10-K
1
form10-k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2020
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For
the transition period from _______to______
MARATHON
DIGITAL HOLDINGS, INC.
(Exact
Name of Registrant as Specified in Charter)
(Address of principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code: 702-945-2773
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock MARA The Nasdaq Capital Market
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes [ ]
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 [ ]
No [X]
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files). Yes [X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. [X]
Large Accelerated Filer [ ] Accelerated Filer [ ]
Non-accelerated Filer [X] Smaller Reporting Company [X]
Emerging growth company [ ]
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
The
aggregate market value of the common stock, no par value, held by non-affiliates of the registrant, based on the closing sale
price of registrant’s common stock as quoted on the Nasdaq Capital Market on June 30, 2020 (the last business day of the
registrant’s most recently completed second fiscal quarter), was approximately $19.8 million. Accordingly, the registrant
qualifies under the SEC’s revised rules as a “smaller reporting company.”
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 98,804,636
shares of common stock are issued and outstanding as of March 16, 2021.
TABLE
OF CONTENTS
Page
PART I.
Item 1. Business 4
Item 1A. Risk Factors 13
Item 1B. Unresolved Staff Comments 29
Item 2. Properties 30
Item 3. Legal Proceedings 30
Item 4. Mine Safety Disclosures 31
PART II.
Item 6. Selected Financial Data 35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 40
Item 8. Financial Statements and Supplementary Data F-1
Item 9A. Controls and Procedures 41
Item 9B. Other Information 41
PART III.
Item 10. Directors, Executive Officers and Corporate Governance 42
Item 11. Executive Compensation 46
Item 14. Principal Accounting Fees and Services 50
PART IV.
Item 15. Exhibits, Financial Statement Schedules 50
MARATHON
DIGITAL HOLDINGS, INC.
FORWARD
LOOKING STATEMENTS
This
Annual Report on Form 10-K and other written and oral statements made from time to time by us may contain so-called “forward-looking
statements,” all of which are subject to risks and uncertainties. Forward-looking statements can be identified by the use
of words such as “expects,” “plans,” “will,” “forecasts,” “projects,”
“intends,” “estimates,” and other words of similar meaning. One can identify them by the fact that they
do not relate strictly to historical or current facts. These statements are likely to address our growth strategy, financial results
and product and development programs. One must carefully consider any such statement and should understand that many factors could
cause actual results to differ from our forward-looking statements. These factors may include inaccurate assumptions and a broad
variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can
be guaranteed, and actual future results may vary materially.
These
statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the
section entitled “Risk Factors” and the risks set out below, any of which may cause our or our industry’s actual
results, levels of activity, performance or achievements to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by these forward-looking statements. These risks include, by way of example and
not in limitation:
● The uncertainty of profitability;
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
Digital Holdings, Inc.”, “Marathon”) and “MARA” mean Marathon Digital Holdings, Inc. and its subsidiaries,
unless otherwise indicated.
PART
I
ITEM
1. BUSINESS
Marathon
is a digital asset technology company that mines cryptocurrencies with a focus on the blockchain ecosystem and the generation
of digital assets. On February 1, 2021, Marathon announced that its main supplier of bitcoin miners, Bitmain, had shipped approximately
4,000 S-19 Pro ASIC miners to the Company’s mining facility in Hardin, MT, all of which were delivered as scheduled. In
addition to the initial 4,000 miners delivered to the Hardin facility in February, Bitmain recently shipped another 6,300 miners
to Hardin. A portion of this new shipment has already been received and installations are progressing. Marathon expects all 10,300
miners to be installed by the end of March, at which point the Company’s mining fleet will consist of 12,920 miners generating
approximately 1.4 EH/s. With BTC at $56,600 (the price on March 12, 2021), generation of 1.4 EH/s translates into gross revenues
of $5.5 million per month. With delivery of all 100,500 miners currently on order (which delivery and installation is expected
to be complete by January 31, 2022, Marathon expects to generate approximately 11.8 EH/s. At the current price of BTC of $56,600,
the Company would expect to generate approximately $46.3 million per month.
Marathon
also acquires bitcoin when our cash, cash equivalents and short-term investments exceed current working capital requirements,
and we may from time to time, subject to favorable market conditions, issue debt or equity securities to raise capital to use
the proceeds to purchase bitcoin. To Marathon, the strategy is to hold bitcoin as a long term investment rather than engaging
in regular trading of bitcoin or to hedge or otherwise enter into derivative contracts with respect to our bitcoin holdings, though
we may sell bitcoin in future periods as needed to generate cash for treasury management and other general corporate purposes.
Holding bitcoin is a strategy to act as a store of value, supported by a robust and public open source architecture, that is not
linked to any country’s monetary policy and can therefore serve as a hedge against inflation. We are of the firm belief
that bitcoin offers additional opportunity for appreciation in value with increasing adoption due to its limited supply. We may
also explore opportunities to become involved in businesses ancillary to our bitcoin mining business as favorable market conditions
and opportunities arise.
We
were incorporated in the State of Nevada on February 23, 2010 under the name Verve Ventures, Inc. On December 7, 2011, we changed
our name to American Strategic Minerals Corporation and were engaged in exploration and potential development of uranium and vanadium
minerals business. In June 2012, we discontinued our minerals business and began to invest in real estate properties in Southern
California. In October 2012, we discontinued our real estate business when our former CEO joined the firm and we commenced our
IP licensing operations, at which time the Company’s name was changed to Marathon Patent Group, Inc. On November 1, 2017,
we entered into a merger agreement with Global Bit Ventures, Inc. (“GBV”), which is focused on mining digital assets.
We purchased cryptocurrency mining machines and established a data center in Canada to mine digital assets. We are expanding our
activities in the mining of new digital assets, while at the same time harvesting the value of our remaining IP assets.
On
June 28, 2018, our Board has determined that it is in the best interests of the Company and our shareholders to allow the Amended
Merger Agreement with GBV to expire on its current termination date of June 28, 2018 without further negotiation or extension.
The Board approved to issue 3,000,000 shares of our common stock to GBV as a termination fee for us canceling the proposed merger
between the two companies.
All
share and per share values for all periods presented in the accompanying consolidated financial statements have been retroactively
adjusted to reflect the 1:4 Reverse Split which occurred on April 8, 2019.
On
September 30, 2019, the Company consummated the purchase of 6000 S-9 Bitmain 13.5 TH/s Bitcoin Antminers (“Miners”)
from SelectGreen Blockchain Ltd. (the “Seller”), a British Columbia corporation, for which the purchase price was
$4,086,250 or 2,335,000 shares of its common stock at a price of $1.75 per share. As a result of an exchange cap requirement imposed
in conjunction with the Company’s Listing of Additional Shares application filed with Nasdaq to the transaction, the Company
issued 1,276,442 shares of its common stock which represented $2,233,773 of the $4,086,250 (constituting 19.9% of the issued and
outstanding shares on the date of the Asset Purchase Agreement) and upon the receipt of shareholder approval, at the Annual Shareholders
Meeting to be held on November 15, 2019, the Company can issue the balance of the 1,058,558 unregistered common stock shares.
The shareholders did approve the issuance of the additional shares at the Annual Shareholders Meeting. The Company has issued
an additional 474,808 at $0.90 per share on December 27, 2019. On March 30, 2020, the Seller has agreed to amend the total of
number of shares to be issued was reduced to 2,101,500 shares and the rest of 350,250 shares was issued at $0.49 per share. There
was no mining payable outstanding as of September 30, 2020.
On
May 11, 2020, the Company announced the purchase of 700 M30S+ (80 TH) miners. On May 12, 2020, the Company announced the purchase
660 Bitmain S19 Pro Miners. On June 11, 2020, the Company announced the purchase of an additional 500 of the latest generation
Bitmain S19 Pro Miners, bringing the Company’s total Hashrate to approximately 240 PH/s when fully deployed.
On
May 20, 2020, the Company amended its note, originally dated August 31, 2017, with Bi-Coastal Consulting Defined Benefit Plan
to reduce the conversion price to $0.60 per share. The current principal balance of the Note was $999,105.60 and accrued the interest
was $215,411.30. The Company agreed to the reduction in the conversion price from $0.80 to $0.60 to incentivize the Note holder
to convert the Note to common stock. As the Note has been fully converted to common stock, the Company has no Long-Term debt.
On
July 28, 2020, we closed a public offering of 7,666,666 shares of common stock, including the exercise in full by the underwriter
of the option to purchase an additional 999,999 shares of common stock, at a public offering price of $0.90 per share. The gross
proceeds of this offering, before deducting underwriting discounts and commissions and other offering expenses payable by Marathon,
were approximately $6.9 million.
On
July 29, 2020, the Company announced the purchase of 700 next generation M31S+ ASIC Miners from MicroBT. Additionally, Bitmain has notified the Company that 660 of the 1,660 Bitmain S-19 Pro Miners previously
purchased will be delivered in mid-August.
On
August 13, 2020, the Company entered into a Long Term Purchase Contract with Bitmaintech PTE., LTD (“Bitmain”) for
the purchase of 10,500 next generation Antminer S-19 Pro ASIC Miners. The purchase price per unit is $2,362 ($2,206 with a 6.62%
discount) for a total gross purchase price of $24,801,000. The parties confirm that the total hashrate of the Antminers under
this agreement shall not be less than 1,155,000 TH/s. Subsequent to executing this agreement, due to the additional executed contracts,
Bitmain applied a total net discount of 8.63% to the purchase price adjusting the amount due to $22,660,673.70.
The
Company shall pay for the Antminers as follows:
Subject
to the timely payment of the purchase price, Bitmain shall deliver products according to the following schedule: 1,500 Units on
or before January 31, 2021; and 1,800 units on or before each of February 28, 2021; March 31, 2021; April 30, 2021, May 31, 2021
and June 30, 2021. As of December 31, 2020, the Company has paid $15,052,648.08 of the total balance of $22,660,673.70.
On
October 23, 2020, the Company executed a contract with Bitmain to purchase an additional 10,000 next generation Antminer S-19
Pro ASIC Miners. The 2021 delivery schedule will be 2,500 Units in January, 4,500 Units in February and the final 3,000 Units
in March 2021.The gross purchase price is $23,620,000.00 with 30% due upon the execution of the contract and the balance paid
over the next 4 months. Subsequent to executing this agreement, due to the additional executed contracts, Bitmain applied a discount
of 8.63% to the purchase price adjusting the amount due to $21,581,594.00. As of December 31, 2020, the Company has paid $13,634,645.00
of the total balance of $21,581,594.00.
On
December 8, 2020, the Company executed a contract with Bitmain to purchase an additional 10,000 next generation Antminer S-19j
Pro ASIC Miners, with 6,000 units to be delivered in August 2021, and the remaining 4,000 units to be delivered in September 2021.
The gross purchase price is $$23,770,000 with 10% of the purchase price due within 48 hours of execution of the contract, 30%
due on January 14, 2021, 10% due on February 15, 2021, 30% due on June 15, 2021 and 20% due on July 15, 2021. Subsequent to executing
this agreement, due to the additional executed contracts, Bitmain applied a discount of 8.63% to the purchase price adjusting
the amount due to $21,718,649.00. As of December 31, 2020, the Company has paid $2,192,307.10 of the total balance of $21,718,649.00.
On
December 23, 2020, the Company executed a contract with Bitmain to purchase an additional 70,000 next generation Antminer S-19
ASIC Miners, with 7,000 units to be delivered in July 2021, and the remaining 63,000 units to be delivered in December 2021. The
purchase price is $167,763,451.93. The purchase price for the miners shall be paid as follows: 20% within 48 hours of signing
of contract; 30% on or before March 1, 2021; 4.75% on June 15, 2021; 1.76% on July 15, 2021; 4.58% on August 15, 2021; 10.19%
on September 15, 2021; 17.63% on October 15, 2021 and 11.55% on November 15, 2021. As of December 31, 2020, the Company has paid
$33,552,690.39 of the total balance of $167,763,451.93.
Effective
December 31, 2020, The Board of Directors of Marathon Digital Holdings, Inc. (the “Company”) ratified the following
arrangements approved by its Compensation Committee:
Merrick
Okamoto, CEO was awarded a cash bonus of $2,000,000 which was paid before year end 2020. He was also awarded a special bonus of
1,000,000 RSUs with immediate vesting. He was given a new three-year employment agreement effective January 1, 2021 with the same
salary and bonus as the prior agreement. He was also granted the following: award of 1,000,000 RSUs when the company’s market
capitalization reaches and sustains a market capitalization for 30 consecutive days above $500,000,000; award of 1,000,000 RSUs
priced when the company’s market capitalization reaches and sustains a market capitalization for 30 consecutive days above
$750,000,000; award of 2,000,000 RSUs priced at lowest closing stock price in past 30 trading days when the company’s market
capitalization reaches and sustains a market capitalization for 30 consecutive days above $1,000,000,000; and award of 2,000,000
RSUs when the company’s market capitalization reaches and sustains a market capitalization for 30 consecutive days above
$2,000,000,000.
Sim
Salzman, CFO, was granted a bonus payment of $40,000 in cash; and a bonus of 91,324 RSUs with immediate vesting. James Crawford,
COO, was granted a bonus payment of $127,308 in cash and a stock bonus of 57,990 RSUs with immediate vesting. Furthermore, per
his employment agreement, his base salary for the 2021 will be increased by 3%.
Compensation
for directors of the board for 2021 as follows: (i) cash compensation of $60,000 per year for each director, plus an additional
$15,000 per year for each committee chair, paid 25% at the end of each calendar quarter; (ii) for existing directors, the equivalent
of 54,795 RSUs; and (iii) for newly elected directors, a one-time grant of 91,324 RSUs, vesting 25% each calendar quarter during
2021. For clarification, new directors will also receive the same annual compensation as existing directors in addition to their
one time grant.
On
January 4, 2021, the Company received a letter from Nasdaq that because the Company had delayed its annual meeting until January
15, 2021 (in order to enable further shareholders to vote their shares in order to meet the 50.1% quorum requirement), that it
was not in compliance with Nasdaq Rules 5620(a) which requires that an annual meeting be held within one year of each fiscal year.
As the Company has indicated to Nasdaq in late December, it has received reports from its proxy solicitor that the quorum requirements
have been met, and all matters have received requisite approvals to pass at the Annual Meeting on January 15, 2021. Once the Annual
Meeting is held and the results publicly reported, Nasdaq has indicated that the Company will be deemed back in compliance with
this requirement.
On
January 12, 2021, the Company also announced that it had successfully completed its previously announced $200 million shelf
offering by utilizing its at-the-market (ATM) facility. As a result, the Company ended the 2020 fiscal year with $217.6 million
in cash and 74,656,549 shares outstanding.
On
January 15, 2021, Marathon Digital Holdings, Inc., a Nevada corporation (the “Company”), held an annual meeting of
stockholders (the “Meeting”). As of the record date for the Meeting, 51,403,280 shares of common stock were issued
and outstanding. A total of 33,981,556 shares of common stock, constituting a quorum, were present and accounted for at the Meeting.
At the Meeting, the Company’s stockholders approved the following proposals:
VOTES
CAST
On
January 12, 2020, Marathon Digital Holdings, Inc., a Nevada corporation (the “Company”), entered into a Securities
Purchase Agreement (the “Purchase Agreement”) with certain purchasers named therein (the “Purchasers”),
pursuant to which the Company agreed to issue and sell, in a registered direct offering (the “Offering”), 12,500,000
shares of its common stock (the “Securities”) at an offering price of $20.00 per share.
The
Purchase Agreement contains customary representations and warranties and agreements of the Company and the Purchasers and customary
indemnification rights and obligations of the parties. The closing of the Offering occurred on January 15, 2021. The Company received
gross proceeds of $250,000,000 in connection with the Offering, before deducting placement agent fees and related offering expenses.
Pursuant
to a letter agreement, dated August 2020 (the “Engagement Letter”), the Company engaged H.C. Wainwright & Co.,
LLC (the “Placement Agent”) as placement agent in connection with the Offering. The Placement Agent agreed to use
its reasonable best efforts to arrange for the sale of the Securities. The Company agreed to pay to the Placement Agent a cash
fee of 5.0% of the aggregate gross proceeds raised in the Offering. The Company also issued to designees of the Placement Agent
warrants to purchase up to 3.0% of the aggregate number of shares of Common Stock sold in the transactions, or warrants to purchase
up to 375,000 shares of Common Stock (the “Placement Agent Warrants”). The Placement Agent Warrants have an exercise
price equal to 125% of the offering price per share (or $25.00 per share). The Company also agreed to pay the Placement Agent
$50,000 for accountable expenses, to reimburse an investor’s legal fees in an amount up to $7,500 and to pay $12,900 for
the Placement Agent’s clearing fees. Pursuant to the terms of the Engagement Letter, the Placement Agent has the right,
for a period of twelve months following the closing of the Offerings, to act (i) as financial advisor in connection with any merger,
consolidation or similar business combination by the Company and (ii) as sole book-running manager, sole underwriter or sole placement
agent in connection with certain debt and equity financing transactions by the Company.
Effective
January 19, 2021, David Lieberman resigned as a director of Marathon Digital Holdings, Inc. (the “Company”). On the
same date, the Company’s Board appointed Kevin DeNuccio as a director to fill the vacancy created by Mr. Lieberman’s
resignation.
Mr.
DeNuccio is the Founder and General Partner of Wild West Capital LLC since 2012 where he focused on angel investments, primarily
in SAAS software start-ups.
He
brings to Marathon more than 25 years of experience as a chief executive, global sales leader, public and private board member,
and more than a dozen angel investments, managing and growing leading technology businesses. He served in senior executive positions
with Verizon, Cisco Systems, Ericsson, Redback Networks, Wang Laboratories and Unisys Corporation.
On
January 25, 2021, the Company announced that it has purchased 4,812.66 BTC in an aggregate purchase price of $150 million.
Effective
March 1, 2021, the Company changed its name to Marathon Digital Holdings, Inc.
Blockchain
and Cryptocurrencies Generally
Bitcoin
is a digital asset that is issued by and transmitted through an open source protocol collectively maintained by a peer-to-peer
network of decentralized user nodes. This network hosts a public transaction ledger, known as the bitcoin blockchain, on which
bitcoin holdings and transactions in bitcoin are recorded. Balances of bitcoin are stored in individual “wallet” functions,
which associate network public addresses with a “private key” that controls the transfer of bitcoin. The bitcoin blockchain
can be updated without any single entity owning or operating the network. New bitcoin is created and allocated by the protocol
that governs bitcoin through a “mining” process that rewards users that verify transactions in the bitcoin blockchain.
The bitcoin protocol limits the total issuance of bitcoin over time to 21 million.
Bitcoin
can be used to pay for goods and services, or it can be converted to fiat currencies, such as the U.S. dollar, at rates of exchange
determined by market forces on bitcoin trading platforms, which operate 24-hours-a-day, 7-days-a-week and are not regulated in
as comprehensive a manner as traditional securities exchanges. As a result, trading on these markets is likely more subject to
manipulation than on securities markets regulated by the SEC, and pricing on these markets is likely affected by such manipulative
activity. In addition to these platforms, over-the-counter markets and derivatives markets for bitcoin also exist; however, these
markets are still maturing and many are unregulated.
Bitcoin
exists entirely in electronic form, as virtually irreversible public transaction ledger entries on the blockchain, and transactions
in bitcoin are recorded and authenticated not by a central repository, but by a decentralized peer-to-peer network. This decentralization
avoids certain threats common to centralized computer networks, such as denial of service attacks, and reduces the dependency
of the bitcoin network on any single system. While the bitcoin network as a whole is decentralized, the private keys used to access
bitcoin balances are not widely distributed and are held on hardware (which can be physically controlled by the holder or by a
third party such as a custodian) or via software programs on third-party servers and loss of such private keys results in an inability
to access, and effective loss of, the corresponding bitcoin. Consequently, bitcoin holdings are susceptible to all of the risks
inherent in holding any electronic data, such as power failure, data corruption, security breach, communication failure, and user
error, among others. These risks, in turn, make bitcoin subject to theft, destruction, or loss of value from hackers, corruption,
or technology-specific factors such as viruses that do not affect conventional fiat currency. In addition, the bitcoin network
relies on open source developers to maintain and improve the bitcoin protocol. Accordingly, bitcoin may be subject to protocol
design changes, governance disputes such as “forked” protocols, competing protocols, and other open source-specific
risks that do not affect conventional proprietary software.
Distributed
blockchain technology is a decentralized and encrypted ledger that is designed to offer a secure, efficient, verifiable, and permanent
way of storing records and other information without the need for intermediaries. Cryptocurrencies serve multiple purposes. They
can serve as a medium of exchange, store of value or unit of account. Examples of cryptocurrencies include: bitcoin, bitcoin cash,
and litecoin. Blockchain technologies are being evaluated for a multitude of industries due to the belief in their ability to
have a significant impact in many areas of business, finance, information management, and governance.
Cryptocurrencies
are decentralized currencies that enable near instantaneous transfers. Transactions occur via an open source, cryptographic protocol
platform which uses peer-to-peer technology to operate with no central authority. The online network hosts the public transaction
ledger, known as the blockchain, and each cryptocurrency is associated with a source code that comprises the basis for the cryptographic
and algorithmic protocols governing the blockchain. In a cryptocurrency network, every peer has its own copy of the blockchain,
which contains records of every historical transaction - effectively containing records of all account balances. Each account
is identified solely by its unique public key (making it effectively anonymous) and is secured with its associated private key
(kept secret, like a password). The combination of private and public cryptographic keys constitutes a secure digital identity
in the form of a digital signature, providing strong control of ownership.
No
single entity owns or operates the network. The infrastructure is collectively maintained by a decentralized public user base.
As the network is decentralized, it does not rely on either governmental authorities or financial institutions to create, transmit
or determine the value of the currency units. Rather, the value is determined by market factors, supply and demand for the units,
the prices being set in transfers by mutual agreement or barter among transacting parties, as well as the number of merchants
that may accept the cryptocurrency. Since transfers do not require involvement of intermediaries or third parties, there are currently
little to no transaction costs in direct peer-to-peer transactions. Units of cryptocurrency can be converted to fiat currencies,
such as the US dollar, at rates determined on various exchanges, such as Cumberland, Coinsquare (in Canada), Coinbase, Bitsquare,
Bitstamp, and others. Cryptocurrency prices are quoted on various exchanges and fluctuate with extreme volatility.
We
believe cryptocurrencies offer many advantages over traditional, fiat currencies, although many of these factors also present
potential disadvantages and may introduce additional risks, including:
● immediate settlement;
● elimination of counterparty risk;
● no trusted intermediary required;
● lower fees;
● identity theft prevention;
● accessible by everyone;
However,
cryptocurrencies may not provide all of the benefits they purport to offer at all or at any time.
Bitcoin
was first introduced in 2008 and was first introduced as a means of exchange in 2009. Bitcoin is a consensus network that enables
a new payment system and a completely new form of digital money. It is the first decentralized peer-to-peer payment network that
is powered by its users with no central authority or middlemen. From a user perspective, we believe bitcoin can be viewed as cash
for the Internet. The bitcoin network shares a public ledger called the “blockchain.” This ledger contains every transaction
ever processed, allowing a user’s computer to verify the validity of each transaction. The authenticity of each transaction
is protected by digital signatures corresponding to the sending addresses, allowing all users to have full control over sending
bitcoins currency rewards from their own bitcoin addresses. In addition, anyone can process transactions using the computing power
of specialized hardware and earn a reward in bitcoins for this service. This process is often called “mining.”
As
with many new and emerging technologies, there are potentially significant risks. Businesses (including the Company) which are
seeking to develop, promote, adopt, transact or rely upon blockchain technologies and cryptocurrencies have a limited track record
and operate within an untested new environment. These risks are not only related to the businesses the Company pursues, but the
sector and industry as a whole, as well as the entirety of the concept behind blockchain and cryptocurrency as value. Factors
such as access to computer processing capacity, interconnectivity, electricity cost, environmental factors (such as cooling capacity)
and location play an important role in “mining,” which is the term for using the specialized computers in connection
with the blockchain for the creation of new units of cryptocurrency.
Mathematically
Controlled Supply
The
method for creating new bitcoins is mathematically controlled in a manner so that the supply of bitcoins grows at a limited rate
pursuant to a pre-set schedule. The number of bitcoins awarded for solving a new block is automatically halved every 210,000 blocks.
Thus, the current fixed reward for solving a new block is 12.5 bitcoins per block and the reward decreased by half to become 6.25
bitcoins around May 10, 2020, which is the current reward (based on estimates of the rate of block solution calculated
by BitcoinClock.com). This deliberately controlled rate of bitcoin creation means that the number of bitcoins in existence will
never exceed 21 million and that bitcoins cannot be devalued through excessive production unless the Bitcoin Network’s source
code (and the underlying protocol for bitcoin issuance) is altered. The Company monitors the Blockchain network and, as of December
9, 2020, based on the information we collected from our network access, more than 18.45 million bitcoins have been mined.
Digital
Asset Mining
We
intend to power and secure blockchains by verifying blockchain transactions using custom hardware and software. We are currently
using our hardware to mine bitcoin (“BTC”) and expect to mine BTC, and potentially other cryptocurrencies. Bitcoin
relies on different technologies based on the blockchain. Wherein bitcoin is a digital currency, we will be compensated in BTC
based on the mining transactions we perform, which is how we will earn revenue.
Blockchains
are decentralized digital ledgers that record and enable secure peer-to-peer transactions without third party intermediaries.
Blockchains enable the existence of digital assets by allowing participants to confirm transactions without the need for a central
certifying authority. When a participant requests a transaction, a peer-to-peer network consisting of computers, known as nodes,
validate the transaction and the user’s status using known algorithms. After the transaction is verified, it is combined
with other transactions to create a new block of data for the ledger. The new block is added to the existing blockchain in a way
that is permanent and unalterable, and the transaction is complete.
Digital
assets (also known as cryptocurrency) are a medium of exchange that uses encryption techniques to control the creation of monetary
units and to verify the transfer of funds. Many consumers use digital assets because it offers cheaper and faster peer-to-peer
payment options without the need to provide personal details. Every single transaction and the ownership of every single digital
asset in circulation is recorded in the blockchain. Miners use powerful computers that tally the transactions to run the blockchain.
These miners update each time a transaction is made and ensure the authenticity of information. The miners receive a transaction
fee for their service in the form of a portion of the new digital “coins” that are issued.
Performance
Metrics – Hashing
We
operate mining hardware which performs computational operations in support of the blockchain measured in “hash rate”
or “hashes per second.” A “hash” is the computation run by mining hardware in support of the blockchain;
therefore, a miner’s “hash rate” refers to the rate at which it is capable of solving such computations. The
original equipment used for mining bitcoin utilized the Central Processing Unit (CPU) of a computer to mine various forms of cryptocurrency.
Due to performance limitations, CPU mining was rapidly replaced by the Graphics Processing Unit (GPU), which offers significant
performance advantages over CPUs. General purpose chipsets like CPUs and GPUs have since been replaced in the mining industry
by Application Specific Integrated Circuits (ASIC) chips. These ASIC chips are designed specifically to maximize the rate of hashing
operations.
We
measure our mining performance and competitive position based on overall hash rate being produced in our mining sites. The latest
equipment utilized in our mining operation performs in the range of approximately 86 – 110 terahash per second (TH/s) per
unit. This mining hardware is on the cutting edge of available mining equipment and we believe our acquisition of our units places
us among leaders of publicly-traded cryptocurrency miners; however, advances and improvements to the technology are ongoing and
may be available in quantities to the market in the near future which may affect our perceived position. We believe that our current
inventory of miners establishes us among the top public companies in the United States mining cryptocurrency.
Government
Regulation
Government
regulation of blockchain and cryptocurrency is being actively considered by the United States federal government via a number
of agencies and regulatory bodies, as well as similar entities in other countries. State government regulations also may apply
to our activities and other activities in which we participate or may participate in the future. Other regulatory bodies are governmental
or semi-governmental and have shown an interest in regulating or investigating companies engaged in the blockchain or cryptocurrency
business.
Businesses
that are engaged in the transmission and custody of bitcoin and other digital assets, including brokers and custodians, can be
subject to U.S. Treasury Department regulations as money services businesses as well as state money transmitter licensing requirements.
Bitcoin and other digital assets are subject to anti-fraud regulations under federal and state commodity laws, and digital asset
derivative instruments are substantively regulated by the U.S. Commodity Futures Trading Commission. Certain jurisdictions, including,
among others, New York and a number of countries outside the United States, have developed regulatory requirements specifically
for digital assets and companies that transact in them.
Regulations
may substantially change in the future and it is presently not possible to know how regulations will apply to our businesses,
or when they will be effective. As the regulatory and legal environment evolves, we may become subject to new laws, further regulation
by the SEC and other agencies, which may affect our mining and other activities. For instance, various bills have also been proposed
in Congress related to our business, which may be adopted and have an impact on us. For additional discussion regarding our belief
about the potential risks existing and future regulation pose to our business, see the Section entitled “Risk Factors”
herein.
In
addition, since transactions in bitcoin provide a reasonable degree of pseudo anonymity, they are susceptible to misuse for criminal
activities, such as money laundering. This misuse, or the perception of such misuse (even if untrue), could lead to greater regulatory
oversight of bitcoin platforms, and there is the possibility that law enforcement agencies could close bitcoin platforms or other
bitcoin-related infrastructure with little or no notice and prevent users from accessing or retrieving bitcoin held via such platforms
or infrastructure. For example, in her January 2021 nomination hearing before the Senate Finance Committee, Treasury Secretary
Janet Yellen noted that cryptocurrencies have the potential to improve the efficiency of the financial system but that they can
be used to finance terrorism, facilitate money laundering, and support malign activities that threaten U.S. national security
interests and the integrity of the U.S. and international financial systems. Accordingly, Secretary Yellen expressed her view
that federal regulators needed to look closely at how to encourage the use of cryptocurrencies for legitimate activities while
curtailing their use for malign and illegal activities. Furthermore, in December 2020, the Financial Crimes Enforcement Network
(“FinCEN”), a unit of the Treasury Department focused on money laundering, proposed a new set of rules for cryptocurrency-based
exchanges aimed at reducing the use of cryptocurrencies for money laundering. These proposed rules would require filing reports
with FinCEN regarding cryptocurrency transactions in excess of $10,000 and also impose record-keeping requirements for cryptocurrency
transactions in excess of $3,000 involving users who manage their own private keys. In January 2021, the Biden Administration
issued a memorandum freezing federal rulemaking, including these proposed FinCEN rules, to provide additional time for the Biden
Administration to review the rulemaking that had been proposed by the Trump Administration. As a result, it remains unclear whether
these proposed rules will take effect.
Intellectual
Property
We
actively use specific hardware and software for our cryptocurrency mining operation. In certain cases, source code and other software
assets may be subject to an open source license, as much technology development underway in this sector is open source. For these
works, we intend to adhere to the terms of any license agreements that may be in place.
We
do not currently own, and do not have any current plans to seek, any patents in connection with our existing and planned blockchain
and cryptocurrency related operations. We do expect to rely upon trade secrets, trademarks, service marks, trade names, copyrights
and other intellectual property rights and expect to license the use of intellectual property rights owned and controlled by others.
In addition, we have developed and may further develop certain proprietary software applications for purposes of our cryptocurrency
mining operation.
Competition
In
cryptocurrency mining, companies, individuals and groups generate units of cryptocurrency through mining. Miners can range from
individual enthusiasts to professional mining operations with dedicated data centers. Miners may organize themselves in mining
pools. The Company competes or may in the future compete with other companies that focus all or a portion of their activities
on owning or operating cryptocurrency exchanges, developing programming for the blockchain, and mining activities. At present,
the information concerning the activities of these enterprises is not readily available as the vast majority of the participants
in this sector do not publish information publicly or the information may be unreliable. Published sources of information include
“bitcoin.org” and “blockchain.info”; however, the reliability of that information and its continued availability
cannot be assured.
Several
public companies (traded in the U.S. and Internationally), such as the following, may be considered to compete with us, although
we believe there is no company, including the following, which engages in the same scope of activities as we do.
● Overstock.com Inc.
● Bitcoin Investment Trust
● Blockchain Industries, Inc. (formerly Omni Global Technologies, Inc.)
● Bitfarms Technologies Ltd. (formerly Blockchain Mining Ltd)
● DMG Blockchain Solutions Inc.
● Digihost International, Inc.
● Hive Blockchain Technologies Inc.
● Hut 8 Mining Corp.
● HashChain Technology, Inc.
● MGT Capital Investments, Inc.
● DPW Holdings, Inc.
● Layer1 Technologies, LLC
● Northern Data AG
● Riot Blockchain
While
there is limited available information regarding our non-public competitors, we believe that our recent acquisition and deployment
of miners (as discussed further above) positions us well among the publicly traded companies involved in the cryptocurrency mining
industry. The cryptocurrency industry is a highly competitive and evolving industry and new competitors and/or emerging technologies
could enter the market and affect our competitiveness in the future.
Employees
As
of March 12, 2021, we had 3 full-time employees. We believe our employee relations to be good.
Accounting
for Digital Currencies
The
lack of U.S. Generally Accepted Accounting Principles (U.S. GAAP) instruction regarding the proper accounting treatment of digital
currency assets has created uncertainty regarding the reporting and proper asset classification of digital currency holdings.
Management intends to exercise its business judgment in determining appropriate accounting treatment for the recognition of revenue
from mining of digital currencies. Management, in conjunction with its outside public accountants and its auditors, has examined
various factors surrounding the substance of the Company’s operations and the available guidance published for public company
accounting practices in Accounting Standards Codification.
The
Company intends to account for its digital currency assets as indefinite life intangible assets. An intangible asset with an indefinite
useful life is not amortized, but rather is assessed for impairment annually, or more frequently, when events or changes in circumstances
occur which indicate 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 will have 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. Realized gain or loss on the sale of digital currencies
is included in other income or expenses in the Company’s statements of operations.
ITEM
1A. RISK FACTORS
The
combined organization will be faced with a market environment that cannot be predicted and that involves significant risks, many
of which will be beyond its control. In addition to the other information contained in this Annual Report on Form 10-K, you should
carefully consider the material risks described below before investing in our securities. If any of the following risks actually
occur, our business, results of operations and financial condition would likely suffer. In these circumstances, the market price
of our common stock could decline, and you may lose all or part of your investment.
We
may be classified as an inadvertent investment company.
We
are not engaged in the business of investing, reinvesting, or trading in securities, and we do not hold ourselves out as being
engaged in those activities. Under the Investment Company Act of 1940, as amended (the “1940 Act”), however, a company
may be deemed an investment company under Section 3(a)(1)(C) of the 1940 Act if the value of its investment securities is more
than 40% of its total assets (exclusive of government securities and cash items) on a consolidated basis.
We
have commenced digital asset mining, the outputs of which are cryptocurrencies, which may be deemed a security. In the event that
the digital assets held by us exceed 40% of our total assets, exclusive of cash, we inadvertently become an investment company.
An inadvertent investment company can avoid being classified as an investment company if it can rely on one of the exclusions
under the 1940 Act. One such exclusion, Rule 3a-2 under the 1940 Act, allows an inadvertent investment company a grace period
of one year from the earlier of (a) the date on which an issuer owns securities and/or cash having a value exceeding 50% of the
issuer’s total assets on either a consolidated or unconsolidated basis and (b) the date on which an issuer owns or proposes
to acquire investment securities having a value exceeding 40% of the value of such issuer’s total assets (exclusive of government
securities and cash items) on an unconsolidated basis. We are putting in place policies that we expect will work to keep the investment
securities held by us at less than 40% of our total assets, which may include acquiring assets with our cash, liquidating our
investment securities or seeking a no-action letter from the SEC if we are unable to acquire sufficient assets or liquidate sufficient
investment securities in a timely manner.
As
Rule 3a-2 is available to a company no more than once every three years, and assuming no other exclusion were available to us,
we would have to keep within the 40% limit for at least three years after we cease being an inadvertent investment company. This
may limit our ability to make certain investments or enter into joint ventures that could otherwise have a positive impact on
our earnings. In any event, we do not intend to become an investment company engaged in the business of investing and trading
securities.
Classification
as an investment company under the 1940 Act requires registration with the SEC. If an investment company fails to register, it
would have to stop doing almost all business, and its contracts would become voidable. Registration is time consuming and restrictive
and would require a restructuring of our operations, and we would be very constrained in the kind of business we could do as a
registered investment company. Further, we would become subject to substantial regulation concerning management, operations, transactions
with affiliated persons and portfolio composition, and would need to file reports under the 1940 Act regime. The cost of such
compliance would result in the Company incurring substantial additional expenses, and the failure to register if required would
have a materially adverse impact to conduct our operations.
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