UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

 

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE ACT OF 1934

 

For the transition period from _______to______

 

MARATHON PATENT GROUP, INC.

(Exact Name of Registrant as Specified in Charter)

 

Nevada   001-36555   01-0949984
(State or other jurisdiction
of incorporation)
  (Commission
File Number)
  (IRS Employer
Identification No.)

 

1180 North Town Center Drive, Suite 100

Las Vegas, NV

  89144
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: 702-945-2773

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. [X]

 

Large Accelerated Filer [  ] Accelerated Filer [  ]
Non-accelerated Filer [  ] Smaller Reporting Company [X]
Emerging growth company [  ]    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [  ] No [X]

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock   MARA   The Nasdaq Capital Market

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 7,853,461 shares of common stock are issued and outstanding as of November 8, 2019.

 

 

 

 
 

 

TABLE OF CONTENTS

 

    Page
PART I. - FINANCIAL INFORMATION  
Item 1. Financial Statements 3
  Consolidated Condensed Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018 3
  Consolidated Condensed Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited) 4
  Consolidated Condensed Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited) 5
  Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (unaudited) 6
  Notes to Unaudited Consolidated Condensed Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 18
     
PART II - OTHER INFORMATION  
Item 1. Legal Proceedings 18
Item 1A Risk Factors 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Mine Safety Disclosures 19
Item 5. Other Information 19
Item 6. Exhibits 19

 

OTHER PERTINENT INFORMATION

 

Unless specifically set forth to the contrary, “Marathon Patent Group, Inc.,” “we,” “us,” “our” and similar terms refer to Marathon Patent Group, Inc., a Nevada corporation, and its subsidiaries. Unless otherwise indicated, the per share information has been retroactively adjusted to reflect the one for four reverse stock split that went into effect on April 8, 2019 (the “Reverse Split”).

 

  2  
 

 

Item 1. Financial Statements

 

MARATHON PATENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

 

    September 30,     December 31,  
    2019     2018  
    (Unaudited)        
ASSETS                
Current assets:                
Cash and cash equivalents   $ 1,342,985     $ 2,551,171  
Digital currencies     2,881       -  
Prepaid expenses and other current assets     209,935       464,006  
Total current assets     1,555,801       3,015,177  
                 
Other assets:                
Property and equipment, net of accumulated depreciation and impairment charges of $4,751,014 and $4,338,931 for September 30, 2019 and December 31, 2018, respectively     4,713,966       1,034,575  
Right-of-use assets     318,881       -  
Intangible assets, net of accumulated amortization of $118,627 and $65,245 for September 30, 2019 and December 31, 2018, respectively     1,091,373       1,144,755  
Total other assets     6,124,220       2,179,330  
TOTAL ASSETS   $ 7,680,021     $ 5,194,507  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
                 
Current liabilities:                
Accounts payable and accrued expenses   $ 1,071,621     $ 1,235,444  
Mining servers payable     1,852,477       -  
Current portion of lease liability     85,689       -  
Warrant liability     46,836       39,083  
Convertible notes payable     999,106       999,106  
Total current liabilities     4,055,729       2,273,633  
Long-term liabilities                
Lease liability     134,947       -  
Total long-term liabilities     134,947       -  
Total liabilities     4,190,676       2,273,633  
                 
Commitments and Contingencies                
                 
Stockholders’ Equity:                
Preferred stock, $0.0001 par value, 50,000,000 shares authorized, no shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively     -       -  
Common stock, $0.0001 par value; 200,000,000 shares authorized; 7,703,461 and 6,379,992 issued and outstanding at September 30, 2019 and December 31, 2018, respectively     771       638  
Additional paid-in capital     108,394,883       105,461,396  
Accumulated other comprehensive loss     (450,719 )     (450,719 )
Accumulated deficit     (104,455,590 )     (102,090,441 )
Total stockholders’ equity     3,489,345       2,920,874  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 7,680,021     $ 5,194,507  

 

The accompanying notes are an integral part to these unaudited consolidated condensed financial statements.

 

  3  
 

 

MARATHON PATENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

 

    For the three months ended     For the nine months ended  
    September 30,     September 30,  
    2019     2018     2019     2018  
Revenues                                
Cryptocurrency mining revenue   $ 321,716     $ 338,672     $ 908,175     $ 1,200,171  
Other revenue     -       -       -       66,970  
Total revenues     321,716       338,672       908,175       1,267,141  
                                 
Operating costs and expenses                                
Cost of revenue     478,811       1,132,570       1,486,039       2,331,909  
Compensation and related taxes     409,609       137,338       1,224,900       803,309  
Consulting fees     34,000       347,500       84,000       573,286  
Professional fees     91,908       126,446       287,282       1,157,246  
General and administrative     115,247       89,859       359,319       1,212,469  
Break-up fee - issuance of shares to GBV     -       -       -       2,850,000  
Total operating expenses     1,129,575       1,833,713       3,441,540       8,928,219  
Operating loss     (807,859 )     (1,495,041 )     (2,533,365 )     (7,661,078 )
Other income (expenses)                                
Other income     300       125,125       181,195       108,670  
Foreign exchange loss     -       (8,003 )     (11,873 )     (31,096 )
Realized income (loss) on sale of digital currencies     (11,236 )     8,760       13,208       (73,533 )
Change in fair value of warrant liability     68,551       45,595       (7,753 )     1,593,481  
Amortization of debt discount     -       -       -       (2,290,028 )
Interest income     8,428       2,553       30,802       2,553  
Interest expense     (12,591 )     (19,446 )     (37,363 )     (68,891 )
Total other income (expenses)     53,452       154,584       168,216       (758,844 )
Net loss   $ (754,407 )   $ (1,340,457 )   $ (2,365,149 )   $ (8,419,922 )
                                 
Net loss per share, basic and diluted:   $ (0.12 )   $ (0.22 )   $ (0.37 )   $ (1.69 )
Weighted average shares outstanding, basic and diluted:     6,372,061       6,080,447       6,353,643       4,973,475  
                                 
Net loss   $ (754,407 )   $ (1,340,457 )   $ (2,365,149 )   $ (8,419,922 )
Other comprehensive income:                                
Unrealized gain on foreign currency translation     -       -       -       15  
Comprehensive loss attributable to Marathon Patent Group, Inc.   $ (754,407 )   $ (1,340,457 )   $ (2,365,149 )   $ (8,419,907 )

 

The accompanying notes are an integral part to these unaudited consolidated condensed financial statements.

 

  4  
 

 

MARATHON PATENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

For the Three Months Ended September 30, 2019

 

    Preferred Stock     Common Stock     Additional Paid-in     Accumulated     Accumulated
Other
Comprehensive
Income
    Total Stockholders’  
    Number     Amount     Number     Amount     Capital     Deficit     (Loss)     Equity  
Balance as of June 30, 2019          -     $       -       6,385,405     $ 639     $ 105,873,870     $ (103,701,183 )   $ (450,719 )   $ 1,722,607  
Stock based compensation     -       -       -       -       207,555       -       -       207,555  
Issuance of common stock, net of offering costs/At-the-market offering     -       -       41,614       4       79,813       -       -       79,817  
Common stock issued for purchase of mining servers     -       -       1,276,442       128       2,233,645       -       -       2,233,773  
Net loss     -       -       -       -       -       (754,407 )     -       (754,407 )
Balance as of September 30, 2019     -     $ -       7,703,461     $ 771     $ 108,394,883     $ (104,455,590 )   $ (450,719 )   $ 3,489,345  

 

For the Nine Months Ended September 30, 2019

 

    Preferred Stock     Common Stock     Additional
Paid-in
    Accumulated     Accumulated
Other
Comprehensive
Income
    Total
Stockholders’
 
    Number     Amount     Number     Amount     Capital     Deficit     (Loss)     Equity  
Balance as of December 31, 2018           -     $       -       6,379,992     $ 638     $ 105,461,396     $ (102,090,441 )   $ (450,719 )   $ 2,920,874  
Stock based compensation     -       -       -       -       620,030       -       -       620,030  
Par value adjustment and additional shares issued due to reverse split     -       -       5,413       1       (1 )     -       -       -  
Issuance of common stock, net of offering costs/At-the-market offering     -       -       41,614       4       79,813       -       -       79,817  
Common stock issued for purchase of mining servers     -       -       1,276,442       128       2,233,645       -       -       2,233,773  
Net loss     -       -       -       -       -       (2,365,149 )     -       (2,365,149 )
Balance as of September 30, 2019     -     $ -       7,703,461     $ 771     $ 108,394,883     $ (104,455,590 )   $ (450,719 )   $ 3,489,345  

 

For the Three Months Ended September 30, 2018

 

    Preferred Stock     Common Stock     Additional
Paid-in
    Accumulated     Accumulated
Other
Comprehensive
Income
    Total
Stockholders’
 
    Number     Amount     Number     Amount     Capital     Deficit     (Loss)     Equity  
Balance as of June 30, 2018     486     $ -       5,894,485     $ 589     $ 104,493,144     $ (96,355,582 )   $ (450,719 )   $ 7,687,432  
Stock based compensation     -       -       -       -       39,053       -       -       39,053  
Conversion of Series E preferred stock     (486 )     -       485,500       49       (49 )                     -  
Net loss     -               -       -       -       -       (1,340,457 )     -       (1,340,457 )
Balance as of September 30, 2018     -     $ -       6,379,985     $ 638       104,532,148     $ (97,696,039 )   $ (450,719 )   $ 6,386,028  

 

For the Nine Months Ended September 30, 2018

 

    Preferred Stock     Common Stock     Additional
Paid-in
    Accumulated     Accumulated
Other
Comprehensive
Income
    Total
Stockholders’
 
    Number     Amount     Number     Amount     Capital     Deficit     (Loss)     Equity  
Balance as of December 31, 2017     1,378     $       1       3,119,445     $ 312     $ 97,114,659     $ (89,276,117 )   $ (450,734 )   $ 7,388,121  
Stock based compensation     -       -       110,850       11       496,424       -       -       496,435  
Conversion of Series E preferred stock     (1,378 )     (1 )     1,377,886       138       (137 )     -       -       -  
Common stock issued for acquisition of patents     -       -       62,500       6       959,994       -       -       960,000  
Issue common stock for conversion of warrants     -       -       4,433       -       55,791       -       -       55,791  
Common stock issuance related to note conversion     -       -       954,871       96       3,055,492       -       -       3,055,588  
Break-up fee - issuance of shares to GBV     -       -       750,000       75       2,849,925       -       -       2,850,000  
Currency translation gain     -       -       -       -       -       -       15       15  
Net loss     -       -       -       -       -       (8,419,922 )     -       (8,419,922 )
Balance as of September 30, 2018     -     $ -       6,379,985     $ 638     $ 104,532,148     $ (97,696,039 )   $ (450,719 )   $ 6,386,028  

 

The accompanying notes are an integral part to these unaudited consolidated condensed financial statements.

 

  5  
 

 

MARATHON PATENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    For the nine months ended  
    September 30,  
    2019     2018  
CASH FLOWS FROM OPERATING ACTIVITIES                
Net loss   $ (2,365,149 )   $ (8,419,922 )
Adjustments to reconcile net loss to net cash (used in) operating activities:                
Depreciation     412,083       1,405,147  
Amortization of patents and website     53,382       48,222  
Realized (gain) loss on sale of digital currencies     (13,208 )     73,533  
Change in fair value of warrant liability     7,753       (1,593,481 )
Stock based compensation     620,030       496,435  
Amortization of debt discount     -       2,290,028  
Amortization of right-of-use assets     67,602       -  
Bad debt allowance     -       6,826  
Break-up fee - issuance of shares to GBV     -       2,850,000  
Changes in operating assets and liabilities:                
Accounts receivables             (102,098 )
Digital currencies     (908,175 )     (1,098,073 )
Lease liability     (66,707 )     -  
Litigation liability     -       (2,150,000 )
Prepaid expenses and other assets     154,930       (457,329 )
Accounts payable and accrued expenses     (163,822 )     (631,873 )
Net cash used in operating activities     (2,201,281 )     (7,282,585 )
CASH FLOWS FROM INVESTING ACTIVITIES                
Sale of digital currencies     918,502       1,024,540  
Acquisition of patents     -       (250,000 )
Purchase of property and equipment     (5,224 )     (5,251,719 )
Net cash provided by (used in) investing activities     913,278       (4,477,179 )
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from issuance of common stock/At-the-market offering     83,453       -  
Offering costs for the issuance of common stock/At-the-market offering     (3,636 )     -  
Net cash provided by financing activities     79,817       -  
                 
Effect of foreign exchange rate changes     -       15  
                 
Net decrease in cash and cash equivalents     (1,208,186 )     (11,759,749 )
Cash and cash equivalents — beginning of period     2,551,171       14,948,529  
Cash and cash equivalents — end of period   $ 1,342,985     $ 3,188,780  
                 
Supplemental schedule of non-cash investing and financing activities:                
Par value adjustment due to reverse split   $ 1     $ -  
Conversion of Series E Preferred Stock to common stock   $ -     $ 551  
Common stock issued for acquisition of patents   $ -     $ 960,000  
Common stock issued for purchase of assets   $ 2,233,773     $ -  
Common stock issued for note conversion   $ -     $ 3,055,588  
Restricted stock issuance   $ -     $ 44  
Mining servers payable   $ 1,852,477     $ -  
Warrants exercised into common shares   $ -     $ 55,791  

 

The accompanying notes are an integral part to these unaudited consolidated condensed financial statements.

 

  6  
 

 

MARATHON PATENT GROUP, INC. AND SUBSIDIARIES

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 expanded its activities in the mining of new digital assets, while at the same time harvesting the value of its remaining IP assets. In order to streamline and create efficiencies, we outsource most of our operations to service providers, and our Granby facility and its bitcoin mining operations are provided by Block Maintain, Inc. Additionally, 24 hour security at our facility is provided by Securitas Canada, and financial operations are provided by Chord Advisors, LLC.

 

The Company’s Board of Directors adopted the reverse stock split approved by its shareholders at its December 2018 Board Meeting. Upon the effectiveness of the reverse stock split, every four shares of issued and outstanding common stock before the open of business on April 8, 2019 was combined into one issued and outstanding share of common stock, with no change in par value per share. 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.

 

On May 21, 2019, the Company received notice from the Nasdaq Capital Market (the “Capital Market”) that the Company has failed to maintain a minimum of $2,500,000 in stockholders’ equity for continued listing as required under Listing Rule 5550(b)(1) as its Form 10-Q for the period ended March 31, 2019 reported stockholders’ equity of $2,158,192. On July 23, 2019, we announced Nasdaq approved the Company’s plan to regain compliance, and the Company is required to file its Form 10-Q for the period ending September 30, 2019 with the SEC on or before November 13, 2019 evidencing compliance with the stockholders’ equity requirement.

 

On September 30, 2019, the Company consummated the purchase of 6,000 S-9 Bitmain 13.5 TH/s Bitcoin Antminers from SelectGreen Blockchain Ltd, a British Columbia corporation, for which the purchase price was $4,086,250 or 2,335,000 shares of its common stock at a price of $1.75 per share. As a result of an exchange cap requirement imposed in conjunction with the Company’s Listing of Additional Shares application filed with Nasdaq with regard to the transaction, the Company issued 1,276,442 shares of its common stock which represented $2,233,773 of the $4,086,250 (constituting 19.9% of the issued and outstanding shares outstanding on the date of the Asset Purchase Agreement for the transaction) and upon receipt of shareholder approval, at the Special Shareholders Meeting on November 15, 2019, the Company will issue the balance of the 1,058,558 unregistered common stock shares. The $1,852,477 set forth on the balance sheet for mining servers payable reflects this balance of 1,058,558 shares to be issued at $1.75 per share immediately upon receipt of shareholder approval, thus immediately satisfying the mining servers payable. If the Company does not gain shareholder approval (which it anticipates it will receive), it would plan to resolicit shareholders after a reasonable waiting period; however, this is neither the intention nor the requirement to make payment in cash.

 

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 $104.5 million at September 30, 2019, a net loss of approximately $2.4 million and approximately $2.2 million net cash used in operating activities for the nine months ended September 30, 2019. 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.

 

  7  
 

 

MARATHON PATENT GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Condensed Financial Statements

 

If adequate funds are not available, we may be required to curtail our operations or other business activities or obtain funds, if available, through arrangements with strategic partners or others that may require us to relinquish rights to certain technologies or potential markets.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Principles of Consolidation

 

The accompanying consolidated condensed financial statements, including the accounts of the Company’s subsidiaries, Marathon Crypto Mining, Inc., Crypto Currency Patent Holding Company and Soems Acquisition Corp., 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, 2019.

 

Use of Estimates

 

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 to the Company’s significant accounting policies to those previously disclosed in the 2018 annual report.

 

Leases

 

Effective January 1, 2019, the Company accounts for its leases under ASC 842, Leases. Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the consolidated balance sheet as both a right of use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line rent expense over the lease term. Variable lease expenses, if any, are recorded when incurred.

 

In calculating the right of use asset and lease liability, the Company elects to combine lease and non-lease components. The Company excludes short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term.

 

The Company continues to account for leases in the prior period financial statements under ASC Topic 840.

 

Other than above, there have been no material changes in the Company’s significant accounting policies to those previously disclosed in the Company’s annual report on Form 10-K, which was filed with the SEC on March 25, 2019.

 

  8  
 

 

MARATHON PATENT GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Condensed Financial Statements

 

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, 2019:

 

Digital currencies at December 31, 2018   $ -  
Additions of digital currencies     908,175  
Realized gain on sale of digital currencies     13,208  
Sale of digital currencies     (918,502 )
Digital Currencies at September 30, 2019   $ 2,881  

 

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.

 

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, 2019 and December 31, 2018, respectively:

 

    Fair value measured at September 30, 2019  
    Total carrying value
at September 30,
    Quoted prices in
active markets
    Significant other
observable inputs
    Significant
unobservable inputs
 
    2019     (Level 1)     (Level 2)     (Level 3)  
Liabilities                                
Warrant liability   $ 46,836     $      -     $          -     $ 46,836  

 

    Fair value measured at December 31, 2018  
    Total carrying value at December 31,     Quoted prices in active markets     Significant other observable inputs     Significant unobservable inputs  
    2018     (Level 1)     (Level 2)     (Level 3)  
Liabilities                                
Warrant liability   $ 39,083     $       -     $              -     $ 39,083  

 

There were no transfers between Level 1, 2 or 3 during the nine months ended September 30, 2019.

 

At September 30, 2019, the Company had an outstanding warrant liability in the amount of $46,836 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, 2019.

 

  9  
 

 

MARATHON PATENT GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Condensed Financial Statements

 

Fair value of warrant liabilities

 

    Fair value  
Outstanding as of December 31, 2018   $ 39,083  
Change in fair value of warrants     7,753  
Outstanding as of September 30, 2019   $ 46,836  

 

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, 2019 and 2018 are as follows:

 

    As of September 30,  
    2019     2018  
Warrants to purchase common stock     182,191       182,191  
Options to purchase common stock     1,733,620       105,462  
Preferred stock to exchange common stock     -       485,540  
Convertible notes to exchange common stock     312,221       312,221  
Total     2,228,032       1,085,414  

 

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,
 
    2019     2018     2019     2018  
Net loss attributable to common shareholders   $ (754,407 )   $ (1,340,457 )   $ (2,365,149 )   $ (8,419,922 )
                                 
Denominator:                                
Weighted average common shares - basic and diluted     6,372,061       6,080,447       6,353,643       4,973,475  
                                 
Loss per common share - basic and diluted   $ (0.12 )   $ (0.22 )   $ (0.37 )   $ (1.69 )

 

Sequencing

 

In connection with the August 14, 2017 Convertible Note financing, the Company adopted a sequencing policy whereby all future instruments may be classified as a derivative liability with the exception of instruments related to share-based compensation issued to employees or directors.

 

Recent Accounting Pronouncements

 

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 adoption of this ASU did not have a material impact on the Company’s 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. The adoption of this ASU did not have a material impact on the Company’s consolidated condensed financial statements.

 

  10  
 

 

MARATHON PATENT GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Condensed Financial Statements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by, among other provisions, recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. For public companies, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted. In transition, entities may also elect a package of practical expedients that must be applied in its entirety to all leases commencing before the adoption date, unless the lease is modified, and permits entities to not reassess (a) the existence of a lease, (b) lease classification or (c) determination of initial direct costs, as of the adoption date, which effectively allows entities to carryforward accounting conclusions under previous U.S. GAAP. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities an optional transition method to apply the guidance under Topic 842 as of the adoption date, rather than as of the earliest period presented. The Company adopted Topic 842 on January 1, 2019, using the optional transition method to apply the new guidance as of January 1, 2019, rather than as of the earliest period presented, and elected the package of practical expedients described above. The adoption did not have a material impact on the Company’s consolidated financial statements.

 

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 – DIGITIAL ASSET MINING

 

On September 30, 2019, the Company consummated the purchase of 6,000 S-9 Bitmain 13.5 TH/s Bitcoin Antminers from SelectGreen Blockchain Ltd, a British Columbia corporation, for which the purchase price was $4,086,250 or 2,335,000 shares of its common stock at a price of $1.75 per share. As a result of an exchange cap requirement imposed in conjunction with the Company’s Listing of Additional Shares application filed with Nasdaq with regard to the transaction, the Company issued 1,279,442 shares of its common stock which represented $2,233,773 or the $4,086,250 (constituting 19.9% of the issued and outstanding shares outstanding on the date of the Asset Purchase Agreement for the transaction) and upon receipt of shareholder approval, at the Special Shareholders Meeting on November 15, 2019, the Company will issue the balance of the 1,058,558 unregistered common stock shares. The $1,852,477 set forth on the balance sheet for mining servers payable reflects this balance of 1,058,558 shares to be issued at $1.75 per share immediately upon receipt of shareholder approval, thus immediately satisfying the mining servers payable. If the Company does not gain shareholder approval (which it anticipates it will receive), it would plan to resolicit shareholders after a reasonable waiting period; however, this is neither the intention nor the requirement to make payment in cash.

 

The components of property, equipment and intangible assets as of September 30, 2019 and December 31, 2018 are:

 

    Useful life (Years)     September 30, 2019     December 31, 2018  
Website     7     $ 121,787     $ 121,787  
Mining equipment     2       7,120,505       3,029,031  
Mining patent     17       1,210,000       1,210,000  
Gross property, equipment and intangible assets             8,452,292       4,360,818  
Less: Accumulated depreciation and amortization             (2,646,953 )     (2,181,488 )
Property, equipment and intangible assets, net           $ 5,805,339     $ 2,179,330  

 

The Company’s depreciation expense for the three and nine months ended September 30, 2019 were $137,361 and $412,083, and $598,549 and $1,405,147 for the three and nine months ended September 30, 2018, respectively. Amortization expense were $17,794 and $53,382 for the three and nine months ended September 30, 2019, and $18,308 and $48,222 for the three and nine months ended September 30, 2018, respectively.

 

NOTE 4 - STOCKHOLDERS’ EQUITY

 

Common Stock

 

At The Market Offering Agreement

 

On July 19, 2019, we entered into an At The Market Offering Agreement (the “Agreement”) with H.C. Wainwright & Co., LLC (“H.C. Wainwright”) which establishes an at-the-market equity program pursuant to which we may offer and sell shares of our common stock, par value $0.0001 per share (“Common Stock”), from time to time as set forth in the Agreement. The Agreement provides for the sale of shares of our Common Stock (“Shares”) having an aggregate offering price of up to $7,472,417 (the Company’s ability to offer shares under the Agreement is limited to the amount of shares it may sell pursuant to General Instruction I.B.6. of Form S-3.

 

  11  
 

 

MARATHON PATENT GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Condensed Financial Statements

 

Subject to the terms and conditions set forth in the Agreement, H.C. Wainwright will use its commercially reasonable efforts consistent with its normal trading and sales practices to sell the Shares from time to time, based upon our instructions. We have provided H.C. Wainwright with customary indemnification rights, and H.C. Wainwright will be entitled to a commission at a fixed rate equal to three percent (3.0%) of the gross proceeds per Share sold. In addition, we have agreed to pay certain expenses incurred by H.C. Wainwright in connection with the Agreement, including up to $25,000 of the fees and disbursements of their counsel. The Agreement will terminate upon the earlier of sale of all of the Shares under the Agreement or July 19, 2022 unless terminated earlier by either party as permitted under the Agreement.

 

Sales of the Shares, if any, under the Agreement shall be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), including sales made by means of ordinary brokers’ transactions, including on the Nasdaq Capital Market, at market prices or as otherwise agreed with H.C. Wainwright. We have no obligation to sell any of the Shares, and, at any time, we may suspend offers under the Agreement or terminate the Agreement.

 

During the nine months ended September 30, 2019, 41,614 shares of common stock were issued under the At The Market Offering for the total proceeds of $79,817, net of offering cost of $3,636.

 

Asset Purchase Agreement

 

On September 30, 2019, the Company consummated the purchase of 6,000 S-9 Bitmain 13.5 TH/s Bitcoin Antminers from SelectGreen Blockchain Ltd, a British Columbia corporation, for which the purchase price was $4,086,250 or 2,335,000 shares of its common stock at a price of $1.75 per share. As a result of an exchange cap requirement imposed in conjunction with the Company’s Listing of Additional Shares application filed with Nasdaq with regard to the transaction, the Company issued 1,279,442 shares of its common stock which represented $2,233,773 of the $4,086,250 (constituting 19.9% of the issued and outstanding shares outstanding on the date of the Asset Purchase Agreement for the transaction) and upon receipt of shareholder approval, at the Special Shareholders Meeting on November 15, 2019, the Company will issue the balance of the 1,058,558 unregistered common stock shares. The $1,852,477 set forth on the balance sheet for mining servers payable reflects this balance of 1,058,558 shares to be issued at $1.75 per share immediately upon receipt of shareholder approval, thus immediately satisfying the mining servers payable. If the Company does not gain shareholder approval (which it anticipates it will receive), it would plan to resolicit shareholders after a reasonable waiting period; however, this is neither the intention nor the requirement to make payment in cash.

 

Series B Convertible Preferred Stock

 

As of September 30, 2019, there was no share of Series B Convertible Preferred Stock outstanding.

 

Series E Preferred Stock

 

There was no Series E Convertible Preferred Stock outstanding as of September 30, 2019.

 

Common Stock Warrants

 

As of September 30, 2019, the Company had warrants outstanding to purchase 182,191 shares of Common Stock with a weighted average remaining life of 2.3 years and a weighted average exercise price of $25.04. There was no activity of the Company’s warrants during the period ended September 30, 2019.

 

Common Stock Options

 

On July 22, 2019, the Company’s board has approved to issue 275,000 shares of option to purchase the Company’s common stock to 8 employees and consultants for the service they provided. The options have a five-year term with an exercise price of $2.04.

 

  12  
 

 

MARATHON PATENT GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Condensed Financial Statements

 

A summary of the stock options as of September 30, 2019 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, 2018     1,466,520     $ 6.66       9.49  
Granted     275,000     $ 2.04       4.81  
Expired     (7,900 )     77.22       -  
Outstanding as of September 30, 2019     1,733,620     $ 5.61       8.16  
Options vested and expected to vest as of September 30, 2019     1,733,620     $ 5.61       8.16  
Options vested and exercisable as of September 30, 2019     1,255,495     $ 6.89       8.29  

 

NOTE 5 - DEBT, COMMITMENTS AND CONTINGENCIES

 

Debt consists of the following:

 

    Maturity     Interest     September 30,     December 31,  
    Date     Rate     2019     2018  
Convertible Note   12/31/2019       5 %   $ 999,106     $ 999,106  
Less: debt discount   and 12/31/2019               -       -  
Total Convertible notes, net of discount                 $ 999,106     $ 999,106  
                                      
Total                 $ 999,106     $ 999,106  
Less: current portion                   (999,106 )     (999,106 )
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 1,718,750 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) $3.20 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 $1.60 per share. The Warrants have an exercise price of $4.80 per share. In two closings of the Unit Purchase Agreement, the Company issued $5,500,000 in Convertible Notes to the investors. The remaining balance of the Convertible Notes were due to mature on May 31, 2018. The investor agreed to extend the maturity date to December 31, 2019. The note bears interest at the rate of 5% per annum and accrues but is not paid in cash. As of September 30, 2019, the Company had an outstanding obligation pursuant to the Convertible Notes in the amount of $999,106. Accrued interest as of September 30, 2019 was $182,344. During the three and nine months ended September 30, 2019, the interest expense were $12,591 and $37,363, and $19,446 and $68,891 for the three and nine months ended September 30, 2018, respectively.

 

The amortization of debt discount was $0 for the three and nine months ended September 30, 2019, and $0 and $2.3 million for the three and nine months ended September 30, 2018, respectively.

 

Leases

 

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 $1,997. A security deposit of $3,815 has been paid.

 

The Company also assumed a lease in connection with the mining operations in Quebec, Canada. Operating leases are included in operating lease right-of-use assets, operating lease liabilities, and noncurrent operating lease liabilities on the balance sheets.

 

  13  
 

 

MARATHON PATENT GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Condensed Financial Statements

 

Operation lease costs are recorded on a straight-line basis within operating expenses. The Company’s total lease expense is comprised of the following:

 

    For the Three
Months Ended
September 30, 2019
    For the Nine
Months Ended
September 30, 2019
 
Operating leases                
Operating lease cost   $ 26,693     $ 80,004  
Operating lease expense     26,693       80,004  
Short-term lease rent expense     6,465       16,413  
Total rent expense   $ 33,158     $ 96,417  

 

Additional information regarding the Company’s leasing activities as a lessee is as follow:

 

    For the Three
Months Ended
September 30, 2019
    For the Nine
Months Ended
September 30, 2019
 
Operating cash flows from operating leases   $ 26,870     $ 79,184  
Weighted-average remaining lease term – operating leases     1.7       1.7  
Weighted-average discount rate – operating leases     6.5 %     6.5 %

 

As of September 30, 2019, contractual minimal lease payments are as follows:

 

2019   $ 17,768  
2020     97,724  
2021     97,724  
2022     26,652  
Total     239,868  
Less present value discount     (19,232 )
Operating lease liabilities   $ 220,636  

 

Legal Proceedings

 

Feinberg Litigation

 

On March 27, 2018, Jeffrey Feinberg, purportedly 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. The plaintiffs purported to state claims under Sections 11, 12(a)(2) and 15 of the federal Securities Act of 1933 and common law claims for “actual fraud and fraudulent concealment,” constructive fraud, and negligent misrepresentation, seeking unspecified money damages (including punitive damages), as well as costs and attorneys’ fees, and equitable or injunctive relief. On June 15, 2018, the defendants filed a motion to dismiss all claims asserted in the complaint and, on July 27, 2018, the plaintiffs filed an opposition to that motion. The court heard argument on the motion and, on January 15, 2019, the court granted the motion to dismiss, allowing 30 days for the filing of an amended complaint. On February 15, 2019, Jeffrey Feinberg, individually and as trustee of the Jeffrey L. Feinberg Personal Trust, and Terrence K. Ankner, as trustee of the Jeffrey L. Feinberg Family Trust, filed an amended complaint that purports to state the same claims and seeks the same relief sought in the original complaint. On March 7 and 22, 2019, defendants filed motions to dismiss the amended complaint and on April 5, 2019, plaintiffs filed an opposition to those motions. The court heard oral argument on the motions to dismiss on July 9, 2019, and at the conclusion of the argument the court took the motions under submission. The parties are waiting for the court’s rulings on the motions to dismiss and, while the motions have been under submission, no discovery has been taken and there have been no other significant developments in the case.

 

NOTE 6 – Subsequent Events

 

On October 1, 2019, the Company issued 150,000 shares of its common stock to a consultant. The fair value of the common stocks was $262,500.

 

The Company has evaluated subsequent events through the date of 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 except as stated directly above.

 

  14  
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This report on Form 10-Q (“Report”) and other written and oral statements made from time to time by us may contain so-called “forward-looking statements,” all of which are subject to risks and uncertainties. Forward-looking statements can be identified by the use of words such as “expects,” “plans,” “will,” “forecasts,” “projects,” “intends,” “estimates,” and other words of similar meaning. One can identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address our growth strategy, financial results and product and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ from our forward-looking statements. These factors may include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially.

 

Information regarding market and industry statistics contained in this Report is included based on information available to us that we believe is accurate. It is generally based on industry and other publications that are not produced for purposes of securities offerings or economic analysis. We have not reviewed or included data from all sources, and cannot assure investors of the accuracy or completeness of the data included in this Report. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. We do not assume any obligation to update any forward-looking statement. As a result, investors should not place undue reliance on these forward-looking statements.

 

Overview

 

We were incorporated in the State of Nevada on February 23, 2010 under the name Verve Ventures, Inc. On December 7, 2011, we changed our name to American Strategic Minerals Corporation and were engaged in exploration and potential development of uranium and vanadium minerals business. In June 2012, we discontinued our minerals business and began to invest in real estate properties in Southern California. In October 2012, we discontinued our real estate business when our former CEO joined the firm and we commenced our IP licensing operations, at which time the Company’s name was changed to Marathon Patent Group, Inc. On November 1, 2017, we entered into a merger agreement with Global Bit Ventures, Inc. (“GBV”), which is focused on mining digital assets. We have since purchased our cryptocurrency mining machines and established a data center in Canada to mine digital assets. Following the merger, we intended 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 June 28, 2018, the board determined that it was in the best interests of the Company and its shareholders to allow the Amended Merger Agreement 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 our common stock to GBV as a termination fee for canceling the proposed merger between the two companies. The fair value of the common stocks was $2,850,000.

 

Critical Accounting Policies and Estimates

 

Our critical accounting policies and significant estimates are detailed in our 2018 Annual Report. Our critical accounting policies and significant estimates have not changed from those previously disclosed in our 2018 Annual Report, except for those accounting subjects mentioned in the section of the notes to the condensed consolidated financial statements titled Adoption of Recent Accounting Pronouncements.

 

Results of Operations

 

For the Three and Nine Months Ended September 30, 2019 and 2018

 

We generated revenues of $321,716 and $908,175 during the three and nine months ended September 30, 2019 as compared to $338,672 and $1.3 million during the three and nine months ended September 30, 2018. For the three and nine months ended September 30, 2019, this represented a decrease of $16,956 or 5% and $358,966 or 28%. Revenues for the three and nine months ended September 30, 2019 and 2018 were derived primarily from cryptocurrency mining.

 

For the three and nine months ended September 30, 2019, the Company received no revenues from newly-issued settlement and license agreements.

 

Direct cost of revenues during the three and nine months ended September 30, 2019 amounted to $478,811 and $1.5 million and for the three and nine months ended September 30, 2018, the direct cost of revenues amounted to $1.1 million and $2.3 million, respectively. For the three and nine months ended September 30, 2019, this represented a decrease of $653,759 or 58% and $845,870 or 36%, respectively. Direct costs of revenue include depreciation and amortization expenses of the cryptocurrency mining machines and patents, contingent payments to patent enforcement legal costs, patent enforcement advisors and inventors as well as various non-contingent costs associated with enforcing the Company’s patent rights and otherwise in developing and entering into settlement and licensing agreements that generate the Company’s revenue.

 

  15  
 

 

We incurred other operating expenses of $650,764 and $2.0 million for the three and nine months September 30, 2019 and $701,143 and $6.6 million for the three and nine months ended September 30, 2018. For the three and nine months ended September 30, 2019, this represented a decrease of $50,379 or 7% and $4.6 million or 70%, respectively. These expenses primarily consisted of compensation to our officers, directors and employees, professional fees and consulting incurred in connection with the day-to-day operation of our business and break-up fee to GBV.

 

The operating expenses consisted of the following:

 

    Total Other Operating Expenses     Total Other Operating Expenses  
    For the Three Months Ended     For the Nine Months Ended  
    September 30, 2019     September 30, 2018     September 30, 2019     September 30, 2018  
Compensation and related taxes (1)   $ 409,609     $ 137,338       1,224,900       803,309  
Consulting fees (2)     34,000       347,500       84,000       573,286  
Professional fees (3)     91,908       126,446       287,282       1,157,246  
Other general and administrative (4)     115,247       89,859       359,319       1,212,469  
Break-up fee - issuance of shares to GBV (5)     -       -       -       2,850,000  
Total   $ 650,764     $ 701,143     $ 1,955,501     $ 6,596,310  

 

Non-cash other operating expenses for the three and nine months ended September 30, 2019, include non-cash other operating expenses totaling $207,555 and $620,030, and $39,053 and $473,619 for the three and nine months ended September 30, 2018 respectively. Non-cash operating expenses consisted of the following:

 

    Non-Cash Other
Operating Expenses
    Non-Cash Other
Operating Expenses
 
    For the Three Months Ended     For the Nine Months Ended  
    September 30, 2019     September 30, 2018     September 30, 2019     September 30, 2018  
Compensation and related taxes (1)   $ 207,555     $ 39,053     $ 620,030     $ 473,619  
Total   $ 207,555     $ 39,053     $ 620,030     $ 473,619  

 

  (1) Compensation expense and related taxes: Compensation expense includes cash compensation and related payroll taxes and benefits, and non-cash equity compensation expenses. For the three and nine months ended September 30, 2019, compensation expense and related payroll taxes were $409,609 and $1.2 million, an increase of $272,271 or 198% and $421,591 or 52% over the comparable periods in 2018. During the three and nine months ended September 30, 2019, we recognized non-cash employee and board equity-based compensation of $207,555 and $620,030, and $39,053 and $473,619 for three and nine months ended September 30, 2018, respectively.
     
  (2) Consulting fees: For the three and nine months ended September 30, 2019, we incurred consulting fees of $34,000 and $84,000, a decrease of $313,500 or 90% and $489,286 or 85% over the comparable periods in 2018. Consulting fees include both cash and non-cash related consulting fees primarily for investor relations and public relations services as well as other consulting services. The decrease in consulting fees for the three and nine months ended September 30, 2019 compared to the same period in the prior year was primarily due to the consulting fees paid to our executives before their employment.
     
  (3) Professional fees: For the three and nine months ended September 30, 2019 professional fees were $91,908 and $287,282, a decrease of $34,538 or 27% and $869,964 or 75% over the comparable periods in 2018. Professional fees primarily reflect the costs of professional outside accounting fees, legal fees and audit fees. The decrease in professional fees was mainly the result of legal fees and accounting fees related to the merger and expanding our business in crypto currency mining in the period of 2018.
     
  (4) Other general and administrative expenses: For the three and nine months ended September 30, 2019, other general and administrative expenses were $115,247 and $359,319, an increase of $25,388 or 28% and a decrease of $853,150 or 70% over the comparable periods in 2018. General and administrative expenses reflect the other non-categorized operating costs of the Company and include expenses related to being a public company, rent, insurance, technology and other expenses incurred to support the operations of the Company.
     
  (5) Break-up fee – issuance of shares to GBV: For the three and nine months ended September 30, 2018, the Board approved to issue 3,000,000 shares of our common stock to Global Bit Ventures, Inc as a termination fee for canceling the proposed merger between the two companies. The fair value of the common stocks was $2.9 million.

 

Operating Loss

 

We reported operating loss from continuing operations of $807,859 and $2.5 million for the three and nine months ended September 30, 2019 and operating loss of $1.5 million and $7.7 million for the three and nine months ended September 30, 2018.

 

  16  
 

 

Other Expenses

 

Total other income was $53,452 and $168,216 or the three and nine months ended September 30, 2019 and total other income was $154,584 and total other expenses was $758,844 for the three and nine months ended September 30, 2018. The changes were mainly due to the amortization of debt discount related to the notes conversions and change in fair value of the warrant liability in nine months ended 2018.

 

Net Loss Available to Common Shareholders

 

We reported net loss of $754,407 and $2.4 million for the three and nine months ended September 30, 2019 and net loss of $1.3 million and $8.4 million for the three and nine months ended September 30, 2018.

 

Liquidity and Capital Resources

 

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 an accumulated deficit of approximately $104.5 million at September 30, 2019, a net loss of approximately $2.4 million and $2.2 million net cash used in operating activities for the nine months ended September 30, 2019. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. At September 30, 2019, the Company’s cash and cash equivalents balances totaled $1.3 million compared to $2.6 million at December 31, 2018.

 

Net working capital decreased by $3.2 million, to working capital deficit of $2.5 million at September 30, 2019 from working capital of $741,544 at December 31, 2018.

 

Cash used in operating activities was $2.2 million during the nine months ended September 30, 2019 and cash used in operating activities of $7.3 million during the nine months ended September 30, 2018.

 

Cash provided by investing activities was $913,278 during the nine months ended September 30, 2019 and cash used in investing activities of $4.5 million for the nine months ended September 30, 2018.

 

Cash provided by financing activities was $79,817 during the nine months ended September 30, 2019.

 

Based on our current revenue and profit projections, we are uncertain that our existing cash will be sufficient to fund its operations through at least the next twelve months, raising substantial doubt regarding our 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 our operations, through, among other potential sources, our newly effected At The Market Facility with H.C. Wainwright; provided, however, there is no assurance that we will be able to raise such additional funds on acceptable terms, if at all. If we raise additional funds by issuing securities, existing stockholders may be diluted; and
     
  review strategic alternatives.

 

If adequate funds are not available, we may be required to curtail our operations or other business activities or obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to certain technologies or potential markets.

 

Off-balance Sheet Arrangements

 

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our consolidated condensed financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not required for smaller reporting companies.

 

  17  
 

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States. Management assessed the effectiveness of our internal control over financial reporting as of September 30, 2019. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework in the 2013 COSO framework. Based on this assessment, management concluded that our disclosure controls and procedures were not effective.

 

Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, we will implement procedures to assure that the initiation of transactions, the custody of assets and the recording of transactions will be performed by separate individuals.

 

We believe that the foregoing steps if implemented, will help remediate the material weakness identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate. Due to the nature of this material weakness in our internal control over financial reporting, there is more than a remote likelihood that misstatements which could be material to our annual or interim financial statements could occur that would not be prevented or detected.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

 

As part of our ongoing program to implement changes and further improve our internal controls and in conjunction with our Code of Ethics, our independent directors have been working with management to include protocols and measures aimed at ensuring quality of our internal controls. Among those measures is the implementation of a whistleblower hotline, which allows third parties to anonymously report noncompliant activity. The hotline may be accessed as follows:

 

To file a report, use the Client Code “MarathonPG” and pick one of the following options:

 

  Call: 1-877-647-3335
  Click: www.RedFlagReporting.com

 

Changes in Internal Controls.

 

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

Feinberg Litigation

 

On March 27, 2018, Jeffrey Feinberg, purportedly 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. The plaintiffs purported to state claims under Sections 11, 12(a)(2) and 15 of the federal Securities Act of 1933 and common law claims for “actual fraud and fraudulent concealment,” constructive fraud, and negligent misrepresentation, seeking unspecified money damages (including punitive damages), as well as costs and attorneys’ fees, and equitable or injunctive relief. On June 15, 2018, the defendants filed a motion to dismiss all claims asserted in the complaint and, on July 27, 2018, the plaintiffs filed an opposition to that motion. The court heard argument on the motion and, on January 15, 2019, the court granted the motion to dismiss, allowing 30 days for the filing of an amended complaint. On February 15, 2019, Jeffrey Feinberg, individually and as trustee of the Jeffrey L. Feinberg Personal Trust, and Terrence K. Ankner, as trustee of the Jeffrey L. Feinberg Family Trust, filed an amended complaint that purports to state the same claims and seeks the same relief sought in the original complaint. On March 7 and 22, 2019, defendants filed motions to dismiss the amended complaint and on April 5, 2019, plaintiffs filed an opposition to those motions. The court heard oral argument on the motions to dismiss on July 9, 2019, and at the conclusion of the argument the court took the motions under submission. The parties are waiting for the court’s rulings on the motions to dismiss and, while the motions have been under submission, no discovery has been taken and there have been no other significant developments in the case.

 

  18  
 

 

Other than as disclosed herein, we know of no other material, active or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceedings or pending litigation other than in the normal course of business.

 

Item 1A. Risk Factors.

 

Not required for smaller reporting companies.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

Not applicable.

 

Item 6. Exhibits.

 

31.1   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101.ins   XBRL Instance Document**
101.sch   XBRL Taxonomy Schema Document**
101.cal   XBRL Taxonomy Calculation Document**
101.def   XBRL Taxonomy Linkbase Document**
101.lab   XBRL Taxonomy Label Linkbase Document**
101.pre   XBRL Taxonomy Presentation Linkbase Document**

 

* Furnished herewith

** Filed herein

 

  19  
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: November 8, 2019

 

  MARATHON PATENT GROUP, INC.
     
  By: /s/ Merrick Okamoto
  Name:  Merrick Okamoto
  Title: Chief Executive Officer
    (Principal Executive Officer)
     
  By: /s/ David Lieberman
  Name: David Lieberman
  Title: Chief Financial Officer and Director
    (Principal Financial and Accounting Officer)

 

  20  
 

 

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