time or over time as appropriate.
MARATHON
PATENT GROUP, INC. AND SUBSIDIARIES
Notes
to Unaudited Consolidated Condensed Financial Statements
There
is only one performance obligation in each digital currency transaction (transfer of a verified transaction to the blockchain).
If the Company is successful in adding a block to the blockchain (by verifying an individual transaction), the Company is automatically
awarded a fixed number of digital currency tokens for their effort. At the time the contract with the customer arises (upon being
the first to solve the algorithm and transferring a verified transaction to the blockchain), the consideration receivable is fixed.
As such, the Company concluded that there was no variable consideration. There is no significant financing component or consideration
payable to the customer in these transactions.
Digital
currencies are non-cash consideration and thus must be included in the transaction price at fair value at the inception of the
contract, which is when the algorithm is solved and a verified transaction is transferred to the blockchain. Fair value is determined
using the average U.S. dollar spot rate of the related digital currency.
The
Company will subsequently account for digital currencies received at fair value, with changes in fair value flowing through current
income, as the Company has concluded that that the fair value measurement model, with both realized and unrealized changes reflected
currently in the income statement, will best represent the economics associated with holding digital currencies. These subsequent
holding gains and losses will not be reflected as revenue from contracts with customers, in accordance with the guidance above
but will be recorded as a component of costs and expenses.
Expenses
associated with running the digital currency mining business, such as rent and electricity cost are also recorded as cost of revenues.
Depreciation on digital currency mining equipment are recorded as a component of costs and expenses.
Related
Party Transactions
Parties
are considered related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are
controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its
management, members of the immediate families of principal owners of the Company and its management and other parties with which
the Company may deal if one party controls or can significantly influence the management or operating policies of the other to
an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses
all related party transactions.
At
March 31, 2018 and December 31, 2017, Note Receivables on the Balance Sheets consists of an uncollateralized note receivable in
the amount of $588,864 from nXn, an entity owned or controlled or previously owned or controlled by Erich Spangenberg. The note
receivable does not carry interest and was repayable to the Company at the earlier of March 31, 2018 or based upon certain milestones.
The note receivable was not repaid by nXn by March 31, 2018 and the Company took a full reserve for bad debt as of December 31,
2017.
At
March 31, 2018 and December 31, 2017, the Company owed Doug Croxall, $20,000 and $124,297, respectively, which is comprised of
$187,500 representing the remaining balance of his bonus pursuant to his Retention Agreement, as amended, and is reduced by $63,203,
which is accounted for and presented as an advance due from related parties. It is possible that these advances by the Company
to related parties could be deemed to be in violation of Section 402 of the Sarbanes-Oxley Act of 2002. However, the Company has
not made a determination as of the date hereof if the advances resulted in a violation of that provision. If, however, it is determined
these advances violated the prohibitions of Section 402, the Company could be subject to investigation and/or litigation that
could involve significant time and costs and may not be resolved favorably. The Company is unable to predict the extent of its
ultimate liability with respect to these transactions. The costs and other effects of any future litigation, government investigations,
legal and administrative cases and proceedings, settlements, judgments and investigations, claims and changes in this matter could
have a material adverse effect on the Company’s financial condition and operating results.
Fair
Value of Financial Instruments
The
Company measures at fair value certain of its financial and non-financial assets and liabilities by using a fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date,
essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy
are:
Level
1:
|
|
Observable
inputs such as quoted market prices in active markets for identical assets or liabilities
|
Level
2:
|
|
Observable
market-based inputs or unobservable inputs that are corroborated by market data
|
Level
3:
|
|
Unobservable
inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
|
MARATHON
PATENT GROUP, INC. AND SUBSIDIARIES
Notes
to Unaudited Consolidated Condensed Financial Statements
The
carrying amounts reported in the consolidated balance sheet for cash, accounts receivable, accounts payable, and accrued expenses,
approximate their estimated fair market value based on the short-term maturity of these instruments. The carrying value of notes
payable and other long-term liabilities approximate fair value as the related interest rates approximate rates currently available
to the Company.
Financial
assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level of input that
is significant to their fair value measurement. The Company measures the fair value of its marketable securities by taking into
consideration valuations obtained from third-party pricing sources. The pricing services utilize industry standard valuation models,
including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly,
to estimate fair value. These inputs included reported trades of and broker-dealer quotes on the same or similar securities, issuer
credit spreads, benchmark securities and other observable inputs.
The
following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis
and the Company’s estimated level within the fair value hierarchy of those assets and liabilities as of March 31, 2018 and
December 31, 2017, respectively:
|
|
Fair
value measured at March 31, 2018
|
|
|
|
Total
carrying
value at
|
|
|
Quoted
prices in active markets
|
|
|
Significant
other observable inputs
|
|
|
Significant
unobservable inputs
|
|
|
|
March 31,
2018
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital
Currencies
|
|
$
|
68,044
|
|
|
$
|
68,044
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
liability
|
|
$
|
285,348
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
285,348
|
|
|
|
Fair
value measured at December 31, 2017
|
|
|
|
Total
carrying
value at
|
|
|
Quoted
prices in active markets
|
|
|
Significant
other observable inputs
|
|
|
Significant
unobservable inputs
|
|
|
|
December 31,
2017
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
liability
|
|
$
|
1,794,396
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,794,396
|
|
There
were no transfers between Level 1, 2 or 3 during the three months ended March 31, 2018.
The
following table presents additional information about Level 1 assets measured at fair value. Changes in Level 1 assets measured
at fair value for the three months ended March 31, 2018:
Digital currencies at fair value -
December 31, 2017
|
|
$
|
-
|
|
Additions of digital currencies
|
|
|
199,582
|
|
Realized loss on sale of digital currencies
|
|
|
(1,510
|
)
|
Change in fair value of digital currencies
|
|
|
(9,557
|
)
|
Proceeds from
sale of digital currencies
|
|
|
(120,471
|
)
|
Digital Currencies
at fair value - March 31, 2018
|
|
$
|
68,044
|
|
The
Company uses Level 1 of the fair value hierarchy to measure the fair value of digital currencies and revalues its digital currencies
at every reporting period and recognizes gains or losses in the condensed statements of operations that are attributable to the
change in the fair value of the digital currency.
As
at March 31, 2018, the Company’s digital currencies consisted of Bitcoin, with a fair value of $68,044. Digital currencies
are recorded at their fair value on the date they are received as revenues, and are revalued to their current market value at
each reporting date. Fair value is determined by taking the spot rate from the most liquid exchanges.
At
March 31, 2018, the Company had an outstanding warrant liability in the amount of $285,348 associated with warrants that were
issued in January 2017 and warrants issued in related to the Convertible Notes issued in August and September of 2017. The following
table rolls forward the fair value of the Company’s warrant liability, the fair value of which is determined by Level 3
inputs for the three months ended March 31, 2018.
MARATHON
PATENT GROUP, INC. AND SUBSIDIARIES
Notes
to Unaudited Consolidated Condensed Financial Statements
FV
of warrant liabilities
|
|
Fair
value
|
|
Outstanding as of December 31, 2017
|
|
$
|
1,794,396
|
|
Exercised
|
|
|
(55,791
|
)
|
Change
in fair value of warrants
|
|
|
(1,453,257
|
)
|
Outstanding as of March 31, 2018
|
|
$
|
285,348
|
|
Basic
and Diluted Net Loss per Share
Net
loss per common share is calculated in accordance with ASC Topic 260: Earnings Per Share (“ASC 260”). Basic loss per
share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period.
The computation of diluted net loss per share does not include dilutive common stock equivalents in the weighted average shares
outstanding, as they would be anti-dilutive.
Securities
that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share
at March 31, 2018 and 2017 are as follows:
|
|
As
of March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Warrants to purchase common
stock
|
|
|
728,764
|
|
|
|
598,643
|
|
Options to purchase common stock
|
|
|
448,771
|
|
|
|
826,156
|
|
Preferred stock to exchange common stock
|
|
|
1,942,161
|
|
|
|
195,501
|
|
Convertible notes
to exchange common stock
|
|
|
2,448,882
|
|
|
|
16,667
|
|
Total
|
|
|
5,568,578
|
|
|
|
1,636,967
|
|
The
following table sets forth the computation of basic and diluted loss per share:
|
|
For
the three months ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net loss attributable to
common shareholders
|
|
$
|
(2,402,820
|
)
|
|
$
|
(3,606,646
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares - basic and diluted
|
|
|
15,222,735
|
|
|
|
4,764,890
|
|
|
|
|
|
|
|
|
|
|
Loss per common share - basic and diluted
|
|
$
|
(0.16
|
)
|
|
$
|
(0.76
|
)
|
Recent
Accounting Pronouncements
In
July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480)
Derivatives and Hedging (Topic 815),” which addresses the complexity of accounting for certain financial instruments with
down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result
in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates
cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round
features that require fair value measurement of the entire instrument or conversion option. For public business entities, the
amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2018 with early adoption permitted. We are currently evaluating the impact that the standard will have on our consolidated
condensed financial statements.
MARATHON
PATENT GROUP, INC. AND SUBSIDIARIES
Notes
to Unaudited Consolidated Condensed Financial Statements
In
May 2017, the FASB issued ASU No. 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
.
This ASU provides clarity about which changes to the terms or conditions of a share-based payment award require the application
of modification accounting. Specifically, ASU 2017-09 clarifies that changes to the terms or conditions of an award should be
accounted for as a modification unless all of the following are met: 1) the fair value of the modified award is the same as the
fair value of the original award immediately before the original award is modified, 2) the vesting conditions of the modified
award are the same as the vesting conditions of the original award immediately before the original award is modified and 3) the
classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the
original award immediately before the original award is modified. ASU 2017-09 is effective for annual reporting periods beginning
after December 15, 2017 and early adoption is permitted. The Company adopted ASU 2017-09 on January 1, 2018 and the adoption did
not have a material impact on the Company’s accounting for share-based payment awards, as changes to awards’ terms
and conditions subsequent to the grant date are unusual and infrequent in nature.
In
January 2017, the FASB issued ASU 2017-01
Business Combinations (Topic 805): Clarifying the Definition of a Business
(“ASU
2017-01”), which clarifies the definition of a business and assists entities with evaluating whether transactions should
be accounted for as acquisitions (or disposals) of assets or businesses. Under this guidance, when substantially all of the fair
value of gross assets acquired is concentrated in a single asset (or group of similar assets), the assets acquired would not represent
a business. In addition, in order to be considered a business, an acquisition would have to include at a minimum an input and
a substantive process that together significantly contribute to the ability to create an output. The amended guidance also narrows
the definition of outputs by more closely aligning it with how outputs are described in FASB guidance for revenue recognition.
This guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The
Company adopted ASU 2017-01 on January 1, 2018 and the adoption did not have a material impact on the Company’s consolidated
condensed financial statements and notes thereto.
In
May 2014, the FASB Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”)
No. 2014-09, Revenue from Contracts with Customers, as a new Topic, (ASC) Topic 606. The new revenue recognition standard provides
a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of the new revenue standard
for periods beginning after December 15, 2016 to December 15, 2017, with early adoption permitted but not earlier than the original
effective date. This ASU must be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the
date of adoption. We are considering the alternatives of adoption of this ASU and we are conducting our review of the likely impact
to the existing portfolio of customer contracts entered into prior to adoption. The Company adopted ASU 2014-09 on January 1,
2018 under the modified retrospective approach and the adoption did not have a material impact on the Company’s results
of operations, cash flows and financial position.
In
February 2016, the FASB issued ASU No. 2016-02, “
Leases (Topic 842)
” (“ASU 2016-02”). The standard
requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months.
ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early
adoption is permitted. Accordingly, the standard is effective for us on September 1, 2019 using a modified retrospective approach.
We are currently evaluating the impact that the standard will have on our consolidated condensed financial statements.
NOTE
3 – PATENT PURCHASES
On
January 11, 2018, Marathon Patent Group, Inc. (the “Company”) entered into a Patent Rights Purchase and Assignment
Agreement (the “Agreement”), with XpresSpa Group, Inc., a Delaware Corporation (the “Seller”) and Crypto
Currency Patent Holdings Company LLC, a Delaware limited liability company and wholly owned subsidiary of the Company (“CCPHC”).
Pursuant to the Agreement, the Seller agreed to irrevocably assign, sell, grant, transfer and convey, and CCPHC agreed to accept
and acquire, the exclusive right, title and interest in and to certain patents owned by the Seller (“Assigned IP”),
subject to the terms and conditions set forth in the Agreement. As consideration for the Assigned IP, the Seller shall receive
(i) payment in the amount of $250,000 from CCPHC and (ii) 250,000 shares of common stock of the Company, par value $0.0001 per
share (the “Consideration Shares”), with piggyback registration rights. The Consideration Shares shall be issued by
the Company to the Seller, subject to the terms and conditions of a lock-up agreement. The fair value of the 250,000 shares was
$960,000 and was based upon the closing price of the Company’s common stock.
As
a condition to the Agreement, the Seller agreed to enter into a lock-up agreement with the Company, which lock-up agreement is
included as an exhibit to the Agreement (the “Lock-up Agreement”). Pursuant to the Lock-up Agreement, the Seller shall
not directly or indirectly offer, sell, pledge or transfer, or otherwise dispose of, the Consideration Shares for a period of
180 days commencing on January 11, 2018 and ending on July 11, 2018; provided, however, upon the effective date of the registration
for resale of the Consideration Shares, and on each day thereafter, one twentieth (1/20) of the Consideration Shares shall be
released from the restrictions contained in the Lock-up Agreement and may be freely sold, transferred, traded or otherwise disposed
of. Notwithstanding the foregoing, in the event that the Consideration Shares, in whole or in part, are not registered for resale
on the 6-month anniversary of the date of issuance of the Consideration Shares (“Six-Month Date”), the holders thereof
may sell, transfer, trade or otherwise dispose of one twentieth (1/20) of the Consideration Shares on the Six-Month Date and on
each day thereafter.
MARATHON
PATENT GROUP, INC. AND SUBSIDIARIES
Notes
to Unaudited Consolidated Condensed Financial Statements
In
addition, the Company agreed to issue 25,000 shares of the Company’s common stock to Andrew Kennedy Lang, one of the named
inventors of the patents, in exchange for consulting services, and 50,000 shares of the Company’s common stock to another
individual in exchange for consulting services, in connection with the acquisition of the Assigned IP. The fair value of these
shares was $278,750 and was based upon the closing price of the Company’s common stock on date of agreement. The Company
recorded the fair value of these shares as a component of compensation and related taxes expense.
NOTE
4 – DIGITIAL ASSET MINING
On
February 7, 2018, Marathon Crypto Mining, Inc. (“MCM”), a Nevada corporation and wholly owned subsidiary of the Company,
entered into an agreement to acquire 1,400 Bitmain’s Antminer S9 miners (“Antminer S9s”). The purchase price
was $5,104,485. The Company also paid installation costs of $694,647 (total paid and capitalized during the three months ended
March 31, 2018 was $5,799,132). The Company will depreciate the Antminer S9’s and related installation costs over a two
year period. Depreciation for the three months ended March 31, 2018 was $232,006.
On
February 12, 2018, in connection with the intended mining operations of MCM, the Company assumed a lease contract dated November
11, 2017 (the “Lease Agreement”) by and between 9349-0001 Quebec Inc. (the “Lessor”) and Blocespace Inc.,
formerly known as Cryptoespace Inc. (the “Lessee”). Pursuant to the Lease Agreement, among other things, the Lessee
leases a building of 26,700 square feet (the “Property”) in Quebec, Canada, for an initial term of five (5) years
(the “Term”), commencing on December 1, 2017 and terminating on November 30, 2022. The Lessee shall pay a monthly
rent of $10,013 plus tax, or an annual rent of $120,150 plus tax (“Yearly Rent”). At the signing of the Lease Agreement,
the Lessee paid the Lessor a deposit equal to the Yearly Rent which amount will be dispersed during the Term as set forth in the
Lease Agreement.
The
Lessee assigned the Lease Agreement to MCM pursuant to an Assignment and Assumption Agreement (the “Assignment”) by
and between the Company and the Lessee’s parent company, Bloctechnologies Canada Inc. Subject to the terms and conditions
of the Assignment, MCM agreed to observe all the covenants and conditions of the Lease Agreement, including the payment of all
rents due. The Company shall be responsible for all necessary capital expenditures in connection with capital improvements to
the Property to set up MCM’s mining operations.
NOTE
5 - STOCKHOLDERS’ EQUITY
Series
B Convertible Preferred Stock
As
of March 31, 2018, 1 share of Series B Convertible Preferred Stock was outstanding.
Series
E Preferred Stock
During
the three months ended March 31, 2018, 3,570 shares of the Series E Convertible Preferred Stock had been converted to the Company’s
Common Stock and 1,942 shares of the Series E Convertible Preferred Stock was outstanding as of March 31, 2018.
Common
Stock
During
the three months ended March 31, 2018, the Company issued 2,619,485 shares of Common Stock to Note Holders in connection with
debt conversions, 218,400 shares of Common Stock were issued to Board members for their services, 3,569,543 shares of Common Stock
with respect to the conversion of Series E Convertible Preferred Stock, 17,731 shares of Common Stock in connection with the exercise
of a warrant, 250,000 shares of Common Stock issued pursuant to a patent purchase and 175,000 shares of Common Stock issued to
consultants.
MARATHON
PATENT GROUP, INC. AND SUBSIDIARIES
Notes
to Unaudited Consolidated Condensed Financial Statements
Common
Stock Warrants
As
of March 31, 2018, the Company had warrants outstanding to purchase 728,764 shares of Common Stock with a weighted average remaining
life of 3.8 years. A summary of the status of the Company’s outstanding stock warrants and changes during the period then
ended is as follows:
|
|
Number
of Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average Remaining
Contractual
Life
(in years)
|
|
Outstanding as of December 31, 2017
|
|
|
773,966
|
|
|
$
|
5.99
|
|
|
|
4.1
|
|
Expired
|
|
|
(1,202
|
)
|
|
|
15.60
|
|
|
|
-
|
|
Exercised
|
|
|
(44,000
|
)
|
|
|
1.20
|
|
|
|
-
|
|
Outstanding as of March 31, 2018
|
|
|
728,764
|
|
|
$
|
6.26
|
|
|
|
3.8
|
|
Warrants exercisable as of March 31, 2018
|
|
|
728,764
|
|
|
$
|
6.26
|
|
|
|
3.8
|
|
Common
Stock Options
A
summary of the stock options as of March 31, 2018 and changes during the period are presented below:
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual Life
(in years)
|
|
Outstanding as of December
31, 2017
|
|
|
448,771
|
|
|
$
|
15.50
|
|
|
|
6.23
|
|
Outstanding as of March 31, 2018
|
|
|
448,771
|
|
|
$
|
15.50
|
|
|
|
5.98
|
|
Options vested and expected to vest
as of March 31, 2018
|
|
|
448,771
|
|
|
$
|
15.50
|
|
|
|
5.98
|
|
Options vested and exercisable as of March 31, 2018
|
|
|
435,855
|
|
|
$
|
15.59
|
|
|
|
5.92
|
|
NOTE
6 - DEBT, COMMITMENTS AND CONTINGENCIES
Debt
consists of the following:
|
|
Maturity
|
|
Interest
|
|
|
|
|
|
|
|
|
|
Date
|
|
Rate
|
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Convertible
Note
|
|
5/10/2018
|
|
|
5
|
%
|
|
$
|
1,959,105
|
|
|
$
|
4,053,948
|
|
Less:
debt discount
|
|
and
5/31/2018
|
|
|
|
|
|
|
(345,256
|
)
|
|
|
(2,290,028
|
)
|
Total
Convertible notes, net of discount
|
|
|
|
|
|
|
|
$
|
1,613,849
|
|
|
$
|
1,763,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
1,613,849
|
|
|
$
|
1,763,920
|
|
Less:
current portion
|
|
|
|
|
|
|
|
|
(1,613,849
|
)
|
|
|
(1,763,920
|
)
|
Total,
net of current portion
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
On
August 14, 2017, the Company entered into a unit purchase agreement (the “Unit Purchase Agreement”) with certain accredited
investors providing for the sale of up to $5,500,000 of 5% secured convertible promissory notes (the “Convertible Notes”),
which are convertible into shares of the Corporation’s common stock, and the issuance of warrants to purchase 6,875,000
shares of the Company’s Common Stock (the “Warrants”). The Convertible Notes are convertible into shares of
the Company’s Common Stock at the lesser of (i) $0.80 per share or (ii) the closing bid price of the Company’s common
stock on the day prior to conversion of the Convertible Note; provided that such conversion price may not be less than $0.40 per
share. The Warrants have an exercise price of $1.20 per share. The Convertible Notes mature on May 31, 2018 and bear interest
at the rate of 5% per annum. In two closings of the Unit Purchase Agreement, the Company issued all $5,500,000 in Convertible
Notes to the investors. As of March 31, 2018, the Company had an outstanding obligation pursuant to the Convertible Notes in the
amount of $1,959,105. Accrued interest as of March 31, 2018 was $103,794.
Office
Lease
In
October 2013, the Company entered into a net-lease for its current office space in Los Angeles, California. The lease will commence
on May 1, 2014 and runs for seven years through April 30, 2021, with monthly lease payment escalating each year of the lease.
In addition, to paying a deposit of $7,564 and the monthly base lease cost, the Company is required to pay pro rata share of operating
expenses and real estate taxes. Under the terms of the lease, the Company will not be required to pay rent for the first five
months but must remain in compliance with the terms of the lease to continue to maintain that benefit. In addition, the Company
has a one-time option to terminate the lease in the 42th month of the lease. Minimum future lease payments under this lease at
March 31, 2018, for the next five years are as follows:
2018 (Nine Months)
|
|
$
|
55,905
|
|
2019
|
|
|
77,872
|
|
2020
|
|
|
81,336
|
|
2021
|
|
|
27,504
|
|
Total
|
|
$
|
242,617
|
|
MARATHON
PATENT GROUP, INC. AND SUBSIDIARIES
Notes
to Unaudited Consolidated Condensed Financial Statements
Legal
Proceedings
Marathon
Patent Group, Inc., Doug Croxall and Francis Knuettel II are currently defendants in a lawsuit, filed on March 27, 2018, captioned
as
Jeffrey Feinberg, Jeffrey L. Feinberg Personal Trust, and Jeffrey L. Feinberg Family Trust v. Marathon Patent Group, Inc.,
Doug Croxall, and Francis Knuettel II
, in the Supreme Court of the State of New York, County of New York, Index No.: 651463/2018.
Mr. Feinberg purports to allege causes of action against Marathon, Doug Croxall and Francis Knuettel II under Sections 11, 12(a)(2)
and 15 of the Securities Act, brought in relation to a December 2016 private placement, and under common law theories of fraud
and fraudulent concealment, constructive fraud, and negligent misrepresentation. Mr. Feinberg previously alleged the same claims
in a now-dismissed lawsuit that was filed in the California Superior Court in Los Angeles. The Company intends to vigorously defend
itself against these claims. However, there can be no assurance that the outcome of these uncertainties will be favorable to the
Company.
In
the normal course of our business of patent monetization, it is generally necessary for us to initiate litigation in order to
commence the process of protecting our patent rights. Such litigation is expected to lead to a monetization event. Accordingly,
we are, and in the future, expect to become, a party to ongoing patent enforcement related litigation alleging infringement by
various third parties of certain patented technologies owned and/or controlled by us. Litigation is commenced by and managed through
the subsidiary that owns the related portfolio of patents or patent rights. In connection with our enforcement activities, we
are currently involved in multiple patent infringement cases. As of March 31, 2018, the Company is involved into a total of 5
lawsuits against defendants in the following jurisdictions:
United
States
|
|
|
|
District
of Delaware
|
|
|
5
|
|
Symantec
On
March 8, 2018, the Company and its subsidiary, Clouding Corp., a California corporation (“Clouding”) entered into
a Settlement Agreement and Release of Claims (the “Settlement Agreement”) with Symantec Corporation (“Symantec”).
Pursuant to the Settlement Agreement, in consideration for an undisclosed amount, Symantec agreed to settle its disputes and dismiss
the actions brought against the Company, Clouding, IP Navigation Group, LLC, Clouding IP, LLC, William J. Carter, and Erich Spangenberg,
each with prejudice. The first case commenced in the Superior Court of California for the County of Los Angeles (the “Los
Angeles Action”) and Symantec thereafter filed a second case in the United States District Court for the District of Delaware
(the “Delaware Action”) naming IP Navigation Group, LLC and Erich Spangenberg as defendants.
Under
the terms of the Settlement Agreement, the Marathon Releasees, Clouding Releasees and the Other Defendant Releasees (as such terms
are defined in the Settlement Agreement) will be released from claims from any and all claims or causes of action based upon,
related to, or arising from the allegations that were made, or could have been made, with respect to the subject matter of the
pleadings filed in the Los Angeles Action and the Delaware Action, and as further set forth in the Settlement Agreement. The Settlement
Agreement contains no admission of wrongdoing, liability or obligation to any of the other parties, except as otherwise set forth
therein.
Feinberg
Litigation
On
March 30, 2018, the Company became aware that a summons and complaint (collectively, the “Summons and Complaint”)
were filed by Jeffrey Feinberg, Jeffrey L. Feinberg Personal Trust, and Jeffrey L. Feinberg Family Trust against the Company and
certain of its officers and directors. The Summons and Complaint were filed with the Supreme Court of the State of New York, County
of New York on March 27, 2018. The Company intends to vigorously defend itself against these claims. However, there can be no
assurance that the outcome of these uncertainties will be favorable to the Company.
NOTE
7 - SUBSEQUENT EVENTS
Restated
Merger Agreement
On
April 3, 2018, the Company and GBV entered into the Amended and Restated Agreement and Plan of Merger (the “Amended Merger
Agreement”), which amends certain terms, among others, in the Merger Agreement, as follows: (i) the Outside Closing Date,
as amended, shall be further extended to ninety (90) days from April 3, 2018, subject to consecutive 30-day extensions upon mutual
written consent of the Parties; (ii) the Company Shareholders shall receive 70,000,000 Parent Common Shares (reduced from 126,674,557
Parent Common Shares) on a fully diluted basis, which include any Parent Common Shares underlying the Parent’s Series C
Preferred Stock issuable in lieu of the Parent Common Shares at the election of the Company Shareholders who would own more than
2.49% of the Parent Common Shares as a result of the Merger; and (iii) in the event that the Merger fails to close by August 9,
2018 or the Company’s Shareholders vote not to approve the Merger, the Parent will issue to the Company, an aggregate of
3,000,000 Parent Common Shares to reimburse GBV for its costs and expenses. All capitalized terms otherwise not defined herein
shall have the meanings set forth in the Amended Merger Agreement.
Lease
Agreement
Effective
June 1, 2018, the Company will be renting its corporate office at 1180 North Town Center Drive, Suite 100, Las Vegas, Nevada 89144,
on a month to month basis. The monthly rent is $1,907. A security deposit of $3,815 has been paid.
Note Conversion
During April 2018, the Company issued 1,200,000 shares of Common Stock to Note Holders
in connection with debt conversions. The Company’s note payable balance was reduced by $960,000.