Quarterly report pursuant to Section 13 or 15(d)

Summary of Significant Accounting Policies

v3.21.1
Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2021
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Principles of Consolidation

 

The accompanying unaudited consolidated condensed financial statements, including the accounts of the Company’s subsidiaries, Marathon Crypto Mining, Inc., Crypto Currency Patent Holding Company and Soems Acquisition Corp., have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations. These consolidated condensed financial statements reflect all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position, the results of operations and cash flows of the Company for the periods presented. It is suggested that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s most recent Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year ended December 31, 2021.

 

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 and fixed assets, the assumptions used to calculate fair value of warrants and options granted, realization of long-lived assets, deferred income taxes, unrealized tax positions and the realization of digital currencies.

 

Significant Accounting Policies

 

There have been no material changes to the Company’s significant accounting policies to those previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

 

Digital Currencies

 

Digital currencies are included in current assets in the consolidated balance sheets. Digital currencies are recorded at cost less impairment.

 

An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.

 

Halving – The bitcoin blockchain and the cryptocurrency reward for solving a block is subject to periodic incremental halving. Halving is a process designed to control the overall supply and reduce the risk of inflation in cryptocurrencies using a Proof-of-Work consensus algorithm. At a predetermined block, the mining reward is cut in half, hence the term “Halving”. The last halving for bitcoin occurred on May 12, 2020. Many factors influence the price of bitcoin and potential increases or decreases in prices in advance of or following a future halving is unknown.

 

The following table presents the activities of the digital currencies for the three months ended March 31, 2021:

 

Digital currencies at December 31, 2020   $ 2,271,656  
Additions of digital currencies     9,152,816  
Realized gain on sale of digital currencies     (54 )
Impairment of cryptocurrencies     (662,199 )
Sale of digital currencies     (16,000 )
Digital currencies at March 31, 2021   $ 10,746,219  

  

Investment Fund

 

In 2016, the FASB issued Accounting Standards Update (ASU) 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, that requires entities to generally measure investments in equity securities at fair value and recognize changes in fair value in net income.

 

On January 25, 2021, the Company entered into a limited partnership agreement with NYDIG Digital Assets Fund III, LP (“fund”) whereas the fund purchased 4,812.66 BTC   in an aggregate purchase price of $150 million. The Company owns 100% of the limited partnership interest. The investment fund is included in current assets in the consolidated balance sheets.

 

Each Fund qualifies and operates as an investment company for accounting purposes pursuant to the accounting and reporting guidance under ASC 946, Financial Services – Investment Companies, which requires fair value measurement of the Fund’s investments in digital assets. The digital assets held by each Fund are traded on a number of active markets globally, including the over-the-counter (“OTC”) market and digital asset exchanges. A fair value measurement under ASC 820 for an asset assumes that the asset is exchanged in an orderly transaction between market participants either in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset (ASC 820-10-35-5). An entity must have access to the principal (or most advantageous) market at the measurement date (ASC 820-10-35-6A).

 

Fair Value of Financial Instruments

 

The Company measures at fair value certain of its financial and non-financial assets and liabilities by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:

 

  Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities
     
  Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data
     
  Level 3: Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.

 

The carrying amounts reported in the consolidated balance sheet for cash, accounts receivable, accounts payable, and accrued expenses, approximate their estimated fair market value based on the short-term maturity of these instruments. The carrying value of notes payable and other long-term liabilities approximate fair value as the related interest rates approximate rates currently available to the Company.

 

Financial assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level of input that is significant to their fair value measurement. The Company measures the fair value of its marketable securities     and investments by taking into consideration valuations obtained from third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs included reported trades of and broker-dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities and other observable inputs.

 

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis and the Company’s estimated level within the fair value hierarchy of those assets and liabilities as of March 31, 2021 and December 31, 2020, respectively:

 

    Fair value measured at March 31, 2021  
    Total carrying value at March 31,     Quoted prices in active markets     Significant other observable inputs     Significant unobservable inputs  
    2021     (Level 1)     (Level 2)     (Level 3)  
Assets                        
Investment Fund   $ 281,822,950     $ 281,822,950                  
                                 
Liabilities                                
Warrant liability   $ 1,914,333     $ -     $ -     $ 1,914,333  
                                 
      Fair value measured at December 31, 2020  
      Total carrying value at December 31,       Quoted prices in active markets       Significant other observable inputs       Significant unobservable inputs  
      2020       (Level 1)       (Level 2)       (Level 3)  
Liabilities                                
Warrant liability   $ 322,437     $ -     $ -     $ 322,437  

 

There were no transfers between Level 1, 2 or 3 during the three months ended March 31, 2021.

 

Fair value of warrant liabilities

 

At March 31, 2021, the Company had an outstanding warrant liability in the amount of $1,914,332 associated with warrants that were issued in January 2017 and January 2021 and warrants issued related to the Convertible Notes issued in August and September of 2017. The following table rolls forward the fair value of the Company’s warrant liability, the fair value of which is determined by Level 3 inputs for the three months ended March 31, 2021.

 

    Fair value  
Outstanding as of December 31, 2020   $ 322,437  
Change in fair value of warrants     1,591,896  
Outstanding as of March 31, 2021   $ 1,914,333  

 

Net Income and Basic and Diluted Net Income per Share

 

Net income for the three months ended March 31, 2021 is $83,356,742, however approximately $132 million of that income was generated as an unrealized gain from the change in value of our “fund of one” investment. In addition, the Company had previously generated NOL carry-forwards for federal and state purposes of approximately $45.6 million and $27.2 million, respectively. As such, the Company would not owe corporate income taxes as of March 31, 2021. Net income per common share is calculated in accordance with ASC Topic 260: Earnings Per Share (“ASC 260”). Basic income 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 incomes per share does not include dilutive common stock equivalents in the weighted average shares outstanding, as they would be anti-dilutive.

 

Computation of potential shares for the diluted earning (loss) per share calculation at March 31, 2021 and 2020 are as follows:

 

    As of March 31,  
    2021     2020  
Warrants to purchase common stock     448,790       164,222  
Options to purchase common stock     81,120       1,727,682  
Convertible notes to exchange common stock     -       1,248,883  
Total     529,910       3,140,787  

 

The following table sets forth the computation of basic and diluted loss per share:

 

    For the Three Months Ended March 31,  
    2021     2020  
Net income (loss) attributable to common shareholders   $ 83,356,742     $ (1,057,931 )
                 
Denominator:                
Weighted average common shares - basic     94,350,216       8,655,525  
Weighted average common shares - diluted     96,251,240       8,655,525  
Income (loss) per common share - basic   $ 0.88     $ (0.12 )
Income (loss) per common share - diluted   $ 0.87     $ (0.12 )

 

Sequencing

 

In connection with August 14, 2017 Convertible Note financing, the Company adopted a sequencing policy whereby all future instruments may be classified as a derivative liability with the exception of instruments related to share-based compensation issued to employees or directors. This convertible note was satisfied in full during the second quarter of 2020, therefore as of March 31, 2021, no future instruments are subject to the Company sequencing policy.

 

Recent Accounting Pronouncements

 

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”)”, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

 

Any new accounting standards, not disclosed above, that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.