Item 1A. Risk Factors 12
Item 1B. Unresolved Staff Comments 29
Item 2. Properties 29
Item 3. Legal Proceedings 30
Item 4. Mine Safety Disclosures 31
PART II.
Item 6. Reserved 33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 50
Item 8. Financial Statements and Supplementary Data 51
Item 9A. Controls and Procedures 104
Item 9B. Other Information 106
PART III.
Item 10. Directors, Executive Officers and Corporate Governance 107
Item 11. Executive Compensation 107
Item 14. Principal Accounting Fees and Services 107
PART IV.
Item 15. Exhibits, Financial Statement Schedules 108
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.
ITEM
1. BUSINESS
I.
CORPORATE OVERVIEW
I.A.
HISTORY AND PIVOT TO BITCOIN MINING
Marathon
is a digital asset technology company that produces or “mines” digital assets with a focus on the blockchain ecosystem and
the generation of digital assets. Marathon’s strategy is to produce and hold bitcoin (after paying for cash operating costs of
production) as a long term investment. 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 store of value outside of
government control. We believe 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 a 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. We purchased digital asset mining machines and established a data center in Canada to mine digital assets in 2017. The Company ceased
operating in Canada in 2020 and relocated all owned mining rigs from Canada to the U.S. The Company has since expanded its activities
in the mining of bitcoin across the U.S. The Company changed its name to Marathon Digital Holdings, Inc. on March 1, 2021. As of December
31, 2022, the Company is solely focused on the mining of bitcoin and ancillary opportunities within the Bitcoin ecosystem.
The
term “Bitcoin” with a capital “B” is used to denote the Bitcoin protocol which implements a highly available,
public, permanent, and decentralized ledger. The term “bitcoin” with a lower case “b” is used to denote the token,
bitcoin.
I.B.
CORPORATE INFORMATION
In
2022, we moved our corporate headquarters to Fort Lauderdale, FL and maintain an address at 101 SE 3rd Avenue, Suite 1200,
Fort Lauderdale, FL 33301. We also maintain a West Coast office at 300 Spectrum Center Drive, Suite 950, Irvine, CA 92618. Our website
is www.mara.com. As of February 20, 2023, we had 30 full-time employees and we expect this number to continue to grow in support
of the increased scale of the business. We believe our employee relations to be good.
I.C.
2022 AND 2023 EVENTS
Effective
March 31, 2022, Hugh Gallagher was appointed Chief Financial Officer of the Company.
On
March 31, 2022, the Company amended its previously announced agreements with affiliates of Beowulf Energy LLC, a Delaware limited liability
company (collectively and as applicable, “Beowulf”), and Two Point One, LLC, a Delaware limited liability company (“2P1”),
pursuant to which Beowulf and 2P1 have been designing and developing a data center facility of up to 110-megawatts (the “Facility”)
located next to, and supplied energy directly from, Beowulf’s power generation station in Hardin, MT. As part of the Company’s
mandate to become carbon neutral by the end of the 2022 fiscal year, the Company, Beowulf and 2P1 agreed to terminate the Data Facility
Services Agreement, the Power Purchase Agreement and the Ground Lease for the Facility as of August 15, 2022, and the Company redeployed
its Hardin-installed mining rigs to renewable power facilities in the third quarter of 2022.
On July 28, 2022, the Company entered into a Revolving Credit and Security
Agreement (the “Agreement”) with Silvergate Bank (the “Bank”) pursuant to which Silvergate agreed to loan the
Company up to $100 million on a revolving basis pursuant to the terms of the Agreement and the $100 million principal amount revolving
credit note issued by the Company in favor of the Bank under the Agreement (“Note”).
On February 6, 2023, the Company provided Silvergate Bank with the required
30-day notice stating the Company’s intent to prepay the outstanding balance on its term loan facility as well as the Company’s
intent to terminate the term loan facility. The Company and Silvergate subsequently agreed to also terminate the revolving line of credit
(“RLOC”) facility. On March 8, 2023, the term loan prepayment was completed, and the Company’s term loan and RLOC facilities
with Silvergate Bank were terminated.
Effective
September 14, 2022, the Company amended its Amended and Restated Bylaws to document the previously disclosed unanimous Board approval
to reduce its quorum requirements to 33-1/3% of the issued and outstanding shares of common stock of the Company.
On
September 22, 2022, Compute North Holdings, Inc. (along with its affiliated debtors, collectively, “Compute North”), filed
for chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of Texas under chapter 11 of the U.S. Bankruptcy
Code (11 U.S. Code section 101 et seq.). Compute North provided operating services to the Company and hosted our mining rigs in
multiple facilities. On December 15, 2022, US Bitcoin Corp (“US Bitcoin”) replaced Compute North as the operator of the facilities
in McCamey, TX, Granbury, TX and Kearney, NE as a result of the Compute North bankruptcy. We currently have arrangements in place with
respect to the McCamey, Granbury and Kearney facilities. We no longer operate at South Souix City. On February 16, 2023, the Bankruptcy
Court approved the Debtors Plan of Reorganization, pursuant to which Marathon’s claim has been fixed at $40,000 thousand as an
unsecured claim to be paid out according to the timing and percentages within the approved Debtor’s plan.
In
connection with a dispute concerning the settlement of certain restricted stock unit awards previously granted to Merrick D. Okamoto,
former Chief Executive Officer and Chairman of the Company on October 12, 2022, the Company entered into a settlement agreement with
Mr. Okamoto, pursuant to which the Company agreed to pay Mr. Okamoto $24,000 thousand. Mr. Okamoto agreed to a settlement and a broad
release of known or unknown claims against the Company, which relate to the Company’s Amended 2018 Equity Incentive Plan or related
restricted stock unit award agreements. The Company also entered into agreements in respect to seven other recipients of the same restricted
stock unit awards including a director and our current Chief Operating Officer and Chief Executive Officer and Chairman. Payments related
to these agreements totaled approximately $2,100 thousand in the aggregate.
Effective
November 21, 2022, John Lee was appointed Chief Accounting Officer of the Company.
On
January 27, 2023, the Company and FS Innovation, LLC (“FSI”) entered into a Shareholders’ Agreement (the “Agreement”)
regarding formation of an Abu Dhabi Global Markets company (the “ADGM Entity”), whose purpose shall be to jointly (a) establish
and operate one or more mining facilities for digital assets; and (b) mine digital assets (collectively, the “Business”).
The initial project by the ADGM Entity shall consist of two digital asset mining sites comprising 250 MW in Abu Dhabi, and the initial
equity ownership in the ADGM Entity shall be 80% FSI and 20% the Company, and capital contributions will be made, subject to the satisfaction
or waiver of certain conditions, during the 2023 development period in those proportions, consisting of both cash and in kind, in amounts
of approximately $406,000 thousand in aggregate. FSI will appoint four directors to the board of the ADGM Entity, and the Company will
appoint one director. Unless otherwise not permitted by applicable law, the digital assets mined by the ADGM Entity will be distributed
to the Company and FSI twice a month in proportion to their respective equity interests in the ADGM Entity. There are market provisions
in the Agreement with respect to financial and tax matters. The Agreement shall terminate at the earlier of the mutual written agreement
of the parties, winding up of the ADGM Entity or the ownership by a shareholder of all of the outstanding equity interests in the ADGM
Entity. The Agreement contains market terms on transfer of shares by a shareholder, preemptive rights and certain tag along and drag
along rights upon a sale of the ADGM Entity. Furthermore, there are five year restrictive covenants which, inter alia, prevent Marathon
from competing in the UAE with the Business or with the business of FSI or any of certain related parties and prevent FSI from competing
in the U.S. with the business of Marathon.
II.
BITCOIN BLOCKCHAIN
II
A. OVERVIEW OF BITCOIN
Bitcoin
is a decentralized digital asset that operates on a peer-to-peer network, allowing users to send and receive payments without the need
for intermediaries such as banks. This is made possible through the use of blockchain technology, which is a distributed ledger that
records and verifies all transactions on the network.
The
Bitcoin blockchain is a public, transparent, and immutable record of all transactions that have ever occurred on the network. This ledger
is maintained by a network of computers, known as nodes, that work together to verify and validate new transactions. Each transaction
is cryptographically signed and added to the blockchain as a new block, which is then permanently recorded and cannot be altered or deleted.
One
of the key advantages of the Bitcoin blockchain is that it allows for trustless, secure transactions without the need for a central authority.
Because the blockchain is decentralized and transparent, all users can verify the legitimacy of a transaction without having to rely
on a third party. This eliminates the need for intermediaries, which can be slow and expensive, and it also makes the network resistant
to censorship and fraud.
Bitcoin’s
decentralized and transparent nature makes it secure, efficient, and accessible, and gives it the potential to enable new forms of value
exchange and innovation.
II
B. OVERVIEW OF BITCOIN “HALVING” EVENTS
The
Bitcoin halving is a phenomenon that occurs approximately every four years on the Bitcoin network. The halving is a key part of the Bitcoin
protocol, and it serves to control the overall supply and reduce the risk of inflation in digital assets using a Proof-of-Work consensus
algorithm. At a predetermined block, the mining reward is cut in half, hence the term “halving”. For bitcoin the reward was
initially set at 50 bitcoin currency rewards per block. The Bitcoin blockchain has undergone halving three times since its inception
as follows: (1) on November 28, 2012 at block height 210,000; (2) on July 9, 2016 at block height 420,000; (3) on May 11, 2020 at block
height 630,000, when the reward was reduced to its current level of 6.25 bitcoin per block. The next halving for the Bitcoin blockchain
is anticipated to occur on or around March 2024 at block height 840,000. This process will reoccur until the total amount of bitcoin
currency rewards issued reaches 21,000 thousand and the theoretical supply of new bitcoin is exhausted, which is expected to occur around
2140.
Factors
Affecting Profitability
Market
Price of Bitcoin
Our
business is heavily dependent on the price of bitcoin. The prices of digital assets, including bitcoin, have experienced substantial
volatility, meaning that high or low prices may be based on speculation and incomplete information, may be subject to rapidly changing
investor sentiment, and may be influenced by factors such as technology, regulatory void or changes, fraudulent actors, manipulation,
and media reporting. Bitcoin (as well as other digital assets) may have value based on various factors, including their acceptance as
a means of exchange by consumers and producers, scarcity, and market demand which are beyond our control.
Halving
The
halving is an important part of the Bitcoin ecosystem, and it is closely watched by miners, investors, and other participants in the
digital asset market. Each halving event has historically been associated with significant price movements in the value of bitcoin.
Network
Hash Rate and Difficulty
Generally,
a bitcoin mining rig’s chance of solving a block on the Bitcoin blockchain and earning a bitcoin reward is a function of the mining
rig’s hash rate, relative to the global network hash rate (i.e., the aggregate amount of computing power devoted to supporting
the Bitcoin blockchain at a given time). As demand for bitcoin has increased, the global network hash rate has increased rapidly, and
as more adoption of bitcoin occurs, we expect the demand for new bitcoin will likewise increase as more mining companies are drawn into
the industry by this increased demand. Further, as more and increasingly powerful mining rigs are deployed, the network difficulty for
Bitcoin has increased. Network difficulty is a measure of how difficult it is to solve a block on the Bitcoin blockchain, which is adjusted
every 2016 blocks (every 2 weeks approximately) so that the average time between each block remains ten minutes. A high difficulty means
that it will take more computing power to solve a block and earn a new bitcoin reward, which, in turn, makes the Bitcoin network more
secure by limiting the possibility of one miner or mining pool gaining control of the network. Therefore, as new and existing miners
deploy additional hash rate, the global network hash rate will continue to increase, meaning a miner’s share of the global network
hash rate (and therefore its chance of earning bitcoin rewards) will decline if it fails to deploy additional hash rate at pace with
the industry.
II
C. OVERVIEW OF BITCOIN MINING
Bitcoin
mining is the process by which new bitcoin are created and transactions on the Bitcoin network are verified. In order to mine bitcoin,
mining rigs use specialized computer hardware to win a lottery, which allows them to add new blocks to the bitcoin blockchain and receive
a reward in the form of newly minted bitcoin. The bitcoin mining process serves several important functions in the bitcoin ecosystem.
First,
bitcoin mining helps to secure the Bitcoin network by verifying transactions and preventing fraud. When a user sends a transaction on
the Bitcoin network, it is broadcast to the network and added to the pool of unconfirmed transactions known as the “mempool.”
Mining rigs then compete in a sort of lottery required to add these transactions to the blockchain, which is the decentralized ledger
that records all Bitcoin transactions. When a mining rig successfully adds a new block to the blockchain, the transactions included in
that block are considered confirmed, and the mining rig receives a reward in the form of newly minted bitcoins.
Second,
bitcoin mining helps to decentralize the Bitcoin network and distribute new bitcoin in a fair and transparent manner. Unlike traditional
currencies, which are issued and controlled by central banks, bitcoin is a decentralized digital asset that is not controlled by any
government or institution. Instead, new bitcoin are created and distributed through the mining process, which allows anyone with the
necessary hardware and expertise to participate in the mining process and potentially earn rewards. This decentralized distribution of
new bitcoin helps to ensure that the supply of the digital asset is controlled in a fair and transparent manner.
Third,
bitcoin mining plays a key role in the maintenance and growth of the Bitcoin network. The mining process helps to support the infrastructure
of the network by providing the computational power needed to verify transactions and add new blocks to the blockchain. As more people
become interested in mining bitcoin, the network becomes more secure and efficient.
III.
A. STRATEGIC FOCUS
The
Company’s focus at the onset of 2022 was on growth execution and transition into a larger operation. This focus consisted of both
the expansion of operations of our core bitcoin mining business (operating mining rigs at third-party owned and operated data centers)
and operating MaraPool – our proprietary bitcoin mining pool which orchestrates the operation of our fleet of mining rigs. Key
activities and milestones throughout 2022 included the following:
● We shut down operations at the coal powered Hardin, MT data center facility
It
was also a year of adaptation, as the Company had to overcome several operational and financial headwinds, including:
● Challenged financial markets and macroeconomic conditions
Our
primary focus in 2023 will be the realization of the full energization of our fleet of nearly 200,000 bitcoin mining rigs and growing
our total operational hashrate from 7.0 exahashes per second at year end 2022 to over 23 exahashes per second by the third quarter of
2023. We will also be focused on our first international expansion, a joint venture that will result in the formation of an Abu Dhabi
Global Markets company whose purpose will be to operate one or more mining facilities for digital assets. The initial project will consist
of two mining sites comprising 250 MW in Abu Dhabi and the Company will own 20% of this entity, which is expected to commence bitcoin
mining operations in the second half of 2023. Additionally, we expect to operationalize a number of technology innovations developed
by our technology team and partners including mining using immersion as well as new hardware and software solutions to optimize mining
rig performance and the reliability of MaraPool operations.
III
B. R&D PROCESS
We
place a strong emphasis on research and development (R&D) as a key driver of innovation and growth. Our R&D process is designed
to support the creation and development of new tools and processes that are an integral part of our overall business strategy and enhance
our productivity as an advanced and sustainable bitcoin miner.
The
first step in our R&D process is ideation, which is the process of generating and evaluating new ideas. We encourage our team members
to come up with creative and innovative ideas, and we provide them with the resources and support they need to explore these ideas further.
Once
we have identified a promising idea, the next step is to develop a prototype. This typically involves creating a small-scale version
of the product or service, which can be tested and evaluated in order to identify potential issues and improve the design. We also conduct
market research to understand the potential market for the product or service.
The
final step in our R&D process is testing and validation. This involves conducting thorough testing of the prototype to identify any
issues or flaws, and to ensure that it meets our quality standards. We also conduct market testing to gather feedback from real-world
users, and we use this feedback to refine and improve the product or service.
Overall,
our R&D process is designed to support the creation and development of innovative technology advancements that ensure we maintain
our competitive advantages and improves our position as a leading bitcoin miner. We believe that this process is essential for driving
growth and staying ahead of the competition, and we are committed to continuously improving and refining it to support our success.
III
C. OUR STRATEGIC INVESTMENTS
We
are committed to pursuing strategic investments that align with our vision and values. Our strategy is focused on identifying and partnering
with companies that have the potential to generate long-term value for our stakeholders.
One
key element of our investment strategy is to focus on companies that are at the forefront of emerging technologies and industries. We
believe that these companies have the potential to drive significant innovation and growth, and we are committed to supporting their
development through investments in both hardware and software companies
Another
key aspect of our strategy is to prioritize investments in companies that are aligned with our values and mission. We believe that our
stakeholders expect us to support businesses that operate in a responsible and sustainable manner, and we are committed to making investments
that reflect these values.
Overall,
our investment strategy is designed to support our growth and success, while propelling us to be the most advanced, agile, and efficient
bitcoin miner. We are committed to making strategic investments that are aligned with our vision and values, and we believe that this
approach will help us to achieve long-term success.
IV.
OUR OPERATIONS
We
deploy or are in the process of deploying our assets at various sites in the United States. All of our sites are currently hosted by
third parties to whom we pay a fee. A summary of our current and anticipated operating locations follows:
On
January 27, 2023, the Company and FSI entered into an Agreement regarding formation of an Abu Dhabi Global Markets company whose purpose
shall be to jointly (a) establish and operate one or more mining facilities for digital assets; and (b) mine digital assets. The initial
project by the ADGM Entity shall consist of two digital asset mining sites comprising 250 MW in immersion in Abu Dhabi, and the initial
equity ownership shall be 80% FSI and 20% the Company. The facility is expected to be operational in the second half of 2023.
V.
COMPETITION
In
digital asset mining, companies and individuals use computing power to solve cryptographic algorithms to record and publish transactions
to blockchain ledgers or provide transaction verification services to the Bitcoin network in exchange for digital asset rewards. The
current reward for verifying a block on the Bitcoin blockchain is 6.25 bitcoin. 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 digital asset 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.
Several
public companies (traded in the U.S. and Internationally), such as the following, may be considered to compete with us:
● Riot Platforms, Inc.
● Cipher Mining Inc.
● Hut 8 Mining Corp.
● Hive Blockchain Technologies Ltd.
● Bitfarms, Ltd.
● Cleanspark, Inc.
● Iris Energy Limited
● Bit Digital, Inc.
● Argo Blockchain plc
● TeraWulf Inc.
● Greenidge Generation Holdings Inc.
● Core Scientific, Inc.
● Stronghold Digital Mining, Inc.
While
there is limited available information regarding our non-public competitors, we believe that our recent acquisition and ongoing deployment
of miners positions us well among the publicly traded companies involved in the digital asset mining industry. The digital asset mining
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.
VI.
INTELLECTUAL PROPERTY
We
actively use specific hardware and software for our digital asset mining operations. 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 any patents except as set forth below. We may in the future plan to seek further patents in connection with our
existing and planned blockchain and digital asset 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 digital asset mining operation.
We
have two patent applications pending with the USPTO:
US
Application No. 17/751370
Systems
And Methods For Decreasing Counterparty Settlement Risk
Marathon
Digital Holdings
US
Application No. 17/975229
Systems
And Methods For Overclocking Mining Rigs
Marathon
Digital Holdings
ITEM
1A. RISK FACTORS
Certain
factors may have a materially adverse effect on our business, financial condition, and results of operations, including the risk, factors,
and uncertainties described under this Part I, Item 1A, and elsewhere in this Annual Report. This is not an exhaustive list, and there
are other factors that may be applicable to our business that are not currently known to us or that we currently do not believe are material.
Any of these risks could have an adverse effect on our business, financial condition, operating results, or prospects, which could cause
the trading price of our common stock to decline, and you could lose part or all of your investment. You should carefully consider the
risks, factors, and uncertainties described below, together with the other information contained in this Annual Report, as well as the
risk, factors, uncertainties, and other information we disclose in other filings we make with the SEC before making an investment decision
regarding our securities.
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 digital assets, which may be deemed a security in the future, although
the SEC states that bitcoin, which is the only digital asset we currently mine, is not a security (https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_fundstrading).
In the event that the digital assets other than bitcoin 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. If we determine to mine digital assets other than bitcoin in the future, we will establish and disclose the process
and framework we use to determine if such digital assets are securities under Section 2(a)(1) of the Securities Act and will address
any specific risks in our policy and framework in making such a determination. This description would also include any policy/framework
limitations and state these are risk-based judgments by us and not a legal standard or determination binding on any regulator.
Failure
to effectively manage our growth could place strains on our managerial, operational and financial resources and could adversely affect
our business and operating results.
Our
growth has placed, and is expected to continue to place, a strain on our limited managerial, operational and financial resources and
systems. Further, as our subsidiary companies’ businesses grow, we will be required to continue to manage multiple relationships.
Any further growth by us or our subsidiary companies, or an increase in the number of our strategic relationships, may place additional
strain on our managerial, operational and financial resources and systems. Although we may not grow as we expect, if we fail to manage
our growth effectively or to develop and expand our managerial, operational and financial resources and systems, our business and financial
results would be materially harmed.
The
further development and acceptance of digital asset networks and other digital assets, which represent a new and rapidly changing industry,
are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of digital
asset systems may adversely affect an investment in us.
Digital
assets such as bitcoins, that may be used, among other things, to buy and sell goods and services are a new and rapidly evolving industry
of which the digital asset networks are prominent, but not unique, parts. The growth of the digital asset industry in general, and the
digital asset networks of bitcoin in particular, are subject to a high degree of uncertainty. The factors affecting the further development
of the digital asset industry, as well as the digital asset networks, include:
● Changes in consumer demographics and public tastes and preferences;
Significant
contributors to all or any digital asset network could propose amendments to the respective network’s protocols and software that,
if accepted and authorized by such network, could adversely affect an investment in us.
For
example, with respect to Bitcoins network, a small group of individuals contribute to the Bitcoin Core project on GitHub.com. These individuals
can propose refinements or improvements to the Bitcoin network’s source code through one or more software upgrades that alter the
protocols and software that govern the Bitcoin network and the properties of Bitcoin, including the irreversibility of transactions and
limitations on the mining of new bitcoin. Proposals for upgrades and discussions relating thereto take place on online forums. For example,
there is an ongoing debate regarding altering the blockchain by increasing the size of blocks to accommodate a larger volume of transactions.
Although some proponents support an increase, other market participants oppose an increase to the block size as it may deter miners from
confirming transactions and concentrate power into a smaller group of miners. To the extent that a significant majority of the users
and miners on the Bitcoin network install such software upgrade(s), the Bitcoin network would be subject to new protocols and software
that may adversely affect an investment in the Shares. In the event a developer or group of developers proposes a modification to the
Bitcoin network that is not accepted by a majority of miners and users, but that is nonetheless accepted by a substantial plurality of
miners and users, two or more competing and incompatible blockchain implementations could result. This is known as a “hard fork.”
In such a case, the “hard fork” in the blockchain could materially and adversely affect the perceived value of digital assets
as reflected on one or both incompatible blockchains, which may adversely affect an investment in us.
The
open-source structure of the Bitcoin network protocol means that the contributors to the protocol are generally not directly compensated
for their contributions in maintaining and developing the protocol. A failure to properly monitor and upgrade the protocol could damage
the Bitcoin network and an investment in us.
The
Bitcoin network for example operates based on an open-source protocol maintained by contributors, largely on the Bitcoin Core project
on GitHub. As an open source project, Bitcoin is not represented by an official organization or authority. As the Bitcoin network protocol
is not sold and its use does not generate revenues for contributors, contributors are generally not compensated for maintaining and updating
the Bitcoin network protocol. The lack of guaranteed financial incentive for contributors to maintain or develop the Bitcoin network
and the lack of guaranteed resources to adequately address emerging issues with the Bitcoin network may reduce incentives to address
the issues adequately or in a timely manner. Changes to a digital asset network which we are mining on may adversely affect an investment
in us.
If
a malicious actor or botnet obtains control in excess of 50% of the processing power active on any digital asset network, including the
Bitcoin network, it is possible that such actor or botnet could manipulate the blockchain in a manner that adversely affects an investment
in us.
If
a malicious actor or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating the actions
of the computers) obtains a majority of the processing power dedicated to mining on any digital asset network, including the Bitcoin
network, it may be able to alter the blockchain by constructing alternate blocks if it is able to solve for such blocks faster than the
remainder of the miners on the blockchain can add valid blocks. In such alternate blocks, the malicious actor or botnet could control,
exclude or modify the ordering of transactions, though it could not generate new digital assets or transactions using such control. Using
alternate blocks, the malicious actor could “double-spend” its own digital assets (i.e., spend the same digital assets in
more than one transaction) and prevent the confirmation of other users’ transactions for so long as it maintains control. To the
extent that such malicious actor or botnet does not yield its majority control of the processing power or the digital asset community
does not reject the fraudulent blocks as malicious, reversing any changes made to the blockchain may not be possible. Such changes could
adversely affect an investment in us.
The
approach towards and possible crossing of the 50% threshold indicate a greater risk that a single mining pool could exert authority over
the validation of digital asset transactions. To the extent that the digital assets ecosystems do not act to ensure greater decentralization
of digital asset mining processing power, the feasibility of a malicious actor obtaining in excess of 50% of the processing power on
any digital asset network (e.g., through control of a large mining pool or through hacking such a mining pool) will increase, which may
adversely impact an investment in us.
If
the award of digital assets for solving blocks and transaction fees for recording transactions are not sufficiently high to incentivize
miners, miners may cease expending hashrate to solve blocks and confirmations of transactions on the blockchain could be slowed temporarily.
A reduction in the hashrate expended by miners on any digital asset network could increase the likelihood of a malicious actor obtaining
control in excess of fifty percent (50%) of the aggregate hashrate active on such network or the blockchain, potentially permitting such
actor to manipulate the blockchain in a manner that adversely affects an investment in us.
Bitcoin
miners record transactions when they solve for and add blocks of information to the blockchain. When a miner solves for a block, it creates
that block, which includes data relating to (i) the solution to the block, (ii) a reference to the prior block in the blockchain to which
the new block is being added and (iii) all transactions that have occurred but have not yet been added to the blockchain. The miner becomes
aware of outstanding, unrecorded transactions through the data packet transmission and propagation discussed above. Typically, bitcoin
transactions will be recorded in the next chronological block if the spending party has an internet connection and at least one minute
has passed between the transaction’s data packet transmission and the solution of the next block. If a transaction is not recorded
in the next chronological block, it is usually recorded in the next block thereafter.
As
the award of new digital assets for solving blocks declines, and if transaction fees are not sufficiently high, miners may not have an
adequate incentive to continue mining and may cease their mining operations. For example, the current fixed reward on the Bitcoin network
for solving a new block is six and one quarter (6.25). bitcoins per block; the reward decreased from twelve and one half (12.5) bitcoin
in May 2020. It is estimated that it will halve again in March 2024, and then again in about four (4) years, and approximately every
four (4) years thereafter until the last bitcoin has been mined, which is estimated to be in or around 2140. This reduction may result
in a reduction in the aggregate hashrate of the Bitcoin network as the incentive for miners will decrease. Moreover, miners ceasing operations
would reduce the aggregate hashrate on the Bitcoin network, which would adversely affect the confirmation process for transactions (i.e.,
temporarily decreasing the speed at which blocks are added to the blockchain until the next scheduled adjustment in difficulty for block
solutions) and make the Bitcoin network more vulnerable to a malicious actor obtaining control in excess of fifty percent (50%) of the
aggregate hashrate on the Bitcoin network. Periodically, the Bitcoin network has adjusted the difficulty for block solutions so that
solution speeds remain in the vicinity of the expected ten (10) minute confirmation time targeted by the Bitcoin network protocol.
Marathon
believes that from time to time there will be further considerations and adjustments to the Bitcoin network, and others regarding the
difficulty for block solutions. More significant reductions in aggregate hashrate on digital asset networks could result in material,
though temporary, delays in block solution confirmation time. Any reduction in confidence in the confirmation process or aggregate hashrate
of any digital asset network may negatively impact the value of digital assets, which will adversely impact an investment in us.
To
the extent that the profit margins of digital asset mining operations are not high, operators of digital asset mining operations are
more likely to immediately sell their digital assets earned by mining in the digital asset exchange market, resulting in a reduction
in the price of digital assets that could adversely impact an investment in us.
Over
the past two years, digital asset mining operations have evolved from individual users mining with computer processors, graphics processing
units and first-generation mining rigs. Currently, new processing power brought onto the digital asset networks is predominantly added
by incorporated and unincorporated “professionalized” mining operations. Professionalized mining operations may use proprietary
hardware or sophisticated machines. They require the investment of significant capital for the acquisition of this hardware, the leasing
of operating space (often in data centers or warehousing facilities), incurring of electricity costs and the employment of technicians
to operate the mining farms. As a result, professionalized mining operations are of a greater scale than prior miners and have more defined,
regular expenses and liabilities. These regular expenses and liabilities require professionalized mining operations to more immediately
sell digital assets earned from mining operations on the digital asset exchange market, whereas it is believed that individual miners
in past years were more likely to hold newly mined digital assets for more extended periods. The immediate selling of newly mined digital
assets greatly increases the supply of digital assets on the digital asset exchange market, creating downward pressure on the price of
each digital asset.
The
extent to which the value of digital assets mined by a professionalized mining operation exceeds the allocable capital and operating
costs determines the profit margin of such operation. A professionalized mining operation may be more likely to sell a higher percentage
of its newly mined digital assets rapidly if it is operating at a low profit margin—and it may partially or completely cease operations
if its profit margin is negative. In a low profit margin environment, a higher percentage could be sold into the digital asset exchange
market more rapidly, thereby potentially reducing digital asset prices. Lower digital asset prices could result in further tightening
of profit margins, particularly for professionalized mining operations with higher costs and more limited capital reserves, creating
a network effect that may further reduce the price of digital assets until mining operations with higher operating costs become unprofitable
and remove mining power from the respective digital asset network. The network effect of reduced profit margins resulting in greater
sales of newly mined digital assets could result in a reduction in the price of digital assets that could adversely impact an investment
in us.
To
the extent that any miners cease to record transactions in solved blocks, transactions that do not include the payment of a transaction
fee will not be recorded on the blockchain until a block is solved by a miner who does not require the payment of transaction fees. Any
widespread delays in the recording of transactions could result in a loss of confidence in that digital asset network, which could adversely
impact an investment in us.
To
the extent that any miners cease to record transaction in solved blocks, such transactions will not be recorded on the blockchain. Currently,
there are no known incentives for miners to elect to exclude the recording of transactions in solved blocks; however, to the extent that
any such incentives arise (e.g., a collective movement among miners or one or more mining pools forcing bitcoin users to pay transaction
fees as a substitute for or in addition to the award of new bitcoins upon the solving of a block), actions of miners solving a significant
number of blocks could delay the recording and confirmation of transactions on the blockchain. Any systemic delays in the recording and
confirmation of transactions on the blockchain could result in greater exposure to double-spending transactions and a loss of confidence
in certain or all digital asset networks, which could adversely impact an investment in us.
The
acceptance of digital asset network software patches or upgrades by a significant, but not overwhelming, percentage of the users and
miners in any digital asset network could result in a “fork” in the respective blockchain, resulting in the operation of
two separate networks until such time as the forked blockchains are merged. The temporary or permanent existence of forked blockchains
could adversely impact an investment in us.
Digital
asset networks are open source projects and, although there is an influential group of leaders in, for example, the Bitcoin network community
known as the “Core Developers,” there is no official developer or group of developers that formally controls the Bitcoin
network. Any individual can download the Bitcoin network software and make any desired modifications, which are proposed to users and
miners on the Bitcoin network through software downloads and upgrades, typically posted to the Bitcoin development forum on GitHub.com.
A substantial majority of miners and Bitcoin users must consent to those software modifications by downloading the altered software or
upgrade that implements the changes; otherwise, the changes do not become a part of the Bitcoin network. Since the Bitcoin network’s
inception, changes to the Bitcoin network have been accepted by the vast majority of users and miners, ensuring that the Bitcoin network
remains a coherent economic system; however, a developer or group of developers could potentially propose a modification to the Bitcoin
network that is not accepted by a vast majority of miners and users, but that is nonetheless accepted by a substantial population of
participants in the Bitcoin network. In such a case, and if the modification is material and/or not backwards compatible with the prior
version of Bitcoin network software, a fork in the blockchain could develop and two separate Bitcoin networks could result, one running
the pre-modification software program and the other running the modified version (i.e., a second “Bitcoin” network). Such
a fork in the blockchain typically would be addressed by community-led efforts to merge the forked blockchains, and several prior forks
have been so merged. This kind of split in the Bitcoin network could materially and adversely impact an investment in us and, in the
worst-case scenario, harm the sustainability of the Bitcoin network’s economy.
Intellectual
property rights claims may adversely affect the operation of some or all digital asset networks.
Third
parties may assert intellectual property claims relating to the holding and transfer of digital assets and their source code. Regardless
of the merit of any intellectual property or other legal action, any threatened action that reduces confidence in some or all digital
asset networks’ long-term viability or the ability of end-users to hold and transfer digital assets may adversely affect an investment
in us. Additionally, a meritorious intellectual property claim could prevent us and other end-users from accessing some or all digital
asset networks or holding or transferring their digital assets. As a result, an intellectual property claim against us or other large
digital asset network participants could adversely affect an investment in us.
Political
or economic crises may motivate large-scale sales of digital assets, which could result in a reduction in some or all digital assets’
values and adversely affect an investment in us.
As
an alternative to fiat currencies that are backed by central governments, digital assets such as bitcoins, which are relatively new,
are subject to supply and demand forces based upon the desirability of an alternative, decentralized means of buying and selling goods
and services, and it is unclear how such supply and demand will be impacted by geopolitical events. Nevertheless, political or economic
crises may motivate large-scale acquisitions or sales of digital assets either globally or locally. Large-scale sales of digital assets
would result in a reduction in their value and could adversely affect an investment in us.
Our
ability to adopt technology in response to changing security needs or trends and reliance on third party, NYDIG, for custody poses
a challenge to the safekeeping of our digital assets.
The
history of digital asset exchanges has shown that exchanges and large holders of digital assets must adapt to technological change in
order to secure and safeguard their digital assets. We rely on NYDIG’s 100% cold storage custody solution held in a purpose-built
physically-secure environment based on established, industry best practices to safeguard our digital assets from theft, loss, destruction
or other issues relating to hackers and technological attack. We believe that it may become a more appealing target of security threats
as the size of our bitcoin holdings grow. To the extent that either NYDIG or we are unable to identify and mitigate or stop new security
threats, our digital assets may be subject to theft, loss, destruction or other attack, which could adversely affect an investment in
us. To the extent that NYDIG is no longer, due to the current banking crisis, able to safeguard our assets, we would be at risk of
loss if safeguarding protocols fail.
Security
threats to us could result in, a loss of our digital assets, or damage to the reputation and our brand, each of which could adversely
affect an investment in us.
Security
breaches, computer malware and computer hacking attacks have been a prevalent concern in the digital asset exchange markets, for example