UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2021
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 ☐
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 ☒
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. Yes☒ No ☐
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 ☒ 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 ☒ 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. ☒
Large Accelerated Filer ☒ Accelerated Filer ☐
Non-accelerated Filer ☐ Smaller Reporting Company ☐
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 ☒
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, 2021 (the last business day of the registrant’s
most recently completed second fiscal quarter), was approximately $3.1 billion. Accordingly, the registrant qualifies under the SEC’s
revised rules as a “large accelerated filer.”
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 103,052,069shares of common stock are issued and outstanding
as of March 9, 2022.
TABLE
OF CONTENTS
Page
PART I.
Item 1. Business 5
Item 1A. Risk Factors 22
Item 1B. Unresolved Staff Comments 38
Item 2. Properties 39
Item 3. Legal Proceedings 39
Item 4. Mine Safety Disclosures 39
PART II.
Item 6. Selected Financial Data 41
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 49
Item 8. Financial Statements and Supplementary Data F-1
Item 9A. Controls and Procedures 50
Item 9B. Other Information 51
PART III.
Item 10. Directors, Executive Officers and Corporate Governance 52
Item 11. Executive Compensation 52
Item 14. Principal Accounting Fees and Services 52
PART IV.
Item 15. Exhibits, Financial Statement Schedules 53
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. 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 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 cancelling 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 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, the Company 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. in the miners arrived 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 (with a 6.62% discount for a discounted price of $23,159,174). The parties confirm that the total
hashrate of the Antminers under this agreement shall not be less than 1,155,000 TH/s.
Subject
to the timely payment of the purchase price, Bitmain delivered 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, 2021, the Company has paid the entire purchase price under this agreement and has received 10,500 units from Bitmain.
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 was for 2,500 units to be delivered in January, 4,500 units delivered in February and the final 3,000
units delivered in March 2021. The gross purchase price was $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, 2021, the Company has paid the entire purchase
price under this agreement and has received 10,000 units from Bitmain.
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 delivered in August 2021, and the remaining 4,000 units 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. As of December
31, 2021, the Company paid the entire purchase price under this agreement and has received 10,000 units from Bitmain.
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 by August 2021, 2,100 units to be delivered by September 2021, 6,500 units to be delivered by October
31, 2021, 14,700 units to be delivered by November 30, 2021, 24,500 units to be delivered by December 31, 2021 and 15,200 units to be
delivered by January 31, 2022. The purchase price is $167,763,451. 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, 2021, the Company
has paid the entire purchase price under this agreement and received over 40,000 units from Bitmain.
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 was 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 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
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.
On
April 26, 2021, the Company appointed Fred Thiel as its new chief executive officer. Mr. Thiel has succeeded Merrick Okamoto, who has
served as the Company’s chief executive officer since 2018, and who served as executive chairman of the board of directors following
the transition until his retirement at the end of 2021.
On
March 25, 2021, Marathon Digital Holdings, Inc. (the “Company”) entered into a licensing agreement with DMG Blockchain Solutions,
Inc. to license DMG’s proprietary Blockseer pool technology for use in its new Marathon OFAC Pool . Pursuant to the terms and conditions
of the Agreement, the Company will be granted an exclusive and irrevocable license to use the technology in the U.S., and DMG will receive:
$500,000 in restricted common stock of the Company (stock to be issued in a transaction exempt from registration under Section 4(a)(2)
under the Securities Act of 1933, as amended); a monthly license fee with a sliding scale based on the MARAPool’s block rewards
and transaction fees received by the pool; and technical support services to be provided on an as-needed basis with payment in US dollars.
As of December 31, 2021, DMG has received shares equivalent to $500,000 in restricted common stock of the Company.
On
May 20, 2021, the Company appointed Georges Antoun and Jay Leupp to its board of directors, effective immediately, as Peter Benz transitions
to become the company’s vice president of corporate development and Michael Berg stepped down from his position of director to
pursue other projects. As a result, Marathon’s board of directors now consists of five directors, including three independent directors
and two inside directors.
On
May 21, 2021, Marathon Digital Holdings, Inc. (the “Company”) entered into a binding letter of intent with Compute North,
LLC to host 73,000 Bitcoin Miners over a staged in implementation between October 2021 and March 2022. The hosting cost is $0.50 per
machine per month and the hosting rate will be $0.044 per kWh. In order to build out the infrastructure without paying for the capital
expenditure, the Company will provide an 18 month bridge loan to Compute North of up to $67 million dollars, in tranches, based upon
specified requirements being met. The terms of the contract are limited to three years with increases thereafter capped at three percent
per year thereafter. The Company has also agreed to pay up to $14 million in expedite fees for construction/electrical and supply chain
expediting activities. As of December 31, 2021, the Company paid $8 million of the $14 million in expedite fees recorded as a
deposit on the balance sheet . On September 3, 2021, the Company entered into a master agreement with Compute North, LLC whereas the
Company will pay an initial deposit of $14.6 million in aggregate over five instalments. As of December 31, 2021, the Company paid
the full $14.6 million initial deposit recorded as a deposit on the balance sheet.
On
July 30, 2021, Marathon Digital Holdings, Inc. (the “Company”) entered into a fully executed contract with Bitmain to purchase
an additional 30,000 S-19j Pro ASIC Miners, with 5,000 units scheduled to be delivered in each of January 2022, February 2022, March
2022, April 2022, May 2022, and June 2022. The purchase price is $126,000,000 with (i) 25% of the purchase price due paid within one
day of execution of the contract, (ii) 35% of the purchase price of each batch due in consecutive months with 35% of the January 2022
batch due immediately, and then 35% of each of the remaining five batches due on the 15th of each consecutive month starting
August 15, 2021, through December 15, 2021 and (iii) the remaining 40% of the purchase price of each batch due on the 15th
of each consecutive month starting November 15, 2021 and then 40% of each of the remaining five batches due on the 15th of
each consecutive month through April 2022.
On
August 9, 2021, the Company appointed Sarita James and Said Ouissal to its board of directors, effective immediately as independent directors.
On
August 23, 2021 , the Company issued 2,722,435 shares of common stock pursuant to the 2018 Equity Incentive Plan.
On
August 27, 2021, Marathon Digital Holdings, Inc. (the “Company”) entered into a Master Securities Loan Agreement (the “Agreement”)
with NYDIG Funding, LLC (“NYDIG”). Pursuant to the Agreement, the Company will loan its bitcoin (“BTC”) to NYDIG
with an interest rate of three percent (3%) per annum. Interest accrues daily and is payable on a monthly basis. The Agreement provides
that the Company may recall its BTC at any time. NYDIG shall, prior to or concurrently with the transfer of the BTC to NYDIG, but in
no case later than the close of business on the day of such transfer, transfer to the Company collateral with a market value at least
equal to 100% of the market value of the loaned BTC, and the Company is granted a first priority lien on such collateral. As of August
27, 2021, the Company loaned 300 BTC to NYDIG.
As
previously disclosed in the Company’s monthly production updates, there have been multiple instances of the power generating station
in Hardin, MT operating below peak capacity and thus limiting the Company’s ability to mine bitcoin during 2021. To mitigate these
issues in the future, system upgrades will be performed on the power generating station beginning in November 2021 and continuing into
2022. Each phase of this maintenance will require the plant, and therefore the Company’s mining operations in Hardin, MT, to be
offline for approximately three to five days. The upgrades are intended to improve the power generating station’s efficacy and
efficiency, increase safety, mitigate the potential for unexpected downtime in the future, and ultimately improve the Company’s
ability to effectively mine bitcoin. The Company believes that the impact of these upgrades on its mining operations will minimize future
downtime and thus counterbalance any maintenance downtime experienced as a result of these repairs.
On
October 1, 2021, Marathon Digital Holdings, Inc. (the “Company”) entered into a Revolving Credit and Security Agreement (the
“Agreement”) with Silvergate Bank (the “Bank”) pursuant to which Silvergate has agreed to loan the Company up
to $100,000,000 on a revolving basis pursuant to the terms of the Agreement and the $100,000,000 principal amount revolving credit note
issued by the Company in favor of the Bank under the Agreement (“Note”). The terms of the facility (“RLOC”) set
forth in the Agreement and Note are as follows:
Initial Term: One (1) Year
Payments: Interest only to be paid monthly, with principal all due at maturity.
On November 9, 2021,
the Company received a waiver letter from Silvergate Bank whereas Silvergate Bank has waived its default rights with respect to noncompliance
of Section VII. Negative Covenants 7.3 Indebtedness and Section VI. Affirmative Covenants 6.5. Financial Covenants. Silvergate Bank accepts
and acknowledges convertible notes in the aggregate principal amount up to $650,000,000, plus an option to purchase an additional $97,500,000
principal amount of Convertible Notes shall not constitute “Indebtedness” for purpose of Section 7.3 of the Revolving Credit
and Security Agreement. Further the maximum debt-to-equity ratio in Section 6.5 shall be revised to be 1.50:1.00.
During
the quarter ended September 30, 2021, the Company and certain of its executives received a subpoena from the SEC to produce documents
and communications concerning the Hardin, Montana data center facility described in our Form 8-K dated October 13, 2020. On October 6,
2020, the Company entered into a series of agreements with multiple parties to design and build a data center for up to 100-megawatts
in Hardin, MT. In conjunction therewith, the Company filed a Current Report on Form 8-K on October 13, 2020. The 8-K discloses that,
pursuant to a Data Facility Services Agreement, the Company issued 6,000,000 shares of restricted Common Stock, in transactions exempt
from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. We understand that the SEC may be investigating whether
or not there may have been any violations of the federal securities law. We are cooperating with the SEC.
On
November 18, 2021, Marathon Digital Holdings, Inc. (the “Company”) issued $650,000,000 principal amount of its 1.00%
Convertible Senior Notes due 2026 (the “Notes”). The Notes were issued pursuant to, and are governed by, an indenture
(the “Indenture”), dated as of November 18, 2021, between the Company and U.S. Bank National Association, as trustee
(the “Trustee”). Pursuant to the purchase agreement between the Company and the initial purchasers of the Notes, the
Company also granted the initial purchasers an option, for settlement within a period of 13 days from, and including, November 18, 2021
to purchase up to an additional $97,500,000 principal amount of Notes. As noted below, this option was exercised and an additional $97,500,000
principal amount of Notes was issued on November 23, 2021.
The
Notes will be the Company’s senior, unsecured obligations and will be (i) equal in right of payment with the Company’s existing
and future senior, unsecured indebtedness; (ii) senior in right of payment to the Company’s existing and future indebtedness that
is expressly subordinated to the Notes; (iii) effectively subordinated to the Company’s existing and future secured indebtedness,
to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future
indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity,
if any, of the Company’s subsidiaries.
The
Notes will accrue interest at a rate of 1.00% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, beginning
on June 1, 2022. The Notes will mature on December 1, 2026, unless earlier repurchased, redeemed or converted. Before the close of business
on the business day immediately before June 1, 2026, noteholders will have the right to convert their Notes only upon the occurrence
of certain events. From and after June 1, 2026, noteholders may convert their Notes at any time at their election until the close of
business on the second scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering,
as applicable, cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election.
The initial conversion rate is 13.1277 shares of common stock per $1,000 principal amount of Notes, which represents an initial conversion
price of approximately $76.17 per share of common stock. The conversion rate and conversion price will be subject to customary adjustments
upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change”
(as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of
time.
The
Notes will be redeemable, in whole or in part (subject to certain limitations described below), at the Company’s option at any
time, and from time to time, on or after December 6, 2024 and on or before the 21st scheduled trading day immediately before the maturity
date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any,
to, but excluding, the redemption date, but only if the last reported sale price per share of the Company’s common stock exceeds
130% of the conversion price on (1) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days
ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (2) the trading
day immediately before the date the Company sends such notice. However, the Company may not redeem less than all of the outstanding Notes
unless at least $100.0 million aggregate principal amount of Notes are outstanding and not called for redemption as of the time the Company
sends the related redemption notice. In addition, calling any Note for redemption will constitute a Make-Whole Fundamental Change with
respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances
if it is converted during the related redemption conversion period.
If
certain corporate events that constitute a “Fundamental Change” (as defined in the Indenture) occur, then, subject to a limited
exception for certain cash mergers, noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to
the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change
repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain
de-listing events with respect to the Company’s common stock.
The
Notes will have customary provisions relating to the occurrence of “Events of Default” (as defined in the Indenture), which
include the following: (i) certain payment defaults on the Notes (which, in the case of a default in the payment of interest on the Notes,
will be subject to a 30-day cure period); (ii) the Company’s failure to send certain notices under the Indenture within specified
periods of time; (iii) the Company’s failure to comply with certain covenants in the Indenture relating to the Company’s
ability to consolidate with or merge with or into, or sell, lease or otherwise transfer, in one transaction or a series of transactions,
all or substantially all of the assets of the Company and its subsidiaries, taken as a whole, to another person; (iv) a default by the
Company in its other obligations or agreements under the Indenture or the Notes if such default is not cured or waived within 60 days
after notice is given in accordance with the Indenture; (v) certain defaults by the Company or any of its subsidiaries with respect to
indebtedness for borrowed money of at least $50,000,000; and (vi) certain events of bankruptcy, insolvency and reorganization involving
the Company or any of its significant subsidiaries.
If
an Event of Default involving bankruptcy, insolvency or reorganization events with respect to the Company (and not solely with respect
to a significant subsidiary of the Company) occurs, then the principal amount of, and all accrued and unpaid interest on, all of the
Notes then outstanding will immediately become due and payable without any further action or notice by any person. If any other Event
of Default occurs and is continuing, then, the Trustee, by notice to the Company, or noteholders of at least 25% of the aggregate principal
amount of Notes then outstanding, by notice to the Company and the Trustee, may declare the principal amount of, and all accrued and
unpaid interest on, all of the Notes then outstanding to become due and payable immediately. However, notwithstanding the foregoing,
the Company may elect, at its option, that the sole remedy for an Event of Default relating to certain failures by the Company to comply
with certain reporting covenants in the Indenture consists exclusively of the right of the noteholders to receive special interest on
the Notes for up to 270 days at a specified rate per annum not exceeding 0.50% on the principal amount of the Notes.
On
November 23, 2021, Marathon Digital Holdings, Inc. (the “Company”) issued $97,500,000 aggregate principal amount of the Company’s
1.00% Convertible Senior Notes due 2026 (the “Option Notes”) to Jefferies LLC, as representative of the several initial purchasers
(collectively, the “Initial Purchasers”) in connection with the exercise of the Initial Purchasers’ option to purchase
additional notes. The Option Notes, together with the $650,0000,000 aggregate principal amount of the Company’s 1.00% Convertible
Senior Notes due 2026 that were previously issued, were issued in connection with a private offering to qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933, as amended, and were issued pursuant to the Indenture dated as of November 18,
2021 by and between the Company and U.S. Bank National Association, as trustee.
Effective
November 30, 2021, Marathon Digital Holdings, Inc. (the “Company”) entered into an amended five year hosting agreement
with Compute North, LLC (“Compute North”) to host 73,000 S19 miners to be deployed during the first two quarters of 2022
at a hosting fee of $0.044 per kilowatt hour with substantially the same terms as the Company’s prior hosting agreements with
Compute North. On that same date, the Company also entered into a joint venture with Compute North to form Marathon Compute North 1
LLC (the “LLC”) of which the equity is owned 82% by Marathon and 18% by Compute North, the business purpose of which
is to jointly host bitcoin miners. The LLC entered into a hosting agreement with Compute North to host an additional
30,000 S19 miners along substantially similar terms to the hosting agreement between the Company and Compute North also at $0.044
per kilowatt hour.
On
December 15, 2021, Marathon Digital Holdings, Inc. (the “Company”) entered into a Severance and Release Agreement (“Agreement”)
with Merrick Okamoto, its Executive Chairman (“Okamoto”). Pursuant to the Agreement, Okamoto is retiring effective December
31, 2021. He is providing a standard release to the Company in exchange for payment of 83,333 restricted stock units of the Company,
which shall vest immediately upon grant. The shares underlying the RSUs are being issued pursuant to the Company’s registration
statement on Form S-8 (file no. 333-258928), filed with the SEC on August 19, 2021. Additionally on December 31, 2021, the Company shall
pay Okamoto the following: (i) accrued wages of $30,942.92, his annual 2021 bonus in the amount of $371,315 and any remaining approved
and unpaid Company expenses incurred by him, if any. He is also entitled to medical insurance reimbursement as currently maintained through
December 31, 2022, and thereafter is entitled to COBRA at his own expense, to the extent available by law.
On
December 17, 2021, a putative class action complaint was filed in the United States District Court for the District Court of Nevada,
against the company and present and former senior management. The Complaint alleges securities fraud related to the disclosures of an
SEC investigation previously made by the Company on November 15, 2021. Plaintiff Tad Schaltre served the Complaint on the Company
on March 1, 2022.
On
December 21, 2021, Marathon Digital Holdings, Inc. (the “Company”) executed a contract with Bitmain to purchase an additional
78,000 next generation Antminer S-19 XP Miners, with 13,000 units being delivered in each of July 2022, August 2022, September 2022,
October 2022, November 2022 and December 2022. The purchase price is $879,060,000. The purchase price for the miners shall be paid as
follows: 35% of the total amount within two days of execution of the purchase contract, 35% of each single shipment price at least six
months prior to each such shipment, and the remaining 30% of each single shipment price at least one month prior to each such shipment.
Effective
December 27, 2021, Marathon Digital Holdings, Inc. (the “Company”) appointed Ashu Swami as its Chief Technology Officer and
entered into an Executive Employment Agreement (“Agreement”) with Mr. Swami.
Mr.
Swami joins Marathon Digital Holdings from Core Scientific where he served as the CPO since Feb 2021, leading the company’s foray
into DeFi and heading the mining hardware and software optimization tech. Prior to that, from Jan 2019 to Feb 2021, he was the CTO of
Apifiny, a hybrid CEX and DEX crypto exchange. Previously, from Jan 2016 to Dec 2018, Mr. Swami headed a SPV of Quadeye Securities which
pioneered and traded Mining Swaps, operated cloud mining data centers, and served as the Chief Advisor to Fortune 50 companies including
Intel Corp on Blockchain initiatives. From May 2013 to Dec 2015, he founded LocalPad, a p2p marketplace and payments plugin that provided
ebay-in-a-box like functionality to large blogs to monetize their user base. Prior to that, from May 2007 to Apr 2013, Mr. Swami was
a Portfolio Manager and led the high frequency market-making business at Morgan Stanley Program Trading to become a top 5 market maker
in US ETFs. Previously, since May 2002, Mr. Swami spent over 4 years as a Sr Component Designer and then Tech Lead in Intel’s Enterprise
Platforms Group. Mr. Swami holds a BTech in CSE from IIT Bombay, and M.B.A. from Duke University.
Pursuant
to the terms of the Agreement, Mr. Swami is employed as CTO for a one year term which shall automatically renew unless either he or the
Company notifies the other at least 90 days before the end of the initial or any renewal term of the intent to terminate the Agreement.
Mr. Swami’s base salary is $275,000 per year with a cash bonus of up to $137,500 per year. Mr. Swami shall also be granted 80,000
restricted stock units, of which 20,000 shall vest on the one year anniversary of the effective date of the Agreement, and then 5000
RSUs shall vest on each subsequent three month anniversary with the last 5000 RSUs vesting on the four year anniversary of the effective
date of the Agreement. Upon certain not for cause termination events under the Agreement, Mr. Swami would be entitled to vesting of all
unvested RSUs and a severance payment of six months of salary in addition to all accrued and unpaid salary and vacation and the like.
The Agreement contains other commercially standard terms for events of termination and the like.
On
December 21, 2021, the Company executed a contract with Bitmain to purchase an additional 78,000 next generation Antminer S-19 XP Miners,
with 13,000 units being delivered in each of July 2022, August 2022, September 2022, October 2022, November 2022 and December 2022. The
purchase price is $879,060,000. The purchase price for the miners shall be paid as follows: 35% of the total amount within two days of
execution of the purchase contract, 35% of each single shipment price at least six months prior to each such shipment, and the remaining
30% of each single shipment price at least one month prior to each such shipment. As of December 31, 2021, the Company has paid $307,671,000
of the purchase price.
On
February 11, 2022, we entered into an At The Market Offering Agreement, or sales agreement, with H.C. Wainwright & Co., LLC, or Wainwright,
relating to shares of our common stock offered by this prospectus supplement. In accordance with the terms of the sales agreement, we
may offer and sell shares of our common stock having an aggregate offering price of up to $750,000,000 from time to time through Wainwright
acting as our sales agent.
On
February 18, 2022, a shareholder derivative complaint was filed in the United States District Court for the District of Nevada, against
current and former members of the Company’s board of directors and senior management. The complaint is based on allegations substantially
similar to the allegations in the December 2021 putative securities class action complaint, related to the Company’s disclosure
of an SEC investigation previously made by the Company on November 15, 2021. On March 4, 2022, the Complaint was served on the Company.
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