RISK
FACTORS
Investing
in our securities involves a high degree of risk. Before making an investment decision, you should consider carefully the risks,
uncertainties and all risk factors set forth in this prospectus supplement and the base prospectus to which it relates, as well
as any documents incorporated by reference in this prospectus, including the risk factors discussed under the heading “Risk
Factors” in our most recent Annual Report on Form 10-K for the year ended December 31, 2019, as amended, and each subsequently
filed quarterly report on Form 10-Q and current reports on Form 8-K, which may be amended, supplemented or superseded from time
to time by the other reports we file with the Commission in the future.
Risks
related to this offering
Future
sales or other issuances of our common stock could depress the market for our common stock.
Sales
of a substantial number of shares of our common stock, or the perception by the market that those sales could occur, whether through
this offering or other offerings of our securities, could cause the market price of our common stock to decline or could make
it more difficult for us to raise funds through the sale of equity in the future.
We
have broad discretion to use the net proceeds from this offering and our investment of these proceeds pending any such use may
not yield a favorable return.
Because
we have not designated the amount of net proceeds from this offering to be used for any particular purpose, our management will
have broad discretion as to the application of the net proceeds from this offering, as described below in “Use of Proceeds,”
and could use them for purposes other than those contemplated at the time of the offering. Our management may use the net proceeds
for corporate purposes that may not improve our financial condition or market value of our common stock.
Purchasers
in this offering will experience immediate and substantial dilution in the book value of their investment.
The
public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock
as of March 31, 2020, before giving effect to this offering. At an assumed public offering price of $0.9446 per share,
which was our closing price in the Nasdaq Capital Market on July 21, 2020, and after deducting estimated
offering expenses and estimated sales agent commissions payable by us, our as adjusted net tangible book value per share after
giving effect to the sale of shares of our common stock in the aggregate amount of $_____ at the assumed offering price would
be $____. Accordingly, purchasers of shares of our common stock in this offering will incur immediate and substantial dilution
of approximately $____ per share, representing the difference between the as adjusted book value per share of our securities after
the offering and the book value per share of our securities prior to the offering as of March 31, 2020. If the price at which
the shares of our common stock are sold in this offering increases, the dilution experienced by such purchasers will increase
proportionately. Furthermore, if the remaining outstanding note is converted, or if outstanding options or warrants are exercised,
you could experience further dilution. For a further description of the dilution that our stockholders will experience immediately
after this offering, see the section in this prospectus supplement entitled “Dilution” in this prospectus.
Our
stock price can be volatile, which increases the risk of litigation, and may result in a significant decline in the value of your
investment.
The
trading price of our common stock has historically been, and is likely to continue to be, highly volatile and subject to wide
fluctuations in price in response to various factors, many of which are beyond our control and may not be related to our operating
performance. These fluctuations could cause you to lose part or all of your investment in our common stock. These factors include,
but are not limited to, the following:
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price
and volume fluctuations in the overall stock market from time to time;
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changes
in the market valuations, stock market prices and trading volumes of similar companies;
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actual
or anticipated changes in our net loss or fluctuations in our operating results or in the expectations of securities analysts;
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the
issuance of new equity securities pursuant to a future offering, including potential issuances of preferred stock;
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general
economic conditions and trends;
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positive
and negative events relating to the overall blockchain and crypto mining sector;
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major
catastrophic events, including the effects of COVID-19;
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sales
of large blocks of our stock;
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additions
or departures of key personnel;
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changes
in the regulatory status of cryptocurrencies, cryptocurrency exchanges, and miners of cryptocurrencies;
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announcements
of new products or technologies, commercial relationships or other events by us or our competitors;
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regulatory
developments in the United States and other countries;
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failure
of our common stock to maintain their listing on the NASDAQ markets or other national market system;
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changes
in accounting principles; and
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discussion
of us or our stock price by the financial and scientific press and in online investor communities.
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In
addition, equity markets in general, and the market for blockchain companies in particular, have experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies traded in those
markets. These broad market and industry factors may materially affect the market price of our common stock, regardless of our
development and operating performance. In the past, following periods of volatility in the market price of a company’s securities,
securities class-action litigation has often been instituted against that company, including Marathon. Due to the volatility of
our stock price, we are currently and may be the target of securities litigation in the future. Securities litigation could result
in substantial costs and divert management’s attention in the future attention and resources from our business.
General
Risks
We
may be classified as an inadvertent investment company.
We
are not engaged in the business of investing, reinvesting, or trading in securities, and we do not hold ourselves out as being
engaged in those activities. Under the Investment Company Act of 1940, as amended (the “1940 Act”), however, a company
may be deemed an investment company under Section 3(a)(1)(C) of the 1940 Act if the value of its investment securities is more
than 40% of its total assets (exclusive of government securities and cash items) on a consolidated basis.
We
have commenced digital asset mining, the outputs of which are cryptocurrencies, which may be deemed a security. In the event that
the digital assets held by us exceed 40% of our total assets, exclusive of cash, we inadvertently become an investment company.
An inadvertent investment company can avoid being classified as an investment company if it can rely on one of the exclusions
under the 1940 Act. One such exclusion, Rule 3a-2 under the 1940 Act, allows an inadvertent investment company a grace period
of one year from the earlier of (a) the date on which an issuer owns securities and/or cash having a value exceeding 50% of the
issuer’s total assets on either a consolidated or unconsolidated basis and (b) the date on which an issuer owns or proposes
to acquire investment securities having a value exceeding 40% of the value of such issuer’s total assets (exclusive of government
securities and cash items) on an unconsolidated basis. We are putting in place policies that we expect will work to keep the investment
securities held by us at less than 40% of our total assets, which may include acquiring assets with our cash, liquidating our
investment securities or seeking a no-action letter from the SEC if we are unable to acquire sufficient assets or liquidate sufficient
investment securities in a timely manner.
As
Rule 3a-2 is available to a company no more than once every three years, and assuming no other exclusion were available to us,
we would have to keep within the 40% limit for at least three years after we cease being an inadvertent investment company. This
may limit our ability to make certain investments or enter into joint ventures that could otherwise have a positive impact on
our earnings. In any event, we do not intend to become an investment company engaged in the business of investing and trading
securities.
Classification
as an investment company under the 1940 Act requires registration with the SEC. If an investment company fails to register, it
would have to stop doing almost all business, and its contracts would become voidable. Registration is time consuming and restrictive
and would require a restructuring of our operations, and we would be very constrained in the kind of business we could do as a
registered investment company. Further, we would become subject to substantial regulation concerning management, operations, transactions
with affiliated persons and portfolio composition, and would need to file reports under the 1940 Act regime. The cost of such
compliance would result in the Company incurring substantial additional expenses, and the failure to register if required would
have a materially adverse impact to conduct our operations.
Failure
to effectively manage our growth could place strains on our managerial, operational and financial resources and could adversely
affect our business and operating results.
Our
growth has placed, and is expected to continue to place, a strain on our limited managerial, operational and financial resources
and systems. Further, as our subsidiary companies’ businesses grow, we will be required to continue to manage multiple relationships.
Any further growth by us or our subsidiary companies, or an increase in the number of our strategic relationships, may place additional
strain on our managerial, operational and financial resources and systems. Although we may not grow as we expect, if we fail to
manage our growth effectively or to develop and expand our managerial, operational and financial resources and systems, our business
and financial results would be materially harmed.
Marathon
has an evolving business model.
As
digital assets and blockchain technologies become more widely available, we expect the services and products associated with them
to evolve. Very recently, the Securities and Exchange Commission (the “Commission” or the “SEC”) issued
a Report that promoters that use initial coin offerings or token sales to raise capital may be engaged in the offer and sale of
securities in violation of the Securities Act and the Exchange Act of 1934 (the “Exchange Act”). This may cause us
to potentially change our future business in order to comply fully with the federal securities laws as well as applicable state
securities laws. As a result, to stay current with the industry, our business model may need to evolve as well. From time to time
we may modify aspects of our business model. We cannot offer any assurance that these or any other modifications will be successful
or will not result in harm to the business. We may not be able to manage growth effectively, which could damage our reputation,
limit our growth and negatively affect our operating results.
Digital
Assets such as bitcoin and ether are likely to be regulated as securities or investment securities.
Bitcoin
is the oldest and most well-known form of digital asset. Bitcoin, ether, and other forms of digital assets/cryptocurrencies have
been the source of much regulatory consternation, resulting in differing definitional outcomes without a single unifying statement.
When the interests of investor protection are paramount, for example in the offer or sale of Initial Coin Offering (“ICO”)
tokens, the SEC has no difficulty determining that the token offerings are securities under the “Howey” test as stated
by the United States Supreme Court, a conclusion with which Marathon agrees. As such, ICO offerings would require registration
under the Securities Act or an available exemption therefrom for offers or sales in the United States to be lawful. Section 5(a)
of the Securities Act provides that, unless a registration statement is in effect as to a security, it is unlawful for any person,
directly or indirectly, to engage in the offer or sale of securities in interstate commerce. Section 5(c) of the Securities Act
provides a similar prohibition against offers to sell, or offers to buy, unless a registration statement has been filed. Although
we do not believe our mining activities require registration for us to conduct such activities and accumulate digital assets the
SEC, CFTC, NASDAQ or other governmental or quasi-governmental agency or organization may conclude that our activities involve
the offer or sale of “securities”, or ownership of “investment securities”, and we may face regulation
under the Securities Act or the 1940 Act. Such regulation or the inability to meet the requirements to continue operations, would
have a material adverse effect on our business and operations.
Bitcoin
and other digital assets are viewed differently by different regulatory and standards setting organizations. For example, the
Financial Action Task Force (“FATF”) and the Internal Revenue Service (“IRS”) consider a cryptocurrency
as currency or an asset or property.
Bitcoin
is described as a virtual currency by the Financial Action Task Force, as follows:
a
digital representation of value that can be digitally traded and functions as: (1) a medium of exchange; and/or (2) a unit of
account; and/or (3) a store of value, but does not have legal tender status (i.e., when tendered to a creditor, is a valid and
legal offer of payment) in any jurisdiction. It is not issued or guaranteed by any jurisdiction, and it fulfils the above functions
only by agreement within the community of users of the virtual currency. Virtual currency is distinguished from fiat currency
(a.k.a. “real currency,” “real money,” or “national currency”), which is the coin and paper
money of a country that is designated as its legal tender; circulates; and is customarily used and accepted as a medium of exchange
in the issuing country. It is distinct from e-money, which is a digital representation of fiat currency used to electronically
transfer value denominated in fiat currency.1
Further,
the IRS views bitcoin as property and applies general tax principles that apply to property transactions to transactions involving
virtual currency, as follows:2
IR-2014-36,
March. 25, 2014
WASHINGTON
— The Internal Revenue Service today issued a notice providing answers to frequently asked questions (FAQs) on virtual currency,
such as bitcoin. These FAQs provide basic information on the U.S. federal tax implications of transactions in, or transactions
that use, virtual currency.
In
some environments, virtual currency operates like “real” currency — i.e., the coin and paper money of the United
States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium
of exchange in the country of issuance — but it does not have legal tender status in any jurisdiction.
The
notice provides that virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply
to property transactions apply to transactions using virtual currency. Among other things, this means that:
Wages
paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject
to federal income tax withholding and payroll taxes.
Payments
using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally
apply. Normally, payers must issue Form 1099.
The
character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset
in the hands of the taxpayer.
A
payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
1 FATF
Report, Virtual Currencies, Key Definitions and Potential AML/CFT Risks, FINANCIAL ACTION TASK FORCE (June 2014), http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potentialaml-cft-risks.pdf.
The Financial Action Task Force (“FATF”) is an independent inter-governmental body that develops and promotes policies
to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons
of mass destruction. The FATF Recommendations are recognized as the global anti-money laundering (“AML”) and counter-terrorist
financing (“CFT”) standard.
2 IR-2014-36
(Marth 25, 2014). https://www.irs.gov/newsroom/irs-virtual-currency-guidance
In
June 2016, the AICPA commented on IRS Notice 2014-21 urging the IRS to provide additional guidance about existing tax principles
whether virtual currency is property, currency or commodity.3
Furthermore,
in the several applications to establish an Exchange Traded Fund (“ETF”) of cryptocurrency, and in the questions raised
by the Staff under the 1940 Act, no clear principles emerge from the regulators as to how they view these issues and how to regulate
cryptocurrency under the applicable securities acts. It has been widely reported that the SEC has recently issued letters and
requested various ETF applications be withdrawn because of concerns over liquidity and valuation and unanswered questions about
absence of reporting and compliance procedures capable of being implemented under the current state of the markets for exchange
traded funds.4
Accordingly,
there is no one unifying principle governing the regulatory status of cryptocurrency nor whether cryptocurrency is a security
in each context in which it is viewed. Cryptocurrency may be a security and its offer or sale may require compliance with Section
5 of the Securities Act, in certain instances. However, since the Company does not intend to be engaged in the offer or sale of
securities in the form of ICO offerings its internal mining activities that are not related to ICO offerings do not require registration
under the Securities Act. We may face similar issues with various state securities regulators who may interpret our actions as
requiring registration under state securities laws, banking laws, or money transmitter and similar laws, which are also an unsettled
area or regulation that exposes us to risks.
Since
there has been limited precedent set for financial accounting or taxation of digital assets other than digital securities,
it is unclear how we will be required to account for digital asset transactions and the taxation of our businesses.
There
is currently no authoritative literature under accounting principles generally accepted in the United States which specifically
addresses the accounting for digital assets, including digital currencies. Therefore, by analogy, we intend to record digital
assets similar to financial instruments under ASC 825, Financial Instruments, because the economic nature of these digital assets
is most closely related to a financial instrument such as an investment in a foreign currency.
We
believe that Marathon will recognize revenue when it is realized or realizable and earned. Our material revenue stream is expected
to be related to the mining of digital currencies. Marathon will derive revenue by providing transaction verification services
within the digital currency networks of crypto-currencies, such as bitcoin and ethereum commonly termed “crypto-currency
mining.” In consideration for these services, Marathon expects to receive digital currency (also known as “Coins”).
Coins are generally recorded as revenue, using the average spot price on the date of receipt. The coins are recorded on the balance
sheet at their fair value. Gains or losses on sale of Coins are recorded in the statement of operations. Expenses associated
with running the crypto-currency mining business, such as equipment deprecation, rent and electricity cost are recorded as cost
of revenues.
In
2014, the IRS issued guidance in Notice 2014-21 that classified cryptocurrency as property, not currency, for federal income tax
purposes. But according to the requirements of FATCA, which requires foreign financial institutions to provide the IRS with information
about accounts held by U.S. taxpayers or foreign entities controlled by U.S. taxpayers, cryptocurrency exchanges, in the ordinary
course of doing business, are considered financial institutions.
On
November 30, 2016, a federal judge in the Northern District of California granted an IRS application to serve a “John Doe”
summons on Coinbase Inc., which operates a cryptocurrency wallet and exchange business. The summons asked Coinbase to identify
all U.S. customers who transferred convertible cryptocurrency from 2013 to 2015. The IRS is trying to get cryptocurrency owners
to report the value of their wallets to the federal government and the IRS is treating cryptocurrency as both property and currency.
The
American Institute of Certified Public Accountants recommended in a June 2016 letter to the IRS that cryptocurrency accounts be
reported in the summary information section of Form 8938, Statement of Specified Foreign Financial Assets, which breaks with the
IRS’s 2014 guidance that cryptocurrency be treated as property.
Property
is divided into certain sections within the Internal Revenue Code (“IRC”) that determine everything from how the property
is treated at sale, to how the property is depreciated, to the nature and character of the gain on sale of the asset. For instance,
IRC §1231 property (real or depreciable business property held for more than one year) is treated as capital in nature when
sold for a profit, but it is treated as ordinary when the property is sold for a loss. IRC §1245 property, on the other hand,
is treated as ordinary in nature. IRC §1245 property encompasses most types of property. IRC §1250 property covers everything
else. IRC §1250 states that a gain from selling real property that has been depreciated should be taxed as ordinary income,
to the extent that the accumulated depreciation exceeds the depreciation calculated using the straight-line method, which is the
most basic depreciation method used on an income statement. IRC §1250 bases the amount of tax due on the type of property,
such as residential or nonresidential property, and on how many months the property was owned.
IRS
guidance is silent on which section of the tax code cryptocurrency falls into. For instance, IRC §1031 allows for the like-kind
exchange of certain property. IRC §1031 exchanges typically are done with real estate or business assets. However, with the
classification of cryptocurrency as property by the IRS, many tax professionals will argue that cryptocurrency can be exchanged
using IRC §1031.
3 https://www.aicpa.org/advocacy/cpaadvocate/2016/virtual-currency-guidance-needed.html
4 https://seekingalpha.com/article/4137093-sec-saying-no-bitcoin-etfs-one-may-still-get-approved
We
believe that all of our digital asset mining activities will be accounted for on the same basis regardless of the form of digital
asset. A change in regulatory or financial accounting standards or interpretation by the IRS or accounting standards or the SEC
could result in changes in our accounting treatment, taxation and the necessity to restate our financial statements. Such a restatement
could negatively impact our business, prospects, financial condition and results of operation.
The
further development and acceptance of digital asset networks and other digital assets, which represent a new and rapidly changing
industry, are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance
of digital asset systems may adversely affect an investment in us.
Digital
assets such as bitcoins and ether, that may be used, among other things, to buy and sell goods and services are a new and rapidly
evolving industry of which the digital asset networks are prominent, but not unique, parts. The growth of the digital asset industry
in general, and the digital asset networks of bitcoin and ether in particular, are subject to a high degree of uncertainty. The
factors affecting the further development of the digital asset industry, as well as the digital asset networks, include:
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continued
worldwide growth in the adoption and use of bitcoins and other digital assets;
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government
and quasi-government regulation of bitcoins and other digital assets and their use, or restrictions on or regulation of access
to and operation of the digital asset network or similar digital assets systems;
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the
maintenance and development of the open-source software protocol of the bitcoin network and ether network;
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changes
in consumer demographics and public tastes and preferences;
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the
availability and popularity of other forms or methods of buying and selling goods and services, including new means of using
fiat currencies;
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general
economic conditions and the regulatory environment relating to digital assets; and
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the
impact of regulators focusing on digital assets and digital securities and the costs associated with such regulatory oversight.
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A
decline in the popularity or acceptance of the digital asset networks of bitcoin or ether, or similar digital asset systems, could
adversely affect an investment in us.
If
we acquire digital securities, even unintentionally, we may violate the Investment Company Act of 1940 and incur potential third-party
liabilities.
The
Company intends to comply with the 1940 Act in all respects. To that end, if holdings of cryptocurrencies are determined to constitute
investment securities of a kind that subject the Company to registration and reporting under the 1940 Act, the Company will limit
its holdings to less than 40% of its assets. Section 3(a)(1)(C) of the 1940 Act defines “investment company” to mean
any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities,
and owns or proposes to acquire investment securities having a value exceeding 40% of the value of such issuer’s total assets
(exclusive of Government securities and cash items) on an unconsolidated basis. Section 3(a)(2) of the 1940 Act defines “investment
securities” to include all securities except (A) Government securities, (B) securities issued by employees’ securities
companies, and (C) securities issued by majority-owned subsidiaries which (i) are not investment companies and (ii) are not relying
on the exception from the definition of investment company in section 3(c)(1) or 3(c)(7) of the 1940 Act. As noted above, the
SEC has not stated whether bitcoin and cryptocurrency is an investment security, as defined in the 1940 Act.
Currently,
there is relatively small use of digital assets in the retail and commercial marketplace in comparison to relatively large use
by speculators, thus contributing to price volatility that could adversely affect an investment in us.
As
relatively new products and technologies, digital assets and the blockchain networks on which they exist have only recently become
widely accepted as a means of payment for goods and services by many major retail and commercial outlets and use of digital assets
by consumers to pay such retail and commercial outlets remains limited. Conversely, a significant portion of demand for digital
assets is generated by speculators and investors seeking to profit from the short- or long-term holding of such digital assets.
A lack of expansion of digital assets into retail and commercial markets, or a contraction of such use, may result in increased
volatility or a reduction in the price of all or any digital asset, either of which could adversely impact an investment in us.
COVID-19
or any pandemic, epidemic or outbreak of an infectious disease in the United States or elsewhere may adversely affect our business.
The
COVID-19 virus has had unpredictable and unprecedented impacts in the United States and around the world. The World Health Organization
has declared the outbreak of COVID-19 as a “pandemic,” or a worldwide spread of a new disease. Many countries
around the world have imposed quarantines and restrictions on travel and mass gatherings to slow the spread of the virus. In the
United States, federal, state and local governments have enacted restrictions on travel, gatherings, and workplaces, with exceptions
made for essential workers and businesses. As of the date of this prospectus, we have not been declared an essential business.
As a result, we may be required to substantially reduce or cease operations in response to governmental action or decree as a
result of COVID-19. We are still assessing the effect on our business from COVID-19 and any actions implemented by the federal,
state and local governments. We have implemented safety protocols to protect our staff, but we cannot offer any assurance that
COVID-19 or any other pandemic, epidemic or outbreak of an infectious disease in the United States or elsewhere, will not materially
and adversely affect our business.
Significant
contributors to all or any digital asset network could propose amendments to the respective network’s protocols and software
that, if accepted and authorized by such network, could adversely affect an investment in us.
For
example, with respect to bitcoins network, a small group of individuals contribute to the Bitcoin Core project on GitHub.com.
This group of contributors is currently headed by Wladimir J. van der Laan, the current lead maintainer. These individuals can
propose refinements or improvements to the bitcoin network’s source code through one or more software upgrades that alter
the protocols and software that govern the bitcoin network and the properties of bitcoin, including the irreversibility of transactions
and limitations on the mining of new bitcoin. Proposals for upgrades and discussions relating thereto take place on online forums.
For example, there is an ongoing debate regarding altering the blockchain by increasing the size of blocks to accommodate a larger
volume of transactions. Although some proponents support an increase, other market participants oppose an increase to the block
size as it may deter miners from confirming transactions and concentrate power into a smaller group of miners. To the extent that
a significant majority of the users and miners on the bitcoin network install such software upgrade(s), the bitcoin network would
be subject to new protocols and software that may adversely affect an investment in the Shares. In the event a developer or group
of developers proposes a modification to the bitcoin network that is not accepted by a majority of miners and users, but that
is nonetheless accepted by a substantial plurality of miners and users, two or more competing and incompatible blockchain implementations
could result. This is known as a “hard fork.” In such a case, the “hard fork” in the blockchain could
materially and adversely affect the perceived value of digital assets as reflected on one or both incompatible blockchains, which
may adversely affect an investment in us.
Forks
in a digital asset network may occur in the future which may affect the value of digital assets held by us.
For
example, on August 1, 2017 bitcoin’s blockchain was forked and Bitcoin Cash was created. The fork resulted in a new blockchain
being created with a shared history, and a new path forward. Bitcoin Cash has a block size of 8mb and other technical changes.
On October 24, 2017, bitcoin’s blockchain was forked and Bitcoin Gold was created. The fork resulted in a new blockchain
being created with a shared history, and new path forward, Bitcoin Gold has a different proof of work algorithm and other technical
changes. The value of the newly created Bitcoin Cash and Bitcoin Gold may or may not have value in the long run and may affect
the price of bitcoin if interest is shifted away from bitcoin to the newly created digital assets. The value of bitcoin after
the creation of a fork is subject to many factors including the value of the fork product, market reaction to the creation of
the fork product, and the occurrence of forks in the future. As such, the value of bitcoin could be materially reduced if existing
and future forks have a negative effect on bitcoin’s value. If a fork occurs on a digital asset network which we are mining
or hold digital assets in it may have a negative effect on the value of the digital asset and may adversely affect an investment
in us.
The
open-source structure of the bitcoin network protocol means that the contributors to the protocol are generally not directly compensated
for their contributions in maintaining and developing the protocol. A failure to properly monitor and upgrade the protocol could
damage the bitcoin network and an investment in us.
The
bitcoin network for example operates based on an open-source protocol maintained by contributors, largely on the Bitcoin Core
project on GitHub. As an open source project, bitcoin is not represented by an official organization or authority. As the bitcoin
network protocol is not sold and its use does not generate revenues for contributors, contributors are generally not compensated
for maintaining and updating the bitcoin network protocol. Although the MIT Media Lab’s Digital Currency Initiative funds
the current maintainer Wladimir J. van der Laan, among others, this type of financial incentive is not typical. The lack of guaranteed
financial incentive for contributors to maintain or develop the bitcoin network and the lack of guaranteed resources to adequately
address emerging issues with the bitcoin network may reduce incentives to address the issues adequately or in a timely manner.
Changes to a digital asset network which we are mining on may adversely affect an investment in us.
If
a malicious actor or botnet obtains control in excess of 50% of the processing power active on any digital asset network, including
the bitcoin network or ether network, it is possible that such actor or botnet could manipulate the blockchain in a manner that
adversely affects an investment in us.
If
a malicious actor or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating the actions
of the computers) obtains a majority of the processing power dedicated to mining on any digital asset network, including the bitcoin
network or ether network, it may be able to alter the blockchain by constructing alternate blocks if it is able to solve for such
blocks faster than the remainder of the miners on the blockchain can add valid blocks. In such alternate blocks, the malicious
actor or botnet could control, exclude or modify the ordering of transactions, though it could not generate new digital assets
or transactions using such control. Using alternate blocks, the malicious actor could “double-spend” its own digital
assets (i.e., spend the same digital assets in more than one transaction) and prevent the confirmation of other users’ transactions
for so long as it maintains control. To the extent that such malicious actor or botnet does not yield its majority control of
the processing power or the digital asset community does not reject the fraudulent blocks as malicious, reversing any changes
made to the blockchain may not be possible. Such changes could adversely affect an investment in us.
For
example, in late May and early June 2014, a mining pool known as GHash.io approached and, during a 24- to 48-hour period in early
June may have exceeded, the threshold of 50% of the processing power on the bitcoin network. To the extent that GHash.io did exceed
50% of the processing power on the network, reports indicate that such threshold was surpassed for only a short period, and there
are no reports of any malicious activity or control of the blockchain performed by GHash.io. Furthermore, the processing power
in the mining pool appears to have been redirected to other pools on a voluntary basis by participants in the GHash.io pool, as
had been done in prior instances when a mining pool exceeded 40% of the processing power on the bitcoin network.
The
approach towards and possible crossing of the 50% threshold indicate a greater risk that a single mining pool could exert authority
over the validation of digital asset transactions. To the extent that the digital assets ecosystems do not act to ensure greater
decentralization of digital asset mining processing power, the feasibility of a malicious actor obtaining in excess of 50% of
the processing power on any digital asset network (e.g., through control of a large mining pool or through hacking such a mining
pool) will increase, which may adversely impact an investment in us.
If
the award of digital assets for solving blocks and transaction fees for recording transactions are not sufficiently high to incentivize
miners, miners may cease expending hashrate to solve blocks and confirmations of transactions on the blockchain could be slowed
temporarily. A reduction in the hashrate expended by miners on any digital asset network could increase the likelihood of a malicious
actor obtaining control in excess of fifty percent (50%) of the aggregate hashrate active on such network or the blockchain, potentially
permitting such actor to manipulate the blockchain in a manner that adversely affects an investment in us.
Bitcoin
miners record transactions when they solve for and add blocks of information to the blockchain. When a miner solves for a block,
it creates that block, which includes data relating to (i) the solution to the block, (ii) a reference to the prior block in the
blockchain to which the new block is being added and (iii) all transactions that have occurred but have not yet been added to
the blockchain. The miner becomes aware of outstanding, unrecorded transactions through the data packet transmission and propagation
discussed above. Typically, bitcoin transactions will be recorded in the next chronological block if the spending party has an
internet connection and at least one minute has passed between the transaction’s data packet transmission and the solution
of the next block. If a transaction is not recorded in the next chronological block, it is usually recorded in the next block
thereafter.
As
the award of new digital assets for solving blocks declines, and if transaction fees are not sufficiently high, miners may not
have an adequate incentive to continue mining and may cease their mining operations. For example, the current fixed reward on
the bitcoin network for solving a new block is twelve and a half (12.5) bitcoins per block; the reward decreased from twenty-five
(25) bitcoin in July 2016. It is estimated that it will halve again in about four (4) years. This reduction may result in a reduction
in the aggregate hashrate of the bitcoin network as the incentive for miners will decrease. Moreover, miners ceasing operations
would reduce the aggregate hashrate on the bitcoin network, which would adversely affect the confirmation process for transactions
(i.e., temporarily decreasing the speed at which blocks are added to the blockchain until the next scheduled adjustment in difficulty
for block solutions) and make the bitcoin network more vulnerable to a malicious actor obtaining control in excess of fifty percent
(50%) of the aggregate hashrate on the bitcoin network. Periodically, the bitcoin network has adjusted the difficulty for block
solutions so that solution speeds remain in the vicinity of the expected ten (10) minute confirmation time targeted by the bitcoin
network protocol.
Marathon
believes that from time to time there will be further considerations and adjustments to the bitcoin network, and others, including
the ether network, regarding the difficulty for block solutions. More significant reductions in aggregate hashrate on digital
asset networks could result in material, though temporary, delays in block solution confirmation time. Any reduction in confidence
in the confirmation process or aggregate hashrate of any digital asset network may negatively impact the value of digital assets,
which will adversely impact an investment in us.
To
the extent that the profit margins of digital asset mining operations are not high, operators of digital asset mining operations
are more likely to immediately sell their digital assets earned by mining in the digital asset exchange market, resulting in a
reduction in the price of digital assets that could adversely impact an investment in us.
Over
the past two years, digital asset mining operations have evolved from individual users mining with computer processors, graphics
processing units and first-generation servers. Currently, new processing power brought onto the digital asset networks is predominantly
added by incorporated and unincorporated “professionalized” mining operations. Professionalized mining operations
may use proprietary hardware or sophisticated machines. They require the investment of significant capital for the acquisition
of this hardware, the leasing of operating space (often in data centers or warehousing facilities), incurring of electricity costs
and the employment of technicians to operate the mining farms. As a result, professionalized mining operations are of a greater
scale than prior miners and have more defined, regular expenses and liabilities. These regular expenses and liabilities require
professionalized mining operations to more immediately sell digital assets earned from mining operations on the digital asset
exchange market, whereas it is believed that individual miners in past years were more likely to hold newly mined digital assets
for more extended periods. The immediate selling of newly mined digital assets greatly increases the supply of digital assets
on the digital asset exchange market, creating downward pressure on the price of each digital asset.
The
extent to which the value of digital assets mined by a professionalized mining operation exceeds the allocable capital and operating
costs determines the profit margin of such operation. A professionalized mining operation may be more likely to sell a higher
percentage of its newly mined digital assets rapidly if it is operating at a low profit margin—and it may partially or completely
cease operations if its profit margin is negative. In a low profit margin environment, a higher percentage could be sold into
the digital asset exchange market more rapidly, thereby potentially reducing digital asset prices. Lower digital asset prices
could result in further tightening of profit margins, particularly for professionalized mining operations with higher costs and
more limited capital reserves, creating a network effect that may further reduce the price of digital assets until mining operations
with higher operating costs become unprofitable and remove mining power from the respective digital asset network. The network
effect of reduced profit margins resulting in greater sales of newly mined digital assets could result in a reduction in the price
of digital assets that could adversely impact an investment in us.
To
the extent that any miners cease to record transactions in solved blocks, transactions that do not include the payment of a transaction
fee will not be recorded on the blockchain until a block is solved by a miner who does not require the payment of transaction
fees. Any widespread delays in the recording of transactions could result in a loss of confidence in that digital asset network,
which could adversely impact an investment in us.
To
the extent that any miners cease to record transaction in solved blocks, such transactions will not be recorded on the blockchain.
Currently, there are no known incentives for miners to elect to exclude the recording of transactions in solved blocks; however,
to the extent that any such incentives arise (e.g., a collective movement among miners or one or more mining pools forcing bitcoin
users to pay transaction fees as a substitute for or in addition to the award of new bitcoins upon the solving of a block), actions
of miners solving a significant number of blocks could delay the recording and confirmation of transactions on the blockchain.
Any systemic delays in the recording and confirmation of transactions on the blockchain could result in greater exposure to double-spending
transactions and a loss of confidence in certain or all digital asset networks, which could adversely impact an investment in
us.
The
acceptance of digital asset network software patches or upgrades by a significant, but not overwhelming, percentage of the users
and miners in any digital asset network could result in a “fork” in the respective blockchain, resulting in the operation
of two separate networks until such time as the forked blockchains are merged. The temporary or permanent existence of forked
blockchains could adversely impact an investment in us.
Digital
asset networks are open source projects and, although there is an influential group of leaders in, for example, the bitcoin network
community known as the “Core Developers,” there is no official developer or group of developers that formally controls
the bitcoin network. Any individual can download the bitcoin network software and make any desired modifications, which are proposed
to users and miners on the bitcoin network through software downloads and upgrades, typically posted to the bitcoin development
forum on GitHub.com. A substantial majority of miners and bitcoin users must consent to those software modifications by downloading
the altered software or upgrade that implements the changes; otherwise, the changes do not become a part of the bitcoin network.
Since the bitcoin network’s inception, changes to the bitcoin network have been accepted by the vast majority of users and
miners, ensuring that the bitcoin network remains a coherent economic system; however, a developer or group of developers could
potentially propose a modification to the bitcoin network that is not accepted by a vast majority of miners and users, but that
is nonetheless accepted by a substantial population of participants in the bitcoin network. In such a case, and if the modification
is material and/or not backwards compatible with the prior version of bitcoin network software, a fork in the blockchain could
develop and two separate bitcoin networks could result, one running the pre-modification software program and the other running
the modified version (i.e., a second “bitcoin” network). Such a fork in the blockchain typically would be addressed
by community-led efforts to merge the forked blockchains, and several prior forks have been so merged. This kind of split in the
bitcoin network could materially and adversely impact an investment in us and, in the worst-case scenario, harm the sustainability
of the bitcoin network’s economy.
Intellectual
property rights claims may adversely affect the operation of some or all digital asset networks.
Third
parties may assert intellectual property claims relating to the holding and transfer of digital assets and their source code.
Regardless of the merit of any intellectual property or other legal action, any threatened action that reduces confidence in some
or all digital asset networks’ long-term viability or the ability of end-users to hold and transfer digital assets may adversely
affect an investment in us. Additionally, a meritorious intellectual property claim could prevent us and other end-users from
accessing some or all digital asset networks or holding or transferring their digital assets. As a result, an intellectual property
claim against us or other large digital asset network participants could adversely affect an investment in us.
The
digital asset exchanges on which digital assets trade are relatively new and, in most cases, largely unregulated and may therefore
be more exposed to fraud and failure than established, regulated exchanges for other products. To the extent that the digital
asset exchanges representing a substantial portion of the volume in digital asset trading are involved in fraud or experience
security failures or other operational issues, such digital asset exchanges’ failures may result in a reduction in the price
of some or all digital assets and can adversely affect an investment in us.
The
digital asset exchanges on which the digital assets trade are new and, in most cases, largely unregulated. Furthermore, many digital
asset exchanges (including several of the most prominent USD denominated digital asset exchanges) do not provide the public with
significant information regarding their ownership structure, management teams, corporate practices or regulatory compliance. As
a result, the marketplace may lose confidence in, or may experience problems relating to, digital asset exchanges, including prominent
exchanges handling a significant portion of the volume of digital asset trading.
For
example, over the past 4 years, a number of bitcoin exchanges have been closed due to fraud, failure or security breaches. In
many of these instances, the customers of such bitcoin exchanges were not compensated or made whole for the partial or complete
losses of their account balances in such bitcoin exchanges. While smaller bitcoin exchanges are less likely to have the infrastructure
and capitalization that make larger bitcoin exchanges more stable, larger bitcoin exchanges are more likely to be appealing targets
for hackers and “malware” (i.e., software used or programmed by attackers to disrupt computer operation, gather sensitive
information or gain access to private computer systems). Further, the collapse of the largest bitcoin exchange in 2014 suggests
that the failure of one component of the overall bitcoin ecosystem can have consequences for both users of a bitcoin exchange
and the bitcoin industry as a whole.
More
recently, the Wall Street Journal has reported that China will shut down bitcoin exchanges and other virtual currency trading
platforms. The article reported that China has accounted for the bulk of global bitcoin trading.
A
lack of stability in the digital asset exchange market and the closure or temporary shutdown of digital asset exchanges due to
fraud, business failure, hackers or malware, or government-mandated regulation may reduce confidence in the digital asset networks
and result in greater volatility in digital asset values. These potential consequences of a digital asset exchange’s failure
could adversely affect an investment in us.
Political
or economic crises may motivate large-scale sales of digital assets, which could result in a reduction in some or all digital
assets’ values and adversely affect an investment in us.
As
an alternative to fiat currencies that are backed by central governments, digital assets such as bitcoins, which are relatively
new, are subject to supply and demand forces based upon the desirability of an alternative, decentralized means of buying and
selling goods and services, and it is unclear how such supply and demand will be impacted by geopolitical events. Nevertheless,
political or economic crises may motivate large-scale acquisitions or sales of digital assets either globally or locally. Large-scale
sales of digital assets would result in a reduction in their value and could adversely affect an investment in us.
Demand
for ether and bitcoin is driven, in part, by their status as the two most prominent and secure digital assets. It is possible
that digital assets other than ether and bitcoin could have features that make them more desirable to a material portion of the
digital asset user base, resulting in a reduction in demand for ether and bitcoin, which could have a negative impact on the price
of ether and bitcoin and adversely affect an investment in us.
Bitcoins
and ether, as assets, hold “first-to-market” advantages over other digital assets. This first-to-market advantage
is driven in large part by having the largest user bases and, more importantly, the largest combined mining power in use to secure
their respective blockchains and transaction verification systems. Having a large mining network results in greater user confidence
regarding the security and long-term stability of a digital asset’s network and its blockchain; as a result, the advantage
of more users and miners makes a digital asset more secure, which makes it more attractive to new users and miners, resulting
in a network effect that strengthens the first-to-market advantage.
As
of June 5, 2020, there were over 5,000 alternate digital assets tracked by CoinMarketCap, having a total market capitalization
(including the market capitalization of ether and bitcoin) of approximately $176.0 billion, using market prices and total available
supply of each digital asset. This included digital assets using a “proof of work” mining structure similar to bitcoin,
and those using a “proof of stake” transaction verification system that is different than bitcoin’s mining system
(e.g., Peercoin, Bitshares and NXT). As of March 23, 2020, bitcoin’s $115.2 billion market capitalization was almost eight
(8) times the size of the $14.9 billion market cap of ether, the second largest proof-of-work digital asset. Despite the marked
first-mover advantage of the bitcoin network over other digital asset networks, it is possible that another digital asset could
become materially popular due to either a perceived or exposed shortcoming of the bitcoin network protocol that is not immediately
addressed by the bitcoin contributor community or a perceived advantage of an altcoin that includes features not incorporated
into bitcoin. If a digital asset obtains significant market share (either in market capitalization, mining power or use as a payment
technology), this could reduce bitcoin’s market share as well as other digital assets we may become involved in and have
a negative impact on the demand for, and price of, such digital assets and could adversely affect an investment in us.
Our
ability to adopt technology in response to changing security needs or trends poses a challenge to the safekeeping of our digital
assets.
The
history of digital asset exchanges has shown that exchanges and large holders of digital assets must adapt to technological change
in order to secure and safeguard their digital assets. We rely on Bitgo Inc.’s multi-signature enterprise storage solution
to safeguard our digital assets from theft, loss, destruction or other issues relating to hackers and technological attack. Our
digital assets will also be moved to various exchanges in order to exchange them for fiat currency during which time we will be
relying on the security of such exchanges to safeguard our digital assets. We believe that it may become a more appealing target
of security threats as the size of our bitcoin holdings grow. To the extent that either Bitgo Inc. or we are unable to identify
and mitigate or stop new security threats, our digital assets may be subject to theft, loss, destruction or other attack, which
could adversely affect an investment in us.
Security
threats to us could result in, a loss of our digital assets, or damage to the reputation and our brand, each of which could adversely
affect an investment in us.
Security
breaches, computer malware and computer hacking attacks have been a prevalent concern in the digital asset exchange markets, for
example since the launch of the bitcoin network. Any security breach caused by hacking, which involves efforts to gain unauthorized
access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other
computer equipment, and the inadvertent transmission of computer viruses, could harm our business operations or result in loss
of our digital assets. Any breach of our infrastructure could result in damage to our reputation which could adversely affect
an investment in us. Furthermore, we believe that, as our assets grow, it may become a more appealing target for security threats
such as hackers and malware.
We
primarily rely on Bitgo Inc.’s (https://www.bitgo.com/) multi-signature enterprise storage solution to
safeguard its digital assets from theft, loss, destruction or other issues relating to hackers and technological attack. Nevertheless,
Bitgo Inc.’s security system may not be impenetrable and may not be free from defect or immune to acts of God, and any loss
due to a security breach, software defect or act of God will be borne by the Company. The Company’s digital assets will
also be stored with exchanges such as Bitgo, Kraken, Bitfinex, Itbit and Coinbase and others prior to selling them.
The
security system and operational infrastructure may be breached due to the actions of outside parties, error or malfeasance of
an employee of ours, or otherwise, and, as a result, an unauthorized party may obtain access to our, private keys, data or bitcoins.
Additionally, outside parties may attempt to fraudulently induce employees of ours to disclose sensitive information in order
to gain access to our infrastructure. As the techniques used to obtain unauthorized access, disable or degrade service, or sabotage
systems change frequently, or may be designed to remain dormant until a predetermined event and often are not recognized until
launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. If an
actual or perceived breach of our security system occurs, the market perception of the effectiveness of our security system could
be harmed, which could adversely affect an investment in us.
At
present, Marathon has not experienced hacking and we use a Bitcoin Address and other cryptocurrency wallets, and may consider
using services, such as Xapo, Inc., or Bitgo Inc., which services claim to offer a free, ultra-secure vault for storing bitcoin,
but we have not made any decision to do so. As disclosed herein, the Company currently use Bitgo Inc. as its wallet provider.
In
the event of a security breach, we may be forced to cease operations, or suffer a reduction in assets, the occurrence of each
of which could adversely affect an investment in us.
A
loss of confidence in our security system, or a breach of our security system, may adversely affect us and the value of an investment
in us.
We
will take measures to protect us and our digital assets from unauthorized access, damage or theft; however, it is possible that
the security system may not prevent the improper access to, or damage or theft of our digital assets. A security breach could
harm our reputation or result in the loss of some or all of our digital assets. A resulting perception that our measures do not
adequately protect our digital assets could result in a loss of current or potential shareholders, reducing demand for our Common
Stock and causing our shares to decrease in value.
Digital
Asset transactions are irrevocable and stolen or incorrectly transferred digital assets may be irretrievable. As a result, any
incorrectly executed digital asset transactions could adversely affect an investment in us.
Digital
asset transactions are not, from an administrative perspective, reversible without the consent and active participation of the
recipient of the transaction or, in theory, control or consent of a majority of the processing power on the respective digital
asset network. Once a transaction has been verified and recorded in a block that is added to the blockchain, an incorrect transfer
of digital assets or a theft of digital assets generally will not be reversible, and we may not be capable of seeking compensation
for any such transfer or theft. Although our transfers of digital assets will regularly be made to or from vendors, consultants,
services providers, etc. it is possible that, through computer or human error, or through theft or criminal action, our digital
assets could be transferred from us in incorrect amounts or to unauthorized third parties. To the extent that we are unable to
seek a corrective transaction with such third party or are incapable of identifying the third party which has received our digital
assets through error or theft, we will be unable to revert or otherwise recover incorrectly transferred Company digital assets.
To the extent that we are unable to seek redress for such error or theft, such loss could adversely affect an investment in us.
5 https://www.bitgo.com/
The
Company’s digital assets may be subject to loss, damage, theft or restriction on access.
There
is a risk that part or all of the Company’s digital assets could be lost, stolen or destroyed. We believe that our digital
assets will be an appealing target to hackers or malware distributors seeking to destroy, damage or steal our digital assets.
Although we primarily utilize Bitgo, Inc.’s enterprise multi-signature storage solution, to minimize the risk of loss, damage
and theft, we cannot guarantee that it will prevent such loss, damage or theft, whether caused intentionally, accidentally or
by act of God. Access to our digital assets could also be restricted by natural events (such as an earthquake or flood) or human
actions (such as a terrorist attack). Any of these events may adversely affect the Company’s operations and, consequently,
an investment in us.
The
limited rights of legal recourse against us, and our lack of insurance protection expose us and our shareholders to the risk of
loss of our digital assets for which no person is liable.
The
digital assets held by us are not insured. Therefore, a loss may be suffered with respect to our digital assets which is not covered
by insurance and for which no person is liable in damages which could adversely affect our operations and, consequently, an investment
in us.
Digital
assets held by us are not subject to FDIC or SIPC protections.
We
do not hold our digital assets with a banking institution or a member of the Federal Deposit Insurance Corporation (“FDIC”)
or the Securities Investor Protection Corporation (“SIPC”) and, therefore, our digital assets are not subject to the
protections enjoyed by depositors with FDIC or SIPC member institutions.
We
may not have adequate sources of recovery if our digital assets are lost, stolen or destroyed.
If
our digital assets are lost, stolen or destroyed under circumstances rendering a party liable to us, the responsible party may
not have the financial resources sufficient to satisfy our claim. For example, as to a particular event of loss, the only source
of recovery for us might be limited, to the extent identifiable, other responsible third parties (e.g., a thief or terrorist),
any of which may not have the financial resources (including liability insurance coverage) to satisfy a valid claim of ours.
The
sale of our digital assets to pay expenses at a time of low digital asset prices could adversely affect an investment in us.
We
may sell our digital assets to pay expenses on an as-needed basis, irrespective of then-current prices. Consequently, our digital
assets may be sold at a time when the prices on the respective digital asset exchange market are low, which could adversely affect
an investment in us.
Regulatory
changes or actions may restrict the use of bitcoins or the operation of the bitcoin network in a manner that adversely affects
an investment in us.
Until
recently, little or no regulatory attention has been directed toward bitcoin and the bitcoin network by U.S. federal and state
governments, foreign governments and self-regulatory agencies. As bitcoin has grown in popularity and in market size, the Federal
Reserve Board, U.S. Congress and certain U.S. agencies (e.g., the CFTC, the Commission, FinCEN and the Federal Bureau of Investigation)
have begun to examine the operations of the bitcoin network, bitcoin users and the bitcoin exchange market.
On
July 25, 2017, the Commission issued its Report of Investigation, or “Report,” which concluded that digital assets
or tokens issued for the purpose of raising funds may be securities within the meaning of the federal securities laws. The
Report focused on the activities of a virtual organization which offered tokens in exchange for ether, which is a prominent digital
asset. The Report emphasized that whether a digital asset is a security is based on the facts and circumstances. Although our
activities are not focused on raising capital or assisting others that do so, the federal securities laws are very broad, and
there can be no assurances that the Commission will not take enforcement action against us in the future including for the sale
of unregistered securities in violation of the Securities Act or acting as an unregistered investment company in violation of
the Investment Company Act. The Commission has taken various actions against persons or entities misusing bitcoin in connection
with fraudulent schemes (i.e., Ponzi scheme), inaccurate and inadequate publicly disseminated information, and the offering of
unregistered securities. More recently, the Commission suspended trading in three digital asset public companies. The CFTC has
determined that bitcoin and other virtual currencies are commodities and the sale of derivatives based on digital currencies must
be done in accordance with the provisions of the CEA and CFTC regulations. Also, of significance, is that the CFTC appears to
have taken the position that bitcoin is not encompassed by the definition of currency under the CEA and CFTC regulations. The
CFTC defined bitcoin and other “virtual currencies” as “a digital representation of value” that functions
as a medium of exchange, a unit of account, and/or a store of value, but does not have legal tender status in any jurisdiction.
Bitcoin and other virtual currencies are distinct from ‘real’ currencies, which are the coin and paper money of the
United States or another country that are designated as legal tender, circulate, and are customarily used and accepted as a medium
of exchange in the country of issuance.” To the extent that bitcoin itself is determined to be a security, commodity future
or other regulated asset, or to the extent that a U.S. or foreign government or quasi-governmental agency exerts regulatory authority
over the bitcoin or bitcoin trading and ownership, trading or ownership in bitcoin or an investment in us may be adversely affected.
The
CFTC affirmed its approach to the regulation of bitcoin and bitcoin-related enterprises on June 2, 2016, when the CFTC settled
charges against Bitfinex, a bitcoin exchange based in Hong Kong. In its Order, the CFTC found that Bitfinex engaged in “illegal,
off-exchange commodity transactions and failed to register as a futures commission merchant” when it facilitated borrowing
transactions among its users to permit the trading of bitcoin on a “leveraged, margined or financed basis” without
first registering with the CFTC. In 2017, the CFTC stated that it would consider bitcoin and other virtual currencies as commodities
or derivatives depending on the facts of the offering. In December 2017, bitcoin futures trading commenced on two CFTC regulated
futures markets.
Local
state regulators such as the New York State Department of Financial Services, or NYSDFS, have also initiated examinations of bitcoin,
the bitcoin network and the regulation thereof. In July 2014, the NYSDFS proposed the first U.S. regulatory framework for licensing
participants in “virtual currency business activity.” The proposed regulations, known as the “BitLicense,”
are intended to focus on consumer protection and, after the closure of an initial comment period that yielded 3,746 formal public
comments and a re-proposal, the NYSDFS issued its final “BitLicense” regulatory framework in June 2015. The “BitLicense”
regulates the conduct of businesses that are involved in “virtual currencies” in New York or with New York customers
and prohibits any person or entity involved in such activity to conduct activities without a license.
Additionally,
a U.S. federal magistrate judge in the U.S. District Court for the Eastern District of Texas has ruled that “Bitcoin is
a currency or form of money,” a Florida circuit court judge determined that bitcoin did not qualify as money or “tangible
wealth,” and an opinion from the U.S. District Court for the Northern District of Illinois identified bitcoin as “virtual
currency.” Additionally, two CFTC commissioners publicly expressed a belief that derivatives based on bitcoin are subject
to the same regulation as those based on commodities, and the IRS released guidance treating bitcoin as property that is not currency
for U.S. federal income tax purposes. Taxing authorities of a number of U.S. states have also issued their own guidance regarding
the tax treatment of bitcoin for state income or sales tax purposes. On June 28, 2014, the Governor of the State of California
signed into law a bill that removed state-level prohibitions on the use of alternative forms of currency or value (including bitcoin).
The bill indirectly authorizes bitcoin’s use as an alternative form of money in the state. In February 2015, a bill was
introduced in the California State Assembly to establish a licensing regime for businesses engaging in “virtual currencies.”
In September 2015, the bill was ordered to become an inactive file and as of the date of this registration statement there has
not been further consideration by the California State Assembly. As of August 2016, the bill was withdrawn from consideration
for vote for the remainder of the year. There is a possibility of future regulatory change altering, perhaps to a material extent,
the nature of an investment in us or the ability of us to continue our operations.
Digital
assets currently face an uncertain regulatory landscape in not only the United States but also in many foreign jurisdictions such
as the European Union, China and Russia. While certain governments such as Germany, where the Ministry of Finance has declared
bitcoin to be “Rechnungseinheiten” (a form of private money that is recognized as a unit of account, but not
recognized in the same manner as fiat currency), have issued guidance as to how to treat bitcoin, most regulatory bodies have
not yet issued official statements regarding intention to regulate or determinations on regulation of bitcoin, the bitcoin network
and bitcoin users.
Among
those for which preliminary guidance has been issued in some form, Canada and Taiwan have labeled bitcoin as a digital or virtual
currency, distinct from fiat currency, while Sweden and Norway are among those to categorize bitcoin as a form of virtual asset
or commodity. In Australia, a GST (similar to the European value added tax (“VAT”)) is currently applied to bitcoin,
forcing a ten (10%) percent markup on top of market price, essentially preventing the operation of any bitcoin exchange. This
may be undergoing a change, however, since the Senate Economics References Committee and the Productivity Commission recommended
that digital currency be treated as money for GST purposes to remove the double taxation. The United Kingdom determined that the
VAT will not apply to bitcoin sales. In China, a recent government notice classified bitcoin as legal and “virtual commodities;”
however, the same notice restricted the banking and payment industries from using bitcoin, creating uncertainty and limiting the
ability of bitcoin exchanges to operate in the then-second largest bitcoin market. In January 2016, the People’s Bank of
China, China’s central bank, disclosed that it has been studying a state-backed electronic monetary system and potentially
had plans for its own state-backed electronic money. In January 2017, the People’s Bank of China announced that it had found
several violations, including margin financing and a failure to impose anti-money laundering controls, after on-site inspections
of two China-based bitcoin exchanges. In response to the Chinese regulator’s oversight, the three largest China-based bitcoin
exchanges, OKCoin, Huobi, and BTC China, started charging trading commission fees to suppress speculative trading and prevent
price swings which resulted in a significant drop in volume on these exchanges. Since December 2013, China, Iceland, Vietnam and
Russia have taken a more restrictive stance toward bitcoin and, thereby, have reduced the rate of expansion of bitcoin use in
each country. In May 2014, the Central Bank of Bolivia banned the use of bitcoin as a means of payment. In the summer and fall
of 2014, Ecuador announced plans for its own state-backed electronic money, while passing legislation that prohibits the use of
decentralized digital assets such as bitcoin. In July 2016, economists at the Bank of England advocated that central banks issue
their own digital currency, and the House of Lords and Bank of England started discussing the feasibility of creating a national
virtual currency, the BritCoin. As of July 2016, Iceland was studying how to create a system in which all money is created by
a central bank, and Canada was beginning to experiment with a digital version of its currency called CAD-COIN, intended to be
used exclusively for interbank payments. On August 24, 2017, Canada issued guidance stating the sale of cryptocurrency may constitute
an investment contract in accordance with Canadian law for determining if an investment constitutes a security. In July 2016,
the Russian Ministry of Finance indicated it supports a proposed law that bans bitcoin domestically but allows for its use as
a foreign currency. Russia recently issued several releases indicating they may begin regulating bitcoin and licensing miners
and entities engaging in initial coin offerings. Conversely, regulatory bodies in some countries such as India and Switzerland
have declined to exercise regulatory authority when afforded the opportunity. In April 2015, the Japanese Cabinet approved proposed
legal changes that would reportedly treat bitcoin and other digital assets as included in the definition of currency. These regulations
would, among other things, require market participants, including exchanges, to meet certain compliance requirements and be subject
to oversight by the Financial Services Agency, a Japanese regulator. In September 2017 Japan began regulating bitcoin exchanges
and registered several such exchanges to operate within Japan. In July 2016, the European Commission released a draft directive
that proposed applying counter-terrorism and anti-money laundering regulations to virtual currencies, and, in September 2016,
the European Banking authority advised the European Commission to institute new regulation specific to virtual currencies, with
amendments to existing regulation as a stopgap measure. Various foreign jurisdictions may, in the near future, adopt laws, regulations
or directives that affect the bitcoin network and its users, particularly bitcoin exchanges and service providers that fall within
such jurisdictions’ regulatory scope. Such laws, regulations or directives may conflict with those of the United States
and may negatively impact the acceptance of bitcoin by users, merchants and service providers outside of the United States and
may therefore impede the growth of the bitcoin economy. On September 4, 2017, reports were published that China may begin prohibiting
the practice of using cryptocurrency for capital fundraising. Additional reports have surfaced that China is considering regulating
bitcoin exchanges by enacting a licensing regime wherein bitcoin exchanges may legally operate. In September 2017, the Financial
Services Commission of South Korea released a statement that initial coin offerings would be prohibited as a fundraising tool.
In January 2018, the South Korean Justice Minister issued remarks about banning bitcoin and other digital assets, although the
South Korean President’s office clarified that no final decision has been made. In June 2017, India’s government ruled
in favor of regulating bitcoin and India’s ministry of Finance is currently developing rules for such regulation. Australia
has previously introduced legislation to regulate bitcoin exchanges and increase anti-money laundering policies.
The
effect of any future regulatory change on us, bitcoins, or other digital assets is impossible to predict, but such change could
be substantial and adverse to us and could adversely affect an investment in us.
It
may be illegal now, or in the future, to acquire, own, hold, sell or use digital assets in one or more countries, and ownership
of, holding or trading in our securities may also be considered illegal and subject to sanction.
Although
currently digital assets are not regulated or are lightly regulated in most countries, including the United States, one or more
countries such as China and Russia may take regulatory actions in the future that severely restricts the right to acquire, own,
hold, sell or use digital assets or to exchange digital assets for fiat currency. Such an action may also result in the restriction
of ownership, holding or trading in our securities. Such restrictions may adversely affect an investment in us.
If
regulatory changes or interpretations of our activities require our registration as a money services business (“MSB”)
under the regulations promulgated by FinCEN under the authority of the U.S. Bank Secrecy Act, we may be required to register and
comply with such regulations. If regulatory changes or interpretations of our activities require the licensing or other registration
of us as a money transmitter (or equivalent designation) under state law in any state in which we operate, we may be required
to seek licensure or otherwise register and comply with such state law. In the event of any such requirement, to the extent Marathon
decides to continue, the required registrations, licensure and regulatory compliance steps may result in extraordinary, non-recurring
expenses to us. We may also decide to cease Marathon’s operations. Any termination of certain Company operations in response
to the changed regulatory circumstances may be at a time that is disadvantageous to investors.
To
the extent that the activities of Marathon cause it to be deemed an MSB under the regulations promulgated by FinCEN under the
authority of the U.S. Bank Secrecy Act, Marathon may be required to comply with FinCEN regulations, including those that would
mandate Marathon to implement anti-money laundering programs, make certain reports to FinCEN and maintain certain records.
To
the extent that the activities of Marathon cause it to be deemed a “money transmitter” (“MT”) or equivalent
designation, under state law in any state in which Marathon operates, Marathon may be required to seek a license or otherwise
register with a state regulator and comply with state regulations that may include the implementation of anti-money laundering
programs, maintenance of certain records and other operational requirements. Currently, the NYSDFS has finalized its “BitLicense”
framework for businesses that conduct “virtual currency business activity,” the Conference of State Bank Supervisors
has proposed a model form of state level “virtual currency” regulation and additional state regulators including those
from California, Idaho, Virginia, Kansas, Texas, South Dakota and Washington have made public statements indicating that virtual
currency businesses may be required to seek licenses as money transmitters. In July 2016, North Carolina updated the law to define
“virtual currency” and the activities that trigger licensure in a business-friendly approach that encourages companies
to use virtual currency and blockchain technology. Specifically, the North Carolina law does not require miners or software providers
to obtain a license for multi-signature software, smart contract platforms, smart property, colored coins and non-hosted, non-custodial
wallets. Starting January 1, 2016, New Hampshire requires anyone exchanges a digital currency for another currency must become
a licensed and bonded money transmitter. In numerous other states, including Connecticut and New Jersey, legislation is being
proposed or has been introduced regarding the treatment of bitcoin and other digital assets. Marathon will continue to monitor
for developments in such legislation, guidance or regulations.
Such
additional federal or state regulatory obligations may cause Marathon to incur extraordinary expenses, possibly affecting an investment
in the Shares in a material and adverse manner. Furthermore, Marathon and its service providers may not be capable of complying
with certain federal or state regulatory obligations applicable to MSBs and MTs. If Marathon is deemed to be subject to and determines
not to comply with such additional regulatory and registration requirements, we may act to dissolve and liquidate Marathon. Any
such action may adversely affect an investment in us.
Current
interpretations require the regulation of bitcoins under the CEA by the CFTC, we may be required to register and comply with such
regulations. To the extent that we decide to continue operations, the required registrations and regulatory compliance steps may
result in extraordinary, non-recurring expenses to us. We may also decide to cease certain operations. Any disruption of our operations
in response to the changed regulatory circumstances may be at a time that is disadvantageous to investors.
Current
and future legislation, CFTC and other regulatory developments, including interpretations released by a regulatory authority,
may impact the manner in which bitcoins are treated for classification and clearing purposes. In particular, bitcoin derivatives
are not excluded from the definition of “commodity future” by the CFTC. We cannot be certain as to how future regulatory
developments will impact the treatment of bitcoins under the law.
Bitcoins
have been deemed to fall within the definition of a commodity and, we may be required to register and comply with additional regulation
under the CEA, including additional periodic report and disclosure standards and requirements. Moreover, we may be required to
register as a commodity pool operator and to register us as a commodity pool with the CFTC through the National Futures Association.
Such additional registrations may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting
an investment in us. If we determine not to comply with such additional regulatory and registration requirements, we may seek
to cease certain of our operations. Any such action may adversely affect an investment in us. No CFTC orders or rulings are applicable
to our business.
If
regulatory changes or interpretations require the regulation of bitcoins under the Securities Act and Investment Company Act by
the Commission, we may be required to register and comply with such regulations. To the extent that we decide to continue operations,
the required registrations and regulatory compliance steps may result in extraordinary, non-recurring expenses to us. We may also
decide to cease certain operations. Any disruption of our operations in response to the changed regulatory circumstances may be
at a time that is disadvantageous to investors. This would likely have a material adverse effect on us and investors may lose
their investment.
Current
and future legislation and the Commission rulemaking and other regulatory developments, including interpretations released by
a regulatory authority, may impact the manner in which bitcoins are treated for classification and clearing purposes. The Commission’s
July 25, 2017 Report expressed its view that digital assets may be securities depending on the facts and circumstances. As of
the date of this prospectus, we are not aware of any rules that have been proposed to regulate bitcoins as securities. We cannot
be certain as to how future regulatory developments will impact the treatment of bitcoins under the law. Such additional registrations
may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting an investment in us. If we determine
not to comply with such additional regulatory and registration requirements, we may seek to cease certain of our operations. Any
such action may adversely affect an investment in us.
To
the extent that digital assets including ether, bitcoins and other digital assets we may own are deemed by the Commission to fall
within the definition of a security, we may be required to register and comply with additional regulation under the 1940 Act,
including additional periodic reporting and disclosure standards and requirements and the registration of our Company as an investment
company. Additionally, one or more states may conclude ether, bitcoins and other digital assets we may own are a security under
state securities laws which would require registration under state laws including merit review laws which would adversely impact
us since we would likely not comply. As stated earlier in this prospectus, some states including California define the term “investment
contract” more strictly than the Commission. Such additional registrations may result in extraordinary, non-recurring expenses
of our Company, thereby materially and adversely impacting an investment in our Company. If we determine not to comply with such
additional regulatory and registration requirements, we may seek to cease all or certain parts of our operations. Any such action
would likely adversely affect an investment in us and investors may suffer a complete loss of their investment.
If
federal or state legislatures or agencies initiate or release tax determinations that change the classification of bitcoins as
property for tax purposes (in the context of when such bitcoins are held as an investment), such determination could have a negative
tax consequence on our Company or our shareholders.
Current
IRS guidance indicates that digital assets such as ether and bitcoin should be treated and taxed as property, and that transactions
involving the payment of ether or bitcoin for goods and services should be treated as barter transactions. While this treatment
creates a potential tax reporting requirement for any circumstance where the ownership of a bitcoin passes from one person to
another, usually by means of bitcoin transactions (including off-blockchain transactions), it preserves the right to apply capital
gains treatment to those transactions which may adversely affect an investment in our Company.
On
December 5, 2014, the New York State Department of Taxation and Finance issued guidance regarding the application of state tax
law to digital assets such as ether or bitcoins. The agency determined that New York State would follow IRS guidance with respect
to the treatment of digital assets such as ether or bitcoin for state income tax purposes. Furthermore, they defined digital assets
such as ether or bitcoin to be a form of “intangible property,” meaning the purchase and sale of ether or bitcoins
for fiat currency is not subject to state income tax (although transactions of bitcoin for other goods and services maybe subject
to sales tax under barter transaction treatment). It is unclear if other states will follow the guidance of the IRS and the New
York State Department of Taxation and Finance with respect to the treatment of digital assets such as ether or bitcoins for income
tax and sales tax purposes. If a state adopts a different treatment, such treatment may have negative consequences including the
imposition of greater a greater tax burden on investors in bitcoin or imposing a greater cost on the acquisition and disposition
of ether or bitcoin, generally; in either case potentially having a negative effect on prices in the digital asset exchange market
and may adversely affect an investment in our Company.
Foreign
jurisdictions may also elect to treat digital assets such as ether or bitcoin differently for tax purposes than the IRS or the
New York State Department of Taxation and Finance. To the extent that a foreign jurisdiction with a significant share of the market
of ether or bitcoin users imposes onerous tax burdens on ether or bitcoin users, or imposes sales or value added tax on purchases
and sales of ether or bitcoin for fiat currency, such actions could result in decreased demand for ether or bitcoins in such jurisdiction,
which could impact the price of ether, bitcoin or other digital assets and negatively impact an investment in our Company.
The
loss or destruction of a private key required to access a digital asset may be irreversible. Our loss of access to our private
keys or our experience of a data loss relating to our Company’s digital assets could adversely affect an investment in our
Company.
Digital
assets are controllable only by the possessor of both the unique public key and private key relating to the local or online digital
wallet in which the digital assets are held. We are required by the operation of digital asset networks to publish the public
key relating to a digital wallet in use by us when it first verifies a spending transaction from that digital wallet and disseminates
such information into the respective network. We safeguard and keep private the private keys relating to our digital assets by
primarily utilizing Bitgo Inc.’s enterprise multi-signature storage solution; to the extent a private key is lost, destroyed
or otherwise compromised and no backup of the private key is accessible, we will be unable to access the digital assets held by
it and the private key will not be capable of being restored by the respective digital asset network. Any loss of private keys
relating to digital wallets used to store our digital assets could adversely affect an investment in us.
Because
many of our digital assets are held by digital asset exchanges, we face heightened risks from cybersecurity attacks and financial
stability of digital asset exchanges.
Marathon
may transfer their digital asset from its wallet to digital asset exchanges prior to selling them. Digital assets not held in
Marathon’s wallet are subject to the risks encountered by digital asset exchanges including a DDoS Attack or other malicious
hacking, a sale of the digital asset exchange, loss of the digital assets by the digital asset exchange and other risks similar
to those described herein. Marathon does not maintain a custodian agreement with any of the digital asset exchanges that hold
the Marathon’s digital assets. These digital asset exchanges do not provide insurance and may lack the resources to protect
against hacking and theft. If this were to occur, Marathon may be materially and adversely affected.
If
the award of digital assets for solving blocks and transaction fees for recording transactions are not sufficiently high to cover
expenses related to running data center operations, it may have adverse effects on an investment in us.
If
the award of new digital assets for solving blocks declines and transaction fees are not sufficiently high, we may not have an
adequate incentive to continue our mining operations, which may adversely impact an investment in us.
As
the number of digital assets awarded for solving a block in the blockchain decreases, the incentive for miners to continue to
contribute processing power to the respective digital asset network will transition from a set reward to transaction fees. Either
the requirement from miners of higher transaction fees in exchange for recording transactions in the blockchain or a software
upgrade that automatically charges fees for all transactions may decrease demand for digital assets and prevent the expansion
of the digital asset networks to retail merchants and commercial businesses, resulting in a reduction in the price of digital
assets that could adversely impact an investment in us.
In
order to incentivize miners to continue to contribute processing power to any digital asset network, such network may either formally
or informally transition from a set reward to transaction fees earned upon solving for a block. This transition could be accomplished
either by miners independently electing to record in the blocks they solve only those transactions that include payment of a transaction
fee or by the digital asset network adopting software upgrades that require the payment of a minimum transaction fee for all transactions.
If transaction fees paid for digital asset transactions become too high, the marketplace may be reluctant to accept digital assets
as a means of payment and existing users may be motivated to switch from one digital asset to another digital asset or back to
fiat currency. Decreased use and demand for bitcoins or ether that we have accumulated may adversely affect their value and may
adversely impact an investment in us.
We
initiate legal proceedings against potentially infringing companies in the normal course of our business and we believe that extended
litigation proceedings would be time-consuming and costly, which may adversely affect our financial condition and our ability
to operate our business.
To
monetize our patent assets, we historically have initiated legal proceedings against potential infringing companies, pursuant
to which we may allege that such companies infringe on one or more of our patents. Our viability could be highly dependent on
the cost and outcome of the litigation, and there is a risk that we may be unable to achieve the results we desire from such litigation,
which failure would substantially harm our business. In addition, the defendants in the litigations are likely to be much larger
than us and have substantially more resources than we do, which could make our litigation efforts more difficult and impact the
duration of the litigation which would require us to devote our limited financial, managerial and other resources to support litigation
that may be disproportionate to the anticipated recovery.
These
legal proceedings may continue for several years and may require significant expenditures for legal fees, patent related costs,
such as inter-parties review, and other expenses. Disputes regarding the assertion of patents and other intellectual property
rights are highly complex and technical. Once initiated, we may be forced to litigate against others to enforce or defend our
patent rights or to determine the validity and scope of other party’s patent rights. The defendants or other third parties
involved in the lawsuits in which we are involved may allege defenses and/or file counterclaims or commence re-examination proceedings
by patenting issuance authorities in an effort to avoid or limit liability and damages for patent infringement or declare our
patents to be invalid or non-infringed. If such defenses or counterclaims are successful, they may preclude our ability to derive
revenue from the patents we own. A negative outcome of any such litigation, or an outcome which affects one or more claims contained
within any such litigation or invalidating any patents, could materially and adversely impact our business. Additionally, we anticipate
that our legal fees and other expenses will be material and will negatively impact our financial condition and results of operations
and may result in our inability to continue our business. We have incurred significant legal expenses in our patent litigation
in the past that are liabilities of the Company and may be unable to settle or reduce these expenses, regardless of the outcome
of our patent litigation or the inability to license or recover damages from our patents. These liabilities may lead to litigation
or claims with respect to the payment or collection of legal expenses.
Variability
in intellectual property laws may adversely affect our intellectual property position.
Intellectual
property laws, and patent laws and regulations in particular, have been subject to significant variability either through administrative
or legislative changes to such laws or regulations or changes or differences in judicial interpretation, and it is expected that
such variability will continue to occur. Additionally, intellectual property laws and regulations differ among states, and countries.
Variations in the patent laws and regulations or in interpretations of patent laws and regulations in the United States and other
countries may diminish the value of our intellectual property and may change the impact of third-party intellectual property on
us. Accordingly, we cannot predict the scope of patents that may be granted to us, the extent to which we will be able to enforce
our patents against third parties, or the extent to which third parties may be able to enforce their patents against us.
We
may seek to internally develop additional new inventions and intellectual property, which would take time and be costly. Moreover,
the failure to obtain or maintain intellectual property rights for such inventions would lead to the loss of our investments in
such activities.
We
may in the future seek to engage in commercial business ventures or seek internal development of new inventions or intellectual
property. These activities would require significant amounts of financial, managerial and other resources and would take time
to achieve. Such activities could also distract our management team from its present business initiatives, which could have a
material and adverse effect on our business. There is also the risk that such initiatives may not yield any viable new business
or revenue, inventions or technology, which would lead to a loss of our investment in such activities.
In
addition, even if we are able to internally develop new inventions, in order for those inventions to be viable and to compete
effectively, we would need to develop and maintain, and we would be heavily reliant upon, a proprietary position with respect
to such inventions and intellectual property. However, there are significant risks associated with any such intellectual property
we may develop principally including the following:
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patent
applications we may file may not result in issued patents or may take longer than we expect to result in issued patents;
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we
may be subject to interference proceedings;
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we
may be subject to opposition proceedings in the U.S. or foreign countries;
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any
patents that are issued to us may not provide meaningful protection;
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we
may not be able to develop additional proprietary technologies that are patentable;
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other
companies may challenge patents issued to us;
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other
companies may have independently developed and/or patented (or may in the future independently develop and patent) similar
or alternative technologies, or duplicate our technologies;
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other
companies may design around technologies we have developed; and
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enforcement
of our patents would be complex, uncertain and very expensive.
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We
cannot be certain that patents will be issued as a result of any future patent applications, or that any of our patents, once
issued, will provide us with adequate protection from competing products. For example, issued patents may be circumvented or challenged,
declared invalid or unenforceable or narrowed in scope. In addition, since publication of discoveries in scientific or patent
literature often lags behind actual discoveries, we cannot be certain that we will be the first to make our additional new inventions
or to file patent applications covering those inventions. It is also possible that others may have or may obtain issued patents
that could prevent us from commercializing our products or require us to obtain licenses requiring the payment of significant
fees or royalties in order to enable us to conduct our business. As to those patents that we may acquire, our continued rights
will depend on meeting any obligations to the seller and we may be unable to do so. Our failure to obtain or maintain intellectual
property rights for our inventions would lead to the loss of our investments in such activities, which would have a material adverse
effect on us.
Moreover,
patent application delays could cause delays in recognizing revenue from our internally generated patents and could cause us to
miss opportunities to license patents before other competing technologies are developed or introduced into the market. We are
not actively pursuing any commercialization opportunities or internally generated patents.
Our
future success depends on our ability to expand our organization to match the growth of our activities.
As
our operations grow, the administrative demands upon us will grow, and our success will depend upon our ability to meet those
demands. We are organized as a holding company, with numerous subsidiaries. Both the parent company and each of our subsidiaries
require certain financial, managerial and other resources, which could create challenges to our ability to successfully manage
our subsidiaries and operations and impact our ability to assure compliance with our policies, practices and procedures. These
demands include, but are not limited to, increased executive, accounting, management, legal services, staff support and general
office services. We may need to hire additional qualified personnel to meet these demands, the cost and quality of which is dependent
in part upon market factors outside of our control. Further, we will need to effectively manage the training and growth of our
staff to maintain an efficient and effective workforce, and our failure to do so could adversely affect our business and operating
results. Currently, we have limited personnel in our organization to meet our organizational and administrative demands.
Potential
acquisitions may present risks, and we may be unable to achieve the financial or other goals intended at the time of any potential
acquisition.
Our
future growth may depend in part on our ability to acquire patented technologies, patent portfolios or companies holding such
patented technologies and patent portfolios if we determine to again actively pursue patent monetization activities in the future.
Such acquisitions are subject to numerous risks, including, but not limited to the following:
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our
inability to enter into a definitive agreement with respect to any potential acquisition, or if we are able to enter into
such agreement, our inability to consummate the potential acquisition;
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difficulty
integrating the operations, technology and personnel of the acquired entity including achieving anticipated synergies;
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our
inability to achieve the anticipated financial and other benefits of the specific acquisition;
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difficulty
in maintaining controls, procedures and policies during the transition and monetization process;
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diversion
of our management’s attention from other business concerns; and
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failure
of our due diligence process to identify significant issues, including issues with respect to patented technologies and patent
portfolios and other legal and financial contingencies.
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If
we are unable to manage these risks effectively as part of any acquisition, our business could be adversely affected.
Our
exposure to uncontrollable risks, including new legislation, court rulings or actions by the United States Patent and Trademark
Office, could adversely affect our activities including our revenues, expenses and results of operations.
Our
patent acquisition and monetization business is subject to numerous risks including new legislation, regulations and rules. If
new legislation, regulations or rules are implemented either by Congress, the United States Patent and Trademark Office (“USPTO”),
the executive branch, or the courts, that impact the patent application process, the patent enforcement process, the rights of
patent holders, or litigation practices, such changes could materially and negatively affect our revenue and expenses and, therefore,
our results of operations and the overall success of our Company. On March 16, 2013, the Leahy-Smith America Invents Act or the
America Invents Act became effective. The America Invents Act includes a number of significant changes to U.S. patent law. In
general, the legislation attempts to address issues surrounding the enforceability of patents and the increase in patent litigation
by, among other things, establishing new procedures for patent litigation. For example, the America Invents Act changes the way
that parties may be joined in patent infringement actions, increasing the likelihood that such actions will need to be brought
against individual allegedly-infringing parties by their respective individual actions or activities. In addition, the America
Invents Act enacted a new inter-partes review, or IPR, process at the USPTO which can be used by defendants, and other individuals
and entities, to separately challenge the validity of any patent. These legislative changes, at this time, have had an impact
on the costs and effectiveness of our patent monetization and enforcement business.
In
addition, the U.S. Department of Justice (the “DOJ”), has conducted reviews of the patent system to evaluate the impact
of patent assertion entities on industries in which those patents relate. It is possible that the findings and recommendations
of the DOJ could impact the ability to effectively monetize and enforce standards-essential patents and could increase the uncertainties
and costs surrounding the enforcement of any such patented technologies. Also, the Federal Trade Commission (the “FTC”),
has published its intent to initiate a proposed study under Section 6(b) of the Federal Trade Commission Act to evaluate the patent
assertion practice and market impact of Patent Assertion Entities, or PAEs.
Finally,
judicial rules regarding the burden of proof in patent enforcement actions could substantially increase the cost of our enforcement
actions and new standards or limitations on liability for patent infringement could negatively impact our revenue derived from
such enforcement actions.
While
we have received a going concern opinion for the year ended December 31, 2019 from our independent registered public accounting
firm, there can be no assurances about Marathon’s ability to continue as a going concern in the future.
The
report of our independent registered public accounting firm with respect to our financial statements included in this report includes
a “going concern” explanatory paragraph. As reflected in the consolidated financial statements, we had an accumulated
deficit of approximately $105.6 million at December 31, 2019, a net loss of approximately $3.5 million and $12.8 million, and
approximately $3.3 million and $8.2 million net cash used in operating activities for the years ended December 31, 2019 and 2018,
respectively. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
In
the future, conditions may exist that raise substantial doubt about our ability to continue as a going concern due to our recurring
losses from operations and substantial decline in our working capital. A “going concern” opinion could impair our
ability to finance our operations through the sale of equity, incurring debt, or other financing alternatives. If we are unable
to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets
are carried on our consolidated financial statements, and it is likely that investors will lose all or a part of their investment.
More
patent applications are filed each year resulting in longer delays in getting patents issued by the USPTO.
We
hold and continue to acquire pending patents in the application or review phase. We believe there is a trend of increasing patent
applications each year, which we believe is resulting in longer delays in obtaining approval of pending patent applications. The
application delays could cause delays in monetizing such patents which could cause us to miss opportunities to license patents
before other competing technologies are developed or introduced into the market.
Any
reductions in the funding of the USPTO could have an adverse impact on the cost of processing pending patent applications and
the value of those pending patent applications.
Our
ownership or acquisition of pending patent applications before the USPTO is subject to funding and other risks applicable to a
government agency. The value of our patent portfolio is dependent, in part, on the issuance of patents in a timely manner, and
any reductions in the funding of the USPTO could negatively impact the value of our assets. Further, reductions in funding from
Congress could result in higher patent application filing and maintenance fees charged by the USPTO, causing an unexpected increase
in our expenses.
Our
acquisitions of patent assets may be time consuming, complex and costly, which could adversely affect our operating results.
Acquisitions
of patent or other intellectual property assets, are often time consuming, complex and costly to consummate. We may utilize many
different transaction structures in our acquisitions and the terms of such acquisition agreements tend to be heavily negotiated.
As a result, we expect to incur significant operating expenses and may be required to raise capital during the negotiations even
if the acquisition is ultimately not consummated. Even if we are able to acquire particular patent assets, there is no guarantee
that we will generate sufficient revenue related to those patent assets to offset the acquisition costs. While we will seek to
conduct sufficient due diligence on the patent assets we are considering for acquisition, we may acquire patent assets from a
seller who does not have proper title to those assets. In those cases, we may be required to spend significant resources to defend
our ownership interest in the patent assets and, if we are not successful, our acquisition may be invalid, in which case we could
lose part or all of our investment in the assets.
We
may also identify patent or other patent assets that cost more than we are prepared to spend. We may incur significant costs to
organize and negotiate a structured acquisition that does not ultimately result in an acquisition of any patent assets or, if
consummated, proves to be unprofitable for us. These higher costs could adversely affect our operating results and, if we incur
losses, the value of our securities will decline.
In
addition, we may acquire patents and technologies that are in the early stages of adoption in the commercial, industrial and consumer
markets. Demand for some of these technologies will likely be untested and may be subject to fluctuation based upon the rate at
which our companies may adopt our patented technologies in their products and services. As a result, there can be no assurance
as to whether technologies we acquire or develop will have value that we can monetize.
In
certain acquisitions of patent assets, we may seek to defer payment or finance a portion of the acquisition price. This approach
may put us at a competitive disadvantage and could result in harm to our business.
We
have limited capital and may seek to negotiate acquisitions of patent or other intellectual property assets where we can defer
payments or finance a portion of the acquisition price. These types of debt financing or deferred payment arrangements may not
be as attractive to sellers of patent assets as receiving the full purchase price for those assets in cash at the closing of the
acquisition. As a result, we might not compete effectively against other companies in the market for acquiring patent assets,
many of whom have substantially greater cash resources than we have. In addition, any failure to satisfy any debt repayment obligations
that we may incur, may result in adverse consequences to our operating results.
Any
failure to maintain or protect our patent assets could significantly impair our return on investment from such assets and harm
our brand, our business and our operating results.
Our
ability to operate our business and compete in the patent market largely depends on the superiority, uniqueness and value of our
acquired patent assets. To protect our proprietary rights, we rely on and will rely on a combination of patent, trademark, copyright
and trade secret laws, confidentiality agreements, common interest agreements and agreements with our employees and third parties,
and protective contractual provisions. No assurances can be given that any of the measures we undertake to protect and maintain
the value of our assets will be successful.
Following
the acquisition of patent assets, we will likely be required to spend significant time and resources to maintain the effectiveness
of such assets by paying maintenance fees and making filings with the USPTO. We may acquire patent assets, including patent applications
that require us to spend resources to prosecute such patent applications with the USPTO. Moreover, there is a material risk that
patent related claims (such as, for example, infringement claims (and/or claims for indemnification resulting therefrom), unenforceability
claims or invalidity claims) will be asserted or prosecuted against us, and such assertions or prosecutions could materially and
adversely affect our business. Regardless of whether any such claims are valid or can be successfully asserted, defending such
claims could cause us to incur significant costs and could divert resources away from our core business activities.
Despite
our efforts to protect our intellectual property rights, any of the following or similar occurrences may reduce the value of our
intellectual property:
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our
patent applications, trademarks and copyrights may not be granted and, if granted, may be challenged or invalidated;
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issued
trademarks, copyrights, or patents may not provide us with any competitive advantages when compared to potentially infringing
other properties;
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our
efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology;
or
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our
efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or
superior to those we acquire and/or prosecute.
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Moreover,
we may not be able to effectively protect our intellectual property rights in certain foreign countries where we may do business
in the future or from which competitors may operate. If we fail to maintain, defend or prosecute our patent assets properly, the
value of those assets would be reduced or eliminated, and our business would be harmed.
Risks
Relating to Marathon’s Stock
Exercise
or conversion of warrants and other convertible securities will dilute shareholder’s percentage of ownership.
We
have issued convertible securities, options and warrants to purchase shares of our Common Stock to our officers, directors, consultants
and certain shareholders. In the future, we may grant additional options, warrants and convertible securities. The exercise, conversion
or exchange of options, warrants or convertible securities, including for other securities, will dilute the percentage ownership
of our shareholders. The dilutive effect of the exercise or conversion of these securities may adversely affect our ability to
obtain additional capital. The holders of these securities may be expected to exercise or convert such options, warrants and convertible
securities at a time when we would be able to obtain additional equity capital on terms more favorable than such securities or
when our Common Stock is trading at a price higher than the exercise or conversion price of the securities. The exercise or conversion
of outstanding warrants, options and convertible securities will have a dilutive effect on the securities held by our shareholders.
We have in the past, and may in the future, exchange outstanding securities for other securities on terms that are dilutive to
the securities held by other shareholders not participating in such exchange.
Our
Common Stock may be delisted from The NASDAQ Capital Market (“NASDAQ”) if we fail to comply with continued listing
standards.
Our
Common Stock is currently traded on NASDAQ under the symbol “MARA”. If we fail to meet any of the continued listing
standards of NASDAQ, our Common Stock could be delisted from NASDAQ. During 2019, Marathon received multiple notices regarding
its failure to meet several continued listing standards, including the $1.00 minimum closing bid price and the $2.5 million stockholders’
equity requirements, which were subsequently satisfied. Our repeated failures may impact our ability to continue to list our shares
for trading on NASDAQ or to obtain approval of any initial listing application in connection with any acquisitions or other changes
that require review and approval by NASDAQ. The continued listing standards include specifically enumerated criteria, such as:
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a
$1.00 minimum closing bid price;
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stockholders’
equity of $2.5 million;
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500,000
shares of publicly-held Common Stock with a market value of at least $1 million;
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300
round-lot stockholders; and
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compliance
with NASDAQ’s corporate governance requirements, as well as additional or more stringent criteria that may be applied
in the exercise of NASDAQ’s discretionary authority.
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As
of April 6, 2020, the Company received notice from the Nasdaq Capital Market (the “Capital Market”) that the Company
has failed to maintain a minimum closing bid price of $1.00 per share of its Common Stock over the last consecutive 30 business
days based upon the closing bid price for its common stock as required by Rule 5550(a)(2). However, the Rules also provide the
Company a compliance period of 180 calendar days in which to regain compliance during which time it must maintain a minimum closing
bid price of at least $1.00 per share for a minimum period of 10 consecutive business days, which must be completed by October
5, 2020. On April 20, 2020, the Company received a further notice from the Nasdaq Capital Market that the Company’s time
to maintain a minimum closing bid price of at least $1.00 per share for a minimum period of 10 consecutive business days has been
extended from October 5, 2020 to December 17, 2020.
Our
stock price may be volatile.
The
market price of our Common Stock is likely to be highly volatile and could fluctuate widely in price in response to various factors,
many of which are beyond our control, including the following:
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changes
in our industry including changes which adversely affect bitcoin, ether and other digital assets;
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competitive
pricing pressures;
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our
ability to obtain working capital financing;
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additions
or departures of key personnel;
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sales
of our Common Stock;
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our
ability to execute our business plan;
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operating
results that fall below expectations;
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loss
of any strategic relationship;
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regulatory
developments; and
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economic
and other external factors.
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In
addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market
price of our Common Stock.
We
have never paid nor do we expect in the near future to pay cash dividends.
We
have never paid cash dividends on our capital stock and do not anticipate paying any cash dividends on our Common Stock for the
foreseeable future. While it is possible that we may declare a dividend after a large settlement, investors should not rely on
such a possibility, nor should they rely on an investment in us if they require income generated from dividends paid on our capital
stock. Any income derived from our Common Stock would only come from rise in the market price of our Common Stock, which is uncertain
and unpredictable.
Offers
or availability for sale of a substantial number of shares of our Common Stock may cause the price of our Common Stock to decline.
If
our stockholders sell substantial amounts of our Common Stock in the public market upon the expiration of any statutory holding
period or lockup agreements, under Rule 144, or issued upon the exercise of outstanding warrants or other convertible securities,
it could create a circumstance commonly referred to as an “overhang” and in anticipation of which the market price
of our Common Stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could
make more difficult our ability to raise additional financing through the sale of equity or equity-related securities in the future
at a time and price that we deem reasonable or appropriate. The shares of our restricted Common Stock will be freely tradable
upon the earlier of: (i) effectiveness of a registration statement covering such shares and (ii) the date on which such shares
may be sold without registration pursuant to Rule 144 (or other applicable exemption) under the Securities Act of 1933, as amended
(“Securities Act”).
Investor
relations activities and supply and demand factors may affect the price of our Common Stock.
We
expect to utilize various techniques such as non-deal road shows and investor relations campaigns in order to generate investor
awareness. These campaigns may include personal, video and telephone conferences with investors and prospective investors in which
our business practices are described. We may provide compensation to investor relations firms and pay for newsletters, websites,
mailings and email campaigns that are produced by third parties based upon publicly-available information concerning us. We do
not intend to review or approve the content of such analysts’ reports or other materials based upon analysts’ own
research or methods. Investor relations firms should generally disclose when they are compensated for their efforts, but whether
such disclosure is made or complete is not under our control. In addition, investors may, from time to time, also take steps to
encourage investor awareness through similar activities that may be undertaken at the expense of the investors. Investor awareness
activities may also be suspended or discontinued which may impact the trading market of our Common Stock.
BUSINESS
We
were incorporated in the State of Nevada on February 23, 2010 under the name Verve Ventures, Inc. On December 7, 2011, we changed
our name to American Strategic Minerals Corporation and were engaged in exploration and potential development of uranium and vanadium
minerals business. In June 2012, we discontinued our minerals business and began to invest in real estate properties in Southern
California. In October 2012, we discontinued our real estate business when our former CEO joined the firm and we commenced our
IP licensing operations, at which time the Company’s name was changed to Marathon Patent Group, Inc. On November 1, 2017,
we entered into a merger agreement with Global Bit Ventures, Inc. (“GBV”), which is focused on mining digital assets.
We purchased cryptocurrency mining machines and established a data center in Canada to mine digital assets. We intend to expand
its activities in the mining of new digital assets, while at the same time harvesting the value of our remaining IP assets.
On
June 28, 2018, our Board has determined that it is in the best interests of the Company and our shareholders to allow the Amended
Merger Agreement with GBV to expire on its current termination date of June 28, 2018 without further negotiation or extension.
The Board approved to issue 3,000,000 shares of our common stock to GBV as a termination fee for us canceling the proposed merger
between the two companies.
All
share and per share values for all periods presented in the accompanying consolidated financial statements have been retroactively
adjusted to reflect the 1:4 Reverse Split which occurred on April 8, 2019.
On
September 30, 2019, the Company consummated the purchase of 6000 S-9 Bitmain 13.5 TH/s Bitcoin Antminers (“Miners”)
from SelectGreen Blockchain Ltd. (the “Seller”), a British Columbia corporation, for which the purchase price was
$4,086,250 or 2,335,000 shares of its common stock at a price of $1.75 per share. As a result of an exchange cap requirement imposed
in conjunction with the Company’s Listing of Additional Shares application filed with Nasdaq to the transaction, the Company
issued 1,276,442 shares of its common stock which represented $2,233,773 of the $4,086,250 (constituting 19.9% of the issued and
outstanding shares on the date of the Asset Purchase Agreement) and upon the receipt of shareholder approval, at the Annual Shareholders
Meeting to be held on November 15, 2019, the Company can issue the balance of the 1,058,558 unregistered common stock shares.
The shareholders did approve the issuance of the additional shares at the Annual Shareholders Meeting. The Company has issued
an additional 474,808 at $0.90 per share on December 27, 2019. On March 30, 2020, the Seller has agreed to amend the total of
number of shares to be issued was reduced to 2,101,500 shares and the rest of 350,250 shares was issued at $0.49 per share. There
was no mining payable outstanding as of March 31, 2020.
As
of April 6, 2020, the Company received notice from the Nasdaq Capital Market (the “Capital Market”) that the Company
has failed to maintain a minimum closing bid price of $1.00 per share of its Common Stock over the last consecutive 30 business
days based upon the closing bid price for its common stock as required by Rule 5550(a)(2). However, the Rules also provide the
Company a compliance period of 180 calendar days in which to regain compliance during which time it must maintain a minimum closing
bid price of at least $1.00 per share for a minimum period of 10 consecutive business days, which must be completed by October
5, 2020. On April 20, 2020, the Company received a further notice from the Nasdaq Capital Market that the Company’s time
to maintain a minimum closing bid price of at least $1.00 per share for a minimum period of 10 consecutive business days has been
extended from October 5, 2020 to December 17, 2020.
On
May 11, 2020, the Company announced the purchase of 700 M30S+ (80 TH) miners. On May 12, 2020, the Company announced the purchase
660 Bitmain S19 Pro Miners.On June 11, 2020 the Company announced the purchase of an additional 500 of the latest generation Bitmain
S19 Pro Miners, bringing the Company’s total Hashrate to approximately 240 PH/s when fully deployed.
On
May 20, 2020, the Company amended its note, originally dated August 31, 2017, with Bi-Coastal Consulting Defined Benefit Plan
to reduce the conversion price to $0.60 per share. The current principal balance of the Note was $999,105.60 and accrued the interest
was $215,411.30. The Company agreed to the reduction in the conversion price from $0.80 to $0.60 to incentivize the Note holder
to convert the Note to common stock. As the Note has been fully converted to common stock, the Company has no Long-Term debt.
Blockchain
and Cryptocurrencies Generally
Distributed
blockchain technology is a decentralized and encrypted ledger that is designed to offer a secure, efficient, verifiable, and permanent
way of storing records and other information without the need for intermediaries. Cryptocurrencies serve multiple purposes.
They can serve as a medium of exchange, store of value or unit of account. Examples of cryptocurrencies include: bitcoin, bitcoin
cash, and litecoin. Blockchain technologies are being evaluated for a multitude of industries due to the belief in their ability
to have a significant impact in many areas of business, finance, information management, and governance.
Cryptocurrencies
are decentralized currencies that enable near instantaneous transfers. Transactions occur via an open source, cryptographic protocol
platform which uses peer-to-peer technology to operate with no central authority. The online network hosts the public transaction
ledger, known as the blockchain, and each cryptocurrency is associated with a source code that comprises the basis for the cryptographic
and algorithmic protocols governing the blockchain. In a cryptocurrency network, every peer has its own copy of the blockchain,
which contains records of every historical transaction - effectively containing records of all account balances. Each account
is identified solely by its unique public key (making it effectively anonymous) and is secured with its associated private key
(kept secret, like a password). The combination of private and public cryptographic keys constitutes a secure digital identity
in the form of a digital signature, providing strong control of ownership.
No
single entity owns or operates the network. The infrastructure is collectively maintained by a decentralized public user base.
As the network is decentralized, it does not rely on either governmental authorities or financial institutions to create, transmit
or determine the value of the currency units. Rather, the value is determined by market factors, supply and demand for the units,
the prices being set in transfers by mutual agreement or barter among transacting parties, as well as the number of merchants
that may accept the cryptocurrency. Since transfers do not require involvement of intermediaries or third parties, there are currently
little to no transaction costs in direct peer-to-peer transactions. Units of cryptocurrency can be converted to fiat currencies,
such as the US dollar, at rates determined on various exchanges, such as Cumberland, Coinsquare (in Canada), Coinbase, Bitsquare,
Bitstamp, and others. Cryptocurrency prices are quoted on various exchanges and fluctuate with extreme volatility.
We
believe cryptocurrencies offer many advantages over traditional, fiat currencies, although many of these factors also present
potential disadvantages and may introduce additional risks, including:
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acting
as a fraud deterrent, as cryptocurrencies are digital and cannot be counterfeited or reversed arbitrarily by a sender;
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immediate
settlement;
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elimination
of counterparty risk;
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no
trusted intermediary required;
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lower
fees;
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identity
theft prevention;
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accessible
by everyone;
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transactions
are verified and protected through a confirmation process, which prevents the problem of double spending;
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decentralized
– no central authority (government or financial institution); and
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recognized
universally and not bound by government imposed or market exchange rates.
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However,
cryptocurrencies may not provide all of the benefits they purport to offer at all or at any time.
Bitcoin
was first introduced in 2008 and was first introduced as a means of exchange in 2009. Bitcoin is a consensus network that enables
a new payment system and a completely new form of digital money. It is the first decentralized peer-to-peer payment network that
is powered by its users with no central authority or middlemen. From a user perspective, we believe bitcoin can be viewed as cash
for the Internet. The bitcoin network shares a public ledger called the “blockchain.” This ledger contains every transaction
ever processed, allowing a user’s computer to verify the validity of each transaction. The authenticity of each transaction
is protected by digital signatures corresponding to the sending addresses, allowing all users to have full control over sending
bitcoins currency rewards from their own bitcoin addresses. In addition, anyone can process transactions using the computing power
of specialized hardware and earn a reward in bitcoins for this service. This process is often called “mining.”
As
with many new and emerging technologies, there are potentially significant risks. Businesses (including the Company) which are
seeking to develop, promote, adopt, transact or rely upon blockchain technologies and cryptocurrencies have a limited track
record and operate within an untested new environment. These risks are not only related to the businesses the Company pursues,
but the sector and industry as a whole, as well as the entirety of the concept behind blockchain and cryptocurrency as value.
Factors such as access to computer processing capacity, interconnectivity, electricity cost, environmental factors (such as cooling
capacity) and location play an important role in “mining,” which is the term for using the specialized computers in
connection with the blockchain for the creation of new units of cryptocurrency.
Mathematically
Controlled Supply
The
method for creating new bitcoins is mathematically controlled in a manner so that the supply of bitcoins grows at a limited rate
pursuant to a pre-set schedule. The number of bitcoins awarded for solving a new block is automatically halved every 210,000 blocks.
Thus, the current fixed reward for solving a new block is 12.5 bitcoins per block and the reward will decrease by half to become
6.25 bitcoins around May 10, 2020 (based on estimates of the rate of block solution calculated by BitcoinClock.com). This deliberately
controlled rate of bitcoin creation means that the number of bitcoins in existence will never exceed 21 million and that bitcoins
cannot be devalued through excessive production unless the Bitcoin Network’s source code (and the underlying protocol for
bitcoin issuance) is altered. The Company monitors the Blockchain network and, as of March 13, 2020, based on the information
we collected from our network access 18.2 million bitcoins have been mined.
Digital
Asset Mining
We
intend to power and secure blockchains by verifying blockchain transactions using custom hardware and software. We are currently
using our hardware to mine bitcoin (“BTC”) and expect to mine BTC and ether (“ETH”), and potentially other
cryptocurrencies. Bitcoin and ether rely on different technologies based on the blockchain. Wherein bitcoin is a digital currency
and ether is generally associated with smart contracts and digital tokens, we will be compensated in either BTC or ETH based on
the mining transactions we perform for each, which is how we will earn revenue.
Blockchains
are decentralized digital ledgers that record and enable secure peer-to-peer transactions without third party intermediaries.
Blockchains enable the existence of digital assets by allowing participants to confirm transactions without the need for a central
certifying authority. When a participant requests a transaction, a peer-to-peer network consisting of computers, known as nodes,
validate the transaction and the user’s status using known algorithms. After the transaction is verified, it is combined
with other transactions to create a new block of data for the ledger. The new block is added to the existing blockchain in a way
that is permanent and unalterable, and the transaction is complete.
Digital
assets (also known as cryptocurrency) are a medium of exchange that uses encryption techniques to control the creation of monetary
units and to verify the transfer of funds. Many consumers use digital assets because it offers cheaper and faster peer-to-peer
payment options without the need to provide personal details. Every single transaction and the ownership of every single digital
asset in circulation is recorded in the blockchain. Miners use powerful computers that tally the transactions to run the blockchain.
These miners update each time a transaction is made and ensure the authenticity of information. The miners receive a transaction
fee for their service in the form of a portion of the new digital “coins” that are issued.
Performance
Metrics – Hashing
Riot
operates mining hardware which performs computational operations in support of the blockchain measured in “hash rate”
or “hashes per second.” A “hash” is the computation run by mining hardware in support of the blockchain;
therefore, a miner’s “hash rate” refers to the rate at which it is capable of solving such computations. The
original equipment used for mining bitcoin utilized the Central Processing Unit (CPU) of a computer to mine various forms of cryptocurrency.
Due to performance limitations, CPU mining was rapidly replaced by the Graphics Processing Unit (GPU), which offers significant
performance advantages over CPUs. General purpose chipsets like CPUs and GPUs have since been replaced in the mining industry
by Application Specific Integrated Circuits (ASIC) chips like those found in the Bitmain S9 Antiminers and the next generation
Bitmain S17 Pro Antiminers currently utilized by Riot at its mining facility. These ASIC chips are designed specifically to maximize
the rate of hashing operations.
Riot
measures our mining performance and competitive position based on overall hash rate being produced in our mining sites. The latest
equipment utilized in Riot’s OKC mining operation, the Bitmain S17 Pro Antminer, performs in the range of approximately
50 - 62 terahash per second (TH/s) per unit. This mining hardware is on the cutting edge of available mining equipment and we
believe our acquisition of _____ units places us among leaders of publicly-traded cryptocurrency miners; however, advances and
improvements to the technology are ongoing and may be available in quantities to the market in the near future which may affect
our perceived position. We believe that our current inventory of _____ miners establishes us among the top public companies in
the United States mining cryptocurrency.
Government
Regulation
Government
regulation of blockchain and cryptocurrency is being actively considered by the United States federal government via a number
of agencies and regulatory bodies, as well as similar entities in other countries. State government regulations also may apply
to our activities such and other activities in which we participate or may participate in the future. Other regulatory bodies
are governmental or semi-governmental and have shown an interest in regulating or investigating companies engaged in the blockchain
or cryptocurrency business.
Regulations
may substantially change in the future and it is presently not possible to know how regulations will apply to our businesses,
or when they will be effective. As the regulatory and legal environment evolves, we may become subject to new laws, further regulation
by the SEC and other agencies, which may affect our mining and other activities. For instance, various bills have also been proposed
in Congress related to our business, which may be adopted and have an impact on us. For additional discussion regarding our belief
about the potential risks existing and future regulation pose to our business, see the Section entitled “Risk Factors”
herein.
Intellectual
Property
We
actively use specific hardware and software for our cryptocurrency mining operation. In certain cases, source code and other software
assets may be subject to an open source license, as much technology development underway in this sector is open source. For these
works, Riot intends to adhere to the terms of any license agreements that may be in place.
We
do not currently own, and do not have any current plans to seek, any patents in connection with our existing and planned blockchain
and cryptocurrency related operations. We do expect to rely upon trade secrets, trademarks, service marks, trade names, copyrights
and other intellectual property rights and expect to license the use of intellectual property rights owned and controlled by others.
In addition, we have developed and may further develop certain proprietary software applications for purposes of our cryptocurrency
mining operation.
Competition
In
cryptocurrency mining, companies, individuals and groups generate units of cryptocurrency through mining. Miners can range from
individual enthusiasts to professional mining operations with dedicated data centers. Miners may organize themselves in mining
pools. The Company competes or may in the future compete with other companies that focus all or a portion of their activities
on owning or operating cryptocurrency exchanges, developing programming for the blockchain, and mining activities. At present,
the information concerning the activities of these enterprises is not readily available as the vast majority of the participants
in this sector do not publish information publicly or the information may be unreliable. Published sources of information include
“bitcoin.org” and “blockchain.info”; however, the reliability of that information and its continued availability
cannot be assured.
Several
public companies (traded in the U.S. and Internationally), such as the following, may be considered to compete with us, although
we believe there is no company, including the following, which engages in the same scope of activities as we do.
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Overstock.com
Inc.
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Bitcoin
Investment Trust
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Blockchain
Industries, Inc. (formerly Omni Global Technologies, Inc.)
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Bitfarms
Technologies Ltd. (formerly Blockchain Mining Ltd)
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DMG
Blockchain Solutions Inc.
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Digihost
International, Inc.
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Hive
Blockchain Technologies Inc.
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Hut
8 Mining Corp.
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HashChain
Technology, Inc.
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MGT
Capital Investments, Inc.
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DPW
Holdings, Inc.
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Layer1
Technologies, LLC
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Northern
Data AG
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Riot
BlockChain
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While
there is limited available information regarding our non-public competitors, we believe that our recent acquisition and deployment
of ____ miners (as discussed further above) positions us well among the publicly traded companies involved in the cryptocurrency
mining industry. The cryptocurrency industry is a highly competitive and evolving industry and new competitors and/or emerging
technologies could enter the market and affect our competitiveness in the future.
Patent
Enforcement Litigation
As
of June 26, 2020, we were not involved in any active patent enforcement litigation.
Employees
As
of June 26, 2020, we had 3 full-time employees. We believe our employee relations to be good.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
following table presents information with respect to our officers, directors and significant employees as of the date of this
Report:
Name
and Address
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Age
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Date
First Elected
or Appointed
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Position(s)
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Merrick
Okamoto
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59
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August
13, 2017
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Chief
Executive Officer
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David
Lieberman
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75
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August
13, 2017
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Chief
Financial Officer and Director
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James
Crawford
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45
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March
1, 2013
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Chief
Operating Officer
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Fred
Thiel
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59
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April
24, 2018
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Director
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Michael
Rudolph
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69
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August
17. 2018
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Director
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Michael
Berg
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70
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August
17, 2018
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Director
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Background
of officers and directors
The
following is a brief account of the education and business experience during at least the past five years of our officers and
directors, indicating each person’s principal occupation during that period, and the name and principal business of the
organization in which such occupation and employment were carried out.
Merrick
D. Okamoto - Chief Executive Officer
Mr.
Merrick D. Okamoto, age 59, serves as the President at Viking Asset Management which he co-founded in 2002. Mr. Okamoto is responsible
for research, due diligence, and structuring potential investment opportunities. He has been instrumental in providing capital
to over 200 private and public companies. He is also responsible for the firm’s trading operations. Prior to Viking, Mr.
Okamoto co-founded TradePortal.com, Inc. in 1999 and served as its President until 2001. He was instrumental in developing the
proprietary Trade Matrix software platform offered by TradePortal Securities. Mr. Okamoto’s negotiations were key in selling
a minority stake in TradePortal.com Inc. to Thomson Financial. Prior to that, he held Vice President positions with Shearson Lehman
Brothers, Prudential Securities, and Paine Webber.
David
P. Lieberman - Chief Financial Officer and Director
Mr.
David Lieberman, age 75, is a seasoned business executive with over 40 years of financial experience beginning with five years
as an accountant with Price Waterhouse. He has extensive experience as a senior operational and financial executive serving both
multiple public and non-public companies. Mr. Lieberman currently serves as the President of Cobra International and Lieberman
Financial Consulting where he acts as administrator for several investment groups. Previously he served as CFO and Director for
MEDL Mobile Holdings, Inc., and CFO and Director of Datascension, Inc., a telephone market research company that provides both
outbound and inbound services to corporate customers, since January 2008 and a director of that company since 2006. From 2006
to 2007, he served as Chief Financial Officer of Dalrada Financial Corporation, a publicly traded payroll processing company based
in San Diego. From 2003 to 2006, he was the Chief Financial Officer for John Goyak & Associates, Inc., a Las Vegas-based aerospace
consulting firm. Mr. Lieberman attended the University of Cincinnati, where he received his B.A. in Business, and is a licensed
CPA in the State of California.
James
Crawford - Chief Operating Officer
Mr.
Crawford, age 45, was a founding member of Kino Interactive, LLC, and of AudioEye, Inc. Mr. Crawford’s experience as an
entrepreneur spans the entire life cycle of companies from start-up capital to compliance officer and director of reporting public
companies. Prior to his involvement as Chief Operating Officer of the Company, Mr. Crawford served as a director and officer of
Augme Technologies, Inc. beginning March 2006, and assisted the company in maneuvering through the initial challenges of acquisitions
executed by the company through 2011 that established the company as a leading mobile marketing company in the United States.
Mr. Crawford is experienced in public company finance and compliance functions. He has extensive experience in the area of intellectual
property creation, management and licensing. Mr. Crawford also served on the board of directors Modavox and Augme Technologies,
and as founder and managing member of Kino Digital, Kino Communications, and Kino Interactive.
Fred
Thiel - Director
Mr.
Thiel, age 59, has been the Chairman of SPROCKET, INC. since June 2017, a Blockchain/Cryptocurrency technology and financial services
company whose mission is to reduce the risk and friction of cryptocurrency trading across marketplaces, regions and exchanges
by establishing a federation of exchanges that together create a single aggregated global trading market place with large scale
liquidity, rapid execution, minimal counter-party risk, and price transparency. From January 2013 until November 2015, Mr. Thiel
served as a director of Local Corporation, which was a NASDAQ listed entity which was a leader in on-line local search and digital
media, mobile search monetization and programmatic retargeting markets. He served as Chairman of the Board of LOCAL from January
2014 to November 2015 and as its Chief Executive Officer from May 2014 to November 2015. Mr. Thiel has been the principal of Thiel
Advisors Inc. since 2013. Thiel Advisors is a boutique advisory firm providing PE and VC firms, as well as public and private
company boards of director, with deep technology industry operating expertise and strategic advisory services.
Michael
Rudolph - Director
Mr.
Rudolph, age 69, has served as the President and Chief Executive Officer of the Edgehill Group since July 1995, a consulting firm
which provides financial management, operational expertise, strategic and tactical advice, project management and change management
guidance. In connection therewith, he served as a contract Chief Financial Officer of ConsejoSano, Inc., a Hispanic telehealth
provider, from May 2016 to July 2017; as the Chief Financial Officer of Fullbottle Group, Inc., an online advertising agency,
from April 2014 to May 2017; as a contract Chief Financial Officer and Chief Administrator Officer of Calaborate Inc., a mobile
app developer, from October 2013 to April 2014; and as interim Chief Financial Officer and Chief Administrative Officer of a software
subsidiary company, Videro LLC and Videro, Inc from July 2011 to September 2015. In addition, Mr. Rudolph provided interim management
as CEO and CFO for several online businesses and firms. From January 2001 until March 2016, Mr. Rudolph co-founded and served
as Chief Financial Officer and Managing Member of Viking Asset Management, LLC, an SEC registered investment adviser (“RIA”)
where he was responsible for finance, operations, treasury, audit, tax, legal, compliance and investor relations for the funds
and the RIA and had direct management responsibility for 17 full time employees. From November 1989 to June 1995, Mr. Rudolph
was the managing director at Charles Schwab & Co., Inc., in San Francisco, California, during which he managed non-trading
functions for the Institutional Brokerage Division including sales/marketing, operations, compliance, financial planning/reporting
and research and managed 10 full time employees and a $4.5 million budget. Mr. Rudolph attended Washington University in St. Louis,
MO, where he received his M.B.A. in Finance/Marketing. He received his B.S. in Biochemistry from Purdue University in West Lafayette,
IN, and was a licensed FINRA registered investment advisor from April 2001 to March 2011.
Michael
Berg - Director
Mr.
Berg, age 70, has been a practicing Certified Public Accountant for over 30 years and currently serves as an advisor to several
small public companies. From September of 1977 until June of 1985, he was an audit manager for Coopers & Lybrand (now PWC)
in San Francisco and in January 2008, co-founded and served as the West Coast PIC of PMB Helin Donovan, a 100+ person CPA firm.
From September 1988 until December 2000, Mr. Berg served as the Chief Financial Officer of a public real estate company and a
high tech manufacturer and a research and development company. He has established several independent companies including EXIS
in January 1992, which sold and installed a proprietary software product which he helped develop for distributed general ledgers
systems. Most recently, in January 2014, he formed the Registry of Accredited Investors that provides services to investors and
companies in Reg D offerings. His industry experience ranges from finance and distribution to high tech, pharma, real estate and
construction. Mr. Berg has worked extensively with public companies and has participated in many public offerings in national
markets. From January 1989 until October 1996, he was the President of the Board of Directors of the Names Project and formed
a not-for-profit called the Permanent Display aimed at creating a San Francisco landmark for the AIDs Quilt. In March 2005, Mr.
Berg also helped found Welcome, a 501C (3) that provides homeless outreach in the Upper Polk Street area of San Francisco. Mr.
Berg attended San Francisco State University, where he received his B.A. in Accounting, and is a licensed CFF and CPA in the States
of California.
Code
of Business Conduct and Ethics
We
have adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer,
principal accounting officer or controller or persons performing similar functions and also to other employees. Our Code of Business
Conduct and Ethics can be found on the Company’s website at www.marathonpg.com.
Family
Relationships
There
are no family relationships between any of our directors, executive officers or directors.
Involvement
in Certain Legal Proceedings
During
the past ten years, none of our officers, directors, promoters or control persons have been involved in any legal proceedings
as described in Item 401(f) of Regulation S-K.
Term
of Office
Our
Board of Directors is comprised of five directors, of which all five seats are currently occupied, and is divided among three
classes, Class I, Class II and Class III. Class I directors will serve until the 2021 annual meeting of stockholders and until
their respective successors have been duly elected and qualified, or until such director’s earlier resignation, removal
or death. Class III directors will serve until the 2020 annual meeting of stockholders and until their respective successors have
been duly elected and qualified, or until such director’s earlier resignation, removal or death. Class II directors, elected
at the Company’s annual shareholder meeting held on September 28, 2016, will serve until the 2019 annual meeting of stockholders
and until their respective successors have been duly elected and qualified, or until such director’s earlier resignation,
removal or death. All officers serve at the pleasure of the Board.
Director
Independence
Mr.
Fred Thiel, Mr. Michael Berg and Mr. Michael Rudolph are “independent” directors based on the definition of independence
in the listing standards of the NASDAQ Stock Market LLC (“NASDAQ”).
Committees
of the Board of Directors
Our
Board has established three standing committees: an audit committee, a nominating and corporate governance committee and a compensation
committee, which are described below. Members of these committees are elected annually at the regular board meeting held in conjunction
with the annual stockholders’ meeting. The charter of each committee is available on our website at www.marathonpg.com.
Audit
Committee
The
Audit Committee members are currently Mr. Fred Thiel, Mr. Michael Berg and Mr. Michael Rudolph, with Mr. Michael Berg as Chairman.
The Audit Committee has authority to review our financial records, deal with our independent auditors, recommend to the Board
policies with respect to financial reporting, and investigate all aspects of our business. All of the members of the Audit Committee
currently satisfy the independence requirements and other established criteria of NASDAQ.
The
Audit Committee Charter is available on the Company’s website at http://www.marathonpg.com/. The Audit Committee has sole
authority for the appointment, compensation and oversight of the work of our independent registered public accounting firm, and
responsibility for reviewing and discussing with management and our independent registered public accounting firm our audited
consolidated financial statements included in our Annual Report on Form 10-K, our interim financial statements and our earnings
press releases. The Audit Committee also reviews the independence and quality control procedures of our independent registered
public accounting firm, reviews management’s assessment of the effectiveness of internal controls, discusses with management
the Company’s policies with respect to risk assessment and risk management and will review the adequacy of the Audit Committee
charter on an annual basis.
Nominating
and Governance Committee
The
Nominating and Corporate Governance Committee members are currently Mr. Fred Thiel, Mr. Michael Berg and Mr. Michael Rudolph,
with Mr. Michael Rudolph as Chairman. The Nominating and Corporate Governance Committee has the following responsibilities: (a)
setting qualification standards for director nominees; (b) identifying, considering and nominating candidates for membership on
the Board; (c) developing, recommending and evaluating corporate governance standards and a code of business conduct and ethics
applicable to the Company; (d) implementing and overseeing a process for evaluating the Board, Board committees (including the
Committee) and overseeing the Board’s evaluation of the Chairman and Chief Executive Officer of the Company; (e) making
recommendations regarding the structure and composition of the Board and Board committees; (f) advising the Board on corporate
governance matters and any related matters required by the federal securities laws; and (g) assisting the Board in identifying
individuals qualified to become Board members; recommending to the Board the director nominees for the next annual meeting of
shareholders; and recommending to the Board director nominees to fill vacancies on the Board.
The
Nominating and Governance Committee Charter is available on the Company’s website at http://www.marathonpg.com/. The Nominating
and Governance Committee determines the qualifications, qualities, skills, and other expertise required to be a director and to
develop, and recommend to the Board for its approval, criteria to be considered in selecting nominees for director (the “Director
Criteria”); identifies and screens individuals qualified to become members of the Board, consistent with the Director Criteria.
The Nominating and Governance Committee considers any director candidates recommended by the Company’s shareholders pursuant
to the procedures described in the Company’s proxy statement, and any nominations of director candidates validly made by
shareholders in accordance with applicable laws, rules and regulations and the provisions of the Company’s charter documents.
The Nominating and Governance Committee makes recommendations to the Board regarding the selection and approval of the nominees
for director to be submitted to a shareholder vote at the Annual Meeting of shareholders, subject to approval by the Board.
Compensation
Committee
The
Compensation Committee oversees our executive compensation and recommends various incentives for key employees to encourage and
reward increased corporate financial performance, productivity and innovation. Its members are currently Mr. Fred Thiel, Mr. Michael
Berg and Mr. Michael Rudolph with Mr. Fred Thiel as Chairman. All of the members of the Compensation Committee currently satisfy
the independence requirements and other established criteria of NASDAQ.
The
Compensation Committee Charter is available on the Company’s website at http://www.marathonpg.com/. The Compensation Committee
is responsible for: (a) assisting our Board in fulfilling its fiduciary duties with respect to the oversight of the Company’s
compensation plans, policies and programs, including assessing our overall compensation structure, reviewing all executive compensation
programs, incentive compensation plans and equity-based plans, and determining executive compensation; and (b) reviewing the adequacy
of the Compensation Committee charter on an annual basis. The Compensation Committee, among other things, reviews and approves
the Company’s goals and objectives relevant to the compensation of the Chief Executive Officer, evaluate the Chief Executive
Officer’s performance with respect to such goals, and set the Chief Executive Officer’s compensation level based on
such evaluation. The Compensation Committee also considers the Chief Executive Officer’s recommendations with respect to
other executive officers and evaluates the Company’s performance both in terms of current achievements and significant initiatives
with long-term implications. It assesses the contributions of individual executives and recommend to the Board levels of salary
and incentive compensation payable to executive officers of the Company; compares compensation levels with those of other leading
companies in similar or related industries; reviews financial, human resources and succession planning within the Company; recommend
to the Board the establishment and administration of incentive compensation plans and programs and employee benefit plans and
programs; recommends to the Board the payment of additional year-end contributions by the Company under certain of its retirement
plans; grants stock incentives to key employees of the Company and administer the Company’s stock incentive plans; and reviews
and recommends for Board approval compensation packages for new corporate officers and termination packages for corporate officers
as requested by management.
Changes
in Nominating Procedures
None.
Board
Leadership Structure and Role in Risk Oversight
Although
we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined,
we have traditionally determined that it is in the best interests of the Company and its shareholders to partially combine these
roles. Due to the small size of the Company, we believe it is currently most effective to have the Chairman and Chief Executive
Officer positions partially combined.
Our
Board is primarily responsible for overseeing our risk management processes. The Board receives and reviews periodic reports from
management, auditors, legal counsel, and others, as considered appropriate regarding the Company’s assessment of risks.
The Board focuses on the most significant risks facing the Company and our general risk management strategy, and also ensures
that risks undertaken by us are consistent with the Board’s risk parameters. While the Board oversees the Company, our management
is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach
for addressing the risks facing the Company and that our board leadership structure supports this approach.
Compliance
with Section 16(a) of the Exchange Act
Section
16(a) of Exchange Act requires our executive officers and directors and persons who beneficially own more than 10% of a registered
class of our equity securities to file with the Commission initial statements of beneficial ownership, statements of changes in
beneficial ownership and annual statement of changes in beneficial ownership with respect to their ownership of the Company’s
securities, on Form 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required by the
Securities and Exchange Commission regulations to furnish our Company with copies of all Section 16(a) reports they file.
Based
solely on our review of the copies of such reports received by us, and on written representations by our officers and directors
regarding their compliance with the applicable reporting requirements under Section 16(a) of the Exchange Act and without conducting
any independent investigation of our own, we believe that with respect to the fiscal year ended December 31, 2019, our officers
and directors, and all of the persons known to us to beneficially own more than 10% of our common stock filed all required reports
on a timely basis.