MARA Holdings, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MARATHON DIGITAL HOLDINGS, INC. CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020 Index to Consolidated Financial Statements REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2 CONSOLIDATED BALANCE SHEETS F-3 CONSOLIDATED STATEMENTS OF OPERATIONS F-4 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS F-6 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F-7 to F-22 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Marathon Digital Holdings, Inc. & Subsidiaries (formerly known as Marathon Patent Group, Inc) Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Marathon Digital Holdings, Inc. & Subsidiaries (the Company) as of December 31, 2020 and 2019, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the two years ended December 31, 2020, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial positions of the Company as of December 31, 2020, and the consolidated results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters: Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements, and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. RBSM LLP We have served as the Company’s auditor since 2017. Henderson, NV March 16, 2021 F- 2 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, December 31, 2020 2019 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 141,322,776 $ 692,963 Digital currencies 2,271,656 1,141 Other receivable 74,767,226 - Deposit 65,647,592 - Prepaid expenses and other current assets 2,399,965 800,024 Total current assets 286,409,215 1,494,128 Non-current assets: Property and equipment, net of accumulated depreciation of $6,480,359 and $3,487,323 for December 31, 2020 and 2019, respectively 17,224,321 3,754,969 Prepaid service contract 8,415,000 - Right-of-use assets 200,301 297,287 Intangible assets, net of accumulated amortization of $207,598 and $136,422 for December 31, 2020 and 2019, respectively 1,002,402 1,073,578 Total non-current assets 26,842,024 5,125,834 TOTAL ASSETS $ 313,251,239 $ 6,619,962 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $ 999,742 $ 1,238,197 Mining servers payable - 513,700 Current portion of operating lease liability 121,596 87,959 Warrant liability 322,437 12,849 Total current liabilities 1,443,775 1,852,705 Long-term liabilities Convertible notes payable - 999,106 SBA PPP loan payable 62,500 - Operating lease liability - 120,479 Total long-term liabilities 62,500 1,119,585 Total liabilities 1,506,275 2,972,290 Commitments and Contingencies Stockholders’ Equity: Preferred stock, 0.0001 par value, 50,000,000 shares authorized, no shares issued and outstanding at December 31, 2020 and 2019, respectively - - Common stock, 0.0001 par value; 200,000,000 shares authorized; 81,974,619 and 8,458,781 issued and outstanding at December 31, 2020 and 2019, respectively 8,197 846 Additional paid-in capital 428,242,763 109,705,051 Accumulated other comprehensive loss (450,719 ) (450,719 ) Accumulated deficit (116,055,277 ) (105,607,506 ) Total stockholders’ equity 311,744,964 3,647,672 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 313,251,239 $ 6,619,962 The accompanying notes are an integral part to these audited consolidated financial statements. F- 3 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 2020 2019 Revenues Cryptocurrency mining revenue $ 4,357,443 $ 1,185,227 Total revenues 4,357,443 1,185,227 Operating costs and expenses Cost of revenue 7,001,128 2,482,181 Impairment of mining equipment 871,302 - Impairment of leasehold improvements - 447,776 Compensation and related taxes 4,730,143 1,475,450 Consulting fees 302,561 130,813 Professional fees 733,741 422,335 General and administrative 551,672 465,783 Total operating expenses 14,190,547 5,424,338 Operating loss (9,833,104 ) (4,239,111 ) Other income (expenses) Gain from extinguishment of debt - 181,995 Other income (expenses) 113,476 - Foreign exchange loss - (11,873 ) Loss on conversion of note (364,833 ) - Realized gain on sale of digital currencies 15,466 36,092 Change in fair value of warrant liability (309,588 ) 26,234 Change in fair value of mining payable (66,547 ) 507,862 Interest income 18,343 33,651 Interest expense (20,984 ) (51,915 ) Total other (expenses) income (614,667 ) 722,046 Loss before income taxes $ (10,447,771 ) $ (3,517,065 ) Income tax expense - - Net loss $ (10,447,771 ) $ (3,517,065 ) Net loss per share, basic and diluted: $ (0.13 ) $ (0.53 ) Weighted average shares outstanding, basic and diluted: 81,408,340 6,664,238 The accompanying notes are an integral part to these audited consolidated financial statements. F- 4 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY Preferred Stock Common Stock Additional Paid-in Accumulated Accumulated Other Comprehensive Total Stockholders’ Number Amount Number Amount Capital Deficit Loss Equity Balance as of December 31, 2018 - $ - 6,379,992 $ 638 $ 105,461,396 $ (102,090,441 ) $ (450,719 ) $ 2,920,874 Stock based compensation - - 150,000 15 933,667 - - 933,682 Par value adjustment and additional shares issued due to reverse split - - 5,413 1 (1 ) - - - Issuance of common stock, net of offering costs/At-the-market offering - - 172,126 17 245,477 - - 245,494 Common stock issued for purchase of mining servers - - 1,751,250 175 3,064,512 - - 3,064,687 Net loss - - - - - (3,517,065 ) - (3,517,065 ) Balance as of December 31, 2019 - $ - 8,458,781 $ 846 $ 109,705,051 $ (105,607,506 ) $ (450,719 ) $ 3,647,672 Stock based compensation - - 2,745,639 275 1,178,334 - - 1,178,609 Issuance of common stock, net of offering costs/At-the-market offering - - 54,301,698 5,430 297,653,840 - - 297,659,270 Common stock issued for purchase of mining servers - - 350,250 35 171,587 - - 171,622 Common stock issued for note conversion - - 2,023,739 202 1,578,873 - - 1,579,075 Common stock issued for long term service  contract - - 6,000,000 600 11,219,400 - - 11,220,000 Issue common stock and warrant for cash - - 7,666,666 767 6,270,833 - - 6,271,600 Warrant exercised for cash - - 413,233 41 464,846 - - 464,887 Options exercised for cash - - 14,613 1 (1 ) - - - Net loss - - - - - (10,447,771 ) - (10,447,771 ) Balance as of December 31, 2020 - $ - 81,974,619 $ 8,197 $ 428,242,763 $ (116,055,277 ) $ (450,719 ) $ 311,744,964 The accompanying notes are an integral part to these audited consolidated financial statements. F- 5 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (10,447,771 ) $ (3,517,065 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 2,993,036 923,304 Amortization of patents and website 71,176 71,177 Loss on conversion of debt 364,833 - Realized gain on sale of digital currencies (15,466 ) (36,092 ) Change in fair value of warrant liability 309,588 (26,234 ) Change in fair value of mining payable 66,547 (507,862 ) Impairment of mining equipment 871,302 - Impairment of leasehold improvements - 447,776 Stock based compensation 1,178,609 933,682 Amortization of right-of-use assets 96,986 82,840 Change in prepaid service contract 561,000 - Changes in operating assets and liabilities: - - Digital currencies (4,357,443 ) (1,185,227 ) Operating lease liability (86,842 ) (72,548 ) Prepaid expenses and other assets 644,059 (435,159 ) Accounts payable and accrued expenses (23,318 ) 2,753 Net cash used in operating activities (7,773,704 ) (3,318,655 ) CASH FLOWS FROM INVESTING ACTIVITIES Sale of digital currencies 2,102,394 1,220,178 Purchase of property and equipment (17,742,315 ) (5,225 ) Deposits for the purchase of mining servers (65,647,592 ) - Net cash (used in) provided by investing activities (81,287,513 ) 1,214,953 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds received on SBA PPP notes payable 62,500 - Proceeds from issuance of common stock/At-the-market offering 229,961,998 255,893 Offering costs for the issuance of common stock/At-the-market offering (7,069,955 ) (10,399 ) Proceeds from issuance of common stock and warrant, net 6,271,600 - Proceeds received on exercise of warrants 464,887 - Net cash provided by financing activities 229,691,030 245,494 Net increase (decrease) in cash and cash equivalents 140,629,813 (1,858,208 ) Cash and cash equivalents — beginning of year 692,963 2,551,171 Cash and cash equivalents — end of year $ 141,322,776 $ 692,963 Supplemental schedule of non-cash investing and financing activities: Par value adjustment due to reverse split $ - $ 1 Receivable due to share issuance $ 74,767,226 $ - Common stock issued for long-term service contract $ 11,220,000 $ - Common stock issued for purchase of mining servers $ 171,622 $ 3,064,687 Reduction of share commitment for purchase of mining servers $ 408,625 $ 1,021,562 Common stock issued for note conversion $ 1,579,075 $ - Restricted stock issuance $ - $ 15 The accompanying notes are an integral part to these audited consolidated financial statements. F- 6 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS Organization Marathon Digital Holdings, Inc. (the “Company”) was incorporated in the State of Nevada on February 23, 2010 under the name Verve Ventures, Inc. On December 7, 2011, the Company changed its name to American Strategic Minerals Corporation and were engaged in exploration and potential development of uranium and vanadium minerals business. In June 2012, the Company discontinued the minerals business and began to invest in real estate properties in Southern California. In October 2012, the Company discontinued its real estate business when the former CEO joined the firm and the Company commenced IP licensing operations, at which time the Company’s name was changed to Marathon Patent Group, Inc. On November 1, 2017, the Company entered into a merger agreement with Global Bit Ventures, Inc. (“GBV”), which is focused on mining digital assets. The Company purchased cryptocurrency mining machines and established a data center in Canada to mine digital assets. The Company expanded its activities in the mining of new digital assets, while at the same time harvesting the value of its remaining IP assets. As of October 2020, the financial operations were brought in house and are completed by the Company’s accounting team that consists of a Chief Financial Officer, Chief Operating Officer and bookkeeper. Subsequent to December 31, 2020, the Company hired a full-time Controller. We have also moved all of our data mining operations to our new facility in Hardin Montana. The Company’s Board of Directors adopted the reverse stock split approved by its shareholders at its December 2018 Board Meeting. Upon the effectiveness of the reverse stock split, every four shares of issued and outstanding common stock before the open of business on April 8, 2019 was combined into one issued and outstanding share of common stock, with no change in par value per share. 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. On January 1, 2018, our Board adopted the 2018 Equity Incentive Plan, subsequently approved by the stockholders on March 7, 2018, pursuant to which up to 625,000 shares of common stock, stock options, restricted stock, preferred stock, stock-based awards and other awards are reserved for issuance as awards to employees, directors, consultants, advisors and other service providers. On May 21, 2019, the Company received notice from the Nasdaq Capital Market (the “Capital Market”) that the Company has failed to maintain a minimum of $2,500,000 in stockholders’ equity for continued listing as required under Listing Rule 5550(b)(1) as its Form 10-Q for the period ended March 31, 2019 reported stockholders’ equity of $2,158,192. On July 23, 2019, we announced Nasdaq approved the Company’s plan to regain compliance, and the Company was required to file its Form 10-Q for the period ending September 30, 2019 with the SEC on or before November 13, 2019, which it did, evidencing compliance with the stockholders’ equity requirement. F- 7 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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., 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. The $513,700 set forth on the balance sheet for mining servers payable reflects the fair value of 583,750 shares to be issued at $0.88 per share to conclude the purchase of the Miners at December 31, 2019. The Company recorded change in fair value of mining payable of $66,547 and $507,862 during the year ended December 31, 2020 and 2019, respectively.. There is no requirement for the Company to make a payment in cash in lieu of issuing the remaining shares. Subsequent to year end, on January 14, 2021, the Company sold its inventory of approximately 5,900 S9, 13.5 TH/s miners. As such, management determined that those crypto-currency machines were impaired by a total of $871,302 based upon an assessment as of December 31, 2020. The Company believes that bitcoin is attractive because it can serve as a store of value, supported by a robust and public open source architecture, that is untethered to sovereign monetary policy and can therefore serve as a hedge against inflation. 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. The Company believes that in the context of the economic and public health crisis precipitated by COVID-19 and the unprecedented government financial stimulus measures adopted around the world, decreasing interest rates, as well as the breakdown of trust in and between political institutions and political parties in the United States and globally, bitcoin represents a more attractive store of value than fiat currency, and further that opportunity for appreciation in the value of bitcoin exists in the event that such factors lead to even more widespread adoption of bitcoin as a treasury reserve alternative. On May 11, 2020, the Company purchased 700 new generation M305+ASIC Miners from MicroBT for approximately $1.3 million. The 700 miners produce 80/Th and will generate 56 PH/s (petahash) of hashing power, compared to the Company’s current S-9 production of 46 PH/s. These next generation MicroBT ASIC miners are markedly more energy efficient than our existing Bitmain models. These miners were delivered to the Company’s Hosting Facility in June and are producing Bitcoins. The Company purchased 660 latest generation Bitmain S19 Pro Miners on May 12, 2020, 500 units on May 18, 2020 and an additional 500 units on June 11, 2020. These miners produce 110 TH/s and will generate 73 PH/s (petahash) of hashing power, compared to the Company’s S-9 production of 46 PH/s. The Company made the payments of approximately $4.2 million in the second quarter of 2020 and received 660 of the 1,660 units at its Hosting Facility in August, and its hosting partner, Compute North, had installed them upon their arrival. Of the 1,000 remaining S-19 Pro Miners due to arrive in the 4 th quarter, 500 were received in November and installed in the Company’s Hosting Facility in Montana, while 500 were received and installed during the remainder of the 4 th quarter. These miners will produce an additional 110 PH/s increasing the Company to an aggregate Hashpower of 294 PH/s. On July 29, 2020, the Company announced the purchase of 700 next generation M31S+ASIC Miners from MicroBT. 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. The parties confirm that the total hashrate of the Antminers under this agreement shall not be less than 1,155,000 TH/s. Subsequent to executing this agreement, due to the additional executed contracts, Bitmain applied a total net discount of 8.63% to the purchase price adjusting the amount due to $22,660,673. F- 8 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company shall pay for the Antminers as follows: (1) Twenty percent (20%) of the total purchase price shall be paid as a nonrefundable down payment within forty-eight (48) hours of execution of the agreement. (2) The Company shall pay the twenty percent (20%) of the total purchase price prior to September 20, 2020. (3) The Company shall pay the ten percent (10%) of the total purchase price prior to October 10, 2020. (4) The Company shall pay the remaining fifty percent (50%) of the total purchase price in equal monthly installments due not less than fifty-five (55) days prior to the scheduled delivery of the Product(s) as follows: a) eight-point thirty-three percent (8.33%) no later than 55 days prior to each scheduled delivery period as to the first installment of products to be shipped to the Company in January 2021. b) eight-point thirty-three percent (8.33%) no later than 55 days prior to each scheduled delivery period as to the second installment of the products to be shipped to the Company in February 2021. c) eight-point thirty-three percent (8.33%) no later than 55 days prior to each scheduled delivery period as to the third installment of the products to be shipped to the Company in March 2021. d) eight-point thirty-three percent (8.33%) no later than 55 days prior to each scheduled delivery period as to the fourth installment of the products to be shipped to the Company in April 2021. e) eight-point thirty-three percent (8.33%) no later than 55 days prior to each scheduled delivery period as to the fifth installment of the products to be shipped to the Company in May 2021. f) eight-point thirty-three percent (8.33%) no later than 55 days prior to each scheduled delivery period as to the sixth installment of the products to be shipped to the Company in June 2021. As of December 31, 2020, the Company has paid $15,052,648 of the total balance of $22,660,679. Subject to the timely payment of the purchase price, Bitmain shall deliver products according to the following schedule: 1,500 Units on or before January 31, 2021; and 1,800 units on or before each of February 28, 2021; March 31, 2021; April 30, 2021, May 31, 2021 and June 30, 2021. On October 6, 2020, the Company entered into a series of 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 (“2Pl”; Marathon, Beowulf and 2Pl each a “Party” and, collectively, the “Parties”). Beowulf and 2Pl have been designing and developing a data center facility of up to 100-megawatts (the “Facility”) that will be located next to, and supplied energy directly from, Beowulf’s power generating station in Hardin, MT (the “Hardin Station”). The Facility is being developed in two phases to reach its 100 MW capacity, and the Hardin Station will supply the Facility exclusively with energy to operate Bitcoin mining servers. The projected build out cost for Phase I is approximately $23 million, which is front loaded as the infrastructure is being built for the full 100 MW project. Phase I accounts for 70 MW of the 100 MW project. It entails high voltage equipment to break down the full 100 MW load from the generating station, and thereafter, the infrastructure cost per MW is a matter of distributing power at a container level. Assuming market conditions similar to current, the build out cost for Phase II works out to approximately $200,000 - $250,000 per MW. These are all in costs covering all equipment and labor needed starting from the power coming off the Generating Station distributed down to running the actual miners: including breakers, transformers, switches, containers, PDUs, fans, network cables, and the like. F- 9 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Marathon and Beowulf entered into an exclusive Power Purchase Agreement for the initial supply of 30 MW (Phase I), and up to 100 MW in the aggregate (Phase II), of energy load to the Facility at a cost of $0.028/kWh. The initial term of the Power Purchase Agreement is five years, with up to five additional three-year extensions, as mutually agreed, assuming 75% energy utilization of the initial 30 MW of energy supplied to the Facility. Marathon purchased certain mining infrastructure and equipment for the Facility from Beowulf for a purchase price of $750,000, and Marathon has the right, at no additional cost, to construct and access the Facility on land adjacent to the Hardin Station pursuant to a lease agreement with Beowulf. After the execution of the contract, the Company entered into additional miner purchase agreements. Due to the increased size of the Company’s fleet of miners, Phase I was increased from the initial 30 MW to 70 MW, while Phase II will encompass the completion of the remaining 30 MW for the project. Beowulf and 2P1 will provide operation and maintenance services for the Facility pursuant to a Data Facility Services Agreement, in exchange for an initial issuance of 3,000,000 shares of Marathon’s common stock to each of Beowulf and 2Pl valued at the time of execution at $1.87 per share or $11,220,000 in aggregate. Upon completion of Phase I, Marathon will issue to Beowulf an additional 150,000 shares of its common stock. During Phase II, Marathon will issue to Beowulf an additional 350,000 shares of its common stock – 150,000 shares upon reaching 60 MW of Facility load and 200,000 at completion of the full 100 MW of Facility load. The cost to maintain and run the Facility will be $0.006/kWh. All shares issued under the Data Facility Services Agreement are issued pursuant to transactions exempt from registration under Section 4(a)(2) of the Securities Act of 1933. Effective October 19, 2020, David Lieberman retired as the Company’s Chief Financial Officer, and Simeon Salzman was appointed Chief Financial Officer. On October 23, 2020, the Company executed a contract with Bitmain to purchase an additional 10,000 next generation Antminer S-19 Pro ASIC Miners. The 2021 delivery schedule will be 2,500 Units in January, 4,500 Units in February and the final 3,000 Units in March 2021.The gross purchase price is $23,620,000 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. As of December 31, 2020, the Company has paid $13,634,645 of the total balance of $21,581,594. As of the November 12, 2020, the Company sold all shares of our common stock available thereunder for an aggregate purchase price of $100,000,000 under our 2020 At the Market Offering pursuant to our registration statement on Form S-3 declared effective by the SEC on August 6, 2020, which was the total amount available for sale thereunder. On December 8, 2020, the Company executed a contract with Bitmain to purchase an additional 10,000 next generation Antminer S-19j Pro ASIC Miners, with 6,000 units to be delivered in August 2021, and the remaining 4,000 units to be delivered in September 2021. The gross purchase price is $$23,770,000 with 10% of the purchase price due within 48 hours of execution of the contract, 30% due on January 14, 2021, 10% due on February 15, 2021, 30% due on June 15, 2021 and 20% due on July 15, 2021. Subsequent to executing this agreement, due to the additional executed contracts, Bitmain applied a discount of 8.63% to the purchase price adjusting the amount due to $21,718,649. As of December 31, 2020, the Company has paid $2,192,307 of the total balance of $21,718,649. On December 11, 2020, the Company entered into an At The Market Agreement with HC Wainwright for up to $200,000,000. 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 $141.3 million in cash and 81,974,619 shares outstanding. On December 23, 2020, the Company executed a contract with Bitmain to purchase an additional 70,000 next generation Antminer S-19 ASIC Miners, with 7,000 units to be delivered in July 2021, and the remaining 63,000 units to be delivered in December 2021. The purchase price is $167,763,451. The purchase price for the miners shall be paid as follows: 20% within 48 hours of signing of contract; 30% on or before March 1, 2021; 4.75% on June 15, 2021; 1.76% on July 15, 2021; 4.58% on August 15, 2021; 10.19% on September 15, 2021; 17.63% on October 15, 2021 and 11.55% on November 15, 2021. As of December 31, 2020, the Company has paid $33,552,690 of the total balance of $167,763,452. F- 10 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On December 31, 2020, the Company sold 6,632,712 shares of common stock pursuant to the At The Market offering. Proceeds of $77.1 million net of offering costs of $2.3 million were received on January 4, 2021. Due to the timing of the proceeds received, an other current receivable was recorded in an amount of $74.8 million. Effective December 31, 2020, the Board of Directors of 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. As of March 12, 2021, Mr. Okamoto had earned all bonuses set forth, and as a result of the maximum shares available under the Company’s 2018 Equity Incentive Plan having been issued, he is owed an additional 2,547,392 RSUs, for which the Company will, within 15 business days of the date of this report, file a proxy statement on Schedule 14A to hold an annual or special meeting of shareholders to gain shareholder approval to increase the number of shares available under the Plan in a sufficient number to cover issuance of these 2,547,392 RSUs. Sim Salzman, CFO, was granted a bonus payment of $40,000 in cash; and a bonus of 91,324 RSUs with immediate vesting. James Crawford, COO, was granted a bonus payment of $127,308 in cash and a stock bonus of 57,990 RSUs with immediate vesting. Furthermore, per his employment agreement, his base salary for the 2021 will be increased by 3%. Compensation for directors of the board for 2021 as follows: (i) cash compensation of $60,000 per year for each director, plus an additional $15,000 per year for each committee chair, paid 25% at the end of each calendar quarter; (ii) for existing directors, the equivalent of 54,795 RSUs; and (iii) for newly elected directors, a one-time grant of 91,324 RSUs, vesting 25% each calendar quarter during 2021. For clarification, new directors will also receive the same annual compensation as existing directors in addition to their one time grant. F- 11 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company’s subsidiaries, Marathon Crypto Mining, Inc., Crypto Currency Patent Holding Company and Soems Acquisition Corp, all of which are dormant as of December 31, 2020. For consolidated entities where the Company owns less than 100% of the subsidiary, the Company records net loss attributable to non-controlling interests in its consolidated statements of operations equal to the percentage of the economic or ownership interest retained in such entities by the respective non-controlling parties. The Company’s consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated. Use of Estimates and Assumptions The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made by management include, but are not limited to, estimating the useful lives of patent assets and fixed assets, the assumptions used to calculate fair value of warrants and options granted, realization of long-lived assets, deferred income taxes, unrealized tax positions and the realization of digital currencies. Cash and Cash Equivalents The Company considers all highly liquid debt instruments and other short-term investments with maturity of three months or less, when purchased, to be cash equivalents. The Company maintains cash and cash equivalent balances at one financial institution that is insured by the Federal Deposit Insurance Corporation. The Company’s accounts at this institution are insured, up to $250,000, by the Federal Deposit Insurance Corporation (“FDIC”). For the years ended December 31, 2020 and 2019, the Company’s bank balances exceeded the FDIC insurance limit in an amount of $140.3 million and $0.2 million, respectively. To reduce its risk associated with the failure of such financial institution, the Company evaluates at least annually the rating of the financial institution in which it holds deposits. As of December 31, 2020 and 2019, the Company did not have any cash equivalents. Segment Reporting Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing performance. Our chief operating decision–making group (“CODM”) is composed of the chief executive officer and chief financial officer. The Company currently operates in the Digital Currency Blockchain segment. The Company’s Crypto-currency Machines are located in the United States, and the Company has employees only in the United States and views its operations as one operating segment as the CODM reviews financial information on a consolidated basis in making decisions regarding resource allocations and assessing performance. Digital Currencies Digital currencies are included in current assets in the consolidated balance sheets. Digital currencies are recorded at cost less impairment. F- 12 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ● An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. The reward for a bitcoin miner changes roughly every four years, or after every 210,000 blocks are mined and gets reduced by half each time, this whole process is called bitcoin halving. The last halving occurred on May 11, 2020 and reduced the reward per block to 6.25 BTC. The following table presents the activities of the digital currencies for the years ended December 31, 2020 and 2019: Digital currencies at December 31, 2018 $ - Additions of digital currencies 1,185,227 Realized gain on sale of digital currencies 36,092 Sale of digital currencies (1,220,178 ) Digital currencies at December 31, 2019 $ 1,141 Additions of digital currencies 4,357,443 Realized gain on sale of digital currencies 15,466 Sale of digital currencies (2,102,394 ) Digital currencies at December 31, 2020 $ 2,271,656 Crypto-currency Machines Management has assessed the basis of depreciation of the Company’s Crypto-currency Machines used to verify digital currency transactions and generate digital currencies and believes they should be depreciated over a 2 year period. The rate at which the Company generates digital assets and, therefore, consumes the economic benefits of its transaction verification servers are influenced by a number of factors including the following: ● the complexity of the transaction verification process which is driven by the algorithms contained within the bitcoin open source software; ● the general availability of appropriate computer processing capacity on a global basis (commonly referred to in the industry as hashing capacity which is measured in Petahash units); and ● technological obsolescence reflecting rapid development in the transaction verification server industry such that more recently developed hardware is more economically efficient to run in terms of digital assets generated as a function of operating costs, primarily power costs i.e. the speed of hardware evolution in the industry is such that later hardware models generally have faster processing capacity combined with lower operating costs and a lower cost of purchase. The Company operates in an emerging industry for which limited data is available to make estimates of the useful economic lives of specialized equipment. Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Subsequent to December 31, 2020, management has determined that the expected useful life of transaction verification servers would be five years. Prior to December 31, 2020, management depreciated these servers over two years. This assessment takes into consideration the availability of historical data and management’s expectations regarding the direction of the industry including potential changes in technology. Management will review this estimate annually and will revise such estimates as and when data comes available. To the extent that any of the assumptions underlying management’s estimate of useful life of its transaction verification servers are subject to revision in a future reporting period either as a result of changes in circumstances or through the availability of greater quantities of data then the estimated useful life could change and have a prospective impact on depreciation expense and the carrying amounts of these assets. Intangible Assets Intangible assets include the Crypto Currency Patent with original estimated useful life of 17 years. The Company amortize the cost of the intangible assets over their estimated useful lives on a straight-line basis. Costs incurred to acquire patents, including legal costs, are also capitalized as long-lived assets and amortized on a straight-line basis with the associated patent. F- 13 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company monitors the carrying value of long-lived assets for potential impairment and tests the recoverability of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. If a change in circumstance occurs, the Company will perform a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. If cash flows cannot be separately and independently identified for a single asset, the Company will determine whether impairment has occurred for the group of assets for which we can identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows, the Company will measure any impairment by comparing the fair value of the asset or asset group to its carrying value. During the year ended December 31, 2020 and 2019, there was no impairment to the intangible assets. Revenue Recognition The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of the new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle: ● Step 1: Identify the contract with the customer ● Step 2: Identify the performance obligations in the contract ● Step 3: Determine the transaction price ● Step 4: Allocate the transaction price to the performance obligations in the contract ● Step 5: Recognize revenue when the Company satisfies a performance obligation In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract). If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following: ● Variable consideration ● Constraining estimates of variable consideration ● The existence of a significant financing component in the contract ● Noncash consideration ● Consideration payable to a customer Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. F- 14 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate. Providing computing power in crypto asset transaction verification services is an output of the Company’s ordinary activities. The provision of computing power is the only performance obligation in the Company’s contracts with third party pool operators. The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date received, which is not materially different than the fair value at contract inception. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the Company successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions. Fair value of the digital asset award received is determined using the average U.S. dollar spot rate of the related digital currency at the time of receipt. Expenses associated with running the digital currency mining business, such as rent and electricity cost are also recorded as cost of revenues. Depreciation on digital currency mining equipment is recorded as a component of cost of revenues. Related Party Transactions Parties are considered related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions. On October 11, 2018, the Company entered into a 2-year Employment Agreement, subject to successive 1 year extension, with Merrick Okamoto, pursuant to which Mr. Okamoto will serve as the Executive Chairman and Chief Executive Officer of the Company. Pursuant to the terms of the Agreement, Mr. Okamoto shall receive a base salary at an annual base salary of $350,000 (subject to annual 3% cost of living increase) and an annual bonus up to 100% of base salary as determined by the Compensation Committee or the Board. As further consideration for Mr. Okamoto’s services, the Company agreed to issue Mr. Okamoto 10-year stock options to purchase 1,250,000 shares of Common Stock, with a strike price of $2.32 per share, vesting 50% on the date of grant and 25% on each 6 months anniversary of the date of grant. As of December 31, 2020 and 2019, no bonus has been accrued. On July 22, 2019, the Company granted David Lieberman, James Crawford and other three board directors 5-year stock options to purchase total of 200,000 shares of common stock, with an exercise price of $2.04 per share, vesting 50% on the date of grant and 25% on each 6 months anniversary of the date of grant. On October 19, 2020, David Lieberman retired and at that time, his shares of common stock fully vested. See Note 1 for a description of bonuses and restricted stock unit awards to related parties ratified by the Board of Directors as of December 31, 2020. Fair Value of Financial Instruments The Company measures at fair value certain of its financial and non-financial assets and liabilities by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are: Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data Level 3: Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions. F- 15 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The carrying amounts reported in the consolidated balance sheet for cash, accounts receivable, accounts payable, and accrued expenses, approximate their estimated fair market value based on the short-term maturity of these instruments. The carrying value of notes payable and other long-term liabilities approximate fair value as the related interest rates approximate rates currently available to the Company. Financial assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level of input that is significant to their fair value measurement. The Company measures the fair value of its marketable securities by taking into consideration valuations obtained from third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs included reported trades of and broker-dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities and other observable inputs. The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis and the Company’s estimated level within the fair value hierarchy of those assets and liabilities as of December 31, 2020 and 2019, respectively: Fair value measured at December 31, 2020 Total carrying value at December 31, Quoted prices in active markets Significant other observable inputs Significant unobservable inputs 2020 (Level 1) (Level 2) (Level 3) Liabilities Warrant liability $ 322,437 $ - $ - $ 322,437 Fair value measured at December 31, 2019 Total carrying value at December 31, Quoted prices in active markets Significant other observable inputs Significant unobservable inputs 2019 (Level 1) (Level 2) (Level 3) Liabilities Warrant liability $ 12,849 $ - $ - $ 12,849 There were no transfers between Level 1, 2 or 3 during the years ended December 31, 2020 and 2019. At December 31, 2020, the Company had an outstanding warrant liability in the amount of $322,437 associated with warrants that were issued in January 2017 and warrants issued related to the Convertible Notes issued in August and September of 2017. The following table rolls forward the fair value of the Company’s warrant liability, the fair value of which is determined by Level 3 inputs for the year ended December 31, 2020. FV of warrant liabilities Fair value Outstanding as of December 31, 2018 $ 39,083 Change in fair value of warrants (26,234 ) Outstanding as of December 31, 2019 $ 12,849 Change in fair value of warrants 309,588 Outstanding as of December 31, 2020 $ 322,437 The fair value of the warrant liabilities are marked-to-market each reporting period and changes in fair value are recorded as a non-operating gain or loss in our statement of operations, until they are completely exercised. The fair value is determined each reporting period using the Black-Scholes option pricing model and is affected by changes in inputs to that model including our stock price, expected stock price volatility, dividends, interest rates and expected term. The assumptions used in valuing the warrant liability as of the year ended December 31, 2020 were exercise price of $4.80 per share; implied stock price of $10.44; expected volatility of 44.47%; expected dividend rate of 0%; risk free interest rate of 1.70%; and expiration date of 2.17 years. Income Taxes The Company accounts for income taxes pursuant to the provision of Accounting Standards Codification (“ASC”) 740-10, “Accounting for Income Taxes” which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized. F- 16 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company follows the provision of the ASC 740-10 related to Accounting for Uncertain Income Tax Position. When tax returns are filed, it is more likely than not that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is most likely that not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for uncertain tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions will more likely than not be upheld upon examination. As such, the Company has not recorded a liability for uncertain tax benefits. Basic and Diluted Net Loss per Share Net loss per common share is calculated in accordance with ASC Topic 260: Earnings Per Share (“ASC 260”). Basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. The computation of diluted net loss per share does not include dilutive common stock equivalents in the weighted average shares outstanding, as they would be anti-dilutive. Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share at December 31, 2020 and 2019 are as follows: As of December 31, 2020 2019 Warrants to purchase common stock 287,656 182,191 Options to purchase common stock 106,120 1,731,745 Convertible notes to exchange common stock - 312,221 Total 393,776 2,226,157 The following table sets forth the computation of basic and diluted loss per share: For the Years Ended December 31, 2020 2019 Net loss attributable to common shareholders $ (10,447,771 ) $ (3,517,065 ) Denominator: Weighted average common shares - basic and diluted 81,408,340 6,664,238 Loss per common share - basic and diluted $ (0.13 ) $ (0.53 ) Impairment of Long-lived Assets Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Subsequent to year end, on January 14, 2021, the Company sold its inventory of approximately 5,900 S9, 13.5 TH/s miners for $616,236. As of December 31, 2020, these assets had a net book value of $1,487,538. As such, management determined that those crypto-currency machines were impaired by a total of $871,302 based upon an assessment as of December 31, 2020. During the year ended December 31, 2020 and 2019, the Company’s leasehold improvements were impaired by $0 and $447,776, respectively. Stock-Based Compensation The Company expenses stock-based compensation to employees and non-employees over the requisite service period based on the estimated grant-date fair value of the awards and forfeiture rates. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. These assumptions are the expected stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of the Company’s common stock over the expected term of the option. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term. F- 17 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Leases Effective January 1, 2019, the Company accounts for its leases under ASC 842, Leases. Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the consolidated balance sheet as both a right of use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line rent expense over the lease term. Variable lease expenses, if any, are recorded when incurred. In calculating the right of use asset and lease liability, the Company elected to combine lease and non-lease components. The Company excluded short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term. The Company continues to account for leases in the prior period financial statements under ASC Topic 840. Recent Accounting Pronouncements In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, “ Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”)” , which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures. F- 18 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates , which, among other items, allows public business entities that qualify as smaller reporting companies for SEC reporting purposes additional time to implement the guidance related to FASB ASC 326 . Under ASU 2019-10, the effective date for such entities is deferred to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Earlier application is still allowed for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures. In June 2018, the FASB issued ASU 2018-07, “ Improvements to Nonemployee Share-Based Payment Accounting ”, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The changes take effect for public companies for fiscal years starting after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. On January 1, 2019, the Company adopted this ASU and the adoption did not have a material impact on the Company’s consolidated financial statements. In July 2017, the FASB issued ASU 2017-11, “ Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815) ,” which addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 with early adoption permitted. On January 1, 2019, the Company adopted this ASU and the adoption did not have a material impact on the Company’s consolidated financial statements. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by, among other provisions, recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. For public companies, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted. In transition, entities may also elect a package of practical expedients that must be applied in its entirety to all leases commencing before the adoption date, unless the lease is modified, and permits entities to not reassess (a) the existence of a lease, (b) lease classification or (c) determination of initial direct costs, as of the adoption date, which effectively allows entities to carryforward accounting conclusions under previous U.S. GAAP. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities an optional transition method to apply the guidance under Topic 842 as of the adoption date, rather than as of the earliest period presented. The Company adopted Topic 842 on January 1, 2019, using the optional transition method to apply the new guidance as of January 1, 2019, rather than as of the earliest period presented, and elected the package of practical expedients described above. Based on the analysis, on January 1, 2019, the Company recorded right of use assets of approximately $388,425, lease liability of approximately $289,283 and eliminated deferred rent of approximately $99,141. Any new accounting standards, not disclosed above, that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. F- 19 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 3 – PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS 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., 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. The $513,700 set forth on the balance sheet for mining servers payable reflects the fair value of 583,750 shares to be issued at $0.88 per share to conclude the purchase of the Miners at December 31, 2019. The Company recorded change in fair value of mining payable of $66,547 and $507,862 during the year ended December 31, 2020 and 2019, respectively. There is no requirement for the Company to make a payment in cash in lieu of issuing the remaining shares. On May 11, 2020, the Company signed a Contract Addendum with Compute North, to pause and suspend services under its Colocation Agreement. This will suspend all production of Bitcoin using our S-9 miners. On May 11, 2020, the Company purchased 700 new generation M305+ASIC Miners from MicroBT for approximately $1.3 million. The 700 miners produce 80/Th and will generate 56 PH/s (petahash) of hashing power, compared to the Company’s current S-9 production of 46 PH/s. These next generation MicroBT ASIC miners are markedly more energy efficient than our existing Bitmain models. These miners were delivered to the Company’s Hosting Facility in June 2020 and are producing Bitcoins. The Company purchased 660 latest generation Bitmain S19 Pro Miners on May 12, 2020, 500 units on May 18, 2020 and an additional 500 units on June 11, 2020. These miners produce 110 TH/s and will generate 73 PH/s (petahash) of hashing power, compared to the Company’s S-9 production of 46 PH/s. The Company made the payments of approximately $4.2 million in the second quarter of 2020 and received 660 of the 1,660 units at its Hosting Facility in August, and its hosting partner, Compute North, had installed them upon their arrival. Of the 1,000 remaining S-19 Pro Miners due to arrive in the 4th quarter, 500 were received in November and installed in the Company’s Hosting Facility in Montana, while 500 are anticipated to be received and installed during the remainder of the 4th quarter. These miners will produce an additional 110 PH/s increasing the Company to an aggregate Hashpower of 294 PH/s. On July 29, 2020, the Company announced the purchase of 700 next generation M31S+ASIC Miners from MicroBT. 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 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. Subsequent to executing this agreement, due to the additional executed contracts, Bitmain applied a total net discount of 8.63% to the purchase price adjusting the amount due to $22,660,673. Subject to the timely payment of the purchase price, Bitmain shall deliver products according to the following schedule: 1,500 Units on or before January 31, 2021; and 1,800 units on or before each of February 28, 2021; March 31, 2021; April 30, 2021, May 31, 2021 and June 30, 2021. As of December 31, 2020, the Company has paid $15,052,648 of the total balance of $22,660,673. On October 23, 2020, the Company executed a contract with Bitmain to purchase an additional 10,000 next generation Antminer S-19 Pro ASIC Miners. The 2021 delivery schedule will be 2,500 Units in January, 4,500 Units in February and the final 3,000 Units in March 2021.The gross purchase price is $23,620,000 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. As of December 31, 2020, the Company has paid $13,634,645 of the total balance of $21,581,594. On December 8, 2020, the Company executed a contract with Bitmain to purchase an additional 10,000 next generation Antminer S-19j Pro ASIC Miners, with 6,000 units to be delivered in August 2021, and the remaining 4,000 units to be delivered in September 2021. The gross purchase price is $23,770,000 with 10% of the purchase price due within 48 hours of execution of the contract, 30% due on January 14, 2021, 10% due on February 15, 2021, 30% due on June 15, 2021 and 20% due on July 15, 2021. Subsequent to executing this agreement, due to the additional executed contracts, Bitmain applied a discount of 8.63% to the purchase price adjusting the amount due to $21,718,649. As of December 31, 2020, the Company has paid $2,192,307 of the total balance of $21,718,649. On December 23, 2020, the Company executed a contract with Bitmain to purchase an additional 70,000 next generation Antminer S-19 ASIC Miners, with 7,000 units to be delivered in July 2021, and the remaining 63,000 units to be delivered in December 2021. The purchase price is $167,763,451. The purchase price for the miners shall be paid as follows: 20% within 48 hours of signing of contract; 30% on or before March 1, 2021; 4.75% on June 15, 2021; 1.76% on July 15, 2021; 4.58% on August 15, 2021; 10.19% on September 15, 2021; 17.63% on October 15, 2021 and 11.55% on November 15, 2021. As of December 31, 2020, the Company has paid $33,552,690 of the total balance of $167,763,451. On February 1, 2021, Marathon announced that Bitmain had shipped approximately 4,000 S-19 Pro ASIC miners to the Company’s mining facility in Hardin, MT, all of which were delivered as scheduled. In addition to the initial 4,000 miners delivered to the Hardin facility in February, Bitmain recently shipped another 6,300 miners to Hardin. A portion of this new shipment has already been received and installations are progressing. Marathon expects all 10,300 miners to be installed by the end of March, at which point the Company’s mining fleet will consist of 12,920 miners generating approximately 1.4 EH/s. The components of property, equipment and intangible assets as of December 31, 2020 and 2019 are: Useful life (Years) December 31, 2020 December 31, 2019 Website 7 $ 121,787 $ 121,787 Mining equipment 5 12,989,318 7,120,505 Construction in Progress N/A 10,593,575 - Right to mining patent 17 1,210,000 1,210,000 Gross property, equipment and intangible assets 24,914,680 8,452,292 Less: Accumulated depreciation and amortization (6,687,957 ) (3,623,745 ) Property, equipment and intangible assets, net $ 18,226,723 $ 4,828,547 As of December 31, 2020, intangible assets amortization are as follows: 2021 $ 71,176 2022 71,176 2023 71,176 2024 71,176 2025 71,176 Thereafter 646,522 Total $ 1,002,402 F- 20 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 4 - STOCKHOLDERS’ EQUITY We are authorized to issue 200,000,000 shares of common stock and 50,000,000 shares of preferred stock, at $.0001 par value per share. As of December 31, 2020, we have 81,974,619 shares of our common stock and no shares of our preferred stock issued and outstanding. Common Stock At The Market Offering Agreement On July 19, 2019, we entered into an At The Market Offering Agreement (the “Agreement”) with H.C. Wainwright & Co., LLC (“H.C. Wainwright”) which establishes an at-the-market equity program pursuant to which we may offer and sell shares of our common stock, par value $0.0001 per share (“Common Stock”), from time to time as set forth in the Agreement. The Agreement provides for the sale of shares of our Common Stock (“Shares”) having an aggregate offering price of up to $7,472,417. Subject to the terms and conditions set forth in the Agreement, H.C. Wainwright will use its commercially reasonable efforts consistent with its normal trading and sales practices to sell the Shares from time to time, based upon our instructions. We have provided H.C. Wainwright with customary indemnification rights, and H.C. Wainwright will be entitled to a commission at a fixed rate equal to three percent (3.0%) of the gross proceeds per Share sold. In addition, we have agreed to pay certain expenses incurred by H.C. Wainwright in connection with the Agreement, including up to $25,000 of the fees and disbursements of their counsel. The Agreement will terminate upon the earlier of sale of all of the Shares under the Agreement or July 19, 2022 unless terminated earlier by either party as permitted under the Agreement. Sales of the Shares, if any, under the Agreement shall be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), including sales made by means of ordinary brokers’ transactions, including on the Nasdaq Capital Market, at market prices or as otherwise agreed with H.C. Wainwright. We have no obligation to sell any of the Shares, and, at any time, we may suspend offers under the Agreement or terminate the Agreement. Follow On Offering On July 23, 2020, the Company entered into an underwriting agreement with H.C. Wainwright. The Company agreed to sell H.C. Wainwright 7,666,666 shares of its common stock, including the exercise in full by H.C. Wainwright 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, which closed on July 28, 2020, were approximately $6.9 million, and proceeds, net of underwriting discount and expenses of $0.6 million, were $6.3 million. Additionally, representative’s warrant to purchase 536,667 shares of our common stock with a five year term and an exercise price of $1.125 per share were issued. Shelf Registration Statements on Form S-3 and At The Market Offering Agreements On August 13, 2020, the Company’s Shelf Registration Statement on Form S-3, filed on August 6, 2020, was declared effective by the SEC, along with the Company’s At The Market Offering Agreement, entered into by the Company and H.C. Wainwright & Co., LLC, as Exhibit 1.1 to the Form S-3 (the “2020 At The Market Agreement”). This 2020 At the Market Agreement establishes an at-the-market equity program pursuant to which the Company may offer and sell shares of its common stock, par value $0.0001 per share, with an aggregate offering price of up to $100 million, from time to time as set forth in the agreement. On December 22, 2020, the Company’s Shelf Registration Statement on Form S-3, filed on December 11, 2020, was declared effective by the SEC, along with the Company’s At The Market Offering Agreement, entered into by the Company and H.C. Wainwright & Co., LLC, as Exhibit 1.1 to the Form S-3 (the “2020 At The Market Agreement”). This 2020 At the Market Agreement establishes an at-the-market equity program pursuant to which the Company may offer and sell shares of its common stock, par value $0.0001 per share, with an aggregate offering price of up to $200 million, from time to time as set forth in the agreement. During the year ended December 31, 2020, 54,301,698 shares of common stock were issued under the Company’s 2020 At The Market Agreements for total proceeds of approximately $307.1 million, net of offering costs, of $9.4 million, and the Company has sold all shares possible under the Agreements. During the year ended December 31, 2019, 172,126 of common stock were issued under the Company’s 2019 At The Market Agreements for total proceeds of approximately $0.3 million, net of offering costs, of $0.01 million, and the Company has sold all shares possible under the Agreements. F- 21 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Asset Purchase Agreement 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., 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. The $513,700 set forth on the balance sheet for mining servers payable reflects the fair value of 583,750 shares to be issued at $0.88 per share to conclude the purchase of the Miners at December 31, 2019. The Company recorded change in fair value of mining payable of $66,547 and $507,862 during the year ended December 31, 2020 and 2019, respectively.. There is no requirement for the Company to make a payment in cash in lieu of issuing the remaining shares. Agreements with Beowulf Energy On October 6, 2020, the Company entered into a series of 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 (“2Pl”; Marathon, Beowulf and 2Pl each a “Party” and, collectively, the “Parties”). Beowulf and 2Pl have been designing and developing a data center facility of up to 100-megawatts (the “Facility”) that will be located next to, and supplied energy directly from, Beowulf’s power generating station in Hardin, MT (the “Hardin Station”). The Facility is being developed in two phases to reach its 100 MW capacity, and the Hardin Station will supply the Facility exclusively with energy to operate Bitcoin mining servers. The projected build out cost for Phase I is approximately $14 million, which is front loaded as the infrastructure is being built for the full 100 MW project. It entails high voltage equipment to break down the full 100 MW load from the generating station, and thereafter, the infrastructure cost per MW is a matter of distributing power at a container level. Assuming market conditions similar to current, the build out cost for Phase II works out to approximately $200,000 - $250,000 per MW. These are all in costs covering all equipment and labor needed starting from the power coming off the Generating Station distributed down to running the actual miners: including breakers, transformers, switches, containers, PDUs, fans, network cables, and the like. Marathon and Beowulf entered into an exclusive Power Purchase Agreement for the initial supply of 30 MW (Phase I), and up to 100 MW in the aggregate (Phase II), of energy load to the Facility at a cost of $0.028/kWh. The initial term of the Power Purchase Agreement is five years, with up to five additional three-year extensions, as mutually agreed, assuming 75% energy utilization of the initial 30 MW of energy supplied to the Facility. Marathon purchased certain mining infrastructure and equipment for the Facility from Beowulf for a purchase price of $750,000, and Marathon has the right, at no additional cost, to construct and access the Facility on land adjacent to the Hardin Station pursuant to a lease agreement with Beowulf. Beowulf and 2P1 will provide operation and maintenance services for the Facility pursuant to a Data Facility Services Agreement, in exchange for an initial issuance of 3,000,000 shares of Marathon’s common stock to each of Beowulf and 2Pl valued at the time of execution or $1.87 per share. Upon completion of Phase I, Marathon will issue to Beowulf an additional 150,000 shares of its common stock. During Phase II, Marathon will issue to Beowulf an additional 350,000 shares of its common stock – 150,000 shares upon reaching 60 MW of Facility load and 200,000 at completion of the full 100 MW of Facility load. The cost to maintain and run the Facility will be $0.006/kWh. All shares issued under the Data Facility Services Agreement are issued pursuant to transactions exempt from registration under Section 4(a)(2) of the Securities Act of 1933. F- 22 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Other 2020 Common Stock Activity During the month of January 2020, the Company issued 118,524 shares of common stock under the At The Market Offering for the total proceeds of $131,215, net of offering cost of $5,045. During the month of February 2020, the Company issued 186,211 shares of common stock under the At The Market Offering for the total proceeds of $220,802, net of offering cost of $8,687. During the month of March 2020, the Company issued 98,340 shares of common stock under the At The Market Offering for the total proceeds of $49,874, net of offering cost of $3,042. On March 30, 2020, the Company issued 350,250 shares of common stock in exchange for S9 miners with a fair market value of $612,938. During the month of April 2020, the Company issued 3,016,385 shares of common stock under the At The Market Offering for the total proceeds of $1,514,969, net of offering cost of $58,532. During the month of May 2020, the Company issued 5,987,723 shares of common stock under the At The Market Offering for the total proceeds of $3,607,398, net of offering cost of $127,765. During the month of June 2020, the Company issued 1,540,710 shares of common stock under the At The Market Offering for the total proceeds of $1,537,346, net of offering cost of $51,526. On June 1, 2020, the Company issued 2,023,739 shares of common stock in exchange for the conversion and extinguishment of the note payable outstanding in an amount of $999,106. During the month of August 2020, the Company issued 5,820,761 shares of common stock under the At The Market Offering for the total proceeds of $20,178,935, net of offering cost of $630,283. During the month of September 2020, the Company issued 943,981 shares of common stock under the At The Market Offering for the total proceeds of $2,516,199, net of offering cost of $78,874. During the month of October 2020, the Company issued 7,813,218 shares of common stock under the At The Market Offering for the total proceeds of $21,320,409, net of offering cost of $665,773. On October 6, 2020, the Company issued 6,000,000 shares of common stock in exchange for five years of services pursuant to the Power Purchase Agreement and Data Facility Services Agreement for the total proceeds of $0, net of offering cost of $0 valued at the time of execution at $1.87 per share or $11,220,000 in aggregate. During the month of November 2020, the Company issued 5,851,295 shares of common stock under the At The Market Offering for the total proceeds of $16,685,649, net of offering cost of $519,992. During the month of December 2020, the Company issued 22,924,550 shares of common stock under the At The Market Offering for the total proceeds of $239,301,605, net of offering cost of $7,255,610. F- 23 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 2019 Common Stock Activity On October 1, 2019, the Company issued 150,000 shares of its common stock to a consultant. The fair value of the common stock was $259,500. Common Stock Warrants A summary of the status of the Company’s outstanding stock warrants and changes during year ended is as follows: Number of Warrants Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Outstanding as of December 31, 2018 182,191 $ 25.04 2.8 Expired - - - Exercised - - - Outstanding as of December 31, 2019 182,191 $ 25.04 2.8 Issued 536,667 1.13 4.6 Expired (17,969 ) 59.14 - Exercised (413,233 ) 1.13 - Outstanding as of December 31, 2020 287,656 $ 12.64 2.7 Warrants exercisable as of December 31, 2020 287,656 $ 12.64 2.7 The aggregate intrinsic value of options outstanding and exercisable at December 31, 2020 was $1,395,921. On July 23, 2020, the Company entered into an underwriting agreement with H.C. Wainwright. The Company agreed to sell H.C. Wainwright 7,666,666 shares of its common stock, including the exercise in full by H.C. Wainwright 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, which closed on July 28, 2020, were approximately $6.9 million, and proceeds, net of underwriting discount and expenses of $0.6 million, were $6.3 million. Additionally, representative’s warrant to purchase 536,667 shares of our common stock with a five year term and an exercise price of $1.125 per share were issued. Common Stock Options On July 22, 2019, the Company’s board has approved to issue 275,000 shares of option to purchase the Company’s common stock to 8 employees and consultants for the service they provided. The options have a five-year term with an exercise price of $2.04, vesting 50% on the date of grant and 25% on each 6 months anniversary of the date of grant. The options were valued based on the Black-Scholes model, using the strike of $2.04 per share, an average expected term of 2.69 years, volatility of 39.46% based on the average volatility of comparable companies over the comparable prior period. On May 5, 2020, the Compensation Committee of the Board of Directors held a meeting and approved bonuses and stock option grants for Directors and Officers for their contributions to the growth of Marathon Patent Group, Inc., for the year ended December 31, 2019. Total awards to be granted amounted to 1,158,138 restricted stock units at a price of $0.43 per unit with a term of one year, vesting quarterly in equal amounts, and (ii) cash award of $105,000 to Merrick Okamoto and $54,000 to David Lieberman. In addition, the Compensation Committee agreed to cancel 1,587,500 existing stock options for Directors, Officers and outside legal counsel, and replace them with 1,587,500 restricted stock units at a price of $0.43 per unit with a term of one year, vesting quarterly in equal amounts. Due to the conversion of stock options to restricted stock options during 2020, the grant date fair value of stock options granted to employees during the years ended December 31, 2020 and 2019 were $0 and $163,165, respectively. Estimated future stock-based compensation expense relating to unvested stock options is approximately $0 as of December 31, 2020. F- 24 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements A summary of the stock options as of December 31, 2020 and changes during the year ended is as follows: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Outstanding as of December 31, 2019 1,731,745 $ 5.50 7.92 Cancelled (1,587,500 ) 2.28 - Exercised (25,000 ) 2.04 - Expired (13,125 ) 83.62 - Outstanding as of December 31, 2020 106,120 $ 44.32 4.28 Options vested and expected to vest as of December 31, 2020 106,120 $ 44.32 4.28 Options vested and exercisable as of December 31, 2020 106,120 $ 44.32 4.28 The aggregate intrinsic value of options outstanding and exercisable at December 31, 2020 was $210,000. A summary of the stock options as of December 31, 2019 and changes during the year ended is as follows: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Outstanding as of December 31, 2018 1,466,520 $ 6.66 9.49 Granted 275,000 2.04 4.81 Expired (9,775 ) 82.05 - Outstanding as of December 31, 2019 1,731,745 $ 5.50 7.92 Options vested and expected to vest as of December 31, 2019 1,731,745 $ 5.50 7.92 Options vested and exercisable as of December 31, 2019 1,594,245 $ 5.80 8.21 F- 25 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements A summary of the RSUs as of December 31, 2020 and 2019, respectively and changes during the period are presented below: Number of Units Weighted Average Grant Date Fair Value Nonvested at December 31, 2018 43,750 $ 6.88 Granted 150,000 $ 1.73 Vested (175,000 ) $ 2.47 Nonvested at December 31, 2019 18,750 $ 6.88 Granted 2,745,639 $ 0.43 Vested (2,198,110 ) $ 0.49 Nonvested at December 31, 2020 566,279 $ 0.43 Number of Units Weighted Average Grant Date Fair Value Nonvested at December 31, 2019 18,750 $ 6.88 Granted 2,745,639 $ 0.43 Vested (2,198,110 ) $ 0.48 Nonvested at December 31, 2020 566,279 $ 0.45 Number of Units Weighted Average Grant Date Fair Value Anticipated Vesting - $ - March 31, 2021 566,279 $ 0.43 NOTE 5 - DEBT, COMMITMENTS AND CONTINGENCIES Included in the Accounts payable and accrued expenses amount of approximately $1.0 million, $0.4 million relates to trade accounts payable incurred in the ordinary course of business while $0.6 million relates to accrued expenses. Debt consists of the following: Maturity Interest December 31, December 31, Date Rate 2020 2019 Convertible Note 9/1/2021 5 % $ - $ 999,106 Less: debt discount - - Total convertible notes, net of discount $ - $ 999,106 Total $ - $ 999,106 Less: current portion - - Long term portion $ - $ 999,106 F- 26 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On August 14, 2017, the Company entered into a unit purchase agreement (the “Unit Purchase Agreement”) with certain accredited investors providing for the sale of up to $5,500,000 of 5% secured convertible promissory notes (the “Convertible Notes”), which are convertible into shares of the Corporation’s common stock, and the issuance of warrants to purchase 1,718,750 shares of the Company’s Common Stock (the “Warrants”). The Convertible Notes are convertible into shares of the Company’s Common Stock at the lesser of (i) $0.80 per share or (ii) the closing bid price of the Company’s common stock on the day prior to conversion of the Convertible Note; provided that such conversion price may not be less than $0.40 per share. The Warrants have an exercise price of $4.80 per share. In two closings of the Unit Purchase Agreement, the Company issued $5,500,000 in Convertible Notes to the investors. The remaining balance of the Convertible Notes were due to mature on May 31, 2018. On February 10, 2020, the investor agreed to extend the maturity date to September 1, 2021, and the conversion price will be changed to the lower of, the closing price on the previous days close prior to the conversion request or a maximum conversion price of $1.00 and a floor of $0.80. The note bears interest at the rate of 5% per annum and accrues but is not paid in cash. During the year ended December 31, 2020, $999,106 remaining balance of the Convertible Notes and $215,136 of accrued and unpaid interest were converted into 2,023,739 shares of the Company’s Common Stock, and the Company recorded $364,833 of expenses pursuant to the inducement of the conversion terms. Issuers of convertible debt that has fallen “out of the money” (the conversion price is more than the applicable stock price) sometimes want to encourage conversion of the debt into its equity securities anyhow. To do that, they can provide an incentive, lasting for a brief period, for holders of the debt to exercise their conversion privilege. Frequently, this inducement will take the form of a temporary lessening of the conversion price (and consequent increase in the “conversion ratio,” which determines how many shares can be converted from each bond). Less often, the issuer may transfer cash or other property to those holders who can be persuaded to exercise the conversion privilege. Statement of Financial Accounting Standards No. 84, Induced Conversions of Convertible Debt, addresses the financial-accounting ramifications of such arrangements. The statement applies only to conversions that comply with two conditions. They must conform to changed conversion privileges that are exercisable for only a limited period. Further, they must include the issuance of all stock that can be issued in accordance with conversion privileges included in the terms of the debt at issuance. During the year ended December 31, 2020 and 2019, there was no amortization of debt discount. Interest expenses were $20,984 and $49,954 for the years ended December 31, 2020 and 2019, respectively. Note Payable On May 6, 2020, the Company entered into a Paycheck Protection Program Promissory Note agreement with a bank which is providing $62,500 to the Company. The note accrues interest at a rate of 1% per annum and matures on May 6, 2022. The Company will apply for 100% forgiveness when the forgiveness portal is opened for submission by the bank. Leases Effective June 1, 2018, the Company rented its corporate office at 1180 North Town Center Drive, Suite 100, Las Vegas, Nevada 89144, on a month to month basis. The monthly rent is $1,997. A security deposit of $3,815 has been paid. The Company also assumed a lease in connection with the mining operations in Quebec, Canada. Operating leases are included in operating lease right-of-use assets, operating lease liabilities, and noncurrent operating lease liabilities on the balance sheets. Subsequent to December 31, 2020, the Company entered into a termination agreement with the Lessor to agree to terminate the lease as of March 7, 2021. As of that date, the Company was fully released and discharged from any and all obligations under the Lease Agreement. F- 27 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Operation lease costs are recorded on a straight-line basis within operating expenses. The Company’s total lease expense is comprised of the following: For the Year Ended December 31, 2020 Operating leases Operating lease cost $ 106,727 Operating lease expense 106,727 Short-term lease rent expense 26,363 Total rent expense $ 133,090 Additional information regarding the Company’s leasing activities as a lessee is as follow: For the Year Ended December 31, 2020 Operating cash flows from operating leases $ 96,908 Weighted-average remaining lease term – operating leases 0.3 Weighted-average discount rate – operating leases 6.5 % 2021 126,783 Total 126,783 Less present value discount (5,187 ) Less current portion of operating lease liabilities (121,596 ) Non-current operating lease liabilities $ - Legal Proceedings Feinberg Litigation Jeffrey Feinberg v. Marathon Patent Group, Inc., Doug Croxall, and Francis Knuettel II, Superior Court of the State of California, County of Los Angeles, Case Number BC673128; Date Filed: August 21, 2017 On August 21, 2017, plaintiff Jeffrey Feinberg filed his Complaint against the Company and its Chief Executive Officer and Chief Financial Officer, purporting to state claims under Sections 11, 12(a)(2) and 15 of the federal Securities Act of 1933, and to state common law claims for “actual fraud and fraudulent concealment,” constructive fraud, and negligent misrepresentation. Feinberg sought unspecified money damages, as well as costs and attorneys’ fees, and equitable or injunctive relief, all based on allegations that he purchased Company securities and was induced to continue holding shares of the Company’s common stock through his reliance on a series of purported misstatements and omissions concerning the Company’s financial performance and future prospects. On October 10, 2017, all defendants filed a motion to dismiss or to stay the action, contending that Feinberg’s claims were encompassed by various written contracts in which he had agreed that any disputes he had with the Company should be litigated exclusively in the courts in New York City. While that motion was pending, on November 14, 2017, Feinberg voluntarily dismissed his complaint, in its entirety, without prejudice. On March 27, 2018, Feinberg, purportedly joined by the Jeffrey L. Feinberg Personal Trust and the Jeffrey L. Feinberg Family Trust, refiled the alleged claims described above in a lawsuit filed in the Supreme Court of the State of New York, County of New York. The new lawsuit is entitled Jeffrey Feinberg, Jeffrey L. Feinberg Personal Trust, and Jeffrey L. Feinberg Family Trust v. Marathon Patent Group, Inc., Doug Croxall, and Francis Knuettel II , Index No. 651463/2018 (the “NY Action”). The plaintiffs purported to state claims under Sections 11, 12(a)(2) and 15 of the federal Securities Act of 1933, and to state common law claims for “actual fraud and fraudulent concealment,” constructive fraud, and negligent misrepresentation. The plaintiffs sought unspecified money damages (including punitive damages), as well as costs and attorneys’ fees, and equitable or injunctive relief, all based on allegations that over a period extending from approximately May 2015 through May 2017 they purchased Company securities and were induced to continue holding shares of the Company’s stock through their reliance on a series of purported misstatements and omissions concerning the Company’s financial performance and future prospects. On June 15, 2018, all defendants filed a motion to dismiss the complaint in the NY Action asserting, among other arguments, that the Jeffrey L. Feinberg Personal Trust and the Jeffrey L. Feinberg Family Trust lack capacity to sue, that the purported state law “holder” claims are barred as a matter of law, and that plaintiffs otherwise failed to state facts sufficient to state a claim. Plaintiffs opposed the motion. After the motion was fully briefed, the court conducted an oral argument on January 16, 2019. At the conclusion of the argument, the court granted the motion to dismiss, allowing plaintiff Feinberg 30 days’ time to replead. In addition, concurrent with filing their motion to dismiss, the defendants filed a motion to stay discovery pursuant to the mandatory stay provisions of the Private Securities Litigation Reform Act of 1995 and local state rules. The plaintiffs filed a statement of non-opposition to the motion to stay discovery, and on January 9, 2019, the court granted that motion. On February 15, 2019, Feinberg, in his individual capacity and purportedly as trustee of the Jeffrey L. Feinberg Personal Trust, and Terrence K. Ankner, purportedly as trustee of the Jeffrey L. Feinberg Family Trust, filed what they styled as an “Amended Complaint.” These plaintiffs purport to state claims against the Company, Doug Croxall and Francis Knuettel II under Sections 11, 12(a)(2) and 15 of the federal Securities Act of 1933, and to state common law claims for “actual fraud and fraudulent concealment,” constructive fraud, and negligent misrepresentation. In the Amended Complaint, the plaintiffs seek unspecified money damages (including punitive damages), as well as costs and attorneys’ fees, and equitable or injunctive relief, all based on allegations that over a period extending from approximately May 2015 through May 2017 they purchased Company securities and were induced to continue holding shares of the Company’s stock through their reliance on a series of purported misstatements and omissions concerning the Company’s financial performance and future prospects. F- 28 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On March 7, 2019, defendants Marathon Patent Group, Inc. and Doug Croxall filed a motion to dismiss the Amended Complaint, and on March 22, 2019, defendant Francis Knuettel II filed a motion to dismiss the Amended Complaint. On April 5, 2019, plaintiffs filed an opposition to defendants’ motions to dismiss, and on April 17, 2019 defendants filed reply papers in support of the motions to dismiss. On July 9, 2019, the court heard the parties’ oral arguments and, at the conclusion of those arguments, took the motions to dismiss under submission. On March 13, 2020, the court issued its Decision in which it granted the motions to dismiss in full and ordered that the case be dismissed with prejudice. On or about May 4, 2020, the plaintiffs filed a notice of appeal. Plaintiffs filed their opening appellate brief on January 4, 2021, and defendants filed their responsive appellate briefs on February 3, 2021. The parties are now awaiting oral argument on the appeal. Amazon Litigation As part of the cancellation of certain indebtedness owed to Fortress Investment Group, LLC, we transferred ownership of various patents, including U.S. Patent No. 7,177,798, commonly referred to as “Patent 798.” Fortress created a new Special Purpose Entity, CF Dynamic Advances LLC, in which we own a 30% interest. In May 2018, Rensselaer Polytechnic Institute and CF Dynamic Advances LLC filed a complaint against Amazon.com, Inc. in the United States District Court for the Northern District of New York, which alleges, among other things, that “Alexa Voice Software and Alexa enabled devices” infringe U.S. Patent No. 7,177,798, entitled “Natural Language Interface Using Constrained Intermediate Dictionary of Results.” The complaint seeks an injunction, monetary damages, an ongoing royalty, pre- and post-judgment interest, attorneys’ fees, and costs. If plaintiffs are successful, and if the recoveries or settlement proceeds are sufficient following litigation expenses and recovery of amounts due in connection with the cancelled loan, the special purpose entity could be entitled to a portion of the net proceeds. There can be no assurance that the plaintiff will be successful or that any recoveries will exceed amounts due under the debt settlement arrangements or that our 30% interest in the special purpose entity will have any value even if the plaintiffs are successful in their case against Amazon. NOTE 6 - INCOME TAXES The Company accounts for income taxes under ASC Topic 740: Income Taxes, which requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry-forwards. ASC Topic 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. The table below summarizes the differences between the Companies’ effective tax rate and the statutory federal rate as follows for the years ended December 31, 2020 and 2019: 2020 2019 U.S. federal statutory income tax rate 21.00 % 21.00 % State and local income taxes, net of federal benefit 7.0 % - Non-Deductible Expenses (4.2 )% - Change in valuation allowance (23.9 )% (21.00 )% Effective tax rate - % - % The components of the provision for income taxes are as follows: 2020 Current: Federal $ - State 2,400 $ 2,400 Deferred: Federal $ - State - $ - Income Tax Provision $ 2,400 The Company has a deferred tax asset, which is summarized as follows at December 31: 2020 2019 Deferred tax assets: Total deferred tax assets $ 15,787,669 $ 23,556,924 Total deferred tax liabilities (1,310,586 ) - Less: valuation allowance (14,477,083 ) (23,556,924 ) Net deferred tax asset $ - $ - The Company does not have any taxable income in carryback years in which net operating losses (“NOLs”) can be carried back to. At December 31, 2020, the Company did not have any taxable temporary differences that will reverse and generate taxable income and was still in a cumulative loss position. Based on all the available information, including tax planning strategies and future forecast, the Company does not believe that it is more likely than not that the net deferred tax assets will be realized; therefore, a full valuation allowance has been recorded against its net deferred tax assets. As of December 31, 2020 and 2019, the Company had NOL carry-forwards for federal and state purposes of approximately $45.6 million and $27.2 million, respectively, which will begin to expire in 2034 (Estimated). The utilization of NOL and credit carry-forwards may be limited under the provisions of the Internal Revenue Code (“IRC”) Section 382, as amended, and similar state provisions. IRC Section 382 generally imposes an annual limitation on the amount of NOL carry-forwards that may be used to offset taxable income where a corporation has undergone significant changes in stock ownership. F- 29 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As of December 31, 2020 and 2019, the Company has not recorded liability for unrecognized tax benefit. As of December 31, 2020 and 2019 the Company did not increase or decrease penalties or interest in connection with liability for unrecognized tax benefit. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months. The Company files U.S. and state income tax returns with varying statutes of limitations. The 2016 through 2020 tax years generally remain subject to examination by federal and state tax authorities. In 2018, the company dissolved those subsidiaries that were required to file tax returns that had no tax due for 2018. Marathon Digital Holdings, Inc. moved its headquarters to Las Vegas, Nevada on June 1, 2018 so it is required to file a final tax return with the state of California for 2018. The company believes there will be no tax due the state of California other than the $800 Minimum Franchise fee all companies are required to pay. Management does not believe there are any material tax liabilities owed with respect to its operations in Canada, since Management believes there is a loss from the Canadian operations. Such operations have been outsourced. (See NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS, for details) The Company believes that bitcoin is attractive because it can serve as a store of value, supported by a robust and public open source architecture, that is untethered to sovereign monetary policy and can therefore serve as a hedge against inflation. 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. The Company believes that in the context of the economic and public health crisis precipitated by COVID-19 and the unprecedented government financial stimulus measures adopted around the world, decreasing interest rates, as well as the breakdown of trust in and between political institutions and political parties in the United States and globally, bitcoin represents a more attractive store of value than fiat currency, and further that opportunity for appreciation in the value of bitcoin exists in the event that such factors lead to even more widespread adoption of bitcoin as a treasury reserve alternative. F- 30 MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 7 – Subsequent Events On January 6, 2021, the Company issued 566,279 shares pursuant to the 2018 Equity Incentive Plan for shares that vested as of December 31, 2020. Subsequent to year end, the Company issued 170,904 and 23,500 shares of common stock pursuant to warrant and option exercises, respectively. 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. Pursuant to the terms of the offering 12,500,000 shares of common stock were issued at a value of $20 per share. As a result, the Company ended the 2020 fiscal year with $141.3 million in cash and 81,974,619 shares outstanding. On January 15, 2021, 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 Common shares PROPOSAL #1 Increase in Shares under 2018 Incentive Plan by 5 million PROPOSAL #2a Election of Merrick Okamoto PROPOSAL #2b Election of Peter Benz PROPOSAL #3 Ratification of Auditor PROPOSAL #4 Nonbinding Advisory Vote on Executive Compensation Yes 10,112,531 12,184,952 12,216,945 32,948,526 11,146,174 No 2,278,676 464,134 1,093,170 Abstain 163,325 369,187 337,194 567,470 315,663 Broker Non-Vote 21,427,024 21,427,417 21,427,417 1,426 21,426,549 On January 12, 2021, the Company, entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain purchasers named therein (the “Purchasers”), pursuant to which the Company agreed to issue and sell, in a registered direct offering (the “Offering”), 12,500,000 shares of its common stock (the “Securities”) at an offering price of $20.00 per share. The Purchase Agreement contains customary representations and warranties and agreements of the Company and the Purchasers and customary indemnification rights and obligations of the parties. The closing of the Offering occurred on January 15, 2021. The Company received gross proceeds of $250,000,000 in connection with the Offering, before deducting placement agent fees and related offering expenses. Pursuant to a letter agreement, dated August 2020 (the “Engagement Letter”), the Company engaged H.C. Wainwright & Co., LLC (the “Placement Agent”) as placement agent in connection with the Offering. The Placement Agent agreed to use its reasonable best efforts to arrange for the sale of the Securities. The Company agreed to pay to the Placement Agent a cash fee of 5.0% of the aggregate gross proceeds raised in the Offering. T he Company also issued to designees of the Placement Agent warrants to purchase up to 3.0% of the aggregate number of shares of Common Stock sold in the transactions, or warrants to purchase up to 375,000 shares of Common Stock (the “Placement Agent Warrants”). The Placement Agent Warrants have an exercise price equal to 125% of the offering price per share (or $25.00 per share). The Company also agreed to pay the Placement Agent $50,000 for accountable expenses, to reimburse an investor’s legal fees in an amount up to $7,500 and to pay $12,900 for the Placement Agent’s clearing fees. Pursuant to the terms of the Engagement Letter, the Placement Agent has the right, for a period of twelve months following the closing of the Offerings, to act (i) as financial advisor in connection with any merger, consolidation or similar business combination by the Company and (ii) as sole book-running manager, sole underwriter or sole placement agent in connection with certain debt and equity financing transactions by the Company. Effective January 19, 2021, David Lieberman resigned as a director of 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. On February 11, 2021, the Company issued 4,701,442 shares of common stock pursuant to the 2018 Equity Incentive Plan. Effective March 1, 2021, the Company changed its name to Marathon Digital Holdings, Inc. On March 7, 2021, the Company entered into a termination agreement with the 9349-0001 Quebec Inc., to agree to terminate the outstanding lease. As of that date, the Company was fully released and discharged from any and all obligations under the Lease Agreement. In November 2017, the Company assumed a lease in connection with the mining operations in Quebec, Canada. The Company has evaluated subsequent events through the date of the consolidated financial statements were available to be issued and has concluded that no such events or transactions took place that would require disclosure herein except as stated directly above. F- 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.