MARATHON DIGITAL HOLDINGS, INC. - Quarter Report: 2014 March (Form 10-Q)

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Nevada		333-171214		01-0949984
(State or other jurisdiction of incorporation)		(Commission File Number)		(IRS Employer Identification No.)
2331 Mill Road, Suite 100, Alexandria, VA				22314
(Address of principal executive offices)				(Zip Code)

Large accelerated filer	[_]	Accelerated filer	[_]
Non-accelerated filer (Do not check if smaller reporting company)	[_]	Smaller reporting company	[x]

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		Page No.
PART I. - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets	F-3
	Consolidated Statements of Operations (unaudited)	F-4
	Consolidated Statements of Cash Flows (unaudited)	F-5
	Notes to Unaudited Consolidated Financial Statements	F-6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	8
Item 4.	Controls and Procedures	9
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	9
Item 1A	Risk Factors	9
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	10
Item 3.	Defaults upon Senior Securities	10
Item 4.	Mine Safety Disclosures	10
Item 5.	Other Information	10
Item 6.	Exhibits	11

 

 

On October 1, 2012, the shareholders holding a majority of the Company’s voting capital had voted and authorized the Company to (i) change the name of the Company to Marathon Patent Group, Inc. (the “Name Change”) and (ii) effectuate a reverse stock split of the Company’s common stock by a ratio of 3-for-2 (the “Reverse Split”) within one year from the date of approval of the stockholders of the Company.  The Board of Directors approved the Name Change and the Reverse Split on October 1, 2012. The Board of Directors determined the name “Marathon Patent Group, Inc.” better reflects the long-term strategy in exploring other opportunities and the identity of the Company going forward.  On February 15, 2013, the Company filed the Certificate of Amendment with the Secretary of State of the State of Nevada in order to effectuate the Name Change. On May 31, 2013, shareholders of record holding a majority of the outstanding voting capital of the Company approved a reverse stock split of the Company’s issued and outstanding common stock by a ratio of not less than one-for-five and not more than one-for-fifteen at any time prior to April 30, 2014, with such ratio to be determined by the Company’s Board of Directors, in its sole discretion. On June 24, 2013, the reverse stock split ratio of one (1) for thirteen (13) basis was approved by the Board of Directors. On July 18, 2013, the Company filed a certificate of amendment to its Amended and Restated Articles of Incorporation with the Secretary of State of the State of Nevada in order to effectuate a reverse stock split of the Company’s issued and outstanding common stock, par value $0.0001 per share on a one (1) for thirteen (13) basis. All share and per share values for all periods presented in the accompanying consolidated financial statements are retroactively restated for the effect of the reverse stock split.

Patent license revenue from enforcement activities is considered United States revenue as payments are for licenses for United States operations irrespective of the location of the licensee's or licensee's parent home domicile. As of March 31, 2014, one customer accounted for 100% of the Company’s total accounts receivable-net. Revenues from two customers accounted for approximately 100% of the Company’s revenues for the three months ended March 31, 2014.

 

Available for sale securities are carried at fair value, with changes in unrealized gains or losses are recognized as an element of comprehensive income based on changes in the fair value of the security. Once liquidated, realized gains or losses on the sale of marketable securities available for sale are reflected in the net income (loss) for the period in which the security was liquidated.

	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.

		Fair Value Measurements Using:
		Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Marketable securities – available for sale, net of discount for effect of restriction		$	-			$	-			$	6,250

 

		For the Three Months ended March 31, 2014				For the Three Months ended March 31, 2013
Loss from continuing operations		$	(281,606	)		$	(714,316	)
Income  from discontinued operations		$	-			$	108,780
Denominator:
Denominator for basic and diluted loss per share
(weighted-average shares)			5,489,593				3,503,565
Loss per common share, basic and diluted:
Loss from continuing operations		$	(0.05	)		$	(0.20	)
Income from discontinued operations		$	-			$	0.03

 

	1.	Significant underperformance relative to expected historical or projected future operating results;
	2.	Significant changes in the manner of use of the acquired assets or the strategy for the overall business; and
	3.	Significant negative industry or economic trends.

CyberFone Systems owns a foundational patent portfolio that includes claims that provide specific transactional data processing, telecommunications, network and database inventions, including financial transactions. The portfolio, which has a large and established licensing base, consists of ten United States patents and 27 foreign patents and one patent pending. The patent rights that cover digital communications and data transaction processing are foundational to certain applications in the wireless, telecommunications, financial and other industries. IP Navigation Group LLC (“IP Nav”), a Company founded by Erich Spangenberg and associated with the CyberFone Sellers will continue to support and manage the portfolio of patents and retain a contingent participation interest in all recoveries.  IP Nav provides patent monetization and support services under an existing agreement with CyberFone Systems.

Intangible assets		$	1,135,512
Goodwill			2,144,488
Net purchase price		$	3,280,000

		March 31, 2014				December 31, 2013
Assets:
Assets of discontinued operations		$	-			$	-
Liabilities:
Accounts payables and accrued expenses		$	30,664			$	30,664
Liabilities of discontinued operations		$	30,664			$	30,664

 

		For the Three Months Ended March 31, 2014				For the Three Months Ended March 31, 2013
Revenues – real estate		$	-			$	986,951
Cost of sales- real estate			-				(817,483	)
Gross profit			-				169,468
Operating and other non-operating expenses			-				(60,688	)
Income from discontinued operations, net of tax		$	-			$	108,780

		March 31, 2014				December 31, 2013
Patent rights		$	7,204,937			$	7,204,937
Accumulated amortization			(1,500,925)				(1,047,278)
Intangible assets, net		$	5,704,012			$	6,157,659

2014		$	1,265,458
2015			1,484,209
2016			944,035
2017			639,626
2018			379,691
2019 and thereafter			990,993
Total		$	5,704,012

		Number of Warrants				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (Years)
Balance at December 31, 2013			708,260			$	6.66				2.74
Granted			-				-				-
Cancelled			(23,077)				-				-
Forfeited			-				-				-
Exercised			-				-				-
Balance at March 31, 2014			685,183			$	6.66				2.31
Warrants exercisable at March 31, 2014			678,773			$	6.67
Weighted average fair value of warrants granted during the period ended						$	-

For the three months ended March 31, 2014 the Company recorded stock-based compensation of $354,132, stock based consulting expense of $128,787 and stock-based legal fees of $5,750 related to vested options. At March 31, 2014, there was a total of $3,071,551 of unrecognized compensation expense related to these non-vested option-based compensation arrangements discussed above.

 

		Number of Options				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (Years)
Balance at December 31, 2013			1,338,076				5.83				5.21
Granted			-				-				-
Exercised			-				-				-
Forfeited			(190,384	)			5.90				-
Cancelled			-				-				-
Balance outstanding at March 31, 2014			1,147,692			$	5.85				4.61
Options exercisable at March 31, 2014			242,580			$	6.13
Options expected to vest			905,112
Weighted average fair value of options granted during the period						$	-

On November 13, 2013, the Company entered into a two year consulting agreement with Jeff Feinberg (the “Feinberg Agreement”), pursuant to which we agreed to grant Mr. Feinberg a restricted stock unit (“RSU”) for 100,000 shares of our restricted common stock.  The RSU vests in two installments:  50% on the one-year anniversary of the Feinberg Agreement (the “First Vesting”) and the remaining 50% on the second year anniversary of the Feinberg Agreement (the “Second Vesting”).  The shares of common stock will be issued upon Mr. Feinberg’s meeting each of the two vesting requirements.  During the first six months, the Feinberg Agreement can be terminated without any vesting under certain circumstances described in the Feinberg Agreement.  If the Feinberg Agreement is terminated following the First Vesting but prior to the Second Vesting, the RSU is subject to acceleration of the Second Vesting under certain circumstances also described in the Feinberg Agreement.  Mr. Feinberg is the trustee of The Feinberg Family Trust and holds voting and dispositive power over the shares held by The Feinberg Family Trust, which is a 10% beneficial owner of our common stock.  The Company valued the RSU at $570,000 or $5.70 per share. During the three months ended March 31, 2014, the Company recorded stock based consulting of $71,250. The remaining balance which is included in prepaid expenses at March 31, 2014 and December 31, 2013 amounted to $461,542 and $532,792, respectively, and will be amortized over the remaining term of the agreement.

TechDev and Mr. Erich Spangenberg (the founder of IP Nav) and his spouse Audrey Spangenberg have filed a Schedule 13G and are deemed to be affiliates of the Company.

On December 22, 2013, in connection with a settlement and license agreement, the Company agreed to settle and release another defendant for past and future use of the Company’s patents, whereby the defendant agreed to assign and transfer 2 U.S. patents and rights to the Company. The Company valued the two patents at an aggregate of $700,000.

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with US GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company accounts for the impairment or disposal of long-lived assets according to the ASC 360 “Property, Plant and Equipment”.  The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of long-lived assets, including mineral rights, may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated future net undiscounted cash flows expected to be generated by the asset. When necessary, impaired assets are written down to their estimated fair value based on the best information available. Estimated fair value is generally based on either appraised value or measured by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset.

We incurred operating expenses of $1,951,254 and $714,377 for the three months ended March 31, 2014 and 2013, respectively, an increase of $1,236,877 or 173%. These expenses primarily consisted of amortization of patents, general expenses, compensation to our officers, directors and employees, professional fees and consulting incurred in connection with the day to day operation of our business. The operating expenses include non-cash expenses totaling $1,135,691, which are discussed below and in detail as seen under the Liquidity and Capital Resources – Operating Activities section. 

 

(3)

Consulting fees: For the three months ended March 31, 2014 and 2013, we incurred consulting fees of $428,107 and $45,224, respectively, an increase of $382,883 or 847%. Consulting fees include both cash and non-cash related consulting fees primarily for investor relations and public relations services but also for other consulting services.  During the three months ended March 31, 2014 and 2013, we recognized stock based consulting of $310,351 and $12,472, respectively.

(4)

Professional fees:  For the three months ended March 31, 2014 and 2013, professional fees were $256,855 and $158,472, respectively, an increase of $98,383 or 62%.  Professional fees primarily reflect the costs of professional outside accounting fees, legal fees and audit fees.  The increase in professional fees for the three months ended March 31, 2014 over that of the prior period are predominately related to professional outside accounting fees and audit fees resulting from a substantially higher level of activity in the Company’s continuing patent acquisition and monetization operations and also a higher level of activity as a public company. Additionally, during the three months ended March 31, 2014 and 2013, professional fees included stock based legal fees of $5,750 and $0, respectively.

 

	(5)	Travel and related expenses: Travel expenses were $32,808 and $28,317 during the three months ended March 31, 2014 and 2013, respectively, an increase of $4,491 or 16%. This increase during the three months ended March 31, 2014 is due to an increase in business development related travel.
	(6)	Other general and administrative expenses: For the three months ended March 31, 2014 and 2013, other general and administrative expenses were $49,850 and $38,142, respectively, an increase of $11,708 or 31%. General and administrative expenses reflect the other operating costs of the Company and include certain public relations costs and other expenses related to being a public company, rent and other expenses incurred to support the operations of the Company.  The increase in general and administrative costs in the three months ended March 31, 2014  resulted from increased rent, internet access, telephone and other operating expenses over the three months ended March 31, 2013. This increase during the three month period 2014 is due to the continued development of our operations.

 

		For the Three Months ended March 31, 2014				For the Three Months ended March 31, 2013
Revenues – real estate		$	-			$	986,951
Cost of sales – real estate			-				(817,483	)
Gross profit			-				169,468
Operating and other non-operating expenses			-				(60,688	)
Gain on sale of assets of discontinued operations			-				-
Income (loss) from discontinued operations		$	-			$	108,780

 

Not required for smaller reporting companies.

None.

None.

 

10.1	Patent rights agreement between the Company and RPX Corporation.*+
10.2	Patent license agreement between Relay IP, Inc. and RPX Corporation.*+
10.3	Patent license agreement between Sampo IP, LLC and RPX Corporation.*+
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

 

	MARATHON PATENT GROUP, INC.
By:	/s/ Doug Croxall
	Name: Doug Croxall
	Title: Chief Executive Officer and Chairman
	(Principal Executive Officer)
By:	/s/ John Stetson
	Name: John Stetson
	Title: Interim Chief Financial Officer
	(Principal Financial and Accounting Officer)