Notes
to Unaudited Consolidated Condensed Financial Statements
NOTE
1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization
Marathon
Patent Group, Inc. (the “Company”) was incorporated in the State of Nevada on February 23, 2010 under the name Verve
Ventures, Inc. On December 7, 2011, the Company changed its name to American Strategic Minerals Corporation and were engaged in
exploration and potential development of uranium and vanadium minerals business. In June 2012, the Company discontinued the minerals
business and began to invest in real estate properties in Southern California. In October 2012, the Company discontinued its real
estate business when the former CEO joined the firm and the Company commenced IP licensing operations, at which time the Company’s
name was changed to Marathon Patent Group, Inc. On November 1, 2017, the Company entered into a merger agreement with Global Bit
Ventures, Inc. (“GBV”), which is focused on mining digital assets. The Company purchased cryptocurrency mining machines
and established a data center in Canada to mine digital assets. The Company intends to expand its 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.
On
June 28, 2018, the Board has determined that it is in the best interests of the Company and its shareholders to allow the Amended
Merger Agreement with GBV to expire on its current termination date of June 28, 2018 without further negotiation or extension.
The Board approved to issue 3,000,000 shares of the Company’s common stock to GBV as a termination fee for the Company canceling
the proposed merger between the two companies.
All
share and per share values for all periods presented in the accompanying consolidated condensed financial statements have been
retroactively adjusted to reflect the 1:4 Reverse Split which occurred on October 30, 2017.
Going
Concern
The
Company’s consolidated condensed 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 consolidated condensed financial statements, the Company had an accumulated deficit of approximately $97.7 million
at September 30, 2018, a net loss of approximately $8.4 million and approximately $6.3 million net cash used in operating activities
for the nine months ended September 30, 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 (“CODM”) is composed of the chief executive officer and
chief financial officer. 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 are included in current assets in the consolidated balance sheets. Digital currencies are recorded at cost less impairment.
An
intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when
events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired.
Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first
perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined
that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company
concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized,
the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.
The
following table presents the activities of the digital currencies for the nine months ended September 30, 2018:
Digital currenciess at December 31,
2017
|
|
$
|
-
|
|
Additions of digital currencies
|
|
|
1,200,171
|
|
Realized loss on sale of digital currencies
|
|
|
(73,533
|
)
|
Sale of digital
currencies
|
|
|
(1,126,638
|
)
|
Digital Currencies
at September 30, 2018
|
|
$
|
-
|
|
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;
|
MARATHON
PATENT GROUP, INC. AND SUBSIDIARIES
Notes
to Unaudited Consolidated Condensed Financial Statements
|
●
|
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.
Intangible
Assets
Intangible
assets include the Crypto Currency Patent with original estimated useful live of 17 years. The Company amortize the cost of the
intangible assets over their estimated useful lives on a straight-line basis. Costs incurred to acquire patents, including legal
costs, are also capitalized as long-lived assets and amortized on a straight-line basis with the associated patent.
The
Company monitors the carrying value of long-lived assets for potential impairment and tests the recoverability of such assets
whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. If a change in circumstance
occurs, the Company will perform a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted
expected future cash flows. If cash flows cannot be separately and independently identified for a single asset, the Company will
determine whether impairment has occurred for the group of assets for which we can identify the projected cash flows. If the carrying
values are in excess of undiscounted expected future cash flows, the Company will measure any impairment by comparing the fair
value of the asset or asset group to its carrying value. During the three and nine months ended September 30, 2018, there is no
impairment to the intangible assets.
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. Gains or losses on sale of digital currencies are recorded as other income (expenses)
in the statement of operations. Expenses associated with running the crypto-currency mining business, such as equipment depreciation,
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
|
MARATHON
PATENT GROUP, INC. AND SUBSIDIARIES
Notes
to Unaudited Consolidated Condensed Financial Statements
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.
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.
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 is 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.
MARATHON
PATENT GROUP, INC. AND SUBSIDIARIES
Notes
to Unaudited Consolidated Condensed Financial Statements
At
September 30, 2018 and December 31, 2017, the Company has fully reserved a Note Receivable on the Balance Sheets which 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 and the Company took a full reserve
for bad debt as of December 31, 2017.
At
September 30, 2018 and December 31, 2017, the Company owed Doug Croxall (former CEO), $0 and $124,297, respectively (comprised
of $187,500 bonus payable and $63,203 advance).
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.
|
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 September 30, 2018
and December 31, 2017, respectively:
|
|
Fair value measured at September 30, 2018
|
|
|
|
Total
carrying value at September 30,
|
|
|
Quoted
prices in active markets
|
|
|
Significant
other observable inputs
|
|
|
Significant
unobservable inputs
|
|
|
|
2018
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
liability
|
|
$
|
145,124
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
145,124
|
|
|
|
Fair
value measured at December 31, 2017
|
|
|
|
Total
carrying value at December 31,
|
|
|
Quoted
prices in active markets
|
|
|
Significant
other observable inputs
|
|
|
Significant
unobservable inputs
|
|
|
|
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 nine months ended September 30, 2018.
At
September 30, 2018, the Company had an outstanding warrant liability in the amount of $145,124 associated with warrants that were
issued in January 2017 and warrants issued 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 nine months ended September 30, 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
|
|
|
(1,593,481
|
)
|
Outstanding as of September 30,
2018
|
|
$
|
145,124
|
|
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 September 30, 2018 and 2017 are as follows:
|
|
As
of September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Warrants to purchase common
stock
|
|
|
728,764
|
|
|
|
7,487,893
|
|
Options to purchase common stock
|
|
|
416,079
|
|
|
|
613,194
|
|
Preferred stock to exchange common stock
|
|
|
-
|
|
|
|
195,501
|
|
Convertible notes
to exchange common stock
|
|
|
1,248,882
|
|
|
|
13,750,000
|
|
Total
|
|
|
2,393,725
|
|
|
|
22,046,588
|
|
The
following table sets forth the computation of basic and diluted loss per share:
|
|
For
the three months ended September 30,
|
|
|
For
the nine months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net loss attributable to
common shareholders
|
|
$
|
(1,340,457
|
)
|
|
$
|
(6,677,486
|
)
|
|
$
|
(8,419,922
|
)
|
|
$
|
(12,484,925
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - basic and diluted
|
|
|
24,321,788
|
|
|
|
6,270,299
|
|
|
|
19,893,901
|
|
|
|
5,564,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share - basic and diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(1.06
|
)
|
|
$
|
(0.42
|
)
|
|
$
|
(2.24
|
)
|
Recent
Accounting Pronouncements
In
August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain
disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded
the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments,
an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note
or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period
for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018. We are
evaluating the impact of this guidance on our condensed consolidated financial statements.
In
June 2018, the FASB issued ASU 2018-07, “
Improvements to Nonemployee Share-Based Payment Accounting
”, which
simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the
guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees.
The changes take effect for public companies for fiscal years starting after December 15, 2018, including interim periods within
that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and
interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s
adoption date of Topic 606. The Company expects that the adoption of this ASU would not have a material impact on the Company’s
consolidated condensed financial statements.
MARATHON
PATENT GROUP, INC. AND SUBSIDIARIES
Notes
to Unaudited Consolidated Condensed Financial Statements
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 the Company’s
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 issued 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 January 1, 2019 using a modified retrospective approach.
We currently expect that most of our operating lease commitments will be subject to the new standard and recognized as operating
lease liabilities and right-of-use assets upon our adoption of Topic 842, which will increase our total assets and total liabilities
that we report relative to such amounts prior to adoption.
Any
new accounting standards, not disclosed above, that have been issued or proposed by FASB that do not require adoption until a
future date are not expected to have a material impact on the financial statements upon adoption.
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.
MARATHON
PATENT GROUP, INC. AND SUBSIDIARIES
Notes
to Unaudited Consolidated Condensed Financial Statements
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.
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 $4,557,072. The Company also paid installation costs of $694,647 (total paid and capitalized was $5,251,719). The Company
will depreciate the Antminer S9’s and related installation costs over a two-year period. Depreciation for the three and
nine months ended September 30, 2018 was $598,549 and $1,405,147, respectively.
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 Canadian Dollars (“CAD”) plus tax, or an annual rent of $120,150 CAD 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. Lease expense for the three and nine months ended September 30, 2018 were
$26,171 and $70,568, respectively.
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 September 30, 2018, there was no share of Series B Convertible Preferred Stock outstanding.
Series
E Preferred Stock
During
the nine months ended September 30, 2018, 5,512 shares of the Series E Convertible Preferred Stock had been converted to the Company’s
Common Stock and there was no Series E Convertible Preferred Stock outstanding as of September 30, 2018.
Common
Stock
During
the nine months ended September 30, 2018, the Company issued 3,819,485 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, 5,511,543 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, 225,000 shares of Common Stock issued to consultants
and 3,000,000 to GBV as a termination fee for canceling the merger agreement. The termination fee was valued based upon the closing
stock price as of June 28, 2018 or $0.95 per common share.
MARATHON
PATENT GROUP, INC. AND SUBSIDIARIES
Notes
to Unaudited Consolidated Condensed Financial Statements
Common
Stock Warrants
As
of September 30, 2018, the Company had warrants outstanding to purchase 728,764 shares of Common Stock with a weighted average
remaining life of 3.3 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 September 30,
2018
|
|
|
728,764
|
|
|
$
|
6.26
|
|
|
|
3.3
|
|
Warrants exercisable as of September 30, 2018
|
|
|
728,764
|
|
|
$
|
6.26
|
|
|
|
3.3
|
|
Common
Stock Options
A
summary of the stock options as of September 30, 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
|
|
Expired
|
|
|
(32,692
|
)
|
|
|
10.71
|
|
|
|
-
|
|
Outstanding as of September 30,
2018
|
|
|
416,079
|
|
|
$
|
15.88
|
|
|
|
5.93
|
|
Options vested and expected to vest
as of September 30, 2018
|
|
|
416,079
|
|
|
$
|
15.88
|
|
|
|
5.93
|
|
Options vested and exercisable as of September 30, 2018
|
|
|
404,968
|
|
|
$
|
16.02
|
|
|
|
5.88
|
|
NOTE
6 - DEBT, COMMITMENTS AND CONTINGENCIES
Debt
consists of the following:
|
|
Maturity
|
|
|
Interest
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
Date
|
|
|
Rate
|
|
|
2018
|
|
|
2017
|
|
Convertible Note
|
|
|
12/31/2019
|
|
|
|
5
|
%
|
|
$
|
999,106
|
|
|
$
|
4,053,948
|
|
Less: debt discount
|
|
|
and
12/31/2019
|
|
|
|
|
|
|
|
-
|
|
|
|
(2,290,028
|
)
|
Total Convertible
notes, net of discount
|
|
|
|
|
|
|
|
|
|
$
|
999,106
|
|
|
$
|
1,763,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
999,106
|
|
|
$
|
1,763,920
|
|
Less: current
portion
|
|
|
|
|
|
|
|
|
|
|
(999,106
|
)
|
|
|
(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. The investor has agreed to an extension of the maturity date of the note to December 31, 2019. As of September
30, 2018, the Company had an outstanding obligation pursuant to the Convertible Notes in the amount of $999,106. Accrued interest
as of September 30, 2018 was $132,390. During the three and nine months ended September 30, 2018 the interest expense were $19,446
and $59,513, and $73,622 and $73,622 for the three and nine months ended September 30, 2017, respectively.
MARATHON
PATENT GROUP, INC. AND SUBSIDIARIES
Notes
to Unaudited Consolidated Condensed Financial Statements
During
the three and nine months ended September 30, 2018, the amortization of debt discount were $0 and $2.3 million, and $0 and $789,392
for the three nine months ended September 30, 2017, respectively.
Office
Lease
Effective
June 1, 2018, the Company rented 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.
Legal
Proceedings
Feinberg
Litigation
On
March 27, 2018, Jeffrey Feinberg, joined by the Jeffrey L. Feinberg Personal Trust and the Jeffrey L. Feinberg Family Trust, filed
a complaint against the Company and certain of its former officers and directors. The complaint was filed in the Supreme Court
of the State of New York, County of New York. On June 15, 2018, defendants filed a motion to dismiss all claims asserted in the
complaint and, on July 27, 2018, plaintiffs filed an opposition to that motion. The motion to dismiss has been submitted for resolution
by the court, with a hearing set for January 15, 2019. In addition, on June 15, 2018, defendants filed a motion for a protective
order declaring that no discovery should proceed in the case pending the resolution of defendants’ motion to dismiss the
complaint. On July 27, 2018, plaintiffs filed a statement of non-opposition to the motion for a protective order. Accordingly,
all discovery in the case is effectively stayed pending the resolution of defendants’ motion to dismiss.
Ramirez
Litigation
On
July 20, 2018, Tony Ramirez filed a complaint against the Company and certain of its former directors. The complaint was filed
in the United States District Court for the Central District of California. Mr. Ramirez alleges that he was and is a shareholder
of the Company, and purports to assert a single claim under Section 14(a) of the Securities and Exchange Act of 1934 and SEC Rule
14a-9 promulgated thereunder. The defendants were recently served with the complaint, and have not yet responded to the complaint.
NOTE
7 – Subsequent Events
The
Company has evaluated subsequent events through the date the consolidated financial statements were available to be issued and
has concluded that no such events or transactions took place that would require disclosure herein.
On
October 11, 2018, the Company entered into a 2-year Employment Agreement, subject to successive 1 year extension, with Merrick
Okamoto, pursuant to which Mr. Okamoto will serve as the Executive Chairman and Chief Executive Officer of the Company. Pursuant
to the terms of the Agreement, Mr. Okamoto shall receive a base salary at an annual base salary of $350,000 (subject to annual
3% cost of living increase) and an annual bonus up to 100% of base salary as determined by the Compensation Committee or the Board.
As further consideration for Mr. Okamoto’s services, the Company agreed to issue Mr. Okamoto 10-year stock options to purchase
5,000,000 shares of Common Stock, with a strike price of $0.58 per share, vesting 50 % on the date of grant and 25% on each 6
months anniversary of the date of grant.
On
October 12, 2018, the Company granted its board members an option to purchase 250,000 shares of the Company’s common stock,
with a strike price of $0.58 per share, vesting 50 % on the date of grant and 25% on each 6 months anniversary of the date of
grant.
On
October 15, 2018, the Company entered into a 2-year Employment Agreement, subject to successive 1 year extension, with David Lieberman,
pursuant to which Mr. Lieberman will serve as the Chief Financial Officer of the Company. Pursuant to the terms of the Lieberman
Agreement, Mr. Lieberman shall receive a base salary at an annual base salary of $180,000 (subject to annual 3% cost of living
increase) and an annual bonus up to 100% of base salary as determined by the Compensation Committee or the Board. As further consideration
for Mr. Lieberman’s services, the Company agreed to issue Mr. Lieberman 10-year stock options to purchase 200,000 shares
of Common Stock, with a strike price of $0.58 per share, vesting 50% on the date of grant and 25% on each 6 months anniversary
of the date of grant.