Item 1. Business
ITEM
1. BUSINESS
I.
CORPORATE OVERVIEW
I.A.
HISTORY AND PIVOT TO BITCOIN MINING
Marathon
is a digital asset technology company that produces or “mines” digital assets with a focus on the blockchain ecosystem and
the generation of digital assets. Marathon’s strategy is to produce and hold bitcoin (after paying for cash operating costs of
production) as a long term investment. Holding bitcoin is a strategy to act as a store of value, supported by a robust and public open
source architecture, that is not linked to any country’s monetary policy and can therefore serve as a store of value outside of
government control. We believe that bitcoin offers additional opportunity for appreciation in value with increasing adoption due to its
limited supply. We may also explore opportunities to become involved in businesses ancillary to our bitcoin mining business as favorable
market conditions and opportunities arise.
We
were incorporated in the State of Nevada on February 23, 2010 under the name Verve Ventures, Inc. On December 7, 2011, we changed our
name to American Strategic Minerals Corporation and were engaged in exploration and potential development of a uranium and vanadium minerals
business. In June 2012, we discontinued our minerals business and began to invest in real estate properties in Southern California. In
October 2012, we commenced our IP licensing operations, at which time the Company’s name was changed to Marathon Patent Group,
Inc. We purchased digital asset mining machines and established a data center in Canada to mine digital assets in 2017. The Company ceased
operating in Canada in 2020 and relocated all owned mining rigs from Canada to the U.S. The Company has since expanded its activities
in the mining of bitcoin across the U.S. The Company changed its name to Marathon Digital Holdings, Inc. on March 1, 2021. As of December
31, 2022, the Company is solely focused on the mining of bitcoin and ancillary opportunities within the Bitcoin ecosystem.
The
term “Bitcoin” with a capital “B” is used to denote the Bitcoin protocol which implements a highly available,
public, permanent, and decentralized ledger. The term “bitcoin” with a lower case “b” is used to denote the token,
bitcoin.
I.B.
CORPORATE INFORMATION
In
2022, we moved our corporate headquarters to Fort Lauderdale, FL and maintain an address at 101 SE 3 rd Avenue, Suite 1200,
Fort Lauderdale, FL 33301. We also maintain a West Coast office at 300 Spectrum Center Drive, Suite 950, Irvine, CA 92618. Our website
is www.mara.com . As of February 20, 2023, we had 30 full-time employees and we expect this number to continue to grow in support
of the increased scale of the business. We believe our employee relations to be good.
I.C.
2022 AND 2023 EVENTS
Effective
March 31, 2022, Hugh Gallagher was appointed Chief Financial Officer of the Company.
On
March 31, 2022, the Company amended its previously announced agreements with affiliates of Beowulf Energy LLC, a Delaware limited liability
company (collectively and as applicable, “Beowulf”), and Two Point One, LLC, a Delaware limited liability company (“2P1”),
pursuant to which Beowulf and 2P1 have been designing and developing a data center facility of up to 110-megawatts (the “Facility”)
located next to, and supplied energy directly from, Beowulf’s power generation station in Hardin, MT. As part of the Company’s
mandate to become carbon neutral by the end of the 2022 fiscal year, the Company, Beowulf and 2P1 agreed to terminate the Data Facility
Services Agreement, the Power Purchase Agreement and the Ground Lease for the Facility as of August 15, 2022, and the Company redeployed
its Hardin-installed mining rigs to renewable power facilities in the third quarter of 2022.
On July 28, 2022, the Company entered into a Revolving Credit and Security
Agreement (the “Agreement”) with Silvergate Bank (the “Bank”) pursuant to which Silvergate agreed to loan the
Company up to $100 million on a revolving basis pursuant to the terms of the Agreement and the $100 million principal amount revolving
credit note issued by the Company in favor of the Bank under the Agreement (“Note”).
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On February 6, 2023, the Company provided Silvergate Bank with the required
30-day notice stating the Company’s intent to prepay the outstanding balance on its term loan facility as well as the Company’s
intent to terminate the term loan facility. The Company and Silvergate subsequently agreed to also terminate the revolving line of credit
(“RLOC”) facility. On March 8, 2023, the term loan prepayment was completed, and the Company’s term loan and RLOC facilities
with Silvergate Bank were terminated.
Effective
September 14, 2022, the Company amended its Amended and Restated Bylaws to document the previously disclosed unanimous Board approval
to reduce its quorum requirements to 33-1/3% of the issued and outstanding shares of common stock of the Company.
On
September 22, 2022, Compute North Holdings, Inc. (along with its affiliated debtors, collectively, “Compute North”), filed
for chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of Texas under chapter 11 of the U.S. Bankruptcy
Code (11 U.S. Code section 101 et seq .). Compute North provided operating services to the Company and hosted our mining rigs in
multiple facilities. On December 15, 2022, US Bitcoin Corp (“US Bitcoin”) replaced Compute North as the operator of the facilities
in McCamey, TX, Granbury, TX and Kearney, NE as a result of the Compute North bankruptcy. We currently have arrangements in place with
respect to the McCamey, Granbury and Kearney facilities. We no longer operate at South Souix City. On February 16, 2023, the Bankruptcy
Court approved the Debtors Plan of Reorganization, pursuant to which Marathon’s claim has been fixed at $40,000 thousand as an
unsecured claim to be paid out according to the timing and percentages within the approved Debtor’s plan.
In
connection with a dispute concerning the settlement of certain restricted stock unit awards previously granted to Merrick D. Okamoto,
former Chief Executive Officer and Chairman of the Company on October 12, 2022, the Company entered into a settlement agreement with
Mr. Okamoto, pursuant to which the Company agreed to pay Mr. Okamoto $24,000 thousand. Mr. Okamoto agreed to a settlement and a broad
release of known or unknown claims against the Company, which relate to the Company’s Amended 2018 Equity Incentive Plan or related
restricted stock unit award agreements. The Company also entered into agreements in respect to seven other recipients of the same restricted
stock unit awards including a director and our current Chief Operating Officer and Chief Executive Officer and Chairman. Payments related
to these agreements totaled approximately $2,100 thousand in the aggregate.
Effective
November 21, 2022, John Lee was appointed Chief Accounting Officer of the Company.
On
January 27, 2023, the Company and FS Innovation, LLC (“FSI”) entered into a Shareholders’ Agreement (the “Agreement”)
regarding formation of an Abu Dhabi Global Markets company (the “ADGM Entity”), whose purpose shall be to jointly (a) establish
and operate one or more mining facilities for digital assets; and (b) mine digital assets (collectively, the “Business”).
The initial project by the ADGM Entity shall consist of two digital asset mining sites comprising 250 MW in Abu Dhabi, and the initial
equity ownership in the ADGM Entity shall be 80% FSI and 20% the Company, and capital contributions will be made, subject to the satisfaction
or waiver of certain conditions, during the 2023 development period in those proportions, consisting of both cash and in kind, in amounts
of approximately $406,000 thousand in aggregate. FSI will appoint four directors to the board of the ADGM Entity, and the Company will
appoint one director. Unless otherwise not permitted by applicable law, the digital assets mined by the ADGM Entity will be distributed
to the Company and FSI twice a month in proportion to their respective equity interests in the ADGM Entity. There are market provisions
in the Agreement with respect to financial and tax matters. The Agreement shall terminate at the earlier of the mutual written agreement
of the parties, winding up of the ADGM Entity or the ownership by a shareholder of all of the outstanding equity interests in the ADGM
Entity. The Agreement contains market terms on transfer of shares by a shareholder, preemptive rights and certain tag along and drag
along rights upon a sale of the ADGM Entity. Furthermore, there are five year restrictive covenants which, inter alia, prevent Marathon
from competing in the UAE with the Business or with the business of FSI or any of certain related parties and prevent FSI from competing
in the U.S. with the business of Marathon.
II.
BITCOIN BLOCKCHAIN
II
A. OVERVIEW OF BITCOIN
Bitcoin
is a decentralized digital asset that operates on a peer-to-peer network, allowing users to send and receive payments without the need
for intermediaries such as banks. This is made possible through the use of blockchain technology, which is a distributed ledger that
records and verifies all transactions on the network.
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The
Bitcoin blockchain is a public, transparent, and immutable record of all transactions that have ever occurred on the network. This ledger
is maintained by a network of computers, known as nodes, that work together to verify and validate new transactions. Each transaction
is cryptographically signed and added to the blockchain as a new block, which is then permanently recorded and cannot be altered or deleted.
One
of the key advantages of the Bitcoin blockchain is that it allows for trustless, secure transactions without the need for a central authority.
Because the blockchain is decentralized and transparent, all users can verify the legitimacy of a transaction without having to rely
on a third party. This eliminates the need for intermediaries, which can be slow and expensive, and it also makes the network resistant
to censorship and fraud.
Bitcoin’s
decentralized and transparent nature makes it secure, efficient, and accessible, and gives it the potential to enable new forms of value
exchange and innovation.
II
B. OVERVIEW OF BITCOIN “HALVING” EVENTS
The
Bitcoin halving is a phenomenon that occurs approximately every four years on the Bitcoin network. The halving is a key part of the Bitcoin
protocol, and it serves to control the overall supply and reduce the risk of inflation in digital assets using a Proof-of-Work consensus
algorithm. At a predetermined block, the mining reward is cut in half, hence the term “halving”. For bitcoin the reward was
initially set at 50 bitcoin currency rewards per block. The Bitcoin blockchain has undergone halving three times since its inception
as follows: (1) on November 28, 2012 at block height 210,000; (2) on July 9, 2016 at block height 420,000; (3) on May 11, 2020 at block
height 630,000, when the reward was reduced to its current level of 6.25 bitcoin per block. The next halving for the Bitcoin blockchain
is anticipated to occur on or around March 2024 at block height 840,000. This process will reoccur until the total amount of bitcoin
currency rewards issued reaches 21,000 thousand and the theoretical supply of new bitcoin is exhausted, which is expected to occur around
2140.
Factors
Affecting Profitability
Market
Price of Bitcoin
Our
business is heavily dependent on the price of bitcoin. The prices of digital assets, including bitcoin, have experienced substantial
volatility, meaning that high or low prices may be based on speculation and incomplete information, may be subject to rapidly changing
investor sentiment, and may be influenced by factors such as technology, regulatory void or changes, fraudulent actors, manipulation,
and media reporting. Bitcoin (as well as other digital assets) may have value based on various factors, including their acceptance as
a means of exchange by consumers and producers, scarcity, and market demand which are beyond our control.
Halving
The
halving is an important part of the Bitcoin ecosystem, and it is closely watched by miners, investors, and other participants in the
digital asset market. Each halving event has historically been associated with significant price movements in the value of bitcoin.
Network
Hash Rate and Difficulty
Generally,
a bitcoin mining rig’s chance of solving a block on the Bitcoin blockchain and earning a bitcoin reward is a function of the mining
rig’s hash rate, relative to the global network hash rate (i.e., the aggregate amount of computing power devoted to supporting
the Bitcoin blockchain at a given time). As demand for bitcoin has increased, the global network hash rate has increased rapidly, and
as more adoption of bitcoin occurs, we expect the demand for new bitcoin will likewise increase as more mining companies are drawn into
the industry by this increased demand. Further, as more and increasingly powerful mining rigs are deployed, the network difficulty for
Bitcoin has increased. Network difficulty is a measure of how difficult it is to solve a block on the Bitcoin blockchain, which is adjusted
every 2016 blocks (every 2 weeks approximately) so that the average time between each block remains ten minutes. A high difficulty means
that it will take more computing power to solve a block and earn a new bitcoin reward, which, in turn, makes the Bitcoin network more
secure by limiting the possibility of one miner or mining pool gaining control of the network. Therefore, as new and existing miners
deploy additional hash rate, the global network hash rate will continue to increase, meaning a miner’s share of the global network
hash rate (and therefore its chance of earning bitcoin rewards) will decline if it fails to deploy additional hash rate at pace with
the industry.
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II
C. OVERVIEW OF BITCOIN MINING
Bitcoin
mining is the process by which new bitcoin are created and transactions on the Bitcoin network are verified. In order to mine bitcoin,
mining rigs use specialized computer hardware to win a lottery, which allows them to add new blocks to the bitcoin blockchain and receive
a reward in the form of newly minted bitcoin. The bitcoin mining process serves several important functions in the bitcoin ecosystem.
First,
bitcoin mining helps to secure the Bitcoin network by verifying transactions and preventing fraud. When a user sends a transaction on
the Bitcoin network, it is broadcast to the network and added to the pool of unconfirmed transactions known as the “mempool.”
Mining rigs then compete in a sort of lottery required to add these transactions to the blockchain, which is the decentralized ledger
that records all Bitcoin transactions. When a mining rig successfully adds a new block to the blockchain, the transactions included in
that block are considered confirmed, and the mining rig receives a reward in the form of newly minted bitcoins.
Second,
bitcoin mining helps to decentralize the Bitcoin network and distribute new bitcoin in a fair and transparent manner. Unlike traditional
currencies, which are issued and controlled by central banks, bitcoin is a decentralized digital asset that is not controlled by any
government or institution. Instead, new bitcoin are created and distributed through the mining process, which allows anyone with the
necessary hardware and expertise to participate in the mining process and potentially earn rewards. This decentralized distribution of
new bitcoin helps to ensure that the supply of the digital asset is controlled in a fair and transparent manner.
Third,
bitcoin mining plays a key role in the maintenance and growth of the Bitcoin network. The mining process helps to support the infrastructure
of the network by providing the computational power needed to verify transactions and add new blocks to the blockchain. As more people
become interested in mining bitcoin, the network becomes more secure and efficient.
III.
A. STRATEGIC FOCUS
The
Company’s focus at the onset of 2022 was on growth execution and transition into a larger operation. This focus consisted of both
the expansion of operations of our core bitcoin mining business (operating mining rigs at third-party owned and operated data centers)
and operating MaraPool – our proprietary bitcoin mining pool which orchestrates the operation of our fleet of mining rigs. Key
activities and milestones throughout 2022 included the following:
●
We
deployed capital to secure the most efficient ASICs mining rigs through contracts that included price protection clauses which benefited
the Company as ASICs prices declined throughout the second and third quarters of 2022.
●
We
shut down operations at the coal powered Hardin, MT data center facility
●
We
started operations at the wind powered site in McCamey, TX and other smaller sites
●
We
focused on securing additional hosting services for our planned expansion of operations, entering into third-party hosting relationships
with Applied Digital to host S19XP mining rigs at sites in Texas and North Dakota.
●
We
increased our hashrate from 3.5 exahashes per second at the beginning of the year to 7.0 exahashes per second at the end of 2022.
It
was also a year of adaptation, as the Company had to overcome several operational and financial headwinds, including:
●
Our
primary mining facility in Hardin, MT going offline after being damaged by a storm in mid-2022
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●
Delays
in the energization of the McCamey, TX site during the second and third quarters of 2022
●
Our
largest hosting partner (Compute North) entering bankruptcy in September 2022
●
A
significant decline in the price of bitcoin, which resulted in impairments of our bitcoin holdings throughout the year and an impairment
charges related to the value of our mining rigs and certain contracts during the fourth quarter of 2022
●
Challenged
financial markets and macroeconomic conditions
Our
primary focus in 2023 will be the realization of the full energization of our fleet of nearly 200,000 bitcoin mining rigs and growing
our total operational hashrate from 7.0 exahashes per second at year end 2022 to over 23 exahashes per second by the third quarter of
2023. We will also be focused on our first international expansion, a joint venture that will result in the formation of an Abu Dhabi
Global Markets company whose purpose will be to operate one or more mining facilities for digital assets. The initial project will consist
of two mining sites comprising 250 MW in Abu Dhabi and the Company will own 20% of this entity, which is expected to commence bitcoin
mining operations in the second half of 2023. Additionally, we expect to operationalize a number of technology innovations developed
by our technology team and partners including mining using immersion as well as new hardware and software solutions to optimize mining
rig performance and the reliability of MaraPool operations.
III
B. R&D PROCESS
We
place a strong emphasis on research and development (R&D) as a key driver of innovation and growth. Our R&D process is designed
to support the creation and development of new tools and processes that are an integral part of our overall business strategy and enhance
our productivity as an advanced and sustainable bitcoin miner.
The
first step in our R&D process is ideation, which is the process of generating and evaluating new ideas. We encourage our team members
to come up with creative and innovative ideas, and we provide them with the resources and support they need to explore these ideas further.
Once
we have identified a promising idea, the next step is to develop a prototype. This typically involves creating a small-scale version
of the product or service, which can be tested and evaluated in order to identify potential issues and improve the design. We also conduct
market research to understand the potential market for the product or service.
The
final step in our R&D process is testing and validation. This involves conducting thorough testing of the prototype to identify any
issues or flaws, and to ensure that it meets our quality standards. We also conduct market testing to gather feedback from real-world
users, and we use this feedback to refine and improve the product or service.
Overall,
our R&D process is designed to support the creation and development of innovative technology advancements that ensure we maintain
our competitive advantages and improves our position as a leading bitcoin miner. We believe that this process is essential for driving
growth and staying ahead of the competition, and we are committed to continuously improving and refining it to support our success.
III
C. OUR STRATEGIC INVESTMENTS
We
are committed to pursuing strategic investments that align with our vision and values. Our strategy is focused on identifying and partnering
with companies that have the potential to generate long-term value for our stakeholders.
One
key element of our investment strategy is to focus on companies that are at the forefront of emerging technologies and industries. We
believe that these companies have the potential to drive significant innovation and growth, and we are committed to supporting their
development through investments in both hardware and software companies
9
Another
key aspect of our strategy is to prioritize investments in companies that are aligned with our values and mission. We believe that our
stakeholders expect us to support businesses that operate in a responsible and sustainable manner, and we are committed to making investments
that reflect these values.
Overall,
our investment strategy is designed to support our growth and success, while propelling us to be the most advanced, agile, and efficient
bitcoin miner. We are committed to making strategic investments that are aligned with our vision and values, and we believe that this
approach will help us to achieve long-term success.
IV.
OUR OPERATIONS
We
deploy or are in the process of deploying our assets at various sites in the United States. All of our sites are currently hosted by
third parties to whom we pay a fee. A summary of our current and anticipated operating locations follows:
●
McCamey,
TX - Approximately 63,000 S19j Pros are deployed and operational at this site, with another 4,000 S19j Pros pending delivery and
deployment in 2023. Our contract for this facility expires in August 2027.
●
Garden
City, TX - Approximately 28,000 S19 XPs are installed at this site, which is currently pending final regulatory approval for energization.
Our current expansion plans call for the deployment of 19 MW of immersion from a combination of new capacity and replacement of air-cooled
units for immersion during 2023. Our contract for this facility expires in July 2027.
●
Ellendale,
ND - Approximately 57,000 S19 XPs are expected to be deployed at this site during the first half of 2023. Energization is expected
to start late in the first quarter of 2023. Our contract for this site expires in July 2027.
●
Jamestown,
ND - Approximately 5,600 S19 XPs are deployed and operational at this site, with planned deployments of another 10,400 air-cooled
units during the first quarter of 2023. In addition to this air-cooled installation, the Company plans to deploy 768 units in immersion
on the site during the second quarter of 2023. Our contract for the immersion deployment expires in August 2026 and our contract
for the air-cooled deployment at the site expires in December 2027.
●
Granbury,
TX - Approximately 12,500 S19j Pros and 4,400 XPs are currently deployed and being energized at this facility. There are no plans
to expand operations at this facility.
●
Coshocton,
OH - Approximately 2,800 S19 Pros are currently deployed and operational at this facility. Our contract for this facility expires
in June 2023 and we do not expect to renew this contract beyond this termination date.
●
Plano,
TX - Approximately 345 S19 Pros are currently deployed and operational at this facility. There are no plans to expand operations
at this facility and our contract for this facility expires in June 2027.
●
Kearney,
NE - Approximately 2,300 S19 J Pros are deployed and operational at this site. The Company expects to deploy an additional 1,300
MicroBT units at this site in 2023.
●
South
Sioux City, SD - Approximately 660 S19 Pros were deployed at this site. The Company’s contract for this facility expired and
the Company exited this facility in early 2023.
On
January 27, 2023, the Company and FSI entered into an Agreement regarding formation of an Abu Dhabi Global Markets company whose purpose
shall be to jointly (a) establish and operate one or more mining facilities for digital assets; and (b) mine digital assets. The initial
project by the ADGM Entity shall consist of two digital asset mining sites comprising 250 MW in immersion in Abu Dhabi, and the initial
equity ownership shall be 80% FSI and 20% the Company. The facility is expected to be operational in the second half of 2023.
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V.
COMPETITION
In
digital asset mining, companies and individuals use computing power to solve cryptographic algorithms to record and publish transactions
to blockchain ledgers or provide transaction verification services to the Bitcoin network in exchange for digital asset rewards. The
current reward for verifying a block on the Bitcoin blockchain is 6.25 bitcoin. Miners can range from individual enthusiasts to professional
mining operations with dedicated data centers. Miners may organize themselves in mining pools. The Company competes or may in the future
compete with other companies that focus all or a portion of their activities on owning or operating digital asset exchanges, developing
programming for the blockchain, and mining activities. At present, the information concerning the activities of these enterprises is
not readily available as the vast majority of the participants in this sector do not publish information publicly or the information
may be unreliable.
Several
public companies (traded in the U.S. and Internationally), such as the following, may be considered to compete with us:
●
Riot
Platforms, Inc.
●
Cipher
Mining Inc.
●
Hut
8 Mining Corp.
●
Hive
Blockchain Technologies Ltd.
●
Bitfarms,
Ltd.
●
Cleanspark,
Inc.
●
Iris
Energy Limited
●
Bit
Digital, Inc.
●
Argo
Blockchain plc
●
TeraWulf
Inc.
●
Greenidge
Generation Holdings Inc.
●
Core
Scientific, Inc.
●
Stronghold
Digital Mining, Inc.
While
there is limited available information regarding our non-public competitors, we believe that our recent acquisition and ongoing deployment
of miners positions us well among the publicly traded companies involved in the digital asset mining industry. The digital asset mining
industry is a highly competitive and evolving industry and new competitors and/or emerging technologies could enter the market and affect
our competitiveness in the future.
VI.
INTELLECTUAL PROPERTY
We
actively use specific hardware and software for our digital asset mining operations. In certain cases, source code and other software
assets may be subject to an open source license, as much technology development underway in this sector is open source. For these works,
we intend to adhere to the terms of any license agreements that may be in place.
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We
do not currently own any patents except as set forth below. We may in the future plan to seek further patents in connection with our
existing and planned blockchain and digital asset related operations. We do expect to rely upon trade secrets, trademarks, service marks,
trade names, copyrights and other intellectual property rights and expect to license the use of intellectual property rights owned and
controlled by others. In addition, we have developed and may further develop certain proprietary software applications for purposes of
our digital asset mining operation.
We
have two patent applications pending with the USPTO:
US
Application No. 17/751370
Systems
And Methods For Decreasing Counterparty Settlement Risk
Marathon
Digital Holdings
US
Application No. 17/975229
Systems
And Methods For Overclocking Mining Rigs
Marathon
Digital Holdings