Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
xx 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
oo 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
(State or other jurisdiction of Incorporation or organization)
01-0949984
(I.R.S. Employer Identification No.)
11100 Santa Monica Blvd. Ste. 380, Los Angeles, CA
(Address of principal executive offices)
90025
(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
(Title of class)
The NASDAQ Stock Market LLC
(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
Non-accelerated filer o
(Do not check if a smaller reporting company)
Accelerated filer o
Smaller reporting company x
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
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Item 17.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
Undertakings
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FORWARD LOOKING STATEMENTS
MARATHON PATENT GROUP, INC.
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.
Table of Contents
ITEM 1. BUSINESS
1
PART I
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:
Subsidiary
Bismarck IP Inc.
Clouding Corp.
CRFD Research, Inc.
Cyberfone Systems, LLC
Dynamic Advances, LLC
E2E Processing, Inc.
Hybrid Sequence IP, Inc.
IP Liquidity Ventures, LLC
Loopback Technologies, Inc.
Magnus IP
Medtech Group
Motheye Technologies
Munitech IP
Relay IP, Inc.
Sampo IP, LLC
Sarif Biomedical LLC
Signal IP, Inc.
TLI Communications, LLC
Traverse Technologies
Vantage Point Technology, Inc.
Number
of
Patents
17
59
5
30
4
4
2
3
9
62
81
1
170
1
3
4
7
6
16
31
Earliest
Expiration
Date
Expired
Expired
05/25/21
Expired
Expired
04/27/20
Expired
Expired
Expired
01/28/22
Expired
06/07/21
9/16/18
Expired
03/13/18
Expired
Expired
06/17/17
02/27/23
Expired
Median
Median
Expiration
Date
02/05/17
06/08/21
09/17/21
06/07/20
09/20/21
11/17/23
07/07/17
Expired
12/05/19
09/29/24
07/12/19
06/07/21
6/21/26
Expired
12/01/19
Expired
08/28/20
06/17/17
06/05/29
11/12/17
08/28/20
Latest
Expiration
Date
01/22/18
03/29/29
08/19/23
Subject Matter
Communication and PBX equipment
Network and data management
Web page content translator and device-
to-device transfer system
06/07/20
Telephony and data transactions
03/06/23
Natural language interface
07/18/24 Manufacturing schedules using adaptive
07/17/17
Expired
08/27/22
12/09/31
learning
Asynchronous communications
Pharmaceuticals / tire pressure systems
Automotive
Network Management/Connected Home
Devices
08/09/29 Medical technology
Optical Networking
06/07/21
5/29/32 W-CDMA and GSM cellular technology
Expired
11/16/23
Expired
08/06/22
06/17/17
07/29/33
03/09/18
Multicasting
Centrifugal communications
Microsurgery equipment
Automotive
Telecommunications
Li-Ion Battery/High Capacity Electrodes
Computer networking and operations
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
Central District of California
Eastern District of Michigan
Research and Development
5
1
1
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
Central District of California
Eastern District of Michigan
5
1
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.
Table of Contents
17
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.
Fiscal 2017
First quarter through March 27, 2017
Fiscal 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
High
Low
$
2.29
$
0.63
2.87
2.93
3.44
2.81
8.43
6.06
3.32
2.00
$
1.29
1.41
2.58
1.44
5.59
2.85
1.85
1.34
$
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
Equity compensation plans approved by security
holders
Equity compensation plans not approved by security
holders
Total
Recent issuances of unregistered securities
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
3,516,316
$
— $
$
3,516,316
4.46
—
4.46
22,146
—
22,146
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
Dynamic Advances, LLC.
Orthophoenix, LLC
Orthophoenix, LLC
Signal IP, Inc.
Orthophoenix, LLC
Total
Licensor
TLI Communications LLC
Vantage Point Technology, Inc.
Orthophoenix, LLC
IP Liquidity Ventures, LLC
IP Liquidity Ventures, LLC
Total
Table of Contents
License
Amount
24,900,000
4,500,000
3,750,000
1,900,000
600,000
34,060,000
License
Amount
3,300,000
2,750,000
2,050,000
1,870,790
1,800,000
11,770,790
$
$
$
$
$
$
$
$
$
$
$
$
% of Revenue
68%
12%
10%
5%
2%
97%
% of Revenue
17%
15%
11%
10%
9%
62%
For the Year Ended December 31, 2015
29
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:
Amortization of patents
Compensation and related taxes
Consulting fees
Professional fees
Other general and administrative
Patent impairment
Goodwill impairment
Total
Total Other Operating Expenses
For the Year Ended
December 31, 2016
For the Year Ended
December 31, 2015
$
$
7,453,004
5,483,031
1,279,092
1,797,922
840,179
11,958,882
4,336,307
33,148,417
$
$
10,825,164
5,419,252
2,324,248
2,548,492
1,143,869
5,793,409
—
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
$
$
7,453,004
1,546,395
378,290
28,657
60,816
11,958,882
4,336,307
25,762,351
$
$
10,825,164
2,176,711
1,590,346
34,109
383,328
5,793,409
—
20,803,067
30
Amortization of patents
Compensation and related taxes
Consulting fees
Professional fees
Other general and administrative
Patent impairment
Goodwill impairment
Total
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.
31
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.
Net loss attributable to Common Shareholders
Denominator
Weighted Average Common Shares - Basic
Weighted Average Common Shares - Diluted
Earnings (Loss) per common share:
Earnings (Loss) - Basic
Earnings (Loss) - Diluted
For the Year Ended
December 31, 2016
For the Year Ended
December 31, 2015
$
(28,665,024)
$
(16,939,859)
15,178,056
15,178,056
14,208,787
14,208,787
$
$
(1.89)
(1.89)
$
$
(1.19)
(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:
32
Table of Contents
Net loss attributable to Common Shareholders
Non-GAAP
Amortization of intangible assets & depreciation
Equity-based compensation
Impairment of patents
Impairment of goodwill
Change in fair value of clouding IP earn out
Non-cash interest expense
Deferred tax benefit
Loss on debt restructuring and extinguishment
Other
Non-GAAP earnings (loss)
Non-GAAP Loss per common share, basic and diluted
Non-GAAP Reconciliation
For the Year Ended
December 31, 2016
For the Year Ended
December 31, 2015
$
(28,665,024)
$
(16,939,859)
7,453,004
1,953,343
11,958,882
4,336,307
(1,832,872 )
1,223,341
11,516,807
—
$
60,816
8,004,604
$
10,825,164
3,801,166
5,793,409
—
(6,137,116)
2,220,992
(8,156,448)
1,416,915
383,328
(6,792,449)
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 net income (loss)
Non-GAAP Reconciliation of Earnings Per Share
For the Year Ended
For the Year Ended
December 31, 2015
December 31, 2016
$
8,004,604
$
(6,792,449)
Denominator
Weighted Average Common Shares - Basic
Weighted Average Common Shares - Diluted
Non-GAAP earnings (loss) per common share:
Non-GAAP earnings (loss) - Basic
Non-GAAP earnings (loss) - Diluted
15,178,056
16,289,903
14,208,787
14,208,787
$
$
0.53
0.49
$
$
(0.48)
(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
Weighted Average Common Shares - Diluted
Earnings (Loss) per common share:
Earnings (Loss) - Basic
Earnings (Loss) - Diluted
Liquidity and Capital Resources
15,178,056
15,178,056
14,208,787
14,208,787
$
$
(1.89)
(1.89)
$
$
(1.19)
(1.19)
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.
33
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.
Table of Contents
34
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
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
CONSOLIDATED STATEMENTS OF CASH FLOWS
F-2
F-4
F-5
F-6
F-7
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
Table of Contents
F-3
MARATHON PATENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Current assets:
ASSETS
Cash
Accounts receivable - net of allowance for bad debt of $387,976 and $375,750 for
December 31, 2016 and December 31, 2015
Bonds posted with courts
Prepaid expenses and other current assets, net of discounts of $3,724 for
December 31, 2016 and $3,414 for December 31, 2015
Total current assets
Other assets:
Property and equipment, net of accumulated depreciation of $108,407 and $67,052
for December 31, 2016 and December 31, 2015
Intangible assets, net
Deferred tax assets
Other non current assets, net of discounts of $797 and $4,831 for December 31,
2016 and December 31, 2015
Goodwill
Total other assets
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses
Clouding IP earn out - current portion
Notes payable, net of discounts of $852,404 and $730,945 for December 31, 2016
and December 31, 2015
Long-term liabilities
Notes Payable, net of discount of $572,763 and $1,425,167 for December 31, 2016
December 31, 2016
December 31, 2015
$
4,998,314
$
2,555,151
95,069
—
428,049
5,521,432
28,329
12,314,628
—
201,203
222,843
12,767,003
136,842
1,748,311
338,598
4,778,902
61,297
25,457,639
12,437,741
9,169
4,482,845
42,448,691
$
$
18,288,435
$
47,227,593
7,217,078
81,930
$
13,162,007
20,461,015
6,534,825
33,646
10,383,177
16,951,648
and December 31, 2015
Clouding IP earn out
Deferred tax liability
Revenue share liability
Other long term liability
Total long-term liabilities
Total liabilities
Stockholders’ Equity (Deficit):
4,670,502
1,400,082
—
1,000,000
43,978
7,114,562
12,223,884
3,281,238
1,044,997
1,000,000
50,084
17,600,203
27,575,577
34,551,851
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
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
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
78
78
1,877
49,877,689
(1,060,390 )
(57,942,548 )
1,487
43,217,513
(1,265,812 )
(29,277,524 )
Total Marathon Patent Group stockholders’ equity (deficit)
(9,123,294 )
12,675,742
Non-controlling Interests
Total Equity (Deficit)
(163,848 )
—
(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
Revenues
Expenses
Cost of revenues
Amortization of patents and website
Compensation and related taxes
Consulting fees
Professional fees
General and administrative
Goodwill impairment
Patent impairment
Total operarating expenses
For The
Year Ended
December 31, 2016
For The
Year Ended
December 31, 2015
$
36,629,276
$
18,977,794
19,064,473
7,453,004
5,483,031
1,279,092
1,797,922
840,179
4,336,307
11,958,882
52,212,890
16,603,792
10,825,164
5,419,252
2,324,248
2,548,492
1,143,869
—
5,793,409
44,658,226
Operating loss from continuing operations
(15,583,614 )
(25,680,432 )
Other income (expenses)
Other income (expense)
Foreign exchange gain (loss)
Change in fair value adjustment of Clouding IP earn out
Interest income
Interest expense
Loss on debt extinguishment
Total other income (expenses)
Loss before benefit for income taxes
Income tax benefit (expense)
Net loss
(57,454 )
(367,847 )
1,832,872
4,353
(3,140,375 )
—
(1,728,451 )
170,706
(61,868 )
6,137,116
1,068
(4,245,982 )
(1,416,915 )
584,125
(17,312,065 )
(25,096,307 )
(11,516,807 )
8,156,448
(28,828,872 )
(16,939,859 )
Net loss attributable to non-controlling interests
163,848
—
Net loss attributable to common shareholders
Loss per common share:
Basic and fully diluted
$
$
(28,665,024)
(1.89)
$
$
(16,939,859)
(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
Net loss
Other Comprehensive Loss:
Unrealized gain (loss) on foreign currency translation
Comprehensive loss
Net loss attributable to noncontrolling interest
Comprehensive loss attributable to Marathon Patent Group, Inc.
For The
Year Ended
December 31, 2016
For The
Year Ended
December 31, 2015
(28,828,872)
$
(16,939,859)
205,422
(28,623,450 )
163,848
(28,459,602)
$
(877,455 )
(17,817,314 )
—
(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
Par Value
Shares
Common Stock
Shares
Par Value
Add’l Paid in Accumulated
Capital
Deficit
Accumulated
Other Comprehensive
Income (Loss)
Non-
Total Stockholders’
Controlling Interest Equity (Deficit)
BALANCE —
December 31,
2014
Equity
compensation
expense
Issue common
stock for
services
Exercise stock
options and
warrants
Warrant issued
in conjunction
with debt
financing
Common stock
issud in
conjunction
with debt
restructuring
Common stock
issued in
conjunction
with debt
financing
Conversion of
series B
Preferred
Stock
932,000 $
93 13,791,460$ 1,379 $36,977,169$(12,337,665)$
(388,357)$
— $
24,252,619
—
—
—
—
—
— 2,490,175
— 210,000
21
900,479
—
31,276
4
18,745
—
—
—
— 318,679
—
—
—
—
—
— 200,000
20
653,980
—
—
— 134,409
13
999,987
(199,996)
(20)
199,996
20
—
—
—
—
—
—
—
—
—
—
2,490,175
900,500
18,749
318,679
654,000
1,000,000
—
Series B
Preferred
Stock
compensation
expense
Issue common
stock in
litigation
settlement
Currency
translation
loss
Net Loss
BALANCE —
December 31,
2015
Equity
compensation
expense
Common stock
issued for
services
Issue common
stock
Issue warrants
Warrant exercise
to purchase
common stock
Convertible debt
warrant
repricing
Currency
translation
loss
Net Loss
BALANCE —
December 31,
2016
Table of Contents
—
—
—
—
—
—
—
—
—
—
50,000
5
—
— 345,329
— 300,000
30
512,970
—
—
—
—
—
—
—
—
—
—
—
—
— (16,939,859)
(877,455)
—
782,004
78 14,867,141
1,487 43,217,513 (29,277,524)
(1,265,812)
—
—
— 1,817,344
— 180,000
18
135,982
— 3,481,997
—
349
—
4,653,731
50
—
23,334
23
46,644
6,425
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
345,334
513,000
(877,455)
(16,939,859)
12,675,742
1,817,344
136,000
4,654,080
50
46,667
6,425
—
—
— (28,665,024)
205,422
—
(163,848)
205,422
(28,828,872)
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
MARATHON PATENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation
Amortization of patents and website
Provision for allowance for doubtul accounts
Deferred tax asset
Deferred tax liability
Impairment of intangible assets
Impairment of goodwill
Stock based compensation
Stock issued for services
Loss on debt extinguishment
Non-cash interest, discount, and financing costs
Change in fair value of Clouding earnout
Other non-cash adjustments
Changes in operating assets and liabilities
Accounts receivable
Prepaid expenses and other assets
For The
Year Ended
December 31, 2016
For The
Year Ended
December 31, 2015
$
(28,828,872)
$
(16,939,859)
4,262
7,453,004
12,226
12,437,741
(1,044,998 )
11,958,882
4,336,307
1,817,344
136,000
—
1,223,341
(1,832,872 )
121,617
29,547
(81,486 )
7,578
10,825,164
375,750
(7,618,580 )
(660,455 )
5,793,409
—
2,490,175
1,245,834
1,416,915
2,220,992
(6,137,116 )
260,938
(295,608 )
(116,791 )
Bonds posted with courts
Accounts payable and accrued expenses
1,748,311
682,253
(45,915 )
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
Purchase of property, equipment, and other intangible assets
Net cash used in investing activities
Cash flows from financing activities:
Payment on note payable in connection with the acquisition of Medtech and
Orthophoenix
Payment on note payable in connection with the acquisition of Orthophoenix
Payment on note payable in connection with the acquisition of Sarif
Payment on note payable in connection with the acquisition of IP Liquidity
Payment on note payable in connection with the acquisition of Dynamic Advances
Payment on MdR Escrow TLI
Cash received upon issuance of notes payable (net of issuance costs)
Cash received upon issuance of common stock (net of issuance costs)
Repayment of notes payable
Cash received upon exercise of warrants
Repayment of convertible notes payable
Payments on notes payable, net
Net cash provided (used in) by financing activities
(3,681,358 )
(8,388 )
(3,689,746 )
(2,953,779 )
—
—
—
—
—
—
4,654,130
(5,379,103 )
46,667
—
(375,805 )
(4,007,890 )
—
(58,386 )
(58,386 )
(4,318,287 )
(5,500,000 )
(276,250 )
(1,109,375 )
(2,624,375 )
(50,000 )
19,600,000
—
—
18,751
(5,050,000 )
(181,626 )
508,838
Effect of exchange rate changes on cash
(31,808 )
(16,632 )
Net increase (decrease) in cash
Cash at beginning of period
Cash at end of period
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest expense
Taxes paid
Loan fees
Cash invested in 3DNano
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued in conjunction with note payable
Warrant issued in conjunction with note payable
Revenue share liability incurred in conjunction with note payable
Note payable issuance in conjunction with the acquisition of GE patent
Non-cash interest increase in debt assumed in the Orthophoenix acquisition
Common stock issued in conjunction with debt exstinguishment
Note payable issuance in conjunction with the acquisition of Seimens patent
Note payable issuance in conjunction with the acquisition of 3D Nano License
Conversion of AP to notes payable
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,443,163
2,555,151
(2,527,418 )
5,082,569
4,998,314
$
2,555,151
1,917,034
43,052
$
$
— $
$
788,097
— $
— $
— $
$
— $
— $
$
$
— $
944,296
1,672,924
100,000
1,982,140
168,378
400,000
—
1,000,000
318,679
1,000,000
—
750,000
654,000
—
—
705,093
The accompanying notes are an integral part to these audited consolidated financial statements.
F-8
Table of Contents
MARATHON PATENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization
Our business is to acquire patents and patent rights and to monetize the value of those assets to generate revenue and profit for the
Company. We acquire patents and patent rights from their owners, who range from individual inventors to Fortune 500
companies. 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 achieve the benefits of a growing diversified portfolio of assets. Generally, the patents and patent rights that we
acquire are characterized by having large identifiable companies who are or have been using technology that 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 a standard form of
comprehensive settlement and license agreement 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 that are appropriate in the circumstances. Our strategy has been developed with the expectation that it will result in a long-term,
diversified revenue stream for the Company.
Marathon Patent Group, Inc. (the “Company”), formerly American Strategic Minerals Corporation, was incorporated under the laws of
the State of Nevada on February 23, 2010.
On December 7, 2011, the Company changed its name to American Strategic Minerals Corporation from Verve Ventures, Inc., and
increased the Company’s authorized capital to 200,000,000 shares of Common Stock, par value $0.0001 per share, and 100,000,000
shares of preferred stock, par value $0.0001 per share. In June 2012, the Company discontinued its exploration and potential development
of uranium and vanadium minerals business. 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.
On August 1, 2012, the shareholders holding a majority of the Company’s voting capital voted in favor of (i) changing the name of the
Company to Fidelity Property Group, Inc. and (ii) the adoption the 2012 Equity Incentive Plan and reserving 20,000,000 shares of
Common Stock for issuance thereunder (the “2012 Plan”). The board of directors of the Company (the “Board of Directors”) approved
the name change and the adoption of the 2012 Plan on August 1, 2012. The Company did not file an amendment to its Articles of
Incorporation with the Secretary of State of Nevada and subsequently abandoned the decision to adopt the Fidelity Property Group, Inc.
name.
On October 1, 2012, the shareholders holding a majority of the Company’s voting capital had voted and authorized the Company to
(i) change the name of the Company to Marathon Patent Group, Inc. and (ii) effectuate a reverse stock split of the Company’s Common
Stock by a ratio of 3-for-2 (the “Reverse Split”) within one year from the date of approval of the stockholders of the Company. The
Board of Directors approved the name change and the Reverse Split on October 1, 2012. The Board of Directors determined the name
Marathon Patent Group, Inc. better reflects the long-term strategy in exploring other opportunities and the identity of the Company going
forward. On February 15, 2013, the Company filed the Certificate of Amendment with the Secretary of State of the State of Nevada in
order to effectuate the name change.
On May 1, 2014, the Company issued 2,047,158 shares of Series A Convertible Preferred Stock and two-year warrants to purchase an
aggregate of 511,790 shares of Common Stock in a private placement to accredited investors. All of the Series A Convertible Preferred
Stock was automatically converted pursuant to the terms of the Series A Convertible Preferred Stock Certificate of Designation during the
year ended December 31, 2014. The exercise price of the warrants is $3.75, after giving effect to the two-for-one stock dividend issued on
December 22, 2014. The warrants expired on May 1, 2016.
On May 2, 2014, the Company issued an aggregate of 782,000 shares of Series B Convertible Preferred Stock valued at $2,807,380 to
acquire IP Liquidity Ventures, LLC, Dynamic Advances, LLC and Sarif Biomedical, LLC.
On August 29, 2014, the Company entered into a patent purchase agreement to acquire a portfolio of patents from Clouding IP, LLC for
an aggregate purchase price of $2.4 million, of which $1.4 million was paid in cash and $1.0 million was paid in the form of a promissory
note issued by the Company that matured on October 31, 2014 and paid on October 1, 2014. The Company also issued 25,000 shares of
its restricted common stock valued at $281,000 in connection with the acquisition. Clouding IP, LLC is also entitled to certain possible
future cash payments.
F-9
Table of Contents
On September 17, 2014, the Company entered into a six-month 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 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. In 2014, the Company issued 150,000 shares of Series B Convertible Preferred Stock for a value of $1,103,581,
and in 2015, the Company issued 50,000 shares of Series B Convertible Preferred Stock for a value of $345,334. 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. The Consulting Agreement
contained an acknowledgement that the conversion of the preferred stock into shares of the Company’s common stock is precluded by the
beneficial ownership blockers set forth in the Series B Convertible Preferred Stock 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 Convertible Preferred Stock was
convertible into two shares of Common Stock, after giving effect to the two-for-one stock dividend issued on December 22, 2014 and four
shares of the Series B pursuant to this agreement remain outstanding.
On October 10, 2014, the Company entered into an interest sale agreement with MedTech Development, LLC (“MedTech”) to acquire
from MedTech 100% of the limited liability membership interests of OrthoPhoenix and TLIF as well as 100% of the shares of MedTech
GmbH. In connection with the transaction, the Company paid MedTech $1 million at closing and is obligated to pay $1 million on each
of the following nine (9) month anniversary dates of the closing. 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, the term of the Note was extended to October 1, 2015 and the Note began accruing interest starting from
May 13, 2015. In addition, the Company agreed to make certain mandatory prepayments under certain circumstances and issue to
MedTech Development 200,000 shares of restricted common stock of the Company. In accordance with ASC 470-50, the Company
recorded this agreement as debt extinguishment and $654,000 was recorded as loss on debt extinguishment during the year ended
December 31, 2015. On October 23, 2015, the Company entered into Amendment No. 1 to the Forbearance Agreement (the
“Amendment”) entered into with MedTech Development on July 16, 2015. Pursuant to the Amendment, the due date of the Promissory
Note was extended to October 23, 2016 in return for which the Company made a payment of $100,000 on October 23, 2015 and modified
the terms under which the Company agreed to make mandatory prepayments under certain circumstances. The acquired subsidiaries are
also obligated to make certain additional payments to MedTech from recoveries following the receipt by the acquired subsidiaries of
200% of the purchase payments, plus recovery of out of pocket expenses in connection with patent claims. The participation payments
may be paid, at the election of the Company, in common stock of the Company at the market price on the date of issuance. Enforcement
activity related to the MedTech patents was completed in 2016 and no liabilities were outstanding as of December 31, 2016.
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, of which, $500,000 was outstanding as of December 31, 2016, 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 there was no beneficial conversion feature and that the conversion feature should
not be bifurcated.
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.
F-10
Table of Contents
On March 13, 2015, the Company settled a dispute with a former consultant whereby the Company issued the consultant 60,000 shares of
Common Stock for a full release of all claims.
For the three months ended March 31, 2015, certain holders of warrants exercised their warrants to purchase, in cash, 5,000 shares of the
Company’s Common Stock.
For the three months ended June 30, 2015, certain holders of options exercised their options to purchase, on a net exercise basis, 33,968
(net) shares of the Company’s Common Stock.
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 issues 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 August 14, 2015, the Company entered into a Business Combination Agreement (the “Business Combination Agreement”) with
Marathon Group SA, a Luxembourg société anonyme (“Holdco”) and Uniloc Luxembourg SA, a Luxembourg société anonyme
(“Uniloc”), and Uniloc Corporation Pty. Limited, an Australian corporation (“Uniloc Australia”). The Business Combination Agreement
was subsequently terminated on February 23, 2016, without completion of the merger set forth in the Business Combination Agreement.
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.
During the year ended December 31, 2015, 199,996 shares of the Series B Convertible Preferred Stock associated with the GRQ
Consulting Agreement were converted into 199,996 shares of the Company’s Common Stock, leaving four shares of the Series B
Convertible Preferred Stock associated with the GRQ Consulting Agreement outstanding.
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 11, 2016, the Company entered into an 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.
F-11
Table of Contents
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 exercise price of the warrants is
$1.70. In conjunction with the offering, the Company issued a five-year warrant on December 14, 2016 to the underwriter to purchase
174,100 shares of the Company’s Common Stock at an exercise price of $1.73.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) and
present the consolidated financial statements of the Company and its wholly owned and majority owned subsidiaries as of December 31,
2016. In the preparation of consolidated financial statements of the Company, intercompany transactions and balances are eliminated.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant
estimates made by management include, but are not limited to, estimating the useful lives of patent assets, the assumptions used to
calculate fair value of warrants and options granted, goodwill 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.
Cash
The Company considers all highly liquid debt instruments and other short-term investments with maturity of three months or less, when
purchased, to be cash equivalents. The Company maintains cash and cash equivalent balances at one financial institution that is insured
by the Federal Deposit Insurance Corporation. The Company’s accounts at this institution are insured, up to $250,000, by the Federal
Deposit Insurance Corporation (“FDIC”). For the years ended December 31, 2016 and 2015, the Company’s bank balances exceeded the
FDIC insurance limit. To reduce its risk associated with the failure of such financial institution, the Company evaluates at least annually
the rating of the financial institution in which it holds deposits.
Accounts Receivable
The Company has a policy of reserving for accounts based on its best estimate of the amount of probable credit losses in its existing
accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on
an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances
deemed to be uncollectible are charged to the bad debt expense after all means of collection have been exhausted and the potential for
recovery is considered remote. At December 31, 2016 and 2015, the Company had recorded an allowance for bad debts in the amounts of
$387,976 and $375,750, respectively. Net accounts receivable at December 31, 2016 and 2015 were $95,069 and $136,842, respectively.
Concentration of Revenue and Geographic Area
Revenue from the Company’s patent enforcement activities is considered United States revenue as any payments for licenses included in
that revenue are for United States operations irrespective of the location of the licensee’s or licensee’s parent home domicile.
Revenues from the five largest licenses for the year ended December 31, 2016 accounted for approximately 97% of the Company’s total
2016 revenue and revenue from the largest five licenses in 2015 accounted for approximately 62% of the Company’s revenues for the
year ended December 31, 2015. The Company derived these revenues from the one-time issuance of non-recurring, non-exclusive, non-
assignable licenses. 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. For the year ended December 31, 2016 the Company earned $161,000 of revenues in Germany. Amounts for
the year ended December 31, 2015 were insignificant.
F-12
Table of Contents
At the current time, we define customers as firms that obtain licenses to the Company’s patents, either prior to or during enforcement
litigation. These firms generally enter into non-recurring, non-exclusive, non-assignable license agreements with the Company, and these
customers do not generally engage on ongoing, recurring business activity with the Company. The Company has historically had a small
number of customers enter into such agreements, resulting in higher levels of revenue concentration.
Revenue Recognition
The Company recognizes revenue
in accordance with Accounting Standards Codification (“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 its settlement and licensing agreements 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. Revenue from patent enforcement activities accounted for 100% of the
Company’s revenues for the years ended December 31, 2016 and December 31, 2015.
Prepaid Expenses
Prepaid expenses of $428,049 and $338,598 at December 31, 2016 and 2015, respectively, consist primarily of costs paid for future
services that will occur within a year. Prepaid expenses include prepayments in cash and in equity instruments for investor relations
public relations services, business advisory, other consulting and prepaid insurance, all of which assets are being amortized over the terms
of their respective agreements.
Bonds Posted With Courts
Under certain circumstances related to litigations in Germany, the Company is either required to or may decide to enter a bond with the
courts. As of December 31, 2016 and December 31, 2015, the Company had outstanding bonds in the amount of $0 and $1,748,311,
respectively. These bonds were entered into in Germany after the first instance of litigation of some of the Company’s patents in German
courts and the difference in the balance of the litigation bonds at December 31, 2016 compared to December 31, 2015 is attributable to the
repayment of all outstanding bonds.
Related Party Transactions
Parties are considered related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are
controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its
management, members of the immediate families of principal owners of the Company and its management and other parties with which
the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent
that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related
party transactions.
On May 10, 2016, the Company entered into an executive employment agreement with Erich Spangenberg pursuant to which Mr.
Spangenberg became the Company’s Director of Acquisitions, Licensing and Strategy.
On May 13, 2013, we entered into a six-year advisory services agreement (the “Advisory Services Agreement”) with IP Navigation
Group, LLC (“IP Nav”), of which Erich Spangenberg is founder and former Chief Executive Officer. Mr. Spangenberg is an affiliate of
the Company. The terms of the Advisory Services Agreement provide that, in consideration for its services as intellectual property
licensing agent, the Company will pay to IP Navigation Group, LLC between 10% and 20% of the gross proceeds of certain licensing
campaigns in which IP Navigation Group, LLC acts as intellectual property licensing agent.
On November 18, 2013, we entered into Amendment No. 1 to the Executive Employment Agreement with our Chief Executive Officer
and Chairman, Doug Croxall, pursuant to which Mr. Croxall’s base salary was raised to $480,000, subject to a 3% increase every year
commencing on November 14, 2014. We also granted Mr. Croxall a bonus of $350,000 and ten-year stock options to purchase an
aggregate of 100,000 shares of our Common Stock, with a strike price of $5.93 per share (representing the closing price on the date of
grant), vesting in twenty-four (24) equal installments on each monthly anniversary of the date of grant.
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On November 18, 2013, we entered into a consulting agreement with Jeff Feinberg (“Feinberg Agreement”), pursuant to which we agreed
to grant Mr. Feinberg 100,000 shares of our restricted Common Stock, 50% of which shall vest on the one-year anniversary of the
Feinberg Agreement and the remaining 50% of which shall vest on the second-year anniversary of the Feinberg Agreement. Mr. Feinberg
is the trustee of The Feinberg Family Trust and holds voting and dispositive power over shares held by The Feinberg Family Trust, which
is a 10% beneficial owner of our Common Stock.
On May 2, 2014, the Company completed the acquisition of certain ownership rights (the “Acquired Intellectual Property”) from
TechDev, Granicus and SFF pursuant to the terms of three purchase agreements between: (i) the Company, TechDev, SFF and DA
Acquisition LLC, a newly formed Texas limited liability company and wholly-owned subsidiary of the Company; (ii) the Company,
Granicus, SFF and IP Liquidity Ventures Acquisition LLC, a newly formed Delaware limited liability company and wholly-owned
subsidiary of the Company; and (iii) the Company, TechDev, SFF and Sarif Biomedical Acquisition LLC, a newly formed Delaware
limited liability company and wholly-owned subsidiary of the Company. TechDev, SFF and Granicus are owned or controlled by Erich
Spangenberg or family members or associates.
·
Pursuant to the DA Agreement, the Company acquired 100% of the limited liability company membership interests of Dynamic
Advances, LLC, a Texas limited liability company, in consideration for: (i) two cash payments of $2,375,000, one payment due at
closing and the other payment was due on or before June 30, 2014, with such second payment being subject to increase to $2,850,000 if
not made on or before June 30, 2014; and (ii) 195,500 shares of the Company’s Series B Convertible Preferred Stock. The remaining
cash payment was made on April 1, 2015 and is fully paid. Under the terms of the DA Agreement, TechDev and SFF are entitled to
possible future payments for a maximum consideration of $250,000,000 pursuant to the Pay Proceeds Agreement described below.
·
Pursuant to the IP Liquidity Agreement, the Company acquired 100% of the limited liability company membership interests of IP
Liquidity Ventures, LLC, a Delaware limited liability company, in consideration for: (i) two cash payments of $2,375,000, one
payment due at closing and the other payment was due on or before June 30, 2014, with such second payment being subject to increase
to $2,850,000 if not made on or before June 30, 2014; and (ii) 195,500 shares of the Company’s Series B Convertible Preferred
Stock. The remaining cash payment was made on April 1, 2015 and is fully paid. Under the terms of the IP Liquidity Agreement,
Granicus and SFF are entitled to possible future payments for a maximum consideration of $250,000,000 pursuant to the Pay Proceeds
Agreement described below.
·
Pursuant to the Sarif Agreement, the Company acquired 100% of the limited liability company membership interests of Sarif
Biomedical, LLC, a Delaware limited liability company, in consideration for two cash payments of $250,000, one payment due at
closing and the other payment was due on or before June 30, 2014, with such second payment being subject to increase to $300,000 if
not made on or before June 30, 2014. The remaining cash payment was made on February 24, 2015 and is fully paid. Under the terms
of the Sarif Agreement, TechDev and SFF are entitled to possible future payments for a maximum consideration of $250,000,000
pursuant to the Pay Proceeds Agreement described below.
· Pursuant to the Pay Proceeds Agreement, the Company may pay the sellers a percentage of the net recoveries (gross revenues minus
certain defined expenses) that the Company makes with respect to the assets held by the entities that the Company acquired pursuant to
the DA Agreement, the IP Liquidity Agreement and the Sarif Agreement. Under the terms of the Pay Proceeds Agreement, as
amended in 2016, if the Company recovers $10,000,000 or less with regard to the IP Assets, then nothing is due to the sellers; if the
Company recovers between $13,000,000 and $40,000,000 with regard to the IP Assets, then the Company shall pay 40% of the
cumulative gross proceeds of such recoveries to the sellers; and if the Company recovers over $40,000,000 with regard to the IP
Assets, the Company shall pay 50% of the cumulative gross proceeds of such recoveries to the sellers. Pursuant to the amendment to
the Pay Proceeds Agreement, the Company paid TechDev, Granicus and SFF $2.4 million. In no event will the total payments made by
the Company under the Pay Proceeds Agreement exceed $250,000,000.
On May 2, 2014, we entered into an opportunity agreement (the “Marathon Opportunity Agreement”) with Erich Spangenberg, who is an
affiliate of the Company. The terms of the Marathon Opportunity Agreement provide that we have ten business days after receiving
notice from Mr. Spangenberg to provide up to 50% of the funding for certain opportunities relating to the licensing, intellectual property
acquisitions and/or intellectual property enforcement actions in which Mr. Spangenberg, IP Nav or any entity controlled by
Mr. Spangenberg, other than: (i) IP Nav or any of its affiliates, and (ii) Medtech Development, LLC or any of its affiliates.
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On June 17, 2014, Selene Communication Technologies Acquisition LLC (“Acquisition LLC”), a Delaware limited liability company and
newly formed wholly-owned subsidiary of the Company, entered into a merger agreement with Selene Communication Technologies,
LLC (“Selene”). Selene owned a patent portfolio consisting of three United States patents in the field of search and network intrusion that
relate to tools for intelligent searches applied to data management systems as well as global information networks such as the internet. IP
Nav provided patent monetization and support services under an existing agreement with Selene prior to the return of the patents to
Stanford Research Institute (“SRI”), the original owners of the patents.
On August 29, 2014, the Company entered into a patent purchase agreement to acquire a portfolio of patents from Clouding IP, LLC for
an aggregate purchase price of $2.4 million, of which $1.4 million was paid in cash and $1.0 million was paid in the form of a promissory
note issued by the Company that matured on October 31, 2014 and was fully paid prior to the maturation date. The Company also issued
25,000 shares of its restricted common stock in connection with the acquisition. Clouding IP, LLC is also entitled to certain possible
future cash payments. Clouding IP LLC is owned or controlled by Erich Spangenberg or family members or associates.
On October 10, 2014, the Company entered into an interest sale agreement with MedTech Development, LLC (“MedTech”) to acquire
from MedTech 100% of the limited liability membership interests of OrthoPhoenix and TLIF as well as 100% of the shares of MedTech
GmbH. In connection with the transaction, the Company is obligated to pay to MedTech $1 million at closing and $1 million on each of
the following nine (9) month anniversary dates of the closing. 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, the term of the Note was extended to October 1, 2015 and the Note began accruing interest starting from May 13, 2015. In
addition, the Company agreed to make certain mandatory prepayments under certain circumstances and issue to MedTech Development
200,000 shares of restricted common stock of the Company. In accordance with ASC 470-50, the Company recorded this agreement as
debt extinguishment and $654,000 was recorded as loss on debt extinguishment during the year ended September 30, 2015. On
October 23, 2015, the Company entered into Amendment No. 1 to the Forbearance Agreement (the “Amendment”) entered into with
MedTech Development on July 16, 2015. Pursuant to the Amendment, the due date of the Promissory Note was extended to October 23,
2016 in return for which the Company made a payment of $100,000 on October 23, 2015 and modified the terms under which the
Company agreed to make mandatory prepayments under certain circumstances. The acquired subsidiaries are also obligated to make
certain additional payments to MedTech from recoveries following the receipt by the acquired subsidiaries of 200% of the purchase
payments, plus recovery of out of pocket expenses in connection with patent claims. The participation payments may be paid, at the
election of the Company, in common stock of Marathon at the market price on the date of issuance. In connection with the transaction,
the Company entered into a promissory note, common interest agreement and in the event of issuance of common stock to MedTech, will
enter into a lockup and registration rights agreement. Approximately forty-five percent (45%) of MedTech is owned or controlled by
Erich Spangenberg or family members or associates.
On October 1, 2016, one of the Company’s subsidiaries, PG Technologies S.a.r.l. entered into an advisory services agreement with
Granicus IP, LLC, an entity owned or controlled by one of the Company’s employees, whereby Granicus receives a percentage of pre-tax
return from PG Technologies after certain revenue thresholds have been met.
During 2016, certain officers and directors of the Company received restricted common stock in the Company’s 3D Nano subsidiary.
Fair Value of Financial Instruments
The Company measures at fair value certain of its financial and non-financial assets and liabilities by using a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based
on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:
Level 1:
Level 2:
Level 3:
Observable inputs such as quoted market prices in active markets for identical assets or liabilities
Observable market-based inputs or unobservable inputs that are corroborated by market data
Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own
assumptions.
The carrying amounts reported in the consolidated balance sheet for cash, accounts receivable, accounts payable, and accrued expenses,
approximate their estimated fair market value based on the short-term maturity of these instruments. The carrying value of notes payable
and other long-term liabilities approximate fair value as the related interest rates approximate rates currently available to the Company.
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The Clouding IP earn out liability was determined to be a Level 3 liability, which requires fair assessment of fair value at each period end
by using a discounted cash flow model as the valuation methodology, using unobservable inputs, such as revenue and expenses forecasts,
timing of proceeds, and discount rates. Based on the reassessment of fair value as of December 31, 2016, the Company determined the
Clouding IP earn out liability to be $81,930 (current portion) and $1,400,082 (long-term portion), which resulted in a gain from exchange
in fair value adjustment of $1,832,872 for the year ended December 31, 2016. Further, the periodic reassessment resulted in a non-routine
impairment of the Clouding patent intangible assets of $3,089,983 for the year ended December 31, 2016.
Under certain circumstances related to litigations in Germany, the Company is either required to or may decide to enter a bond with the
courts. As of December 31, 2016 and December 31, 2015, the Company had outstanding bonds in the amount of $0 and $1,748,311,
respectively. These bonds were entered into in Germany after the first instance of litigation of some of the Company’s patents in German
courts and the difference in the balance of the litigation bonds at December 31, 2016 compared to December 31, 2015 is attributable to the
repayment of all outstanding bonds. The Company adjusts the value of the bonds at the end of each reporting period to reflect changes to
the exchange rate between the Euro and the US Dollar.
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.
Income Taxes
The Company accounts for income taxes pursuant to the provision of ASC 740-10, “Accounting for Income Taxes” which requires,
among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which
management believes it is more likely than not that the net deferred asset will not be realized.
The Company follows the provision of the ASC 740-10 related to Accounting for Uncertain Income Tax Position. When tax returns are
filed, it is more likely than not that some positions taken would be sustained upon examination by the taxing authorities, while others are
subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In
accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during
which, based on all available evidence, management believes it is most likely that not that the position will be sustained upon
examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other
positions.
Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than
50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions
taken that exceeds the amount measured as described above should be reflected as a liability for uncertain tax benefits in the
accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon
examination. The Company believes its tax positions will more likely than not be upheld upon examination. As such, the Company has
not recorded a liability for uncertain tax benefits.
The federal and state income tax returns of the Company are subject to examination by the Internal Revenue Service and state taxing
authorities, generally for three years after they were filed. The Company is in the process of filing the 2016 tax returns. After review of
the prior year financial statements and the results of operations through December 31, 2016, the Company has recorded a full valuation
allowance on its deferred tax asset.
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Basic and Diluted Net Loss per Share
Net loss per common share is calculated in accordance with ASC Topic 260: Earnings Per Share (“ASC 260”). Basic loss per share is
computed by dividing net loss by the weighted average number of shares of Common Stock outstanding during the period. The
computation of diluted net loss per share does not include dilutive Common Stock equivalents in the weighted average shares outstanding,
as they would be anti-dilutive. As of December 31, 2016, the Company has warrants to purchase 466,078 shares of Common Stock
outstanding, options to purchase 3,516,136 shares of Common Stock outstanding, convertible notes convertible into 66,667 shares of
Common Stock outstanding and 782,004 shares of Series B Convertible Preferred Stock convertible into 782,004 shares of Common
Stock outstanding, all of which were excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive
impact on the Company’s net loss per share computation.
The following table sets forth the computation of basic and diluted loss per share on a GAAP basis:
Net loss attributable to Common Shareholders
For the Year Ended
December 31, 2016
$
(28,665,024)
For the Year Ended
December 31, 2015
(16,939,859)
$
Denominator
Weighted Average Common Shares - Basic
Weighted Average Common Shares - Diluted
Earnings (Loss) per common share:
Earnings (Loss) - Basic
Earnings (Loss) - Diluted
Intangible Assets - Patents
15,178,056
15,178,056
14,208,787
14,208,787
$
$
(1.89)
(1.89)
$
$
(1.19)
(1.19)
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.
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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.
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 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.
Reclassification
Certain prior year reported amounts have been reclassified to conform to the current year presentation. The reclassification did not have
an impact on previously issued net income (loss) or Total Shareholders’ Equity.
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Liquidity and Capital Resources
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 from the issuance date of the financial
statements, raising substantial doubt regarding the Company’s ability to continue operating as a going concern. If we do not meet our
revenue and profit projections or the business climate turns negative, then we will need to:
· raise additional funds to support the Company’s operations; provided, however, there is no assurance that the Company will
be able to raise such additional funds on acceptable terms, if at all. If the Company raises additional funds by issuing
securities, existing stockholders may be diluted; and
· review strategic alternatives.
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. The
accompanying consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern,
which contemplates the realization of assets and settlements of liabilities in the normal course of business, and do not include any
adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of
liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern
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.
In January 2017, the FASB issued ASU 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU
2017-01”), which clarifies the definition of a business and assists entities with evaluating whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. Under this guidance, when substantially all of the fair value of gross assets acquired is
concentrated in a single asset (or group of similar assets), the assets acquired would not represent a business. In addition, in order to be
considered a business, an acquisition would have to include at a minimum an input and a substantive process that together significantly
contribute to the ability to create an output. The amended guidance also narrows the definition of outputs by more closely aligning it with
how outputs are described in FASB guidance for revenue recognition. This guidance is effective for interim and annual periods beginning
after December 15, 2017, with early adoption permitted.
In October 2016, the FASB issued 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 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 May 2014, the FASB Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers, as a new Topic, (ASC) Topic 606. The new revenue recognition standard provides a five-step
analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with
Customers: Deferral of the Effective Date, which deferred the effective date of the new revenue standard for periods beginning after
December 15, 2016 to December 15, 2017, with early adoption permitted but not earlier than the original effective date. This ASU must be
applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are considering the
alternatives of adoption of this ASU and we are conducting our review of the likely impact to the existing portfolio of customer contracts
entered into prior to adoption. After completing our review, we will continue to evaluate the effect of adopting this guidance upon our
results of operations, cash flows and financial position.
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 January 1, 2017 and we are currently evaluating the impact that the standard will have on
our consolidated financial statements.
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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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There were other updates recently issued, most of which represented technical corrections to the accounting literature or application to
specific industries and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
NOTE 3 — ACQUISITIONS
Dynamic Advances, IP Liquidity and Sarif Biomedical
On May 2, 2014, the Company completed the acquisition of certain ownership rights (the “Acquired Intellectual Property”) from
TechDev, Granicus IP, LLC (“Granicus”) and SFF pursuant to the terms of three purchase agreements between: (i) the Company,
TechDev, SFF and DA Acquisition LLC, a newly formed Texas limited liability company and wholly-owned subsidiary of the Company;
(ii) the Company, Granicus, SFF and IP Liquidity Ventures Acquisition LLC, a newly formed Delaware limited liability company and
wholly-owned subsidiary of the Company; and (iii) the Company, TechDev, SFF and Sarif Biomedical Acquisition LLC, a newly formed
Delaware limited liability company and wholly-owned subsidiary of the Company (the “DA Agreement,” the “IP Liquidity Agreement”
and the “Sarif Agreement,” respectively and the collective transactions, the “Acquisitions”).
Dynamic Advances
Pursuant to the DA Agreement, the Company acquired 100% of the limited liability company membership interests of Dynamic
Advances, LLC, a Texas limited liability company, in consideration for: (i) two cash payments totaling $5,225,000; and (ii) 391,000
shares of the Company’s Series B Convertible Preferred Stock. Under the terms of the DA Agreement, TechDev and SFF are entitled to
possible future payments for a maximum consideration of $250,000,000 pursuant to the Pay Proceeds Agreement described below.
Dynamic Advances, LLC holds exclusive license to monetize certain patents owned by a third party.
On May 2, 2014, the Company issued TechDev and SFF a promissory note in order to evidence the second cash payment due under the
terms of the DA Agreement in the amount of $2,375,000 due on or before September 30, 2014, with such amount due under the terms of
the promissory note being subject to increase to $2,850,000 if the Company’s payment pursuant to the terms of the DA Agreement are not
made on or before June 30, 2014. The Company did not make the payment prior to June 30, 2014 and the promissory note matured on
September 30, 2014. Effective September 30, 2014, TechDev and SFF extended the maturity to March 31, 2015 in return for a payment
of $249,375, payable within thirty days. The payment for this extension of the maturity date was made on October 10, 2014 and the loan
was paid off on April 1, 2015. The promissory note did not otherwise include any interest payable by the Company. Since the Company
did not make the payment on the promissory note prior to June 30, 2014, the Company included in the consideration paid for Dynamic
Advances the promissory note balance of $2,850,000. Further, the Company had the Series B Convertible Preferred Stock valued by a
third party firm that determined, based on the rights and privileges of the Series B Convertible Preferred Stock, that it was on par with the
value of the Company’s Common Stock. The total amount of consideration paid by the Company for Dynamic Advances, including
capitalized costs associated with the purchase, was $6,653,078.
After evaluating the facts and circumstances of the purchase, the Company determined that this was an asset purchase. In coming to its
conclusion, the Company reviewed the status of the assets, the historical activity and the absence of any employees, licenses, revenues,
and any other assets other than the IP Assets. Further, as there are no assumed licensees or historical revenues, the Company is not
certain that it will be able to obtain access to customers pursuant to AC 805-10-55-7.
IP Liquidity
Pursuant to the IP Liquidity Agreement, the Company acquired 100% of the limited liability company membership interests of IP
Liquidity Ventures, LLC, a Delaware limited liability company, in consideration for: (i) two cash payments totaling $5,225,000; and
(ii) 391,000 shares of the Company’s Series B Convertible Preferred Stock. Under the terms of the IP Liquidity Agreement, Granicus and
SFF are entitled to possible future payments for a maximum consideration of $250,000,000 pursuant to the Pay Proceeds Agreement
described below. IP Liquidity Ventures, LLC holds contract rights to the proceeds from the monetization of certain patents owned by a
number of third parties.
On May 2, 2014, the Company issued Granicus and SFF a promissory note in order to evidence the second cash payment due under the
terms of the IP Liquidity Agreement in the amount of $2,375,000 due on or before September 30, 2014, with such amount due under the
terms of the promissory note being subject to increase to $2,850,000 if the Company’s payment pursuant to the terms of the IP Liquidity
Agreement are not made on or before June 30, 2014. The Company did not make the payment prior to June 30, 2014 and the promissory
note matured on September 30, 2014. Effective September 30, 2014, Granicus and SFF extended the maturity to March 31, 2015 in return
for a payment of $249,375, payable within thirty days. The payment for this extension of the maturity date was made on October 10, 2014
and the loan was paid off on April 1, 2015. The promissory note did not otherwise include any interest payable by the Company. Since
the Company did not make the payment on the promissory note prior to June 30, 2014, the Company included in the consideration paid
for IP Liquidity the promissory note balance of $2,850,000. Further, the Company had the Series B Convertible Preferred Stock valued
by a third party firm that determined, based on the rights and privileges of the Series B Convertible Preferred Stock that it was on par with
the value of the Company’s Common Stock. The total amount of consideration paid by the Company for IP Liquidity, including
capitalized costs associated with the purchase, was $6,653,078.
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After evaluating the facts and circumstances of the purchase, the Company determined that this was an asset purchase. In coming to its
conclusion, the Company reviewed the status of the assets, the historical activity and the absence of any employees, licenses, revenues,
and any other assets other than the IP Assets. Further, as there are no assumed licensees or historical revenues, the Company is not
certain that it will be able to obtain access to customers pursuant to AC 805-10-55-7.
Sarif Biomedical
Pursuant to the Sarif Agreement, the Company acquired 100% of the limited liability company membership interests of Sarif Biomedical,
LLC, a Delaware limited liability company, in consideration for two cash payments totaling $550,000. Under the terms of the Sarif
Agreement, TechDev is entitled to possible future payments for a maximum consideration of $250,000,000 pursuant to the Pay Proceeds
Agreement described below. Sarif Biomedical, LLC holds ownership rights to certain patents.
On May 2, 2014, the Company issued TechDev a promissory note in order to evidence the second cash payment due under the terms of
the Sarif Agreement in the amount of $250,000 due on or before September 30, 2014, with such amount due under the terms of the
promissory note being subject to increase to $300,000 if the Company’s payment pursuant to the terms of the Sarif Agreement are not
made on or before September 30, 2014. The Company did not make the payment prior to June 30, 2014 and the promissory note matured
on September 30, 2014. Effective September 30, 2014, TechDev extended the maturity to March 31, 2015 in return for a payment of
$26,250, payable within thirty days. The payment for this extension of the maturity date was made on October 10, 2014 and the loan was
paid off on February 24, 2015. The promissory note did not otherwise include any interest payable by the Company. Since the Company
did not make the payment on the promissory note prior to June 30, 2014, the Company included in the consideration paid for Dynamic
Advances the higher principal amount of the promissory note. The total amount of consideration paid by the Company for Sarif
Biomedical, including capitalized costs associated with the purchase, was $552,024.
After evaluating the facts and circumstances of the purchase, the Company determined that this was an asset purchase. In coming to its
conclusion, the Company reviewed the status of the assets, the historical activity and the absence of any employees, licenses, revenues,
and any other assets other than the IP Assets. Further, as there are no assumed licensees or historical revenues, the Company is not certain
that it will be able to obtain access to customers pursuant to AC 805-10-55-7.
Dynamic Advances, IP Liquidity and Sarif Biomedical
Pursuant to the Pay Proceeds Agreement, the Company may pay the sellers a percentage of the net recoveries (gross revenues minus
certain defined expenses) that the Company makes with respect to the assets held by the entities that the Company acquired pursuant to
the DA Agreement, the IP Liquidity Agreement and the Sarif Agreement (the “IP Assets”). Under the terms of the Pay Proceeds
Agreement, if the Company recovers $10,000,000 or less with regard to the IP Assets, then nothing is due to the sellers; if the Company
recovers between $10,000,000 and $40,000,000 with regard to the IP Assets, then the Company shall pay 40% of the net proceeds of such
recoveries to the sellers; and if the Company recovers over $40,000,000 with regard to the IP Assets, the Company shall pay 50% of the
net proceeds of such recoveries to the sellers. In no event will the total payments made by the Company under the Pay Proceeds
Agreement exceed $250,000,000.
Pursuant to a Registration Rights Agreement with the sellers (the “Acquisition Registration Rights Agreement”), the Company agreed to
file a “resale” registration statement with the SEC covering at least 10% of the registrable shares of the Company’s Series B Convertible
Preferred Stock issued to the sellers under the terms of the DA Agreement and the IP Liquidity Agreement, at any time on or after
November 2, 2014 upon receipt of a written demand from the sellers which describes the amount and type of securities to be included in
the registration and the intended method of distribution thereof. The Company shall not be required to file more than three such
registration statements not more than sixty days after the receipt of each such written demand from the sellers.
TechDev and Mr. Erich Spangenberg (the founder of IP Nav) and his spouse Audrey Spangenberg have jointly filed a Schedule 13G and
are deemed to be affiliates of the Company.
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Clouding Corp.
On August 29, 2014, the Company entered into a patent purchase agreement (the “Clouding Agreement”) between Clouding Corp., a
Delaware corporation and a wholly owned subsidiary of the Company (“Clouding”) and Clouding IP, LLC, a Delaware limited liability
company (“Clouding IP”), pursuant to which Clouding acquired a portfolio of patents from Clouding IP. Clouding owns patents related to
network and data management technology.
The Company paid Clouding IP (i) $1.4 million in cash, (ii) $1.0 million in the form of a promissory note issued by the Company that
matures on October 31, 2014, (iii) 50,000 shares of its restricted Common Stock valued at $281,000 and (iv) fifty percent (50%) of the net
recoveries (gross revenues minus certain defined expenses) in excess of $4.0 million in net revenues that the Company makes with respect
to the patents purchased from Clouding IP. The Company valued the Common Stock at the fair market value on the date of the Interests
Sale Agreement at $5.62 per share or $281,000 and the promissory note was paid in full prior to October 31, 2014. The revenue share
under item (iv) above was booked as an earn out liability on the balance sheet in accordance with the appraisal of the consideration and
intangible value. The Company booked a payable to the sellers pursuant to the earn out liability in the amount of $2,148,000 at
September 30, 2014, based on license agreements entered into during the quarter. No further amount is owed until the Company generates
additional revenue, if any, from the Clouding patents.
The Company accounted for the acquisition as a business combination in accordance with ASC 805 “Business Combinations”. The
Company engaged a third party valuation firm to determine the fair value of the assets purchases, and the net purchase price paid by the
Company was subsequently allocated to assets acquired and liabilities assumed on the records of the Company as follows:
Intangible assets
Goodwill
Net purchase price
Total consideration paid of the following:
Cash
Promissory Note
Common Stock
Earn-Out Liability
Net purchase price
$
$
$
$
14,500,000
1,296,000
15,796,000
1,400,000
1,000,000
281,000
13,115,000
15,796,000
Upon further evaluation, the total value of the earn-out liability was reduced, measured as of the acquisition date, to reflect certain
underlying changes in the litigation schedule. Historical financial statements of Clouding and the pro forma condensed combined
consolidated financial statements can be found on the Form 8-K/A filed with the SEC on November 12, 2014. The unaudited pro forma
condensed combined consolidated financial statements are not necessarily indicative of the results that actually would have been attained
if the merger had been in effect on the dates indicated or which may be attained in the future. Such statements should be read in
conjunction with the historical financial statements of the Company.
The Clouding IP earn out liability was determined to be a Level 3 liability, which requires fair assessment of fair value at each period end
by using a discounted cash flow model as the valuation methodology, using unobservable inputs, such as revenue and expenses forecasts,
timing of proceeds, and discount rates. Based on the reassessment of fair value as of December 31, 2016, the Company determined the
Clouding IP earn out liability to be $81,930 (current portion) and $1,400,082 (long-term portion), which resulted in a gain from exchange
in fair value adjustment of $1,832,872 for the year ended December 31, 2016. Further, the periodic reassessment resulted in a non-routine
impairment of the Clouding patent intangible assets of $3,089,983 for the year ended December 31, 2016.
Medtech Group
On October 13, 2014, Medtech Group Acquisition Corp (“Medtech Corp.”), a Texas corporation and newly formed wholly-owned
subsidiary of the Company, entered into an interest sale agreement to purchase 100% of the equity or membership interests of
OrthoPhoenix, LLC (“OrthoPhoenix”), a Delaware limited liability company, TLIF, LLC (“TLIF”) and MedTech Development
Deutschland GmbH (“MedTech GmbH” and along with OrthoPhoenix and TLIF, the “Medtech Entities”) from MedTech Development,
LLC (“MedTech Development”). The Medtech Group own patents in the medical technology field.
Pursuant to the terms of the Interest Sale Agreement between MedTech Development, Medtech Corp. and the Medtech Entities, the
Company (i) paid MedTech Development $1,000,000 cash and (ii) issue a Promissory Note to MedTech Development in the amount of
$9,000,000 and (iii) assumed existing debt payable to Medtronics, Inc. The assumed debt payable to Medtronics was renegotiated, as a
result of which, the outstanding amount was $6.25 million prior to any repayment by the Company. The debt is due in installments
through July 20, 2015; in the event that the Company paid the total amount due by June 30, 2015, the Company would have received a
reduction in the remaining principal owed by the Company in the amount of $750,000. Since the Company expected to make the payment
by that time when it entered into the agreement, the Company took a discount to the principal amount during the fourth quarter of 2014
when it made the acquisition. However, since the Company did not actually make the payment of the final principal amount by June 30,
2015, the Company reversed the earlier discount as of June 30, 2015. The transaction resulted in a business combination and caused the
Medtech Entities to become wholly-owned subsidiaries of the Company.
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The Company accounted for the acquisition as a business combination in accordance with ASC 805 “Business Combinations”. The
Company is the acquirer for accounting purposes and TLIC is the acquired company. The Company engaged a third party valuation firm
to determine the fair value of the assets purchases, and the net purchase price paid by the Company was subsequently allocated to assets
acquired and liabilities assumed on the records of the Company as follows:
Intangible assets
Goodwill
Net purchase price
$
$
12,800,000
2,700,000
15,500,000
Historical financial statements of the Medtech Entities and the pro forma condensed combined consolidated financial statements can be
found on the Form 8-K/A filed with the SEC on December 24, 2014. The unaudited pro forma condensed combined consolidated
financial statements are not necessarily indicative of the results that actually would have been attained if the merger had been in effect on
the dates indicated or which may be attained in the future. Such statements should be read in conjunction with the historical financial
statements of the Company.
Bridgestone Americas Tire Operations, LLC (“BATO”)
On April 23, 2015, IP Liquidity entered into a Patent Purchase Agreement (“BATO PPA”), as amended, whereby IP Liquidity purchased
43 patents from Bridgestone Americas Tire Operations LLC (“BATO”).
Pursuant to the terms of the BATO PPA, the Company agreed to pay BATO (i) $3.5 million in two increments shortly after the execution
of the document and (ii) an additional $7.5 million in the event that the Company funds the German court bond requirement to put an
injunction in place.
The Company accounted for the acquisition as an asset acquisition in accordance with ASC 805-50 “Business Combinations”. The
Company engaged a third party valuation firm to determine the fair value of the assets purchased, which determined that the fair value of
the assets was in excess of the purchase consideration, so the Company booked the assets at the purchase consideration of $11 million.
On November 15, 2015, the Company and its wholly-owned subsidiary, IP Liquidity, entered into a Memorandum of Understanding with
BATO and IP Nav pursuant to which BATO acknowledged that IP Liquidity was entitled to certain fees under an Advisory Services
Agreement (“ASA”) dated December 3, 2012. In addition, (i) the parties further agreed to terminate the Advisory Services Agreement
and (ii) rescind the BATO PPA entered into between Bridgestone and the Company on April 23, 2015, as amended. In connection with
the termination of the ASA and the rescission of the BATO PPA, as of November 15, 2015, the Company removed notes payable in the
amount of $10,000,000, $9,068,504 in patent assets from the Company’s books and records associated with the rescission of the BATO
PPA, and in connection with the termination of the ASA, the Company removed $2,451,550 in patents assets from the Company’s books
and records.
Munitech IP S.a.r.l. (“Munitech”)
On June 27, 2016, Munitech S.a.r.l. (“Munitech”), a Luxembourg limited liability company and newly formed wholly-owned subsidiary
of the Company, entered into two Patent Purchase Agreements (the “PPA” or together, the “PPAs”) to purchase 221 patents from
Siemens Aktiengesellschaft. The patents purchased by Munitech relate to W-CDMA and GSM cellular technology and cover all the major
global economies including China, France, Germany, the United Kingdom and the United States. Significantly, many of the patent
families have been declared to be Standard Essential Patents (“SEPs”) with the European Telecommunications Standard Institute
(“ETSI”) and/or the Association of Radio Industries and Businesses (“ARIB”) related to Long Term Evolution (“LTE”), Universal
Mobile Telecommunications System (“UMTS”), and/or General Packet Radio Service (“GPRS”).
Pursuant to the terms of the PPAs, Munitech (i) paid Siemens Aktiengesellschaft $1,150,000 in cash upon closing and (ii) agreed to two
future payments, one in the amount of $1,000,000 payable on December 31, 2016 and the second in the amount of $750,000 payable on
September 30, 2017.
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After evaluating the facts and circumstances of the purchase, the Company determined that this was an asset purchase. In coming to its
conclusion, the Company reviewed the status of the assets, the historical activity and the absence of any employees, licensing activity,
vendors associated with the patents, any royalties, and any other assets other than the patents.
Magnus IP GmbH (“Magnus”)
On July 5, 2016, Marathon IP GmbH (“Marathon IP”), a German corporate entity and newly formed wholly-owned subsidiary of the
Company, entered into a Patent Purchase Agreements (the “PPA”) to purchase 86 patents from Siemens Switzerland Ltd and Siemens
Industry Inc., (together, “Siemens”). On September 15, 2016, the patents were assigned by Marathon IP to Magnus, both of which are
wholly-owned subsidiaries of the Company. The patents purchased by Marathon IP relate to Internet-of-Things (IOT) technology.
Generally, the portfolio’s subject matter is directed toward self-healing control networks for automation systems. The patents are relevant
to wireless mesh or home area networks for use in IOT, or connected home devices and enable simple commissioning, application level
security, simplified bridging, and end-to-end IP security. The technology can support a wide variety of IOT enabled devices including
lighting, sensors, appliances, security, and more. Pursuant to the terms of the PPA, Marathon IP paid Siemens $250,000 in cash upon
closing.
Pursuant to the terms of the PPAs, Munitech (i) paid Siemens $250,000 in cash upon closing and (ii) will pay a percentage of gross
proceeds in excess of a reserve threshold on behalf of Marathon IP.
After evaluating the facts and circumstances of the purchase, the Company determined that this was an asset purchase. In coming to its
conclusion, the Company reviewed the status of the assets, the historical activity and the absence of any employees, licensing activity,
vendors associated with the patents, any royalties, and any other assets other than the patents.
Traverse Technologies Corp. (“Traverse”)
On August 3, 2016, Traverse Technologies Corp. (“Traverse”), a United States corporation and newly formed wholly-owned subsidiary of
the Company, entered into a Patent Purchase Agreement (the “PPA”) to purchase 12 patents from CPT IP Holdings (“CPT”). The patents
purchased by Traverse relate to batteries and principally cover various Asian and the United States markets.
Pursuant to the terms of the PPAs, Traverse (i) paid CPT $1,300,000 in cash upon closing and (ii) will pay a percentage of net recoveries
in excess of a reserve threshold on behalf of Traverse.
After evaluating the facts and circumstances of the purchase, the Company determined that this was an asset purchase. In coming to its
conclusion, the Company reviewed the status of the assets, the historical activity and the absence of any employees, licensing activity,
vendors associated with the patents, any royalties, and any other assets other than the patents.
PG Technologies S.a.r.l. (“PG Tech”)
On August 11, 2016, PG Technologies S.a.r.l. (“PG Tech”), a Luxembourg limited liability company jointly owned with a large litigation
financing fund, entered into a Patent Funding and Exclusive License Agreement (the “ELA”) to manage the monetization of greater than
10,000 patents in a single industry vertical with a Fortune 50 company. The patents cover all the major global economies including China,
France, Germany, the United Kingdom and the United States. The Company determined that its ownership in PG Tech constitutes a VIE
and that the Company is the primary beneficiary, as a result of which, the Company consolidated PG Tech in its financial statements.
Pursuant to the terms of the ELA, PG Tech agreed with the Fortune 50 company to pay (i) $1,000,000 in cash upon closing, (ii) a future
payment in the amount of $1,000,000 payable on or before December 31, 2016, (iii) minimum quarterly payments of $250,000 starting on
April 1, 2017 and (iv) split 50% of the net licensing revenues.
After evaluating the facts and circumstances of the purchase, the Company determined that this was an asset purchase. In coming to its
conclusion, the Company reviewed the status of the assets, the historical activity and the absence of any employees, licensing activity,
vendors associated with the patents, any royalties, and any other assets other than the patents.
Motheye Technologies LLC (“Motheye”)
On September 13, 2016, Motheye Technologies, LLC (“Motheye”), a United States corporation and newly formed wholly-owned
subsidiary of the Company, entered into a Patent Purchase Agreements (the “PPA”) to purchase 1 patent from Cirrex Systems, LLC
(“Cirrex”). The patent purchased by Motheye relates to LED lighting and is issued in the United States.
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Pursuant to the terms of the PPA, Motheye pays no determined cash consideration, but is required to pay a percentage of net recoveries in
excess of a reserve threshold on behalf of Motheye.
After evaluating the facts and circumstances of the purchase, the Company determined that this was an asset purchase. In coming to its
conclusion, the Company reviewed the status of the assets, the historical activity and the absence of any employees, licensing activity,
vendors associated with the patents, any royalties, and any other assets other than the patents.
NOTE 4 — INTANGIBLE ASSETS, NET
Intangible assets include patents purchased and patents acquired in lieu of cash in licensing transactions. Patents purchased are recorded
based at their acquisition cost and patents acquired in lieu of cash are recorded at their fair market value. Intangible assets consisted of the
following:
Intangible Assets
Accumulated Amortization & Impairment
Intangible assets, net
$
December 31, 2016 December 31, 2015
41,014,992
(15,557,353)
25,457,639
30,214,116
(17,899,488)
12,314,628
$
$
$
Intangible assets are comprised of patents with estimated useful lives between approximately 1 to 13 years. Once placed in service, the
Company amortizes the costs of intangible assets over their estimated useful lives on a straight-line basis. During the years ended
December 31, 2016 and 2015, respectively, the Company capitalized a total of $6,450,000 and $252,946 in patent acquisition costs. Costs
incurred to acquire patents, including legal costs, are also capitalized as long-lived assets and amortized on a straight-line basis with the
associated patent. Amortization of patents is included as an operating expense as reflected in the accompanying consolidated statements of
operations. The Company assesses fair market value for any impairment to the carrying values. Management concluded that there was an
impairment to the carrying value in the amount of $11,958,882 for the year ended December 31, 2016 compared to an impairment to the
carrying value in the amount of $5,793,409 for the year ended December 31, 2015. The Company determined the fair value using a Level
3 fair value category of unobservable inputs and concluded that the fair value on these intangibles was zero.
Amortization expense for the years ended December 31, 2016 and 2015 was $7,453,004 and $10,825,164, respectively. Future
amortization of current intangible assets, net is as follows:
2017
2018
2019
2020
2021
2022 and thereafter
Total
$
$
2,317,258
1,885,345
1,801,910
1,492,503
1,324,119
3,493,493
12,314,628
Since November 2012, the Company has continued to add to its intangible assets, through either the purchase of intangible asset directly
or purchasing entities holding intangible assets. During the years ended December 31, 2016 and December 31, 2015, the Company made
the following intangible asset acquisitions:
· In April 2015, we purchased 43 patents from Bridgestone Americas Tire Operations LLC (“BATO”), with such patents related to
automobile tire pressure monitoring systems, with such purchase terminated and reversed on November 15, 2015.
· 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, we acquired a patent portfolio from CPT IP Holdings, LLC covering battery technology;
· In August 2016, 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; and
· In September 2016, we acquired a patent from Cirrex Systems, LLC covering LED technology.
NOTE 5 - STOCKHOLDERS’ EQUITY
The Company has authorized capital to 200,000,000 shares of Common Stock with par value to $0.0001 per share, and has authorized
capital of 100,000,000 shares of preferred stock, par value $0.0001 per share.
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Preferred Stock
The terms of the Series B Convertible Preferred Stock are summarized below:
Dividend. The holders of Series B Convertible Preferred Stock will be entitled to receive such dividends paid and distributions made to
the holders of Common Stock, pro rata to the same extent as if such holders had converted the Series B Convertible Preferred Stock into
Common Stock (without regard to any limitations on conversion herein or elsewhere) and had held such shares of Common Stock on the
record date for such dividends and distributions.
Liquidation Preference. In the event of a liquidation, dissolution or winding up of the Company, after provision for payment of all debts
and liabilities of the Company, any remaining assets of the Company shall be distributed pro rata to the holders of Common Stock and the
holders of Series B Convertible Preferred Stock as if the Series B Convertible Preferred Stock had been converted into shares of Common
Stock on the date of such liquidation, dissolution or winding up of the Company.
Voting Rights . The Series B Convertible Preferred Stock have no voting rights except with regard to certain customary protective
provisions set forth in the Series B Convertible Preferred Stock Certificate of Designations and as otherwise provided by applicable law.
Conversion. Each share of Series B Convertible Preferred Stock may be converted at the holder’s option at any time after issuance
into one share of Common Stock, provided that the number of shares of Common Stock to be issued pursuant to such conversion does not
exceed, when aggregated with all other shares of Common Stock owned by such holder at such time, result in such holder beneficially
owning (as determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules thereunder) in
excess of 9.99% of all of the Common Stock outstanding at such time, unless otherwise waived in writing by the Company with sixty-
one (61) days’notice.
On May 2, 2014, the Company issued an aggregate of 782,000 shares of Series B Convertible Preferred Stock valued at $2,807,380 to
acquire IP Liquidity Ventures, LLC, Dynamic Advances, LLC and Sarif Biomedical, LLC. 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 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. An aggregate of 150,000 shares of Series B Convertible Preferred Stock 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 prior to the termination of the Consulting
Agreement. All shares of Series B Convertible Preferred Stock issuable to GRQ shall be pursuant to the 2014 Plan (as defined below) .
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 beneficial ownership blockers set forth in the Series B Convertible Preferred Stock Certificate of
Designation and in Section 17 of the 2014 Plan to ensure compliance with NASDAQ Listing Rule 5635(d).
Common Stock
On January 29, 2015, the Company issued 134,409 shares of the Company’s Common Stock to DBD Credit Funding, LLC (“DBD”), an
affiliate of Fortress Credit Corp., pursuant to the Fortress transaction.
On March 13, 2015, the Company settled a dispute with a former consultant whereby the Company issued the consultant 60,000 shares of
Common Stock for a full release of all claims.
For the three months ended March 31, 2015, certain holders of warrants exercised their warrants to purchase, in cash, 5,000 shares of the
Company’s Common Stock.
For the three months ended June 30, 2015, certain holders of options exercised their options to purchase, on a net exercise basis, 33,968
(net) shares of the Company’s Common Stock.
In a series of transactions, the Series B Convertible Preferred Stock associated with the GRQ Consulting Agreement was converted into
shares of the Company’s Common Stock, with 183,330 shares of Series B Convertible Preferred Stock converted into Common Stock
prior to September 30, 2015.
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 by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not
involving a public offering.
On October 20, 2015, 16,666 shares of Series B Convertible Preferred Stock associated with the GRQ Consulting Agreement was
converted into 16,666 shares of the Company’s Common Stock.
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 by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not
involving a public offering.
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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. The shares were issued pursuant to this transaction on January 25, 2016.
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.
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, or $17,019.95 in total. None of the
warrants were purchased prior to December 31, 2016, and all were subsequently purchased prior to the date of this report.
Common Stock Warrants
During the year ended December 31, 2016, the Company issued a warrant to purchase 174,100 shares of Common Stock in connection
with financings and warrants for 23,334 shares of Common Stock were exercised. Warrants to purchase 1,705,996 shares of Common
Stock were cancelled as they reached the end of their lives without being exercised in accordance with the terms of the underlying
agreements. During the years ended December 31, 2016 and December 31, 2015, the Company recorded stock based compensation
expense of $0 and $3,465,respectively, in connection with the vested warrants associated with one warrant-based compensatory grant. At
December 31, 2016, there was a total of $0 of unrecognized compensation expense related to future recognition of warrant-based
compensation arrangements.
As of December 31, 2016, the Company had warrants outstanding to purchase 466,078 shares of Common Stock with a weighted average
remaining life of 3.25 years. A summary of the status of the Company’s outstanding stock warrants and changes during the period then
ended is as follows:
Balance at December 31, 2015
Granted
Cancelled
Forfeited
Exercised
Balance at December 31, 2016
Warrants exercisable at December 31, 2016
Weighted average fair value of warrants granted during the period
Number of Warrants
Weighted Average
Exercise Price
Weighted Average
Remaining Life
2,021,308
174,100
1,705,996
—
23,334
466,078
466,078
$
$
$
$
4.27
1.73
3.22
—
2.00
3.79
0.37
0.87
4.94
—
—
—
3.25
The warrants pursuant to the Purchase Agreement entered into on December 9, 2016, as described above, were purchased and issued in
January and February 2017 and are not included in the table set forth above.
Common Stock Options
On November 14, 2012, the Company entered into an employment agreement with Doug Croxall (the “Croxall Employment
Agreement”), whereby Mr. Croxall agreed to serve as Company’s Chief Executive Officer for a period of two years. Mr. Croxall received
a ten-year option award to purchase an aggregate of 307,692 shares of the Company’s Common Stock with an exercise price of $3.25 per
share, subject to adjustment, which shall vest in 24 equal monthly installments on each monthly anniversary of the date of the Croxall
Employment Agreement. The options were valued on the grant date at approximately $3.12 per option or a total of $968,600 using a
Black-Scholes option pricing model with the following assumptions: stock price of $3.25 per share (based on the recent selling price of
the Company’s Common Stock at private placements), volatility of 192%, expected term of 5 years, and a risk free interest rate of 0.61%.
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On March 1, 2013, Mr. James Crawford was appointed as the Company’s Chief Operating Officer. Pursuant to the employment
agreement between the Company and Mr. Crawford dated March 1, 2013 (“Crawford Employment Agreement”), Mr. Crawford shall
serve as the Company’s Chief Operating Officer for two (2) years. Mr. Crawford was awarded a five-year stock option to purchase an
aggregate of 76,924 shares of the Company’s Common Stock, with a strike price based on the closing price of the Company’s Common
Stock on March 1, 2013 as reported by the OTC Bulletin Board or an exercise price of $5.525 per share, vesting in twenty-four (24) equal
installments on each monthly anniversary of March 1, 2013, provided Mr. Crawford is still employed by the Company on each such date.
On June 19, 2013, the Company granted Mr. Crawford an option to purchase 76,924 shares of Common Stock. The stock options granted
have an exercise price equal to the fair market value per share on the option grant date, which was $2.47 per share. The options issued to
Mr. Crawford are conditioned upon the cancellation of the stock options granted to him on March 1, 2013 under his employment
agreement with the Company and will vest in twenty-four (24) equal installments on each monthly anniversary of the date of grant.
On June 11, 2013, the Company granted five-year options to purchase an aggregate of 353,846 shares of Common Stock exercisable at
$2.625 per share to the Chief Executive Officer and two directors of the Company. The stock options shall vest pro rata monthly over the
following 24-month period.
On November 18, 2013, we entered into Amendment No. 1 to the Croxall Employment Agreement with our Chief Executive Officer and
Chairman, Doug Croxall. As part of Amendment No. 1, we granted Mr. Croxall a ten-year stock options to purchase an aggregate of
200,000 shares of our Common Stock, with an exercise price of $2.965 per share, reflecting the closing price of our Common Stock on the
date of grant, and vesting in twenty-four (24) equal installments on each monthly anniversary date of the grant. The Company has valued
the option grant at $442,692 using the Black-Scholes option pricing model with the following assumptions: an expected life of five
years; volatility of 100%; and a risk-free rate of 1.33%.
On April 15, 2014, the Company issued a new board member, Edward Kovalik, a five (5) year option to purchase an aggregate of 20,000
shares of the Company’s Common Stock with an exercise price of $3.295 per share, subject to adjustment, which shall vest in twelve (12)
monthly installments commencing on the date of grant. The option was valued based on the Black-Scholes model, using the strike and
market prices of $3.295 per share, life of three years, volatility of 51% 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 0.84%.
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-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 option was
valued based on the Black-Scholes model, using the strike and market prices of $4.165 per share, life of 6.5 years, volatility of 63% 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
1.97%.
On February 5, 2015 the Company issued to a consultant, a five-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.
On March 6, 2015 the Company issued to a new board member a five-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 to a new board member a five-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%.
On April 7, 2015 (the “Effective Date”), 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
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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 a ten-year stock option to purchase 280,000 shares of the Company’s Common Stock pursuant to the Company’s 2014
Equity Incentive Plan (the “2014 Plan). 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 option 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 option shall be subject in all respects to the terms of the 2014
Plan. Notwithstanding anything herein to the contrary, the remainder of the option 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 option shall not vest at all unless
the price of the Company’s common stock while Mr. Chernicoff continues as an officer and/or director reaches $8.99 and (B) options to
purchase 70,000 shares of the Company’s common stock under the option shall not vest at all unless the price of the Company’s common
stock while Mr. Chernicoff continues as an officer and/or director reaches $10.14.
On September 16, 2015, 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 $2.03 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 October 14, 2015, the Company issued certain of its employees ten-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.
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 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%.
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Table of Contents
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.
At December 31, 2016, there was a total of $1,371,382 of unrecognized compensation expense related to non-vested option-based
compensation arrangements entered into during the year. A summary of the stock options as of December 31, 2016 and changes during
the period are presented below:
Balance at December 31, 2015
Granted
Cancelled
Forfeited
Exercised
Balance at December 31, 2016
Number of Options
3,383,267
780,000
373,856
273,275
$
$
$
$
— $
$
3,516,316
Options Exercisable at December 31, 2016
Options expected to vest
Weighted average fair value of options granted during the period
2,574,703
941,433
$
$
$
Weighted Average
Exercise Price
Weighted Average
Remaining Life
4.25
2.13
5.80
5.24
—
4.46
4.67
3.65
0.89
7.11
9.44
—
—
—
6.80
6.03
8.90
Stock options outstanding at December 31, 2016 as disclosed in the above table have $0 in intrinsic value at the end of the period.
NOTE 6 — COMMITMENTS AND CONTINGENCIES
Debt consists of the following:
Maturity
Date
Interest
Rate
December 31,
2016
2015
Senior secured term notes
Less: debt discount
Total senior-term notes, net of discount
29-Jul-18
LIBOR + 9.75% $
15,620,759
(1,425,167)
14,195,592
$
$
$
20,513,892
(2,150,263)
18,363,629
Maturity
Date
Interest
Rate
December 31,
2016
2015
10-Oct-18
11.00% $
Maturity
Date
On Demand
Maturity
Date
31-Jan-17
Maturity
Date
On Demand
Maturity
Date
On Demand
Maturity
Date
On Demand
Maturity
Date
30-Sep-17
Maturity
Date
15-Oct-17
Maturity
Date
On Demand
Maturity
Date
31-Jan-17
F-31
$
$
$
$
Late
Fee
1.5% per month
Interest
Rate
Interest
Rate
Interest
Rate
NA
NA
28.00% $
500,000
—
500,000
$
$
December 31,
500,000
(5,849)
494,151
2016
2015
191,697
$
494,244
December 31,
2016
103,000
$
December 31,
—
2015
2015
2016
2016
2016
— $
45,000
December 31,
— $
December 31,
2015
2,953,779
2015
Interest
Rate
Interest
Rate
Interest
Rate
Interest
Rate
Interest
Rate
4.82% $
— $
56,258
December 31,
2016
1,672,924
$
December 31,
2016
2015
2015
—
125,000
$
200,000
December 31,
2016
944,296
$
December 31,
2016
100,000
$
2015
2015
—
—
NA
NA
NA
NA
$
$
$
$
2016
17,832,509
(13,162,007)
4,670,502
$
$
2015
22,607,061
(10,383,177)
12,223,884
$
$
Convertible Note
Less: debt discount
Total convertible note
iRunway trade payable
Note payable
Sichenzia trade payable
Medtech LLC note payable
Afco financing
Siemens
Dominion Harbor
Oil & Gas
3dnano Liscense Fee
Table of Contents
Total
Less: current portion
Total, net of current portion
Senior Secured Term Notes:
On January 29, 2015, the Company and certain of its subsidiaries entered into a series of Agreements including a Securities Purchase
Agreement with DBD Credit Funding LLC, (“DBD”) an affiliate of Fortress Credit Corp., under which the terms of the notes were:
(i) $15,000,000 original principal amount of Fortress Notes (the “Initial Note”);
(ii) a right to receive a portion of certain proceeds from monetization net revenues received by the Company (the “Revenue
Stream”, after receipt by the Company of $15,000,000 of monetization net revenues and repayment of the Fortress
Notes);
(iii) a five-year 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 Issuer’s Common Stock (the “Fortress Shares”).
On February 12, 2015, the Company issued an additional $5,000,000 of Notes (which increase proportionately the Revenue Stream).
The Initial Note matures on July 29, 2018. Additional Notes issued pursuant to the Fortress Purchase Agreement mature 42 months after
issuance. The unpaid principal amount of the Initial Note plus the additional $5,000,000 note (including any PIK Interest, as defined
below) bear cash interest at a rate equal to LIBOR plus 9.75% per annum payable on the last business day of each month. Interest is paid
in cash except that 2.75% per annum of the interest due on each Interest Payment Date shall be paid-in-kind, by increasing the principal
amount of the Notes by the amount of such interest. Monthly principal payments are due commencing one year after the anniversary dates
of the loans.
The terms of the Fortress Warrant provide that until January 29, 2020, the Warrant may be exercised for cash or on a cashless basis.
Exercisability of the Fortress Warrant is limited if, upon exercise, the holder would beneficially own more than 4.99% of the Company’s
Common Stock. The exercise price of the warrant is $7.44 and the warrant fair value was determined to be $318,679 utilizing the Black-
Scholes model, with the fair value of the warrants recorded as additional paid-in capital and reducing the carrying value of the Notes. As
of December 31, 2016, and 2015 the unamortized discount on the Notes was $1,425,167 and $2,150,263; respectively.
Senior Secured Term Note Amendment
On January 10, 2017 the Company and certain of its subsidiaries entered into the Amended and Restated Revenue Sharing and Securities
Purchase Agreement (“ARRSSPA”) with DBD Credit Funding LLC, 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, of which $15,620,759 is currently outstanding (less $4,500,000 that is currently held in a cash
collateral account), (ii) an interest in the Company’s revenues from certain activities and warrants to purchase 100,000 shares of the
Company’s common stock. The ARRSSPA amends and restates the Original Agreement to provide for (i) the sale by the Company of a
$4,500,000 promissory note (the “New Note”) and (ii) the insurance of additional warrants to purchase 187,500 shares of common stock
(the “New Warrant”). Pursuant to the ARRSSPA, Fortress acquired an increased revenue stream right to certain revenues generated by
the Company through monetization of our patent portfolio (“Monetization Revenues”). The ARRSSPA increases the revenue stream basis
to $1,225,000. The ARRSSPA provides for the potential issuance of up to $7,500,000 of additional notes (the “Additional Notes”), of
which not more than $3,750,000 shall be made prior to June 30, 2017 and of which not more than $3,750,000 shall be made available
during the period following June 30, 2017 and on or prior to December 31, 2017 and not more than two such issuances shall occur under
the ARRSSPA.
The unpaid principal amount of the New Note (including any PIK Interest, as defined below) shall bear cash interest at a rate equal to
LIBOR plus 9.75% per annum; provided that upon and during the continuance of an Event of Default (as defined in the Initial Note), the
interest rate shall increase by an additional 2% per annum.
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Table of Contents
Interest on the Initial Note shall be paid on the last business day of each calendar month (the “Interest Payment Date”), commencing
January 31, 2017. Interest shall be paid in cash except that 2.75% per annum of the interest due on each Interest Payment Date shall be
paid-in-kind, by increasing the principal amount of the Notes by the amount of such interest, effective as of the applicable Interest
Payment Date (“PIK Interest”). PIK Interest shall be treated as added principal of the New Note for all purposes, including interest
accrual and the calculation of any prepayment premium. The Company paid a structuring fee of 2.0% of the New Note and would pay a
2.0% fee upon the issuance of any Additional Notes. The proceeds of the New Note and any Additional Notes may be used for working
capital purposes, portfolio acquisitions, growth capital and other general corporate purposes.
The ARRSSPA contains certain customary events of default, and also contains certain covenants including a requirement that the
Company maintain minimum liquidity of $1,250,000 in unrestricted cash and cash equivalents.
The terms of the New Warrants provide that from July 10, 2017 until January 10, 2022, the Warrant may be exercised for cash or on a
cashless basis. Exercisability of the Warrant is limited if, upon exercise, the holder would beneficially own more than 4.99% of the
Issuer’s Common Stock.
Pursuant to the ARSSPA, as security for the payment and performance in full of the Secured Obligations (as defined in the Security
Agreement entered in favor of the Note purchasers (the “Security Agreement”) 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. As further set forth in the Security Agreement, repayment of the Note Obligations (as defined in the Notes) is
secured by a first priority lien and security interest in all the assets of the Company, subject to certain permitted liens. Certain subsidiaries
of the Company also executed guarantees in favor of the purchasers (each, a “Guaranty”), guaranteeing the Note Obligations.
Convertible Note
In two transactions, on October 9, 2014 and October 16, 2014, the Company sold an aggregate $5,550,000 of principal amount of
convertible notes (“Convertible Notes”) along with two-year warrants to purchase 129,499 shares of the Company’s Common Stock. The
Convertible Notes are convertible into shares of the Company’s Common Stock at $7.50 per share and the Warrants have an exercise
price of $8.25 per share. The Notes mature on October 10, 2018 and bear interest at the rate of 11% per annum, payable quarterly in cash
on each of the three, six, nine and twelve month anniversaries of the issuance date and on each conversion date. The Notes may become
secured by a security interest granted to the holder in certain future assets under certain circumstances. In the event the Company’s
Common Stock trades at a price of at least $27.00 per share for four out of eight trading days, the Notes will be mandatorily converted
into Common Stock of the Company at the then applicable conversion price per share. The Company repaid the Convertible Notes for all
but one holder in early 2015.
iRunway
The Company converted a set of outstanding invoices related to work performed by one of the Company’s vendors to a short-term payable
whereby the Company agreed to pay iRunway over time for the open invoices, subject to a payment schedule as defined. To the extent that
the Company does not make payments according to that schedule, the remaining balance accrues interest at 1.5% per month. As of
December 31, 2016 and 2015, principal in the amount of $191,697 and $494,244 remained outstanding and the Company expects to repay
the open balance during the year ended December 31, 2017.
Note Payable
The Company entered into a short term advance with an officer related to funds the Company was transferring from its European
subsidiaries. The advance carried no interest and as of December 31, 2016, principal in the amount of $103,000 was outstanding, which
was subsequently repaid by the Company in January 2017.
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Table of Contents
Sichenzia Trade Payable
The Company converted a set of outstanding invoices related to work performed by Company’s primary outside law firms to a trade
payable whereby the Company agreed to pay Sichenzia over time for the open invoices, subject to a payment schedule as defined. There
was no interest payable associated with the Sichenzia Trade Payable, and as of the December 31, 2016, all balances had been repaid.
Medtech Note Payable
The Company entered into a purchase agreement to acquire ownership of or monetization rights to certain patents. As part of the
purchase agreement, the Company agreed to certain future payments of cash consideration. The Medtech Note Payable carried an interest
rate of up to 28%, and as of December 31, 2016, the Company had repaid all amounts outstanding relative to this purchase obligation.
AFCO Financing
The Company financed its Directors and Officers (“D&O”) insurance through AFCO, whereby the Company agreed to make nine
(9) monthly payments commencing one month after binding of the insurance. The AFCO Financings carried an interest rate of 4.82% per
annum and as of December 31, 2016, the Company had repaid all amounts outstanding relative to the D&O financing.
Siemens Purchase Payment
The Company entered into a purchase agreement to acquire ownership of certain patents. As part of the purchase agreement, the
Company agreed to certain future payments of cash consideration. The payment obligation bears no interest and as of December 31,
2016, the Company had an outstanding obligation for purchase of certain Siemens patents in the net amount of $1,672,924, with such
payments expected to be made by the September 30, 2017.
Dominion Harbor Settlement Note
The Company entered into a settlement agreement with Dominion Harbor, a former licensing agent for some of the Company’s
subsidiaries, on October 29, 2015 whereby the Company agreed to issue 300,000 shares of the Company’s Common Stock to Dominion
Harbor and make eight (8) payments of $25,000 each ending on October 15, 2017. The shares issued to Dominion Harbor were valued at
the quoted market price on the date of the grant of $1.71 per share or $513,000. As of December 31, 2016, $125,000 remained
outstanding and the Company and Dominion Harbor subsequently agreed to make one payment of $25,000 and issue 125,000 shares of
the Company’s Common Stock, which has not yet occurred as of the date of this report.
Oil & Gas Purchase Payment
The Company entered into a purchase agreement to acquire monetization rights to certain patents. As part of the purchase agreement, the
Company agreed to certain future payments of cash consideration. The payment obligation bears no interest and as of December 31, 2016,
the Company had an outstanding obligation for purchase of certain Siemens patents in the net amount of $944,296, with such payments
expected to be made by December 31, 2017.
3D Nano Purchase Payment
3D Nano entered into a license and purchase agreement with HP Inc. to acquire the rights to use if 3D Nano chooses, the right to exercise
an option to acquire, ownership of certain patents, trade secrets and other intellectual property (the “Technology”). As part of the
purchase agreement, the Company agreed to license the Technology for two payments of $100,000 each, with the first payment made in
April 2016 and the second payment due by January 31, 2017. The payment obligation bears no interest and as of December 31, 2016, the
Company had an outstanding obligation in the amount of $100,000, which was subsequently paid to HP in January 2017.
Future minimum principal payments are as follows:
2017
2018
Total
Table of Contents
Office Lease
$
$
14,014,411
5,243,265
19,257,676
F-34
In October 2013, the Company entered into a net-lease for its current office space in Los Angeles, California. The lease commenced on
May 1, 2014 and has a term of seven years, which term expires on April 30, 2021, with monthly lease payments escalating each year of
the lease. In addition, to paying a deposit of $7,564 and the monthly base lease cost, the Company is required to pay its pro rata share of
operating expenses and real estate taxes. Under the terms of the lease, the Company will not be required to pay rent for the first five
months but must remain in compliance with the terms of the lease to continue to maintain that benefit. In addition, the Company has a
one-time option to terminate the lease in the 42nd month of the lease. Minimum future lease payments under this lease at December 31,
2016, net of the rent abatement, for the next five years are as follows:
2017
2018
2019
2020
2021
Total
$
$
71,288
74,540
77,872
81,336
27,504
332,540
The lease for the property maintained in Longview, Texas is month-to-month and can be cancelled upon thirty days’ notice.
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
Central District of California
Eastern District of Michigan
5
1
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.
NOTE 7 - INCOME TAXES
The Company accounts for income taxes under ASC Topic 740: Income Taxes, which requires the recognition of deferred tax assets and
liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for
the expected future tax benefit to be derived from tax losses and tax credit carry-forwards. ASC Topic 740 additionally requires the
establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets.
F-35
Table of Contents
The following table presents the current and deferred provision (benefit) for income taxes for the years ended December 31, 2016:
US Net Income/(loss)
Foreign Net Income (loss)
Current:
Federal
State
Foreign
Deferred:
Federal
2016
(21,151,022)
(7,677,850)
(28,828,872)
2015
(15,246,302)
(1,693,557)
(16,939,859)
2016
2015
$
$
$
53,634
101,969
4,077
159,680
10,182,479
$
$
$
(28,000)
48,188
—
20,188
(6,046,674)
State
Foreign
Total provision (benefit)
1,996,064
(821,416)
11,357,127
11,516,807
$
$
(1,171,260)
(958,702)
(8,176,636)
(8,156,448)
$
$
The table below summarizes the differences between the Company’s effective tax rate and the statutory federal rate for the years ended
December 31, 2016 and 2015.
Tax benefit computed at “expected” statutory rate
State income taxes, net of benefit
Permanent differences :
Deemed Dividend
Stock based compensation and consulting
Transaction Cost
Other permanent differences
Foreign rate Differential
Amortization of patents and other
Change in valuation allowance
Net income tax benefit
2016
(6,018,384)
(406,978)
$
—
525,774
(345,981)
350,180
—
17,412,196
11,516,807
$
2015
(8,533,296)
(818,432)
—
738,904
208,481
247,895
—
—
—
(8,156,448)
$
$
The table below summarizes the differences between the Companies’ effective tax rate and the statutory federal rate as follows for the
years ended December 31, 2016 and 2015:
2016
2015
(34.00)%
(2.30)%
2.97%
—%
98.37%
65.04%
(34.00)%
(3.26)%
4.75%
—%
—%
(32.51)%
2016
2015
$
17,412,196
—
(17,412,196)
— $
12,437,741
(1,044,997)
—
11,392,744
$
2016
89,649
—
(6,968)
7,005,648
—
—
1,839,980
4,410
8,425,843
53,634
(17,412,196)
2015
95,356
—
(8,634)
1,094,758
—
19,961
1,490,489
—
8,700,814
—
—
11,392,744
$
$
$
Computed “expected” tax expense (benefit)
State income taxes
Permanent differences
Timing differences
Change in valuation allowance
Effective tax rate
The Company has a deferred tax asset, which is summarized as follows at December 31:
Deferred tax assets:
Total deferred tax assets
Total deferred tax liabilities
Less: valuation allowance
Net deferred tax asset
The details of the deferred tax asset and deferred tax liability are as follows:
Accruals
Reserves
Fixed Assets
Intangible Assets
Inventory
State Taxes
Other
Charitable Contributions
Net Operating Loss
AMT Credit
Valuation Allowance
Net Deferred Asset/(Liability)
Table of Contents
$
— $
F-36
The Company does not have any taxable income in carryback years in which net operating losses (“NOLs”) can be carried back to. At
December 31, 2016, the Company did not have any taxable temporary differences that will reverse and generate taxable income and was
still in a cumulative loss position. Based on all the available information, including tax planning strategies and future forecast, the
Company does not believe that it is more likely than not that the net deferred tax assets will be realized; therefore, a full valuation
allowance has been recorded against its net deferred tax assets.
As of December 31, 2016, the Company had NOL carry-forwards for federal and state purposes of approximately $18.0 million and $12.9
million, respectively, which will begin to expire in 2032. The utilization of NOL and credit carry-forwards may be limited under the
provisions of the Internal Revenue Code (“IRC”) Section 382 and similar state provisions. IRC Section 382 generally imposes an annual
limitation on the amount of NOL carry-forwards that may be used to offset taxable income where a corporation has undergone significant
changes in stock ownership.
As of December 31, 2016 and 2015, the Company has not recorded liability for unrecognized tax benefit. As of December 31, 2016 and
2015 the Company did not increase or decrease penalties or interest in connection with liability for unrecognized tax benefit. The
Company does not expect its unrecognized tax benefits to change significantly over the next 12 months. The Company files U.S. and state
income tax returns with varying statutes of limitations. The 2012 through 2015 tax years generally remain subject to examination by
federal and state tax authorities.
The Company has not recognized a deferred tax liability on foreign earnings that it has declared as indefinitely reinvested. This amount
may become taxable upon repatriation of assets from the subsidiaries or a sale or liquidation of the subsidiaries. The amount of earnings
designated as indefinitely reinvested offshore is based upon our expectations of the future cash needs of the Company’s foreign entities.
NOTE 8 — SUBSEQUENT EVENTS
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 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. Under the terms of the ARRSSPA, the Company pays interest only through January 2018, after which
the principal amortizes over thirty (30) months.
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.
The warrants pursuant to the Purchase Agreement entered into on December 9, 2016, as described above in Note 6, were purchased and
issued in January and February 2017.
On March 15, 2017, the Company terminated four of its employees and all six employees employed at the Company’s subsidiary, 3D
Nano.
F-37
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On January 5, 2017, the Board appointed BDO USA, LLP (“BDO”) as the Company’s independent registered public accounting firm for
the Company’s fiscal year ending December 31, 2016. During the fiscal years ended December 31, 2016 and 2015 and during the
subsequent interim period through January 10, 2017, neither the Company nor anyone acting on its behalf consulted with BDO regarding
(i) the application of accounting principles to a specified transaction either completed or proposed or the type of audit opinion that might
be rendered on the Company’s financial statements, and neither a written report not oral advice was provided that BDO concluded was an
important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue, or (ii) any
matter that was either the subject of a disagreement between the Company and its predecessor auditor as described in Item 304(a)(1)
(iv) of Regulation S-K or a reportable event as described in Item 304(a)(1)(v) of Regulation S-K.
On January 11, 2017, the Company notified SingerLewak LLP ( “SingerLewak”) of its dismissal, effective January 11, 2017, as the
Company’s independent registered public accounting firm. SingerLewak served as the auditors of the Company’s financial statements for
the period from April 16, 2014 through the date of dismissal. The reports of SingerLewak on the Company’s consolidated financial
statements for the Company’s fiscal years ended December 31, 2015 and 2014 did not contain any adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. The decision to change accountants was
approved by the Company’s Board of Directors. During the Company’s fiscal years ended December 31, 2015 and 2014, and during the
subsequent interim period through January 12, 2017, there were (i) no disagreements with SingerLewak on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of SingerLewak, would have caused SingerLewak to make reference to the subject matter of the disagreements as defined in
Item 304 of Regulation S-K in connection with any reports its reports, and (ii) there were no “reportable events” as such term is described
in Item 304 of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
Management’s Conclusions Regarding Effectiveness of Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”), as defined by
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of December 31, 2016, the
end of the period covered by this Annual Report on Form 10-K. The Disclosure Controls evaluation was done under the supervision and
with the participation of management, including our Chief Executive Officer and Chief Financial Officer. There are inherent limitations to
the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can
only provide reasonable assurance of achieving their control objectives. Based upon this evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that, because of material weakness in our internal control over financial reporting, described below in
Management’s Report on Internal Control Over Financial Reporting, our disclosure controls and procedures were not effective as of
December 31, 2016, such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and
communicated to our management, including our principal executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our management is also required to assess and report on the effectiveness of our
internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Our internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes of accounting principles generally accepted in the United States.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this
assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control - Integrated Framework in the 2013 COSO framework. During our assessment of the effectiveness of internal control
over financial reporting as of December 31, 2016, management identified a material weakness with respect to the financial reporting and
close process, resulting from a lack of segregation of duties within accounting functions and evidence of control review. Accordingly,
management concluded that our internal controls over financial reporting were not effective as of December 31, 2016.
Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible.
However, to the extent possible, we will implement procedures to assure that the initiation of transactions, the custody of assets and the
recording of transactions will be performed by separate individuals.
We believe that the foregoing steps if implemented, will help remediate the material weakness identified above, and we will continue to
monitor the effectiveness of these steps and make any changes that our management deems appropriate. Due to the nature of this material
weakness in our internal control over financial reporting, there is more than a remote likelihood that misstatements which could be
material to our annual or interim financial statements could occur that would not be prevented or detected.
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Table of Contents
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a
timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is
less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s
financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies and procedures may deteriorate.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding
internal control over financial reporting since the Company is a smaller reporting company under the rules of the SEC.
Changes in Internal Control over Financial Reporting.
During the fourth fiscal quarter of 2016, there was no change in our internal control over financial reporting (as such term is defined in
Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
Table of Contents
36
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table presents information with respect to our officers, directors and significant employees as of the date of this Report:
Name and Address
Doug Croxall
Francis Knuettel II
James Crawford
Richard S. Chernicoff
Edward Kovalik
Christopher Robichaud
Richard Tyler
Age
48
50
41
51
42
50
59
Background of officers and directors
Date First Elected or Appointed
Position(s)
November 14, 2012
May 15, 2014
March 1, 2013
March 6, 2015
April 15, 2014
September 28, 2016
March 18, 2015
Chief Executive Officer and Chairman
Chief Financial Officer
Chief Operating Officer
Director
Director
Director
Director
The following is a brief account of the education and business experience during at least the past five years of our officers and directors,
indicating each person’s principal occupation during that period, and the name and principal business of the organization in which such
occupation and employment were carried out.
Doug Croxall - Chief Executive Officer and Chairman
Mr. Croxall, 48, has served as the Chief Executive Officer and Founder of LVL Patent Group LLC, a privately owned patent licensing
company since 2009. From 2003 to 2008, Mr. Croxall served as the Chief Executive Officer and Chairman of FirePond, a software
company that licensed configuration pricing and quotation software to Fortune 1000 companies. Mr. Croxall earned a Bachelor of Arts
degree in Political Science from Purdue University in 1991 and a Master of Business Administration from Pepperdine University in
1995. Mr. Croxall was chosen as a director of the Company based on his knowledge of and relationships in the patent acquisition and
monetization business.
Francis Knuettel II - Chief Financial Officer
Prior to joining the Company, Mr. Knuettel, 50, was Managing Director and CFO for Greyhound IP LLC, an investor in patent litigation
expenses for patents enforced by small firms and individual inventors. Since 2007 he has been the Managing Member of Camden Capital
LLC, a company focused on the monetization of patents Mr. Knuettel acquired in 2007. From 2007 through 2013, Mr. Knuettel served as
the Chief Financial Officer of IP Commerce, Inc. and from 2005 through 2007, Mr. Knuettel served as the CFO of InfoSearch
Media, Inc., a publicly traded company. From 2000 through 2004, Mr. Knuettel was at Internet Machines Corporation, a fables
semiconductor company located in Los Angeles, where he served on the Board of Directors and held several positions, including Chief
Executive Officer and Chief Financial Officer. From 2008 through 2011, Mr. Knuettel was a member of the Board of Directors and
Chairman of the Audit Committee for Firepond, Inc., a publicly traded producer of CPQ software systems and currently sits on the Board
of Directors of Spindle Inc., a publicly traded provider of unified commerce solutions for electronic payments for small and medium sized
businesses. Mr. Knuettel received his BA with honors in Economics from Tufts University and holds an MBA in Finance and
Entrepreneurial Management from The Wharton School at the University of Pennsylvania.
James Crawford - Chief Operating Officer
Mr. Crawford, 41, was a founding member of Kino Interactive, LLC, and of AudioEye, Inc. Mr. Crawford’s experience as an entrepreneur
spans the entire life cycle of companies from start-up capital to compliance officer and director of reporting public companies. Prior to his
involvement as Chief Operating Officer of the Company, Mr. Crawford served as a director and officer of Augme Technologies, Inc.
beginning March 2006, and assisted the company in maneuvering through the initial challenges of acquisitions executed by the company
through 2011 that established the company as a leading mobile marketing company in the United States. Mr. Crawford is experienced in
public company finance and compliance functions. He has extensive experience in the area of intellectual property creation, management
and licensing. Mr. Crawford also served on the board of directors Modavox and Augme Technologies, and as founder and managing
member of Kino Digital, Kino Communications, and Kino Interactive.
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Richard S. Chernicoff — Director
Richard Chernicoff, 51, has served as a director of Unwired Planet, Inc. since March 2014. Prior to joining the board of directors of
Unwired Planet, Inc., Mr. Chernicoff was President of Tessera Intellectual Property Corp. from July 2011 to January 2013.
Mr. Chernicoff was President of Unity Semiconductor Corp. from December 2009 to July 2011. Prior to that, Mr. Chernicoff was with
San Disk from 2003 to 2009 where as Senior Vice President, Business Development, Mr. Chernicoff was responsible for mergers and
acquisitions and intellectual property matters. Previously, Mr. Chernicoff was a mergers and acquisitions partner in the Los Angeles office
of Brobeck, Phleger & Harrison LLP from 2001 to 2003, and Mr. Chernicoff was a corporate lawyer in the Los Angeles office of
Skadden, Arps, Slate, Meagher & Flom LLP from 1995 to 2000. From 1993 to 1995 Mr. Chernicoff was a member of the staff of the
United States Securities and Exchange Commission in Washington D.C.. Mr. Chernicoff began his career as a certified public accountant
with Ernst & Young. Mr. Chernicoff has a B.S. in Business Administration from California State University Northridge and received a
J.D. from St. John’s University School of Law. The Board believes Mr. Chernicoff’s qualifications to sit on the Board of Directors include
his significant experience with mergers and acquisitions, intellectual property (acquisition, licensing and litigation) and leadership of
business organizations.
Edward Kovalik — Director
Edward Kovalik, 42, is the Chief Executive Officer and Managing Partner of KLR Group, which he co-founded in 2012. KLR Group is
an investment bank specializing in the Energy sector. Mr. Kovalik manages the firm and focuses on structuring customized financing
solutions for the firm’s clients. He has over 16 years of experience in the financial services industry. Prior to founding KLR, Mr. Kovalik
was Head of Capital Markets at Rodman & Renshaw, and headed Rodman’s Energy Investment Banking team. Prior to Rodman, from
1999 to 2002, Mr. Kovalik was a Vice President at Ladenburg Thalmann & Co, where he focused on private placement transactions for
public companies. Mr. Kovalik serves as a director on the board of River Bend Oil and Gas.
Christopher Robichaud — Director
Christopher Robichaud, 50, has served as Chief Executive Officer of PMK•BNC, a communications, marketing and consulting agency
since January 2010. In addition to managing teams in Los Angeles, New York and London, he advises clients across the globe on how to
apply the “Science of Popular Culture” to build audiences, create fans, and ultimately engage with consumers in today’s ever-changing
world and recently created and leads the agency’s global consulting unit, which helps companies better understand today’s changing
landscape worldwide branding landscape. Prior to serving as CEO of PMK•BNC, Mr. Robichaud was the President and COO of BNC
from September 1990 through December 2009.
Richard Tyler - Director
Richard Tyler, Age 59, has a background in private equity, venture capital and mergers and acquisitions. He has been serving as a
Managing Director of Vulano Group, a leading technology and intellectual property development company since 2007. Prior to Vulano
Group, he founded M2P Capital, LLC, a Denver based private equity firm, where he has served as partner since 2002. Prior to forming
M2P Capital, he was a partner in Taleria Ventures, a venture firm engaged in early stage investing and start-up management. In 1988, he
founded BACE Industries; a company that executed buy and build strategies in the manufacturing, distribution, business services and
technology industries. In addition, he serves as a director and adviser to numerous private companies and is a director of The American
Institute for Avalanche Research and Education, Colorado Outward Bound School and The American Mountain Guides Association. He
graduated from the Colorado College in 1980 with a BA degree. The Board of Directors believes Mr. Tyler’s qualifications to sit as a
member on the Board of Directors includes his significant experience with mergers and acquisitions, intellectual property (acquisition,
licensing and litigation) and leadership of business organizations.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer,
principal accounting officer or controller or persons performing similar functions and also to other employees. Our Code of Business
Conduct and Ethics can be found on the Company’s website at www.marathonpg.com.
Family Relationships
There are no family relationships between any of our directors, executive officers or directors.
Involvement in Certain Legal Proceedings
During the past ten years, none of our officers, directors, promoters or control persons have been involved in any legal proceedings as
described in Item 401(f) of Regulation S-K.
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Table of Contents
Term of Office
Our Board of Directors is comprised of five directors, and is divided among three classes, Class I, Class II and Class III. Class I directors
will serve until the 2018 annual meeting of stockholders and until their respective successors have been duly elected and qualified, or
until such director’s earlier resignation, removal or death. Class III directors will serve until the 2017 annual meeting of stockholders and
until their respective successors have been duly elected and qualified, or until such director’s earlier resignation, removal or death.
Class II directors, elected at the Company’s annual shareholder meeting held on September 28, 2016, will serve until the 2019 annual
meeting of stockholders and until their respective successors have been duly elected and qualified, or until such director’s earlier
resignation, removal or death. All officers serve at the pleasure of the Board.
Director Independence
Mr. Richard Chernicoff, Mr. Edward Kovalik, Mr. Christopher Robichaud and Mr. Richard Tyler are “independent” directors based on
the definition of independence in the listing standards of the NASDAQ Stock Market LLC (“NASDAQ”).
Committees of the Board of Directors
Our Board of Directors has established three standing committees: an audit committee, a nominating and corporate governance committee
and a compensation committee, which are described below. Members of these committees are elected annually at the regular board
meeting held in conjunction with the annual stockholders’ meeting. The charter of each committee is available on our website at
www.marathonpg.com.
Audit Committee
The Audit Committee members are Mr. Edward Kovalik, Mr. Christopher Robichaud and Mr. Richard Tyler with Mr. Edward Kovalik as
Chairman. The Committee has authority to review our financial records, deal with our independent auditors, recommend to the Board
policies with respect to financial reporting, and investigate all aspects of the our business. All members of the Audit Committee currently
satisfy the independence requirements and other established criteria of NASDAQ.
The Audit Committee has sole authority for the appointment, compensation and oversight of the work of our independent registered
public accounting firm, and responsibility for reviewing and discussing with management and our independent registered public
accounting firm our audited consolidated financial statements included in our Annual Report on Form 10-K, our interim financial
statements and our earnings press releases. The Audit Committee also reviews the independence and quality control procedures of our
independent registered public accounting firm, reviews management’s assessment of the effectiveness of internal controls, discusses with
management the Company’s policies with respect to risk assessment and risk management and will review the adequacy of the Audit
Committee charter on an annual basis.
Nominating and Governance Committee
The Nominating and Corporate Governance Committee members are Mr. Edward Kovalik, Mr. Christopher Robichaud and Mr. Richard
Tyler, with Mr. Richard Tyler as Chairman. The Nominating and Corporate Governance Committee has the following responsibilities:
(a) setting qualification standards for director nominees; (b) identifying, considering and nominating candidates for membership on the
Board; (c) developing, recommending and evaluating corporate governance standards and a code of business conduct and ethics
applicable to the Company; (d) implementing and overseeing a process for evaluating the Board, Board committees (including the
Committee) and overseeing the Board’s evaluation of the Chairman and Chief Executive Officer of the Company; (e) making
recommendations regarding the structure and composition of the Board and Board committees; (f) advising the Board on corporate
governance matters and any related matters required by the federal securities laws; and (g) assisting the Board in identifying individuals
qualified to become Board members; recommending to the Board the director nominees for the next annual meeting of shareholders; and
recommending to the Board director nominees to fill vacancies on the Board.
The Nominating and Governance Committee determines the qualifications, qualities, skills, and other expertise required to be a director
and to develop, and recommend to the Board for its approval, criteria to be considered in selecting nominees for director (the “Director
Criteria”); identifies and screens individuals qualified to become members of the Board, consistent with the Director Criteria. The
Nominating and Governance Committee considers any director candidates recommended by the Company’s stockholders pursuant to the
procedures described in the Company’s proxy statement, and any nominations of director candidates validly made by stockholders in
accordance with applicable laws, rules and regulations and the provisions of the Company’s charter documents. The Nominating and
Governance Committee makes recommendations to the Board regarding the selection and approval of the nominees for director to be
submitted to a stockholder vote at the annual meeting of stockholders, subject to approval by the Board.
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Compensation Committee
The Compensation Committee oversees our executive compensation and recommends various incentives for key employees to encourage
and reward increased corporate financial performance, productivity and innovation. Its members are Mr. Richard Chernicoff, Mr. Edward
Kovalik and Mr. Richard Tyler, with Mr. Richard Chernicoff as chairman. All members of the Compensation Committee currently satisfy
the independence requirements and other established criteria of NASDAQ.
The CompensationCommittee is responsible for: (a) assisting our Board in fulfilling its fiduciary duties with respect to the oversight of
the Company’s compensation plans, policies and programs, including assessing our overall compensation structure, reviewing all
executive compensation programs, incentive compensation plans and equity-based plans, and determining executive compensation; and
(b) reviewing the adequacy of the Compensation Committee charter on an annual basis. The Compensation Committee, among other
things, reviews and approves the Company’s goals and objectives relevant to the compensation of the Chief Executive Officer, evaluate
the Chief Executive Officer’s performance with respect to such goals, and set the Chief Executive Officer’s compensation level based on
such evaluation. The Compensation Committee also considers the Chief Executive Officer’s recommendations with respect to other
executive officers and evaluates the Company’s performance both in terms of current achievements and significant initiatives with long-
term implications. It assesses the contributions of individual executives and recommend to the Board levels of salary and incentive
compensation payable to executive officers of the Company; compares compensation levels with those of other leading companies in
similar or related industries; reviews financial, human resources and succession planning within the Company; recommend to the Board
the establishment and administration of incentive compensation plans and programs and employee benefit plans and programs;
recommends to the Board the payment of additional year-end contributions by the Company under certain of its retirement plans; grants
stock incentives to key employees of the Company and administer the Company’s stock incentive plans; and reviews and recommends for
Board approval compensation packages for new corporate officers and termination packages for corporate officers as requested by
management.
Changes in Nominating Procedures
None.
Board Leadership Structure and Role in Risk Oversight
Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or
combined, we have traditionally determined that it is in the best interests of the Company and its shareholders to partially combine these
roles. Due to the small size of the Company, we believe it is currently most effective to have the Chairman and Chief Executive Officer
positions partially combined.
Our Board of Directors is primarily responsible for overseeing our risk management processes. The Board of Directors receives and
reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding the Company’s
assessment of risks. The Board of Directors focuses on the most significant risks facing the Company and our general risk management
strategy, and also ensures that risks undertaken by us are consistent with the Board of Directors’ risk parameters. While the Board of
Directors oversees the Company, our management is responsible for day-to-day risk management processes. We believe this division of
responsibilities is the most effective approach for addressing the risks facing the Company and that our board leadership structure
supports this approach.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of Exchange Act requires our executive officers and directors and persons who beneficially own more than 10% of a
registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership,
statements of changes in beneficial ownership and annual statement of changes in beneficial ownership with respect to their ownership of
the Company’s securities, on Form 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required
by the Securities and Exchange Commission regulations to furnish our Company with copies of all Section 16(a) reports they file.
Based solely on our review of the copies of such reports received by us, and on written representations by our officers and directors
regarding their compliance with the applicable reporting requirements under Section 16(a) of the Exchange Act and without conducting
any independent investigation of our own, we believe that with respect to the fiscal year ended December 31, 2016, our officers and
directors, and all of the persons known to us to beneficially own more than 10% of our common stock filed all required reports on a
timely basis.
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Table of Contents
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table sets forth information concerning compensation for services rendered in all capacities during
2016 and 2015 awarded to, earned by or paid to our executive officers. The value attributable to any option awards and stock awards
reflects the grant date fair values of stock awards calculated in accordance with FASB Accounting Standards Codification Topic 718. As
described further in Note 6 — Stockholders’ Equity - Common Stock Options to our consolidated year-end financial statements, the
assumptions made in the valuation of these option awards and stock awards is set forth therein.
Name and Principal Position
Year
Salary
($)
Bonus
Awards
($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Plan
Compensation
($)
Nonqualified
Deferred
Earnings
($)
All Other
Compensation
($)
Doug Croxall
CEO and Chairman
Francis Knuettel II
CFO & Secretary
James Crawford
COO
Enrique Sanchez (1)
IP Counsel & SVP of Licensing
Umesh Jani (2)
CTO, SVP of Licensing
David Liu (3)
CTO
Erich Spangenberg (4)
Dir. of Acquisitions & Licensing
Richard Chernicoff (5)
Interim General Counsel
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
511,210
496,200
250,000
250,000
184,290
185,002
183,196
220,833
225,000
225,000
114,583
—
150,000
—
120,000
255,500
509,000
575,000
185,000
215,000
50,000
18,700
—
25,000
—
43,500
—
—
200,000
—
—
12,500
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
137,095
—
91,396
—
31,989
—
45,698
—
45,698
198,105
—
357,264
—
—
709,492
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
($)
1,020,210
1,208,295
435,000
556,396
234,290
235,691
183,196
291,531
225,000
314,198
312,688
—
707,264
—
120,000
977,492
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1) Enrique Sanchez was appointed as the Senior Vice President of Licensing of the Company on November 3, 2014 and his employment with the Company terminated on September 22, 2016.
(2) Umesh Jani was appointed as the Chief Technology Officer and SVP of Licensing of the Company on October 31, 2014 and his employment with the Company terminated on January 31, 2017.
(3) David Liu was appointed as the Chief Technology Officer of the Company on July 18, 2016 and his employment with the Company was terminated on March 15, 2017.
(4) Erich Spangenberg was appointed as the Director of Acquisitions and Licensing on May 11, 2016.
(5) Richard Chernicoff was appointed as the Interim General Counsel on April 7, 2015 in addition to his responsibilities as a Director and his appointment as Interim General Counsel was terminated on
July 31, 2016.
Employment Agreements
On November 14, 2012, we entered into an employment agreement with Doug Croxall (the “Croxall Employment Agreement”), whereby
Mr. Croxall agreed to serve as our Chief Executive Officer for a period of two years, subject to renewal, in consideration for an annual
salary of $350,000 and an Indemnification Agreement. Additionally, under the terms of the Croxall Employment Agreement, Mr. Croxall
shall be eligible for an annual bonus if we meet certain criteria, as established by the Board of Directors, subject to standard “claw-back
rights” in the event of any restatement of any prior period earnings or other results as from which any annual bonus shall have been
determined. As further consideration for his services, Mr. Croxall received a ten-year option award to purchase an aggregate of 307,692
shares of our common stock with an exercise price of $3.25 per share, which shall vest in twenty-four (24) equal monthly installments on
each monthly anniversary of the date of the Croxall Employment Agreement. On November 18, 2013, we entered into Amendment No. 1
to the Croxall Employment Agreement (“Amendment”). Pursuant to the Amendment, the term of the Croxall Agreement shall be
extended to November 14, 2017, and Mr. Croxall’s annual base salary shall be increased to $480,000, subject to a 3% increase every year,
commencing on November 14, 2014.
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Table of Contents
On March 1, 2013, Mr. James Crawford was appointed as our Chief Operating Officer. Pursuant to the employment agreement with
Mr. Crawford dated March 1, 2013 (“Crawford Employment Agreement”). Mr. Crawford shall serve as our Chief Operating Officer for
two years. The Crawford Employment Agreement shall be automatically renewed for successive one year periods thereafter.
Mr. Crawford shall be entitled to a base salary at an annual rate of $185,000, with such upward adjustments as shall be determined by the
Board of Directors in its sole discretion. Mr. Crawford shall also be entitled to an annual bonus if we meet or exceed criteria adopted by
the Compensation Committee of the Board of Directors for earning bonuses. Mr. Crawford shall be awarded five-year stock options to
purchase an aggregate of 76,923 shares of our common stock, with a strike price based on the closing price of our common stock on
March 1, 2013, vesting in twenty-four (24) equal installments on each monthly anniversary of March 1, 2013, provided Mr. Crawford is
still employed by us on each such date.
On May 15, 2014, we entered into a three-year executive employment agreement with Francis Knuettel II (“Knuettel Employment
Agreement”), pursuant to which Mr. Knuettel will serve as the Chief Financial Officer of the Company, effective May 15, 2014. Pursuant
to the terms of the Knuettel Employment Agreement, Mr. Knuettel shall receive a base salary at an annual rate of $250,000 and an annual
bonus up to 75% of Mr. Knuettel’s base salary as determined by the Compensation Committee of the Board of Directors. As further
consideration for Mr. Knuettel’s services, the Company agreed to issue Mr. Knuettel ten-year stock options 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 Employment Agreement, provided Mr. Knuettel is still employed by the Company on each such
date.
On October 31, 2014, we entered into a two-year executive employment agreement with Umesh Jani (“Jani Employment Agreement”)
pursuant to which Mr. Jani shall serve as the Company’s Chief Technology Officer and SVP Licensing. Pursuant to the terms of the Jani
Employment Agreement, Mr. Jani shall receive a base salary at an annual rate of $225,000 and an annual incentive compensation of up to
100% of the base salary, as determined by the Compensation Committee. As further consideration for Mr. Jani’s services, the Company
agreed to issue him ten-year stock options under the Company’s 2014 Equity Incentive Plan to purchase an aggregate of 100,000 shares of
common stock, with an exercise price of $6.40 per share. The options shall vest in thirty-six (36) equal installments on each monthly
anniversary of the date of the Jani Employment Agreement, provided Mr. Jani is still employed by the Company on each such date.
On November 3, 2014, we entered into a two-year executive employment agreement (“Sanchez Employment Agreement”) with Rick
Sanchez, effective October 31, 2014, pursuant to which Mr. Sanchez shall serve as the Company’s Senior Vice President of Licensing.
Pursuant to the terms of the Sanchez Employment Agreement, Mr. Sanchez shall receive a base salary at an annual rate of $215,000 and
an annual incentive compensation of up to 100% of the base salary, as determined by the Compensation Committee. As further
consideration for Mr. Sanchez’s services, the Company agreed to issue him ten-year stock options under the Company’s 2014 Equity
Incentive Plan to purchase an aggregate of 160,000 shares of common stock, with an exercise price of $6.40 per share. The options shall
vest in thirty-six (36) equal installments on each monthly anniversary of the date of the Sanchez Employment Agreement, provided
Mr. Sanchez is still employed by the Company on each such date.
On April 7, 2015 (the “Chernicoff Effective Date”), 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 a ten
(10) year stock option to purchase 280,000 shares of the Company’s common stock (the “Award”) pursuant to the Company’s 2014
Equity Incentive Plan. 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 twelve 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 Equity
Incentive 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 reaches $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 reaches $10.14.
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%.
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Table of Contents
On June 29, 2016, we entered into an employment agreement (“Liu Employment Agreement”) with David Liu, effective no later than
August 1, 2016, pursuant to which Mr. Liu shall serve as the Company’s Chief Technology Officer. Pursuant to the terms of the Liu
Employment Agreement, Mr. Liu shall receive a base salary at an annual rate of $250,000 and annual incentive compensation of up to
100% of the base salary, as determined by the Compensation Committee. As further consideration for Mr. Liu’s services, the Company
agreed to issue him ten-year stock options under the Company’s 2014 Equity Incentive Plan to purchase an aggregate of 150,000 shares of
common stock, with an exercise price of $2.79 per share. The options shall vest in thirty-six (36) equal installments on each monthly
anniversary of the date of the Liu Employment Agreement, provided Mr. Liu is still employed by the Company on each such date.
Mr. Liu’s employement with the Company was terminated on March 15, 2016.
Directors’ Compensation
The following summary compensation table sets forth information concerning compensation for services rendered in all capacities during
2016 and 2015 awarded to, earned by or paid to our directors. The value attributable to any warrant awards reflects the grant date fair
values of stock awards calculated in accordance with FASB Accounting Standards Codification Topic 718. As described further in Note 6
— Stockholders’ Equity — Common Stock Warrants to our consolidated year-end financial statements, a discussion of the assumptions
made in the valuation of these warrant awards.
Name
Richard Chernicoff
Edward Kovalik
William Rosellini (1)
Richard Tyler
Christopher Robichaud (2)
Fees Earned
or paid in
cash
($)
Stock
awards
($)
Option
awards
($)
Non-equity
incentive plan
compensation
($)
Non-qualified
deferred
compensation
earnings
($)
All other
compensation
($)
Total
($)
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
40,250
20,923
47,250
—
38,205
53,125
44,125
23,270
10,250
—
—
—
—
—
—
—
—
—
—
—
20,864
60,742
20,864
18,060
—
18,060
20,864
55,868
20,864
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
61,114
81,665
68,114
18,060
38,205
71,185
64,989
79,138
31,114
—
(1) Mr. William Rosellini elected not to continue serving on the Company’s Board of Directors and his term ended with the annual
shareholders meeting held on September 28, 2016.
(2)
Mr. Christopher Robichaud was elected to the Company’s Board of Directors at the annual shareholders meeting held on
September 28, 2016, filling the seat vacated by Mr. Rosellini.
Employee Grants of Plan Based Awards and Outstanding Equity Awards at Fiscal Year-End
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, after
giving effect to the Reverse Split.
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Table of Contents
On September 16, 2014, our Board of Directors adopted the 2014 Equity Incentive Plan (the “2014 Plan”), and only July 31, 2015, the
shareholders approved the 2014 Plan at the Company’s annual meeting. The 2014 Plan authorizes the Company to grant stock options,
restricted stock, preferred stock, other stock based awards, and performance awards to purchase up to 2,000,000 shares of common stock.
Awards may be granted to the Company’s directors, officers, consultants, advisors and employees. Unless earlier terminated by the Board,
the 2014 Plan will terminate, and no further awards may be granted, after September 16, 2024. As of December 31 2016, and within sixty
(60) days thereafter, the following sets forth the option and stock awards to officers of the Company.
Option Awards
Equity
incentive plan
awards:
Number of
securities
underlying
unexercised
unearned
options
(#)
unexercisable
Number of
securities
underlyng
unexercised
options (1)
(#) exercisable
Number of
securities
underlying
unexercised
options
(#)
unexercisable
Stock awards
Option
exercise price
($)
Option
expiration date
Number of
shares of units
of stock that
have not
vested
(#)
Market value
of shares of
units of stock
that have not
vested
($)
Equity
incentive plan
awards:
Number of
unearned
shares, units or
other rights
that have not
vested
(#)
Equity
incentive plan
awards:
Market or
payout value
of unearned
shares, units or
other rights
that have not
vested
($)
Doug Croxall
Doug Croxall
Doug Croxall
Doug Croxall
Doug Croxall
James Crawford
James Crawford
James Crawford
James Crawford
Francis Knuettel II
Francis Knuettel II
Francis Knuettel II
Umesh Jani
Umesh Jani
Umesh Jani
Umesh Jani
Umesh Jani
Erich Spangenberg
David Liu
307,692
307,692
200,000
220,000
118,750
38,462
30,000
80,000
27,708
290,000
100,000
79,167
23,076
83,333
40,000
40,000
39,583
250,000
41,667
—
—
—
—
31,250
—
—
—
7,292
—
—
20,833
—
16,667
—
—
10,417
250,000
108,333
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3.25
2.64
2.97
6.40
1.86
2.47
4.17
6.40
1.86
4.17
6.40
1.86
3.43
6.40
4.17
5.05
1.86
1.87
2.79
11/14/22
06/11/18
11/18/23
10/31/24
10/14/25
06/19/18
05/14/24
10/31/24
10/14/25
05/14/24
10/31/24
10/14/25
07/25/18
10/31/24
05/14/19
06/15/19
10/14/25
05/10/26
07/01/16
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the Board of Directors or compensation committee of any other entity that has one
or more of its executive officers serving as a member of our Board of Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The following table sets forth certain information regarding beneficial ownership of our common stock as of March 15, 2017: (i) by each
of our directors, (ii) by each of the named executive officers, (iii) by all of our executive officers and directors as a group, and (iv) by each
person or entity known by us to beneficially own more than five percent (5%) of any class of our outstanding shares. As of March 15,
2017, there were 19,302,472 shares of our common stock outstanding.
44
Table of Contents
Name and Address of
Beneficial Owner (1)
Officers and Directors
Amount and Nature of Beneficial Ownershipas of March 15, 2017 (1)
Common
Stock
Options
Warrants
Total
Percentage
of Common
Stock (%)
Doug Croxall (Chairman and CEO) (2)
615,384
1,154,134
Francis Knuettel II (Chief Financial Officer)
(3)
James Crawford (Chief Operating Officer) (4)
Umesh Jani (Chief Technology Officer and
SVP, Licensing) (5)
Erich Spangenberg (Director Acquisitions &
Licensing) (6)
David Liu (Chief Technical Officer) (7)
Richard Chernicoff (Director) (8)
Edward Kovalik (Director) (9)
Christopher Robichaud (Director) (10)
Richard Tyler (Director) (11)
All Directors and Executive Officers (ten
persons)
* Less than 1%
—
—
—
469,167
176,170
202,917
—
—
—
—
1,769,518
469,167
176,170
202,917
8.7%
2.4%
*
1.0%
2,408,924
250,000
48,078
2,707,002
13.8%
—
—
—
—
—
41,667
152,292
71,667
11,667
51,667
—
—
—
—
—
41,667
152,292
71,667
11,667
51,667
*
*
*
*
*
3,024,308
2,581,346
48,078
5,653,732
25.8%
(1) Amounts set forth in the table and footnotes gives effect to the two-for-one stock dividend that we effectuated on December 22, 2014.
In determining beneficial ownership of our common stock as of a given date, the number of shares shown includes shares of common
stock which may be acquired on exercise of warrants or options or conversion of convertible securities within 60 days of March 15, 2017.
In determining the percent of common stock owned by a person or entity on March 15, 2017, (a) the numerator is the number of shares of
the class beneficially owned by such person or entity, including shares which may be acquired within 60 days on exercise of warrants or
options and conversion of convertible securities, and (b) the denominator is the sum of (i) the total shares of common stock outstanding on
March 15, 2017 and (ii) the total number of shares that the beneficial owner may acquire upon conversion of securities and upon exercise
of the warrants and options, subject to limitations on conversion and exercise as more fully described below. Unless otherwise stated, each
beneficial owner has sole power to vote and dispose of its shares and such person’s address is c/o Marathon Patent Group, Inc., 11100
Santa Monica Blvd., Ste. 380, Los Angeles, CA 90025.
(2) Shares of Common Stock are held by Croxall Family Revocable Trust, over which Mr. Croxall holds voting and dispositive power.
Represents options to purchase (i) 307,692 shares of Common Stock at an exercise price of $3.25 per share, (ii) 307,692 shares of
Common Stock at an exercise price of $2.625 per share, (iii) 200,000 shares of Common Stock at an exercise price of $2.965 per share,
(iv) 220,000 shares of Common Stock at an exercise price of $6.40 per share and (v) 118,750 shares of Common Stock at an exercise price
of $1.86 per share. Excludes options to purchase 31,250 shares of Common Stock at an exercise price of $1.86 per share that does not vest
and is not exercisable within 60 days of March 15, 2017.
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Table of Contents
(3) Represents options to purchase (i) 290,000 shares of Common Stock at an exercise price of $4.165 per share, (ii) 100,000 shares of
Common Stock at an exercise price of $6.40 per share and (iii) 79,167 shares of Common Stock at an exercise price of $1.86 per share.
Excludes options to purchase 20,833 shares of Common Stock at an exercise price of $1.86 per share that does not vest and is not
exercisable within 60 days of March 15, 2017.
(4) Represents options to purchase (i) 38,462 shares of Common Stock at an exercise price of $2.47 per share, (ii) 30,000 shares of
Common Stock at an exercise price of $4.165 per share, (iii) 80,000 shares of Common Stock at an exercise price of $6.40 per share and
(iv) 27,708 shares of Common Stock at an exercise price of $1.86 per share. Excludes options to purchase 7,292 shares of Common Stock
at an exercise price of $1.86 per share that does not vest and is not exercisable within 60 days of March 15, 2017.
(5) Represents options to purchase (i) 23,076 shares of Common Stock at an exercise price of $3.43per share, (ii) 83,333 shares of
Common Stock at an exercise price of $6.40 per share, (ii) 40,000 shares of Common Stock at an exercise price of $4.165 per share,
(iii) 40,000 shares of Common Stock at an exercise price of $5.05 per share, and (iv) 39,583 shares of Common Stock at an exercise price
of $1.86 per share. Excludes options to purchase (i) 16,667 shares of Common Stock at an exercise price of $6.40 per share and
(ii) 10,417 shares of Common Stock at an exercise price of $1.86 per share, all of which do not vest and are not exercisable within 60 days
of March 15, 2016.
(6) Represents an option to purchase 250,000 shares of Common Stock at an exercise price of $1.87 per share. Excludes an option to
purchase 250,000 shares of Common Stock at an exercise price of $1.87 per share that does not vest and is not exercisable within 60 days
of March 15, 2017. Includes 1,626,924 shares of common stock, 782,000 of Series B Convertible Preferred Stock convertible into
782,000 shares of common stock and warrants to purchase 48,078 shares of common stock.
(7) Represents options to purchase 41,667 shares of Common Stock at an exercise price of $2.79 per share. Excludes options to purchase
118,333 shares of Common Stock at an exercise price of $2.79 per share that does not vest and is not exercisable within 60 days of
March 15, 2017.
(8) Represents options to purchase (i) 20,000 shares of Common Stock at an exercise price of $7.37 per share, (ii) 72,917 shares of
Common Stock at an exercise price of $6.76 per share, (iii) 20,000 shares of Common Stock at an exercise price of $2.03 per share,
(iv) 27,708 shares of Common Stock at an exercise price of $1.86 per share and (v) 11,667 shares of Common Stock at an exercise price
of $2.41 per share. Excludes options to purchase (i) 67,083 shares of Common Stock at an exercise price of $6.76 per share, (ii) 7,292
shares of Common Stock at an exercise price of $1.86 per share and (iii) 8,333 shares of Common Stock at an exercise price of $2.41 per
share, all of which do not vest and are not exercisable within 60 days of March 15, 2017.
(9) Represents options to purchase (i) 20,000 shares of Common Stock at an exercise price of $3.295 per share, (ii) 20,000 shares of
Common Stock at an exercise price of $7.445 per share, (iii) 20,000 shares of Common Stock at an exercise price of $2.03 per share and
(iv) 11,667 shares of Common Stock at an exercise price of $2.41 per share. Excludes an option to purchase 8,333 shares of Common
Stock at an exercise price of $2.41 per share that does not vest and is not exercisable within 60 days of March 15, 2017.
(10) Represents an option to purchase 11,667 shares of Common Stock at an exercise price of $2.41 per share. Excludes an option to
purchase 8,333 shares of Common Stock at an exercise price of $2.41 per share that does not vest and is not exercisable within 60 days of
March 15, 2017.
(11) Represents options to purchase (i) 20,000 shares of Common Stock at an exercise price of $6.61 per share, (ii) 20,000 shares of
Common Stock at an exercise price of $2.03 per share and (iii) 11,667 shares of Common Stock at an exercise price of $2.41 per share.
Excludes an option to purchase 8,333 shares of Common Stock at an exercise price of $2.41 per share that does not vest and is not
exercisable within 60 days of March 15, 2017.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Other than disclosed herein, there were no transactions during the year ended December 31, 2016 or any currently proposed transactions,
in which the Company was or is to be a participant and the amount involved exceeds $120,000, and in which any related person had or
will have a direct or indirect material interest.
46
Table of Contents
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
During the year ended December 31, 2016 we engaged BDO USA, LLP as our independent auditor and during the year ended
December 31, 2015, we engaged SingerLewak LLP, as our independent auditor. For the years ended December 31, 2016, and 2015, we
incurred fees as discussed below:
Audit fees
Audit — related fees
Tax fees
All other fees
Fiscal Year Ended
December 31,
2016
December 31,
2015
$
155,000
—
$
—
246,947
—
12,297
—
Audit fees consist of fees related to professional services rendered in connection with the audit of our annual financial statements, review
of our quarterly financial statements and review of the Company’s S-4 and registration statements.
Our policy is to pre-approve all audit and permissible non-audit services performed by the independent accountants. These services may
include audit services, audit-related services, tax services and other services. Under our Audit Committee’s policy, pre-approval is
generally provided for particular services or categories of services, including planned services, project based services and routine
consultations. In addition, the Audit Committee may also pre-approve particular services on a case-by-case basis. Our Audit Committee
approved all services that our independent accountants provided to us in the past two fiscal years.
Table of Contents
ITEM 15. EXHIBITS
47
PART IV
The following exhibits are filed as part of this Registration Statement.
Exhibit No.
3.1
3.2
3.3
3.4
3.5
3.6
4.1
4.2
4.3
4.4
4.5
4.6
4.7
10.1
10.2
Description
Amended and Restated Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 to the Current
Report on Form 8-K filed with the SEC on December 9, 2011)
Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.1 to the Current Report on
Form 8-K filed with the SEC on December 9, 2011)
Certificate of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Current Report on
Form 8-K filed with the SEC on February 20, 2013)
Certificate of Amendment to Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to
the Current Report on Form 8-K filed with the SEC on July 19, 2013)
Certificate of Designations of Series A Convertible Preferred Stock of Marathon Patent Group, Inc. (Incorporated by
reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed with the SEC on May 7, 2014)
Certificate of Designations of Series B Convertible Preferred Stock of Marathon Patent Group, Inc. (Incorporated by
reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed with the SEC on May 7, 2014)
Form of Warrant Amendment Letter dated April 20, 2014 (Incorporated by reference to Exhibit 4.1 to the Current Report
on 8-K filed with the SEC on April 24, 2014)
Note due July 29, 2018 (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on 8-K, filed with the
SEC on February 3, 2015)
Warrant to Purchase Common Stock dated January 29, 2015 (Incorporated by reference to Exhibit 10.3 to the Company’s
Current Report on 8-K, filed with the SEC on February 3, 2015)
Form of Warrant (Incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed with the SEC on
December 12, 2016).
Form of Placement Agent’s Warrant (Incorporated by reference to Exhibit 4.2 to the current report on Form 8-K filed with
the SEC on December 12, 2016).
Form of Warrant dated January 10, 2017 (Incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed
with the SEC on January 17, 2017).
Promissory Note dated January 10, 2017(Incorporated by reference to Exhibit 4.2 to the current report on Form 8-K filed
with the SEC on January 17, 2017).
Revenue Sharing and Securities Purchase Agreement by and among Marathon Patent Group, Inc. and its subsidiaries and
DBD Credit Funding LLC dated January 29, 2015 (Incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on 8-K, filed with the SEC on February 3, 2015) +
Subscription Agreement between Marathon Patent Group, Inc. and DBD Credit Funding LLC dated January 29, 2015
10.3
10.4
10.5
10.6
(Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on 8-K, filed with the SEC on February 3,
2015)
Security Agreement by and among Marathon Patent Group, Inc. and certain of its subsidiaries and DBD Credit Funding
LLC dated January 29, 2015 (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on 8-K, filed
with the SEC on February 3, 2015)+
Patent Security Agreement by Marathon Patent Group, Inc. and certain of its subsidiaries in favor of DBD Credit Funding
LLC dated January 29, 2015 (Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on 8-K, filed
with the SEC on February 3, 2015)+
Lockup Agreement by and between DBD Credit Funding LLC and Marathon Patent Group, Inc. dated January 29, 2015
(Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on 8-K, filed with the SEC on February 3,
2015)
Lockup Agreement by and between TechDev Holdings, LLC, Audrey Spangenberg, Erich Spangenberg, Granicus IP, LLC
and Marathon Patent Group, Inc. dated January 29, 2015 (Incorporated by reference to Exhibit 10.8 to the Company’s
Current Report on 8-K, filed with the SEC on February 3, 2015)
48
Table of Contents
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
14.1
16.1
23.1
23.2
Lockup Agreement by and between TechDev Holdings, LLC, Audrey Spangenberg, Erich Spangenberg, Granicus IP,
LLC and Marathon Patent Group, Inc. dated January 29, 2015 (Incorporated by reference to Exhibit 10.8 to the
Company’s Current Report on 8-K, filed with the SEC on February 3, 2015)
Patent License Agreement by and among Marathon Patent Group, Inc. and certain of its subsidiaries and DBD Credit
Funding LLC dated January 29, 2015 (Incorporated by reference to Exhibit 10.9 to the Company’s Current Report on 8-
K, filed with the SEC on February 3, 2015)+
Guaranty Agreement by certain subsidiaries of Marathon Patent Group, Inc. in favor of DBD Credit Funding LLC dated
January 29, 2015 (Incorporated by reference to Exhibit 10.10 to the Company’s Current Report on 8-K, filed with the
SEC on February 3, 2015)
Consulting Agreement by and between Marathon Patent Group, Inc. and Richard Chernicoff dated April 7, 2015
(Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on 8-K, filed with the SEC on April 13,
2015)
Form of Securities Purchase Agreement (Incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed
with the SEC on December 12, 2016).
Form of Registration Rights Agreement (Incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed
with the SEC on December 12, 2016).
Form of Placement Agency Agreement (Incorporated by reference to Exhibit 10.3 to the current report on Form 8-K filed
with the SEC on December 12, 2016).
Amended and Restated Revenue Sharing and Securities Purchase Agreement by and among the Company, certain of the
Company’s subsidiaries and DBD Credit Funding dated January 10, 2017 (Incorporated by reference to Exhibit 10.1 to the
current report on Form 8-K filed with the SEC on January 17, 2017).
Patent Security Agreement dated January 10, 2017 by and among the Company, certain of the Company’s subsidiaries
and DBD Credit Funding dated January 10, 2017(Incorporated by reference to Exhibit 10.2 to the current report on
Form 8-K filed with the SEC on January 17, 2017).
Amended and Restated Patent License Agreement dated January 10, 2017 by and among the Company, certain of the
Company’s subsidiaries and DBD Credit Funding dated January 10, 2017(Incorporated by reference to Exhibit 10.3 to the
current report on Form 8-K filed with the SEC on January 17, 2017).
Security Agreement Supplement dated January 10, 2017 by and among the Company, certain of the Company’s
subsidiaries and DBD Credit Funding dated January 10, 2017(Incorporated by reference to Exhibit 10.4 to the current
report on Form 8-K filed with the SEC on January 17, 2017).
Sales Agreement (Incorporated by reference to Exhibit 10.1 to the current report on Form 8-K dated January 27, 2017).
Code of Business Conduct and Ethics (Incorporated by reference to Exhibit 14.1 to the Company’s Annual Report on 10-
K, filed with the SEC on March 31, 2014)
SingerLewak LLP letter to the Securities and Exchange Commission (incorporated by reference to 8-K filed January 17,
2017)
Consent of SingerLewak LLP*
Consent of BDO USA, LLP*
* Filed herein.
ITEM 16. FORM 10-K SUMMARY
None.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
31.1
31.2
32.1
101.INS
Certification of Chief Executive Officer pursuant to Section302 of the Sarbanes-Oxley Act 2002*
Certification of Chief Financial Officer pursuant to Section302 of the Sarbanes-Oxley Act 2002*
Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer*
XBRL Instance Document
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
XBRL Taxonomy Extension Schema Docment
XBRL Taxonomy Calculation Linkbase Document
XBRL Taxonomy Label Linkbase Document
XBRL Taxonomy Presentation Linkbase Document
XBRL Taxonomy Extension Definition Document
Table of Contents
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: April 4, 2017
MARATHON PATENT GROUP, INC.
By: /s/ Doug Croxall
Name: Doug Croxall
Title: Chief Executive Officer
(Principal Executive Officer)
By: /s/ Francis Knuettel II
Name: Francis Knuettel II
Title: Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Doug Croxall
Doug Croxall
/s/ Francis Knuettel II
Francis Knuettel II
/s/ Richard Chernicoff
Richard Chernicoff
/s/ Edward Kovalik
Edward Kovalik
/s/ Christopher Robichaud
Christopher Robichaud
/s/ Richard Tyler
Richard Tyler
Chief Executive Officer and Chairman (Principal Executive Officer)
April 4, 2017
Chief Financial Officer (Principal Financial and Accounting Officer)
April 4, 2017
Director
Director
Director
Director
50
April 4, 2017
April 4, 2017
April 4, 2017
April 4, 2017
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement (No. 333-198569, No. 333-196994, and No. 333-200394) on
Form S-3 of Marathon Patent Group, Inc. and subsidiaries (collectively, the “Company”) of our report dated March 30, 2016, relating to
the consolidated financial statements, appearing in this Annual Report on Form 10-K of the Company for the year ended December 31,
2016.
Exhibit 23.1
SingerLewak LLP
/S/ SingerLewak LLP
Los Angeles, California
April 4, 2017
Consent of Independent Registered Public Accounting Firm
Exhibit 23.2
Marathon Patent Group, Inc.
Los Angeles, CA
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-198569, No. 333-196994, and
No. 333-200394) of Marathon Patent Group, Inc. (“Company”) of our report dated April 4, 2017, relating to the consolidated financial
statements which appears in this Form 10-K. Our report contains an explanatory paragraph regarding the Company’s ability to continue
as a going concern.
Los Angeles, CA
/s/ BDO USA, LLP
April 4, 2017
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Doug Croxall, certify that:
1. I have reviewed this annual report on Form 10-K of Marathon Patent Group, Inc.;
Exhibit 31.1
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly for the period in which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Dated: April 4, 2017
By: /s/ Doug Croxall
Doug Croxall
Chief Executive Officer and Chairman (Principal Executive
Officer)
CERTIFICATION OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Francis Knuettel II, certify that:
1. I have reviewed this annual report on Form 10-K of Marathon Patent Group, Inc.;
Exhibit 31.2
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly for the period in which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Dated: April 4, 2017
By: /s/ Francis Knuettel II
Francis Knuettel II
Chief Financial Officer (Principal Financial and Accounting
Officer)
Certification
Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002
(Subsections (A) And (B) Of Section 1350, Chapter 63 of Title 18, United States Code)
Exhibit 32.1
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States
Code), each of the undersigned officers of Marathon Patent Group, Inc. (the “Company”), does hereby certify, that:
The Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the “Form 10-K”) of the Company fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-K fairly
presents, in all material respects, the financial condition and results of operations of the Company.
Date: April 4, 2017
Date: April 4, 2017
By: /s/ Doug Croxall
Doug Croxall
Chief Executive Officer and Chairman (Principal Executive
Officer)
By: /s/ Francis Knuettel II
Francis Knuettel II
Chief Financial Officer (Principal Financial and Accounting
Officer)