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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2016

 

or

 

o         TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                to              

 

Commission file number 001-36555

 

MARATHON PATENT GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

 

01-0949984

(State or other jurisdiction of Incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

11100 Santa Monica Blvd. Ste. 380, Los Angeles, CA

 

90025

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code (703) 232-1701

 

Securities registered under Section 12(b) of the Exchange Act:

 

Common Stock $0.0001 par value per share

 

The NASDAQ Stock Market LLC

(Title of class)

 

(Name of each exchange on which registered)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x

 

Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) 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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o

 

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this From 10-K. o

 

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

 

Large accelerated filer o

 

Accelerated filer o

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No x

 

As of June 30, 2016, the aggregate market value of voting stock held by non-affiliates of the registrant, based on the closing sales price of common stock, par value $0.0001 per share (the “Common Stock”) on June 30, 2016, was approximately $37.6 million.

 

As of March 15, 2017, the registrant had 19,302,472 shares of Common Stock outstanding.

 

 

 



Table of Contents

 

Table of Contents

 

 

 

Page

 

 

 

PART I

 

 

Item 1.

Business

2

Item 1A.

Risk Factors

5

Item 1B.

Unresolved Staff Comments

16

Item 2.

Properties

16

Item 3.

Legal Proceedings

17

Item 4.

Mine Safety Disclosures

17

 

 

 

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

18

Item 6.

Selected Financial Data

24

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 8.

Financial Statements and Supplementary Data

F-1

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

35

Item 9A.

Controls and Procedures

35

Item 9B.

Other Information

36

 

 

 

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

37

Item 11.

Executive Compensation

41

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

44

Item 13.

Certain Relationships and Related Transactions, and Director Independence

46

Item 14.

Principal Accounting Fees and Services

47

 

 

 

PART IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

48

Item 16.

Form 10-K Summary

49

Item 17.

Undertakings

49

 



Table of Contents

 

MARATHON PATENT GROUP, INC.

 

FORWARD LOOKING STATEMENTS

 

This Annual Report on Form 10-K 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.

 

These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors” and the risks set out below, any of which may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks include, by way of example and not in limitation:

 

·                          The uncertainty of profitability;

 

·                          Risks related to failure to obtain adequate financing on a timely basis and on acceptable terms; and

 

·                          Other risks and uncertainties related to our business plan and business strategy.

 

This list is not an exhaustive list of the factors that may affect any of our forward-looking statements. These and other factors should be considered carefully and readers should not place undue reliance on our forward-looking statements. Forward looking statements are made based on management’s beliefs, estimates and opinions on the date the statements are made and we undertake no obligation to update forward-looking statements if these beliefs, estimates and opinions or other circumstances should change. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States we do not intend to update any of the forward-looking statements to conform these statements to actual results.

 

Information regarding market and industry statistics contained in this Annual Report on Form 10-K 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. 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. As a result, investors should not place undue reliance on these forward-looking statements.

 

As used in this annual report, the terms “we”, “us”, “our”, the “Company”, “Marathon Patent Group, Inc.” and “MARA” mean Marathon Patent Group, Inc. and its subsidiaries, unless otherwise indicated.

 

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PART I

 

ITEM 1. BUSINESS

 

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 CEO joined the firm and we commenced our current business, at which time the Company’s name was changed to Marathon Patent Group, Inc.

 

We acquire patents and patent rights from owners or other ventures and seek to monetize the value of the patents through litigation and licensing strategies, alone or with others.  Part of our acquisition strategy is to acquire or invest in patents and patent rights that cover a wide-range of subject matter which allows us to seek the benefits of a diversified portfolio of assets in differing industries and countries.  Generally, the patents and patent rights that we seek to acquire have large identifiable targets who are or have been using technology that we believe infringes our patents and patent rights.  We generally monetize our portfolio of patents and patent rights by entering into license discussions, and if that is unsuccessful, initiating enforcement activities against any infringing parties with the objective of entering into comprehensive settlement and license agreements that may include the granting of non-exclusive retroactive and future rights to use the patented technology, a covenant not to sue, a release of the party from certain claims, the dismissal of any pending litigation and other terms.  Our strategy has been developed with the expectation that it will result in a long-term, diversified revenue stream for the Company. As of December 31, 2016, on a consolidated basis, our operating subsidiaries owned 515 patents and had economic rights to over 10,000 additional patents, both of which include U.S. patents and certain foreign counterparts, covering technologies used in a wide variety of industries.

 

Our principal office is located at 11100 Santa Monica Blvd., Suite 380, Los Angeles, CA 90025. Our telephone number is (703) 232-1701. Our internet address is www.marathonpg.com. Information on our website is not incorporated into this report.

 

Industry Overview and Market Opportunity

 

Under U.S. law, an inventor or patent owner has the right to seek to exclude others from making, selling or using their patented invention and to seek damages for infringement. Unfortunately, it is often the case that infringers are unwilling, at least initially, to negotiate or pay reasonable royalties for their unauthorized use of patents and some prefer to contest allegations of patent infringement. Inventors and/or patent holders, without sufficient legal, financial and/or expert technical resources to commence or continue legal action are at a disadvantage as they may be perceived to lack credibility in dealing with potential licensees and as a result, are often ignored. As a result of the common reluctance of patent infringers to negotiate and ultimately obtain a patent license for the use of patented technologies, patent licensing and enforcement often begins with the filing of patent enforcement litigation. However, the majority of patent infringement litigations settle out of court based on the strength of the patent claims, validity, and persuasive evidence and clarity that the patent is being infringed.

 

Business Model and Strategy — Overview

 

Our business encompasses two main elements: (1) the identification, analysis and acquisition of patents and patent rights; and (2) the generation of revenue from the acquired patents or patent rights.  Typically, we compensate the patent holder with some combination of cash, equity, earn-out or debt in consideration for the patents or patent rights or resolution of claims.

 

Key Factors of Our Business Model

 

Diversification

 

As of December 31, 2016, on a consolidated basis, our operating subsidiaries owned 515 patents and had economic rights to over 10,000 additional patents, both of which include U.S. patents and certain foreign counterparts, covering technologies used in a wide variety of industries. These acquisitions continue to expand and diversify our revenue generating opportunities. We intend to add more patents and patent applications to our portfolio for the purpose of generating additional revenues from assertion of claims against infringers.  By owning multiple patent assets, we seek to continue to be diversified in both the types of patents that we own as well as the frequency and size of the monetization revenue generated by such patents.  This diversification prevents us from having to rely on a single patent, or patent family, to generate our revenue. Additionally, by commencing multiple settlement and licensing campaigns with our different patent assets, we intend to generate frequent revenue events through the execution of multiple settlement and licensing agreements.  Finally, we have commenced operations in Germany and France and are considering other venues as well, giving the Company diversification across different countries and increasing the damages footprint for our portfolios with counterparts in different countries.  Our diversification of patent assets and revenue generation allows us to avoid the binary risk that can be associated with owning a single patent asset that typically generates a single stream of licensing revenue.

 

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Patent Acquisition Opportunities

 

We have worked to establish a supply of patent acquisition opportunities with patent brokers and dealers, with individual inventors and patent owners, as well as with large corporations (including Fortune 500 corporations) who own patents.  Service providers, such as patent prosecution and litigation attorneys and patent licensing professionals have also become key providers of patent opportunities.   We intend to continue to expand our relationships for patent acquisitions and expand the industries to which our patents apply.

 

Patent Portfolio Evaluation

 

We follow a disciplined due diligence approach when analyzing potential patent acquisitions.  Each opportunity to acquire a patent can vary based on the amount and type of patent assets, the complexity of the underlying inventions and the analysis of the industries in which the invention is being used.  Our portfolio evaluation involves an initial screening with our analytics platform, Opus Analytics, followed by internal technical analysis, third-party experts and damages assessment.

 

In September 2014, we acquired a limited field of use exclusive license to use Opus Analytics from IP Navigation Group, LLC (“IP Nav”).  Opus Analytics is a proprietary patent analytics tool that we use extensively to review and analyze patent acquisition opportunities.

 

We enter potential patent acquisition opportunities into Opus Analytics to evaluate patent decisions.  The algorithm underlying Opus Analytics is comprised of approximately 120 factors, and it has been continuously updated using actual observations.  After evaluation of the patents by Opus Analytics, the Company reviews subtleties in the language of a patent’s recorded interactions with the patent office and evaluates prior art and literature. This evaluation can make significant differences in the potential monetization revenue derived from a patent or patent portfolio. We have developed proprietary processes and procedures for identifying problem areas and evaluating the strength of a patent portfolio before the decision is made to allocate resources to an acquisition or to launch an effective monetization effort, using the judgment and skill of our personnel.

 

We often also seek to use third-party experts in the evaluation and due diligence of patent assets.  The combination of our management team and third-party patent attorneys, intellectual property licensing experts and technology engineers allow us to conduct our tailored patent acquisition and evaluation processes and procedures.  We evaluate both the types and strength of the claims of the patent as well as the file history of the patent.

 

Finally, we identify potential infringers; industries within which the potential infringers exist; longevity of the patented technology; and a variety of other factors that directly impact the magnitude and potential success of a licensing and enforcement program.

 

Competition

 

While there has previously been a noticeable proliferation of patent monetization firms seeking to enter the business, both public and private, there has been a visible decline over the last 12 months in the competition for purchasing patents as a result of a series of judicial rulings and certain components of the American Invents Act (“AIA”), both of which have made patent enforcement and licensing in the United States more expensive and risky. This has had the effect of reducing the purchase prices and making acquisitions less competitive, providing the Company with considerable opportunities for new acquisitions, both in the United States and internationally.

 

Customers

 

Currently, we define customers as those companies that procure licenses to our patents, to satisfy legal claims of infringement against commercial products or services they produce or sell. Our licensees generally obtain non-recurring, non-exclusive, non-assignable license agreements in return for a single payment upon execution of the license agreement.  However, in certain cases, such as the licenses for our Medtech portfolio, we may enter into licenses with recurring royalty payments that continue for a defined period.

 

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Intellectual Property and Patent Rights

 

Our intellectual property is primarily comprised of issued patents, patent applications and contract rights to patents.  We began to generate revenue from patents during the second quarter of 2013.  As of December 31, 2016, the median expiration date for patents in our portfolio is August 28, 2020 and the latest expiration date for a patent in our portfolio is July 29, 2033.  A summary of our patent portfolios is as follows:

 

 

 

Number

 

Earliest

 

Median

 

Latest

 

 

 

 

of

 

Expiration

 

Expiration

 

Expiration

 

 

Subsidiary

 

Patents

 

Date

 

Date

 

Date

 

Subject Matter

Bismarck IP Inc.

 

17

 

Expired

 

02/05/17

 

01/22/18

 

Communication and PBX equipment

Clouding Corp.

 

59

 

Expired

 

06/08/21

 

03/29/29

 

Network and data management

CRFD Research, Inc.

 

5

 

05/25/21

 

09/17/21

 

08/19/23

 

Web page content translator and device-to-device transfer system

Cyberfone Systems, LLC

 

30

 

Expired

 

06/07/20

 

06/07/20

 

Telephony and data transactions

Dynamic Advances, LLC

 

4

 

Expired

 

09/20/21

 

03/06/23

 

Natural language interface

E2E Processing, Inc.

 

4

 

04/27/20

 

11/17/23

 

07/18/24

 

Manufacturing schedules using adaptive learning

Hybrid Sequence IP, Inc.

 

2

 

Expired

 

07/07/17

 

07/17/17

 

Asynchronous communications

IP Liquidity Ventures, LLC

 

3

 

Expired

 

Expired

 

Expired

 

Pharmaceuticals / tire pressure systems

Loopback Technologies, Inc.

 

9

 

Expired

 

12/05/19

 

08/27/22

 

Automotive

Magnus IP

 

62

 

01/28/22

 

09/29/24

 

12/09/31

 

Network Management/Connected Home Devices

Medtech Group

 

81

 

Expired

 

07/12/19

 

08/09/29

 

Medical technology

Motheye Technologies

 

1

 

06/07/21

 

06/07/21

 

06/07/21

 

Optical Networking

Munitech IP

 

170

 

9/16/18

 

6/21/26

 

5/29/32

 

W-CDMA and GSM cellular technology

Relay IP, Inc.

 

1

 

Expired

 

Expired

 

Expired

 

Multicasting

Sampo IP, LLC

 

3

 

03/13/18

 

12/01/19

 

11/16/23

 

Centrifugal communications

Sarif Biomedical LLC

 

4

 

Expired

 

Expired

 

Expired

 

Microsurgery equipment

Signal IP, Inc.

 

7

 

Expired

 

08/28/20

 

08/06/22

 

Automotive

TLI Communications, LLC

 

6

 

06/17/17

 

06/17/17

 

06/17/17

 

Telecommunications

Traverse Technologies

 

16

 

02/27/23

 

06/05/29

 

07/29/33

 

Li-Ion Battery/High Capacity Electrodes

Vantage Point Technology, Inc.

 

31

 

Expired

 

11/12/17

 

03/09/18

 

Computer networking and operations

 

 

 

 

Median

 

08/28/20

 

 

 

 

 

In addition to the patents set forth in this table, the Company’s subsidiary, PG Technologies S.a.r.l., has an exclusive worldwide license to monetize more than 10,000 patents in a single industry vertical, owned by a Fortune 50 global firm.

 

Patent Enforcement Litigation

 

We are involved in numerous ongoing enforcement proceedings alleging infringement of patent rights in numerous jurisdictions, both within the United States and internationally.  As of December 31, 2016, we were involved in seven enforcement actions in three different districts, as set forth below:

 

United States

 

 

District of Delaware

 

5

Central District of California

 

1

Eastern District of Michigan

 

1

 

Research and Development

 

We have not expended funds for research and development costs.

 

Employees

 

As of December 31, 2016, we had 15 full-time employees, which includes 5 in our 3D Nanocolor Corp. (“3D Nano”) subsidiary.   We believe our employee relations to be good.

 

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ITEM 1A. RISK FACTORS

 

There are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. If any of these risks actually occur, our business, financial condition or results of operation may be materially adversely affected. In such case, the trading price of our Common Stock could decline and investors could lose all or part of their investment.

 

Risks Related to Our Company

 

We have changed the focus of our business to acquiring patents and patent rights and monetizing the value of those assets through enforcement campaigns that are expected to generate revenue.  We may not be able to successfully monetize the patents that we acquire and thus we may fail to realize all of the anticipated benefits of such acquisitions.

 

There is no assurance that we will be able to continue to successfully acquire, develop or monetize our patent portfolio. The acquisition of patents could fail to produce anticipated benefits or there could be other adverse effects that we do not currently foresee. Failure to successfully monetize our patents would have a material adverse effect on our business, financial condition and results of operations.

 

In addition, the acquisition of patent portfolios is subject to a number of risks, including, but not limited to the following:

 

·                  There is a significant time lag between acquiring a patent portfolio and recognizing revenue from such patent asset. During such time lag, substantial amounts of costs are likely to be incurred that could have a negative effect on our results of operations, cash flows and financial position;

·                  The monetization of a patent portfolio is a time consuming and expensive process that may disrupt our operations. If our monetization efforts are not successful, our results of operations could be harmed. In addition, we may not achieve anticipated synergies or other benefits from such acquisition; and

·                  We may encounter unforeseen difficulties with our business or operations in the future that may deplete our capital resources more rapidly than anticipated. As a result, we may be required to obtain additional working capital in the future through public or private debt or equity financings, borrowings or otherwise. If we are required to raise additional working capital in the future, such financing may be unavailable to us on favorable terms, if at all, or may be dilutive to our existing stockholders. If we fail to obtain additional working capital, as and when needed, such failure could have a material adverse impact on our business, results of operations and financial condition.

 

Therefore, there is no assurance that the monetization of our patent portfolios will generate enough revenue to recoup our investment.

 

We presently rely upon the patent assets we acquire from other patent owners. If we are unable to monetize such assets and generate revenue and profit through those assets or by other means, there is a significant risk that our business would fail.

 

When we commenced our current line of business in 2012, we acquired a portfolio of patent assets from Sampo IP, LLC (“Sampo”), a company affiliated with our Chief Executive Officer, Douglas Croxall, from which we have generated revenue from enforcement activities and for which we plan to continue to generate enforcement related revenue.  On April 16, 2013, we acquired a patent from Mosaid Technologies Incorporated, a Canadian corporation. On April 22, 2013, we acquired a patent portfolio through a merger between our wholly-owned subsidiary, CyberFone Acquisition Corp., a Texas corporation and CyberFone Systems LLC, a Texas limited liability company (“CyberFone Systems”). In June 2013, in connection with the closing of a licensing agreement with Siemens Technology, we acquired a patent portfolio from that company.  In September 2013, we acquired a portfolio from TeleCommunication Systems and an additional portfolio from Intergraph Corporation.  In October 2013, we acquired a patent portfolio from TT IP, LLC.  In December 2013, we engaged in three transactions: (i) in connection with a licensing agreement with Zhone, we acquired a portfolio of patents from that company; (ii) we acquired a patent portfolio from Delphi Technologies, Inc.; and (iii) in connection with a settlement and license agreement, we agreed to settle and release a defendant for past and future use of our patents, whereby the defendant agreed to assign and transfer two U.S. patents and rights to us.  In May 2014, we acquired ownership rights of Dynamic Advances, LLC, a Texas limited liability company, IP Liquidity Ventures, LLC, a Delaware limited liability company and Sarif Biomedical, LLC, a Delaware limited liability company, all of which hold patent portfolios or contract rights to the revenue generated from patent portfolios. In June 2014, we acquired Selene Communication Technologies, LLC, which holds multiple patents in the search and network intrusion field.  In August 2014, we acquired patents from Clouding IP LLC, with such patents related to network and data management technology. In September 2014, we acquired TLI Communications, which owns a single patent in the telecommunication field. In October 2014, we acquired three patent portfolios from MedTech Development, LLC, which owns medical technology patents. In June 2016, we acquired two patent portfolios from Siemens covering W-CDMA and GSM cellular technology. In July 2016, we acquired a patent portfolio from Siemens covering internet-of-things technology. In August 2016, entered into two transactions.  In the first, we acquired a patent portfolio from CPT IP Holdings, LLC covering battery technology and in the second, we entered into a Patent Funding and Exclusive License Agreement with a Fortune 50 company to monetize more than 10,000 patents in a single industry vertical. In September 2016, we acquired a patent from Cirrex Systems, LLC covering LED technology. We plan to generate revenues from our acquired patent portfolios.  However, if our efforts to generate revenue from these assets fail, we will have incurred significant losses and may be unable to acquire additional assets. If this occurs, our business would likely fail.

 

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We have economic interests in patent portfolios that the Company does not control and the decision regarding the timing and amount of licenses are held by third parties, which could lead to outcomes materially different than what the Company intended.

 

The Company owns contract rights to two patent portfolios over which it does not exercise control and cannot determine when and if, and if so, for how much, the patent owner licenses the patents.  This could lead to situations where we have dedicated resources, time and money to portfolios that, despite the best interests of the Company, provide little or no return on our investment.  In these situations, the Company would record a loss on its investment and incur losses that contribute to the overall performance of the Company and could have a material adverse impact on its financial condition.

 

Failure to effectively manage our growth could place strains on our managerial, operational and financial resources and could adversely affect our business and operating results.

 

Our growth has placed, and is expected to continue to place, a strain on our limited managerial, operational and financial resources and systems. Further, as our subsidiary companies’ businesses grow, we will be required to continue to manage multiple relationships. Any further growth by us or our subsidiary companies, or an increase in the number of our strategic relationships, may place additional strain on our managerial, operational and financial resources and systems. Although we may not grow as we expect, if we fail to manage our growth effectively or to develop and expand our managerial, operational and financial resources and systems, our business and financial results would be materially harmed.

 

We initiate legal proceedings against potentially infringing companies in the normal course of our business and we believe that extended litigation proceedings would be time-consuming and costly, which may adversely affect our financial condition and our ability to operate our business.

 

To monetize our patent assets, we generally initiate legal proceedings against potential infringing companies, pursuant to which we may allege that such companies infringe on one or more of our patents. Our viability could be highly dependent on the outcome of the litigation, and there is a risk that we may be unable to achieve the results we desire from such litigation, which failure would substantially harm our business.  In addition, the defendants in the litigations are likely to be much larger than us and have substantially more resources than we do, which could make our litigation efforts more difficult and impact the duration of the litigation which would require us to devote our limited financial, managerial and other resources to support litigation that may be disproportionate to the anticipated recovery.

 

We anticipate that these legal proceedings may continue for several years and may require significant expenditures for legal fees and other expenses. Disputes regarding the assertion of patents and other intellectual property rights are highly complex and technical. Once initiated, we may be forced to litigate against others to enforce or defend our patent rights or to determine the validity and scope of other party’s patent rights. The defendants or other third parties involved in the lawsuits in which we are involved may allege defenses and/or file counterclaims or commence re-examination proceedings by patenting issuance authorities in an effort to avoid or limit liability and damages for patent infringement, or declare our patents to be invalid or non-infringed. If such defenses or counterclaims are successful, they may preclude our ability to derive monetization revenue from the patents we own. A negative outcome of any such litigation, or an outcome which affects one or more claims contained within any such litigation, could materially and adversely impact our business. Additionally, we anticipate that our legal fees and other expenses will be material and will negatively impact our financial condition and results of operations and may result in our inability to continue our business.

 

Variability in intellectual property laws may adversely affect our intellectual property position.

 

Intellectual property laws, and patent laws and regulations have been subject to significant variability either through administrative or legislative changes to such laws or regulations or changes or differences in judicial interpretation, and it is expected that such variability will continue to occur. Additionally, intellectual property laws and regulations differ among countries. Variations in the patent laws and regulations or in interpretations of patent laws and regulations in the United States and other countries may diminish the value of our intellectual property and may change the impact of third-party intellectual property on us. Accordingly, we cannot predict the scope of patents that may be granted to us, the extent to which we will be able to enforce our patents against third parties, or the extent to which third parties may be able to enforce their patents against us.

 

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We may seek to internally develop additional new inventions and intellectual property, which would take time and be costly. Moreover, the failure to obtain or maintain intellectual property rights for such inventions would lead to the loss of our investments in such activities.

 

We may in the future seek to engage in commercial business ventures or seek internal development of new inventions or intellectual property. These activities would require significant amounts of financial, managerial and other resources and would take time to achieve. Such activities could also distract our management team from its present business initiatives, which could have a material and adverse effect on our business. There is also the risk that such initiatives may not yield any viable new business or revenue, inventions or technology, which would lead to a loss of our investment in such activities.

 

In addition, even if we are able to internally develop new inventions, in order for those inventions to be viable and to compete effectively, we would need to develop and maintain, and we would be heavily reliant upon, a proprietary position with respect to such inventions and intellectual property. However, there are significant risks associated with any such intellectual property we may develop principally including the following:

 

·                                          patent applications we may file may not result in issued patents or may take longer than we expect to result in issued patents;

·                                          we may be subject to interference proceedings;

·                                          we may be subject to opposition proceedings in the U.S. or foreign countries;

·                                          any patents that are issued to us may not provide meaningful protection;

·                                          we may not be able to develop additional proprietary technologies that are patentable;

·                                          other companies may challenge patents issued to us;

·                                          other companies may have independently developed and/or patented (or may in the future independently develop and patent) similar or alternative technologies, or duplicate our technologies;

·                                          other companies may design around technologies we have developed; and

·                                          enforcement of our patents would be complex, uncertain and very expensive.

 

We cannot be certain that patents will be issued as a result of any future patent applications, or that any of our patents, once issued, will provide us with adequate protection from competing products. For example, issued patents may be circumvented or challenged, declared invalid or unenforceable or narrowed in scope. In addition, since publication of discoveries in scientific or patent literature often lags behind actual discoveries, we cannot be certain that we will be the first to make our additional new inventions or to file patent applications covering those inventions. It is also possible that others may have or may obtain issued patents that could prevent us from commercializing our products or require us to obtain licenses requiring the payment of significant fees or royalties in order to enable us to conduct our business. As to those patents that we may acquire, our continued rights will depend on meeting any obligations to the seller and we may be unable to do so. Our failure to obtain or maintain intellectual property rights for our inventions would lead to the loss of our investments in such activities, which would have a material adverse effect on us.

 

Moreover, patent application delays could cause delays in recognizing revenue from our internally generated patents and could cause us to miss opportunities to license patents before other competing technologies are developed or introduced into the market.

 

Our future success depends on our ability to expand our organization to match the growth of our activities.

 

As our operations grow, the administrative demands upon us will grow, and our success will depend upon our ability to meet those demands. We are organized as a holding company, with numerous subsidiaries. Both the parent company and each of our subsidiaries require certain financial, managerial and other resources, which could create challenges to our ability to successfully manage our subsidiaries and operations and impact our ability to assure compliance with our policies, practices and procedures. These demands include, but are not limited to, increased executive, accounting, management, legal services, staff support and general office services. We may need to hire additional qualified personnel to meet these demands, the cost and quality of which is dependent in part upon market factors outside of our control. Further, we will need to effectively manage the training and growth of our staff to maintain an efficient and effective workforce, and our failure to do so could adversely affect our business and operating results.

 

Potential acquisitions may present risks, and we may be unable to achieve the financial or other goals intended at the time of any potential acquisition.

 

Our future growth depends in part on our ability to acquire patented technologies, patent portfolios or companies holding such patented technologies and patent portfolios. Accordingly, we have engaged in acquisitions to expand our patent portfolios and we intend to continue to explore such acquisitions. Such acquisitions are subject to numerous risks, including, but not limited to the following:

 

·                                          our inability to enter into a definitive agreement with respect to any potential acquisition, or if we are able to enter into such agreement, our inability to consummate the potential acquisition;

 

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·                                        difficulty integrating the operations, technology and personnel of the acquired entity including achieving anticipated synergies;

·                                          our inability to achieve the anticipated financial and other benefits of the specific acquisition;

·                                          difficulty in maintaining controls, procedures and policies during the transition and monetization process;

·                                          diversion of our management’s attention from other business concerns; and

·                                          failure of our due diligence process to identify significant issues, including issues with respect to patented technologies and patent portfolios and other legal and financial contingencies.

 

If we are unable to manage these risks effectively as part of any acquisition, our business could be adversely affected.

 

Our revenues are unpredictable, and this may harm our financial condition.

 

From November 12, 2012 to the present, our operating subsidiaries have executed our business strategy of acquiring patent portfolios and accompanying patent rights and monetizing the value of those assets.  As of December 31, 2016, on a consolidated basis, our operating subsidiaries owned 515 patents and had economic rights to over 10,000 additional patents, both of which include U.S. patents and certain foreign counterparts, covering technologies used in a wide variety of industries. These acquisitions continue to expand and diversify our revenue generating opportunities. However, due to the nature of our patent monetization business and uncertainties regarding the amount and timing of the receipt of funds from the monetization of our patent assets resulting in part from uncertainties regarding the outcome of enforcement actions, rates of adoption of our patented technologies, outlook for the businesses for defendants, and certain other factors, our revenues may vary substantially from quarter to quarter, which could make our business difficult to manage, adversely affect our business and operating results, cause our quarterly results to fall below expectations and adversely affect the market price of our Common Stock.

 

Our patent monetization cycle is lengthy and costly, and our marketing, legal and administrative efforts may be unsuccessful.

 

We expect significant marketing, legal and administrative expenses prior to generating revenue from monetization efforts.  We will also spend considerable time and resources educating defendants on the benefits of a settlement, prior to or during litigation, that may include issuing a license to our patents and patent rights.  As such, we may incur significant losses in any particular period before revenue streams commence.

 

If our efforts to convince defendants of the benefits of a settlement arrangement prior to litigation are unsuccessful, we may need to continue with the litigation process or other enforcement action to protect our patent rights and to realize revenue from those rights.  We may also need to litigate to enforce the terms of existing license agreements, protect our trade secrets or determine the validity and scope of the proprietary rights of others. Enforcement proceedings are typically protracted and complex. The costs are typically substantial, and the outcomes are unpredictable. Enforcement actions will divert our managerial, technical, legal and financial resources from business operations.

 

Our exposure to uncontrollable risks, including new legislation, court rulings or actions by the United States Patent and Trademark Office (“USPTO”), could adversely affect our activities including our revenues, expenses and results of operations.

 

Our patent acquisition and monetization business is subject to numerous risks including new legislation, regulations and rules. If new legislation, regulations or rules are implemented either by Congress, the U.S. Patent and Trademark Office, the executive branch, or the courts, that impact the patent application process, the patent enforcement process, the rights of patent holders, or litigation practices, such changes could materially and negatively affect our revenue and expenses and, therefore, our results of operations and the overall success of our Company.  On March 16, 2013, the Leahy-Smith America Invents Act or the America Invents Act became effective. The America Invents Act includes a number of significant changes to U.S. patent law. In general, the legislation attempts to address issues surrounding the enforceability of patents and the increase in patent litigation by, among other things, establishing new procedures for patent litigation. For example, the America Invents Act changes the way that parties may be joined in patent infringement actions, increasing the likelihood that such actions will need to be brought against individual allegedly-infringing parties by their respective individual actions or activities. In addition, the America Invents Act enacted a new inter-partes review, or IPR, process at the USPTO which can be used by defendants, and other individuals and entities, to separately challenge the validity of any patent. At this time, it is not clear what, if any, impact the America Invents Act will have on the operation of our patent monetization and enforcement business. However, the America Invents Act and its implementation could increase the uncertainties and costs surrounding the enforcement of our patented technologies, which could have a material adverse effect on our business and financial condition.  Patents from nine of our portfolios are currently the subject of inter-partes reviews.

 

The report of our independent registered public accounting firm expresses substantial doubt about the Company’s ability to continue as a going concern.

 

Our auditors have indicated in their report on the Company’s financial statements for the fiscal year ended December 31, 2016 that conditions exist that raise substantial doubt about our ability to continue as a going concern due to our recurring losses from operations and substantial decline in our working capital. A “going concern” opinion could impair our ability to finance our operations through the sale of equity, incurring debt, or other financing alternatives. Our ability to continue as a going concern will depend upon the availability and terms of future funding, continued growth in product orders and shipments, improved operating margins and our ability to profitably meet our after-sale service commitments with existing customers.  If we are unable to achieve these goals, our business would be jeopardized and the Company may not be able to continue.

 

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In addition, the U.S. Department of Justice, or the DOJ, has conducted reviews of the patent system to evaluate the impact of patent assertion entities on industries in which those patents relate. It is possible that the findings and recommendations of the DOJ could impact the ability to effectively monetize and enforce standards-essential patents and could increase the uncertainties and costs surrounding the enforcement of any such patented technologies. Also, the Federal Trade Commission, or FTC, has published its intent to initiate a proposed study under Section 6(b) of the Federal Trade Commission Act to evaluate the patent assertion practice and market impact of Patent Assertion Entities, or PAEs.  The FTC’s notice and request for public comment relating to the PAE study appeared in the Federal Register on October 3, 2013. The FTC solicited information from the Company regarding its portfolios and activities, and the Company complied with the FTC request for such information. The results of the PAE study by the FTC were provided to Congress and other agencies, such as the DOJ, who could take action, including legislative proposals, based on the results of the study.

 

Finally, new rules regarding the burden of proof in patent enforcement actions could substantially increase the cost of our enforcement actions and new standards or limitations on liability for patent infringement could negatively impact our revenue derived from such enforcement actions.

 

Changes in patent laws could adversely impact our business.

 

Patent laws may continue to change and may alter the historically consistent protections afforded to owners of patent rights. Such changes may not be advantageous for us and may make it more difficult for us to obtain adequate patent protection to enforce our patents against infringing parties. Increased focus on the growing number of patent-related lawsuits may result in legislative changes that increase our costs and related risks of asserting patent enforcement actions.

 

Trial judges and juries often find it difficult to understand complex patent enforcement litigation, and as a result, we may need to appeal adverse decisions by lower courts in order to successfully enforce our patent rights.

 

It is difficult to predict the outcome of litigation, particularly patent enforcement litigation. It is often difficult for juries and trial judges to understand complex, patented technologies and, as a result, there is a higher rate of successful appeals in patent enforcement litigation than more standard business litigation. Such appeals are expensive and time consuming, resulting in increased costs and delayed final non-appealable judgments that can require payment of damages to the Company. Although we diligently pursue enforcement litigation, we cannot predict with significant reliability the decisions that may be made by juries and trial courts.

 

More patent applications are filed each year resulting in longer delays in getting patents issued by the USPTO.

 

We hold and continue to acquire pending patents in the application or review phase. We believe there is a trend of increasing patent applications each year, which we believe is resulting in longer delays in obtaining approval of pending patent applications. The application delays could cause delays in monetizing such patents which could cause us to miss opportunities to license patents before other competing technologies are developed or introduced into the market.

 

The length of time required time to litigate an enforcement action is increasing.

 

Our patent enforcement actions are almost exclusively prosecuted in federal court. Federal trial courts that hear our patent enforcement actions also hear criminal and other cases. Criminal cases always take priority over our actions. As a result, it is difficult to predict the length of time it will take to complete an enforcement action. Moreover, we believe there is a trend in increasing numbers of civil and criminal proceedings and, as a result, we believe that the risk of delays in our patent enforcement actions has grown and will continue to grow and will increasingly affect our business in the future unless this trend changes.

 

Any reductions in the funding of the USPTO could have an adverse impact on the cost of processing pending patent applications and the value of those pending patent applications.

 

Our ownership or acquisition of pending patent applications before the USPTO is subject to funding and other risks applicable to a government agency. The value of our patent portfolio is dependent, in part, on the issuance of patents in a timely manner, and any reductions in the funding of the USPTO could negatively impact the value of our assets. Further, reductions in funding from Congress could result in higher patent application filing and maintenance fees charged by the USPTO, causing an unexpected increase in our expenses.

 

Our acquisitions of patent assets may be time consuming, complex and costly, which could adversely affect our operating results.

 

Acquisitions of patent or other intellectual property assets, are often time consuming, complex and costly to consummate. We may utilize many different transaction structures in our acquisitions and the terms of such acquisition agreements tend to be heavily negotiated. As a result, we expect to incur significant operating expenses and may be required to raise capital during the negotiations even if the acquisition is ultimately not consummated. Even if we are able to acquire particular patent assets, there is no guarantee that we will generate sufficient revenue related to those patent assets to offset the acquisition costs. While we will seek to conduct sufficient due diligence on the patent assets we are considering for acquisition, we may acquire patent assets from a seller who does not have proper title to those assets. In those cases, we may be required to spend significant resources to defend our ownership interest in the patent assets and, if we are not successful, our acquisition may be invalid, in which case we could lose part or all of our investment in the assets.

 

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We may also identify patent or other patent assets that cost more than we are prepared to spend. We may incur significant costs to organize and negotiate a structured acquisition that does not ultimately result in an acquisition of any patent assets or, if consummated, proves to be unprofitable for us. These higher costs could adversely affect our operating results and, if we incur losses, the value of our securities will decline.

 

In addition, we may acquire patents and technologies that are in the early stages of adoption in the commercial, industrial and consumer markets. Demand for some of these technologies will likely be untested and may be subject to fluctuation based upon the rate at which our companies may adopt our patented technologies in their products and services. As a result, there can be no assurance as to whether technologies we acquire or develop will have value that we can monetize.

 

In certain acquisitions of patent assets, we may seek to defer payment or finance a portion of the acquisition price. This approach may put us at a competitive disadvantage and could result in harm to our business.

 

We have limited capital and may seek to negotiate acquisitions of patent or other intellectual property assets where we can defer payments or finance a portion of the acquisition price. These types of debt financing or deferred payment arrangements may not be as attractive to sellers of patent assets as receiving the full purchase price for those assets in cash at the closing of the acquisition. As a result, we might not compete effectively against other companies in the market for acquiring patent assets, many of whom have substantially greater cash resources than we have. In addition, any failure to satisfy any debt repayment obligations that we may incur, may result in adverse consequences to our operating results.

 

Any failure to maintain or protect our patent assets could significantly impair our return on investment from such assets and harm our brand, our business and our operating results.

 

Our ability to operate our business and compete in the patent market largely depends on the superiority, uniqueness and value of our acquired patent assets.  To protect our proprietary rights, we rely on and will rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality agreements, common interest agreements and agreements with our employees and third parties, and protective contractual provisions. No assurances can be given that any of the measures we undertake to protect and maintain the value of our assets will be successful.

 

Following the acquisition of patent assets, we will likely be required to spend significant time and resources to maintain the effectiveness of such assets by paying maintenance fees and making filings with the USPTO. We may acquire patent assets, including patent applications that require us to spend resources to prosecute such patent applications with the USPTO. Moreover, there is a material risk that patent related claims (such as, for example, infringement claims (and/or claims for indemnification resulting therefrom), unenforceability claims or invalidity claims) will be asserted or prosecuted against us, and such assertions or prosecutions could materially and adversely affect our business. Regardless of whether any such claims are valid or can be successfully asserted, defending such claims could cause us to incur significant costs and could divert resources away from our core business activities.

 

Despite our efforts to protect our intellectual property rights, any of the following or similar occurrences may reduce the value of our intellectual property:

 

·                  our patent applications, trademarks and copyrights may not be granted and, if granted, may be challenged or invalidated;

·                  issued trademarks, copyrights, or patents may not provide us with any competitive advantages when compared to potentially infringing other properties;

·                  our efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology; or

·                  our efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or superior to those we acquire and/or prosecute.

 

Moreover, we may not be able to effectively protect our intellectual property rights in certain foreign countries where we may do business in the future or from which competitors may operate. If we fail to maintain, defend or prosecute our patent assets properly, the value of those assets would be reduced or eliminated, and our business would be harmed.

 

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Weak global economic conditions may cause infringing parties to delay entering into settlement and licensing agreements, which could prolong our litigation and adversely affect our financial condition and operating results.

 

Our business depends significantly on worldwide economic conditions, and the United States and world economies have recently experienced weak economic conditions. Uncertainty about global economic conditions poses a risk as businesses may postpone spending in response to tighter credit, negative financial news and declines in income or asset values. This response could have a material adverse effect on the willingness of parties infringing on our assets to enter into settlements or other revenue generating agreements voluntarily. Entering into such agreements is critical to our business and our failure to do so could cause material harm to our business.

 

If we are unable to adequately protect our patent assets, we may not be able to compete effectively.

 

Our ability to compete depends in part upon the strength of the patents and patent rights that we own or may hereafter acquire. We rely on a combination of U.S. and foreign patents, copyrights, trademark, trade secret laws and other types of agreements to establish and protect our patent, intellectual property and proprietary rights. The efforts we take to protect our patents, intellectual property and proprietary rights may not be sufficient or effective at stopping unauthorized use of our patents, intellectual property and proprietary rights. In addition, effective trademark, patent, copyright and trade secret protection may not be available or cost-effective in every country in which our services are made available. There may be instances where we are not able to fully protect or utilize our patent and other intellectual property in a manner that maximizes competitive advantage. If we are unable to protect our patent assets and intellectual property and proprietary rights from unauthorized use, the value of those assets may be reduced, which could negatively impact our business. Our inability to obtain appropriate protections for our intellectual property may also allow competitors to enter markets and produce or sell the same or similar products. In addition, protecting our patents and patent rights is expensive and diverts critical managerial resources. If any of the foregoing were to occur, or if we are otherwise unable to protect our intellectual property and proprietary rights, our business and financial results could be adversely affected.

 

If we are forced to resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome and expensive. In addition, our patent rights could be at risk if we are unsuccessful in, or cannot afford to pursue, those proceedings. We also rely on trade secrets and contract law to protect some of our patent rights and proprietary technology. We will enter into confidentiality and invention agreements with our employees and consultants. Nevertheless, these agreements may not be honored and they may not effectively protect our right to our un-patented trade secrets and know-how. Moreover, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how.

 

We expect that we will be substantially dependent on a concentrated number of customers. If we are unable to establish, maintain or replace our relationships with customers and develop a diversified customer base, our revenues may fluctuate and our growth may be limited.

 

A significant portion of our revenues will be generated from a limited number of customers and licenses to such customers. For the year ended December 31, 2016, the five largest licenses accounted for approximately 97% of our total revenue. There can be no guarantee that we will be able to obtain additional licenses for the Company’s patents, or if we are able to generate additional licenses, that those licenses will be of the same or larger size allowing us to sustain or grow our revenue levels, respectively. If we are not able to generate licenses from the limited group of prospective customers that we anticipate may generate a substantial majority of our revenues in the future, or if they do not generate revenues at the levels or at the times that we anticipate, our ability to maintain or grow our revenues and our results of operations will be adversely affected.

 

We acquired the rights to market and license a patent analytics tool from IP Navigation Group, LLC and will dedicate resources and incur costs in an effort to generate revenues.  We may not be able to generate revenues and there is a risk that the time spent marketing and licensing the tool will distract management from the enforcement of the Company’s patent portfolios.

 

We expect to dedicate resources and incur costs in the marketing and licensing of Opus Analytics, the patent analytics tool, in order to generate revenue, but there are no assurances that our efforts will be successful.  We may not generate any revenues from the licensing of Opus Analytics or may not generate enough license revenue to exceed our costs.  Our efforts therefore could lead to losses and could have a material adverse effect on our income, expenses or results of operations.

 

In addition, the time and effort spent marketing and licensing Opus Analytics could distract the Company and its officers from the management of the balance of the Company’s business and have a deleterious effect on results from the enforcement of the Company’s patents and patent rights.  This could lead to either sub-par returns from the patent and patent right enforcement efforts or even total losses of the value of such patents and patent rights, leading to considerable losses.

 

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The Company is subject to laws and regulations worldwide, changes to which could increase the Company’s costs and individually or in the aggregate adversely affect the Company’s business.

 

The Company is subject to laws and regulations affecting its domestic and international operations in a number of areas. These U.S. and foreign laws and regulations affect the Company’s activities and compliance with these laws, regulations and similar requirements may be onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction, further increasing the cost of compliance and doing business. Any such costs, which may rise in the future as a result of changes in these laws and regulations or in their interpretation, could individually or in the aggregate impact the Company’s revenue, margins and profits or cause the Company to change or limit its business practices. The Company has implemented policies and procedures designed to ensure compliance with applicable laws and regulations, but there can be no assurance that the Company’s employees, contractors, or agents will not violate such laws and regulations or the Company’s policies and procedures.

 

The Company’s business is subject to the risks of international operations.

 

The Company derives an increasing portion of its revenue and earnings from its international operations. Compliance with applicable U.S. and foreign laws and regulations, such as anti-corruption laws, tax laws, foreign exchange controls and cash repatriation restrictions, data privacy requirements, environmental laws, labor laws and anti-competition regulations, increases the costs of doing business in foreign jurisdictions. Although the Company has implemented policies and procedures to comply with these laws and regulations, a violation by the Company’s employees, contractors, or agents could nevertheless occur. The Company also could be significantly affected by other risks associated with international activities including, but not limited to, economic and labor conditions, foreign exchange fluctuations, increased duties, taxes and other costs and political instability.

 

The Company is subject to the risk of certain fees and penalties.

 

Under certain circumstances, the Company would be subject to the payment of fees and penalties in the event that it was to lose an enforcement action, with the fees and penalties payable either or both to the defendants or the courts.  While the Company endeavors to avoid such fees and penalties with high level of diligence of new enforcement actions, there can be no guarantee that the Company may lose one or more enforcement campaigns and be subject to such penalties or fees.

 

In order to satisfy a judgment against defendants, the Company may be required to post a bond and there is no certainty that the Company will have the resources do so.

 

In certain jurisdictions, the Company would be required to post a bond in order to effectuate a judgement against one or more defendants.  There is no certainty that the Company will have the resources to do so, which would put at risk the judgment against the defendants and cost the Company to be unable to affect its case.

 

Risks Related to Our Indebtedness

 

Our cash flows and capital resources may be insufficient to make required payments on our indebtedness and future indebtedness.

 

As of December 31, 2016, we have $17,832,509 of indebtedness outstanding, net of discounts. Our indebtedness could have important consequences to our shareholders. For example, it could:

 

·                make it difficult for us to satisfy our debt obligations;

·                make us more vulnerable to general adverse economic and industry conditions;

·                limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other general corporate requirements;

·                expose us to interest rate fluctuations because the interest rate on the debt under our existing credit facility is variable;

·                  require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow for operations and other purposes;

·                limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and

·                  place us at a competitive disadvantage compared to competitors that may have proportionately less debt and greater financial resources.

 

In addition, our ability to make scheduled payments or refinance our obligations depends on our successful financial and operating performance, cash flows and capital resources, which in turn depend upon prevailing economic conditions and certain financial, business and other factors, many of which are beyond our control. These factors include, among others:

 

·          economic and demand factors affecting our industry;

·          pricing pressures;

·          increased operating costs;

·          competitive conditions; and

·          other operating difficulties.

 

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If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell material assets or operations, obtain additional capital or restructure our debt. In the event that we are required to dispose of material assets or operations to meet our debt service and other obligations, the value realized on such assets or operations will depend on market conditions and the availability of buyers. Accordingly, any such sale may not, among other things, be for a sufficient dollar amount. Our obligations pursuant to our loan agreement with Fortress (as defined below) are secured by a security interest in all of our assets, exclusive of intellectual property. The foregoing encumbrances may limit our ability to dispose of material assets or operations. We also may not be able to restructure our indebtedness on favorable economic terms, if at all.

 

We may incur additional indebtedness in the future, including pursuant to the Fortress Documents (as defined herein). Our incurrence of additional indebtedness would intensify the risks described above.

 

The Fortress Documents contain various covenants limiting the discretion of our management in operating our business.

 

On January 29, 2015, the Company and certain of its subsidiaries entered into a series of agreements including a Securities Purchase Agreement (the “Fortress Purchase Agreement”) and a Subscription Agreement with DBD Credit Funding, LLC (“DBD”), an affiliate of Fortress Credit Corp., pursuant to which the Company sold to the purchasers: (i) $15,000,000 original principal amount of Senior Secured Notes (the “Fortress Notes”), (ii) a right to receive a portion of certain proceeds from monetization net revenues received by the Company (after receipt by the Company of $15,000,000 of monetization net revenues and repayment of the Fortress Notes), (iii) a five-year warrant (the “Fortress Warrant”) to purchase 100,000 shares of the Company’s Common Stock exercisable at $7.44 per share, subject to adjustment; and (iv) 134,409 shares of the Company’s Common Stock.  Pursuant to the Fortress Purchase Agreement, as security for the payment and performance in full of the secured obligations, the Company and certain subsidiaries executed and delivered in favor of the purchasers a Security Agreement and a Patent Security Agreement, including a pledge of the Company’s interests in certain of its subsidiaries (together with the Fortress Purchase Agreement, the Fortress Notes and the Fortress Warrant, the “Fortress Documents”).  On February 12, 2015, the Company exercised its right to require the purchasers to purchase an additional $5,000,000 of Notes from the Company.

 

On January 10, 2017, the Company and certain of its subsidiaries (each a “Subsidiary” and collectively with the Issuer, the “Company”) entered into an amended and restated revenue sharing and securities purchase agreement (the “ARRSSPA”) with DBD, an affiliate of Fortress Credit Corp. (“Fortress”), under which the Company and DBD amended and restated the Revenue Sharing and Securities Purchase Agreement dated January 29, 2015 (the “Original Agreement”) pursuant to which (i) Fortress purchased $20,000,000 in promissory notes, (ii) an interest in the Company’s revenues from certain activities and (iii) warrants to purchase 100,000 shares of the Company’s common stock.  As of the close of the restructuring on January 10, 2017, there was $20,131,158 in outstanding principal and PIK interest accrued.

 

The Fortress Documents contain, subject to certain carve-outs, various restrictive covenants that limit our management’s discretion in operating our business. In particular, these instruments limit our ability to, among other things:

 

·          incur additional debt;

·          grant liens on assets;

·          dispose assets outside the ordinary course of business; and

·          make fundamental business changes.

 

If we fail to comply with the restrictions in the Fortress Documents, a default may allow the creditors under the relevant instruments to accelerate the related debt and to exercise their remedies under these agreements, which will typically include the right to declare the principal amount of that debt, together with accrued and unpaid interest and other related amounts, immediately due and payable, to exercise any remedies the creditors may have to foreclose on assets that are subject to liens securing that debt and to terminate any commitments they had made to supply further funds.

 

The rights of the holders of the Company’s Common Stock will be subordinate to our creditors.

 

On October 16, 2014, we issued convertible notes in the aggregate principal amount of $5,550,000, which mature on October 16, 2018, of which, $500,000 remains outstanding as of December 31, 2016. On January 29, 2015 and February 12, 2015, we issued to DBD notes in the principal amounts of $15,000,000 and $5,000,000, respectively, and on January 10, 2017, we entered into an amendment of the agreement with DBD whereby we restructured the principal amortization scheduled. At the close of the restructuring, the outstanding principal and accrued PIK interest under the mended and restated revenue sharing and securities purchase agreement (the “ARRSSPA”) was $20,131,158.

 

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Accordingly, the holders of Common Stock will rank junior to such indebtedness, as well as to other non-equity claims on the Company and our assets, including claims upon liquidation.

 

Risks Relating to Our Stock

 

Our management will be able to exert significant influence over us to the detriment of minority stockholders.

 

Our executive officers and directors beneficially own approximately 25.8% of our outstanding Common Stock as of March 15, 2017. As a result, our management could exert significant influence over our business and affairs and all matters requiring stockholder approval, including mergers or other fundamental corporate transactions. The concentration of ownership may have the effect of delaying or preventing a change in control and could affect the market price of our Common Stock.

 

Exercise of warrants will dilute stockholders’ percentage of ownership.

 

We have issued options and warrants to purchase shares of our Common Stock to our officers, directors, consultants and certain shareholders.  In the future, we may grant additional options, warrants and convertible securities. The exercise or conversion of options, warrants or convertible securities will dilute the percentage ownership of our stockholders. The dilutive effect of the exercise or conversion of these securities may adversely affect our ability to obtain additional capital. The holders of these securities may be expected to exercise or convert such options, warrants and convertible securities at a time when we would be able to obtain additional equity capital on terms more favorable than such securities or when our common stock is trading at a price higher than the exercise or conversion price of the securities. The exercise or conversion of outstanding warrants, options and convertible securities will have a dilutive effect on the securities held by our stockholders.

 

Our Common Stock may be delisted from The NASDAQ Capital Market (“NASDAQ”) if we fail to comply with continued listing standards.

 

Our Common Stock is currently traded on NASDAQ under the symbol “MARA”.  If we fail to meet any of the continued listing standards of NASDAQ, our Common Stock could be delisted from NASDAQ.  These continued listing standards include specifically enumerated criteria, such as:

 

·                  a $1.00 minimum closing bid price;

·                  stockholders’ equity of $2.5 million;

·                  500,000 shares of publicly-held Common Stock with a market value of at least $1 million;

·                  300 round-lot stockholders; and

·                  compliance with NASDAQ’s corporate governance requirements, as well as additional or more stringent criteria that may be applied in the exercise of NASDAQ’s discretionary authority.

 

We could fail in future financing efforts or be delisted from NASDAQ if we fail to receive stockholder approval when required.

 

Under the NASDAQ rules, we are required to obtain stockholder approval for any issuance of additional equity securities that would comprise 20% or more of the total shares of our Common Stock outstanding before the issuance of such securities sold at a discount to the greater of book or market value in an offering that is not deemed to be a “public offering” by NASDAQ.  Funding of our operations and acquisitions of assets may require issuance of additional equity securities at a discount that would comprise 20% or more of the total shares of our Common Stock outstanding, but we might not be successful in obtaining the required stockholder approval for such an issuance.  If we are unable to obtain financing due to stockholder approval difficulties, such failure may have a material adverse effect on our ability to continue operations.

 

Our Common Stock may be affected by limited trading volume and price fluctuations, which could adversely impact the value of our Common Stock.

 

There has been limited trading in our Common Stock and there can be no assurance that an active trading market in our Common Stock will either develop or be maintained. Our Common Stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our Common Stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our Common Stock to fluctuate substantially. These fluctuations may also cause short sellers to periodically enter the market in the belief that we will have poor results in the future. We cannot predict the actions of market participants and, therefore, can offer no assurances that the market for our common stock will be stable or appreciate over time.

 

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Holders of the Company’s Common Stock will experience immediate and substantial dilution upon the conversion of the Company’s outstanding preferred stock, convertible note and the exercise of the Company’s outstanding options and warrants including the warrants for which the underlying shares are being registered herein.

 

As of December 31, 2016:

 

·                  3,516,136 shares of our common stock issuable upon the exercise of outstanding stock options having a weighted average exercise price of $4.46 per share;

·                  466,078 shares of our common stock issuable upon the exercise of outstanding warrants with a weighted average exercise price of $3.79;

·                  782,004 shares of common stock issuable upon conversion of 782,004 outstanding shares of Series B Preferred Stock; and

·                  66,667 shares of common stock issuable upon conversion of $500,000 in outstanding convertible notes.

 

Assuming full conversion of the Series B Preferred Stock and the convertible notes and exercise of all outstanding options and warrants, the number of shares of our Common Stock outstanding will increase 4,830,885 shares from 19,302,472 shares of Common Stock outstanding as of March 15, 2017 to 24,133,357 shares of Common Stock outstanding.

 

Our stock price may be volatile.

 

The market price of our Common Stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:

 

·                  changes in our industry;

·                  competitive pricing pressures;

·                  our ability to obtain working capital financing;

·                  additions or departures of key personnel;

·                  sales of our Common Stock;

·                  our ability to execute our business plan;

·                  operating results that fall below expectations;

·                  loss of any strategic relationship;

·                  regulatory developments; and

·                  economic and other external factors.

 

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our Common Stock.

 

We have never paid nor do we expect in the near future to pay cash dividends.

 

On November 19, 2014, we declared a stock dividend pursuant to which holders of our common stock as of the close of business on December 15, 2014 received one additional share of Common Stock for each share of common stock held by such holders. Other than as described herein, we have never paid cash dividends on our capital stock and do not anticipate paying any cash dividends on our Common Stock for the foreseeable future.  While it is possible that we may declare a dividend after a large settlement, investors should not rely on such a possibility, nor should they rely on an investment in us if they require income generated from dividends paid on our capital stock.  Any income derived from our Common Stock would only come from rise in the market price of our Common Stock, which is uncertain and unpredictable.

 

Offers or availability for sale of a substantial number of shares of our Common Stock may cause the price of our Common Stock to decline.

 

If our stockholders sell substantial amounts of our Common Stock in the public market upon the expiration of any statutory holding period or lockup agreements, under Rule 144, or issued upon the exercise of outstanding warrants or other convertible securities, it could create a circumstance commonly referred to as an “overhang” and in anticipation of which the market price of our Common Stock could fall.  The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.  The shares of our restricted Common Stock will be freely tradable upon the earlier of: (i) effectiveness of a registration statement covering such shares and (ii) the date on which such shares may be sold without registration pursuant to Rule 144 (or other applicable exemption) under the Securities Act.

 

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Because we became a public company by means of a reverse merger, we may not be able to attract the attention of major brokerage firms.

 

There may be risks associated with us because we became a public company through a reverse merger. Securities analysts of major brokerage firms may not provide coverage of us since there is no incentive to brokerage firms to recommend the purchase of our Common Stock.  No assurance can be given that brokerage firms will, in the future, want to conduct any secondary offerings on our behalf.

 

Investor relations activities, nominal “float” and supply and demand factors may affect the price of our stock.

 

We expect to utilize various techniques such as non-deal road shows and investor relations campaigns in order to generate investor awareness.  These campaigns may include personal, video and telephone conferences with investors and prospective investors in which our business practices are described.  We may provide compensation to investor relations firms and pay for newsletters, websites, mailings and email campaigns that are produced by third parties based upon publicly-available information concerning us. We do not intend to review or approve the content of such analysts’ reports or other materials based upon analysts’ own research or methods.  Investor relations firms should generally disclose when they are compensated for their efforts, but whether such disclosure is made or complete is not under our control. In addition, investors  may, from time to time, also take steps to encourage investor awareness through similar activities that may be undertaken at the expense of the investors.  Investor awareness activities may also be suspended or discontinued which may impact the trading market our Common Stock.

 

If we lose key personnel or are unable to attract and retain additional qualified personnel, we may not be able to successfully manage our business and achieve our objectives.

 

We believe our future success will depend upon our ability to retain our key management, including Doug Croxall, our Chief Executive Officer. The loss of Mr. Croxall or any other key members of management would have a material adverse effect on our operations.  We have entered into an amendment to the employment agreement with Mr. Croxall, which extends the term of his employment agreement to November 2017.  In addition, Erich Spangenberg, the founder and former Chief Executive Officer and principal of IP Nav and a significant stockholder of the Company, is also important to the success of our Company.  We do not have any agreement with Mr. Spangenberg related to services he is to perform for IP Nav or the Company. We may not be successful in attracting, assimilating and retaining our employees in the future.  We are competing for employees against companies that are more established than we are and that have the ability to pay more cash compensation than we do.  As of the date hereof, we have not experienced problems hiring employees.

 

If we fail to establish and maintain an effective system of internal control, we may not be able to report our financial results accurately and timely or to prevent fraud. Any inability to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading price of our Common Stock.

 

Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. As a result, our small size and any future internal control deficiencies may adversely affect our financial condition, results of operation and access to capital. We have not performed an in-depth analysis to determine if historical un-discovered failures of internal controls exist, and may in the future discover areas of our internal control that need improvement.

 

As a result of its internal control assessment, the Company determined there is a material weakness with respect to the financial reporting and closing process from lack of segregation of duties and evidence of control review.

 

The Company determined that there is a material weakness in its internal controls with respect to the financial reporting and closing process, resulting from a lack of segregation of duties and evidence of control review.  Since the Company (not including its subsidiary 3D Nano) has ten employees, most of whom have no involvement in our financial controls and reporting, we are unable to sufficiently distribute reporting and accounting to tasks across enough individuals to ensure that the Company does not have a material weakness in its financial reporting system.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not Applicable

 

ITEM 2. PROPERTIES

 

We lease approximately 1,732 square feet of office space at 11100 Santa Monica Blvd., Suite 380, Los Angeles, California 90025.  In October 2013, we entered into a new seven-year lease for the office space which lease commenced on May 1, 2014.  The lease provides for an initial monthly base rent of $5,300 plus the payment of certain operating expenses. In addition, the lease contains annual increases in rent.

 

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We lease a suite at 911 NW Loop 281, Longview, Texas 75604. The lease provides for a month-to-month term at a rate of $654 per month.

 

ITEM 3. LEGAL PROCEEDINGS

 

In the normal course of our business of patent monetization, it is generally necessary for us to initiate litigation in order to commence the process of protecting our patent rights. Such litigation is expected to lead to a monetization event. Accordingly, we are, and in the future, expect to become, a party to ongoing patent enforcement related litigation alleging infringement by various third parties of certain patented technologies owned and/or controlled by us. Litigation is commenced by and managed through the subsidiary that owns the related portfolio of patents or patent rights. In connection with our enforcement activities, we are currently involved in multiple patent infringement cases. As of December 31, 2016, the Company is involved into a total of 7 lawsuits against defendants in the following jurisdictions:

 

United States

 

 

District of Delaware

 

5

Central District of California

 

1

Eastern District of Michigan

 

1

 

On November 14, 2016, Symantec Corporation filed a complaint against Clouding Corp., a wholly-owned subsidiary of the Company, the Company and other unaffiliated parties in the Superior Court of the State of California for the County of Los Angeles, Unlimited Jurisdiction.  Symantec Corporation asserted claims against Clouding Corp. and the Company of negligent misrepresentation, fraudulent misrepresentation, intentional interference with contractual relations, violation of Business & Professions Code Section 17200, and for an accounting.  The Court has sustained in its entirety Clouding Corp.’s demurrer to Symantec Corporation’s complaint. Neither Clouding Corp. nor the Company were parties to the agreement on which the claims are based.  Clouding Corp. plans to vigorously defend against such claims and is exploring counter-claims and repayment of the Company’s legal fees.

 

On October 13, 2016, Liner LLP (“Liner”), a law firm, filed an arbitration request seeking payment of outstanding legal fees invoiced by Liner to Signal IP, Inc., a wholly-owned subsidiary of the Company.  The Company is preparing counter-claims against Liner for its breach of the engagement agreement and abject failure in its representation of Signal IP, Inc. The Company plans to vigorously defend against such claims and is preparing counter-claims and will seek repayment of the Company’s legal fees.

 

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 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Market Information

 

Our common stock is currently quoted on The NASDAQ Capital Market under the symbol “MARA”. Previously, our common stock was quoted on the OTC Bulletin Board under the symbol “MARA” and prior to that under the symbol “AMSC”.

 

The following table sets forth the high and low bid quotations for our common stock as reported on The NASDAQ Capital Market for the periods indicated. All per share prices set forth below reflect the 1:2 stock dividend issued on December 22, 2014.

 

 

 

High

 

Low

 

Fiscal 2017

 

 

 

 

 

First quarter through March 27, 2017

 

$

2.29

 

$

0.63

 

 

 

 

 

 

 

Fiscal 2016

 

 

 

 

 

First Quarter

 

2.87

 

1.29

 

Second Quarter

 

2.93

 

1.41

 

Third Quarter

 

3.44

 

2.58

 

Fourth Quarter

 

2.81

 

1.44

 

 

 

 

 

 

 

Fiscal 2015

 

 

 

 

 

First Quarter

 

$

8.43

 

$

5.59

 

Second Quarter

 

6.06

 

2.85

 

Third Quarter

 

3.32

 

1.85

 

Fourth Quarter

 

2.00

 

1.34

 

 

Holders

 

As of March 15, 2017, there were 48 holders of record of 19,302,472 shares of the Company’s Common Stock.

 

Dividends

 

On November 19, 2014, we declared a stock dividend pursuant to which holders of our Common Stock, par value $0.0001 as of the close of business on December 15, 2014 received one additional share of common stock for each share of Common Stock held by such holders (“Stock Dividend”). All share numbers and per share prices in this Annual Report reflect the Stock Dividend, unless otherwise indicated. Other than as described herein, the Company has not paid any cash dividends to date and does not anticipate or contemplate paying cash dividends in the foreseeable future. It is the present intention of management to utilize all available funds for the development of the Company’s business.

 

The ARRSSPA prohibits the Company from issuing any dividends so long as the Fortress Notes are outstanding.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

2012 and 2014 Equity Incentive Plans

 

The following table gives information about the Company’s common stock that may be issued upon the exercise of options granted to employees, directors and consultants under its 2012 and 2014 Equity Incentive Plans as of December 31, 2016. On August 1, 2012, our board of directors and stockholders adopted the 2012 Equity Incentive Plan, pursuant to which 1,538,462 shares of our common stock are reserved for issuance as awards to employees, directors, consultants, advisors and other service providers and on September 16, 2014, our board of directors adopted the 2014 Equity Incentive Plan, subsequently approved by the shareholders on July 31, 2015, pursuant to which up to 2,000,000 shares of our common stock, stock options, restricted stock, preferred stock, stock-based awards and other awards are reserved for issuance as awards to employees, directors, consultants, advisors and other service providers.

 

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Equity Compensation Plan Information

 

Plan category

 

Number of securities
to
be issued upon exercise
of outstanding options,
warrants and rights

 

Weighted-
average
exercise price of
outstanding options,
warrants and rights

 

Number of securities
remaining available for
future issuance under
equity compensation
plans

 

 

 

 

 

 

 

 

 

Equity compensation plans approved by security holders

 

3,516,316

 

$

4.46

 

22,146

 

Equity compensation plans not approved by security holders

 

 

$

 

 

Total

 

3,516,316

 

$

4.46

 

22,146

 

 

Recent issuances of unregistered securities

 

On April 22, 2014, the Company issued 300,000 shares of Restricted Common Stock to TT IP LLC in consideration of acquisition of patents on November 13, 2013. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

On May 14, 2014, the Company issued to consultants, five (5) year options to purchase an aggregate of 160,000 shares of the Company’s Common Stock with an exercise price of $4.165 per share, subject to adjustment, which vest in three (3) annual installments, with 33% vesting on the first anniversary of the date of grant, 33% on the second anniversary of the date of grant and 34% on the third anniversary of the date of grant. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(a)(2) therefore, as a transaction by an issuer not involving a public offering.  The options were valued based on the Black-Scholes model, using the strike and market prices of $4.165 per share, life of 3.5 years, volatility of 50% based on the closing price of the 50 trading sessions immediately preceding the grant and a discount rate as published by the Federal Reserve of 1.00%.

 

On May 15, 2014, the Company entered into an executive employment agreement with Francis Knuettel II (“Knuettel Agreement”) pursuant to which Mr. Knuettel would serve as the Company’s Chief Financial Officer. As part of the consideration, the Company agreed to grant Mr. Knuettel a ten (10) year stock option to purchase an aggregate of 290,000 shares of Common Stock, with a strike price of $4.165 per share, vesting in thirty-six (36) equal installments on each monthly anniversary of the date of the Knuettel Agreement. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(a)( (2) thereof, as a transaction by an issuer not involving a public offering.

 

On June 15, 2014, the Company issued to a consultant a five (5) year stock option to purchase an aggregate of 40,000 shares of the Company’s Common Stock with an exercise price of $5.05 per share, subject to adjustment, which shall vest in twenty-four (24) each monthly installments on each monthly anniversary date of the grant. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(a)(2) therefore, as a transaction by an issuer not involving a public offering.

 

On June 2, 2014, the Company issued 48,078 shares of unrestricted Common Stock to an investor in the May 2013 private placement, pursuant to the exercise of a warrant received in the May 2013 private placement. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

On June 30, 2014, the Company issued 200,000 shares of restricted Common Stock in the acquisition of Selene Communications Technologies, LLC. In connection with this transaction, the Company valued the shares at the fair market value on the date of grant at $4.90 per share or $980,000. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

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On July 18, 2014, the Company issues a total of 26,722 shares of Common Stock pursuant to the exercise of stock options held by a former member of the Company’s Board of Directors and the Company’s former Chief Financial Officer. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

On August 29, 2014, the Company entered into an executive employment agreement with Daniel Gelbtuch (“Gelbtuch Agreement”) pursuant to which Mr. Gelbtuch would serve as the Company’s Chief Marketing Officer. As part of the consideration, the Company agreed to grant Mr. Gelbtuch ten (10) year stock options to purchase an aggregate of 290,000 shares of Common Stock, with a strike price of $5.62 per share, vesting in thirty-six (36) equal installments on each monthly anniversary of the date of the Gelbtuch Agreement. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.  Mr. Gelbtuch’s employment with the Company was terminated as of January 20, 2015 and the vested shares at that time remain available for Mr. Gelbtuch to exercise.

 

On September 16, 2014, the Company issued to two of its independent board members, in lieu of cash compensation, 6,178 shares each of Restricted Common Stock.  The shares shall vest quarterly over twelve (12) months commencing on the date of grant. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

On September 17, 2014, the Company entered into a consulting agreement (the “Consulting Agreement”) with GRQ Consultants, Inc. (“GRQ”), pursuant to which GRQ shall provide certain consulting services including, but not limited to, advertising, marketing, business development, strategic and business planning, channel partner development and other functions intended to advance the business of the Company.  As consideration, GRQ shall be entitled to 200,000 shares of the Company’s Series B Convertible Preferred Stock, 50% of which vested upon execution of the Consulting Agreement, and 50% of which shall vest in six (6) equal monthly installments of commencing on October 17, 2014.  The first tranche of 100,000 shares of Series B Convertible Preferred Stock was issued to GRQ on October 6, 2014 and 150,000 shares in total, for a value of $1,103,581, was issued in 2014 and 50,000 shares of Series B Convertible Preferred Stock for a value of $345,334 was issued in 2015. In addition, the Consulting Agreement allows for GRQ to receive additional shares of Series B Convertible Preferred Stock upon the achievement of certain performance benchmarks.  No milestones were met and no additional shares were issued in 2015.  All shares of Series B Convertible Preferred Stock issuable to GRQ shall be pursuant to the 2014 Plan and shall be subject to shareholder approval of the 2014 Plan on or prior to September 16, 2015. The Consulting Agreement contains an acknowledgement that the conversion of the preferred stock into shares of the Company’s Common Stock is precluded by the equity blockers set forth in the certificate of designation and in Section 17 of the 2014 Plan to ensure compliance with NASDAQ Listing Rule 5635(d). Every share of Series B Preferred Stock may be converted into two shares of Common Stock, after giving effect to the 2:1 stock dividend issued on December 22, 2014. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act by virtue of the provisions of Section 4(a)(2) and Regulation D (Rule 506) thereunder, and the corresponding provisions of state securities laws.

 

On September 19, 2014, the Company authorized the issuance of 60,000 shares of Common Stock to the sellers of TLI Communications LLC. The Company valued the Common Stock at the fair market value on the date of the Interests Sale Agreement at $13.63 per share or $818,000. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

On September 30, 2014, the Company issued 50,000 shares of restricted Common Stock in the acquisition of the assets of Clouding IP, LLC. In connection with this transaction, the Company valued the shares at the quoted market price on the date of grant at $5.62 per share or $281,000. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

For the three months ended September 30, 2014, certain holders of warrants exercised their warrants in a cashless, net exercise basis in exchange for 84,652 shares of the Company’s Common Stock. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

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On October 16, 2014, the Company sold to certain accredited investors an aggregate of $5,550,000 of principal amount of convertible notes due October 9, 2018 along with two-year warrants to purchase 258,998 shares of the Company’s Common Stock, par value $0.0001 per share pursuant to a securities purchase agreement.  The warrants were valued at $169,015 and were recorded as a discount to the fair value of the convertible notes. The notes and warrants are initially convertible into shares of the Company’s Common Stock at a conversion price of $7.50 per share and an exercise price of $8.25 per share, respectively.  The conversion and exercise prices are subject to adjustment in the event of certain events, including stock splits and dividends.  The Notes bear interest at the rate of 11% per annum, payable quarterly in cash on each of the three, six, nine and twelve-month anniversary of the issuance date and on each conversion date. The Company reviewed the instruments in the context of ASC 480 and determined that the convertible notes should be recorded as a liability and analyzed the conversion feature and bifurcation pursuant to ASC 815 and ASC 470, respectively, to determine that the was no beneficial conversion feature and that the convertible notes and warrants should not be bifurcated.

 

On October 31, 2014, the Company entered into an executive employment agreement with Enrique Sanchez (“Sanchez Agreement”) pursuant to which Mr. Sanchez would serve as the Company’s Senior Vice President of Licensing. As part of the consideration, the Company agreed to grant Mr. Sanchez a ten (10) year stock option to purchase an aggregate of 160,000 shares of Common Stock, with a strike price of $6.40 per share, vesting in thirty-six (36) equal installments on each monthly anniversary of the date of the Sanchez Agreement. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

On October 31, 2014, the Company entered into an executive employment agreement with Umesh Jani (“Jani Agreement”) pursuant to which Mr. Jani would serve as the Company’s Chief Technology Officer and SVP of Licensing. As part of the consideration, the Company agreed to grant Mr. Jani a ten (10) year stock option to purchase an aggregate of 100,000 shares of Common Stock, with a strike price of $6.40 per share, vesting in thirty-six (36) equal installments on each monthly anniversary of the date of the Jani Agreement. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

On October 31, 2014, the Company issued existing employees, ten (10) year options to purchase an aggregate of 680,000 shares of the Company’s Common Stock with an exercise price of $6.40 per share, subject to adjustment, which shall vest in twenty-four (24) equal installments on each monthly anniversary. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(a)(2) therefore, as a transaction by an issuer not involving a public offering.

 

On October 31, 2014, the Company issued to a consultant, a five (5) year option to purchase an aggregate of 30,000 shares of the Company’s Common Stock with an exercise price of $6.40 per share, subject to adjustment, which shall vest in twenty-four (24) equal installments on each monthly anniversary of the grant. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(a)(2) therefore, as a transaction by an issuer not involving a public offering.

 

For the three months ended December 31, 2014, certain holders of warrants exercised their warrants in exchange for 29,230 shares of the Company’s Common Stock. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

On February 5, 2015, the Company issued to a consultant, a five (5) year option to purchase an aggregate of 25,000 shares of the Company’s Common Stock with an exercise price of $6.80 per share, subject to adjustment, which shall vest in twenty-four (24) equal installments on each monthly anniversary of the grant. The options were valued based on the Black-Scholes model, using the strike and market prices of $6.80 per share, an expected term of 3.25 years, volatility of 47% based on the average volatility of comparable companies over the comparable prior period and a discount rate as published by the Federal Reserve of 0.92%.

 

On March 6, 2015, the Company issued a new board member a five (5) year option to purchase an aggregate of 20,000 shares of the Company’s Common Stock with an exercise price of $7.37 per share, subject to adjustment, which shall vest in twelve (12) equal installments on each monthly anniversary of the grant. The options were valued based on the Black-Scholes model, using the strike and market prices of $7.37 per share, an expected term of 3.0 years, volatility of 41% based on the average volatility of comparable companies over the comparable prior period and a discount rate as published by the Federal Reserve of 1.16%.

 

On March 18, 2015, the Company issued a new board member a five (5) year option to purchase an aggregate of 20,000 shares of the Company’s Common Stock with an exercise price of $6.61 per share, subject to adjustment, which shall vest in twelve (12) equal installments on each monthly anniversary of the grant. The options were valued based on the Black-Scholes model, using the strike and market prices of $6.61 per share, an expected term of 3.0 years, volatility of 41% based on the average volatility of comparable companies over the comparable prior period and a discount rate as published by the Federal Reserve of 0.92%.

 

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On April 7, 2015, the Company entered into a consulting agreement (the “Consulting Agreement”) with Richard Chernicoff, a member of the Company’s Board of Directors, pursuant to which Mr. Chernicoff shall provide certain services to the Company, including serving as the interim General Counsel and interim General Manager of commercial product commercialization development. Pursuant to the terms of the Consulting Agreement, Mr. Chernicoff shall receive a monthly retainer of $27,000 and subject to shareholder approval and pursuant to the Company’s 2014 Equity Incentive Plan (the “2014 Plan”), a ten (10) year stock option to purchase 280,000 shares of the Company’s common stock (the “Award”).  The stock options shall have an exercise price of $6.76 per share, the closing price of the Company’s common stock on the date immediately prior to the Board of Directors approval of such stock options and the options shall vest as follows: 25% of the Award shall vest on the 12 month anniversary of the effective date and thereafter 2.083% on the 21st day of each succeeding calendar month for the following twelve months, provided Mr. Chernicoff continues to provide services (in addition to as a member of the Company’s Board of Directors) at the time of vesting.  The Award shall be subject in all respects to the terms of the 2014 Plan. Notwithstanding anything herein to the contrary, the remainder of the Award shall be subject to the following as an additional condition of vesting: (A) options to purchase 70,000 shares of the Company’s common stock under the Award shall not vest at all unless the price of the Company’s common stock while Mr. Chernicoff continues as an officer and/or director reach $8.99 and (B) options to purchase 70,000 shares of the Company’s common stock under the Award shall not vest at all unless the price of the Company’s common stock while Mr. Chernicoff continues as an officer and/or director reach $10.14.  For valuation purposes, the options were divided into two parts — the time-based vesting component and the performance-based vesting component.  The time-based vesting component was valued based on the Black-Scholes model, using the strike and market prices of $6.76 per share, an expected term of 6.25 years, volatility of 53% based on the average volatility of comparable companies over the comparable prior period and a discount rate as published by the Federal Reserve of 1.53%. The performance-based vesting component was valued based on the Monte Carlo Simulation model, using the strike and market prices of $6.76 per share, an expected term of 10.0 years, volatility of 61% based on the average volatility of comparable companies over the comparable prior period and a discount rate as published by the Federal Reserve of 1.89%.

 

On July 16, 2015, the Company entered into a forbearance agreement (the “Agreement”) with MedTech Development, the holder of a Promissory Note issued by the Company, dated October 10, 2014. Pursuant to the Agreement, among other terms, the Company issued to MedTech Development 200,000 shares of restricted common stock of the Company.  In connection with this transaction, the Company valued the shares at the quoted market price on the date of grant at $3.27 per share or $654,000. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

On September 16, 2015, the Company issued its independent board members ten (10) year options to purchase an aggregate of 80,000 shares of the Company’s Common Stock with an exercise price of $2.03 per share, subject to adjustment, which shall vest monthly over twelve (12) months commencing on the date of grant. The options were valued based on the Black-Scholes model, using the strike and market prices of $2.03 per share, an expected term of 5.5 years, volatility of 47% based on the average volatility of comparable companies over the comparable prior period and a discount rate as published by the Federal Reserve of 1.72%.

 

On September 21, 2015, the Company issued 150,000 shares of the Company’s Common Stock to Alex Partners, LLC and Del Mar Consulting Group, Inc., pursuant to a services agreement entered into on September 21, 2015.  In connection with this transaction, the Company valued the shares at the quoted market price on the date of grant at $2.23 per share or $334,500. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

On October 14, 2015, the Company issued certain of its employees ten (10) year options to purchase an aggregate of 385,000 shares of the Company’s Common Stock with an exercise price of $1.86 per share, subject to adjustment, which shall vest monthly over twenty-four (24) months commencing on the date of grant. The options were valued based on the Black-Scholes model, using the strike and market prices of $1.86 per share, an expected term of 6.5 years, volatility of 49% based on the average volatility of comparable companies over the comparable prior period and a discount rate as published by the Federal Reserve of 1.57%.

 

On October 14, 2015, the Company issued certain of its consultants ten (10) year options to purchase an aggregate of 70,000 shares of the Company’s Common Stock with an exercise price of $1.86 per share, subject to adjustment, which shall vest monthly over twenty-four (24) months commencing on the date of grant. The options were valued based on the Black-Scholes model, using the strike and market prices of $1.86 per share, an expected term of 6.5 years, volatility of 49% based on the average volatility of comparable companies over the comparable prior period and a discount rate as published by the Federal Reserve of 1.57%.

 

On October 20, 2015, 16,666 shares of Series B Convertible Preferred Stock associated with the GRQ Consulting Agreement were converted into 16,666 shares of the Company’s Common Stock.

 

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On November 4, 2015, the Company issued 300,000 shares of the Company’s Common Stock to Dominion Harbor Group LLC (“Dominion”), pursuant to a settlement agreement entered into with Dominion on October 30, 2015.  In connection with this transaction, the Company valued the shares at the quoted market price on the date of grant at $1.71 per share or $513,000. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

On December 9, 2015, the Company entered into an agreement with Melechdavid, Inc. (“Melechdavid”), pursuant to which the Company agreed to issue 100,000 shares of the Company’s Common Stock.  In connection with this transaction, the Company valued the shares at the quoted market price on the date of grant at $1.61 per share or $161,000. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

On May 10, 2016, the Company entered into an executive employment agreement with Erich Spangenberg (“Spangenberg Agreement”) pursuant to which Mr. Spangenberg would serve as the Company’s Director of Acquisitions, Licensing and Strategy. As part of the consideration, the Company agreed to grant Mr. Spangenberg a ten-year stock option to purchase an aggregate of 500,000 shares of Common Stock, with a strike price of $1.87 per share, vesting in twenty-four (24) equal installments on each monthly anniversary of the date of the Spangenberg Agreement. The options were valued based on the Black-Scholes model, using the strike and market prices of $1.87 per share, an expected term of 5.75 years, volatility of 47% based on the average volatility of comparable companies over the comparable prior period and a discount rate as published by the Federal Reserve of 1.32%.

 

On May 11, 2016, the Company entered into a consulting agreement with the Cooper Law Firm, LLC (“Cooper”), pursuant to which the Company agreed to issue 80,000 shares of the Company’s Common Stock. In connection with this transaction, the Company valued the shares at the quoted market price on the date of grant at $1.70 per share or $136,000. The transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

On May 20, 2016, the Company entered into an employment agreement with Kathy Grubbs (“Grubbs Agreement”) pursuant to which Ms. Grubbs would serve as an analyst. As part of the consideration, the Company agreed to grant Ms. Grubbs a ten-year stock option to purchase an aggregate of 50,000 shares of Common Stock, with a strike price of $2.25 per share, vesting in thirty-six (36) equal installments on each monthly anniversary of the date of the Grubbs Agreement. The options were valued based on the Black-Scholes model, using the strike and market prices of $2.25 per share, an expected term of 6.50 years, volatility of 47% based on the average volatility of comparable companies over the comparable prior period and a discount rate as published by the Federal Reserve of 1.88%.

 

On July 1, 2016, in conjunction with an executive employment agreement with David Liu (“Liu Agreement”) pursuant to which Mr. Liu would serve as the Company’s CTO, entered into on June 29, 2016, the Company granted Mr. Liu a ten-year stock option to purchase an aggregate of 150,000 shares of Common Stock, with a strike price of $2.79 per share, vesting in thirty-six (36) equal installments on each monthly anniversary of the date of the Liu Agreement. The options were valued based on the Black-Scholes model, using the strike and market prices of $2.79 per share, an expected term of 6.50 years, volatility of 47% based on the average volatility of comparable companies over the comparable prior period and a discount rate as published by the Federal Reserve of 1.20%.

 

On October 13, 2016, the Company issued its independent board members ten-year options to purchase an aggregate of 80,000 shares of the Company’s Common Stock with an exercise price of $2.41 per share, subject to adjustment, which shall vest monthly over twelve (12) months commencing on the date of grant. The options were valued based on the Black-Scholes model, using the strike and market prices of $2.41 per share, an expected term of 5.5 years, volatility of 46% based on the average volatility of comparable companies over the comparable prior period and a discount rate as published by the Federal Reserve of 1.21%. As there were not sufficient shares in the Company’s equity incentive plans to accommodate these grants, Mr. Croxall forfeited a portion of one of his options to purchase 80,000 shares.

 

On October 17, 2016, the Company issued 23,334 shares to the holder of the Company’s convertible note pursuant to their exercise of their warrant.

 

On December 9, 2016, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain institutional investors for the sale of an aggregate of 3,481,997 shares of the Company’s common stock, at a purchase price of $1.50 per share, and warrants to purchase 1,740,995 shares of common stock for a purchase price of $0.01 per warrant. The shares of  common stock were issued in a registered direct offering pursuant to a prospectus supplement filed with the Securities and Exchange Commission on December 9, 2016, in connection with a takedown from the Registration Statement on Form S-3 (File No. 333-198569), which was declared effective by the Securities and Exchange Commission on January 6, 2015. The shares underlying the warrants were not registered at the time of the issuance or at the time of this filing, but the underlying shares are subject to a registration statement filed under Form S-1 on February 10, 2017.

 

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Recent Repurchases of Securities

 

None.

 

ITEM 6. SELECTED FINANCIAL DATA

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 (the “Exchange Act”) and are not required to provide the information under this item.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Business of the Company

 

We acquire patents and patent rights from owners or other ventures and seek to monetize the value of the patents through litigation and licensing strategies, alone or with others.  Part of our acquisition strategy is to acquire or invest in patents and patent rights that cover a wide-range of subject matter which allows us to seek the benefits of a diversified portfolio of assets in differing industries and countries.  Generally, the patents and patent rights that we seek to acquire have large identifiable targets who are or have been using technology that we believe infringes our patents and patent rights.  We generally monetize our portfolio of patents and patent rights by entering into license discussions, and if that is unsuccessful, initiating enforcement activities against any infringing parties with the objective of entering into comprehensive settlement and license agreements that may include the granting of non-exclusive retroactive and future rights to use the patented technology, a covenant not to sue, a release of the party from certain claims, the dismissal of any pending litigation and other terms.  Our strategy has been developed with the expectation that it will result in a long-term, diversified revenue stream for the Company. As of December 31, 2016, we owned 515 patents and had economic rights to over 10,000 additional patents, both of which include U.S. patents and certain foreign counterparts, covering technologies used in a wide variety of industries.

 

Recent Developments

 

On January 10, 2017, Marathon Patent Group, Inc. (the “Company”) and certain of its subsidiaries (each a “Subsidiary” and collectively with the Issuer, the “Company”) entered into the ARRSSPA with DBD Credit Funding, LLC (“DBD”), an affiliate of Fortress Credit Corp.(“Fortress”), under which the Company and DBD amended and restated the Revenue Sharing and Securities Purchase Agreement dated January 29, 2015 (the “Original Agreement”) pursuant to which (i) Fortress purchased $20,000,000 in promissory notes, (ii) an interest in the Company’s revenues from certain activities and (iii) warrants to purchase 100,000 shares of the Company’s common stock.  As of the close of the restructuring on January 10, 2017, there was $20,131,158 in outstanding principal and PIK interest accrued.

 

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On January 27, 2017, the Company entered into a sales agreement (the “Sales Agreement”) with Northland Securities, Inc., as agent (“Northland”), pursuant to which the Company may offer and sell, from time to time through Northland, up to 750,000 shares (the “Shares”) of the Company’s common stock in an “at the market offering” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended. As of January 31, 2017, the Company sold all 750,000 shares of common stock under the Sales Agreement for gross proceeds of approximately $1,301,923 and no further shares are available under the terms of the Sales Agreement as filed on January 27, 2017.

 

On March 15, 2017, the Company terminated four of its employees and all six employees employed at the Company’s subsidiary, 3D Nano.

 

Critical Accounting Policies and Estimates

 

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.

 

Management believes the following critical accounting policies affect the significant judgments and estimates used in the preparation of the financial statements.

 

Principles of Consolidation

 

The consolidated financial statements are prepared in accordance with GAAP and present the financial statements of the Company and our wholly-owned and majority owned subsidiaries. In the preparation of our consolidated financial statements, intercompany transactions and balances are eliminated.

 

Use of Estimates and Assumptions

 

The preparation of financial statements in conformity with 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 and intangible assets impairment, realization of long-lived assets, valuation of Clouding IP earn out liability, deferred income taxes, unrealized tax positions and business combination accounting.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with ASC Topic 605, “Revenue Recognition.” Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) all obligations have been substantially performed, (iii) amounts are fixed or determinable and (iv) collectability of amounts is reasonably assured. In general, revenue arrangements provide for the payment of contractually determined fees in consideration for the grant of certain intellectual property rights for patented technologies owned or controlled by the Company.

 

These rights typically include some combination of the following: (i) the grant of a non-exclusive, perpetual license to use patented technologies owned or controlled by the Company, (ii) a covenant-not-to-sue, (iii) the dismissal of any pending litigation.

 

The intellectual property rights granted typically are perpetual in nature.  Pursuant to the terms of these agreements, the Company has no further obligation with respect to the grant of the non-exclusive licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on the Company’s part to maintain or upgrade the technology, or provide future support or services. Generally, the agreements provide for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the agreement. As such, the earnings process is complete and revenue is recognized upon the execution of the agreement, when collectibility is reasonably assured, and when all other revenue recognition criteria have been met.

 

The Company also considers the revenue generated from a settlement and licensing agreement as one unit of accounting under ASC 605-25, “Multiple-Element Arrangements” as the delivered items do not have value to customers on a standalone basis, there are no undelivered elements and there is no general right of return relative to the license. Under ASC 605-25, the appropriate recognition of revenue is determined for the combined deliverables as a single unit of accounting and revenue is recognized upon delivery of the final elements, including the license for past and future use and the release.

 

Also, due to the fact that the settlement element and license element for past and future use are the Company’s major central business, the Company presents these two elements as one revenue category in its statement of operations. The Company does not expect to provide licenses that do not provide some form of settlement or release.

 

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Accounting for Acquisitions

 

In the normal course of its business, the Company makes acquisitions of patent assets and may also make acquisitions of businesses.  With respect to each such transaction, the Company evaluates facts of the transaction and follows the guidelines prescribed in accordance with ASC 805 — Business Combinations to determine the proper accounting treatment for each such transaction and then records the transaction in accordance with the conclusions reached in such analysis. The Company performs such analysis with respect to each material acquisition within the consolidated group of entities.

 

Intangible Assets - Patents

 

Intangible assets include patents purchased and patents acquired in lieu of cash in licensing transactions. The patents purchased are recorded based on the cost to acquire them and patents acquired in lieu of cash are recorded at their fair market value.  The costs of these assets are amortized over their remaining useful lives. Useful lives of intangible assets are periodically evaluated for reasonableness and the assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may no longer be recoverable. The Company recorded impairment charges to its intangible assets during the year ended December 31, 2016 in the amount of $11,958,882, associated with the end of life of a number of the Company’s portfolios, compared to an impairment charge in the amount of $5,793,409 during the year ended December 31, 2015 associated with the reduction in the carrying value of one the Company’s portfolios.

 

Goodwill

 

Goodwill is tested for impairment at the reporting unit level at least annually in accordance with ASC 350, and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.

 

When conducting its annual goodwill impairment assessment, the Company initially performs a qualitative evaluation of whether it is more likely than not that goodwill is impaired. If it is determined by a qualitative evaluation that it is more likely than not that goodwill is impaired, the Company then applies a two-step impairment test. The two-step impairment test first compares the fair value of the Company’s reporting unit to its carrying or book value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired. If the carrying value of the reporting unit exceeds its fair value, the Company determines the implied fair value of the reporting unit’s goodwill and if the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then an impairment loss equal to the difference is recorded in the consolidated statement of operations. The Company performs the annual testing for impairment of goodwill at the reporting unit level during the quarter ended September 30.

 

For the year ended December 31, 2016, the Company recorded an impairment charge to its goodwill in the amount of $4,336,307, and for the year ended December 31, 2015, the Company recorded no impairment charge to its goodwill.

 

Other Intangible Assets

 

In accordance with ASC 350-30, “Intangibles - Goodwill and Others”, the Company assesses the impairment of identifiable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers to be important which could trigger an impairment review include the following: (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.

 

When the Company determines that the carrying value of intangibles may not be recoverable based upon the existence of one or more of the above indicators of impairment and the carrying value of the asset cannot be recovered from projected undiscounted cash flows, the Company records an impairment charge. The Company measures any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in the current business model.

 

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Impairment of Long-lived Assets

 

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 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 that the Company expects to be generated by the asset. When necessary, impaired assets are written down to 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. The Company did not record any impairment charges on its long-lived assets, other than its definite-lived intangible assets, as identified above, during the years ended December 31, 2016 and 2015.

 

Stock-based Compensation

 

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the consolidated financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award. As stock-based compensation expense is recognized based on awards expected to vest, forfeitures are also estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For the year ended December 31, 2016, the expected forfeiture rate was 2.4%, which resulted in a decrease in expense of $44,146, recognized in the Company’s compensation expenses and for the year ended December 31, 2015, the expected forfeiture rate was 10.40%, which resulted in a decrease in expense of $28,663, recognized in the Company’s compensation expenses.  The Company will continue to re-assess the impact of forfeitures if actual forfeitures increase in future quarters.

 

Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third parties, compensation expense is determined at the “measurement date.” The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based on the fair value of the award at the reporting date.

 

Recent Accounting Pronouncements

 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04 Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). This guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation.  Under the amended guidance, a goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective for interim and annual period beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017.

 

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In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), which clarifies the definition of a business and assists entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under this guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset (or group of similar assets), the assets acquired would not represent a business. In addition, in order to be considered a business, an acquisition would have to include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. The amended guidance also narrows the definition of outputs by more closely aligning it with how outputs are described in FASB guidance for revenue recognition. This guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted.

 

In October 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-16 Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which eliminates the exception in existing guidance which defers the recognition of the tax effects of intra-entity asset transfers other than inventory until the transferred asset is sold to a third party. Rather, the amended guidance requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted as of the beginning of an annual reporting period. The Company is currently assessing the impact of this guidance on its consolidated financial statements.

 

In August 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). The standard is intended to eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 will be effective for fiscal years beginning after December 15, 2017. Early adoption is permitted for all entities. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. Accordingly, the standard is effective for us on September 1, 2017 and we are currently evaluating the impact that the standard will have on our consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-07, “Simplifying the Transition to the Equity Method of Accounting.” The amendments in the ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years and should be applied prospectively upon the effective date. Early adoption is permitted. The Company is currently evaluating the provisions of this guidance.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The standard requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. Accordingly, the standard is effective for us on September 1, 2019 using a modified retrospective approach. We are currently evaluating the impact that the standard will have on our consolidated financial statements.

 

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Results of Operations for the Years Ended December 31, 2016 and December 31, 2015

 

Revenues

 

Revenues in the year ended December 31, 2016 were $36,629,276, compared to $18,997,794 of revenue in the year ended December 31, 2015.  This represented a year-over-year increase in revenues of $17,631,482, which represented a 93% increase in 2016 over 2015.  The increase in revenues in 2016 resulted primarily from licenses issued by our Dynamic Advances and Orthophoenix subsidiaries, with the Dynamic Advances settlement occurring shortly before commencement of the scheduled trial.

 

Revenues from the five largest licenses in 2016 accounted for approximately 97% of the Company’s revenue for the year ended December 31, 2016 and revenues from the five largest licenses in 2015 accounted for approximately 62% of the Company’s revenue for the year ended December 31, 2015, as summarized below:

 

For the Year Ended December 31, 2016

 

Licensor

 

License
 Amount

 

% of Revenue

 

Dynamic Advances, LLC.

 

$

24,900,000

 

68

%

Orthophoenix, LLC

 

$

4,500,000

 

12

%

Orthophoenix, LLC

 

$

3,750,000

 

10

%

Signal IP, Inc.

 

$

1,900,000

 

5

%

Orthophoenix, LLC

 

$

600,000

 

2

%

Total

 

$

34,060,000

 

97

%

 

For the Year Ended December 31, 2015

 

Licensor

 

License
Amount

 

% of Revenue

 

TLI Communications LLC

 

$

3,300,000

 

17

%

Vantage Point Technology, Inc.

 

$

2,750,000

 

15

%

Orthophoenix, LLC

 

$

2,050,000

 

11

%

IP Liquidity Ventures, LLC

 

$

1,870,790

 

10

%

IP Liquidity Ventures, LLC

 

$

1,800,000

 

9

%

Total

 

$

11,770,790

 

62

%

 

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The Company derived these revenues from the one-time issuance of non-recurring, non-exclusive, non-assignable licenses to certain licensees and their affiliates for certain of the Company’s patents. While the Company has a growing portfolio of patents, at this time, the Company expects that a significant portion of its future revenues will be based on one-time grants of similar non-recurring, non-exclusive, non-assignable licenses to a relatively small number of entities and their affiliates. Further, with the expected small number of firms with which the Company enters into license agreements, and the amount and timing of such license agreements, the Company also expects that its revenues may be highly variable from one period to the next.

 

Operating Expenses

 

Direct costs of revenues for the years ended December 31, 2016 and December 31, 2015 were $19,064,473 and $16,603,793, respectively. For the year ended December 31, 2016, this represented an increase of $2,460,680, or 15%. Direct costs of revenue include contingent payments related to patent enforcement legal costs, patent enforcement advisors and inventors.  Direct costs of revenue also includes 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.  Such costs include other legal fees and expenses, consulting fees, data management costs and other costs. Direct costs of revenues for 2016 were higher than in 2015 due to higher revenues in 2016. Direct costs of revenues in 2015 were a higher percentage of revenue than in 2016 based on a fixed fee engagement agreement with a law firm that represented one of the Company’s subsidiaries in two United States trials during the year, an increase in enforcement activity in Germany and to a lesser extent France and preparation for a significant number of trials in both the United States and Germany in 2015 in the Company’s Dynamic Advances, Signal IP and TLI subsidiaries.

 

We incurred other operating expenses of $33,148,417 and $28,054,434 for the years ended December 31, 2016 and December 31, 2015, respectively. This represented an increase of $5,093,983, or 18%, in 2016 compared to 2015. This increase in other operating expenses in 2016 compared to 2015 resulted from an increase in patent impairment expenses in the amount of $6,165,473 in 2016 compared to 2015 and goodwill impairment expenses in 2016 of $4,336,307 compared to no goodwill impairment expenses in 2015.  These increases were partially offset by a decrease in patent amortization expenses of $3,372,160, a decrease of consulting and professional fees of $1,795,726 and a decline of $303,690 in other general and administrative expenses. Other operating expenses consisted of the following:

 

 

 

Total Other Operating Expenses

 

 

 

For the Year Ended
December 31, 2016

 

For the Year Ended
December 31, 2015

 

 

 

 

 

 

 

Amortization of patents

 

$

7,453,004

 

$

10,825,164

 

Compensation and related taxes

 

5,483,031

 

5,419,252

 

Consulting fees

 

1,279,092

 

2,324,248

 

Professional fees

 

1,797,922

 

2,548,492

 

Other general and administrative

 

840,179

 

1,143,869

 

Patent impairment

 

11,958,882

 

5,793,409

 

Goodwill impairment

 

4,336,307

 

 

Total

 

$

33,148,417

 

$

28,054,434

 

 

Operating expenses for the years ended December 31, 2016 and December 31, 2015 include non-cash operating expenses totaling $25,762,351 and $20,803,067, respectively.  The results for the year ended December 31, 2016 represent an increase in non-cash operating expenses in the amount of $4,959,284 or 24%, compared to the non-cash operating expenses for the year ended December 31, 2015.  Non-cash operating expenses consisted of the following:

 

 

 

Non-Cash Operating Expenses

 

 

 

For the Year Ended
December 31, 2016

 

For the Year Ended
December 31, 2015

 

 

 

 

 

 

 

Amortization of patents

 

$

7,453,004

 

$

10,825,164

 

Compensation and related taxes

 

1,546,395

 

2,176,711

 

Consulting fees

 

378,290

 

1,590,346

 

Professional fees

 

28,657

 

34,109

 

Other general and administrative

 

60,816

 

383,328

 

Patent impairment

 

11,958,882

 

5,793,409

 

Goodwill impairment

 

4,336,307

 

 

Total

 

$

25,762,351

 

$

20,803,067

 

 

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Table of Contents

 

Amortization of patents

 

Amortization expenses were $7,453,004 and $10,825,164 for the years ended December 31, 2016 and December 31, 2015, respectively, a decrease of $3,372,160 or 31%. The decrease results from the lower carrying value of the assets due to impairment expenses incurred to existing patent assets during the year as well as a (1) lower carrying value of new patent assets acquired during 2016 and (2) amortization of newly acquired patents assets for only a portion of the year, as most of these patent assets were acquired at or after mid-year.  The lower carrying value of newly acquired patent assets is a result of much lower market valuations of patent portfolios.  This environment provides the Company with a prime opportunity to acquire new patent assets at a fraction of what it would have cost in prior years. When the Company acquires patents and patent rights, the Company capitalizes those assets and amortizes the costs over the remaining useful lives of the assets. All patent amortization expenses are non-cash expenses.

 

Compensation expense and related taxes

 

Compensation expense includes cash compensation, related payroll taxes and benefits and non-cash equity compensation. For the years ended December 31, 2016 and December 31, 2015, total compensation expense and related payroll taxes were $5,483,031 and $5,419,252, respectively, an increase of $63,779 or 1%. The increase in compensation primarily reflects an increase in cash-based compensation, benefit costs and payroll costs related to an increase in the number of employees in 2016 compared to 2015.  The increase reflects both a slight increase in the number of employees at the Company’s core business as well as at the Company’s 3D Nano subsidiary.  The increase was mostly offset by a decrease in equity-based compensation. During the years ended December 31, 2016 and 2015, we recognized non-cash employee and board equity based compensation of $1,546,395 and $2,176,711, respectively.

 

Consulting fees

 

For the years ended December 31, 2016 and December 31, 2015, we incurred consulting fees of $1,279,092 and $2,324,248, respectively, a decrease of $1,045,156 or 45%. 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. During the years ended December 31, 2016 and December 31, 2015, we recognized non-cash equity based consulting fees of $378,290 and $1,590,346, respectively.

 

Professional fees

 

Professional fees for the years ended December 31, 2016 and December 31, 2015, respectively, were $1,797,922 and $2,548,492, respectively, a decrease of $750,570 or 29%. Professional fees primarily reflect the costs of professional outside accounting fees, legal fees and audit fees. The decrease in professional fees for the year ended December 31, 2016 compared to the same period in 2015 are predominantly related to the procurement of a fairness opinion prepared for and outside legal, accounting and audit fees resulting from the Business Combination Agreement entered into with Uniloc on August 14, 2015.  The Business Combination Agreement was subsequently terminated in early 2016 prior to completion of the merger. During the years ended December 31, 2016 and December 31, 2015, we recognized non-cash equity based professional fees of $28,657 and $34,109, respectively.

 

Other general and administrative expenses

 

For the years ended December 31, 2016 and December 31, 2015, other general and administrative expenses were $840,179 and $1,143,869, respectively, a decrease of $303,690, or approximately 27%. 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. During the years ended December 31, 2016 and December 31, 2015, we recognized non-cash equity based professional fees of $60,816 and $383,328, respectively.

 

Loss on impairment of intangible assets

 

For the years ended December 31, 2016 and December 31, 2015, the Company recorded a loss on the impairment of intangible assets in the amounts of $11,958,882 and $5,793,409, respectively.

 

Loss on impairment of goodwill

 

For the years ended December 31, 2016 and December 31, 2015, the Company recorded a loss on the impairment of goodwill in the amounts of $4,336,307 and $0, respectively.

 

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Table of Contents

 

Operating loss

 

The operating loss declined by $10,096,818 to $(15,583,614) in 2016 from $(25,680,432) in 2015 as a result of the increase in revenues and smaller proportional increase in direct costs of revenues and other operating expenses in 2016 compared to 2015.

 

Other income (expense)

 

Other income (expense) was $(1,728,451) for the year ended December 31, 2016 compared to other income (expense) of $584,125 for the year ended December 31, 2015.  The decline in other income is attributable to a smaller gain on the reduction of the value of the Clouding IP earn out liability in 2016 in the amount of $1,832,872, compared to $6,137,116 in 2015 and an increase in foreign exchange loss in 2016 compared to 2015.  This was partially offset by lower interest expenses in 2016 compared to 2015 and a loss on extinguishment of debt in 2015 and no comparable expense in 2016.

 

Income tax benefit (expense)

 

We recognized an income tax benefit (expense) in the amount of $(11,516,807) and $8,156,448, respectively, for the years ended December 31, 2016 and 2015. The Company has recorded a full valuation allowance for its deferred tax assets in 2016.

 

Net income and net (loss) available to common shareholders

 

We reported net loss of $(28,828,872) and $(16,939,859) for the years ended December 31, 2016 and December 31, 2015, respectively.

 

Loss per common share, basic and diluted

 

The Company reported an increase in the net loss per share of $0.70 per share to $(1.89) per share for the year ended December 31, 2016 from $(1.19) for the year ended December 31, 2015.  The increase in the net loss per share was principally a result of the valuation allowance.  The increase in the number of weighted-average shares outstanding reflects increases in shares outstanding resulting from shares issued in connection with certain non-cash compensation arrangements plus the issuance of new shares in connection with the Company’s financing.

 

 

 

For the Year Ended
December 31, 2016

 

For the Year Ended
December 31, 2015

 

Net loss attributable to Common Shareholders

 

$

(28,665,024

)

$

(16,939,859

)

 

 

 

 

 

 

Denominator

 

 

 

 

 

Weighted Average Common Shares - Basic

 

15,178,056

 

14,208,787

 

Weighted Average Common Shares - Diluted

 

15,178,056

 

14,208,787

 

 

 

 

 

 

 

Earnings (Loss) per common share:

 

 

 

 

 

Earnings (Loss) - Basic

 

$

(1.89

)

$

(1.19

)

Earnings (Loss) - Diluted

 

$

(1.89

)

$

(1.19

)

 

Non-GAAP Reconciliation

 

Non-GAAP earnings as presented in this Annual Report is a supplemental measure of our performance that are neither required by, nor presented in accordance with, U.S. generally accepted accounting principles (“US GAAP”). Non-GAAP earnings is not a measurement of our financial performance under US GAAP and should not be considered as alternative to net income, operating income, or any other performance measures derived in accordance with US GAAP, or as alternative to cash flow from operating activities as a measure of our liquidity. In addition, in evaluating Non-GAAP earnings, you should be aware that in the future we will incur expenses or charges such as those added back to calculate Non-GAAP earnings. Our presentation of Non-GAAP earnings should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.

 

Non-GAAP earnings has limitations as an analytical tool, and you should not consider it in isolation, or as substitutes for analysis of our results as reported under US GAAP. Some of these limitations are (i) it does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) they do not reflect changes in, or cash requirements for, our working capital needs, (iii) it does not reflect interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Non-GAAP earnings does not reflect any cash requirements for such replacements, (v) it does not adjust for all non-cash income or expense items that are reflected in our statements of cash flows, and (vi) other companies in our industry may calculate this measure differently than we do, limiting its usefulness as comparative measures.

 

We compensate for these limitations by providing specific information regarding the US GAAP amounts excluded from such non-GAAP financial measures. We further compensate for the limitations in our use of Non-GAAP financial measures by presenting comparable US GAAP measures more prominently.

 

We believe that Non-GAAP earnings facilitates operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present Non-GAAP earnings because (i) we believe that this measure is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe that investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use Non-GAAP earnings internally as benchmark to compare our performance to that of our competitors.

 

The Company uses a Non-GAAP reconciliation of net income (loss) and earnings (EPS reconciliation loss) per share in the presentation of financial results here.  Management believes that this presentation may be more meaningful in analyzing our income generation.

 

On a Non-GAAP basis, the Company’s recorded Non-GAAP earnings of $8,004,604 for the year ended December 31, 2016 compared to Non-GAAP loss in the amount of $(6,792,449) for the year ended December 31, 2015. The details of those expenses and non-GAAP reconciliation of these non-cash items are set forth below:

 

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Table of Contents

 

 

 

Non-GAAP Reconciliation

 

 

 

For the Year Ended
December 31, 2016

 

For the Year Ended
December 31, 2015

 

Net loss attributable to Common Shareholders

 

$

(28,665,024

)

$

(16,939,859

)

Non-GAAP

 

 

 

 

 

Amortization of intangible assets & depreciation

 

7,453,004

 

10,825,164

 

Equity-based compensation

 

1,953,343

 

3,801,166

 

Impairment of patents

 

11,958,882

 

5,793,409

 

Impairment of goodwill

 

4,336,307

 

 

Change in fair value of clouding IP earn out

 

(1,832,872

)

(6,137,116

)

Non-cash interest expense

 

1,223,341

 

2,220,992

 

Deferred tax benefit

 

11,516,807

 

(8,156,448

)

Loss on debt restructuring and extinguishment

 

 

1,416,915

 

Other

 

60,816

 

383,328

 

Non-GAAP earnings (loss)

 

$

8,004,604

 

$

(6,792,449

)

 

Non-GAAP Loss per common share, basic and diluted

 

For the year ended December 31, 2016, net income on a Non-GAAP basis was $0.53 per weighted average basic common share compared to net loss per basic common share on a Non-GAAP basis of $(0.48) for the year ended December 31, 2015.  On a diluted common share basis, net income on a Non-GAAP basis for the year ended December 31, 2016 was $0.49 per diluted common share compared to a net loss on a Non-GAAP basis of $(0.48) per diluted common share for the year ended December 31, 2015.

 

 

 

Non-GAAP Reconciliation of Earnings Per Share

 

 

 

For the Year Ended
December 31, 2016

 

For the Year Ended
December 31, 2015

 

Non-GAAP net income (loss)

 

$

8,004,604

 

$

(6,792,449

)

 

 

 

 

 

 

Denominator

 

 

 

 

 

Weighted Average Common Shares - Basic

 

15,178,056

 

14,208,787

 

Weighted Average Common Shares - Diluted

 

16,289,903

 

14,208,787

 

 

 

 

 

 

 

Non-GAAP earnings (loss) per common share:

 

 

 

 

 

Non-GAAP earnings (loss) - Basic

 

$

0.53

 

$

(0.48

)

Non-GAAP earnings (loss) - Diluted

 

$

0.49

 

$

(0.48

)

 

The below is a reconciliation to our US GAAP loss per common share, basic and diluted

 

Net loss attributable to Common Shareholders

 

$

(28,665,024

)

$

(16,939,859

)

 

 

 

 

 

 

Denominator

 

 

 

 

 

Weighted Average Common Shares - Basic

 

15,178,056

 

14,208,787

 

Weighted Average Common Shares - Diluted

 

15,178,056

 

14,208,787

 

 

 

 

 

 

 

Earnings (Loss) per common share:

 

 

 

 

 

Earnings (Loss) - Basic

 

$

(1.89

)

$

(1.19

)

Earnings (Loss) - Diluted

 

$

(1.89

)

$

(1.19

)

 

Liquidity and Capital Resources

 

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 December 31, 2016, the Company’s cash balances totaled $4,998,314 compared to $2,555,151 at December 31, 2015.  The increase in the cash balance of $2,433,163 resulted primarily from the Company’s net cash provided by operations offset by the increased use of cash in investing activities, principally the acquisition of new patent assets, and the increased use of cash in financing activities, principally the repayment of the remainder of the Medtech acquisition debt as well as principal repayments made towards the Fortress debt.

 

The net working capital deficit increased by $2,766,837 to a deficit of $(14,939,583) at December 31, 2016 compared to a deficit of $(12,172,746) at December 31, 2015.  The increase in the net working capital deficit resulted primarily from an increase in the current portion of notes payable and accounts payable and accrued expenses.

 

Cash provided (used in) by operating activities was $10,172,607 during the year ended December 31, 2016 compared to cash used by operating activities of $(2,961,238) during the year ended December 31, 2015.

 

Cash provided (used in) investing activities was $(3,689,746) for the year ended December 31, 2016 compared to cash used in investing activities in the amount of $(58,386) for the year ended December 31, 2015. The increase in cash used in investing activities during the year ended December 31, 2016 was related to the acquisition of new patent assets, partially offset by a decrease in the purchase of equipment. However, purchase of non-patent assets, specifically equipment and other non-patent intangibles represented less than 1% of total acquisitions of assets.

 

Cash provided (used in) by financing activities was $(4,007,890) during the year ended December 31, 2016 compared to cash provided by financing activities in the amount of $508,838 during the year ended December 31, 2015. Cash used in financing activities for the year ended December 31, 2016 resulted from the repayment of the remainder of the Medtech Group acquisition debt and the repayment of principal associated with the Fortress note, offset by equity financing consummated in December 2016.

 

At December 31, 2016, we had approximately $5.0 million in cash and cash equivalents and a working capital deficit of approximately $14.9 million.

 

Based on the Company’s current revenue and profit projections, management is uncertain that the Company’s existing cash and accounts receivables will be sufficient to fund its operations through at least the next twelve months, 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.

 

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.

 

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Table of Contents

 

Off-Balance Sheet Arrangements

 

None.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

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Table of Contents

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

MARATHON PATENT GROUP, INC.

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016

 

Index to Financial Statements

 

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS

F-2

 

 

CONSOLIDATED BALANCE SHEETS

F-4

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS

F-5

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

F-6

 

 

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

F-7

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

F-8

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

F-9 to F-37

 

F-1



Table of Contents

 

 

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Stockholders

Marathon Patent Group, Inc.

Los Angeles, CA

 

We have audited the accompanying consolidated balance sheet of Marathon Patent Group, Inc. and Subsidiaries (collectively, the “Company”) as of December 31, 2016 and the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity (deficit), and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Marathon Patent Group, Inc. and Subsidiaries at December 31, 2016, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As described in Note 2 to the consolidated financial statements, the Company has experienced recurring losses since inception, has negative working capital and has net capital deficiency, that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

 

 

/s/ BDO USA, LLP

 

 

 

Los Angeles, California

 

 

 

April 4, 2017

 

 

F-2



Table of Contents

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors

Marathon Patent Group, Inc. and its subsidiaries

 

We have audited the accompanying consolidated balance sheet of Marathon Patent Group, Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 2015 and the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity (deficit), and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2015 and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

 

/s/ SingerLewak LLP

 

Los Angeles, California

 

March 30, 2016

 

 

F-3



Table of Contents

 

MARATHON PATENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

December 31, 2016

 

December 31, 2015

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash

 

$

4,998,314

 

$

2,555,151

 

Accounts receivable - net of allowance for bad debt of $387,976 and $375,750 for December 31, 2016 and December 31, 2015

 

95,069

 

136,842

 

Bonds posted with courts

 

 

1,748,311

 

Prepaid expenses and other current assets, net of discounts of $3,724 for December 31, 2016 and $3,414 for December 31, 2015

 

428,049

 

338,598

 

   Total current assets

 

5,521,432

 

4,778,902

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $108,407 and $67,052 for December 31, 2016 and December 31, 2015

 

28,329

 

61,297

 

Intangible assets, net

 

12,314,628

 

25,457,639

 

Deferred tax assets

 

 

12,437,741

 

Other non current assets, net of discounts of $797 and $4,831 for December 31, 2016 and December 31, 2015

 

201,203

 

9,169

 

Goodwill

 

222,843

 

4,482,845

 

     Total other assets

 

12,767,003

 

42,448,691

 

 

 

 

 

 

 

     Total Assets

 

$

18,288,435

 

$

47,227,593

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

7,217,078

 

$

6,534,825

 

Clouding IP earn out - current portion

 

81,930

 

33,646

 

Notes payable, net of discounts of $852,404 and $730,945 for December 31, 2016 and December 31, 2015

 

13,162,007

 

10,383,177

 

 

 

20,461,015

 

16,951,648

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

Notes Payable, net of discount of $572,763 and $1,425,167 for December 31, 2016 and December 31, 2015

 

4,670,502

 

12,223,884

 

Clouding IP earn out

 

1,400,082

 

3,281,238

 

Deferred tax liability

 

 

1,044,997

 

Revenue share liability

 

1,000,000

 

1,000,000

 

Other long term liability

 

43,978

 

50,084

 

Total long-term liabilities

 

7,114,562

 

17,600,203

 

 

 

 

 

 

 

     Total liabilities

 

27,575,577

 

34,551,851

 

 

 

 

 

 

 

Stockholders’ Equity (Deficit):

 

 

 

 

 

Preferred stock Series B, $.0001 par value, 100,000,000 shares  authorized: 782,004 issued and outstanding at December 31, 2016 and December 31, 2015

 

78

 

78

 

Common stock, $.0001 par value; 200,000,000 shares authorized;  18,552,472 and 14,867,141 at December 31, 2016 and December 31, 2015

 

1,877

 

1,487

 

Additional paid-in capital

 

49,877,689

 

43,217,513

 

Accumulated other comprehensive loss

 

(1,060,390

)

(1,265,812

)

Accumulated deficit

 

(57,942,548

)

(29,277,524

)

 

 

 

 

 

 

Total Marathon Patent Group stockholders’ equity (deficit)

 

(9,123,294

)

12,675,742

 

 

 

 

 

 

 

Non-controlling Interests

 

(163,848

)

 

 

 

 

 

 

 

Total Equity (Deficit)

 

(9,287,142

)

12,675,742

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity (deficit)

 

$

18,288,435

 

$

47,227,593

 

 

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

 

F-4



Table of Contents

 

MARATHON PATENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

For The

 

For The

 

 

 

Year Ended

 

Year Ended

 

 

 

December 31, 2016

 

December 31, 2015

 

 

 

 

 

 

 

Revenues

 

$

36,629,276

 

$

18,977,794

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

Cost of revenues

 

19,064,473

 

16,603,792

 

Amortization of patents and website

 

7,453,004

 

10,825,164

 

Compensation and related taxes

 

5,483,031

 

5,419,252

 

Consulting fees

 

1,279,092

 

2,324,248

 

Professional fees

 

1,797,922

 

2,548,492

 

General and administrative

 

840,179

 

1,143,869

 

Goodwill impairment

 

4,336,307

 

 

Patent impairment

 

11,958,882

 

5,793,409

 

     Total operarating expenses

 

52,212,890

 

44,658,226

 

 

 

 

 

 

 

Operating loss from continuing operations

 

(15,583,614

)

(25,680,432

)

 

 

 

 

 

 

Other income (expenses)

 

 

 

 

 

Other income (expense)

 

(57,454

)

170,706

 

Foreign exchange gain (loss)

 

(367,847

)

(61,868

)

Change in fair value adjustment of Clouding IP earn out

 

1,832,872

 

6,137,116

 

Interest income

 

4,353

 

1,068

 

Interest expense

 

(3,140,375

)

(4,245,982

)

Loss on debt extinguishment

 

 

(1,416,915

)

     Total other income (expenses)

 

(1,728,451

)

584,125

 

 

 

 

 

 

 

Loss before benefit for income taxes

 

(17,312,065

)

(25,096,307

)

 

 

 

 

 

 

Income tax benefit (expense)

 

(11,516,807

)

8,156,448

 

 

 

 

 

 

 

Net loss

 

(28,828,872

)

(16,939,859

)

 

 

 

 

 

 

Net loss attributable to non-controlling interests

 

163,848

 

 

 

 

 

 

 

 

Net loss attributable to common shareholders

 

$

(28,665,024

)

$

(16,939,859

)

 

 

 

 

 

 

Loss per common share:

 

 

 

 

 

Basic and fully diluted

 

$

(1.89

)

$

(1.19

)

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

 

 

 

 

 

Basic and fully diluted

 

15,178,056

 

14,208,787

 

 

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

 

F-5



Table of Contents

 

MARATHON PATENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

 

 

For The

 

For The

 

 

 

Year Ended

 

Year Ended

 

 

 

December 31, 2016

 

December 31, 2015

 

Net loss

 

$

(28,828,872

)

$

(16,939,859

)

 

 

 

 

 

 

Other Comprehensive Loss:

 

 

 

 

 

Unrealized gain (loss) on foreign currency translation

 

205,422

 

(877,455

)

Comprehensive loss

 

(28,623,450

)

(17,817,314

)

Net loss attributable to noncontrolling interest

 

163,848

 

 

Comprehensive loss attributable to Marathon Patent Group, Inc.

 

$

(28,459,602

)

$

(17,817,314

)

 

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

 

F-6



Table of Contents

 

MARATHON PATENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

Preferred Stock/Units

 

Common Stock

 

Add’l Paid in

 

Accumulated

 

Accumulated
Other Comprehensive

 

Non-

 

Total Stockholders’

 

 

 

Shares

 

Par Value

 

Shares

 

Par Value

 

Capital

 

Deficit

 

Income (Loss)

 

Controlling Interest

 

Equity (Deficit)

 

BALANCE — December 31, 2014

 

932,000

 

$

93

 

13,791,460

 

$

1,379

 

$

36,977,169

 

$

(12,337,665

)

$

(388,357

)

$

 

$

24,252,619

 

Equity compensation expense

 

 

 

 

 

2,490,175

 

 

 

 

 

2,490,175

 

Issue common stock for services

 

 

 

210,000

 

21

 

900,479

 

 

 

 

 

900,500

 

Exercise stock options and warrants

 

 

 

31,276

 

4

 

18,745

 

 

 

 

 

18,749

 

Warrant issued in conjunction with debt financing

 

 

 

 

 

318,679

 

 

 

 

 

318,679

 

Common stock issud in conjunction with debt restructuring

 

 

 

200,000

 

20

 

653,980

 

 

 

 

 

654,000

 

Common stock issued in conjunction with debt financing

 

 

 

134,409

 

13

 

999,987

 

 

 

 

 

1,000,000

 

Conversion of series B Preferred Stock

 

(199,996

)

(20

)

199,996

 

20

 

 

 

 

 

 

 

Series B Preferred Stock compensation expense

 

50,000

 

5

 

 

 

345,329

 

 

 

 

 

345,334

 

Issue common stock in litigation settlement

 

 

 

300,000

 

30

 

512,970

 

 

 

 

 

513,000

 

Currency translation loss

 

 

 

 

 

 

 

(877,455

)

 

 

(877,455

)

 Net Loss

 

 

 

 

 

 

(16,939,859

)

 

 

(16,939,859

)

BALANCE —December 31, 2015

 

782,004

 

 

78

 

14,867,141

 

 

1,487

 

 

43,217,513

 

 

(29,277,524

)

 

(1,265,812

)

 

 

 

12,675,742

 

Equity compensation expense

 

 

 

 

 

1,817,344

 

 

 

 

1,817,344

 

Common stock issued for services

 

 

 

180,000

 

18

 

135,982

 

 

 

 

 

136,000

 

Issue common stock

 

 

 

3,481,997

 

349

 

4,653,731

 

 

 

 

 

 

4,654,080

 

Issue warrants

 

 

 

 

 

 

 

50

 

 

 

 

 

 

50

 

Warrant exercise to purchase common stock

 

 

 

23,334

 

23

 

46,644

 

 

 

 

 

 

46,667

 

Convertible debt warrant repricing

 

 

 

 

 

6,425

 

 

 

 

 

6,425

 

Currency translation loss

 

 

 

 

 

 

 

205,422

 

 

 

205,422

 

 Net Loss

 

 

 

 

 

 

(28,665,024

)

 

(163,848

)

(28,828,872

)

BALANCE —December 31, 2016

 

782,004

 

$

78

 

18,552,472

 

$

1,877

 

$

49,877,689

 

$

(57,942,548

)

$

(1,060,390

)

$

(163,848

)

$

(9,287,142

)

 

The accompanying notes are an integral part of these audited consolidated financial statements.

 

F-7



Table of Contents

 

MARATHON PATENT GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

For The

 

For The

 

 

 

Year Ended

 

Year Ended

 

 

 

December 31, 2016

 

December 31, 2015

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(28,828,872

)

$

(16,939,859

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation

 

4,262

 

7,578

 

Amortization of patents and website

 

7,453,004

 

10,825,164

 

Provision for allowance for doubtul accounts

 

12,226

 

375,750

 

Deferred tax asset

 

12,437,741

 

(7,618,580

)

Deferred tax liability

 

(1,044,998

)

(660,455

)

Impairment of intangible assets

 

11,958,882

 

5,793,409

 

Impairment of goodwill

 

4,336,307

 

 

Stock based compensation

 

1,817,344

 

2,490,175

 

Stock issued for services

 

136,000

 

1,245,834

 

Loss on debt extinguishment

 

 

1,416,915

 

Non-cash interest, discount, and financing costs

 

1,223,341

 

2,220,992

 

Change in fair value of Clouding earnout

 

(1,832,872

)

(6,137,116

)

Other non-cash adjustments

 

121,617

 

260,938

 

Changes in operating assets and liabilities

 

 

 

 

 

Accounts receivable

 

29,547

 

(295,608

)

Prepaid expenses and other assets

 

(81,486

)

(116,791

)

Bonds posted with courts

 

1,748,311

 

(45,915

)

Accounts payable and accrued expenses

 

682,253

 

4,216,331

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

10,172,607

 

(2,961,238

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Acquisition of patents

 

(3,681,358

)

 

Purchase of property, equipment, and other intangible assets

 

(8,388

)

(58,386

)

Net cash used in investing activities

 

(3,689,746

)

(58,386

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payment on note payable in connection with the acquisition of Medtech and Orthophoenix

 

(2,953,779

)

(4,318,287

)

Payment on note payable in connection with the acquisition of Orthophoenix

 

 

(5,500,000

)

Payment on note payable in connection with the acquisition of Sarif

 

 

(276,250

)

Payment on note payable in connection with the acquisition of IP Liquidity

 

 

(1,109,375

)

Payment on note payable in connection with the acquisition of Dynamic Advances

 

 

(2,624,375

)

Payment on MdR Escrow TLI

 

 

(50,000

)

Cash received upon issuance of notes payable (net of issuance costs)

 

 

19,600,000

 

Cash received upon issuance of common stock (net of issuance costs)

 

4,654,130

 

 

Repayment of notes payable

 

(5,379,103

)

 

Cash received upon exercise of warrants

 

46,667

 

18,751

 

Repayment of convertible notes payable

 

 

(5,050,000

)

Payments on notes payable, net

 

(375,805

)

(181,626

)

Net cash provided (used in) by financing activities

 

(4,007,890

)

508,838

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(31,808

)

(16,632

)

 

 

 

 

 

 

Net increase (decrease) in cash

 

2,443,163

 

(2,527,418

)

 

 

 

 

 

 

Cash at beginning of period

 

2,555,151

 

5,082,569

 

 

 

 

 

 

 

Cash at end of period

 

$

4,998,314

 

$

2,555,151

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest expense

 

$

1,917,034

 

$

1,982,140

 

Taxes paid

 

$

43,052

 

$

168,378

 

Loan fees

 

$

 

$

400,000

 

Cash invested in 3DNano

 

$

788,097

 

$

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

Common stock issued in conjunction with note payable

 

$

 

$

1,000,000

 

Warrant issued in conjunction with note payable

 

$

 

$

318,679

 

Revenue share liability incurred in conjunction with note payable

 

$

 

$

1,000,000

 

Note payable issuance in conjunction with the acquisition of GE patent

 

$

944,296

 

$

 

Non-cash interest increase in debt assumed in the Orthophoenix acquisition

 

$

 

$

750,000

 

Common stock issued in conjunction with debt exstinguishment

 

$

 

$

654,000

 

Note payable issuance in conjunction with the acquisition of Seimens patent

 

$

1,672,924