UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
or
For the transition period from _______to______
(Exact Name of Registrant as Specified in Charter)
(State or other jurisdiction of incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s
telephone number, including area code:
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated Filer | ☐ | |
| Non-accelerated Filer | ☐ | Smaller Reporting Company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The
|
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date, shares of common stock are issued and outstanding as of November 14, 2022.
TABLE OF CONTENTS
OTHER PERTINENT INFORMATION
Unless specifically set forth to the contrary, “Marathon Digital Holdings, Inc.,” “we,” “us,” “our” and similar terms refer to Marathon Digital Holdings, Inc., a Nevada corporation, and its subsidiaries.
| 2 |
Item 1. Financial Statements
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Digital currencies | ||||||||
| Digital currencies loaned | ||||||||
| Digital currencies held in fund | ||||||||
| Receivable from sale of equipment | ||||||||
| Deposits | ||||||||
| Loan receivable | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Other assets: | ||||||||
| Property
and equipment (net of accumulated depreciation of $ and $ | ||||||||
| Advances to vendors | ||||||||
| Investments | ||||||||
| Digital currencies, restricted | ||||||||
| Long term deposits | ||||||||
| Long term prepaids | ||||||||
| Right-of-use assets | ||||||||
| Intangible
assets (net of accumulated amortization of $ | ||||||||
| Total other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Legal reserve payable | ||||||||
| Operating lease liabilities | ||||||||
| Current portion of accrued bond interest | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities | ||||||||
| Convertible notes | ||||||||
| Term loan | ||||||||
| Operating lease liabilities | ||||||||
| Deferred tax liabilities | ||||||||
| Total long-term liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred stock, par value, shares authorized, shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | ||||||||
| Common stock, par value; shares authorized; and issued and outstanding at September 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part to these unaudited consolidated condensed financial statements.
| 3 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Total Revenues | $ | $ | $ | $ | ||||||||||||
| Costs and expenses | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| Cost of revenues - energy, hosting and other | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Cost of revenues - depreciation and amortization | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
| Operating expenses | ||||||||||||||||
| General and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Legal reserves | ( | ) | ( | ) | ||||||||||||
| Impairment of deposits due to vendor bankruptcy filing | ( | ) | ( | ) | ||||||||||||
| Impairment of digital currencies | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Impairment of patents | ( | ) | ||||||||||||||
| Realized and unrealized gains (losses) on digital currencies held in fund | ( | ) | ||||||||||||||
| Gain on sale of equipment, net of disposals | ||||||||||||||||
| ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Impairment of loan and investment due to vendor bankruptcy filing | ( | ) | ( | ) | ||||||||||||
| Other non-operating income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before income taxes | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Income tax benefit | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share, basic and diluted: | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares outstanding, basic and diluted: | ||||||||||||||||
The accompanying notes are an integral part to these unaudited consolidated condensed financial statements.
| 4 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| For the Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Accumulated
Other Comprehensive | Total Stockholders’ | |||||||||||||||||||||||||||
| Number | Amount | Number | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock based compensation, net of tax withholding | - | |||||||||||||||||||||||||||||||
| Issuance of common stock, net of offering costs/At-the-market offering | - | |||||||||||||||||||||||||||||||
| Options exercised on a cashless basis | - | ( | ) | |||||||||||||||||||||||||||||
| Warrant exercised for cash | - | |||||||||||||||||||||||||||||||
| Common stock issued for cashless exercise of warrants | ||||||||||||||||||||||||||||||||
| Common stock issued for service and license agreements | ||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| For the Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Accumulated
Other Comprehensive | Total Stockholders’ | |||||||||||||||||||||||||||
| Number | Amount | Number | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock based compensation, net of tax withholding | - | |||||||||||||||||||||||||||||||
| Issuance of common stock, net of offering costs/At-the-market offering | - | |||||||||||||||||||||||||||||||
| Common stock issued for long term service contract | - | |||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| For the Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Accumulated
Other Comprehensive | Total Stockholders’ | |||||||||||||||||||||||||||
| Number | Amount | Number | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock based compensation, net of tax withholding | - | |||||||||||||||||||||||||||||||
| Common stock issued for service and license agreements | - | |||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| For the Three Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Accumulated
Other Comprehensive | Total Stockholders’ | |||||||||||||||||||||||||||
| Number | Amount | Number | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock based compensation, net of tax withholding | - | |||||||||||||||||||||||||||||||
| Issuance of common stock, net of offering costs/At-the-market offering | - | |||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
The accompanying notes are an integral part to these unaudited consolidated condensed financial statements.
| 5 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of prepaid service contract | ||||||||
| Gain on sale of assets, net of disposals | ( | ) | ( | ) | ||||
| Deferred tax expense | ( | ) | ||||||
| Realized and unrealized losses (gains) on digital currencies held in fund | ( | ) | ||||||
| Impairment of digital currencies | ||||||||
| Stock based compensation | ||||||||
| Amortization of bond issuance costs | ||||||||
| Impairment of patents | ||||||||
| Impairment of assets related to vendor bankruptcy filing | ||||||||
| Other adjustments from operations, net | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Digital currencies | ( | ) | ( | ) | ||||
| Deposits | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ||||||||
| Legal reserve payable | ||||||||
| Accrued interest | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Advances to vendors | ( | ) | ( | ) | ||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Sales of property and equipment | ||||||||
| Purchase of digital currencies in fund | ( | ) | ||||||
| Purchase of equity investments | ( | ) | ||||||
| Sale of digital currencies in investment fund | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from issuance of common stock, net of issuance costs | ||||||||
| Proceeds from term loan borrowings, net of issuance costs | ||||||||
| Value of shares withheld for taxes | ( | ) | ( | ) | ||||
| Proceeds received on exercise of options and warrants | ||||||||
| Net cash provided by financing activities | ||||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ) | ( | ) | ||||
| Cash, cash equivalents and restricted cash — beginning of period | ||||||||
| Cash, cash equivalents and restricted cash — end of period | $ | $ | ||||||
| Supplemental cash flow information: | ||||||||
| Interest paid | $ | $ | ||||||
| Supplemental schedule of non-cash investing and financing activities: | ||||||||
| Options exercised into common stock | $ | $ | ||||||
| Operating lease assets obtained in exchange for new operating lease liabilities | $ | $ | ||||||
| Digital currencies transferred from fund | $ | |||||||
| Unpaid proceeds from sale of property & equipment | $ | $ | ||||||
| Reclassifications from advances to vendor to property and equipment upon receipt of equipment | $ | $ | ||||||
| Common stock issued for service and license agreements | $ | $ | ||||||
The accompanying notes are an integral part to these unaudited consolidated condensed financial statements.
| 6 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Marathon Digital Holdings, Inc. (the “Company”) was incorporated in the State of Nevada on February 23, 2010 under the name Verve Ventures, Inc. On December 7, 2011, the Company changed its name to American Strategic Minerals Corporation and was engaged in exploration and potential development of a minerals business. In June 2012, the Company discontinued the minerals business and began to invest in real estate properties in Southern California. In October 2012, the Company discontinued its real estate business and the Company commenced IP licensing operations, at which time the Company’s name was changed to Marathon Patent Group, Inc. In 2018, the Company began its bitcoin mining operations by purchasing cryptocurrency mining machines and establishing a data center in Canada to mine digital assets. The Company ceased operating in Canada in 2020 and relocated all owned mining equipment out of Canada to the U.S. The Company has since expanded its activities in the mining of bitcoin across the U.S. The Company changed its name to Marathon Digital Holdings, Inc. on March 1, 2021. As of September 30, 2022, the Company is solely focused on the mining of bitcoin and ancillary opportunities within the bitcoin ecosystem.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with the rules and regulations of the SEC. They include all adjustments that we consider necessary for a fair statement of the results for the interim periods presented. Such adjustments consisted only of normal recurring items unless otherwise disclosed. The September 30, 2022, Condensed Consolidated Balance Sheet was derived from audited financial statements but does not include all footnote disclosures from the annual financial statements.
These financial statements should be read in conjunction with the financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 10, 2022.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated condensed financial statements, including the accounts of the Company’s subsidiaries, Marathon Crypto Mining, Inc., Crypto Currency Patent Holding Company and Soems Acquisition Corp. have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations. These consolidated condensed financial statements reflect all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position, the results of operations and cash flows of the Company for the periods presented. It is suggested that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s most recent Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year ended December 31, 2022.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications have no effect on the reported financial position, results of operations, or cash flows. Previously reported compensation and related taxes, consulting fees, and professional fees have now been reclassified within general and administrative expenses. In addition, previously reported change in fair value of warrant liability, realized gain on sale of digital currencies and interest income have now been reclassified as other non-operating income.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made by management include, but are not limited to, estimating the useful lives of fixed assets, the assumptions used to calculate fair value of options granted, realization of long-lived assets, deferred income taxes, unrealized tax positions and the realization of digital currencies.
| 7 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Restricted Cash
Restricted cash principally represents those cash balances that support commercial letters of credit and are restricted from withdrawal. The following table provides a reconciliation of the total cash, cash equivalents and restricted cash reported on the Condensed Consolidated Balance Sheets to the corresponding amounts reported on the Condensed Consolidated Statements of Cash Flows.
As of September 30, 2022 | As of September 30, 2021 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Cash, cash equivalents and restricted cash | $ | $ | ||||||
Digital Currencies, Digital currencies, restricted and Digital currencies loaned
Digital currencies, and Digital currencies loaned are included in current assets in the consolidated balance sheets. Digital currencies are recorded as indefinite lived intangibles at cost less impairment in accordance with FASB ASC 350 – Intangibles-Goodwill and Other. Digital currencies, restricted represent collateral for long-term loans and as such are classified as a non-current asset.
An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. When the exchange-traded price of digital currencies declines below its carrying value, the Company has determined that it is more likely than not that an impairment exists. When this occurs, the amount of impairment to record is determined based on the fair value of digital currencies in accordance with the fair value measurement framework in FASB ASC 820 – Fair Value Measurement “(ASC 820”). If the fair value of digital currency is lower than its carrying amount, the Company will record an impairment in an amount by which the carrying value exceeds the fair value of the digital currency. Subsequent reversal of impairment losses is not permitted.
The following table presents the activities of the digital currencies for the nine months ended September 30, 2022:
| Digital currencies at December 31, 2021* | $ | |||
| Additions of digital currencies | ||||
| Digital currencies transferred from fund | ||||
| Disposal of digital currency for charitable contribution | ( | ) | ||
| Impairment of digital currencies | ( | ) | ||
| Digital currencies at September 30, 2022 | $ |
| * |
| Digital currencies at December 31, 2020 | $ | |||
| Additions of digital currencies | ||||
| Impairment of digital currencies | ( | ) | ||
| Interest received on digital currencies, restricted | ||||
| Sale of digital currencies, net | ( | ) | ||
| Digital currencies at September 30, 2021 | $ |
At
September 30, 2022, the Company held approximately
| 8 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Halving – The bitcoin blockchain and the cryptocurrency reward for solving a block is subject to periodic incremental halving. Halving is a process designed to control the overall supply and reduce the risk of inflation in cryptocurrencies using a Proof-of-Work consensus algorithm. At a predetermined block, the mining reward is cut in half, hence the term “Halving”. The last halving for bitcoin occurred on May 12, 2020. For example, the current fixed reward on the bitcoin network for solving a new block is six and one quarter (6.25) bitcoin per block, which decreased from twelve and a half (12.5) bitcoin per block in May 2020. It is estimated that the number of bitcoin per block will halve again in May 2024. Many factors influence the price of bitcoin and potential increases or decreases in prices in advance of or following a future halving is unknown.
Digital Currencies Held in Fund
On
January 25, 2021, the Company entered into a limited partnership agreement with NYDIG Digital Assets Fund III, LP (“Fund”)
wherein the Fund purchased
The Fund qualified and operated as an investment company for accounting purposes pursuant to the accounting and reporting guidance under ASC 946, Financial Services – Investment Companies, which requires fair value measurement of the Fund’s investments in digital assets. The digital assets held by the Fund were traded on a number of active markets globally, including the over-the-counter market and digital asset exchanges. A fair value measurement under ASC 820 for an asset assumes that the asset is exchanged in an orderly transaction between market participants either in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset (ASC 820-10-35-5). The fair value of the assets within the Fund were measured daily based on pricing obtained from CoinDesk Bitcoin Price Index at approximately 4pm New York time. Any changes in the fair value of the assets were recorded in the Consolidated Statement of Operations under the caption “Realized and unrealized gains (losses) of digital currencies held in fund.”
On June 10, 2022, the Company redeemed 100%
of its limited partnership interest in the Fund in exchange for approximately 4,768.5 bitcoin (with a fair market value of
approximately $
| Digital currencies held in fund at December 31, 2021 | $ | |||
| Sale of digital currencies | ( | ) | ||
| Realized and unrealized losses on digital currencies held in fund | ( | ) | ||
| Management expenses incurred by fund | ( | ) | ||
| Digital currencies transferred out of fund | ( | ) | ||
| Digital currencies held in fund at September 30, 2022 | $ | |||
| Digital currencies held in fund at December 31, 2020 | $ | |||
| Purchase of digital currencies held in fund | ||||
| Realized and unrealized gains on digital currencies held in fund | ||||
| Management expenses incurred by fund | ( | ) | ||
| Digital currencies held in fund at December 31, 2021 | $ |
Investments
Investments, which may be made from time to time for strategic reasons (and not to engage in the business of investments) are included in non-current assets in the consolidated balance sheets. Investments are recorded at cost and the Company analyzes the value of investments on a quarterly basis. As part of the Company’s policy to maximize return on strategic investment opportunities, while preserving capital and limiting downside risk, the Company may at times enter into equity investments or Simple Agreements for Future Equity (“SAFE”) agreements. The nature and timing of the Company’s investments will depend on available capital at any particular time and the investment opportunities identified and available to the Company.
On December 21, 2021 and December 30, 2021, the Company entered into two separate SAFE agreements classified on the balance sheet as non-current assets. SAFE agreements are accounted for as equity securities without readily determinable fair value at cost minus impairment, as adjusted for observable price changes in orderly transactions for identical or similar investment of the same issue pursuant to Topic 321 Investments – Equity Securities (“ASC 321”).
| 9 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
On
February 3, 2022, the Company invested approximately $
On
May 3, 2022, the Company converted $
As of September 30, 2022, the Company has one remaining
SAFE investment with a carrying value of $
Fair Value of Financial Instruments
The Company measures at fair value certain of its financial and non-financial assets and liabilities by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:
| Level 1: | Observable inputs such as quoted market prices in active markets for identical assets or liabilities | |
| Level 2: | Observable market-based inputs or unobservable inputs that are corroborated by market data | |
| Level 3: | Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions. |
The carrying amounts reported in the consolidated balance sheet for cash, accounts receivable, accounts payable, and accrued expenses, approximate their estimated fair market value based on the short-term maturity of these instruments. The carrying value of notes payable and other long-term liabilities approximate fair value as the related interest rates approximate rates currently available to the Company.
Financial assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level of input that is significant to their fair value measurement. The Company measures the fair value of its marketable securities and investments by taking into consideration valuations obtained from third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs included reported trades and broker-dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities and other observable inputs.
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis and the Company’s estimated level within the fair value hierarchy of those assets and liabilities as of September 30, 2022 and December 31, 2021, respectively:
| Fair value measured at September 30, 2022 | ||||||||||||||||
| Total carrying value at September 30, | Quoted prices in active markets | Significant other observable inputs | Significant unobservable inputs | |||||||||||||
| 2022 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Assets | ||||||||||||||||
| Money Market Accounts | $ | $ | $ | $ | ||||||||||||
| Fair value measured at December 31, 2021 | ||||||||||||||||
| Total
carrying value at December 31, | Quoted prices in active markets | Significant other observable inputs | Significant unobservable inputs | |||||||||||||
| 2021 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Assets | ||||||||||||||||
| Money Market Accounts | $ | $ | $ | $ | ||||||||||||
| Digital currencies held in fund | $ | $ | $ | $ | ||||||||||||
| 10 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
There were no transfers among Levels 1, 2 or 3 during the three and nine months ended September 30, 2022.
On
June 10, 2022, the Company withdrew approximately
Net income per common share is calculated in accordance with ASC Topic 260: Earnings Per Share (“ASC 260”). Basic income per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. For the three and nine months ended September 30, 2022, respectively, the Company incurred a loss position and as such the computation of diluted net loss per share does not include dilutive common stock equivalents in the weighted average shares outstanding, as they would be anti-dilutive.
| As of September 30, | ||||||||
| 2022 | 2021 | |||||||
| Warrants to purchase common stock | ||||||||
| Restricted stock | ||||||||
| Options to purchase common stock | ||||||||
| Convertible notes to exchange common stock | ||||||||
| Total | ||||||||
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net loss attributable to common shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator: | ||||||||||||||||
| Weighted average common shares - basic and diluted | ||||||||||||||||
| Loss per common share - basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
NOTE 3 – REVENUES FROM CONTRACTS WITH CUSTOMERS
The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
| ● | Step 1: Identify the contract with the customer | |
| ● | Step 2: Identify the performance obligations in the contract | |
| ● | Step 3: Determine the transaction price | |
| ● | Step 4: Allocate the transaction price to the performance obligations in the contract | |
| ● | Step 5: Recognize revenue when the Company satisfies a performance obligation |
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met:
| ● | The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and | |
| ● | the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract). |
| 11 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
| ● | Variable consideration | |
| ● | Constraining estimates of variable consideration | |
| ● | The existence of a significant financing component in the contract | |
| ● | Noncash consideration | |
| ● | Consideration payable to a customer |
Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
The Company’s ongoing major or central operations is to use computing power to solve cryptographic algorithms to record and publish Bitcoin (“BTC”) transactions to blockchain ledgers or provide BTC transaction verification services to the BTC network (such activity, collectively, “mining”). In return for verifying transactions to be added as a new block to the network (i.e., successfully ‘solving’ a block), the Company is entitled to receive transaction fees and block rewards in the form of BTCs. Transaction fees are specified in each block of transactions request and are paid by the requester. The Bitcoin blockchain protocol itself currently issues a block reward for each solved block at a current rate of 6.25 BTC per block. Such reward is expected to be reduced to half of that in 2024. The Company also mines in a self-operated private pool, which was open to third-party pool participants from September 2021 until May 2022. The third-party pool participants employed the Company’s services as a pool operator in exchange for a pool fee paid to the Company. As a private pool operator, the Company facilitated the contribution of hash rate by third-party pool participants who choose to join or leave the pool at will.
Block rewards - The inflow of bitcoin as a result of receiving a block reward meets the definition of revenue because it gives the miner economic benefits from rendering services or carrying out its mining activities. Therefore, the Company may account for the block reward as revenue.
The Company determined it should recognize block rewards it receives from successfully solving a block as revenue from a contract with a customer (i.e. BTC network or pool operators) under FASB ASC 606. The customers under each type of revenue (Participant vs. Private pool participants) are further noted below. All relevant facts and circumstances, including the network’s protocols, were considered in determining (1) whether the Company has a contract with a customer under FASB ASC 606-10-25-2 and (2) whether its mining activities on the network meet all the criteria in FASB ASC 606-10-25-1.
Block rewards are the Company’s most significant source of revenue. Block rewards included in revenues on the statements of operations were approximately $12.5 million and $50.8 million, respectively for the three months ended September 30, 2022, and September 30, 2021. Block rewards included in revenues on the statements of operations were approximately $88.1 and $85.6 million for the nine months ended September 30, 2022 and September 30, 2021.
Transaction Fees - The transaction fees are specified in each transaction request and paid by the requester to the miner in exchange for the successful processing of the transaction. The requester meets the definition of a customer in FASB ASC 606 and pursuant to AICPA Practice Guide “Accounting for and Auditing Digital Assets” because it has contracted with the miner to obtain a service (successful mining) that is an output of the miner’s ordinary activities in exchange for consideration.
Transaction
fees included in revenues on the statements of operations were approximately $
Pool Fees - Pool fees earned by the Company as an operator of a private pool are recognized as revenue from contracts with customers in accordance with FASB ASC 606.
Pool fees included in revenues on
the statements of operations were approximately
| 12 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The Company earns revenues as:
| ● | a participant in a third-party operated mining pool (“Participant”) | |
| ● | a participant in a privately operated mining pool (“Private pool participant”) | |
| ● | the operator of a private pool (“Operator”) |
Participant
The Company has entered into contracts with third-party mining pool operators, whom the Company considers its customer under FASB ASC 606. The Company provides a service of computing power (i.e., generated hash rate) that is an output of the Company’s ordinary activities in exchange for consideration. These contracts are terminable at any time by either party and the Company’s enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. In exchange for providing computing power, the Company is entitled to consideration equal to a fractional share of the BTC reward (non-cash consideration, less any pool fees paid to the mining pool operator which are recorded as contra-revenues), for successfully adding a block to the blockchain. The Company’s fractional share of the block reward is based on the proportion of the Company’s contributed hash rate to the total computing power contributed by all mining pool participants in solving the current algorithm as calculated and determined by the pool operator, net of any pool fees.
The provision of computing power is the only performance obligation under our arrangements with the third-party mining pool operators. The transaction consideration the Company receives, is non-cash and variable in that the amount that it receives is dependent on the success of the mining pool regardless of whether any hash rate is contributed by the Company (the pool being the first to solve an algorithm). The non-cash consideration is measured at the estimated fair value of the contract inception. However, because it is not probable that a significant reversal of revenue will not occur, as the Company does not have visibility to exactly when a block is won and the pro rata share to which it is entitled (as it does when the Company is a participant in a privately operated pool where the Company is also the pool operator) all consideration is constrained until the Company receives confirmation of the consideration it earned, usually via the settlement of the block reward in the Company’s digital wallet, at which time revenue is recognized. The Company measures the non-cash consideration at the fair value on the date the block reward is received in the Company’s digital wallet when the contingency constraint on the transaction consideration is resolved, which is not materially different than the fair value at contract inception or the time the Company has earned the awards from the third-party mining pools. There is no significant financing component in these transactions.
Fair value of the digital asset award received is determined using the daily closing U.S. dollar spot rate of the related digital currency on the date received, which is not materially different than the fair value at contract inception.
Expenses associated with running the digital currency mining business, such as rent and electricity cost are recorded as cost of revenues. Depreciation on digital currency mining equipment is also recorded as a component of cost of revenues.
Private pool participant
The Company operates as a participant in its privately operated pool (“Marapool”). From September 2021 until May 2022, the Company operated as a participant in Marapool alongside third-party pool participants. The Company views the transaction requestor and the blockchain network as its customers under FASB ASC 606. The Company provides a service (successful mining) that is an output of the Company’s ordinary activities in exchange for consideration from the requester and the blockchain network (transaction fee and block reward, respectively). A contract with a customer exists at the point when the miner successfully validates a requesting customer’s transaction to the distributed ledger. At this point, the performance obligation has been satisfied (i.e., earned) in accordance with FASB ASC 606-10-25-30. Specifically, the inception of the contract and the point in time at which the consideration in that same contract is earned occurs simultaneously. Because of this, the additional criteria in FASB ASC 606-10-25-1 would be met as follows:
| ● | Both the requester (a customer) and the miner have approved the contract and are committed to the transaction at the point of successfully validating and adding the transaction to the distributed ledger. | |
| ● | Each party’s rights, the consideration to be transferred, and the payment terms are clear. | |
| ● | The transaction has commercial substance (that is, the risk, timing, or amount of the miner’s future cash flows is expected to change as a result of the contract). | |
| ● | Collection occurs in conjunction with the inception of the contract and the fulfillment of the performance obligation (i.e. successfully solving a block) and therefore, there is no risk of collectability. |
By successfully mining a block, the miner satisfies its performance obligation to the requester and network, thus, should recognize revenue at that point in time, which is the same point in time as contract inception. The transaction consideration the Company receives, is non-cash consideration paid in BTC, and is comprised of transaction fees and block rewards. The transaction consideration is variable in that the amount of block reward earned is based on the pro rata share of the computing power the Company contributes in relation to the total computing power contributed by the pool. The non-cash consideration is measured at its estimated fair value at contract inception - that is, the date that the criteria in FASB ASC 606-10-25-1 are met. The Company is able to apply an estimate to the variable transaction consideration without risk of significant revenue reversal as the Company has visibility to the computing power it provides for a given transaction, and the exact timing of when its privately operated pool successfully solves for a block (as compared to when the Company is a participant in a third-party operated pool as discussed above). As the Company can estimate its pro rata share of block rewards and transaction fees prior to the receipt of the rewards in their digital wallet, the Company measures the non-cash consideration at the fair value when block reward and transaction fee are earned, which is the same point in time as contract inception.
| 13 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Fair value of the digital asset award received is determined using the daily closing U.S. dollar spot rate of the related digital currency on the date the block reward and transaction fees are earned, which is not materially different than the fair value at contract inception, or the time the Company has earned the award from the requester and network. There is no significant financing component in these transactions.
Expenses associated with running the digital currency mining business, such as rent and electricity cost are recorded as cost of revenues. Depreciation on digital currency mining equipment is also recorded as a component of cost of revenues.
Operator
From September 2021 until May 2022, the Company entered into pool service contracts with third-party mining pool participants, whom the Company considered to be a customer under FASB ASC 606. In these contracts, the Company provided a facilitator service to connect miners to the blockchain network and to track hash rate generated by each pool participant in exchange for non-cash consideration equal to a percentage of the block reward and transaction fee earned by the individual pool participants as pool fees. These contracts were terminable at any time by either party and the Company’s enforceable right to compensation only began when the Company provided the facilitator services and access to the pool’s software licenses to the pool participants.
The Company’s performance obligations under the arrangement with third-party pool participants were to provide access to the pool’s software license and track the hash rate generated by each pool participant to enable calculation of the pro rata block reward and transaction fee payment to each pool participant. The transaction consideration the Company received is non-cash and variable in that the pool fees earned is based on the block reward and transaction fees earned by pool participants. The non-cash consideration is measured at the estimated fair value of the contract inception, which occurs simultaneously to when the Company has earned the pool fees (i.e., upon successful mining of a block). The Company is able to estimate variable consideration at the point in time it has earned the fees without risk of significant revenue reversal as the Company has visibility to the exact timing of when the pool successfully solves for a block as pool operator (as compared to when the Company is a participant in a third-party operated pool) and the block rewards and transaction fees each pool participant is entitled to base on contributed hash rate. As the Company can estimate the amount of pool fees prior to the receipt of the fees in the pool’s digital wallet, the Company measures the non-cash consideration at the fair value on the date the pool fees are earned (using the stated convention below), which occurs simultaneously to contract inception.
Fair value of the digital asset award received is determined using the daily closing U.S. dollar spot rate of the related digital currency on the date the pool fees are earned, which is not materially different than the fair value at contract inception which occurs simultaneously to the time the pool participants have earned the award from the requester and network. There is no significant financing component in these transactions.
Fees associated with the licensed software used in the operation of the private pool are recorded as cost of revenues.
NOTE 4 – ADVANCES TO VENDORS AND DEPOSITS
The Company contracts with bitcoin mining equipment manufacturers in procuring equipment necessary for the operation of its bitcoin mining operations. A typical agreement calls for a certain percentage of the total order to be paid in advance at specific intervals, usually within several days of execution of a specific contract and periodically thereafter with final payments due prior to each shipment date. We account for these payments as Advances to vendors on the balance sheet.
As
of September 30, 2022 and December 31, 2021, such advances totaled approximately $
In addition, the Company contracts with other service providers for hosting of its equipment and operational support in data centers where the company’s equipment is deployed. These arrangements also call for advance payments to be made to vendors in conjunction with the contractual obligations associated with these services. We classify these payments as Deposits on the balance sheet.
| 14 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 5 – PROPERTY AND EQUIPMENT
The components of property and equipment as of September 30, 2022 and December 31, 2021 are:
| Useful life (Years) | September 30, 2022 | December 31, 2021 | ||||||||
| Website | ||||||||||
| Mining equipment | ||||||||||
| Construction in Progress | N/A | |||||||||
| Gross property and equipment, net | ||||||||||
| Less: Accumulated depreciation and amortization | ( |
) | ( |
) | ||||||
| Property, equipment and intangible assets, net | $ | $ | ||||||||
The
Company’s depreciation expense related to property and equipment for the three months ended September 30, 2022 and September 30,
2021 was $
Amortization
expense for the three months ended September 30, 2022 and September 30, 2021 was $
NOTE 6 – COMPUTE NORTH BANKRUPTCY
On September 22, 2022, Compute North Holdings, Inc. (along with its affiliated debtors, collectively, “Compute North”), filed for chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of Texas under Chapter 11 of the U.S. Bankruptcy Code (11 U.S. Code section 101 et seq.). Marathon’s financial exposure to Compute North at the time of the bankruptcy filing included:
| - | Approximately
$ |
| - | Approximately
$ |
| - | Approximately
$ |
The Company assessed this financial exposure and recorded an impairment of the Convertible Preferred Stock, the unsecured Senior Promissory note and certain deposits totaling $39 million during the three months ended September 30, 2022. The ultimate outcome of the bankruptcy process, and its impact on the remaining deposits held by the Company, remains to be determined. The Company has engaged creditor’s counsel and is vigorously defending and protecting its various assets at the Compute North facilities as well as minimizing its long-term financial exposure with regard to Compute North.
NOTE 7 – LEGAL RESERVES
During
the three months ended September 30, 2022, the Company recorded a $
NOTE 8 – STOCKHOLDERS’ EQUITY
Common Stock
Shelf Registration Statements on Form S-3 and At-The-Market Offering Agreements
On
February 11, 2022, the Company entered into an At-The-Market Offering Agreement, or sales agreement, with H.C. Wainwright & Co.,
LLC (“Wainwright”) relating to shares of its common stock. In accordance with the terms of the sales agreement, the
Company may offer and sell shares of our common stock having an aggregate offering price of up to $
| 15 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Series B Convertible Preferred Stock
As of September 30, 2022, there were shares of Series B Convertible Preferred Stock outstanding.
Series E Preferred Stock
As of September 30, 2022, there were shares of Series E Convertible Preferred Stock outstanding.
Common Stock Warrants
A summary of the Company’s issued and outstanding stock warrants and changes during the nine months ended September 30, 2022 is as follows:
| Number of Warrants | Weighted
Average Exercise Price | Weighted
Average Remaining Contractual Life (in years) | ||||||||||
| Outstanding as of December 31, 2021 | $ | |||||||||||
| Issued | $ | - | ||||||||||
| Expired | ( | ) | $ | - | ||||||||
| Exercised | $ | - | ||||||||||
| Outstanding as of September 30, 2022 | $ | |||||||||||
| Warrants exercisable as of September 30, 2022 | $ | |||||||||||
| The aggregate intrinsic value of warrants outstanding and exercisable at September 30, 2022 was | $ | |||||||||||
Common Stock Options
As of September 30, 2022 and December 31, 2021, there were stock options outstanding.
Restricted Stock
Restricted Stock Units
| Number of Units | Weighted Average Grant Date Fair Value | |||||||
| Nonvested at December 31, 2021 | $ | |||||||
| Granted | $ | |||||||
| Vested | ( | ) | $ | |||||
| Nonvested at September 30, 2022 | $ | |||||||
During the third quarter of 2022, the Compensation Committee issued grants that will vest over the next and result in total stock compensation expense of approximately $million.
| 16 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 9 – DEBT
On
November 18, 2021, the Company issued $
On
July 28, 2022, the Company entered into a Revolving Credit and Security Agreement (the “Agreement” or “RLOC”)
with Silvergate Bank (the “Bank”) pursuant to which Silvergate has agreed to loan the Company up to $
| Initial Term: | Termination
is on | |
| Availability of the facilities: | The RLOC shall be made available from time to time to the Company for periodic draws (provided no event of default then exists) from its closing date up to and including the termination date of the Agreement.
The
Company may borrow up to $ | |
Origination Fees for the facilities: |
RLOC:
Term
Loan: An origination fee of $ | |
Unused Commitment Fee on the RLOC: |
||
| Renewal of the RLOC: | The
RLOC may be renewed annually by agreement between the Bank and the Company, subject to (without limitation): |
Interest Rate and Payments for the facilities: |
RLOC:
Interest only to be paid monthly, with principal all due at maturity. The interest rate is defined as the higher of (i) the Floor
Rate and (ii) Prime Rate plus the Applicable Margin. “Floor Rate” shall mean, as of any date of determination:
Term
Loan: Interest, which shall be due on the principal amount of the loan, at the higher of |
| 17 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
| Collateral for the facilities: | The RLOC and term loan facilities are secured by a pledge of a sufficient amount of Company’s right, title and interest in and to bitcoin stored in a custody account for the benefit of the Bank (the “Collateral Account”). The Bank will establish a Collateral Account with a regulated custodial entity (the “Custodian”) that has been approved by the Bank. The Bank and Custodian will have a custodial agreement to perfect the security interest in the pledged Collateral Account which, among other things, allows for 1) the Bank to monitor the balance of the Collateral Account and 2) allows the Bank to have exclusive control over the Collateral Account including liquidation of the collateral in the event of Company’s default under the terms of the RLOC. The Bank may also file a UCC financing statement on the pledged collateral. The Company bears the risk of loss from market value declines of its collateral pursuant to its obligation to pledge additional bitcoin if its market value declines such that outstanding borrowings under the RLOC are undercollateralized. The Company may also withdraw its collateral from the Collateral Account if market value of bitcoin increases and outstanding borrowings under the RLOC are overcollateralized or if such borrowings are repaid in whole or in part. | |
Minimum Advance Rates for the facilities: |
At
origination, the Company must ensure the Collateral Account balance has sufficient bitcoin to cause the LTV ratio to equal | |
| Covenants for the facilities: | The
Company must maintain a minimum adjusted net worth of $ |
NOTE 10 – LEASES, COMMITMENTS AND CONTINGENCIES
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), and has since issued amendments thereto, related to the accounting for leases (collectively referred to as “ASC 842”). ASC 842 establishes a right-of-use, or ROU model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Effective January 1, 2019, the Company adopted ASU 842. The Company determines if an arrangement contains a lease at inception based on whether or not the Company has the right to control the asset during the contract period and other facts and circumstances.
The Company leases office space in the United States under operating lease agreements. Office space is the Company’s only material underlying asset class under operating lease agreements. The Company has no material finance leases.
Effective June 1, 2018, the Company rented its corporate office at 1180 North Town Center Drive, Suite 100, Las Vegas, Nevada 89144, on a month-to-month basis.
Effective February 14, 2022, the Company rented an office located at Tower 101, 101 NE Third Avenue, Fort Lauderdale, Florida, 33301, for a term of 63 months.
Effective March 1, 2022, the Company rented an office located at 300 Spectrum Center Drive, Irvine CA, 92618, for a term of 24 months.
Effective May 1, 2022, the Company rented warehouse space located at 3306 5th Street SE, East Wenatchee, Washington, 98802, for a term of 24 months.
Effective September 21, 2022, the Company rented warehouse space located at 512 N. Douglas Ave., Oklahoma City, OK, 73106, for a term of 36 months.
As
of September 30, 2022, the Company’s right-of-use (“ROU”) assets and total lease liabilities were $
| 18 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Operation lease costs are recorded on a straight-line basis within operating expenses. The Company’s total lease expense is comprised of the following:
| For the Nine Months Ended | ||||||||
| September 30, 2022 | September 30, 2021 | |||||||
| Operating leases | ||||||||
| Operating lease cost | $ | $ | ||||||
| Operating lease expense | ||||||||
| Short-term lease rent expense | ||||||||
| Total rent expense | $ | $ | ||||||
| For the Three Months Ended | ||||||||
| September 30, 2022 | September 30, 2021 | |||||||
| Operating leases | ||||||||
| Operating lease cost | $ | $ | ||||||
| Operating lease expense | ||||||||
| Short-term lease rent expense | ||||||||
| Total rent expense | $ | $ | ||||||
Additional information regarding the Company’s leasing activities as a lessee is as follow:
| For the Nine Months Ended | ||||||||
| September 30, 2022 | September 30, 2021 | |||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| Weighted-average remaining lease term – operating leases | ||||||||
| Weighted-average discount rate – operating leases | % | % | ||||||
As of September 30, 2022, contractual minimum lease payments are as follows for the next five years.
| Year | Amount | |||
| 2022 (remaining) | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | ||||
| 19 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Legal Proceedings
Ho Matter
On
January 14, 2021, Plaintiff Michael Ho (“Plaintiff” or “Ho”) filed a Civil Complaint for Damages and
Restitution (“Complaint”) against the Company and 10 Doe Defendants. The Complaint alleges six causes of action against
the Company, (1) Breach of Written Contract; (2) Breach of Implied Contract; (3) Quasi-Contract; (4) Services Rendered; (5)
Intentional Interference with Prospective Economic Relations; and (6) Negligent Interference with Prospective Economic Relations,
which is the one plead against “all Defendants” and is most likely to involve later named defendants. The claims arise
from the same set of facts, Ho alleges that the Company profited from commercially sensitive information he shared with the Company
and then it refused to compensate him for his role in securing the acquisition of a supplier of energy for the Company. On February
22, 2021, the Company responded to Mr. Ho’s Complaint with a general denial and the assertion of applicable affirmative
defenses. Then, on February 25, 2021, the Company removed the action to the United States District Court in the Central District of
California, where the action remains pending. The Company filed a motion for summary judgment/adjudication of all causes of action.
On February 11, 2022, the Court granted the motion and dismissed Ho’s 2nd, 5th and 6th causes of action. Discovery is
substantially closed. The Court held a pre-trial conference on February 24, 2022, where it vacated the March 3, 2022 trial date and
ordered the parties to meet and confer on a new trial date. The Court discussed the various theories of damages maintained by the
parties. In its ruling on the summary judgment motion and at the pre-trial conference on February 24, 2022, the Court noted that a
jury is more likely to accept $
Information Subpoena
On October 6, 2020, the Company entered into a series of agreements with multiple parties to design and build a data center for up to 100-megawatts in Hardin, MT. In conjunction therewith, the Company filed a Current Report on Form 8-K on October 13, 2020. The 8-K disclosed that, pursuant to a Data Facility Services Agreement, the Company issued shares of restricted Common Stock, in transactions exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. During the quarter ended September 30, 2021, the Company and certain of its executives received a subpoena to produce documents and communications concerning the Hardin, Montana data center facility described in our Form 8-K dated October 13, 2020. We understand that the SEC may be investigating whether or not there may have been any violations of the federal securities law. We are cooperating with the SEC.
Putative Class Action Complaint
On December 17, 2021, a putative class action complaint was filed in the United States District Court for the District of Nevada, against the Company and present and former senior management. The complaint alleges securities fraud related to the disclosure of an SEC investigation previously made by the Company on November 15, 2021. Plaintiff Tad Schlatre served the complaint on the Company on March 1, 2022. On September 12, 2022, the court appointed Carlos Marina as lead plaintiff. On October 21, 2022, lead plaintiff voluntarily dismissed the complaint without prejudice.
Derivative Complaints
On February 18, 2022, a shareholder derivative complaint was filed in the United States District Court for the District of Nevada, against current and former members of the Company’s board of directors and senior management. The complaint is based on allegations substantially similar to the allegations in the December 2021 putative class action complaint, related to the Company’s disclosure of an SEC investigation previously made by the Company on November 15, 2021. On March 4, 2022, the complaint was served on the Company. On April 4, 2022, the defendants moved to dismiss the complaint.
On May 5, 2022, a second shareholder derivative complaint was filed in the United States District Court for the District of Nevada, against current and former members of the Company’s board of directors and senior management. The second shareholder derivative complaint is based on allegations substantially similar to the allegations in the February 18, 2022 derivative complaint. On May 11, 2022, the defendants moved to dismiss the second shareholder derivative complaint.
On June 1, 2022, the Court entered an order consolidating the two derivative actions. A June 13, 2022 scheduling order provides for plaintiffs to file a consolidated complaint and for renewed motions to dismiss the consolidated shareholder derivative complaint. The consolidated complaint has not yet been filed.
In the opinion of management, after consulting legal counsel, the ultimate disposition of these matters will not have a material adverse effect on the Company and its related entities combined financial position, results of operations, or liquidity.
Compute North Bankruptcy
On September 22, 2022, Compute North filed for chapter 11 bankruptcy protection. Compute North provides operating services to the Company and hosts our equipment in multiple facilities. We deliver miners to Compute North, which then installs the equipment in several facilities, operates and maintains the equipment, and provides energy to keep the miners operating. In chapter 11, Compute North is currently seeking to sell substantially all of its assets, including its direct and indirect ownership interests in the facilities that house the Company’s miners. Compute North may also seek to assume and assign the Compute North agreements to which the Company is party to one or more third-party purchasers of Compute North’s assets or it may seek to reject such agreements. Accordingly, Compute North’s chapter 11 cases could cause a disruption in services provided by Compute North to us and, therefore, could have an adverse effect on our operations in the facilities managed by Compute North.
| 20 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
At this stage of Compute North’s chapter 11 cases, it is difficult to predict whether Marathon will receive any meaningful recovery on account of its claims.
NOTE 11 – RELATED PARTY MATTERS
On
September 23, 2022, the Company made an incremental $
NOTE 12 –REVISION OF CERTAIN PRIOR PERIOD AMOUNTS
We have revised amounts reported in previously issued financial statements for the periods presented in this Quarterly report on Form 10-Q related to an immaterial error. The error relates to the non-consolidation of an investment fund as described below. We evaluated the aggregate effects of the errors to our previously issued financial statements in accordance with SEC Staff Accounting Bulletins No. 99 and No. 108 and, based upon quantitative and qualitative factors, determined that the errors were not material to the previously issued financial statements and disclosures included in our Annual Reports on Form 10-K for the years ended December 31, 2021, or for any quarterly periods included therein or through our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022.
On
January 25, 2021, the Company entered into a limited partnership agreement with NYDIG Digital Assets Fund III, LP
(“Fund”) whereas the Fund purchased approximately
The correction of this error has resulted in revisions to certain line items on the balance sheet as of December 31, 2021, the statements of operations for the three and nine months ended September 30, 2021, and the statement of cash flows for the nine-month period ended September 30, 2021. A reconciliation of the various financial statement captions that have been revised from the previous period presentation follows:
| Balance Sheet as of December 31, 2021 | As reported | Revision | Revised | |||||||||
| Cash and cash equivalents | ||||||||||||
| Digital currencies held in fund | ||||||||||||
| Investment fund | ( | ) | ||||||||||
| Prepaid expenses and other current assets | ||||||||||||
| Accounts payable | ||||||||||||
| Accrued expenses | ||||||||||||
| Statements of Operations | Three months ended September 30, 2021 | Nine months ended September 30, 2021 | ||||||||||||||||||||||
| As reported / reclassified (1) | Revision | Revised | As reported / reclassified (1) | Revision | Revised | |||||||||||||||||||
| General and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Change in fair value of investment in NYDIG fund | ( | ) | ( | ) | ||||||||||||||||||||
| Realized and unrealized gains (losses) on digital currencies held in fund | ||||||||||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Statement of Cash Flows | Nine months ended September 30, 2021 | |||||||||||
| As reported | Revision | Revised | ||||||||||
| Realized and unrealized gains on digital currencies held in fund | ( | ) | ( | ) | ||||||||
| Change in fair value of investment securities | ( | ) | ||||||||||
| Accounts payable and accrued expenses | ||||||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ( | ) | ||||||
| Sale of digital currencies in investment fund | ||||||||||||
| Net cash used in investing activities | ( | ) | ( | |||||||||
| (1) |
NOTE 13 – SUBSEQUENT EVENTS
During October 2022,
The Company has evaluated other subsequent events through the date the consolidated financial statements were available to be issued and has concluded that no such events or transactions took place that would require disclosure except as disclosed above and in Note 6 – Compute North Bankruptcy, Note 7 – Legal Reserves and Note 11 – Related Party matters.
| 21 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This report on Form 10-Q (“Report”) and other written and oral statements made from time to time by us may contain so-called “forward-looking statements,” all of which are subject to risks and uncertainties. Forward-looking statements can be identified by the use of words such as “expects,” “plans,” “will,” “forecasts,” “projects,” “intends,” “estimates,” and other words of similar meaning. One can identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address our growth strategy, financial results and product and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ from our forward-looking statements. These factors may include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed, and actual future results may vary materially.
Information regarding market and industry statistics contained in this Report is included based on information available to us that we believe is accurate. It is generally based on industry and other publications that are not produced for purposes of securities offerings or economic analysis. We have not reviewed or included data from all sources and cannot assure investors of the accuracy or completeness of the data included in this Report. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. We do not assume any obligation to update any forward-looking statement. As a result, investors should not place undue reliance on these forward-looking statements.
The following discussion and analysis are intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those expressed, implied or anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission.
Cautionary Note Regarding Forward-Looking Statements
This report and other documents that we file with the Securities and Exchange Commission contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management’s assumptions. Statements that are not historical facts are forward-looking statements. Words such as “expect,” “outlook,” “forecast,” “would,” “could,” “should,” “project,” “intend,” “plan,” “continue,” “sustain”, “on track”, “believe,” “seek,” “estimate,” “anticipate,” “may,” “assume,” and variations of such words and similar expressions are often used to identify such forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward- looking statements are not guarantees of future performance and involve risks, assumptions and uncertainties, including, but not limited to, those described in our reports that we file or furnish with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. Except to the extent required by law, we undertake no obligation to update publicly any forward-looking statements after the date they are made, whether as a result of new information, future events, changes in assumptions or otherwise.
Business of the Company
The Company was incorporated in the State of Nevada on February 23, 2010 under the name Verve Ventures, Inc. On December 7, 2011, the Company changed its name to American Strategic Minerals Corporation and were engaged in exploration and potential development of uranium and vanadium minerals business. In June 2012, the Company discontinued the minerals business and began to invest in real estate properties in Southern California. In October 2012, the Company discontinued its real estate business and the Company commenced IP licensing operations, at which time the Company’s name was changed to Marathon Patent Group, Inc. The Company commenced mining bitcoin in 2018 and changed its name to Marathon Digital Holdings, Inc. on March 1, 2021. As of September 30, 2022, the Company is solely focused on the mining of bitcoin and ancillary opportunities within the bitcoin ecosystem under the name Marathon Digital Holdings, Inc.
| 22 |
Significant developments for the three-month period ended September 30, 2022
The three-month period ended September 30, 2022, was particularly active from an operations and a financial standpoint, with noteworthy events including:
Legal reserves:
In connection with a dispute concerning the settlement of certain restricted stock unit awards previously granted to Merrick D. Okamoto, former Chief Executive Officer and Chairman of the Company, on October 12, 2022, the Company entered into a settlement agreement with Mr. Okamoto, pursuant to which the Company agreed to pay Mr. Okamoto $24 million. Mr. Okamoto agreed to a settlement and a broad release of known or unknown claims against the Company, which relate to the Company’s Amended 2018 Equity Incentive Plan or related restricted stock unit award agreements. The Company entered into related settlement agreements in respect to certain restricted stock unit awards previously granted to five other individuals, including a director and our current Chief Executive Officer and Chairman, which total approximately $1 million in the aggregate. The expense associated with this settlement totaled approximately $25 million is listed on the statement of operation as Legal reserves. The portion of this settlement that remained unpaid as of September 30, 2022 is listed on the balance sheet as Legal reserve payable and totaled $21.2 million. All amounts due as a result of this settlement have been paid as of October 15, 2022.
Compute North Bankruptcy:
On September 22 , 2022, Compute North filed for chapter 11 bankruptcy protection. The Company has engaged creditor’s counsel and is vigorously defending and protecting its various assets at CN facilities and to minimize its long-term financial exposure with regard to the CN Entities.
The Company’s financial exposure to Compute North on the date of the Bankruptcy was approximately $81 million, including:
| ● | Approximately $10 million in convertible preferred stock of Compute North Holdings, Inc. |
| ● | Approximately $21 million related to an unsecured senior promissory note with Compute North LLC. This loan totaled $30 million at June 30, 2022 but was amended in July with approximately $9 million in principal being applied as a deposit for the Wolf Hollow site. |
| ● | Approximately $50 million in operating deposits to Compute North entities, including the King Mountain Joint Venture and the Wolf Hollow site. |
The Company assessed the impairment of these assets given the bankruptcy proceedings and estimated that the preferred stock, the unsecured loan, and approximately $8 million in deposits were fully impaired. As a result, the company recorded an impairment charge of $39 million as of September 30, 2022, reducing the overall exposure to Compute North to approximately $42 million, primarily in deposits associated with King Mountain and Wolf Hollow. The full recoverability of these deposits remains a risk given the ongoing bankruptcy proceedings.
The bulk of the Company’s current operations are hosted by a Compute North / NextEra Joint Venture in McCamey, TX (“King Mountain”) which is not directly subject to the bankruptcy process but is impacted by the bankruptcy proceedings. Energization of the site started in August and as of November 9, the Company has approximately 64,000 bitcoin mining servers on site and operating.
In early July 2022, the Company expanded certain hosting arrangements with Compute North in Granbury, TX (“Wolf Hollow”). As of November 9, the Company has approximately 6,000 mining servers in operation. The Company’s understanding is that plans for additional deployments have been delayed due to uncertainties associated with the Compute North Bankruptcy.
Applied Blockchain Hosting:
On July 12, 2022, the Company entered into an agreement to secure approximately 200 megawatts of hosting capacity for the Company’s previously purchased miners, including 90 megawatts of hosting capacity in Texas and at least 110 megawatts of hosting capacity in North Dakota. The Company expects to have 66,000 miners, representing approximately 9.2 EH/s, hosted across these facilities. Based on current construction schedules, installations of the Company’s miners are expected to begin at these facilities during the fourth quarter of 2022 with all miners installed by approximately mid-year 2023. As part of this agreement, the Company has an option to increase hosting capabilities utilizing up to an additional 70 megawatts in North Dakota.
| 23 |
Completion of the Hardin, MT exit
The company completed its previously disclosed exit from the Hardin, MT facility (“Hardin”) in September. The Company had deployed approximately 30,000 mining servers at Hardin. In conjunction with this exit, the Company sold approximately 22,000 bitcoin mining servers for cash proceeds of $46.5 million, recording a gain on sale of $3.2 million. The company also recorded additional depreciation of $4.1 million in the period related to approximately 1,800 bitcoin mining servers that were previously deployed at Hardin that are no longer in operating condition based on inspections of the assets at the facility and experience with the assets formerly deployed at Hardin in the weeks following redeployment. In addition to the depreciation expense recorded within the period, the company determined that the useful lives of the remaining equipment formerly deployed at Hardin should be reduced from 36 months to 24 months. These assets had a book value of approximately $12 million at September 30, 2022. As such, the annual depreciation on this equipment will increase to approximately $6 million from approximately $4 million.
Critical Accounting Policies and Estimates
We believe that the following accounting policies, which are included in the footnotes section of this report, are the most critical to aid you in fully understanding and evaluating this management discussion and analysis:
| ● | Digital currencies | |
| ● | Revenue from contracts with customers | |
| ● | Impairment of long-lived assets |
Digital currencies
Digital currencies are included in current and other assets in the consolidated balance sheets as intangible assets with indefinite useful life and are recorded at cost less impairment. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the digital currency at the time its fair value is being measured. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that the price of Bitcoin declines to lower than the carrying value, the Company has determined that it is more likely than not that an impairment exists. The Company determines the amount of impairment to record based on the fair value of bitcoin following the fair value measurement framework in ASC 820 – Fair Value Measurement. If the fair value of bitcoin is lower than the carrying amount the Company will record an impairment and subsequent reversal of impairment losses is not permitted.
Revenues from contracts with customers
The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Please refer to footnote 3 for a complete description of this policy.
Impairment of long-lived assets
Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Non-GAAP Financial Measures
We provide investors with a reconciliation from net loss to the non-GAAP measure known as Adjusted EBITDA as a component of Management’s Discussion and Analysis. For each period in question, we define “Adjusted EBITDA” as (a) GAAP net income (or loss) plus (b) adjustments to add back the impacts of (1) depreciation and amortization, (2) interest expense, (3) income tax expense and (4) adjustments for non-cash and non-recurring items which currently include (i) stock compensation expense, net of withholding taxes, (ii) impairments of patents and (iii) impairment losses related to the Compute North Bankruptcy.
Adjusted EBITDA is not a measurement of financial performance under GAAP and, as a result, this measure may not be comparable to similarly titled measures of other companies. Non-GAAP financial measures are subject to material limitations as they are not in accordance with, or a substitute for, measurements prepared in accordance with GAAP. Adjusted EBITDA is not meant to be considered in isolation and should be read only in conjunction with our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K as filed with the Securities and Exchange Commission. Management uses both Adjusted EBITDA and the supplemental information provided herein as a means of understanding, managing, and evaluating business performance and to help inform operating decision making. We rely primarily on our Consolidated Condensed Financial Statements to understand, manage, and evaluate our financial performance and use the non-GAAP financial measures only supplementally.
Recent Issued Accounting Standards
See Note 2 to our Consolidated Condensed Financial Statements for a discussion of recent accounting standards and pronouncements.
| 24 |
Results of Operations
For the three months ended September 30, 2022 and 2021
| Three Months Ended September 30, | Favorable | |||||||||||
| 2022 | 2021 | (Unfavorable) | ||||||||||
| Revenues | $ | 12,690,452 | $ | 51,707,483 | $ | (39,017,031 | ) | |||||
| Cost of revenues - energy, hosting and other | (13,772,555 | ) | (5,922,811 | ) | (7,849,744 | ) | ||||||
| Cost of revenues - depreciation and amortization | (26,294,842 | ) | (4,340,198 | ) | (21,954,644 | ) | ||||||
| Total margin | (27,376,945 | ) | 41,444,474 | (68,821,419 | ) | |||||||
| General and administrative expenses | (12,352,008 | ) | (99,235,984 | ) | 86,883,976 | |||||||
| Gain on sale of equipment, net of disposals | 31,934,307 | - | 31,934,307 | |||||||||
| Legal reserves | (24,960,000 | ) | - | (24,960,000 | ) | |||||||
| Impairment of deposits due to vendor bankruptcy filing | (7,987,147 | ) | - | (7,987,147 | ) | |||||||
|
Realized and unrealized gains (losses) on digital currencies held in fund | - | 42,086,907 | (42,086,907 | ) | ||||||||
| Impairment of digital currencies | (5,903,891 | ) | (6,731,890 | ) | 827,999 | |||||||
| Total change in carrying value of digital currencies | (5,903,891 | ) | 35,355,017 | (41,258,908 | ) | |||||||
| Impairment of loan and investment due to vendor bankruptcy filing | (31,012,853 | ) | - | (31,012,853 | ) | |||||||
| Other non-operating income | 238,159 | 261,273 | (23,114 | ) | ||||||||
| Net loss | $ | (75,422,407 | ) | $ | (22,172,567 | ) | $ | (53,249,840 | ) | |||
| Bitcoin (“BTC”) production during the period, in BTC | 616 | 1,253 | (637 | ) | ||||||||
| Reconciliation to Adjusted EBITDA | ||||||||||||
| Net loss | $ | (75,422,407 | ) | $ | (22,172,567 | ) | $ | (53,249,840 | ) | |||
| Exclude: Interest expense | 3,752,301 | 287 | 3,752,014 | |||||||||
| Exclude: Income tax benefit | (5,750,272 | ) | (2,940 | ) | (5,747,332 | ) | ||||||
| EBIT | (77,420,378 | ) | (22,175,220 | ) | (55,245,158 | ) | ||||||
| Exclude: Depreciation and amortization | 26,294,842 | 4,340,198 | 21,954,644 | |||||||||
| EBITDA | (51,125,536 | ) | (17,835,022 | ) | (33,290,514 | ) | ||||||
| Exclude: Stock compensation expense, net of withholding tax | 3,423,324 | 96,617,325 | (93,194,001 | ) | ||||||||
| Exclude: Impairment of deposits due to vendor bankruptcy filing | 7,987,147 | - | 7,987,147 | |||||||||
| Exclude: Impairment of loan and investment due to vendor bankruptcy filing | 31,012,853 | - | 31,012,853 | |||||||||
| Adjusted EBITDA | $ | (8,702,212 | ) | $ | 78,782,303 | $ | (87,484,515 | ) | ||||
| 25 |
Revenues and Costs of Revenues: We generated revenues of $12.7 million during the three months ended September 30, 2022 compared with $51.7 million during the three months ended September 30, 2021. The $39.0 million decrease in revenue was primarily driven by a $26.3 million decrease in revenue resulting from lower bitcoin production. This decrease in production resulted from downtime at Hardin in July and delays in energization at King Mountain in July and August. Lower market prices for bitcoin in the current-year period contributed an additional $12.7 million decline in revenue vs the prior-year period. Cost of revenues – energy, hosting and other during the three months ended September 30, 2022, totaled $13.8 million compared with $5.9 million in the prior-year period. The $7.9 million increase was driven by accelerated cost recognition associated with the early exit from Hardin ($5.7 million) and higher production costs per bitcoin mined ($5.1 million) partially offset by the impacts of decreased production on costs ($3.2 million). Cost of revenues - depreciation and amortization was $26.3 million in the current-year period compared with $4.3 million in the prior-year period, an increase of $22 million. This increase in expense was primarily due to the acceleration of depreciation related to our exit of the Hardin, MT facility ($11 million in infrastructure depreciation and $4.1 million in mining server depreciation) and, to a lesser extent increased depreciation costs associated with a higher number of mining servers in operation.
Total Margin: Total margin was a loss of ($27.4) million in the current-year period compared with income of $41.4 million in the prior-year period, a decline of ($68.8) million. This decline was driven by the factors discussed above, which are summarized in the table below (in millions):
| Revenue: | ||||||
| ● | Impact of lower production | $ | (26.3 | ) | ||
| ● | Impact of lower bitcoin market prices | (12.7 | ) | |||
| Cost of revenue – energy, hosting and other: | ||||||
| ● | Impact of lower bitcoin production | 3.2 | ||||
| ● | Impact of accelerated cost recognition from Hardin exit | (5.7 | ) | |||
| ● | Other increases | (5.1 | ) | |||
| Cost of revenue – depreciation and amortization: | ||||||
| ● | Impact of accelerated cost recognition from Hardin exit | (15.1 | ) | |||
| ● | Other, primarily increased mining servers in operation | (6.9 | ) | |||
| $ | (68.8 | ) | ||||
| 26 |
Gain on sales of equipment, net: On December 2, 2021, we entered into an agreement with DCRBN Ventures Development and Acquisition LLC (“DCRBN”) in which the Company agreed to sell certain equipment to DCRBN starting in April 2022, in conjunction with the development of commercial activities at the King Mountain wind farm in McCamey, TX. During the three months ended September 30, 2022, the Company sold equipment for cash proceeds totaling $43.6 million and realized a pre-tax gain on the sale of such assets of $28.7 million. The Company also completed its previously disclosed exit from the Hardin, MT facility during the current-year period. In conjunction with this exit, the Company sold approximately 22,000 bitcoin mining servers for cash proceeds of $46.5 million and recorded a gain on sale, net of disposal losses of $3.2 million. There were no such sales in the prior-year period.
General and administrative expenses: General and administrative expenses were $12.4 million for the three months ended September 30, 2022, compared with expenses of $99.2 million in the prior-year period. Our general and administrative expenses included stock-based (non-cash) compensation expense of $3.4 million in the current-year period and $96.6 million in the prior-year period. General and administrative expenses excluding stock-based compensation was $8.9 million in the current-year period compared with $2.6 million in the prior-year period. The $6.3 million increase was primarily due to higher payroll and benefits costs ($3.8 million) and increased insurance expense ($1 million). Professional fees, travel costs and other expenses also increased due to the increased scope of our operations in the current-year period.
Legal reserves: In connection with a dispute concerning the settlement of certain restricted stock unit awards previously granted to the Company’s former Chief Executive Officer and Chairman, on October 12, 2022, the Company entered into a settlement agreement pursuant to which the Company agreed to pay $24 million. Given the outcome of this settlement, the Company entered into related settlement agreements in respect to five other recipients of the same restricted stock unit awards, including a director and our current Chief Executive Officer and Chairman. These related settlements totaled approximately $1 million in the aggregate.
Impairment of assets related to vendor bankruptcy filing: On September 22, 2022, Compute North filed for restructuring under Chapter 11 of the U.S. Bankruptcy Code. During the three months ended September 30, 2022, the Company assessed the impairment of assets associated with Compute North given their bankruptcy proceedings. As a result, the company recorded an impairment charge of approximately $8.0 million (related to deposits) as an operating expense and an additional impairment charge of approximately $31 million (related to a loan and preferred stock investment) as non-operating expenses.
Changes in carrying value of digital assets:
| ● | Impairment of digital currencies: We incurred impairment of digital assets during the three months ended September 30, 2022 of $5.9 million compared with an impairment of $6.7 million in the prior-year period. |
| ● | Change in fair value of digital currencies held in fund: On June 10, 2022, the company withdrew 4,769 bitcoin from its investment fund. As a result, there was no change in the fair value of the digital assets held in the fund during the three months ended September 30, 2022. During the prior-year quarter, the change in fair value of the bitcoin held in the investment fund was a gain of $42.1 million. |
Other non-operating income: Other non-operating income declined by $23 thousand from the prior-year period.
Interest expense: Interest expense increased $3.7 million from the prior year as a result interest related to the convertible notes issued in November 2021 ($2.8 million) and interest on borrowings outstanding under the Company’s Term loan and revolving credit (“RLOC”) facilities ($0.9 million).
Income tax benefit: The Company recorded an income tax benefit of $5.8 million for the three-month period ended September 30, 2022 compared with an income tax benefit of $3 thousand in the prior-year period.
Net loss: We recorded a net loss of ($75.4) million in the current-year period compared with net loss of ($22.2) million in the prior period. The $53.2 million decline was primarily driven by lower total margin ($68.8 million), the impairment related to the Compute North bankruptcy ($39 million), legal reserves ($25 million), declines in the carrying value of our digital assets ($41.3 million), and increased interest expense ($3.7 million). Partially offsetting these unfavorable variances was a significant reduction in general and administrative expenses primarily associated with lower stock-based compensation ($86.9 million), gain on sale of equipment of $31.9 million and the net increase in the income tax benefit.
Adjusted EBITDA: Adjusted EBITDA was a loss of ($8.3) million compared with a positive Adjusted EBITDA of $78.8 million in the prior-year period. The $87.1 million decline was primarily driven by lower total margin excluding the impact of depreciation and amortization ($46.9 million), declines in the carrying value of our digital assets ($41.3 million), legal reserve ($25 million), and higher general and administrative expenses excluding non-cash stock based compensation costs ($6.3 million). Partially offsetting these unfavorable variances were gain on the sale of equipment of $31.9 million.
| 27 |
For the nine months ended September 30, 2022 and 2021
| Nine Months Ended September 30, | Favorable | |||||||||||
| 2022 | 2021 | (Unfavorable) | ||||||||||
| Revenues | $ | 89,329,986 | $ | 90,182,155 | $ | (852,169 | ) | |||||
| Cost of revenues - energy, hosting and other | (42,974,265 | ) | (11,647,457 | ) | (31,326,808 | ) | ||||||
| Cost of revenues - depreciation and amortization | (64,881,323 | ) | (8,015,801 | ) | (56,865,522 | ) | ||||||
| Total margin | (18,525,602 | ) | 70,518,897 | (89,044,499 | ) | |||||||
| General and administrative expenses | (39,187,098 | ) | (159,411,404 | ) | 120,224,306 | |||||||
| Gain on sale of equipment, net of disposals | 90,115,824 | - | 90,115,824 | |||||||||
| Legal reserves | (24,960,000 | ) | - | (24,960,000 | ) | |||||||
| Impairment of deposits due to vendor bankruptcy filing | (7,987,147 | ) | - | (7,987,147 | ) | |||||||
| Impairment of patents | (919,363 | ) | - | (919,363 | ) | |||||||
|
Realized and unrealized gains (losses) on digital currencies held in fund | (85,016,208 | ) | 59,410,028 | (144,426,236 | ) | |||||||
| Impairment of digital currencies | (153,045,376 | ) | (18,472,750 | ) | (134,572,626 | ) | ||||||
| Total change in carrying value of digital currencies | (238,061,584 | ) | 40,937,278 | (278,998,862 | ) | |||||||
| Impairment of loan and investment due to vendor bankruptcy filing | (31,012,853 | ) | - | (31,012,853 | ) | |||||||
| Other non-operating income | 632,132 | 254,024 | 378,108 | |||||||||
| Net loss | $ | (280,027,638 | ) | $ | (47,700,445 | ) | $ | (232,327,193 | ) | |||
| Bitcoin (“BTC”) production during the period, in BTC | 2,582 | 2,099 | 483 | |||||||||
| Reconciliation to Adjusted EBITDA | ||||||||||||
| Net loss | $ | (280,027,638 | ) | $ | (47,700,445 | ) | $ | (232,327,193 | ) | |||
| Exclude: Interest expense | 10,314,659 | 2,694 | 10,311,965 | |||||||||
| Exclude: Income tax benefit | (192,712 | ) | (3,454 | ) | (189,258 | ) | ||||||
| EBIT | (269,905,691 | ) | (47,701,205 | ) | (222,204,486 | ) | ||||||
| Exclude: Depreciation and amortization | 64,881,323 | 8,015,801 | 56,865,522 | |||||||||
| EBITDA | (205,024,368 | ) | (39,685,404 | ) | (165,338,964 | ) | ||||||
| Exclude: Stock compensation expense, net of withholding tax | 18,874,798 | 152,334,886 | (133,460,088 | ) | ||||||||
| Exclude: Impairment of deposits due to vendor bankruptcy filing | 7,987,147 | - | 7,987,147 | |||||||||
| Exclude: Impairment of loan and investment due to vendor bankruptcy filing | 31,012,853 | - | 31,012,853 | |||||||||
| Exclude: Impairment of patents | 919,363 | - | 919,363 | |||||||||
| Adjusted EBITDA | $ | (146,230,207 | ) | $ | 112,649,482 | $ | (258,879,689 | ) | ||||
| 28 |
Revenues and Costs of revenue: We generated revenues of $89.3 million during the nine months ended September 30, 2022 compared with $90.2 million during the prior-year period. The $0.9 million decrease is primarily attributable to the impact of lower market prices for bitcoin in the current-year ($21.6 million) mostly offset by the impact of increased production when compared to the prior-year period ($20.7 million). Cost of revenues – energy, hosting and other during the three months ended September 30, 2022 totaled $43 million compared with $11.6 million in the prior-year period. The $31.3 million increase was driven by accelerated cost recognition associated with the early exit from Hardin ($18.2 million) and higher production costs per bitcoin mined ($10.4 million) and to a lesser extent the impact of the higher costs associated with increased production ($2.7 million). Cost of revenues – Depreciation and amortization was $64.9 million in the current-year period compared with $8.0 million in the prior-year period, an increase of $56.8 million . This increase in expense was primarily due to the acceleration of depreciation related to our exit of the Hardin, MT facility ($31.9 million in infrastructure depreciation and $4.1 million in mining server depreciation) and increased depreciation costs associated with a higher number of mining servers in operation in the current-year period.
Total Margin: Total margin was a loss of ($18.5) million in the current-year period compared with income of $70.5 million in the prior-year period, a decline of ($89.0) million. This decline was driven by the factors discussed above, which are summarized in the table below (in millions):
| Revenue: | ||||||
| ● | Impact of higher production | $ | 20.7 | |||
| ● | Impact of lower bitcoin market prices | (21.6 | ) | |||
| Cost of revenue – energy, hosting and other: | ||||||
| ● | Impact of higher bitcoin production | (10.4 | ) | |||
| ● | Impact of accelerated cost recognition from Hardin exit | (18.2 | ) | |||
| ● | Other increases | (2.7 | ) | |||
| Cost of revenue – depreciation and amortization: | ||||||
| ● | Impact of accelerated cost recognition from Hardin exit | (36.0 | ) | |||
| ● | Other, primarily increased mining servers in operation | (20.8 | ) | |||
| $ | (89.0 | ) | ||||
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Gain on sales of equipment, net: On December 2, 2021, we entered into an agreement with DCRBN Ventures Development and Acquisition LLC (“DCRBN”) in which the Company agreed to sell certain equipment to DCRBN starting in April 2022, in conjunction with the development of commercial activities at the King Mountain wind farm in McCamey, TX. During the nine months ended September 30, 2022, the Company sold equipment for cash proceeds totaling $130.9 million and realized a pre-tax gain on the sale of such assets of $86.9 million. The Company also completed its previously disclosed exit from the Hardin, MT facility during the current-year period. In conjunction with this exit, the Company sold approximately 22,000 bitcoin mining servers for cash proceeds of $46.5 million and recorded a gain on sale, net of disposal losses of $3.2 million. There were no such sales in the prior-year period.
General and administrative expenses: General and administrative expenses were $39.2 million for the nine months ended September 30, 2022 compared with expenses of $159.4 million in the prior-year period, a decrease of $120.2 million. Our general and administrative expenses included stock-based (non-cash) compensation expense of $18.9 million in the current-year period and $152.3 million in the prior-year period. General and administrative expenses excluding stock-based compensation increased to $20.3 million in the current year period compared with $7.1 million in the prior-year period. The $13.2 million increase was primarily due to higher payroll and benefits costs ($5.4 million), increased insurance expense ($2.2 million) and higher professional fees ($1.6 million). Other expenses also increased due to the increased scope of our operations in the current-year period.
Legal reserves: In connection with a dispute concerning the settlement of certain restricted stock unit awards previously granted to the Company’s former Chief Executive Officer and Chairman, on October 12, 2022, the Company entered into a settlement agreement pursuant to which the Company agreed to pay $24 million. Given the outcome of this settlement, the Company entered into related settlement agreements in respect to five other recipients of the same restricted stock unit awards, including a director and our current Chief Executive Officer and Chairman. These related settlements totaled approximately $1 million in the aggregate.
Impairment of assets related to vendor bankruptcy filing: On September 22, 2022, Compute North filed for restructuring under Chapter 11 of the U.S. Bankruptcy Code. During the period ended September 30, 2022, the Company assessed the impairment of its assets associated with Compute North given their bankruptcy proceedings. As a result, the company recorded an impairment charge of approximately $8.0 million (related to deposits) as an operating expense and an additional impairment charge of approximately $31 million (related to a loan and preferred stock investment) as non-operating expenses.
Impairment of patents: The Company recorded an impairment of $0.9 million in the current-year period related to certain patents no longer utilized in its business operations.
Changes in carrying value of digital assets:
| ● | Impairment of digital currencies: We incurred impairment of digital assets during the nine months ended September 30, 2022, of $153 million compared with an impairment of $18.2 million in the prior-year period, reflecting the overall decline in value of bitcoin in the current-year period. |
| ● | Change in fair value of digital currencies held in fund: On June 10, 2022, the Company withdrew 4,769 bitcoin from its investment fund. Total changes in the fair value of investment fund from April 1 through the June 10 withdrawal date resulted in a loss of ($85.0) million in the current year period. During the prior-year period, the change in fair value of the bitcoin held in the investment fund was a gain of $59.4 million. |
Other non-operating income: Other non-operating income increased $378 thousand from the prior-year period.
Interest expense: Interest expense increased $10.3 million from the prior year as a result interest related to the convertible notes issued in November 2021 and interest on borrowings outstanding under the Company’s Term loan and revolving credit (“RLOC”) facilities.
Income tax benefit: The company recorded a modest income tax benefit of $193 thousand in the current-year period compared with a benefit of $3 thousand in the prior-year period.
Net loss: We recorded a net loss of $(280) million in the current-year period compared with a net loss of $(47.7) million in the prior period. The $232.3 million decline was primarily driven by the $279 million decrease in the carrying value of our digital assets, the $89 million decrease in total margin, the impairment of assets related the Compute North bankruptcy ($39 million), the legal reserve ($25 million), and higher interest expense ($10.3 million). Partially offsetting these unfavorable variances was a significant decrease in general and administrative expenses ($120.2 million) associated with lower stock-based compensation and gain on sales of equipment ($90.1 million).
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Adjusted EBITDA: Adjusted EBITDA was a loss of $(145.8) million compared with a positive Adjusted EBITDA of $112.6 million in the prior-year period. The $258.9 million decline was primarily driven by the $279 million decrease in the carrying value of our digital assets, lower total margin excluding the impact of depreciation and amortization $(32.2 million), legal reserves ($25 million), and higher operating expenses excluding non-cash stock compensation costs ($13.2 million). The gain on the sales of equipment partially offset these unfavorable variances.
Financial Condition and Liquidity: Cash, cash equivalents and restricted cash totaled $64.1 million at September 30, 2022, a decrease of $204.4 million from December 31, 2021. The decrease in cash, cash equivalents and restricted cash was primarily driven by a $368.1 million use of cash from investing activities resulting from significant levels of advances to vendors ($482.1 million) and, to a lesser extent, equity investments ($44.0 million) and purchases of property and equipment ($19.8 million). These uses of cash were partially offset by the proceeds from assets sales of $177.4 million.
Cash flows from operating activities resulted in a use of funds of ($84.2) million. Cash flows from operating activities before the impact of changes in operating assets and liabilities (a $18.1 million source of funds) were more than offset by a ($102.3) million use of funds from changes in operating assets and liabilities, primarily due to changes in digital currencies (an $89.3 million use of funds) prepaid expenses (a $30.6 million use of funds) and deposits (a $13.6 million use of fund) partially offset by the impact of higher accounts payable, including a payable related to the legal reserve (a $21.2 million source of funds). This legal reserve payable was settled in cash in October 2022.
Cash flows from financing activities resulted in a source of cash of $247.9 million, primarily from proceeds from the issuance of common stock ($198.7 million) and proceeds from borrowings outstanding under the Company’s Term loan agreement ($49.3 million).
We borrowed the initial $50 million under our Term Loan facility during the three months ended September 30, 2022. There were no borrowings outstanding under our revolving credit facility at September 30, 2022. The maximum borrowings outstanding under the Company’s revolving credit facility during the three and nine months ended September 30, 2022, was $35 million and $70 million, respectively.
The Company expects to have sufficient liquidity, including cash on hand and available borrowing capacity to support ongoing operations. We will continue to seek to fund our business activities through the capital markets, primarily through periodic equity issuances using our At-The-Market facility.
Bitcoin Holdings: At September 30, 2022, we held approximately 10,670 bitcoin with a total carrying value of $197.2 million on the balance sheet. Approximately 3,828 bitcoin were being utilized as collateral for credit facilities and were classified as “digital currencies, restricted”. The remaining bitcoin were classified as “Digital currencies” on the balance sheet. The fair market value of our bitcoin holdings at September 30, 2022 was approximately $207.3 million and the value of a single bitcoin was approximately $19,432.
During the month of October 2022, the Company borrowed an additional $50 million under its RLOC facility for general corporate purposes and provided an additional 3,993 bitcoin as collateral for this borrowing. This increased the Company’s collateral balance to 7,821 bitcoin. On November 9, 2022, bitcoin prices declined to a new yearly low on concerns of financial instability in the crypto industry. As a result, the Company was required to provide an additional 1,669 bitcoin (valued at $16,212.50 per bitcoin) as collateral for its $50 million RLOC and $50 million term loan borrowings, bringing its total collateral balance to 9,490 bitcoin (approximately $153.9 million). The Company’s total bitcoin holdings as of November 9, 2022, are approximately 11,440 bitcoin, of which 1,950 (approximately $31.6 million) are unrestricted. Given the uncertainty around bitcoin prices in the near-term, the Company has decided to delay previously announced plans to refinance the RLOC with a term loan during the month of November. This enables the Company to retain the optionality to repay the RLOC borrowings in the near-term versus committing to a two-year term loan borrowing which would carry prepayment penalties. The Company retains an option to draw an additional $50 million on the term loan through April of 2023.
At September 30, 2021 we held a total of 7,035 bitcoin with a total carrying value of $282.7 million on the balance sheet. The fair market value of our bitcoin holdings at September 30, 2021 was approximately $308.1 million and the value of a single bitcoin was approximately $43,791.
We expect to increase our bitcoin holdings over time primarily through mining activities. As our mining activities increase, we will likely begin selling a portion of bitcoin produced in future periods to fund monthly operating costs, for treasury management purposes or for general corporate purposes.
Off-balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our consolidated condensed financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of September 30, 2022, our exposure to market risk was primarily from our At-The-Market Facility. During the quarter the price at which we sold our common stock per share fluctuated from $5.54 to $18.24 with an average price per share of $11.85. We also have interest rate risk associated with our RLOC and Term Loan facilities, both of which bear interest at a variable rate tied to the Wall Street Journal Prime Rate. We have no other floating debt obligations. Our interest rate exposure will be primarily due to differences between our floating rate debt obligations compared to our floating rate short-term investments. Our ability to borrow under our debt facilities is based upon a floating formula regarding the value of collateral, which is our owned bitcoin, thus decreases in the market price for bitcoin limit our ability to borrow under the facility.
There have been no other material changes in our primary risk exposures or management of market risks as of this quarter.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States. Management assessed the effectiveness of our internal control over financial reporting as of September 30, 2022. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework in the 2013 COSO framework. Based on this assessment, management concluded that our disclosure controls and procedures were not effective as of September 30, 2022 for the reasons stated in our Annual Report on Form 10-K for the year ended December 31, 2021.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
As part of our ongoing program to implement changes and further improve our internal controls and in conjunction with our Code of Ethics, our independent directors have been working with management to include protocols and measures aimed at ensuring quality of our internal controls. Among those measures is the implementation of a whistle blower hotline, which allows third parties to anonymously report noncompliant activity. The hotline may be accessed as follows:
To file a report, use the Client Code “MarathonPG” and pick one of the following options:
| ● | Call: 1-877-647-3335 | |
| ● | Click: http://www.RedFlagReporting.com |
Changes in Internal Controls.
There have been changes in our internal control over financial reporting during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
We have created a position of Assistant Controller to support our Chief Accounting Officer and his staff which position was filled in July 2022. We are also undertaking an exhaustive review process of our outside internal controls consultants and bringing in additional resources to support our efforts to continue remediation of our internal controls.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Ho Matter
On January 14, 2021, Plaintiff Michael Ho (“Plaintiff” or “Ho”) filed a Civil Complaint for Damages and Restitution (“Complaint”) against the Company and 10 Doe Defendants. The Complaint alleges six causes of action against the Company, (1) Breach of Written Contract; (2) Breach of Implied Contract; (3) Quasi-Contract; (4) Services Rendered; (5) Intentional Interference with Prospective Economic Relations; and (6) Negligent Interference with Prospective Economic Relations, which is the one plead against “all Defendants” and is most likely to involve later named defendants. The claims arise from the same set of facts, Ho alleges that the Company profited from commercially sensitive information he shared with the Company and then it refused to compensate him for his role in securing the acquisition of a supplier of energy for the Company. On February 22, 2021, the Company responded to Mr. Ho’s Complaint with a general denial and the assertion of applicable affirmative defenses. Then, on February 25, 2021, the Company removed the action to the United States District Court in the Central District of California, where the action remains pending. The Company filed a motion for summary judgment/adjudication of all causes of action. On February 11, 2022, the Court granted the motion and dismissed Ho’s 2nd, 5th and 6th causes of action. Discovery is substantially closed. The Court held a pre-trial conference on February 24, 2022, where it vacated the March 3, 2022 trial date and ordered the parties to meet and confer on a new trial date. The Court discussed the various theories of damages maintained by the parties. In its ruling on the summary judgment motion and at the pre-trial conference on February 24, 2022, the Court noted that a jury is more likely to accept $150,000 as an appropriate damages amount if liability is found, as opposed to the various theories espoused by Ho that result in multi-million-dollar recoveries. Due to outstanding issues of fact and law, it is impossible to predict the outcome at this time; however, after consulting legal counsel, the Company is confident that it will prevail in this litigation, since it did not have a contract with Mr. Ho and he did not disclose any commercially sensitive information under any mutual nondisclosure agreement that was used to structure any joint venture with energy providers. Trial has been postponed to February 2023.
Information Subpoena
On October 6, 2020, the Company entered into a series of agreements with multiple parties to design and build a data center for up to 100-megawatts in Hardin, MT. In conjunction therewith, the Company filed a Current Report on Form 8-K on October 13, 2020. The 8-K discloses that, pursuant to a Data Facility Services Agreement, the Company issued 6,000,000 shares of restricted Common Stock, in transactions exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. During the quarter ended September 30, 2021, the Company and certain of its executives received a subpoena to produce documents and communications concerning the Hardin, Montana data center facility described in our Form 8-K dated October 13, 2020. We understand that the SEC may be investigating whether or not there may have been any violations of the federal securities law. We are cooperating with the SEC.
Putative Class Action Complaint
On December 17, 2021, a putative class action complaint was filed in the United States District Court for the District of Nevada, against the Company and present and former senior management. The complaint alleges securities fraud related to the disclosure of an SEC investigation previously made by the Company on November 15, 2021. Plaintiff Tad Schlatre served the complaint on the Company on March 1, 2022. On September 12, 2022, the court appointed Carlos Marina as lead plaintiff. On October 21, 2022, lead plaintiff voluntarily dismissed the complaint without prejudice.
Derivative Complaints
On February 18, 2022, a shareholder derivative complaint was filed in the United States District Court for the District of Nevada, against current and former members of the Company’s board of directors and senior management. The complaint is based on allegations substantially similar to the allegations in the December 2021 putative class action complaint, related to the Company’s disclosure of an SEC investigation previously made by the Company on November 15, 2021. On March 4, 2022, the complaint was served on the Company. On April 4, 2022, the defendants moved to dismiss the complaint.
On May 5, 2022, a second shareholder derivative complaint was filed in the United States District Court for the District of Nevada, against current and former members of the Company’s board of directors and senior management. The second shareholder derivative complaint is based on allegations substantially similar to the allegations in the February 18, 2022 derivative complaint. On May 11, 2022, the defendants moved to dismiss the second shareholder derivative complaint.
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On June 1, 2022, the Court entered an order consolidating the two derivative actions. A June 13, 2022 scheduling order provides for plaintiffs to file a consolidated complaint and for renewed motions to dismiss the consolidated shareholder derivative complaint. The consolidated complaint has not yet been filed.
In the opinion of management, after consulting legal counsel, the ultimate disposition of these matters will not have a material adverse effect on the Company and its related entities combined financial position, results of operations, or liquidity.
Compute North Bankruptcy
On September 22, 2022, Compute North filed for chapter 11 bankruptcy protection. Compute North provides operating services to us and hosts our equipment in multiple facilities. We deliver miners to Compute North, which then installs the equipment in several facilities, operates and maintains the equipment, and provides energy to keep the miners operating. In chapter 11, Compute North is currently seeking to sell substantially all of its assets, including its direct and indirect ownership interests in the facilities that house Marathon’s miners. Compute North may also seek to assume and assign the Compute North agreements to which Marathon is party to one or more third-party purchasers of Compute North’s assets or it may seek to reject such agreements. Accordingly, Compute North’s chapter 11 cases could cause a disruption in services provided by Compute North to us and, therefore, could have an adverse effect on our operations in the facilities managed by Compute North.
At this stage of Compute North’s chapter 11 cases, it is difficult to predict whether Marathon will receive any meaningful recovery on account of its claims.
Item 1A. Risk Factors.
There are no updates or changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2021 except as set forth below.
Our business could be harmed by prolonged power and internet outages, shortages, or capacity constraints and deployment delays.
Our operations require a significant amount of electrical power and access to high-speed internet to be successful. If we are unable to secure sufficient electrical power, or if we lose internet access for a prolonged period, we may be required to reduce our operations or cease them altogether. We are also dependent upon our third-party energy providers to power miners upon installation, and there may be delays in deployment and implementation. If any of these scenarios occurs, our business and results of operations may be materially and adversely affected.
We may face capital calls as a result of our existing loan agreements.
During October 2022, we borrowed an additional $50 million under our RLOC facility and provided an additional 3,993 bitcoin as collateral which increased the Company’s collateral balance to 7,821 bitcoin. On November 9, 2022, bitcoin prices declined to a new yearly low which triggered a capital call of an additional 1,669 bitcoin to cover collateral for our $50 million RLOC and $50 million term loan borrowings, bringing its total collateral balance to 9,490 bitcoin. The Company’s remaining unrestricted balance is 1,950 and any further decrease in bitcoin prices could cause us to have to pledge all or a substantial portion of our remaining bitcoin holdings. There is no assurance that if there are continued marked decreases in the price of bitcoin that our remaining unrestricted bitcoin will be sufficient to cover further increased collateral requirements or that if not, that we would have sufficient capital to cover any resulting capital calls, which could result in our not being able to maintain liquidity and could force us to consider reorganization or liquidation.
We are subject to risks associated with our need for significant electrical power.
Our operations have required significant amounts of electrical power, and, as we continue to expand our mining fleet, we anticipate our demand for electrical power will continue to grow. If we are unable to continue to obtain sufficient electrical power on a cost-effective basis, we may not realize the anticipated benefits of our significant capital investments.
Additionally, our operations could be materially adversely affected by prolonged power outages. Therefore, we may have to reduce or cease our operations in the event of an extended power outage, or as a result of the unavailability or increased cost of electrical power. If this were to occur, our business and results of operations could be materially and adversely affected.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
3.1 |
|
| 10.1 | Auradine, Inc. Preferred Stock Placement |
| 31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
| 31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
| 32.1 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
| 32.2 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
| 101.ins | Inline XBRL Instance Document** |
| 101.sch | Inline XBRL Taxonomy Schema Document** |
| 101.cal | Inline XBRL Taxonomy Calculation Document** |
| 101.def | Inline XBRL Taxonomy Linkbase Document** |
| 101.lab | Inline XBRL Taxonomy Label Linkbase Document** |
| 101.pre | Inline XBRL Taxonomy Presentation Linkbase Document** |
| 104 | Inline XBRL |
| * | Furnished herewith |
| ** | Filed herein |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 14, 2022
| MARATHON DIGITAL HOLDINGS, INC. | ||
| By: | /s/ Fred Thiel | |
| Name: | Fred Thiel | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
| By: | /s/ Hugh Gallagher | |
| Name: | Hugh Gallagher | |
| Title: | Chief Financial Officer | |
| (Principal Financial Officer) | ||
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Exhibit 3.1
AMENDED AND RESTATED BYLAWS
OF
MARATHON DIGITAL HOLDINGS, INC.
(a Nevada corporation)
ARTICLE I
STOCKHOLDERS
1. CERTIFICATES REPRESENTING STOCK. Certificates representing stock in the corporation shall be signed by, or in the name of, the corporation by the Chairperson or Vice-Chairperson of the Board of Directors, if any, or by the Chief Executive Officer or a President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the corporation. Any or all the signatures on any such certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were such officer, transfer agent, or registrar at the date of issue.
Whenever the corporation shall be authorized to issue more than one class of stock or more than one series of any class of stock, and whenever the corporation shall issue any shares of its stock as partly paid stock, the certificates representing shares of any such class or series or of any such partly paid stock shall set forth thereon the statements prescribed by the Chapter 78 of the General Corporation Law of Nevada (the “Private Corporations Law”). Any restrictions on the transfer or registration of transfer of any shares of stock of any class or series shall be noted conspicuously on the certificate representing such shares.
The corporation may issue a new certificate of stock or uncertificated shares in place of any certificate theretofore issued by it, alleged to have been lost, stolen, or destroyed, and the Board of Directors may require the owner of the lost, stolen, or destroyed certificate, or such owner’s legal representative, to give the corporation a bond sufficient to indemnify the corporation against any claim that may be made against it on account of the alleged loss, theft, or destruction of any such certificate or the issuance of any such new certificate or uncertificated shares.
2. UNCERTIFICATED SHARES. Subject to any conditions imposed by the Private Corporations Law, the Board of Directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of the stock of the corporation shall be uncertificated shares. Within a reasonable time after the issuance or transfer of any uncertificated shares, the corporation shall send to the registered owner thereof any written notice prescribed by the Private Corporations Law.
3. FRACTIONAL SHARE INTERESTS. The corporation may, but shall not be required to, issue fractions of a share. If the corporation does not issue fractions of a share, it shall (1) arrange for the disposition of fractional interests by those entitled thereto, (2) pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined, or (3) issue scrip or warrants in registered form (either represented by a certificate or uncertificated) or bearer form (represented by a certificate) which shall entitle the holder to receive a full share upon the surrender of such scrip or warrants aggregating a full share. A certificate for a fractional share or an uncertificated fractional share shall, but scrip or warrants shall not unless otherwise provided therein, entitle the holder to exercise voting rights, to receive dividends thereon, and to participate in any of the assets of the corporation in the event of liquidation. The Board of Directors may cause scrip or warrants to be issued subject to the conditions that they shall become void if not exchanged for certificates representing the full shares or uncertificated full shares before a specified date, or subject to the conditions that the shares for which scrip or warrants are exchangeable may be sold by the corporation and the proceeds thereof distributed to the holders of scrip or warrants, or subject to any other conditions which the Board of Directors may impose.
4. STOCK TRANSFERS. Upon compliance with provisions restricting the transfer or registration of transfer of shares of stock, if any, transfers or registration of transfers of shares of stock of the corporation shall be made only on the stock ledger of the corporation by the registered holder thereof, or by the registered holder’s attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation or with a transfer agent or a registrar, if any, and, in the case of shares represented by certificates, on surrender of the certificate or certificates for such shares of stock properly endorsed and the payment of all taxes due thereon.
5. RECORD DATE FOR STOCKHOLDERS. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining the stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by the Private Corporations Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by the Private Corporations Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.
6. MEANING OF CERTAIN TERMS. As used herein in respect of the right to notice of a meeting of stockholders or a waiver thereof or to participate or vote thereat or to consent or dissent in writing in lieu of a meeting, as the case may be, the term “share” or “shares” or “share of stock” or “shares of stock” or “stockholder” or “stockholders” refers to an outstanding share or shares of stock and to a holder or holders of record of outstanding shares of stock when the corporation is authorized to issue only one class of shares of stock, and said reference is also intended to include any outstanding share or shares of stock and any holder or holders of record of outstanding shares of stock of any class upon which or upon whom the articles of incorporation confers such rights where there are two or more classes or series of shares of stock or upon which or upon whom the Private Corporations Law confers such rights notwithstanding that the incorporation may provide for more than one class or series of shares of stock, one or more of which are limited or denied such rights thereunder; provided, however, that no such right shall vest in the event of an increase or a decrease in the authorized number of shares of stock of any class or series which is otherwise denied voting rights under the provisions of the articles of incorporation, except as any provision of law may otherwise require.
7. STOCKHOLDER MEETINGS.
- TIME. The annual meeting shall be held on the date and at the time fixed, from time to time, by the directors, provided, that the first annual meeting shall be held on a date within thirteen months after the organization of the corporation, and each successive annual meeting shall be held on a date within thirteen months after the date of the preceding annual meeting. A special meeting shall be held on the date and at the time fixed by the directors.
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- PLACE. Annual meetings and special meetings may be held at such place, either within or without the State of Nevada, as the directors may, from time to time, fix. Whenever the directors shall fail to fix such place, the meeting shall be held at the registered office of the corporation in the State of Nevada. The board of directors may also, in its sole discretion, determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication as authorized by Section 78.320 of the Nevada Private Corporations Law. If a meeting by remote communication is authorized by the board of directors in its sole discretion, and subject to guidelines and procedures as the board of directors may adopt, stockholders and proxyholders not physically present at a meeting of stockholders may, by means of remote communication participate in a meeting of stockholders and be deemed present in person and vote at a meeting of stockholders whether such meeting is to be held at a designated place or solely by means of remote communication, provided that (a) the corporation shall implement reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxyholder, (b) the corporation shall implement reasonable measures to provide such stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings, and (c) if any stockholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of such vote or other action shall be maintained by the corporation.
- CALL. Annual meetings and special meetings may be called by the directors or by any officer instructed by the directors to call the meeting.
- NOTICE OR WAIVER OF NOTICE. Written notice of all meetings shall be given, which shall state the place, if any, date, and hour of the meeting, the means of remote communication, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such meeting, and in the case of a special meeting, the purpose or purposes for which the meeting is called. The notice of an annual meeting shall state that the meeting is called for the election of directors and for the transaction of other business which may properly come before the meeting, and shall (if any other action which could be taken at a special meeting is to be taken at such annual meeting) state the purpose or purposes. The notice of any meeting shall also include, or be accompanied by, any additional statements, information, or documents prescribed by the Private Corporations Law. Except as otherwise provided by the Private Corporations Law, the written notice of any meeting shall be given not less than ten days nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder’s address as it appears on the records of the corporation. If a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time, place, if any, thereof, and the means of remote communications, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Whenever notice is required to be given under the Private Corporations Law, articles of incorporation or bylaws, a written waiver signed by the person entitled to notice, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a stockholder at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meetings of the stockholders need be specified in any written waiver of notice or any waiver by electronic transmission unless so required by the articles of incorporation or these bylaws.
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- STOCKHOLDER LIST. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting for a period of at least ten days prior to the meeting on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting or during ordinary business hours at the principal place of business of the corporation. In the event that the corporation determines to make the list available on an electronic network, the corporation may take reasonable steps to ensure that such information is available only to stockholders of the corporation. If the meeting is to be held at a place, then the list shall be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this section or the books of the corporation, or to vote in person or by proxy at any meeting of stockholders.
- CONDUCT OF MEETING. Meetings of the stockholders shall be presided over by one of the following officers in the order of seniority and if present and acting - the Chairperson of the Board, if any, the Vice-Chairperson of the Board, if any, the Chief Executive Officer, President, an Executive Vice-President, or, if none of the foregoing is in office and present and acting, by a chairperson to be chosen by the stockholders. The Secretary of the corporation, or in such Secretary’s absence, an Assistant Secretary, shall act as secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present the chairperson of the meeting shall appoint a secretary of the meeting.
- PROXY REPRESENTATION. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by proxy, but no such proxy shall be voted or acted upon after 3 years from its date, unless the proxy provides for a longer period. A stockholder may execute a writing authorizing another person or persons to act for such stockholder as proxy. Execution may be accomplished by the stockholder or such stockholder’s authorized officer, director, employee or agent signing such writing or causing such person’s signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature. A stockholder may also authorize another person or persons to act for such stockholder as proxy by transmitting or authorizing the transmission of a telegram, cablegram, or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that any such telegram, cablegram or other means of electronic transmission must either set forth or be submitted with information from which it can be determined that the telegram, cablegram or other electronic transmission was authorized by the stockholder. If it is determined that such telegrams, cablegrams or other electronic transmissions are valid, the inspectors or, if there are no inspectors, such other persons making the determination shall specify the information upon which they relied. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to Section 78.355 of the Private Corporations Law may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. A duly executed proxy shall be irrevocable if it states that it is irrevocable and, if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally.
- INSPECTORS. The directors, in advance of any meeting, may, but need not, appoint one or more inspectors of election to act at the meeting or any adjournment thereof. If an inspector or inspectors are not appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, if any, before entering upon the discharge of duties of inspector, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of such inspector’s ability. The inspectors, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots, or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots, or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspector or inspectors, if any, shall make a report in writing of any challenge, question, or matter determined by such inspector or inspectors and execute a certificate of any fact found by such inspector or inspectors.
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- QUORUM. The holders of 33-1/3 of the outstanding shares of stock shall constitute a quorum at a meeting of stockholders for the transaction of any business. The stockholders present may adjourn the meeting despite the absence of a quorum.
- VOTING. Each share of stock shall entitle the holder thereof to one vote. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Any other action shall be authorized by a majority of the votes cast except where the Private Corporations Law prescribes a different percentage of votes and/or a different exercise of voting power, and except as may be otherwise prescribed by the provisions of the articles of incorporation and these Bylaws. In the election of directors, and for any other action, voting need not be by ballot.
8. STOCKHOLDER ACTION WITHOUT MEETINGS. Except as any provision of the Private Corporations Law may otherwise require, any action required by the Private Corporations Law to be taken at any annual or special meetings of stockholders, or any action which may be taken at any annual or special meetings of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. A telegram, cablegram or other electronic transmission consenting to an action to be taken and transmitted by a stockholder or proxyholder, or by a person or persons authorized to act for a stockholder or proxyholder, shall be deemed to be written, signed and dated for the purposes of this section, provided that any such telegram, cablegram or other electronic transmission sets forth or is delivered with information from which the corporation can determine that the telegram, cablegram or other electronic transmission was transmitted by the stockholder or proxyholder or by a person or persons authorized to act for the stockholder or proxyholder and the date on which such stockholder or proxyholder or authorized person or persons transmitted such telegram, cablegram or electronic transmission. The date on which such telegram, cablegram or electronic transmission is transmitted shall be deemed to be the date on which such consent was signed. No consent given by telegram, cablegram or other electronic transmission shall be deemed to have been delivered until such consent is reproduced in paper form and until such paper shall be delivered to the corporation by delivery to its principal place of business or an officer or agent of the corporation having custody of the book in which the proceedings of meetings of stockholders are recorded, to the extent and in the manner provided by resolution of the board of directors of the corporation. Any copy, facsimile or other reliable reproduction of a consent in writing may be substituted or used in lieu of the original writing for any and all purposes for which the original writing could be used, provided that such copy, facsimile or other reproduction shall be a complete reproduction of the entire original writing. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Action taken pursuant to this paragraph shall be subject to the provisions of Section 78.320 of the Private Corporations Law.
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ARTICLE II
DIRECTORS
1. FUNCTIONS AND DEFINITION. The business and affairs of the corporation shall be managed by or under the direction of the Board of Directors of the corporation. The Board of Directors shall have the authority to fix the compensation of the members thereof. The use of the phrase “whole board” herein refers to the total number of directors which the corporation would have if there were no vacancies.
2. QUALIFICATIONS AND NUMBER. A director need not be a stockholder, a citizen of the United States, or a resident of the State of Nevada. The initial Board of Directors shall consist of one person. Thereafter the number of directors constituting the whole board shall be at least one. Subject to the foregoing limitation and except for the first Board of Directors, such number may be fixed from time to time by action of the stockholders or of the directors, or, if the number is not fixed, the number shall be one. The number of directors may be increased or decreased by action of the stockholders or of the directors.
3. ELECTION AND TERM. The first Board of Directors, unless the members thereof shall have been named in the articles of incorporation, shall be elected by the incorporator or incorporators and shall hold office until the first annual meeting of stockholders and until their successors are elected and qualified or until their earlier resignation or removal. Any director may resign at any time upon notice given in writing or by electronic transmission to the corporation. Thereafter, directors who are elected at an annual meeting of stockholders, and directors who are elected in the interim to fill vacancies and newly created directorships, shall hold office until the next annual meeting of stockholders and until their successors are elected and qualified or until their earlier resignation or removal. Except as the Private Corporations Law may otherwise require, in the interim between annual meetings of stockholders or of special meetings of stockholders called for the election of directors and/or for the removal of one or more directors and for the filling of any vacancy in that connection, newly created directorships and any vacancies in the Board of Directors, including unfilled vacancies resulting from the removal of directors for cause or without cause, may be filled by the vote of a majority of the remaining directors then in office, although less than a quorum, or by the sole remaining director.
4. MEETINGS.
- TIME. Meetings shall be held at such time as the Board shall fix, except that the first meeting of a newly elected Board shall be held as soon after its election as the directors may conveniently assemble.
- PLACE. Meetings shall be held at such place within or without the State of Nevada as shall be fixed by the Board.
- CALL. No call shall be required for regular meetings for which the time and place have been fixed. Special meetings may be called by or at the direction of the Chairperson of the Board, if any, the Vice-Chairperson of the Board, if any, of the President, or of a majority of the directors in office.
- NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be required for regular meetings for which the time and place have been fixed. Written, oral, or any other mode of notice of the time and place shall be given for special meetings in sufficient time for the convenient assembly of the directors thereat. Whenever notice is required to be given under the Private Corporations Law, articles of incorporation or bylaws, a written waiver signed by the person entitled to notice, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of any such person at a meeting shall constitute a waiver of notice of such meeting, except when such person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meetings of the directors need be specified in any written waiver of notice.
- QUORUM AND ACTION. A majority of the whole Board shall constitute a quorum except when a vacancy or vacancies prevents such majority, whereupon a majority of the directors in office shall constitute a quorum, provided, that such majority shall constitute at least one-third of the whole Board. A majority of the directors present, whether or not a quorum is present, may adjourn a meeting to another time and place. Except as herein otherwise provided, and except as otherwise provided by the Private Corporations Law, the vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board. The quorum and voting provisions herein stated shall not be construed as conflicting with any provisions of the Private Corporations Law and these Bylaws which govern a meeting of directors held to fill vacancies and newly created directorships in the Board or action of disinterested directors.
Any member or members of the Board of Directors or of any committee designated by the Board, may participate in a meeting of the Board, or any such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other.
- CHAIRPERSON OF THE MEETING. The Chairperson of the Board, if any and if present and acting, shall preside at all meetings. Otherwise, the Vice-Chairperson of the Board, if any and if present and acting, or the President, if present and acting, or any other director chosen by the Board, shall preside.
5. REMOVAL OF DIRECTORS. Except as may otherwise be provided by the Private Corporations Law, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors.
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6. COMMITTEES. The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member of any such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation with the exception of any power or authority the delegation of which is prohibited by Section 78.125 of the Private Corporations Law, and may authorize the seal of the corporation to be affixed to all papers which may require it.
7. WRITTEN ACTION. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing or electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.
ARTICLE III
OFFICERS
The officers of the corporation shall consist of a Chief Executive Officer, President, a Secretary, a Treasurer, and, if deemed necessary, expedient, or desirable by the Board of Directors, a Chairperson of the Board, a Vice-Chairperson of the Board, one or more Executive Vice-Presidents, one or more other Vice-Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers with such titles as the resolution of the Board of Directors choosing them shall designate. Except as may otherwise be provided in the resolution of the Board of Directors choosing such officer, no officer other than the Chairperson or Vice-Chairperson of the Board, if any, need be a director. Any number of offices may be held by the same person, as the directors may determine.
Unless otherwise provided in the resolution choosing such officer, each officer shall be chosen for a term which shall continue until the meeting of the Board of Directors following the next annual meeting of stockholders and until such officer’s successor shall have been chosen and qualified.
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All officers of the corporation shall have such authority and perform such duties in the management and operation of the corporation as shall be prescribed in the resolutions of the Board of Directors designating and choosing such officers and prescribing their authority and duties, and shall have such additional authority and duties as are incident to their office except to the extent that such resolutions may be inconsistent therewith. The Secretary or an Assistant Secretary of the corporation shall record all of the proceedings of all meetings and actions in writing of stockholders, directors, and committees of directors, and shall exercise such additional authority and perform such additional duties as the Board shall assign to such Secretary or Assistant Secretary. Any officer may be removed, with or without cause, by the Board of Directors. Any vacancy in any office may be filled by the Board of Directors.
ARTICLE IV
CORPORATE SEAL
The corporate seal shall be in such form as the Board of Directors shall prescribe.
ARTICLE V
FISCAL YEAR
The fiscal year of the corporation shall be fixed, and shall be subject to change, by the Board of Directors.
ARTICLE VI
CONTROL OVER BYLAWS
Subject to the provisions of the articles of incorporation and the provisions of the Private Corporations Law, the power to amend, alter, or repeal these Bylaws and to adopt new Bylaws may be exercised by the Board of Directors or by the stockholders.
ARTICLE VII
INDEMNIFICATION
A director or officer of the Corporation shall have no personal liability to the Corporation or its stockholders for damages for breach of fiduciary duty as a director or officer, except for damages for breach of fiduciary duty resulting from (a) acts or omissions which involve intentional misconduct, fraud, or a knowing violation of law, or (b) the payment of dividends in violation of the Nevada Revised Statutes as it may from time to time be amended or any successor provision thereto.
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Exhibit 10.1
RIGHT
OF FIRST REFUSAL
AND CO-SALE AGREEMENT
THIS RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT (this “Agreement”), is made as of April ____, 2022 by and among Auradine, Inc., a Delaware corporation (the “Company”), the Investors (as defined below) listed on Schedule A and the Key Holders (as defined below) listed on Schedule B.
WHEREAS, each Key Holder is the beneficial owner of shares of Capital Stock, or of options to purchase Common Stock;
WHEREAS, the Company and the Investors are parties to that certain Series A Preferred Stock Purchase Agreement, of even date herewith (the “Purchase Agreement”), pursuant to which the Investors have agreed to purchase shares of the Company’s Series A-1 Preferred Stock, par value $0.00001 per share, shares of the Company’s Series A-2 Preferred Stock, par value $0.00001 per share, shares of the Company’s Series A-3 Preferred Stock, par value $0.00001 per share, and shares of the Company’s Series A-4 Preferred Stock, par value $0.00001 per share (collectively, “Series A Preferred Stock”); and
WHEREAS, the Key Holders and the Company desire to further induce the Investors to purchase the Series A Preferred Stock;
1. Definitions.
1.1 “Affiliate” means, with respect to any specified Investor, any other Investor who directly or indirectly, controls, is controlled by or is under common control with such Investor, including, without limitation, any general partner, managing member, officer, director or trustee of such Investor, or any venture capital fund or other investment fund now or hereafter existing which is controlled by one (1) or more general partners, managing members or investment advisers of, or shares the same management company or investment adviser with, such Investor.
1.2 “Board of Directors” means the board of directors of the Company.
1.3 “Capital Stock” means (a) shares of Common Stock and Series A Preferred Stock (whether now outstanding or hereafter issued in any context), (b) shares of Common Stock issued or issuable upon conversion of Series A Preferred Stock, and (c) shares of Common Stock issued or issuable upon exercise or conversion, as applicable, of stock options, warrants or other convertible securities of the Company, in each case now owned or subsequently acquired by any Key Holder, any Investor, or their respective successors or permitted transferees or assigns. For purposes of the number of shares of Capital Stock held by an Investor or Key Holder (or any other calculation based thereon), all shares of Series A Preferred Stock shall be deemed to have been converted into Common Stock at the then-applicable conversion ratio.
1.4 “Change of Control” means a transaction or series of related transactions in which a person, or a group of related persons, acquires from stockholders of the Company shares representing more than fifty percent (50%) of the outstanding voting power of the Company.
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1.5 “Common Stock” means shares of Common Stock of the Company, $0.00001 par value per share.
1.6 “Company Notice” means written notice from the Company notifying the selling Key Holders and each Investor that the Company intends to exercise its Right of First Refusal as to some or all of the Transfer Stock with respect to any Proposed Key Holder Transfer.
1.7 “Investor Notice” means written notice from any Investor notifying the Company and the selling Key Holder(s) that such Investor intends to exercise its Secondary Refusal Right as to a portion of the Transfer Stock with respect to any Proposed Key Holder Transfer.
1.8 “Investors” means the persons named on Schedule A hereto, each person to whom the rights of an Investor are assigned pursuant to Section 6.9; provided, however, that upon the Second Tranche Closing (as defined in the Purchase Agreement), if any aforementioned person has not purchased its entire number of Additional A-4 Shares (as defined in the Purchase Agreement) set forth opposite such person’s name on Exhibit A to the Purchase Agreement as of the Initial Closing (as defined in the Purchase Agreement), such person shall not be deemed an Investor for purposes of this Agreement under any circumstances; provided further that any such person shall cease to be considered an Investor for purposes of this Agreement at any time such person and his, her or its Affiliates collectively hold fewer than eighty-five percent (85%) of the total number of shares of Series A Preferred Stock purchased by such person at the Closings (as defined in the Purchase Agreement).
1.9 “Key Holders” means the persons named on Schedule B hereto, each person to whom the rights of a Key Holder are assigned pursuant to Section 3.1, each person who hereafter becomes a signatory to this Agreement pursuant to Section 6.9 or 6.17 and any one of them, as the context may require.
1.10 “Proposed Key Holder Transfer” means any assignment, sale, offer to sell, pledge, mortgage, hypothecation, encumbrance, disposition of or any other like transfer or encumbering of any Transfer Stock (or any interest therein) proposed by any of the Key Holders.
1.11 “Proposed Transfer Notice” means written notice from a Key Holder setting forth the terms and conditions of a Proposed Key Holder Transfer.
1.12 “Prospective Transferee” means any person to whom a Key Holder proposes to make a Proposed Key Holder Transfer.
1.13 “Restated Certificate” means the Company’s Amended and Restated Certificate of Incorporation, as amended and/or restated from time to time.
1.14 “Reverse Merger” means the merger of the Company with a company whose shares are registered under the Securities Exchange Act of 1934, as amended, and whose shares are listed for traded on a securities exchange (an “Acquiror”), or a merger with an affiliate of such Acquiror.
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1.15 “Right of Co-Sale” means the right, but not an obligation, of an Investor to participate in a Proposed Key Holder Transfer on the terms and conditions specified in the Proposed Transfer Notice.
1.16 “Right of First Refusal” means the right, but not an obligation, of the Company, or its permitted transferees or assigns, to purchase some or all of the Transfer Stock with respect to a Proposed Key Holder Transfer, on the terms and conditions specified in the Proposed Transfer Notice.
1.17 “Secondary Notice” means written notice from the Company notifying the Investors and the selling Key Holder that the Company does not intend to exercise its Right of First Refusal as to all shares of any Transfer Stock with respect to a Proposed Key Holder Transfer, on the terms and conditions specified in the Proposed Transfer Notice.
1.18 “Secondary Refusal Right” means the right, but not an obligation, of each Investor to purchase up to its pro rata portion (based upon the total number of shares of Capital Stock then held by all Investors) of any Transfer Stock not purchased pursuant to the Right of First Refusal, on the terms and conditions specified in the Proposed Transfer Notice.
1.19 “Transfer Stock” means shares of Capital Stock owned by a Key Holder, or issued to a Key Holder after the date hereof (including, without limitation, in connection with any stock split, stock dividend, recapitalization, reorganization, or the like), but does not include any shares of Series A Preferred Stock or of Common Stock that are issued or issuable upon conversion of Series A Preferred Stock.
1.20 “Undersubscription Notice” means written notice from an Investor notifying the Company and the selling Key Holder that such Investor intends to exercise its option to purchase all or any portion of the Transfer Stock not purchased pursuant to the Right of First Refusal or the Secondary Refusal Right.
2. Agreement Among the Company, the Investors and the Key Holders.
2.1 Right of First Refusal.
(a) Grant. Subject to the terms of Section 3 below, each Key Holder hereby unconditionally and irrevocably grants to the Company a Right of First Refusal to purchase all or any portion of Transfer Stock that such Key Holder may propose to transfer in a Proposed Key Holder Transfer, at the same price and on the same terms and conditions as those offered to the Prospective Transferee.
(b) Notice. Each Key Holder proposing to make a Proposed Key Holder Transfer must deliver a Proposed Transfer Notice to the Company and each Investor not later than forty-five (45) days prior to the consummation of such Proposed Key Holder Transfer. Such Proposed Transfer Notice shall contain the material terms and conditions (including price and form of consideration) of the Proposed Key Holder Transfer, the identity of the Prospective Transferee and the intended date of the Proposed Key Holder Transfer. To exercise its Right of First Refusal under this Section 2, the Company must deliver a Company Notice to the selling Key Holder and the Investors within fifteen (15) days after delivery of the Proposed Transfer Notice specifying the number of shares of Transfer Stock to be purchased by the Company. In the event of a conflict between this Agreement and any other agreement that may have been entered into by a Key Holder with the Company that contains a preexisting right of first refusal, the Company and the Key Holder acknowledge and agree that the terms of this Agreement shall control and the preexisting right of first refusal shall be deemed satisfied by compliance with Section 2.1(a) and this Section 2.1(b).
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(c) Grant of Secondary Refusal Right to the Investors. Subject to the terms of Section 3 below, each Key Holder hereby unconditionally and irrevocably grants to the Investors a Secondary Refusal Right to purchase all or any portion of the Transfer Stock not purchased by the Company pursuant to the Right of First Refusal, as provided in this Section 2.1(c). If the Company does not provide the Company Notice exercising its Right of First Refusal with respect to all Transfer Stock subject to a Proposed Key Holder Transfer, the Company must deliver a Secondary Notice to the selling Key Holder and to each Investor to that effect no later than fifteen (15) days after the selling Key Holder delivers the Proposed Transfer Notice to the Company. To exercise its Secondary Refusal Right, an Investor must deliver an Investor Notice to the selling Key Holder and the Company within ten (10) days after the Company’s deadline for its delivery of the Secondary Notice as provided in the preceding sentence.
(d) Undersubscription of Transfer Stock. If options to purchase have been exercised by the Company and the Investors pursuant to Sections 2.1(b) and (c) with respect to some but not all of the Transfer Stock by the end of the ten (10) day period specified in the last sentence of Section 2.1(c) (the “Investor Notice Period”), then the Company shall, within five (5) days after the expiration of the Investor Notice Period, send written notice (the “Company Undersubscription Notice”) to those Investors who fully exercised their Secondary Refusal Right within the Investor Notice Period (the “Exercising Investors”). Each Exercising Investor shall, subject to the provisions of this Section 2.1(d), have an additional option to purchase all or any part of the balance of any such remaining unsubscribed shares of Transfer Stock on the terms and conditions set forth in the Proposed Transfer Notice. To exercise such option, an Exercising Investor must deliver an Undersubscription Notice to the selling Key Holder and the Company within ten (10) days after the expiration of the Investor Notice Period. In the event there are two (2) or more such Exercising Investors that choose to exercise the last-mentioned option for a total number of remaining shares in excess of the number available, the remaining shares available for purchase under this Section 2.1(d) shall be allocated to such Exercising Investors pro rata based on the number of shares of Transfer Stock such Exercising Investors have elected to purchase pursuant to the Secondary Refusal Right (without giving effect to any shares of Transfer Stock that any such Exercising Investor has elected to purchase pursuant to the Company Undersubscription Notice). If the options to purchase the remaining shares are exercised in full by the Exercising Investors, the Company shall immediately notify all of the Exercising Investors and the selling Key Holder of that fact.
(e) Consideration; Closing. If the consideration proposed to be paid for the Transfer Stock is in property, services or other non-cash consideration, the fair market value of the consideration shall be as determined in good faith by the Board of Directors and as set forth in the Company Notice. If the Company or any Investor cannot for any reason pay for the Transfer Stock in the same form of non-cash consideration, the Company or such Investor may pay the cash value equivalent thereof, as determined in good faith by the Board of Directors and as set forth in the Company Notice. The closing of the purchase of Transfer Stock by the Company and the Investors shall take place, and all payments from the Company and the Investors shall have been delivered to the selling Key Holder, by the later of (i) the date specified in the Proposed Transfer Notice as the intended date of the Proposed Key Holder Transfer; and (ii) forty-five (45) days after delivery of the Proposed Transfer Notice.
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2.2 Right of Co-Sale.
(a) Exercise of Right. If any Transfer Stock subject to a Proposed Key Holder Transfer is not purchased pursuant to Section 2.1 above and thereafter is to be sold to a Prospective Transferee, each respective Investor may elect to exercise its Right of Co-Sale and participate on a pro rata basis in the Proposed Key Holder Transfer as set forth in Section 2.2(b) below and, subject to Section 2.2(d), otherwise on the same terms and conditions specified in the Proposed Transfer Notice. Each Investor who desires to exercise its Right of Co-Sale (each, a “Participating Investor”) must give the selling Key Holder written notice to that effect within fifteen (15) days after the deadline for delivery of the Secondary Notice described above, and upon giving such notice such Participating Investor shall be deemed to have effectively exercised the Right of Co-Sale.
(b) Shares Includable. Each Participating Investor may include in the Proposed Key Holder Transfer all or any part of such Participating Investor’s Capital Stock equal to the product obtained by multiplying (i) the aggregate number of shares of Transfer Stock subject to the Proposed Key Holder Transfer (excluding shares purchased by the Company or the Participating Investors pursuant to the Right of First Refusal or the Secondary Refusal Right) by (ii) a fraction, the numerator of which is the number of shares of Capital Stock owned by such Participating Investor immediately before consummation of the Proposed Key Holder Transfer (including any shares that such Participating Investor has agreed to purchase pursuant to the Secondary Refusal Right) and the denominator of which is the total number of shares of Capital Stock owned, in the aggregate, by all Participating Investors immediately prior to the consummation of the Proposed Key Holder Transfer (including any shares that all Participating Investors have collectively agreed to purchase pursuant to the Secondary Refusal Right), plus the number of shares of Transfer Stock held by the selling Key Holder. To the extent one (1) or more of the Participating Investors exercise such right of participation in accordance with the terms and conditions set forth herein, the number of shares of Transfer Stock that the selling Key Holder may sell in the Proposed Key Holder Transfer shall be correspondingly reduced.
(c) Purchase and Sale Agreement. The Participating Investors and the selling Key Holder agree that the terms and conditions of any Proposed Key Holder Transfer in accordance with this Section 2.2 will be memorialized in, and governed by, a written purchase and sale agreement with the Prospective Transferee (the “Purchase and Sale Agreement”) with customary terms and provisions for such a transaction, and the Participating Investors and the selling Key Holder further covenant and agree to enter into such Purchase and Sale Agreement as a condition precedent to any sale or other transfer in accordance with this Section 2.2.
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(d) Allocation of Consideration.
(i) Subject to Section 2.2(d)(ii), the aggregate consideration payable to the Participating Investors and the selling Key Holder shall be allocated based on the number of shares of Capital Stock sold to the Prospective Transferee by each Participating Investor and the selling Key Holder as provided in Section 2.2(b), provided that if a Participating Investor wishes to sell Series A Preferred Stock, the price set forth in the Proposed Transfer Notice shall be appropriately adjusted based on the conversion ratio of the Series A Preferred Stock into Common Stock.
(ii) In the event that the Proposed Key Holder Transfer constitutes a Change of Control, the terms of the Purchase and Sale Agreement shall provide that the aggregate consideration from such transfer shall be allocated to the Participating Investors and the selling Key Holder in accordance with Sections 2.1 and 2.2 of Article IV(B) of the Restated Certificate and, if applicable, the next sentence, as if (A) such transfer were a Deemed Liquidation Event (as defined in the Restated Certificate), and (B) the Capital Stock sold in accordance with the Purchase and Sale Agreement were the only Capital Stock outstanding. In the event that a portion of the aggregate consideration payable to the Participating Investor(s) and selling Key Holder is placed into escrow and/or is payable only upon satisfaction of contingencies, the Purchase and Sale Agreement shall provide that (x) the portion of such consideration that is not placed in escrow and is not subject to contingencies (the “Initial Consideration”) shall be allocated in accordance with Sections 2.1 and 2.2 of Article IV(B) of the Restated Certificate as if the Initial Consideration were the only consideration payable in connection with such transfer, and (y) any additional consideration which becomes payable to the Participating Investor(s) and selling Key Holder upon release from escrow or satisfaction of such contingencies shall be allocated in accordance with Sections 2.1 and 2.2 of Article IV(B) of the Restated Certificate after taking into account the previous payment of the Initial Consideration as part of the same transfer.
(e) Purchase by Selling Key Holder; Deliveries. Notwithstanding Section 2.2(c) above, if any Prospective Transferee(s) refuse(s) to purchase securities subject to the Right of Co-Sale from any Participating Investor or Investors or upon the failure to negotiate in good faith a Purchase and Sale Agreement reasonably satisfactory to the Participating Investors, no Key Holder may sell any Transfer Stock to such Prospective Transferee(s) unless and until, simultaneously with such sale, such Key Holder purchases all securities subject to the Right of Co-Sale from such Participating Investor or Investors on the same terms and conditions (including the proposed purchase price) as set forth in the Proposed Transfer Notice and as provided in Section 2.2(d)(i); provided, however, if such sale constitutes a Change of Control, the portion of the aggregate consideration paid by the selling Key Holder to such Participating Investor or Investors shall be made in accordance with the first sentence of Section 2.2(d)(ii). In connection with such purchase by the selling Key Holder, such Participating Investor or Investors shall deliver to the selling Key Holder any stock certificate or certificates, properly endorsed for transfer, representing the Capital Stock being purchased by the selling Key Holder (or request that the Company effect such transfer in the name of the selling Key Holder). Any such shares transferred to the selling Key Holder will be transferred to the Prospective Transferee against payment therefor in consummation of the sale of the Transfer Stock pursuant to the terms and conditions specified in the Proposed Transfer Notice, and the selling Key Holder shall concurrently therewith remit or direct payment to each such Participating Investor the portion of the aggregate consideration to which each such Participating Investor is entitled by reason of its participation in such sale as provided in this Section 2.2(e).
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(f) Additional Compliance. If any Proposed Key Holder Transfer is not consummated within sixty (60) days after receipt of the Proposed Transfer Notice by the Company, the Key Holders proposing the Proposed Key Holder Transfer may not sell any Transfer Stock unless they first comply in full with each provision of this Section 2. The exercise or election not to exercise any right by any Investor hereunder shall not adversely affect its right to participate in any other sales of Transfer Stock subject to this Section 2.2.
2.3 Effect of Failure to Comply.
(a) Transfer Void; Equitable Relief. Any Proposed Key Holder Transfer not made in compliance with the requirements of this Agreement shall be null and void ab initio, shall not be recorded on the books of the Company or its transfer agent and shall not be recognized by the Company. Each party hereto acknowledges and agrees that any breach of this Agreement would result in substantial harm to the other parties hereto for which monetary damages alone could not adequately compensate. Therefore, the parties hereto unconditionally and irrevocably agree that any non-breaching party hereto shall be entitled to seek protective orders, injunctive relief and other remedies available at law or in equity (including, without limitation, seeking specific performance or the rescission of purchases, sales and other transfers of Transfer Stock not made in strict compliance with this Agreement).
(b) Violation of First Refusal Right. If any Key Holder becomes obligated to sell any Transfer Stock to the Company or any Investor under this Agreement and fails to deliver such Transfer Stock in accordance with the terms of this Agreement, the Company and/or such Investor may, at its option, in addition to all other remedies it may have, send to such Key Holder the purchase price for such Transfer Stock as is herein specified and transfer to the name of the Company or such Investor (or request that the Company effect such transfer in the name of an Investor) on the Company’s books any certificates, instruments, or book entry representing the Transfer Stock to be sold.
(c) Violation of Co-Sale Right. If any Key Holder purports to sell any Transfer Stock in contravention of the Right of Co-Sale (a “Prohibited Transfer”), each Participating Investor who desires to exercise its Right of Co-Sale under Section 2.2 may, in addition to such remedies as may be available by law, in equity or hereunder, require such Key Holder to purchase from such Participating Investor the type and number of shares of Capital Stock that such Participating Investor would have been entitled to sell to the Prospective Transferee had the Prohibited Transfer been effected in compliance with the terms of Section 2.2. The sale will be made on the same terms, including, without limitation, as provided in Section 2.2(d)(i) and the first sentence of Section 2.2(d)(ii), as applicable, and subject to the same conditions as would have applied had the Key Holder not made the Prohibited Transfer, except that the sale (including, without limitation, the delivery of the purchase price) must be made within ninety (90) days after the Participating Investor learns of the Prohibited Transfer, as opposed to the timeframe proscribed in Section 2.2. Such Key Holder shall also reimburse each Participating Investor for any and all reasonable and documented out-of-pocket fees and expenses, including reasonable legal fees and expenses, incurred pursuant to the exercise or the attempted exercise of the Participating Investor’s rights under Section 2.2.
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3. Exempt Transfers.
3.1 Exempted Transfers. Notwithstanding the foregoing or anything to the contrary herein, the provisions of Sections 2.1 and 2.2 shall not apply (a) in the case of a Key Holder that is an entity, upon a transfer by such Key Holder to its stockholders, members, partners or other equity holders, (b) to a repurchase of Transfer Stock from a Key Holder by the Company at a price no greater than that originally paid by such Key Holder for such Transfer Stock and pursuant to an agreement containing vesting and/or repurchase provisions approved by a majority of the Board of Directors, or (c) in the case of a Key Holder that is a natural person, upon a transfer of Transfer Stock by such Key Holder made for bona fide estate planning purposes, either during his or her lifetime or on death by will or intestacy to his or her spouse, including any life partner or similar statutorily-recognized domestic partner, child (natural or adopted), or any other direct lineal descendant of such Key Holder (or his or her spouse, including any life partner or similar statutorily-recognized domestic partner) (all of the foregoing collectively referred to as “family members”), or any other relative approved by unanimous consent of the Board of Directors, or any custodian or trustee of any trust, partnership or limited liability company for the benefit of, or the ownership interests of which are owned wholly by such Key Holder or any such family members; provided that in the case of clause (a) or (c), the Key Holder shall deliver prior written notice to the Investors of such pledge, gift or transfer and such shares of Transfer Stock shall at all times remain subject to the terms and restrictions set forth in this Agreement and such transferee shall, as a condition to such transfer, deliver a counterpart signature page to this Agreement as confirmation that such transferee shall be bound by all the terms and conditions of this Agreement as a Key Holder (but only with respect to the securities so transferred to the transferee), including the obligations of a Key Holder with respect to Proposed Key Holder Transfers of such Transfer Stock pursuant to Section 2.
3.2 Exempted Offerings. Notwithstanding the foregoing or anything to the contrary herein, the provisions of Section 2 shall not apply to the sale of any Transfer Stock (a) to the public in an offering pursuant to an effective registration statement under the Securities Act of 1933, as amended; or (b) pursuant to a Deemed Liquidation Event (as defined in the Restated Certificate).
3.3 Prohibited Transferees. Notwithstanding the foregoing, no Key Holder shall transfer any Transfer Stock to (a) any entity which, in the determination of the Board of Directors, directly or indirectly competes with the Company; or (b) any customer, distributor or supplier of the Company, if the Board of Directors should determine that such transfer would result in such customer, distributor or supplier receiving information that would place the Company at a competitive disadvantage with respect to such customer, distributor or supplier.
4. Legend. Each certificate, instrument, or book entry representing shares of Transfer Stock held by the Key Holders or issued to any permitted transferee in connection with a transfer permitted by Section 3.1 hereof shall be notated with the following legend:
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THE SALE, PLEDGE, HYPOTHECATION, OR TRANSFER OF THE SECURITIES REPRESENTED HEREBY IS SUBJECT TO, AND IN CERTAIN CASES PROHIBITED BY, THE TERMS AND CONDITIONS OF A CERTAIN RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT BY AND AMONG THE STOCKHOLDER, THE CORPORATION AND CERTAIN OTHER HOLDERS OF STOCK OF THE CORPORATION. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION.
Each Key Holder agrees that the Company may instruct its transfer agent to impose transfer restrictions on the shares notated with the legend referred to in this Section 4 above to enforce the provisions of this Agreement, and the Company agrees to promptly do so. The legend shall be removed upon termination of this Agreement at the request of the holder.
5. Lock-Up.
5.1 Agreement to Lock-Up. Each Key Holder hereby agrees that it will not, without the prior written consent of the managing underwriter, during the period commencing on the date of the final prospectus relating to the Company’s initial public offering (the “IPO”) and ending on the date specified by the Company and the managing underwriter (such period not to exceed one hundred eighty (l80) days, or such other period as may be requested by the Company or an underwriter to accommodate regulatory restrictions on (1) the publication or other distribution of research reports; and (2) analyst recommendations and opinions, including, but not limited to, the restrictions contained in applicable FINRA rules, or any successor provisions or amendments thereto), or in the case of a Reverse Merger, during the period commencing on the date of the closing of the Reverse Merger and ending on the date that is one hundred eighty (180) days after such closing, (a) lend, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Capital Stock held immediately prior to the effectiveness of the registration statement for the IPO or the closing of the Reverse Merger; or (b) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Capital Stock, whether any such transaction described in clause (a) or (b) above is to be settled by delivery of Capital Stock or other securities, in cash or otherwise. The foregoing provisions of this Section 5 shall not apply to the sale of any shares to an underwriter pursuant to an underwriting agreement, and shall only be applicable to the Key Holders if all officers, directors and holders of more than two percent (2%) of the outstanding Common Stock (after giving effect to the conversion into Common Stock of all outstanding Series A Preferred Stock) enter into similar agreements. The underwriters in connection with the IPO, and the Acquiror in connection with the Reverse Merger, are intended third-party beneficiaries of this Section 5 and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto. Each Key Holder further agrees to execute such agreements as may be reasonably requested by the underwriters in the IPO or the Acquiror in the Reverse Merger that are consistent with this Section 5 or that are necessary to give further effect thereto.
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5.2 Stop Transfer Instructions. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the shares of Capital Stock of each Key Holder (and transferees and assignees thereof) until the end of such restricted period.
6. Miscellaneous.
6.1 Term. This Agreement shall automatically terminate upon the earlier of (a) immediately prior to the consummation of the Company’s IPO or the Reverse Merger; (b) when the Company first becomes subject to the periodic reporting requirements of Section 12(g) or 15(d) of the Securities Exchange Act of 1934, as amended, and (c) the consummation of a Deemed Liquidation Event (as defined in the Restated Certificate).
6.2 Stock Split. All references to numbers of shares in this Agreement shall be appropriately adjusted to reflect any stock dividend, split, combination or other recapitalization affecting the Capital Stock occurring after the date of this Agreement.
6.3 Ownership. Each Key Holder represents and warrants that such Key Holder is the sole legal and beneficial owner of the shares of Transfer Stock subject to this Agreement and that no other person or entity has any interest in such shares (other than a community property interest as to which the holder thereof has acknowledged and agreed in writing to the restrictions and obligations hereunder).
6.4 Dispute Resolution. The parties (a) hereby irrevocably and unconditionally submit to the jurisdiction of the state courts of California and to the jurisdiction of the United States District Court for the Northern District of California for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement, (b) agree not to commence any suit, action or other proceeding arising out of or based upon this Agreement except in the state courts of California or the United States District Court for the Northern District of California, and (c) hereby waive, and agree not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court.
Waiver of Jury Trial: EACH PARTY HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE OTHER TRANSACTION AGREEMENTS, THE SECURITIES OR THE SUBJECT MATTER HEREOF OR THEREOF. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS (INCLUDING NEGLIGENCE), BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THIS SECTION HAS BEEN FULLY DISCUSSED BY EACH OF THE PARTIES HERETO AND THESE PROVISIONS WILL NOT BE SUBJECT TO ANY EXCEPTIONS. EACH PARTY HERETO HEREBY FURTHER WARRANTS AND REPRESENTS THAT SUCH PARTY HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
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6.5 Notices.
(a) All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given upon the earlier of actual receipt or (a) personal delivery to the party to be notified, (b) when sent, if sent by electronic mail during normal business hours of the recipient, and if not sent during normal business hours, then on the recipient’s next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) business day after deposit with a nationally recognized overnight courier, freight prepaid, specifying next business day delivery, with written verification of receipt. All communications shall be sent to the respective parties at their address as set forth on Schedule A or Schedule B hereof, as the case may be, or to such email address or address as subsequently modified by written notice given in accordance with this Section 6.5. If notice is given to the Company, it shall be sent to 985 Paradise Way, Palo Alto, CA 94306, Attn: Barun Kar; and a copy (which copy shall not constitute notice) shall also be sent to Paul Hastings LLP, 1117 S. California Avenue, Palo Alto, CA 94304, Attn: Jeff Hartlin, Email: jeffhartlin@paulhastings.com; and if notice is given to the Investors, a copy (which copy shall not constitute notice) shall also be given to Sage Law Group LLC, 1550 Wewatta Street, Suite 200, Denver, CO 80202, Attn: Rose Standifer, Email: rstandifer@sagelawgroup.com.
(b) Consent to Electronic Notice. Each Investor and Key Holder consents to the delivery of any stockholder notice pursuant to the Delaware General Corporation Law (the “DGCL”), as amended or superseded from time to time, by electronic transmission pursuant to Section 232 of the DGCL (or any successor thereto) at the electronic mail address set forth below such Investor’s or Key Holder’s name on the Schedules hereto, as updated from time to time by notice to the Company, or as on the books of the Company. To the extent that any notice given by means of electronic transmission is returned or undeliverable for any reason, the foregoing consent shall be deemed to have been revoked until a new or corrected electronic mail address has been provided, and such attempted electronic notice shall be ineffective and deemed to not have been given. Each Investor and Key Holder agrees to promptly notify the Company of any change in its electronic mail address, and that failure to do so shall not affect the foregoing.
6.6 Entire Agreement. This Agreement (including, the Exhibits and Schedules hereto) together with the other Transaction Agreements (as defined in the Purchase Agreement) constitutes the full and entire understanding and agreement between the parties with respect to the subject matter hereof, and any other written or oral agreement relating to the subject matter hereof existing between the parties are expressly canceled.
6.7 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power or remedy of such non-breaching or non-defaulting party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative.
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6.8 Amendment; Waiver and Termination. This Agreement may be amended, modified or terminated (other than pursuant to Section 6.1 above) and the observance of any term hereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only by a written instrument executed by (a) the Company, (b) the Key Holders holding a majority of the shares of Transfer Stock then held by all of the Key Holders who are then providing services to the Company as officers, employees or consultants, and (c) the holders of a majority of the shares of Common Stock issued or issuable upon conversion of the then outstanding shares of Series A Preferred Stock held by the Investors (voting as a single separate class and on an as-converted basis). Any amendment, modification, termination or waiver so effected shall be binding upon the Company, the Investors, the Key Holders and all of their respective successors and permitted assigns whether or not such party, assignee or other shareholder entered into or approved such amendment, modification, termination or waiver. Notwithstanding the foregoing, (i) this Agreement may not be amended, modified or terminated and the observance of any term hereunder may not be waived with respect to any Investor or Key Holder without the written consent of such Investor or Key Holder unless such amendment, modification, termination or waiver applies to all Investors and Key Holders, respectively, in the same fashion, (ii) this Agreement may not be amended, modified or terminated and the observance of any term hereunder may not be waived with respect to any Investor without the written consent of such Investor, if such amendment, modification, termination or waiver would adversely affect the rights of such Investor in a manner disproportionate to any adverse effect such amendment, modification, termination or waiver would have on the rights of the other Investors under this Agreement, (iii) the consent of the Key Holders shall not be required for any amendment, modification, termination or waiver if such amendment, modification, termination or waiver does not apply to the Key Holders, (iv) Schedule A hereto may be amended by the Company from time to time in accordance with the Purchase Agreement to add information regarding Additional Purchasers (as defined in the Purchase Agreement) without the consent of the other parties hereto, and (v) Schedule B hereto may be amended by the Company from time to time to add information regarding the issuance of additional shares of Capital Stock after the date hereof pursuant to Section 6.17 without the written consent of the other parties hereto. The Company shall give prompt written notice of any amendment, modification or termination hereof or waiver hereunder to any party hereto that did not consent in writing to such amendment, modification, termination or waiver. No waivers of or exceptions to any term, condition or provision of this Agreement, in any one (1) or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision.
6.9 Assignment of Rights.
(a) The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and permitted assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and permitted assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.
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(b) Any successor or permitted assignee of any Key Holder, including any Prospective Transferee who purchases shares of Transfer Stock in accordance with the terms hereof, shall deliver to the Company and the Investors, as a condition to any transfer or assignment, a counterpart signature page hereto pursuant to which such successor or permitted assignee shall confirm their agreement to be subject to and bound by all of the provisions set forth in this Agreement that were applicable to the predecessor or assignor of such successor or permitted assignee.
(c) The rights of the Investors hereunder are not assignable without the Company’s written consent (which shall not be unreasonably withheld, delayed or conditioned), except (i) by an Investor to any Affiliate, or (ii) to an assignee or transferee who acquires at least sixty percent (60%) of the total number of shares of Series A Preferred Stock purchased by an Investor at the Closings (as defined in the Purchase Agreement), it being acknowledged and agreed that any such assignment, including an assignment contemplated by the preceding clauses (i) or (ii) shall be subject to and conditioned upon any such assignee’s delivery to the Company and the other Investors of a counterpart signature page hereto pursuant to which such assignee shall confirm their agreement to be subject to and bound by all of the provisions set forth in this Agreement that were applicable to the assignor of such assignee.
(d) Except in connection with an assignment by the Company by operation of law to the acquirer of the Company, the rights and obligations of the Company hereunder may not be assigned under any circumstances.
6.10 Severability. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision.
6.11 Additional Investors. Notwithstanding anything to the contrary contained herein, if the Company issues additional shares of the Company’s Series A Preferred Stock after the date hereof, if agreed to by the Company, any purchaser of such shares of Series A Preferred Stock may become a party to this Agreement by executing and delivering an additional counterpart signature page to this Agreement and thereafter shall be deemed an “Investor” for all purposes hereunder.
6.12 Governing Law. This Agreement shall be governed by the internal law of the State of Delaware, without regard to conflict of law principles that would result in the application of any law other than the law of the State of Delaware.
6.13 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.
6.14 Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Counterparts may be delivered via electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g., www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.
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6.15 Aggregation of Stock. All shares of Capital Stock held or acquired by Affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement and such Affiliated persons may apportion such rights as among themselves in any manner they deem appropriate.
6.16 Specific Performance. In addition to any and all other remedies that may be available at law in the event of any breach of this Agreement, each Investor shall be entitled to specific performance of the agreements and obligations of the Company and the Key Holders hereunder and to such other injunction or other equitable relief as may be granted by a court of competent jurisdiction.
6.17 Additional Key Holders. In the event that (i) after the date of this Agreement but prior to the Second Tranche Closing (as defined in the Purchase Agreement), the Company issues shares of Common Stock to any employee or consultant, which shares would collectively constitute with respect to such employee or consultant 3.5% or more of the Company’s then outstanding Common Stock (treating for this purpose all shares of Common Stock issuable upon exercise of or conversion of outstanding options, warrants or convertible securities, as if exercised or converted); or (ii) after the date of the Second Tranche Closing, the Company issues shares of Common Stock to any employee or consultant, which shares would collectively constitute with respect to such employee or consultant 2.5% or more of the Company’s then outstanding Common Stock (treating for this purpose all shares of Common Stock issuable upon exercise of or conversion of outstanding options, warrants or convertible securities, as if exercised or converted), the Company shall, as a condition to such issuance, cause such employee or consultant to execute a counterpart signature page hereto as a Key Holder, and such person shall thereby be bound by, and subject to, all the terms and provisions of this Agreement applicable to a Key Holder.
[Signature Page Follows]
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IN WITNESS WHEREOF, the parties have executed this Right of First Refusal and Co-Sale Agreement as of the date first written above.
| COMPANY: | ||
| AURADINE, INC. | ||
| By: | ||
| Name: | Barun Kar | |
| Title: | Chief Executive Officer | |
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES A PREFERRED STOCK PURCHASE AGREEMENT (this “Agreement”), is made as of is made as of April ____, 2022, by and among Auradine, Inc., a Delaware corporation (the “Company”) and the investors listed on Exhibit A attached to this Agreement (each a “Purchaser” and together the “Purchasers”).
The parties hereby agree as follows:
1. Purchase and Sale of Preferred Stock.
1.1 Sale and Issuance of Preferred Stock.
(a) The Company shall have, prior to the Initial Closing (as defined below), authorized the sale and issuance of up to (i) 2,781,863 shares of the Company’s Series A-1 Preferred Stock, $0.00001 par value per share (the “Series A-1 Preferred Stock”), (ii) 352,661 shares of the Company’s Series A-2 Preferred Stock, $0.00001 par value per share (the “Series A-2 Preferred Stock”), (iii) 15,552,400 shares of the Company’s Series A-3 Preferred Stock, $0.00001 par value per share, and (iv) 3,484,200 shares of the Company’s Series A-4 Preferred Stock, $0.00001 par value per share (the “Series A-4 Preferred Stock,” collectively with the Series A-1 Preferred Stock, the Series A-2 Preferred Stock and the Series A-3 Preferred Stock, the “Series A Preferred Stock”). The Company shall have adopted and filed with the Secretary of State of the State of Delaware on or before the Initial Closing the Amended and Restated Certificate of Incorporation in the form of Exhibit B attached to this Agreement (the “Restated Certificate”), which sets forth the rights, privileges, preferences and restrictions of such shares of Series A Preferred Stock.
(b) Subject to the terms and conditions of this Agreement, each Purchaser agrees to purchase at the applicable Closing (as defined below) and the Company agrees to sell and issue to each Purchaser at the applicable Closing that number of shares of Series A Preferred Stock set forth opposite each Purchaser’s name on Exhibit A, at a purchase price of (i) $1.33902 per share with respect to Series A-1 Preferred Stock, (ii) $1.41779 per share with respect to Series A-2 Preferred Stock, (iii) $1.57532 per share with respect to Series A-3 Preferred Stock, or (iv) $12.91544 per share with respect to Series A-4 Preferred Stock. The shares of Series A Preferred Stock issued to the Purchasers pursuant to this Agreement shall be referred to in this Agreement as the “Shares.”
1.2 Closing; Delivery.
(a) The initial purchase and sale of the Shares shall take place electronically via the exchange of documents and signatures, on the date hereof, or at such other time and place as the Company and the Purchasers mutually agree upon, orally or in writing (which time and place are designated as the “Initial Closing”). In the event there is more than one closing, the term “Closing” shall apply to each such closing unless otherwise specified. The Purchasers of Series A-3 Preferred Stock in the Initial Closing are referred to in this Agreement as the “Initial A-3 Purchasers”.
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(b) At each Closing, the Company shall deliver to each Purchaser a certificate representing the Shares being purchased by such Purchaser at such Closing against payment of the purchase price therefor by check payable to the Company, by wire transfer to a bank account designated by the Company, by cancellation or conversion of indebtedness or other convertible securities of the Company to Purchaser, or by any combination of such methods.
(c) The Company has issued simple agreements for future equity (collectively, the “SAFEs”), which are automatically convertible into Series A-1 Preferred Stock or Series A-2 Preferred Stock pursuant to the terms set forth therein. The undersigned Purchasers who hold the SAFEs hereby acknowledge and agree that (i) at the Initial Closing, all issued and outstanding SAFEs will convert into Series A-1 Preferred Stock or Series A-2 Preferred Stock as set forth on Exhibit A, (ii) notwithstanding anything to the contrary under any terms of any SAFE, upon such conversion, the Company will be forever released from all of its obligations (including, without limitation, any pro rata rights, consent rights, information rights and pre-emptive right that a SAFE holder may have) and liabilities under the SAFEs except for any liability for gross negligence or intentional misconduct leading a Purchaser to not receive the full amount of equity, free from any encumbrances (except for any encumbrances created by such Purchaser), with respect to the SAFEs, (iii) notwithstanding anything to the contrary under any terms of any SAFE, after the conversion of the SAFEs, such Purchasers shall only have the rights as set forth in this Agreement or any other agreement entered into by and between the Company and such SAFE holder on or after the date of this Agreement, (iv) such Purchasers hereby amend their respective SAFE to remove from such SAFE any pro rata rights, consent rights, information rights, pre-emptive right and other rights that the Purchasers may have after the conversion of the SAFE, (v) such Purchasers consent to the transactions contemplated under this Agreement for all purposes and in all respects, and (vi) following such conversion, such SAFEs are terminated, extinguished and cancelled. Each of the undersigned Purchasers who holds a SAFE hereby waives the right to receive any cash payment or other consideration in lieu of a fractional share of Series A-1 Preferred Stock or Series A-2 Preferred Stock that would otherwise be issued upon conversion of such SAFE.
1.3 Sale of Additional Shares of Preferred Stock.
(a) After the Initial Closing, the Company may sell, on the same terms and conditions as those contained in this Agreement, any remaining authorized but unissued shares of Series A-3 Preferred Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or similar recapitalization affecting such shares) (the “Additional A-3 Shares”), to one (1) or more purchasers reasonably acceptable to _________, Marathon Digital Holdings, Inc. (“Marathon”), and (“_______” and collectively with Celesta, the “Lead Investors”, and such acceptable purchasers, the “Additional A-3 Purchasers” and, together with the Initial A-3 Purchasers, the “A-3 Purchasers”), provided that (i) such subsequent sale of shares of Series A-3 Preferred Stock is consummated prior to sixty (60) days after the Initial Closing; and (ii) each Additional A-3 Purchaser becomes a party to the Transaction Agreements (as defined below) (other than the Management Rights Letter), by executing and delivering a counterpart signature page to each of the Transaction Agreements. Each closing of the sale of Additional A-3 Shares to Additional A-3 Purchasers, including the Initial Closing, shall be referred to in this Agreement as a “First Tranche Closing.”
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(b) After the last First Tranche Closing, unless determined by the Company’s Board of Directors, including at least two of the Common Directors (as defined in the Voting Agreement) and one Preferred Director (as defined in the Voting Agreement), the Company shall sell to each of the Purchasers, and each of the Purchasers shall purchase from the Company, on the same terms and conditions as those contained in this Agreement and on the date determined by the Company, that number of Series A-4 Preferred Stock set forth opposite each Purchaser’s name on Exhibit A (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or similar recapitalization affecting such shares) (the “Additional A-4 Shares,” collectively with the Additional A-3 Shares, the “Additional Shares”); provided that (i) such subsequent sale of shares of Series A-4 Preferred Stock shall be consummated prior to the earlier of October 15, 2022, and within fifteen (15) business days from the date the Company delivers written notice of the Second Tranche Closing (as defined below); and (ii) the Company cannot update Exhibit A to increase a Purchaser’s allocation in the Second Tranche Closing (above what is reflected on Exhibit A for the Second Tranche Closing as of the Initial Closing) without the consent of such Purchaser. Each closing of the sale of Additional A-4 Shares to A-3 Purchasers shall be referred to in this Agreement as a “Second Tranche Closing.”
(c) Exhibit A to this Agreement shall be updated from time to time to reflect the number of Shares purchased at each Closing and the parties purchasing Shares at such Closing.
1.4 Defined Terms Used in this Agreement. In addition to the terms defined above, the following terms used in this Agreement shall be construed to have the meanings set forth or referenced below.
(a) “Affiliate” means, with respect to any specified Person, any other Person who, directly or indirectly, controls, is controlled by, or is under common control with such Person, including, without limitation, any general partner, managing member, officer, director or trustee of such Person, or any venture capital fund or registered investment company now or hereafter existing that is controlled by one (1) or more general partners, managing members or investment advisers of, or shares the same management company or investment adviser with, such Person.
(b) “Code” means the Internal Revenue Code of 1986, as amended.
(c) “Company Intellectual Property” or “Company IP” means all patents, patent applications, registered and unregistered trademarks, trademark applications, registered and unregistered service marks, service mark applications, tradenames, copyrights, trade secrets, domain names, mask works, information and proprietary rights and processes, similar or other intellectual property rights, subject matter of any of the foregoing, tangible embodiments of any of the foregoing, licenses in, to and under any of the foregoing, and in any and all such cases as are necessary to the Company in the conduct of the Company’s business as now conducted and as presently proposed to be conducted.
(d) “Indemnification Agreement” means the agreement between the Company and the director designated by any Purchaser entitled to designate a member of the Board of Directors pursuant to the Voting Agreement, dated as of the date of the Initial Closing, in the form of Exhibit D attached to this Agreement.
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(e) “Investors’ Rights Agreement” means the agreement among the Company and the Purchasers and certain other stockholders of the Company dated as of the date of the Initial Closing, in the form of Exhibit E attached to this Agreement.
(f) “Key Employee” means each of Barun Kar, Said Ouissal and Rajiv Khemani.
(g) “Knowledge” including the phrase “to the Company’s knowledge” shall mean the actual knowledge after reasonable investigation and assuming such knowledge as a Key Employee would have as a result of the reasonable performance of his or her duties in the ordinary course.
(h) “Management Rights Letter” means the agreement between the Company and a Purchaser, dated as of the date of the Initial Closing, in the form of Exhibit F attached to this Agreement.
(i) “Material Adverse Effect” means a material adverse effect on the business, assets (including intangible assets), liabilities, financial condition, property or results of operations of the Company.
(j) “Person” means any individual, corporation, partnership, trust, limited liability company, association or other entity.
(k) “Purchaser” means each of the Purchasers who is initially a party to this Agreement and any additional Purchaser who becomes a party to this Agreement at a subsequent Closing under Section 1.3.
(l) “Right of First Refusal and Co-Sale Agreement” means the agreement among the Company, the Purchasers, and certain other stockholders of the Company, dated as of the date of the Initial Closing, in the form of Exhibit G attached to this Agreement.
(m) “Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
(n) “Transaction Agreements” means this Agreement, the Investors’ Rights Agreement, the Management Rights Letter, the Right of First Refusal and Co-Sale Agreement and the Voting Agreement.
(o) “Voting Agreement” means the agreement among the Company, the Purchasers and certain other stockholders of the Company, dated as of the date of the Initial Closing, in the form of Exhibit H attached to this Agreement.
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2. Representations and Warranties of the Company. The Company hereby represents and warrants to each Purchaser that, except as set forth on the Disclosure Schedule attached as Exhibit C to this Agreement, which exceptions shall be deemed to be part of the representations and warranties made hereunder, the following representations are true and complete as of the date of the Initial Closing, except as otherwise indicated. The Disclosure Schedule shall be arranged in sections corresponding to the numbered and lettered sections contained in this Section 2, and the disclosures in any section of the Disclosure Schedule shall qualify other sections in this Section 2 only to the extent it is readily apparent from a reading of the disclosure that such disclosure is applicable to such other sections.
For purposes of these representations and warranties (other than those in Sections 2.2, 2.3, 2.4, 2.5, and 2.6), the term the “Company” shall include any subsidiaries of the Company, unless otherwise noted herein.
2.1 Organization, Good Standing, Corporate Power and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now conducted and as presently proposed to be conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect.
2.2 Capitalization.
(a) The authorized capital of the Company consists, immediately prior to the Initial Closing, of:
(i) 50,123,085 shares of common stock, $0.00001 par value per share (the “Common Stock”), 22,636,361 shares of which are issued and outstanding immediately prior to the Initial Closing. All of the outstanding shares of Common Stock have been duly authorized, are fully paid and nonassessable and were issued in compliance with all applicable federal and state securities laws.
(ii) 22,171,124 shares of preferred stock, $0.00001 par value per share (the “Preferred Stock”), of which, 2,781,863 shares have been designated Series A-1 Preferred Stock, none of which are issued and outstanding immediately prior to the Initial Closing, 352,661 shares have been designated Series A-2 Preferred Stock, none of which are issued and outstanding immediately prior to the Initial Closing, 15,552,400 shares have been designated Series A-3 Preferred Stock, none of which are issued and outstanding immediately prior to the Initial Closing, and 3,484,200 shares have been designated Series A-4 Preferred Stock, none of which are issued and outstanding immediately prior to the Initial Closing. The rights, privileges and preferences of the Preferred Stock are as stated in the Restated Certificate and as provided by the General Corporation Law of the State of Delaware, as amended or superseded from time to time (the “DGCL”).
(b) The Company has reserved 2,240,600 shares of Common Stock for issuance to officers, directors, employees and consultants of the Company pursuant to its 2021 Equity Incentive Plan duly adopted by the Board of Directors and approved by the Company stockholders (as amended from time to time, the “Stock Plan”). Of such reserved shares of Common Stock, 525,000 shares have been issued pursuant to restricted stock purchase agreements, no options to purchase shares have been granted and are currently outstanding, and 1,700,000 shares of Common Stock are unallocated, uncommitted, and remain available for issuance to officers, directors, employees and consultants pursuant to the Stock Plan. The Company has furnished to the Purchasers complete and accurate copies of the Stock Plan and forms of agreements used thereunder.
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(c) Except for (A) the conversion privileges of the Shares to be issued under this Agreement, (B) the rights provided in Section 4 of the Investors’ Rights Agreement, and (C) the securities and rights described in Sections 2.2(a)(ii) and 2.2(b) of this Agreement and Section 2.2(c) of the Disclosure Schedule, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal or similar rights) or agreements, orally or in writing, to purchase or acquire from the Company any shares of Common Stock or Series A Preferred Stock, or any securities convertible into or exchangeable for shares of Common Stock or Series A Preferred Stock. All outstanding shares of the Company’s Common Stock and all shares of the Company’s Common Stock underlying outstanding options are subject to (i) a right of first refusal in favor of the Company upon any proposed transfer (other than transfers for estate planning purposes); and (ii) a lock-up or market standoff agreement of not less than one hundred eighty (180) days following the Company’s initial public offering pursuant to a registration statement filed with the Securities and Exchange Commission under the Securities Act.
(d) None of the Company’s stock purchase agreements or stock option documents contains a provision for acceleration of vesting (or lapse of a repurchase right) or other changes in the vesting provisions or other terms of such agreement or understanding upon the occurrence of any event or combination of events, including, without limitation, in the case where the Company’s Stock Plan is not assumed in an acquisition. The Company has never adjusted or amended the exercise price of any stock options previously awarded, whether through amendment, cancellation, replacement grant, repricing, or any other means. Except as set forth in the Restated Certificate, the Company has no obligation (contingent or otherwise) to purchase or redeem any of its capital stock.
(e) The Company has obtained valid waivers of any rights by other parties to purchase any of the Shares covered by this Agreement.
2.3 Subsidiaries. The Company does not currently own or control, directly or indirectly, any interest in any other corporation, partnership, trust, joint venture, limited liability company, association, or other business entity. The Company is not a participant in any joint venture, partnership or similar arrangement.
2.4 Authorization. All corporate action required to be taken by the Company’s Board of Directors and stockholders in order to authorize the Company to enter into the Transaction Agreements, and to issue the Shares at the Closing and the Common Stock issuable upon conversion of the Shares, has been taken or will be taken prior to the applicable Closing. All action on the part of the officers of the Company necessary for the execution and delivery of the Transaction Agreements, the performance of all obligations of the Company under the Transaction Agreements to be performed as of the Closing, and the issuance and delivery of the Shares has been taken or will be taken prior to the applicable Closing. The Transaction Agreements, when executed and delivered by the Company, shall constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with their respective terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, or other laws of general application relating to or affecting the enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, or (iii) to the extent the indemnification provisions contained in the Investors’ Rights Agreement and the Indemnification Agreement may be limited by applicable federal or state securities laws.
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2.5 Valid Issuance of Shares. The Shares, when issued, sold and delivered in accordance with the terms and for the consideration set forth in this Agreement, will be validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under the Transaction Agreements, applicable state and federal securities laws and liens or encumbrances created by or imposed by a Purchaser. Assuming the accuracy of the representations of the Purchasers in Section 3 of this Agreement and subject to the filings described in the Voting Agreement, the Shares will be issued in compliance with all applicable federal and state securities laws. The Common Stock issuable upon conversion of the Shares has been duly reserved for issuance, and upon issuance in accordance with the terms of the Restated Certificate, will be validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under the Transaction Agreements, applicable federal and state securities laws and liens or encumbrances created by or imposed by a Purchaser. Assuming the accuracy of the representations of the Purchasers in Section 3 of this Agreement and in the Voting Agreement, the Common Stock issuable upon conversion of the Shares will be issued in compliance with all applicable federal and state securities laws.
2.6 Governmental Consents and Filings. Assuming the accuracy of the representations made by the Purchasers in Section 3 of this Agreement, no consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority is required on the part of the Company in connection with the consummation of the transactions contemplated by this Agreement, except for (i) the filing of the Restated Certificate, which will have been filed as of the Initial Closing, and (ii) filings pursuant to applicable securities laws, which have been made or will be made in a timely manner.
2.7 Litigation. There is no claim, action, suit, proceeding, arbitration, complaint, charge or investigation pending or to the Company’s knowledge, currently threatened (i) against the Company or any officer, director or Key Employee of the Company arising out of their employment or board relationship with the Company; (ii) to the Company’s knowledge, that questions the validity of the Transaction Agreements or the right of the Company to enter into them, or to consummate the transactions contemplated by the Transaction Agreements.; or (iii) to the Company’s knowledge, that would reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. Neither the Company nor, to the Company’s knowledge, any of its officers, directors or Key Employees is a party or is named as subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality (in the case of officers, directors or Key Employees, such as would affect the Company). There is no action, suit, proceeding or investigation by the Company pending or which the Company intends to initiate. The foregoing includes, without limitation, actions, suits, proceedings or investigations pending or threatened in writing (or any basis therefor known to the Company) involving the prior employment of any of the Company’s employees, their services provided in connection with the Company’s business, any information or techniques allegedly proprietary to any of their former employers or their obligations under any agreements with prior employers.
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2.8 Intellectual Property.
(a) The Company owns or possesses or believes it can acquire on commercially reasonable terms sufficient legal rights to all Company Intellectual Property without any known conflict with, or infringement of, the rights of others, including prior employees or consultants, or academic or medical institutions with which any of them may be affiliated now or may have been affiliated in the past. The Company has not received any communications alleging that the Company has violated, or by conducting its business, would violate any of the patents, trademarks, service marks, tradenames, copyrights, trade secrets, mask works or other proprietary rights or processes of any other Person.
(b) To the Company’s knowledge, no product or service marketed or sold (or proposed to be marketed or sold) by the Company violates or will violate any license or infringes or will infringe any intellectual property rights of any other party.
(c) Other than with respect to commercially available software products under standard end-user object code license agreements, there are no outstanding options, licenses, agreements, claims, encumbrances or shared ownership interests of any kind relating to the Company Intellectual Property, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, proprietary rights and processes of any other Person.
(d) The Company has obtained and possesses valid licenses to use all of the software programs present on the computers and other software-enabled electronic devices that it owns or leases or that it has otherwise provided to its employees for their use in connection with the Company’s business.
(e) Each employee and consultant has assigned to the Company all intellectual property rights he or she owns that are related to the Company’s business as now conducted and as presently proposed to be conducted and all intellectual property rights that he, she or it solely or jointly conceived, reduced to practice, developed or made during the period of his, her or its employment or consulting relationship with the Company that (i) relate, at the time of conception, reduction to practice, development, or making of such intellectual property right, to the Company’s business as then conducted or as then proposed to be conducted, (ii) were developed on any amount of the Company’s time or with the use of any of the Company’s equipment, supplies, facilities or information or (iii) resulted from the performance of services for the Company. It will not be necessary to use any inventions of any of its employees or consultants (or Persons it currently intends to hire) made prior to their employment by the Company, including prior employees or consultants, or academic or medical institutions with which any of them may be affiliated now or may have been affiliated in the past.
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(f) Section 2.8(f) of the Disclosure Schedule lists all patents, patent applications, registered trademarks, trademark applications, service marks, service mark applications, tradenames, registered copyrights, and licenses to and under any of the foregoing, in each case owned by the Company.
(g) The Company has not embedded, used or distributed any open source, copyleft or community source code (including but not limited to any libraries or code, software, technologies or other materials that are licensed or distributed under any General Public License, Lesser General Public License or similar license arrangement or other distribution model described by the Open Source Initiative at www.opensource.org, collectively “Open Source Software”) in connection with any of its products or services that are generally available or in development in any manner that would materially restrict the ability of the Company to protect its proprietary interests in any such product or service or in any manner that requires, or purports to require (i) any Company IP (other than the Open Source Software itself) be disclosed or distributed in source code form or be licensed for the purpose of making derivative works; (ii) any restriction on the consideration to be charged for the distribution of any Company IP; (iii) the creation of any obligation for the Company with respect to Company IP owned by the Company, or the grant to any third party of any rights or immunities under Company IP owned by the Company; or (iv) any other limitation, restriction or condition on the right of the Company with respect to its use or distribution of any Company IP.
(h) No government funding, facilities of a university, college, other educational institution or research center, or funding from third parties was used in the development of any Company Intellectual Property. No Person who was involved in, or who contributed to, the creation or development of any Company Intellectual Property, has performed services for the government, university, college, or other educational institution or research center in a manner that would affect Company’s rights in the Company Intellectual Property.
2.9 Compliance with Other Instruments. The Company is not in violation or default (i) of any provisions of its Restated Certificate or Bylaws, (ii) of any instrument, judgment, order, writ or decree, (iii) under any note, indenture or mortgage, or (iv) under any lease, agreement, contract or purchase order to which it is a party or by which it is bound that is required to be listed on the Disclosure Schedule, or (v) to its knowledge, of any provision of federal or state statute, rule or regulation applicable to the Company, the violation of which would have a Material Adverse Effect. The execution, delivery and performance of the Transaction Agreements and the consummation of the transactions contemplated by the Transaction Agreements will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either (i) a default under any such provision, instrument, judgment, order, writ, decree, contract or agreement; or (ii) an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company or the suspension, revocation, forfeiture, or nonrenewal of any material permit or license applicable to the Company.
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2.10 Agreements; Actions.
(a) Except for the Transaction Agreements, there are no agreements, understandings, instruments, contracts or proposed transactions to which the Company is a party or by which it is bound that involve (i) obligations (contingent or otherwise) of, or payments to, the Company in excess of $150,000, (ii) the license of any patent, copyright, trademark, trade secret or other proprietary right to or from the Company, (iii) the grant of rights to manufacture, produce, assemble, license, market, or sell its products to any other Person that limit the Company’s exclusive right to develop, manufacture, assemble, distribute, market or sell its products, or (iv) indemnification by the Company with respect to infringements of proprietary rights.
(b) The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or incurred any other liabilities individually in excess of $150,000 or in excess of $500,000 in the aggregate, (iii) made any loans or advances to any Person, other than ordinary advances for business expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than in the ordinary course of business. For the purposes of (a) and (b) of this Section 2.10, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same Person (including Persons the Company has reason to believe are affiliated with each other) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such section.
(c) The Company is not a guarantor or indemnitor of any indebtedness of any other Person.
2.11 Certain Transactions.
(a) Other than (i) standard employee benefits generally made available to all employees, standard employee offer letters and Confidential Information Agreements (as defined below), (ii) standard director and officer indemnification agreements approved by the Board of Directors, (iii) the purchase of shares of the Company’s capital stock and the issuance of options to purchase shares of the Company’s Common Stock, in each instance, approved in the written minutes of the Board of Directors (previously provided to the Purchasers or their respective counsel), and (iv) the Transaction Agreements, there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, consultants or Key Employees, or any Affiliate thereof.
(b) The Company is not indebted, directly or indirectly, to any of its directors, officers or employees or to their respective spouses or children or to any Affiliate of any of the foregoing, other than in connection with expenses or advances of expenses incurred in the ordinary course of business or employee relocation expenses and for other customary employee benefits made generally available to all employees. None of the Company’s directors, officers or employees, or any members of their immediate families, or any Affiliate of the foregoing are, directly or indirectly, indebted to the Company or, to the Company’s knowledge, have any (i) material commercial, industrial, banking, consulting, legal, accounting, charitable or familial relationship with any of the Company’s customers, suppliers, service providers, joint venture partners, licensees and competitors, (ii) direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation which competes with the Company except that directors, officers, employees or stockholders of the Company may own stock in (but not exceeding two percent (2%) of the outstanding capital stock of) publicly traded companies that may compete with the Company; or (iii) financial interest in any material contract with the Company.
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2.12 Rights of Registration and Voting Rights. Except as provided in the Investors’ Rights Agreement, the Company is not under any obligation to register under the Securities Act any of its currently outstanding securities or any securities issuable upon exercise or conversion of its currently outstanding securities. To the Company’s knowledge, except as contemplated in the Voting Agreement, no stockholder of the Company has entered into any agreements with respect to the voting of capital shares of the Company.
2.13 Property. The property and assets that the Company owns are free and clear of all mortgages, deeds of trust, liens, loans and encumbrances, except for statutory liens for the payment of current taxes that are not yet delinquent and encumbrances and liens that arise in the ordinary course of business and do not materially impair the Company’s ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in compliance with such leases and holds a valid leasehold interest free of any liens, claims or encumbrances other than those of the lessors of such property or assets. The Company does not own any real property.
2.14 Material Liabilities. The Company has no liability or obligation, absolute or contingent (individually or in the aggregate), except (i) obligations and liabilities incurred after the date of incorporation in the ordinary course of business that are not material, individually or in the aggregate, and (ii) obligations under contracts made in the ordinary course of business that would not be required to be reflected in financial statements prepared in accordance with generally accepted accounting principles.
2.15 Changes. To the Company’s knowledge, since October 28, 2021 through the date of this Agreement, there have been no events or circumstances of any kind that have had or could reasonably be expected to result in a Material Adverse Effect.
2.16 Employee Matters.
(a) To the Company’s knowledge, none of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would materially interfere with such employee’s ability to promote the interest of the Company or that would conflict with the Company’s business. Neither the execution or delivery of the Transaction Agreements, nor the carrying on of the Company’s business by the employees of the Company, nor the conduct of the Company’s business as now conducted and as presently proposed to be conducted, will, to the Company’s knowledge, conflict with or result in a breach of the terms, conditions, or provisions of, or constitute a default under, any contract, covenant or instrument under which any such employee is now obligated.
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(b) The Company is not delinquent in payments to any of its employees, consultants, or independent contractors for any wages, salaries, commissions, bonuses, or other direct compensation for any service performed for it to the date hereof or amounts required to be reimbursed to such employees, consultants or independent contractors. The Company has complied in all material respects with all applicable state and federal equal employment opportunity laws and with other laws related to employment, including those related to wages, hours, worker classification and collective bargaining. The Company has withheld and paid to the appropriate governmental entity or is holding for payment not yet due to such governmental entity all amounts required to be withheld from employees of the Company and is not liable for any arrears of wages, taxes, penalties or other sums for failure to comply with any of the foregoing.
(c) To the Company’s knowledge, no Key Employee intends to terminate employment with the Company or is otherwise likely to become unavailable to continue as a Key Employee. The Company does not have a present intention to terminate the employment of any of the foregoing. The employment of each employee of the Company is terminable at the will of the Company. Except as set forth in Section 2.16(c)(i) of the Disclosure Schedule or as required by law, upon termination of the employment of any such employees, no severance or other payments will become due. Except as set forth in Section 2.16(c)(ii) of the Disclosure Schedule, the Company has no policy, practice, plan or program of paying severance pay or any form of severance compensation in connection with the termination of employment services.
(d) The Company has not made any representations regarding equity incentives to any officer, employee, director or consultant that are inconsistent with the share amounts and terms set forth in the minutes of meetings of (or actions taken by unanimous written consent by) the Company’s Board of Directors.
(e) Each former Key Employee whose employment was terminated by the Company has entered into an agreement with the Company providing for the full release of any claims against the Company or any related party arising out of such employment.
(f) Section 2.16(f) of the Disclosure Schedule sets forth each employee benefit plan maintained, established or sponsored by the Company, or which the Company participates in or contributes to, which is subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The Company has made all required contributions and has no liability to any such employee benefit plan, other than liability for health plan continuation coverage described in Part 6 of Title I(B) of ERISA, and has complied in all material respects with all applicable laws for any such employee benefit plan.
2.17 Tax Returns and Payments. There are no federal, state, county, local or foreign taxes due and payable by the Company which have not been timely paid. There are no accrued and unpaid federal, state, country, local or foreign taxes of the Company which are due, whether or not assessed or disputed. There have been no examinations or audits of any tax returns or reports by any applicable federal, state, local or foreign governmental agency. The Company has duly and timely filed all federal, state, county, local and foreign tax returns required to have been filed by it and there are in effect no waivers of applicable statutes of limitations with respect to taxes for any year.
2.18 Insurance. The Company has in full force and effect insurance policies concerning such casualties as would be reasonable and customary for companies like the Company, with extended coverage, sufficient in amount (subject to reasonable deductions) to allow it to replace any of its properties that might be damaged or destroyed.
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2.19 Employee Agreements. Each current and former employee, consultant and officer of the Company has executed an agreement with the Company regarding confidentiality and proprietary information substantially in the form or forms delivered to the Purchasers or their respective counsel (the “Confidential Information Agreements”). No current or former Key Employee has excluded works or inventions from his or her assignment of inventions pursuant to such Key Employee’s Confidential Information Agreement. Each current and former Key Employee has executed a non-solicitation agreement substantially in the form or forms delivered to the Purchasers or their respective counsel. The Company is not aware that any of its Key Employees is in violation of any agreement described in this Section 2.19.
2.20 Permits. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business, the lack of which could reasonably be expected to have a Material Adverse Effect. The Company is not in default in any material respect under any of such franchises, permits, licenses or other similar authority.
2.21 Corporate Documents. The Certificate of Incorporation and Bylaws of the Company as of the date of this Agreement are in the form provided to the Purchasers. The copy of the minute books of the Company provided to the Purchasers contains minutes of all meetings of directors and stockholders and all actions by written consent without a meeting by the directors and stockholders since the date of incorporation and accurately reflects in all material respects all actions by the directors (and any committee of directors) and stockholders.
2.22 83(b) Elections. To the Company’s knowledge, all elections and notices under Section 83(b) of the Code have been or will be timely filed by all individuals who have acquired unvested shares of the Company’s Common Stock.
2.23 Environmental and Safety Laws. Except, to the Company’s knowledge, as could not reasonably be expected to have a Material Adverse Effect (a) the Company is and has been in compliance with all Environmental Laws; (b) there has been no release or threatened release of any pollutant, contaminant or toxic or hazardous material, substance or waste or petroleum or any fraction thereof (each a “Hazardous Substance”), on, upon, into or from any site currently or heretofore owned, leased or otherwise used by the Company; (c) there have been no Hazardous Substances generated by the Company that have been disposed of or come to rest at any site that has been included in any published U.S. federal, state or local “superfund” site list or any other similar list of hazardous or toxic waste sites published by any governmental authority in the United States; and (d) there are no underground storage tanks located on, no polychlorinated biphenyls (“PCBs”) or PCB-containing equipment used or stored on, and no hazardous waste as defined by the Resource Conservation and Recovery Act, as amended, stored on, any site owned or operated by the Company, except for the storage of hazardous waste in compliance with Environmental Laws. The Company has made available to the Purchasers true and complete copies of all material environmental records, reports, notifications, certificates of need, permits, pending permit applications, correspondence, engineering studies and environmental studies or assessments.
For purposes of this Section 2.23, “Environmental Laws” means any law, regulation, or other applicable requirement relating to (a) releases or threatened release of Hazardous Substance; (b) pollution or protection of employee health or safety, public health or the environment; or (c) the manufacture, handling, transport, use, treatment, storage, or disposal of Hazardous Substances.
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2.24 Qualified Small Business Stock. As of and immediately following the Closing: (i) the Company will be an eligible corporation as defined in Section 1202(e)(4) of the Code, (ii) the Company will not have made purchases of its own stock described in Code Section 1202(c)(3)(B) during the one (1) year period preceding the Initial Closing, except for purchases that are disregarded for such purposes under Treasury Regulation Section 1.1202-2, (iii) the Company’s aggregate gross assets, as defined by Code Section 1202(d)(2), at no time between its incorporation and through the Initial Closing have exceeded $50 million, taking into account the assets of any corporations required to be aggregated with the Company in accordance with Code Section 1202(d)(3), and (iv) the Shares will meet each of the requirements for qualification as “qualified small business stock” within the meaning of Sections 1202 and 1045 of the Code; provided, however, that in no event shall the Company be liable to the Purchasers or any other party for any damages arising from any subsequently proven or identified error in the Company’s determination with respect to the applicability or interpretation of Code Section 1202, unless such determination shall have been given by the Company in a manner either grossly negligent or fraudulent.
2.25 Foreign Corrupt Practices Act. Neither the Company nor any of its directors, officers, employees or agents have, directly or indirectly, made, offered, promised or authorized any payment or gift of any money or anything of value to or for the benefit of any “foreign official” (as such term is defined in the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”)), foreign political party or official thereof or candidate for foreign political office for the purpose of (i) influencing any official act or decision of such official, party or candidate, (ii) inducing such official, party or candidate to use his, her or its influence to affect any act or decision of a foreign governmental authority, or (iii) securing any improper advantage, in the case of (i), (ii) and (iii) above in order to assist the Company or any of its affiliates in obtaining or retaining business for or with, or directing business to, any person. Neither the Company nor any of its directors, officers, employees or agents have made or authorized any bribe, rebate, payoff, influence payment, kickback or other unlawful payment of funds or received or retained any funds in violation of any law, rule or regulation. Neither the Company nor, to the Company’s knowledge, any of its officers, directors or employees are the subject of any allegation, voluntary disclosure, investigation, prosecution or other enforcement action related to the FCPA or any other anti-corruption law.
2.26 Export Control Laws. The Company has conducted all export transactions in accordance with applicable provisions of United States export control laws and regulations, including the Export Administration Regulations, the International Traffic in Arms Regulations, the regulations administered by the Office of Foreign Assets Control of the U.S. Treasury Department, and the export control laws and regulations of any other applicable jurisdiction. Without limiting the foregoing: (a) the Company has obtained all export licenses and other approvals, timely filed all required filings and has assigned the appropriate export classifications to all products, in each case as required for its exports of products, software and technologies from the United States and any other applicable jurisdiction; (b) the Company is in compliance with the terms of all applicable export licenses, classifications, filing requirements or other approvals; (c) there are no pending or, to the Company’s knowledge, threatened claims against the Company with respect to such exports, classifications, required filings or other approvals; (d) there are no pending investigations related to the Company’s exports; and (e) there are no actions, conditions, or circumstances pertaining to the Company’s export transactions that would reasonably be expected to give rise to any material future claims.
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2.27 CFIUS Representations. The Company does not engage in (a) the design, fabrication, development, testing, production or manufacture of one (1) or more “critical technologies” within the meaning of the Defense Production Act of 1950, as amended, including all implementing regulations thereof (the “DPA”); (b) the ownership, operation, maintenance, supply, manufacture, or servicing of “covered investment critical infrastructure” within the meaning of the DPA (where such activities are covered by column 2 of Appendix A to 31 C.F.R. Part 800); or (c) the maintenance or collection, directly or indirectly, of “sensitive personal data” of U.S. citizens within the meaning of the DPA. The Company has no current intention of engaging in such activities in the future.
2.28 Disclosure. The Company has made available to the Purchasers all the information reasonably available to the Company that the Purchasers have requested for deciding whether to acquire the Shares. No representation or warranty of the Company contained in this Agreement, as qualified by the Disclosure Schedule, and no certificate furnished or to be furnished to Purchasers at the Closing contains any untrue statement of a material fact or, to the Company’s knowledge, omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. It is understood that this representation is qualified by the fact that the Company has not delivered to the Purchasers, and has not been requested to deliver, a private placement or similar memorandum or any written disclosure of the types of information customarily furnished to purchasers of securities.
3. Representations and Warranties of the Purchasers. Each Purchaser hereby represents and warrants to the Company, severally and not jointly, that:
3.1 Authorization. The Purchaser has full power and authority to enter into the Transaction Agreements. The Transaction Agreements to which the Purchaser is a party, when executed and delivered by the Purchaser, will constitute valid and legally binding obligations of the Purchaser, enforceable against such Purchaser in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and any other laws of general application affecting enforcement of creditors’ rights generally, and as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies, or (b) to the extent the indemnification provisions contained in the Investors’ Rights Agreement may be limited by applicable federal or state securities laws.
3.2 Purchase Entirely for Own Account. This Agreement is made with the Purchaser in reliance upon the Purchaser’s representation to the Company, which by the Purchaser’s execution of this Agreement, the Purchaser hereby confirms, that the Shares to be acquired by the Purchaser will be acquired for investment for the Purchaser’s own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Purchaser further represents that the Purchaser does not presently have any contract, undertaking, agreement or arrangement with any Person to sell, transfer or grant participations to such Person or to any third Person, with respect to any of the Shares. The Purchaser has not been formed for the specific purpose of acquiring the Shares.
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3.3 Disclosure of Information. The Purchaser has had an opportunity to discuss the Company’s business, management, financial affairs and the terms and conditions of the offering of the Shares with the Company’s management and has had an opportunity to review the Company’s facilities. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of the Purchasers to rely thereon.
3.4 Restricted Securities. The Purchaser understands that the Shares have not been, and will not be, registered under the Securities Act, by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Purchaser’s representations as expressed herein. The Purchaser understands that the Shares are “restricted securities” under applicable U.S. federal and state securities laws and that, pursuant to these laws, the Purchaser must hold the Shares indefinitely unless they are registered with the Securities and Exchange Commission and qualified by state authorities, or an exemption from such registration and qualification requirements is available. The Purchaser acknowledges that the Company has no obligation to register or qualify the Shares, or the Common Stock into which it may be converted, for resale except as set forth in the Investors’ Rights Agreement. The Purchaser further acknowledges that if an exemption from registration or qualification is available, it may be conditioned on various requirements including, but not limited to, the time and manner of sale, the holding period for the Shares, and on requirements relating to the Company which are outside of the Purchaser’s control, and which the Company is under no obligation and may not be able to satisfy.
3.5 No Public Market. The Purchaser understands that no public market now exists for the Shares, and that the Company has made no assurances that a public market will ever exist for the Shares.
3.6 Legends. The Purchaser understands that the Shares and any securities issued in respect of or exchange for the Shares, may be notated with one or all of the following legends:
“THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH TRANSFER MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.”
(a) Any legend set forth in, or required by, the other Transaction Agreements.
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(b) Any legend required by the securities laws of any state to the extent such laws are applicable to the Shares represented by the certificate, instrument, or book entry so legended.
No Purchaser shall be required to include any additional legend not set forth or required by any Transaction Agreements for its Shares or stock certificates unless otherwise required by applicable laws as pursuant to clause (b) above.
3.7 Accredited Investor. The Purchaser is an accredited investor as defined in Rule 501(a) of Regulation D promulgated under the Securities Act.
3.8 Foreign Investors. If the Purchaser is not a United States person (as defined by Section 7701(a)(30) of the Code), the Purchaser hereby represents that it has satisfied itself as to the full observance of the laws of its jurisdiction in connection with any invitation to subscribe for the Shares or any use of this Agreement, including (i) the legal requirements within its jurisdiction for the purchase of the Shares, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents that may need to be obtained, and (iv) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale, or transfer of the Shares. The Purchaser’s subscription and payment for and continued beneficial ownership of the Shares will not violate any applicable securities or other laws of the Purchaser’s jurisdiction.
3.9 CFIUS Foreign Person Status. The Purchaser is not a “foreign person” or a “foreign entity,” as defined in Section 721 of the DPA. The Purchaser is not controlled by a “foreign person,” as defined in the DPA. The Purchaser does not permit any foreign person affiliated with the Purchaser, whether affiliated as a limited partner or otherwise, to obtain through the Purchaser any of the following with respect to the Company: (i) access to any “material nonpublic technical information” (as defined in the DPA) in the possession of the Company; (ii) membership or observer rights on the Board of Directors or equivalent governing body of the Company or the right to nominate an individual to a position on the Board of Directors or equivalent governing body of the Company; (iii) any involvement, other than through the voting of shares, in the substantive decision-making of the Company regarding (x) the use, development, acquisition, or release of any “critical technology” (as defined in the DPA), (y) the use, development, acquisition, safekeeping, or release of “sensitive personal data” (as defined in the DPA) of U.S. citizens maintained or collected by the Company, or (z) the management, operation, manufacture, or supply of “covered investment critical infrastructure” (as defined in the DPA); or (iv) “control” of the Company (as defined in the DPA).
3.10 No General Solicitation. Neither the Purchaser, nor any of its officers, directors, employees, agents, stockholders or partners has either directly or indirectly, including, through a broker or finder (a) engaged in any general solicitation, or (b) published any advertisement in connection with the offer and sale of the Shares.
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3.11 Exculpation Among Purchasers. The Purchaser acknowledges that it is not relying upon any Person, other than the Company and its officers and directors, in making its investment or decision to invest in the Company. The Purchaser agrees that neither any Purchaser nor the respective controlling Persons, officers, directors, partners, agents, or employees of any Purchaser shall be liable to any other Purchaser for any action heretofore taken or omitted to be taken by any of them in connection with the purchase of the Shares.
3.12 Residence. If the Purchaser is an individual, then the Purchaser resides in the state or province identified in the address of the Purchaser set forth on Exhibit A; if the Purchaser is a partnership, corporation, limited liability company or other entity, then the office or offices of the Purchaser in which its principal place of business is identified in the address or addresses of the Purchaser set forth on Exhibit A.
3.13 Consent to Promissory Note/SAFE Conversion and Termination. Each Purchaser, to the extent that such Purchaser, as set forth on the Schedule of Purchasers, is a holder of any promissory note or SAFE of the Company being converted and/or cancelled in consideration of the issuance hereunder of Shares to such Purchaser, hereby agrees that the entire amount owed to such Purchaser under such note or evidenced by such SAFE, as the case may be, is being tendered to the Company in exchange for the applicable Shares set forth on the Schedule of Purchasers, and effective upon the Company’s and such Purchaser’s execution and delivery of this Agreement, without any further action required by the Company or such Purchaser, such note or SAFE, as the case may be, and all obligations set forth therein shall be immediately deemed satisfied in full and terminated in their entirety, including, but not limited to, any security interest effected therein.
3.14 Investment Decision. Each Purchaser acknowledges and agrees that its investment decision to purchase the Series A-4 Preferred Stock pursuant to this Agreement is being made as of the date of this Agreement and based and in reliance on the terms of this Agreement, including the Post Closing Covenants set forth below, and the Transaction Agreements.
4. Representations and Warranties of Marathon. Marathon hereby represents and warrants to the Company that it has complied with any and all applicable conflict of interest policies and requirements for its acquisition and purchase of Shares pursuant to the terms of this Agreement.
5. Conditions to the Purchasers’ Obligations at Initial Closing. The obligations of each Purchaser to purchase Shares at the Initial Closing are subject to the fulfillment, on or before such Initial Closing, of each of the following conditions, unless otherwise waived:
5.1 Representations and Warranties. The representations and warranties of the Company contained in Section 2 shall be true and correct in all respects as of the Initial Closing.
5.2 Performance. The Company shall have performed and complied with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by the Company on or before the Initial Closing.
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5.3 Compliance Certificate. The Chief Executive Officer of the Company shall deliver to the Purchasers at the Initial Closing a certificate certifying that the conditions specified in Sections 5.1 and 5.2 have been fulfilled.
5.4 Qualifications. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Shares pursuant to this Agreement shall be obtained and effective as of such Closing.
5.5 Opinion of Company Counsel. The Purchasers shall have received from Paul Hastings LLP, counsel for the Company, an opinion, dated as of the Initial Closing, in substantially the form of Exhibit I attached to this Agreement.
5.6 Board of Directors. As of the Initial Closing, the authorized size of the Company’s Board of Directors shall be six, and the Board shall be comprised of Barun Kar, Said Ouissal, Rajiv Khemani, Fred Thiel, Sriram Viswanathan, and Navin Chaddha.
5.7 Indemnification Agreement. The Company shall have executed and delivered the Indemnification Agreements.
5.8 Investors’ Rights Agreement. The Company and each Purchaser (other than the Purchaser relying upon this condition to excuse such Purchaser’s performance hereunder) and the other stockholders of the Company named as parties thereto shall have executed and delivered the Investors’ Rights Agreement.
5.9 Right of First Refusal and Co-Sale Agreement. The Company, each Purchaser (other than the Purchaser relying upon this condition to excuse such Purchaser’s performance hereunder), and the other stockholders of the Company named as parties thereto shall have executed and delivered the Right of First Refusal and Co-Sale Agreement.
5.10 Voting Agreement. The Company, each Purchaser (other than the Purchaser relying upon this condition to excuse such Purchaser’s performance hereunder), and the other stockholders of the Company named as parties thereto shall have executed and delivered the Voting Agreement.
5.11 Restated Certificate. The Company shall have filed the Restated Certificate with the Secretary of State of Delaware on or prior to the Initial Closing, which shall continue to be in full force and effect as of such Closing.
5.12 Secretary’s Certificate. The Secretary of the Company shall have delivered to the Purchasers at the Initial Closing a certificate certifying (i) the Certificate of Incorporation and Bylaws of the Company as in effect at the Closing, (ii) resolutions of the Board of Directors of the Company approving the Transaction Agreements and the transactions contemplated under the Transaction Agreements, and (iii) resolutions of the stockholders of the Company approving the Restated Certificate.
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5.13 Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated at such Initial Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to each Purchaser, and each Purchaser (or its respective counsel) shall have received all such counterpart original and certified or other copies of such documents as reasonably requested. Such documents may include good standing certificates.
5.14 Management Rights. A Management Rights Letter shall have been executed by the Company and delivered to each Purchaser to whom it is addressed.
6. Conditions of the Company’s Obligations at Closing. The obligations of the Company to sell Shares to the Purchasers at the Initial Closing or any subsequent Closing are subject to the fulfillment, on or before such Closing, of each of the following conditions, unless otherwise waived:
6.1 Representations and Warranties. The representations and warranties of each Purchaser contained in Section 3 (and solely with respect to Marathon, the representations and warranties contained in Section 4) shall be true and correct in all respects as of such Closing.
6.2 Performance. The Purchasers shall have performed and complied with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by them on or before such Closing.
6.3 Qualifications. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Shares pursuant to this Agreement shall be obtained and effective as of the Closing.
6.4 Investors’ Rights Agreement. Each Purchaser shall have executed and delivered the Investors’ Rights Agreement.
6.5 Right of First Refusal and Co-Sale Agreement. Each Purchaser and the other stockholders of the Company named as parties thereto shall have executed and delivered the Right of First Refusal and Co-Sale Agreement.
6.6 Voting Agreement. Each Purchaser and the other stockholders of the Company named as parties thereto shall have executed and delivered the Voting Agreement.
7. Post-Closing Covenants.
7.1 Appointment of Chief Executive Officer. The Company’s Board of Directors shall appoint Rajiv Khemani as the Company’s Chief Executive Officer no later than January 30, 2023, and the Company shall use best efforts to facilitate such appointment and management transition.
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7.2 Conflict of Interest Matters. Within ninety (90) days after the Initial Closing, the Company shall adopt a conflict of interest policy which, at a minimum, will require the Company’s directors, officers and Key Employees to disclose outside roles and interests that potentially conflict with the Company’s business relationships. In addition, such policy will require that (i) for so long as Said Ouissal is a member of the Company’s Board of Directors, Mr. Ouissal will recuse himself from all matters related to the Company’s business dealings with Marathon, and (ii) upon the issuance of material purchase orders by Marathon for the Company’s products following a successful tape-out for such products, the Preferred Directors (as defined in the Restated Certificate) and the Chief Executive Officer of the Company will evaluate Mr. Ouissal’s continued service on the Board of Directors and, in consultation with legal counsel, will revise such policy and/or adopt further procedures to ensure the continued avoidance and/or management of conflicts of interest, including from any overlapping directorships.
7.3 Public Relations. The Company shall adopt and implement a marketing and public relations plan, including the announcement of the consummation of the purchase of Shares and related transactions contemplated in this Agreement, subject to approval by the Board of Directors of the Company, including at least one Preferred Director (as defined in the Restated Certificate).
7.4 Redemption. In the event a Purchaser fails to purchase all of the Additional A-4 Shares that such Purchaser is required to purchase pursuant to Section 1.3(b) of this Agreement by the deadline set forth in such Section 1.3(b), the Company shall have the option, exercisable in the Company’s sole discretion at any time prior to the date that is 180 days after the Second Tranche Closing, to repurchase all of the Shares held by such Purchaser for an aggregate purchase price of $1.00 (each, a “Redemption Right”). Each Purchaser hereby constitutes and appoints as the proxies of the party and hereby grants a power of attorney to each Common Director (as defined in the Voting Agreement), and each of them, with full power of substitution, to execute a Stock Assignment Separate from Certificate on behalf of such Purchaser to effect any such Redemption Right. Each of the proxy and power of attorney granted pursuant to this Section 7.4 is given in consideration of the agreements and covenants of the Company and the parties in connection with the transactions contemplated by this Agreement and, as such, each is coupled with an interest and shall be irrevocable unless and until this Agreement terminates. Each Purchaser hereby revokes any and all previous proxies or powers of attorney with respect to the Shares (except as set forth in the Voting Agreement) and shall not hereafter, unless and until this Agreement terminates, purport to grant any other proxy or power of attorney with respect to any of the Shares, deposit any of the Shares into a voting trust or enter into any agreement (other than this Agreement and the Voting Agreement), arrangement or understanding with any person, directly or indirectly, to vote, grant any proxy or give instructions with respect to the voting of any of the Shares, in each case, with respect to the Redemption Right.
8. Miscellaneous.
8.1 Survival of Warranties. Unless otherwise set forth in this Agreement, the representations and warranties of the Company and the Purchasers contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and each Closing and shall in no way be affected by any investigation or knowledge of the subject matter thereof made by or on behalf of the Purchasers or the Company.
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8.2 Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.
8.3 Governing Law. This Agreement shall be governed by the internal law of the State of Delaware, without regard to conflict of law principles that would result in the application of any law other than the law of the State of Delaware.
8.4 Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Counterparts may be delivered via electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g., www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.
8.5 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.
8.6 Notices.
(a) General. All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given upon the earlier of actual receipt, or (a) personal delivery to the party to be notified, (b) when sent, if sent by electronic mail during normal business hours of the recipient, and if not sent during normal business hours, then on the recipient’s next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) business day after deposit with a nationally recognized overnight courier, freight prepaid, specifying next business day delivery, with written verification of receipt. All communications shall be sent to the respective parties at their address as set forth on the signature page or Exhibit A, or to such e-mail address or address as subsequently modified by written notice given in accordance with this Section 8.6. If notice is given to the Company, a copy (which copy shall not constitute notice) shall also be sent to Paul Hastings LLP, 1117 S. California Avenue, Palo Alto, CA 94304, Attn: Jeff Hartlin, Email: jeffhartlin@paulhastings.com, and if notice is given to the Purchasers, a copy (which copy shall not constitute notice) shall also be given to Sage Law Group, 1550 Wewatta Street, Ste. 2000, Denver, CO 80202, Attn: Rose Standifer, rstandifer@sagelawgroup.com.
(b) Consent to Electronic Notice. Each Purchaser consents to the delivery of any stockholder notice pursuant to the DGCL, by electronic transmission pursuant to Section 232 of the DGCL (or any successor thereto) at the e-mail address set forth below such Purchaser’s name on the signature page or Exhibit A, as updated from time to time by notice to the Company. To the extent that any notice given by means of electronic transmission is returned or undeliverable for any reason, the foregoing consent shall be deemed to have been revoked until a new or corrected e-mail address has been provided, and such attempted electronic notice shall be ineffective and deemed to not have been given. Each Purchaser agrees to promptly notify the Company of any change in its e-mail address, and that failure to do so shall not affect the foregoing.
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8.7 No Finder’s Fees. Each party represents that it neither is nor will be obligated for any finder’s fee or commission in connection with this transaction. Each Purchaser agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finder’s or broker’s fee arising out of this transaction (and the costs and expenses of defending against such liability or asserted liability) for which each Purchaser or any of its officers, employees or representatives is responsible. The Company agrees to indemnify and hold harmless each Purchaser from any liability for any commission or compensation in the nature of a finder’s or broker’s fee arising out of this transaction (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible.
8.8 Fees and Expenses. At the Initial Closing, the Company shall pay the reasonable fees and expenses of Sage Law Group LLC, counsel for Celesta and Mayfield, in an amount not to exceed, in the aggregate, $50,000.
8.9 Attorneys’ Fees. If any action at law or in equity (including, arbitration) is necessary to enforce or interpret the terms of any of the Transaction Agreements, the prevailing party shall be entitled to reasonable attorneys’ fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled.
8.10 Amendments and Waivers. Except as set forth in Section 1.3(c) of this Agreement, any term of this Agreement may be amended, terminated or waived only with the written consent of the Company and the holders of at least a majority of the then-outstanding Shares. Any amendment or waiver effected in accordance with this Section 8.10 shall be binding upon the Purchasers and each transferee of the Shares (or the Common Stock issuable upon conversion thereof), each future holder of all such securities, and the Company.
8.11 Severability. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision.
8.12 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power or remedy of such non-breaching or non-defaulting party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative.
8.13 Entire Agreement. This Agreement (including the Exhibits hereto), the Restated Certificate and the other Transaction Agreements constitute the full and entire understanding and agreement between the parties with respect to the subject matter hereof, and any other written or oral agreement relating to the subject matter hereof existing between the parties are expressly canceled.
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8.14 Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON THE QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT.
8.15 Termination of Closing Obligations. Each Purchaser shall have the right to terminate its obligations to complete a First Tranche Closing or a Second Tranche Closing, as the case may be, if prior to the occurrence thereof, any of the following occurs:
(a) the Company consummates a Deemed Liquidation Event (as defined in the Restated Certificate);
(b) the closing of an initial public offering of the Company, in which case the Purchasers may terminate their obligations hereunder immediately prior to, or contingent upon, such closing; or
(c) the Company (i) applies for or consents to the appointment of a receiver, trustee, custodian or liquidator of itself or substantially all of its property, (ii) becomes subject to the appointment of a receiver, trustee, custodian or liquidator of itself or substantially all of its property, (iii) makes an assignment for the benefit of creditors, (iv) institutes any proceedings under the United States Bankruptcy Code or any other federal or state bankruptcy, reorganization, receivership, insolvency or other similar law affecting the rights of creditors generally, or files a petition or answer seeking reorganization or an arrangement with creditors to take advantage of any insolvency law, or files an answer admitting the material allegations of a bankruptcy, reorganization or insolvency petition filed against it, or (v) becomes subject to any involuntary proceedings under the United States Bankruptcy Code or any other federal or state bankruptcy, reorganization, receivership, insolvency or other similar law affecting the rights of creditors generally, when proceeding is not dismissed within thirty (30) days of filing, or have an order for relief entered against it in any proceedings under the United States Bankruptcy Code.
8.16 Dispute Resolution. The parties (a) hereby irrevocably and unconditionally submit to the jurisdiction of the state courts of California and to the jurisdiction of the United States District Court for the Northern District of California for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement, (b) agree not to commence any suit, action or other proceeding arising out of or based upon this Agreement except in the state courts of California or the United States District Court for the Northern District of California, and (c) hereby waive, and agree not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court.
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Waiver of Jury Trial: EACH PARTY HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE OTHER TRANSACTION AGREEMENTS, THE SECURITIES OR THE SUBJECT MATTER HEREOF OR THEREOF. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS (INCLUDING NEGLIGENCE), BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THIS SECTION HAS BEEN FULLY DISCUSSED BY EACH OF THE PARTIES HERETO AND THESE PROVISIONS WILL NOT BE SUBJECT TO ANY EXCEPTIONS. EACH PARTY HERETO HEREBY FURTHER WARRANTS AND REPRESENTS THAT SUCH PARTY HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
8.17 Waiver of Conflicts. Each party to this Agreement acknowledges that Paul Hastings LLP, counsel for the Company, may have in the past performed, and may continue to or in the future perform, legal services for certain of the Purchasers in matters that are similar, but not substantially related, to the transactions described in this Agreement, including the representation of such Purchasers in venture capital financings and other matters. Accordingly, each party to this Agreement hereby acknowledges that (a) they have had an opportunity to ask for information relevant to this disclosure, and (b) Paul Hastings LLP represents only the Company with respect to the Agreement and the transactions contemplated hereby. The Company gives its informed consent to Paul Hastings LLP’s representation of the Purchasers in matters not substantially related to this Agreement, and the Purchasers give their informed consent to Paul Hastings LLP’s representation of the Company in connection with this Agreement and the transactions contemplated hereby.
[Signature Page Follows]
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IN WITNESS WHEREOF, the parties have executed this Series A Preferred Stock Purchase Agreement as of the date first written above.
| COMPANY: | ||
| AURADINE, INC. | ||
| By: | ||
| Name: | Barun Kar | |
| Title: | Chief Executive Officer | |
| Address: | ||
| 985 Paradise Way | ||
| Palo Alto, CA 94306 | ||
| IN WITNESS WHEREOF, the parties have executed this Series A Preferred Stock Purchase Agreement as of the date first written above. | ||
INVESTORS’ RIGHTS AGREEMENT
THIS INVESTORS’ RIGHTS AGREEMENT (this “Agreement”) is made as of April ____, 2022, by and among Auradine, Inc., a Delaware corporation (the “Company”), and each of the investors listed on Schedule A hereto, each of which is referred to in this Agreement as an “Investor”.
RECITALS
WHEREAS, the Company and the Investors are parties to that certain Series A Preferred Stock Purchase Agreement of even date herewith (the “Purchase Agreement”); and
WHEREAS, in order to induce the Company to enter into the Purchase Agreement and to induce the Investors to invest funds in the Company pursuant to the Purchase Agreement, the Investors and the Company hereby agree that this Agreement shall govern the rights of the Investors to cause the Company to register shares of Common Stock issuable to the Investors, to receive certain information from the Company, and to participate in future equity offerings by the Company, and shall govern certain other matters as set forth in this Agreement;
NOW, THEREFORE, the parties hereby agree as follows:
| 1. | Definitions. For purposes of this Agreement: |
1.1 “Affiliate” means, with respect to any specified Person, any other Person who, directly or indirectly, controls, is controlled by, or is under common control with such Person, including, without limitation, any general partner, managing member, officer, director or trustee of such Person, or any venture capital fund or other investment fund now or hereafter existing that is controlled by one (1) or more general partners, managing members or investment adviser of, or shares the same management company or investment adviser with, such Person.
1.2 “Board of Directors” means the board of directors of the Company.
1.3 “Celesta” means Celesta Capital IV, L.P.
1.4 “Certificate of Incorporation” means the Company’s Amended and Restated Certificate of Incorporation, as amended and/or restated from time to time.
1.5 “Common Stock” means shares of the Company’s common stock, par value $0.00001 per share.
1.6 “Competitor” means a Person engaged, directly or indirectly (including through any partnership, limited liability company, corporation, joint venture or similar arrangement (whether now existing or formed hereafter)), in the development of hardware or software for bitcoin mining, but shall not include any financial investment firm or collective investment vehicle that, together with its Affiliates, holds less than twenty percent (20%) of the outstanding equity of any Competitor and does not, nor do any of its Affiliates, have a right to designate any members of the board of directors of any Competitor; provided that in no event shall either Celesta or Mayfield be deemed a Competitor.
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1.7 “Damages” means any loss, damage, claim or liability (joint or several) to which a party hereto may become subject under the Securities Act, the Exchange Act, or other federal or state law, insofar as such loss, damage, claim or liability (or any action in respect thereof) arises out of or is based upon: (i) any untrue statement or alleged untrue statement of a material fact contained in any registration statement of the Company, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (ii) an omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (iii) any violation or alleged violation by the indemnifying party (or any of its agents or Affiliates) of the Securities Act, the Exchange Act, any state securities law, or any rule or regulation promulgated under the Securities Act, the Exchange Act, or any state securities law.
1.8 “Derivative Securities” means any securities or rights convertible into, or exercisable or exchangeable for (in each case, directly or indirectly), Common Stock, including options and warrants.
1.9 “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
1.10 “Excluded Registration” means (i) a registration relating to the sale or grant of securities to employees of the Company or a subsidiary pursuant to a stock option, stock purchase, equity incentive or similar plan; (ii) a registration relating to an SEC Rule 145 transaction; (iii) a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities; or (iv) a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities that are also being registered.
1.11 “Form S-1” means such form under the Securities Act as in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC.
1.12 “Form S-3” means such form under the Securities Act as in effect on the date hereof or any registration form under the Securities Act subsequently adopted by the SEC that permits forward incorporation of substantial information by reference to other documents filed by the Company with the SEC.
1.13 “GAAP” means generally accepted accounting principles in the United States as in effect from time to time.
1.14 “Holder” means any holder of Registrable Securities who is a party to this Agreement.
1.15 “Immediate Family Member” means a child, stepchild, grandchild, parent, stepparent, grandparent, spouse, life partner or similar statutorily-recognized domestic partner, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships of a natural person referred to herein.
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1.16 “Initiating Holders” means, collectively, Holders who properly initiate a registration request under this Agreement.
1.17 “IPO” means the Company’s first underwritten public offering of its Common Stock under the Securities Act.
1.18 “Major Investor” means each of Celesta, Marathon, and Mayfield; provided that, upon the Second Tranche Closing (as defined in the Purchase Agreement), if any aforementioned person has not purchased its entire number of Additional A-4 Shares (as defined in the Purchase Agreement) set forth opposite such person’s name on Exhibit A to the Purchase Agreement as of the Initial Closing (as defined in the Purchase Agreement), such person shall not be deemed a Major Investor under any circumstances; and provided further that any such aforementioned person shall cease to be considered a Major Investor for purposes of this Agreement at any time such person and his, her or its Affiliates collectively hold fewer than eighty-five percent (85%) of the total number of shares of Series A Preferred Stock purchased by such person at the Closings (as defined in the Purchase Agreement).
1.19 “Marathon” means Marathon Digital Holdings, Inc.
1.20 “Mayfield” means Mayfield Select II, a Delaware Limited Partnership.
1.21 “New Securities” means, collectively, equity securities of the Company, whether or not currently authorized, as well as rights, options, or warrants to purchase such equity securities, or securities of any type whatsoever that are, or may become, convertible or exchangeable into or exercisable for such equity securities.
1.22 “Person” means any individual, corporation, partnership, trust, limited liability company, association or other entity.
1.23 “Preferred Director” means any director of the Company that the holders of record of Series A Preferred Stock are entitled to elect, exclusively and as a separate class, pursuant to the Certificate of Incorporation.
1.24 “Registrable Securities” means (i) the Common Stock issuable or issued upon conversion of the Series A Preferred Stock; (ii) any Common Stock, or any Common Stock issued or issuable (directly or indirectly) upon conversion and/or exercise of any other securities of the Company, acquired by the Investors after the date hereof; and (iii) any Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right, or other security that is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the shares referenced in clauses (i) and (ii) above; excluding in all cases, however, any Registrable Securities sold by a Person in a transaction in which the applicable rights under this Agreement are not assigned pursuant to Section 6.1, and excluding for purposes of Section 2 any shares for which registration rights have terminated pursuant to Section 2.13 of this Agreement.
1.25 “Registrable Securities then outstanding” means the number of shares determined by adding the number of shares of outstanding Common Stock that are Registrable Securities and the number of shares of Common Stock issuable (directly or indirectly) pursuant to then exercisable and/or convertible securities that are Registrable Securities.
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1.26 “Restricted Securities” means the securities of the Company required to be notated with the legend set forth in Section 2.12 (b) hereof.
1.27 “Reverse Merger” means the merger of the Company with a company whose shares are registered under the Exchange Act and whose shares are listed for traded on a securities exchange (an “Acquiror”), or a merger with an affiliate of such Acquiror.
1.28 “SEC” means the Securities and Exchange Commission.
1.29 “SEC Rule 144” means Rule 144 promulgated by the SEC under the Securities Act.
1.30 “SEC Rule 145” means Rule 145 promulgated by the SEC under the Securities Act.
1.31 “Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
1.32 “Selling Expenses” means all underwriting discounts, selling commissions, and stock transfer taxes applicable to the sale of Registrable Securities, and fees and disbursements of counsel for any Holder, except for the fees and disbursements of the Selling Holder Counsel borne and paid by the Company as provided in Section 2.6.
1.33 “Series A Preferred Stock” means, collectively, shares of the Company’s Series A-1 Preferred Stock, par value $0.00001 per share, shares of the Company’s Series A-2 Preferred Stock, par value $0.00001 per share, shares of the Company’s Series A-3 Preferred Stock, par value $0.00001 per share, and shares of the Company’s Series A-4 Preferred Stock, par value $0.00001 per share.
| 2. | Registration Rights. The Company covenants and agrees as follows: |
2.1 Demand Registration.
(a) Form S-1 Demand. If at any time after the earlier of (i) five (5) years after the date of this Agreement or (ii) one hundred eighty (180) days after the effective date of the registration statement for the IPO, the Company receives a request from Holders of a majority of the Registrable Securities then outstanding that the Company file a Form S-1 registration statement with respect to at least forty percent (40%) of the Registrable Securities then outstanding (the “S-1 Request”), then the Company shall: (x) within ten (10) days after the date such request is given, give notice thereof (the “Demand Notice”) to all Holders other than the Initiating Holders; and (y) as soon as practicable, and in any event within sixty (60) days after the date such request is given by the Initiating Holders, file a Form S-1 registration statement under the Securities Act covering all Registrable Securities that the Initiating Holders requested to be registered and any additional Registrable Securities requested to be included in such registration by any other Holders, as specified by notice given by each such Holder to the Company within twenty (20) days of the date the Demand Notice is given, and in each case, subject to the limitations of Sections 2.1 (c) and 2.3.
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(b) Form S-3 Demand. If at any time when it is eligible to use a Form S-3 registration statement, the Company receives a request from Holders of at least twenty percent (20%) of the Registrable Securities then outstanding that the Company file a Form S-3 registration statement with respect to outstanding Registrable Securities of such Holders having an anticipated aggregate offering price, net of Selling Expenses, of at least $10 million (the “S-3 Request”), then the Company shall (i) within ten (10) days after the date such request is given, give a Demand Notice to all Holders other than the Initiating Holders; and (ii) as soon as practicable, and in any event within forty-five (45) days after the date such request is given by the Initiating Holders, file a Form S-3 registration statement under the Securities Act covering all Registrable Securities requested to be included in such registration by any other Holders, as specified by notice given by each such Holder to the Company within twenty (20) days of the date the Demand Notice is given, and in each case, subject to the limitations of Sections 2.1 (c) and 2.3.
(c) Notwithstanding the foregoing obligations, if the Company furnishes to Holders requesting a registration pursuant to this Section 2.1 a certificate signed by the Company’s chief executive officer stating that in the good faith judgment of the Board of Directors it would be materially detrimental to the Company and its stockholders for such registration statement to either become effective or remain effective for as long as such registration statement otherwise would be required to remain effective, because such action would (i) materially interfere with a significant acquisition, corporate reorganization, or other similar transaction involving the Company; (ii) require premature disclosure of material information that the Company has a bona fide business purpose for preserving as confidential; or (iii) render the Company unable to comply with requirements under the Securities Act or Exchange Act, then the Company shall have the right to defer taking action with respect to such filing, and any time periods with respect to filing or effectiveness thereof shall be tolled correspondingly, for a period of not more than one hundred twenty (120) days after the request of the Initiating Holders is given; provided, however, that the Company may not invoke this right more than once in any twelve (12) month period; and provided further that the Company shall not register any securities for its own account or that of any other stockholder during such one hundred twenty (120) day period other than an Excluded Registration.
(d) The Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to Section 2.1 (a), (i) during the period that is sixty (60) days before the Company’s good faith estimate of the date of filing of, and ending on a date that is one hundred eighty (180) days after the effective date of, a Company-initiated registration, provided that the Company is actively employing in good faith commercially reasonable efforts to cause such registration statement to become effective; (ii) after the Company has effected one (1) registration pursuant to Section 2.1(a); or (iii) if the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form S-3 pursuant to a request made pursuant to Section 2.1(b). The Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to Section 2.1(b), (i) during the period that is thirty (30) days before the Company’s good faith estimate of the date of filing of, and ending on a date that is ninety (90) days after the effective date of, a Company-initiated registration, provided that the Company is actively employing in good faith commercially reasonable efforts to cause such registration statement to become effective; or (ii) if the Company has effected two (2) registrations pursuant to Section 2.1(b) within the twelve (12) month period immediately preceding the date of such request. A registration shall not be counted as “effected” for purposes of this Section 2.1(d) until such time as the applicable registration statement has been declared effective by the SEC, unless the Initiating Holders withdraw their request for such registration, elect not to pay the registration expenses therefor, and forfeit their right to one demand registration statement pursuant to Section 2.6, in which case such withdrawn registration statement shall be counted as “effected” for purposes of this Section 2.1(d); provided, that if such withdrawal is during a period the Company has deferred taking action pursuant to Section 2.1(c), then the Initiating Holders may withdraw their request for registration and such registration will not be counted as “effected” for purposes of this Section 2.1(d).
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(e) If the Company fails to (i) file a Form S-1 registration statement under the Securities Act pursuant to Section 2.1(a) within sixty (60) days after the S-1 Request is given (and not withdrawn) by the Initiating Holders, or (ii) file a Form S-3 registration statement under the Securities Act pursuant to Section 2.1(b) within forty-five (45) days after the S-3 Request is given (and not withdrawn) by the Initiating Holders (any such failure or breach being referred to as an “Event”, and for purposes of clauses (i) and (ii), the date on which such Event occurs, being referred to as an “Event Date”), then, in addition to any other rights the Holders may have hereunder or under applicable law, on each such Event Date and on each monthly anniversary of each such Event Date (if the applicable Event shall not have been cured by such date) until the applicable Event is cured, the Company shall pay to each Holder an amount in cash, as partial liquidated damages and not as a penalty, equal to the product of 1.5% multiplied by the aggregate subscription amount paid by such Holder to the Company pursuant to the Purchase Agreement for the Registrable Securities held by such Holder (the “Aggregate Subscription Price”). The parties agree that the maximum aggregate liquidated damages payable to a Holder under this Agreement shall be 6% of such Holder’s Aggregate Subscription Price. Notwithstanding the foregoing, no liquidated damages shall be owed to a Holder with respect to any period during which all of such Holder’s Registrable Securities may be sold by such Holder without restriction under Rule 144 (including, without limitation, volume restrictions) and without the need for current public information required by Rule 144(c)(1) (or Rule 144(i)(2), if applicable) or, with respect to any Holder, to the extent the Company has previously paid to such Holder an aggregate of liquidated damages in excess of 6% of the Aggregate Subscription Price paid by such Holder pursuant to the Purchase Agreement.
2.2 Company Registration. If the Company proposes to register (including for this purpose a registration effected by the Company for stockholders other than the Holders) any of its securities under the Securities Act in connection with the public offering of such securities solely for cash (other than in an Excluded Registration, a registration relating to a demand pursuant to Section 2.1 or the IPO), the Company shall, at such time, promptly give each Holder notice of such registration. Upon the request of each Holder given within twenty (20) days after such notice is given by the Company, the Company shall, subject to the provisions of Section 2.3, cause to be registered all of the Registrable Securities that each such Holder has requested to be included in such registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 2.2 before the effective date of such registration, whether or not any Holder has elected to include Registrable Securities in such registration. The expenses (other than Selling Expenses) of such withdrawn registration shall be borne by the Company in accordance with Section 2.6.
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2.3 Underwriting Requirements.
(a) If, pursuant to Section 2.1, the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to Section 2.1, and the Company shall include such information in the Demand Notice. The underwriter(s) will be selected by the Board of Directors and shall be reasonably acceptable to a majority in interest of the Initiating Holders. In such event, the right of any Holder to include such Holder’s Registrable Securities in such registration shall be conditioned upon such Holder’s participation in such underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in Section 2.4(e)) enter into an underwriting agreement in customary form with the underwriter(s) selected for such underwriting. Notwithstanding any other provision of this Section 2.3, if the managing underwriter(s) advise(s) the Initiating Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, then the Initiating Holders shall so advise all Holders of Registrable Securities that otherwise would be underwritten pursuant hereto, and the number of Registrable Securities that may be included in the underwriting shall be allocated among such Holders of Registrable Securities, including the Initiating Holders, in proportion (as nearly as practicable) to the number of Registrable Securities owned by each Holder or in such other proportion as shall mutually be agreed to by all such selling Holders; provided, however, that the number of Registrable Securities held by the Holders to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest one hundred (100) shares.
(b) In connection with any offering involving an underwriting of shares of the Company’s capital stock pursuant to Section 2.2, the Company shall not be required to include any of the Holders’ Registrable Securities in such underwriting unless the Holders accept the terms of the underwriting as agreed upon between the Company and its underwriters, and then only in such quantity as the underwriters in their sole discretion determine will not jeopardize the success of the offering by the Company. If the total number of securities, including Registrable Securities, requested by stockholders to be included in such offering exceeds the number of securities to be sold (other than by the Company) that the underwriters in their reasonable discretion determine is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters and the Company in their sole discretion determine will not jeopardize the success of the offering. If the underwriters determine that less than all of the Registrable Securities requested to be registered can be included in such offering, then the Registrable Securities that are included in such offering shall be allocated among the selling Holders in proportion (as nearly as practicable to) the number of Registrable Securities owned by each selling Holder or in such other proportions as shall mutually be agreed to by all such selling Holders. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest one hundred (100) shares. Notwithstanding the foregoing, in no event shall (i) the number of Registrable Securities included in the offering be reduced unless all other securities (other than securities to be sold by the Company) are first entirely excluded from the offering, or (ii) the number of Registrable Securities included in the offering be reduced below twenty percent (20%) of the total number of securities included in such offering, unless such offering is the IPO, in which case the selling Holders may be excluded further if the underwriters make the determination described above and no other stockholder’s securities are included in such offering. For purposes of the provision in this Section 2.3(b) concerning apportionment, for any selling Holder that is a partnership, limited liability company, or corporation, the partners, members, retired partners, retired members, stockholders, and Affiliates of such Holder, or the estates and Immediate Family Members of any such partners, retired partners, members, and retired members and any trusts for the benefit of any of the foregoing Persons, shall be deemed to be a single “selling Holder,” and any pro rata reduction with respect to such “selling Holder” shall be based upon the aggregate number of Registrable Securities owned by all Persons included in such “selling Holder,” as defined in this sentence.
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(c) For purposes of Section 2.1, a registration shall not be counted as “effected” if, as a result of an exercise of the underwriter’s cutback provisions in Section 2.3(a), fewer than fifty percent (50%) of the total number of Registrable Securities that Holders have requested to be included in such registration statement are actually included.
2.4 Obligations of the Company. Whenever required under this Section 2 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:
(a) prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its commercially reasonable efforts to cause such registration statement to become effective and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for a period of up to one hundred twenty (120) days or, if earlier, until the distribution contemplated in the registration statement has been completed; provided, however, that such one hundred twenty (120) day period shall be extended for a period of time equal to the period the Holder refrains, at the request of an underwriter of Common Stock (or other securities) of the Company, from selling any securities included in such registration;
(b) prepare and file with the SEC such amendments and supplements to such registration statement, and the prospectus used in connection with such registration statement, as may be necessary to comply with the Securities Act in order to enable the disposition of all securities covered by such registration statement;
(c) furnish to the selling Holders such numbers of copies of a prospectus, including a preliminary prospectus, as required by the Securities Act, and such other documents as the Holders may reasonably request in order to facilitate their disposition of their Registrable Securities;
(d) use its commercially reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or blue-sky laws of such jurisdictions as shall be reasonably requested by the selling Holders; provided that the Company shall not be required to qualify to do business or to file a general consent to service of process in any such states or jurisdictions, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act;
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(e) in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the underwriter(s) of such offering;
(f) use its commercially reasonable efforts to cause all such Registrable Securities covered by such registration statement to be listed on a national securities exchange or trading system and each securities exchange and trading system (if any) on which similar securities issued by the Company are then listed;
(g) provide a transfer agent and registrar for all Registrable Securities registered pursuant to this Agreement and provide a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration;
(h) promptly make available for inspection by the selling Holders, any managing underwriter(s) participating in any disposition pursuant to such registration statement, and any attorney or accountant or other agent retained by any such underwriter or selected by the selling Holders, all financial and other records, pertinent corporate documents, and properties of the Company, and cause the Company’s officers, directors, employees, and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant, or agent, in each case, as necessary or advisable to verify the accuracy of the information in such registration statement and to conduct appropriate due diligence in connection therewith;
(i) notify each selling Holder, promptly after the Company receives notice thereof, of the time when such registration statement has been declared effective or a supplement to any prospectus forming a part of such registration statement has been filed; and
(j) after such registration statement becomes effective, notify each selling Holder of any request by the SEC that the Company amend or supplement such registration statement or prospectus.
In addition, the Company shall ensure that, at all times after any registration statement covering a public offering of securities of the Company under the Securities Act shall have become effective, its insider trading policy shall provide that the Company’s directors may implement a trading program under Rule 10b5-1 of the Exchange Act.
2.5 Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 2 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as is reasonably required to effect the registration of such Holder’s Registrable Securities.
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2.6 Expenses of Registration. All expenses (other than Selling Expenses) incurred in connection with registrations, filings, or qualifications pursuant to Section 2, including all registration, filing, and qualification fees; printers’ and accounting fees; fees and disbursements of counsel for the Company; and the reasonable fees and disbursements, not to exceed $25,000 per registration, of one counsel for the selling Holders selected by Holders of a majority of the Registrable Securities to be registered (“Selling Holder Counsel”), shall be borne and paid by the Company; provided, however, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 2.1 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all selling Holders shall bear such expenses pro rata based upon the number of Registrable Securities that were to be included in the withdrawn registration), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to one registration pursuant to Sections 2.1(a) or 2.1(b), as the case may be. All Selling Expenses relating to Registrable Securities registered pursuant to this Section 2 (other than fees and disbursements of counsel to any Holder, other than the Selling Holder Counsel, which shall be borne solely by the Holder engaging such counsel) shall be borne and paid by the Holders pro rata on the basis of the number of Registrable Securities registered on their behalf.
2.7 Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any registration pursuant to this Agreement as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 2.
2.8 Indemnification. If any Registrable Securities are included in a registration statement under this Section 2:
(a) To the extent permitted by law, the Company will indemnify and hold harmless each selling Holder, and the partners, members, officers, directors, and stockholders of each such Holder; legal counsel and accountants for each such Holder; any underwriter (as defined in the Securities Act) for each such Holder; and each Person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any Damages, and the Company will pay to each such Holder, underwriter, controlling Person, or other aforementioned Person any legal or other expenses reasonably incurred thereby in connection with investigating or defending any claim or proceeding from which Damages may result, as such expenses are incurred; provided, however, that the indemnity agreement contained in this Section 2.8(a) shall not apply to amounts paid in settlement of any such claim or proceeding if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable for any Damages to the extent that they arise out of or are based upon actions or omissions made in reliance upon and in conformity with written information furnished by or on behalf of any such Holder, underwriter, controlling Person, or other aforementioned Person expressly for use in connection with such registration.
(b) To the extent permitted by law, each selling Holder, severally and not jointly, will indemnify and hold harmless the Company, and each of its directors, each of its officers who has signed the registration statement, each Person (if any), who controls the Company within the meaning of the Securities Act, legal counsel and accountants for the Company, any underwriter (as defined in the Securities Act), any other Holder selling securities in such registration statement, and any controlling Person of any such underwriter or other Holder, against any Damages, in each case only to the extent that such Damages arise out of or are based upon actions or omissions made in reliance upon and in conformity with written information furnished by or on behalf of such selling Holder expressly for use in connection with such registration; and each such selling Holder will pay to the Company and each other aforementioned Person any legal or other expenses reasonably incurred thereby in connection with investigating or defending any claim or proceeding from which Damages may result, as such expenses are incurred; provided, however, that the indemnity agreement contained in this Section 2.8(b) shall not apply to amounts paid in settlement of any such claim or proceeding if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; and provided further that in no event shall the aggregate amounts payable by any Holder by way of indemnity or contribution under Section 2.8(b) and 2.8(d) exceed the proceeds from the offering received by such Holder (net of any Selling Expenses paid by such Holder), except in the case of fraud or willful misconduct by such Holder.
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(c) Promptly after receipt by an indemnified party under this Section 2.8 of notice of the commencement of any action (including any governmental action) for which a party may be entitled to indemnification hereunder, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.8, give the indemnifying party notice of the commencement thereof. The indemnifying party shall have the right to participate in such action and, to the extent the indemnifying party so desires, participate jointly with any other indemnifying party to which notice has been given, and to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such action. The failure to give notice to the indemnifying party within a reasonable time of the commencement of any such action shall relieve such indemnifying party of any liability to the indemnified party under this Section 2.8, only to the extent that such failure materially prejudices the indemnifying party’s ability to defend such action. The failure to give notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 2.8.
(d) To provide for just and equitable contribution to joint liability under the Securities Act in any case in which either: (i) any party otherwise entitled to indemnification hereunder makes a claim for indemnification pursuant to this Section 2.8 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case, notwithstanding the fact that this Section 2.8 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any party hereto for which indemnification is provided under this Section 2.8, then, and in each such case, such parties will contribute to the aggregate losses, claims, damages, liabilities, or expenses to which they may be subject (after contribution from others) in such proportion as is appropriate to reflect the relative fault of each of the indemnifying party and the indemnified party in connection with the statements, omissions, or other actions that resulted in such loss, claim, damage, liability, or expense, as well as to reflect any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or allegedly untrue statement of a material fact, or the omission or alleged omission of a material fact, relates to information supplied by the indemnifying party or by the indemnified party and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission; provided, however, that, in any such case (x) no Holder will be required to contribute any amount in excess of the public offering price of all such Registrable Securities offered and sold by such Holder pursuant to such registration statement, and (y) no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation; and provided further that in no event shall a Holder’s liability pursuant to this Section 2.8(d), when combined with the amounts paid or payable by such Holder pursuant to Section 2.8(b), exceed the proceeds from the offering received by such Holder (net of any Selling Expenses paid by such Holder), except in the case of willful misconduct or fraud by such Holder.
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(e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control; provided, however, that any matter expressly provided for or addressed by the foregoing provisions that is not expressly provided for or addressed by the underwriting agreement shall be controlled by the foregoing provisions.
(f) Unless otherwise superseded by an underwriting agreement entered into in connection with the underwritten public offering, the obligations of the Company and Holders under this Section 2.8 shall survive the completion of any offering of Registrable Securities in a registration under this Section 2, and otherwise shall survive the termination of this Agreement or any provision(s) of this Agreement.
2.9 Reports Under Exchange Act. With a view to making available to the Holders the benefits of SEC Rule 144 and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company shall:
(a) make and keep available adequate current public information, as those terms are understood and defined in SEC Rule 144, at all times after the effective date of the registration statement filed by the Company for the IPO;
(b) use commercially reasonable efforts to file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after the Company has become subject to such reporting requirements); and
(c) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) to the extent accurate, a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety (90) days after the effective date of the registration statement filed by the Company for the IPO), the Securities Act, and the Exchange Act (at any time after the Company has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after the Company so qualifies); and (ii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC that permits the selling of any such securities without registration (at any time after the Company has become subject to the reporting requirements under the Exchange Act) or pursuant to Form S-3 (at any time after the Company so qualifies to use such form).
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2.10 Limitations on Subsequent Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Requisite Holders (as defined in the Certificate of Incorporation), enter into any agreement with any holder or prospective holder of any securities of the Company that would (i) provide to such holder or prospective holder the right to include securities in any registration on other than on a subordinate basis with respect to the Registrable Securities after all Holders have had the opportunity to include in the registration and offering all shares of Registrable Securities that they wish to so include; or (ii) allow such holder or prospective holder to initiate a demand for registration of any securities held by such holder or prospective holder; provided that this limitation shall not apply to Registrable Securities acquired by any additional Investor that becomes a party to this Agreement in accordance with Section 6.9.
2.11 “Market Stand-off” Agreement. Each Holder hereby agrees that it will not, without the prior written consent of the managing underwriter, during the period commencing on the date of the final prospectus relating to the registration by the Company of shares of its Common Stock or any other equity securities under the Securities Act on a registration statement on Form S-1, and ending on the date specified by the Company and the managing underwriter (such period not to exceed one hundred eighty (180) days in the case of the IPO, or such other period as may be requested by the Company or an underwriter to accommodate regulatory restrictions on (1) the publication or other distribution of research reports and (2) analyst recommendations and opinions, including, but not limited to, the restrictions contained in applicable FINRA rules, or any successor provisions or amendments thereto), or in the case of a Reverse Merger, during the period commencing on the date of the closing of the Reverse Merger and ending on the date that is one hundred eighty (180) days after such closing, (i) lend; offer; pledge; sell; contract to sell; sell any option or contract to purchase; purchase any option or contract to sell; grant any option, right, or warrant to purchase; or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable (directly or indirectly) for Common Stock held immediately before the effective date of the registration statement for such offering or the closing of the Reverse Merger, or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of such securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or other securities, in cash, or otherwise. The foregoing provisions of this Section 2.11 shall apply only to the IPO and the Reverse Merger, shall not apply to the sale of any shares to an underwriter pursuant to an underwriting agreement, or the transfer of any shares to any trust for the direct or indirect benefit of the Holder or the immediate family of the Holder, provided that the trustee of the trust agrees to be bound in writing by the restrictions set forth herein, and provided further that any such transfer shall not involve a disposition for value, and shall be applicable to the Holders only if all officers and directors are subject to the same restrictions and the Company uses commercially reasonable efforts to obtain a similar agreement from all stockholders individually owning more than one percent (1%) of the Company’s outstanding Common Stock (after giving effect to conversion into Common Stock of all outstanding Series A Preferred Stock). The underwriters in connection with such IPO registration, and the Acquiror in such Reverse Merger, are intended third-party beneficiaries of this Section 2.11 and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto. Each Holder further agrees to execute such agreements as may be reasonably requested by the underwriters in connection with such IPO registration, and the Acquiror in connection with such Reverse Merger, that are consistent with this Section 2.11 or that are necessary to give further effect thereto. Any discretionary waiver or termination of the restrictions of any or all of such agreements by the Company or the underwriters shall apply pro rata to all Company stockholders that are subject to such agreements, based on the number of shares subject to such agreements.
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2.12 Restrictions on Transfer.
(a) The Series A Preferred Stock and the Registrable Securities shall not be sold, pledged, or otherwise transferred, and the Company shall not recognize and shall issue stop-transfer instructions to its transfer agent with respect to any such sale, pledge, or transfer, except upon the conditions specified in this Agreement, which conditions are intended to ensure compliance with the provisions of the Securities Act. Notwithstanding anything to the contrary, a Holder of outstanding shares of Series A Preferred Stock shall be entitled to transfer any such shares of Series A Preferred Stock to a transferee that (i) is an Affiliate of a Holder; (ii) is a Holder’s Immediate Family Member or trust for the benefit of an individual Holder or one (1) or more of such Holder’s Immediate Family Members; (iii) is a partnership or fund managed by such Holder or the director, officer, or partner of such partnership or fund; or (iv) after such transfer, holds at least one percent (1%) of the total then-outstanding shares of Series A Preferred Stock of the Company (subject to appropriate adjustment for stock splits, stock dividends, combinations, and other recapitalizations); provided that such transferee (x) agrees to be subject to the terms of this Agreement and the Voting Agreement of even date herewith entered among the Investors, the Company and the other parties named therein, and (y) is not a Competitor as reasonably determined by the Board of Directors. A transferring Holder will cause any proposed purchaser, pledgee, or transferee of the Series A Preferred Stock and the Registrable Securities held by such Holder to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Agreement.
(b) Each certificate, instrument, or book entry representing (i) the Series A Preferred Stock, (ii) the Registrable Securities, and (iii) any other securities issued in respect of the securities referenced in clauses (i) and (ii), upon any stock split, stock dividend, recapitalization, merger, consolidation, or similar event, shall (unless otherwise permitted by the provisions of Section 2.12(c)) be notated with a legend substantially in the following form:
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SHARES MAY NOT BE SOLD, PLEDGED, OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR A VALID EXEMPTION FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT.
THE SECURITIES REPRESENTED HEREBY MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.
The Holders consent to the Company making a notation in its records and giving instructions to any transfer agent of the Restricted Securities in order to implement the restrictions on transfer set forth in this Section 2.12.
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(c) The holder of such Restricted Securities, by acceptance of ownership thereof, agrees to comply in all respects with the provisions of this Section 2. Before any proposed sale, pledge, or transfer of any Restricted Securities, unless there is in effect a registration statement under the Securities Act covering the proposed transaction, the Holder thereof shall give notice to the Company of such Holder’s intention to effect such sale, pledge, or transfer. Each such notice shall describe the manner and circumstances of the proposed sale, pledge, or transfer in sufficient detail and, if reasonably requested by the Company, shall be accompanied at such Holder’s expense by either (i) a written opinion of legal counsel who shall, and whose legal opinion shall, be reasonably satisfactory to the Company, addressed to the Company, to the effect that the proposed transaction may be effected without registration under the Securities Act; (ii) a “no action” letter from the SEC to the effect that the proposed sale, pledge, or transfer of such Restricted Securities without registration will not result in a recommendation by the staff of the SEC that action be taken with respect thereto; or (iii) any other evidence reasonably satisfactory to counsel to the Company to the effect that the proposed sale, pledge, or transfer of the Restricted Securities may be effected without registration under the Securities Act, whereupon the Holder of such Restricted Securities shall be entitled to sell, pledge, or transfer such Restricted Securities in accordance with the terms of the notice given by the Holder to the Company. The Company will not require such a legal opinion or “no action” letter (x) in any transaction in compliance with SEC Rule 144; or (y) in any transaction in which such Holder distributes Restricted Securities to an Affiliate of such Holder for no consideration; provided that each transferee agrees in writing to be subject to the terms of this Section 2.12. Each certificate, instrument, or book entry representing the Restricted Securities transferred as above provided shall be notated with, except if such transfer is made pursuant to SEC Rule 144, the appropriate restrictive legend set forth in Section 2.12(b), except that such certificate instrument, or book entry shall not be notated with such restrictive legend if, in the opinion of counsel for such Holder and the Company, such legend is not required in order to establish compliance with any provisions of the Securities Act.
2.13 Termination of Registration Rights. The right of any Holder to request registration or inclusion of Registrable Securities in any registration pursuant to Sections 2.1 or 2.2 shall terminate upon the earliest to occur of:
(a) the closing of a Deemed Liquidation Event, as such term is defined in the Certificate of Incorporation, in which the consideration received by the Investors in such Deemed Liquidation Event is in the form of cash and/or publicly traded securities, or if the Investors receive registration rights from the acquiring company or other successor to the Company reasonably comparable to those set forth in this Section 2;
(b) such time after consummation of the IPO as SEC Rule 144 or another similar exemption under the Securities Act is available for the sale of all of such Holder’s shares without limitation, during a three (3)-month period without registration (and without the requirement for the Company to be in compliance with the current public information required under subsection (c)(1) of SEC Rule 144) and such Holder (together with its “affiliates” determined under SEC Rule 144) holds less than one percent (1%) of the outstanding capital stock of the Company; and
(c) the fifth (5th) anniversary of the IPO.
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| 3. | Information Rights. |
3.1 Delivery of Financial Statements. The Company shall deliver to each Major Investor, provided that the Board of Directors has not reasonably determined that such Major Investor is a Competitor of the Company:
(a) as soon as practicable, but in any event within one hundred twenty (120) days after the end of each fiscal year of the Company, beginning with the fiscal year ending December 31, 2022, (i) an unaudited balance sheet as of the end of such year, (ii) unaudited statements of income and of cash flows for such year, and (iii) an unaudited statement of stockholders’ equity as of the end of such year;
(b) as soon as practicable, but in any event within forty-five (45) days after the end of each quarter of each fiscal year of the Company, beginning with the fiscal quarter ending June 30, 2022, unaudited statements of income and cash flows for such fiscal quarter, and an unaudited balance sheet as of the end of such fiscal quarter, all prepared in accordance with GAAP (except that such financial statements may (i) be subject to normal year-end audit adjustments; and (ii) not contain all notes thereto that may be required in accordance with GAAP);
(c) if requested by a Major Investor (up to once per quarter), a statement showing the number of shares of each class and series of capital stock and securities convertible into or exercisable for shares of capital stock outstanding at the end of the period, the Common Stock issuable upon conversion or exercise of any outstanding securities convertible or exercisable for Common Stock and the exchange ratio or exercise price applicable thereto, and the number of shares of issued stock options and stock options not yet issued but reserved for issuance, if any, all in sufficient detail as to permit the Major Investors to calculate their respective percentage equity ownership in the Company;
(d) At least fifteen (15) days before the end of each fiscal year, beginning with the fiscal year ending December 31, 2022, an operating budget for the next fiscal year, prepared on a quarterly basis, forecasting the revenues, expenses, and cash position of the Company; and
(e) such other information relating to the financial condition, business, prospects, or corporate affairs of the Company as any Major Investor may from time to time reasonably request; provided, however, that the Company shall not be obligated under this Section 3.1 to provide information (i) that the Company reasonably determines in good faith to be a trade secret or confidential information (unless covered by an enforceable confidentiality agreement, in a form acceptable to the Company); or (ii) the disclosure of which would adversely affect the attorney-client privilege between the Company and its counsel.
If, for any period, the Company has any subsidiary whose accounts are consolidated with those of the Company, then in respect of such period the financial statements delivered pursuant to the foregoing sections shall be the consolidated and consolidating financial statements of the Company and all such consolidated subsidiaries.
Notwithstanding anything else in this Section 3.1 to the contrary, the Company may cease providing the information set forth in this Section 3.1 during the period starting with the date 45 days before the Company’s good-faith estimate of the date of filing of a registration statement if it reasonably concludes it must do so to comply with the SEC rules applicable to such registration statement and related offering; provided that the Company’s covenants under this Section 3.1 shall be reinstated at such time as the Company is no longer actively employing its commercially reasonable efforts to cause such registration statement to become effective.
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3.2 Inspection. The Company shall permit each Major Investor (provided that the Board of Directors has not reasonably determined that such Major Investor is a Competitor of the Company), at such Major Investor’s expense, to visit and inspect the Company’s properties; examine its books of account and records; and discuss the Company’s affairs, finances, and accounts with its officers, during normal business hours of the Company as may be reasonably requested by the Major Investor; provided, however, that the Company shall not be obligated pursuant to this Section 3.2 to provide access to any information that it reasonably and in good faith considers to be a trade secret or confidential information (unless covered by an enforceable confidentiality agreement, in form acceptable to the Company) or the disclosure of which would adversely affect the attorney-client privilege between the Company and its counsel.
3.3 Termination of Information. The covenants set forth in Section 3.1 and Section 3.2 shall terminate and be of no further force or effect (i) immediately before the consummation of the IPO or the Reverse Merger, (ii) when the Company first becomes subject to the periodic reporting requirements of Section 12(g) or 15(d) of the Exchange Act, or (iii) upon the closing of a Deemed Liquidation Event, whichever event occurs first.
3.4 Confidentiality. Each Investor agrees that such Investor will keep confidential and will not disclose, divulge, or use for any purpose (other than to monitor or make decisions with respect to its investment in the Company) any confidential information obtained from the Company pursuant to the terms of this Agreement (including notice of the Company’s intention to file a registration statement), unless such confidential information (a) is known or becomes known to the public in general (other than as a result of a breach of this Section 1.1 by such Investor),(b) is or has been independently developed or conceived by such Investor without use of the Company’s confidential information, or (c) is or has been made known or disclosed to such Investor by a third party without a breach of any obligation of confidentiality such third party may have to the Company; provided, however, that an Investor may disclose confidential information (i) to its attorneys, accountants, consultants, and other professionals to the extent reasonably necessary to obtain their services in connection with monitoring its investment in the Company; (ii) to any prospective purchaser of any Registrable Securities from such Investor, if such prospective purchaser agrees to be bound by the provisions of this Section 1.1; provided that the Board of Directors has not reasonably determined that such prospective purchaser is a Competitor of the Company; (iii) to any Affiliate, partner, member, stockholder, or wholly owned subsidiary of such Investor in the ordinary course of business, provided that such Investor informs such Person that such information is confidential and directs such Person to maintain the confidentiality of such information; or (iv) as may otherwise be required by law, regulation, rule, court order or subpoena, provided that such Investor promptly notifies the Company of such disclosure and takes reasonable steps to minimize the extent of any such required disclosure.
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3.5 Waiver of Statutory Information Rights. Each Investor hereby acknowledges and agrees that until the consummation of the IPO, such Investor shall hereby be deemed to have unconditionally and irrevocably, to the fullest extent permitted by law, on behalf of such Investor and all beneficial owners of the shares of Common Stock or Series A Preferred Stock owned by such Investor (a “Beneficial Owner”), waived any rights such Investor or a Beneficial Owner might otherwise have had under Section 220 of the Delaware General Corporation Law (or under similar rights under other applicable law) to inspect for any proper purpose and to make copies and extracts from the Company’s stock ledger, a list of its stockholders and its other books and records or the books and records of any subsidiary. This waiver applies only in such Investor’s capacity as a stockholder and does not affect any other information and inspection rights such Investor may expressly have pursuant to Sections 3.1 and 3.2 of this Agreement. Each Investor hereby further warrants and represents that such Investor has reviewed this waiver with its legal counsel, and that such Investor knowingly and voluntarily waives its rights otherwise provided by Section 220 of the Delaware General Corporation Law (or under similar rights under other applicable law).
| 4. | Rights to Future Stock Issuances. |
4.1 Right of First Offer. Subject to the terms and conditions of this Section 4.1 and applicable securities laws, if the Company proposes to offer or sell any New Securities, the Company shall first offer such New Securities to each Major Investor. A Major Investor shall be entitled to apportion the right of first offer hereby granted to it in such proportions as it deems appropriate, among (i) itself, and (ii) its Affiliates.
(a) The Company shall give notice (the “Offer Notice”) to each Major Investor, stating (i) its bona fide intention to offer such New Securities, (ii) the number of such New Securities to be offered, and (iii) the price and terms, if any, upon which it proposes to offer such New Securities.
(b) By notification to the Company within twenty (20) days after the Offer Notice is given, each Major Investor may elect to purchase or otherwise acquire, at the price and on the terms specified in the Offer Notice, up to that portion of such New Securities which equals the proportion that the Common Stock then held by such Major Investor (including all shares of Common Stock then issuable (directly or indirectly) upon conversion and/or exercise, as applicable, of the Series A Preferred Stock and any other Derivative Securities then held by such Major Investor) bears to the total Common Stock of the Company then outstanding (assuming full conversion and/or exercise, as applicable, of all Series A Preferred Stock and any other Derivative Securities then outstanding). At the expiration of such twenty (20) day period, the Company shall promptly notify each Major Investor that elects to purchase or acquire all the shares available to it (each, a “Fully Exercising Investor”) of any other Major Investor’s failure to do likewise. During the ten (10) day period commencing after the Company has given such notice, each Fully Exercising Investor may, by giving notice to the Company, elect to purchase or acquire, in addition to the number of shares specified above, up to that portion of the New Securities for which Major Investors were entitled to subscribe but that were not subscribed for by the Major Investors which is equal to the proportion that the Common Stock issued and held, or issuable (directly or indirectly) upon conversion and/or exercise, as applicable, of Series A Preferred Stock and any other Derivative Securities then held, by such Fully Exercising Investor bears to the Common Stock issued and held, or issuable (directly or indirectly) upon conversion and/or exercise, as applicable, of the Series A Preferred Stock and any other Derivative Securities then held, by all Fully Exercising Investors who wish to purchase such unsubscribed shares. The closing of any sale pursuant to this Section 4.1(b) shall occur within the later of ninety (90) days of the date that the Offer Notice is given and the date of initial sale of New Securities pursuant to Section 4.1(c).
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(c) If all New Securities referred to in the Offer Notice are not elected to be purchased or acquired as provided in Section 4.1(b), the Company may, during the ninety (90) day period following the expiration of the periods provided in Section 4.1(b), offer and sell the remaining unsubscribed portion of such New Securities to any Person or Persons at a price not less than, and upon terms no more favorable to the offeree than, those specified in the Offer Notice. If the Company does not enter into an agreement for the sale of the New Securities within such period, or if such agreement is not consummated within thirty (30) days of the execution thereof, the right provided hereunder shall be deemed to be revived and such New Securities shall not be offered unless first reoffered to the Major Investors in accordance with this Section 4.1.
(d) The right of first offer in this Section 4.1 shall not be applicable to (i) Exempted Securities (as defined in the Certificate of Incorporation); (ii) shares of Common Stock issued in the IPO; and (iii) the issuance of shares of Series A Preferred Stock to Additional Purchasers pursuant to Section 1.3 of the Purchase Agreement.
4.2 Termination. The covenants set forth in Section 4.1 shall terminate and be of no further force or effect (i) immediately before the consummation of the IPO or the Reverse Merger, or (ii) upon the closing of a Deemed Liquidation Event, whichever event occurs first.
| 5. | Additional Covenants. |
5.1 Insurance. The Company shall obtain, within ninety (90) days of the date hereof, from financially sound and reputable insurers Directors and Officers liability insurance in an amount and on terms and conditions satisfactory to the Board of Directors, and will use commercially reasonable efforts to cause such insurance policies to be maintained until such time as the Board of Directors determines that such insurance should be discontinued. The policy shall not be cancelable by the Company without prior approval by the Board of Directors.
5.2 Employee Agreements. Unless otherwise approved by the Board of Directors, the Company will cause each Person now or hereafter employed by it or by any subsidiary (or engaged by the Company or any subsidiary as a consultant/independent contractor) with access to confidential information and/or trade secrets to enter into a nondisclosure, proprietary rights assignment and non-solicitation agreement. In addition, the Company shall not amend, modify, terminate, waive, or otherwise alter, in whole or in part, any of the above-referenced agreements or any restricted stock agreement between the Company and any employee, without the consent of the Board of Directors.
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5.3 Employee Stock. Unless otherwise approved by the Board of Directors, including the approval of at least one Preferred Director, all future employees of the Company who purchase, receive options to purchase, or receive awards of shares of the Company’s capital stock after the date hereof shall be required to execute restricted stock or option agreements, as applicable, providing for (i) vesting of shares over a four (4) year period, with the first twenty-five percent (25%) of such shares vesting following twelve (12) months of continued employment or service, and the remaining shares vesting in equal monthly installments over the following thirty-six (36) months, and (ii) a market stand-off provision substantially similar to that in Section 2.11. Without the prior approval by the Board of Directors, including the approval of at least one Preferred Director, the Company shall not amend, modify, terminate, waive or otherwise alter, in whole or in part, any stock purchase, stock restriction or option agreement with any existing employee or service provider if such amendment would cause it to be inconsistent with this Section 5.3. In addition, unless otherwise approved by the Board of Directors, including the approval of at least one Preferred Director, the Company (x) shall not offer or allow any acceleration of vesting, and (y) shall retain (and not waive) a “right of first refusal” on employee transfers until the Company’s IPO and shall have the right to repurchase unvested shares at cost upon termination of employment of a holder of restricted stock.
5.4 Qualified Small Business Stock. The Company shall use commercially reasonable efforts to refrain from taking any action that could reasonably be expected to cause the shares of Series A Preferred Stock, as well as any shares into which such shares are converted, within the meaning of Section 1202(f) of the Internal Revenue Code (the “Code”), to fail to qualify as “qualified small business stock” as defined in Section 1202(c) of the Code; provided, however, that such requirement shall not be applicable if the Board of Directors determines, in its good-faith business judgment, that such qualification is inconsistent with the best interests of the Company. The Company shall submit to its stockholders (including the Investors) and to the Internal Revenue Service any reports that may be required under Section 1202(d)(1)(C) of the Code. In addition, within twenty (20) business days after any Investor’s written request therefor, the Company shall deliver to the Investors a checklist in substantially the same form as Annex 1. The Company shall use commercially reasonable efforts to ensure the accuracy of any such checklist, but in no event shall the Company be liable to the Investors or any other person for any damages arising from any errors or inaccuracies in such report or checklist, unless made by the Company in a manner either grossly negligent or fraudulent.
5.5 Right to Conduct Activities. The Company hereby agrees and acknowledges that each of Celesta and Mayfield (together with their Affiliates) is a professional investment organization, and as such reviews the business plans and related proprietary information of many enterprises, some of which may compete directly or indirectly with the Company’s business (as currently conducted or as currently propose to be conducted). Nothing in this Agreement shall preclude or in any way restrict the Investors from evaluating or purchasing securities, including publicly traded securities, of a particular enterprise, or investing or participating in any particular enterprise whether or not such enterprise has products or services which compete with those of the Company; and the Company hereby agrees that, to the extent permitted under applicable law, neither Celesta nor Mayfield (nor their Affiliates) shall be liable to the Company for any claim arising out of, or based upon, (i) the investment by either Celesta or Mayfield (or their Affiliates) in any entity competitive with the Company, or (ii) actions taken by any partner, officer, employee or other representative of either Celesta or Mayfield (or their Affiliates) to assist any such competitive company, whether or not such action was taken as a member of the board of directors of such competitive company or otherwise, and whether or not such action has a detrimental effect on the Company; provided, however, that the foregoing shall not relieve (x) any of the Investors from liability associated with the unauthorized disclosure of the Company’s confidential information obtained pursuant to this Agreement, or (y) any director or officer of the Company from any liability associated with his or her fiduciary duties to the Company.
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5.6 FCPA. The Company covenants that it shall not (and shall not permit any of its subsidiaries or Affiliates or any of its or their respective directors, officers, managers, employees, independent contractors, representatives or agents to) promise, authorize or make any payment to, or otherwise contribute any item of value to, directly or indirectly, to any third party, including any Non-U.S. Official (as such term is defined in the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”)), in each case, in violation of the FCPA, the U.K. Bribery Act, or any other applicable anti-bribery or anti-corruption law. The Company further covenants that it shall (and shall cause each of its subsidiaries and Affiliates to) cease all of its or their respective activities, as well as remediate any actions taken by the Company, its subsidiaries or Affiliates, or any of their respective directors, officers, managers, employees, independent contractors, representatives or agents in violation of the FCPA, the U.K. Bribery Act, or any other applicable anti-bribery or anti-corruption law. The Company further covenants that it shall (and shall cause each of its subsidiaries and Affiliates to) maintain systems of internal controls (including, but not limited to, accounting systems, purchasing systems and billing systems) to ensure compliance with the FCPA, the U.K. Bribery Act, or any other applicable anti-bribery or anti-corruption law. Upon request, the Company agrees to provide responsive information and/or certifications concerning its compliance with applicable anti-corruption laws. The Company shall promptly notify each Investor if the Company becomes aware of any Enforcement Action (as defined in the Purchase Agreement). The Company shall, and shall cause any direct or indirect subsidiary or entity controlled by it, whether now in existence or formed in the future, to comply with the FCPA. The Company shall use its best efforts to cause any direct or indirect subsidiary, whether now in existence or formed in the future, to comply in all material respects with all applicable laws.
5.7 Board Matters. The Company shall reimburse the nonemployee directors for all reasonable out-of-pocket travel expenses incurred (consistent with the Company’s travel policy) in connection with attending meetings of the Board of Directors. The director designated by Celesta shall serve as the Chairman of the Board of Directors. In the event that the Company establishes any committee of the Board of Directors, such committee shall consist of at least one Preferred Director.
5.8 Successor Indemnification. If the Company or any of its successors or assignees consolidates with or merges into any other Person and is not the continuing or surviving corporation or entity of such consolidation or merger, then to the extent necessary, proper provision shall be made so that the successors and assignees of the Company assume the obligations of the Company with respect to indemnification of members of the Board of Directors as in effect immediately before such transaction, whether such obligations are contained in the Company’s Bylaws, the Certificate of Incorporation, or elsewhere, as the case may be.
5.9 Termination of Covenants. The covenants set forth in this Section 5, except for Section 5.8, shall terminate and be of no further force or effect (i) immediately before the consummation of the IPO or the Reverse Merger, (ii) when the Company first becomes subject to the periodic reporting requirements of Section 12(g) or 15(d) of the Exchange Act, or (iii) upon a Deemed Liquidation Event, whichever event occurs first.
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| 6. | Miscellaneous. |
6.1 Successors and Assigns. The rights under this Agreement may be assigned (but only with all related obligations) by a Holder to a transferee of Registrable Securities that (i) is an Affiliate of a Holder; (ii) is a Holder’s Immediate Family Member or trust for the benefit of an individual Holder or one (1) or more of such Holder’s Immediate Family Members; (iii) is a partnership or fund managed by such Holder or the director, officer, or partner of such partnership or fund; or (iv) after such transfer, holds at least one percent (1%) of the total then-outstanding shares of Series A Preferred Stock of the Company (subject to appropriate adjustment for stock splits, stock dividends, combinations, and other recapitalizations); provided, however, that (x) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee and the Registrable Securities with respect to which such rights are being transferred; (y) such transferee agrees in a written instrument delivered to the Company to be bound by and subject to the terms and conditions of this Agreement, including the provisions of Section 2.11, and the terms and conditions of the Voting Agreement of even date herewith entered among the Investors, the Company and the other parties named therein; and (z) such transferee is not a Competitor as reasonably determined by the Board of Directors. For the purposes of determining the number of shares of Registrable Securities held by a transferee, the holdings of a transferee (1) that is an Affiliate or stockholder of a Holder; (2) who is a Holder’s Immediate Family Member; or (3) that is a trust for the benefit of an individual Holder or such Holder’s Immediate Family Member shall be aggregated together and with those of the transferring Holder; provided further that all transferees who would not qualify individually for assignment of rights shall, as a condition to the applicable transfer, establish a single attorney-in-fact for the purpose of exercising any rights, receiving notices, or taking any action under this Agreement. The terms and conditions of this Agreement inure to the benefit of and are binding upon the respective successors and permitted assignees of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and permitted assignees any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein.
6.2 Governing Law. This Agreement shall be governed by the internal law of the State of Delaware, without regard to conflict of law principles that would result in the application of any law other than the law of the State of Delaware.
6.3 Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Counterparts may be delivered via electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g., www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.
6.4 Titles and Subtitles. The titles and subtitles used in this Agreement are for convenience only and are not to be considered in construing or interpreting this Agreement.
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6.5 Notices.
(a) All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given upon the earlier of actual receipt or (i) personal delivery to the party to be notified; (ii) when sent, if sent by electronic mail during the recipient’s normal business hours, and if not sent during normal business hours, then on the recipient’s next business day; (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (iv) one (1) business day after the business day of deposit with a nationally recognized overnight courier, freight prepaid, specifying next-day delivery, with written verification of receipt. All communications shall be sent to the respective parties at their addresses as set forth on Schedule A hereto, or (as to the Company) to the principal office of the Company and to the attention of the Chief Executive Officer, or in any case to such email address or address as subsequently modified by written notice given in accordance with this Section 6.5. If notice is given to the Company, a copy (which copy shall not constitute notice) shall also be sent to Paul Hastings LLP, 1117 S. California Avenue, Palo Alto, CA 94304, Attn: Jeff Hartlin, Email: jeffhartlin@paulhastings.com, and if notice is given to Investors, a copy (which copy shall not constitute notice) shall also be given to Sage Law Group LLC, 1550 Wewatta Street, Ste. 200, Denver, CO 80202, Attn.: Rose Standifer, rstandifer@sagelawgroup.com.
(b) Consent to Electronic Notice. Each Investor consents to the delivery of any stockholder notice pursuant to the General Corporation Law of the State of Delaware (the “DGCL”), as amended or superseded from time to time, by electronic transmission pursuant to Section 232 of the DGCL (or any successor thereto) at the electronic mail address set forth below such Investor’s name on the Schedules hereto, as updated from time to time by notice to the Company, or as on the books of the Company. To the extent that any notice given by means of electronic transmission is returned or undeliverable for any reason, the foregoing consent shall be deemed to have been revoked until a new or corrected electronic mail address has been provided, and such attempted electronic notice shall be ineffective and deemed to not have been given. Each Investor agrees to promptly notify the Company of any change in such stockholder’s electronic mail address, and that failure to do so shall not affect the foregoing.
6.6 Amendments and Waivers. Any term of this Agreement may be amended, modified or terminated and the observance of any term of this Agreement may be waived (either generally or in a particular instance, and either retroactively or prospectively) only with the written consent of the Company and the holders of at least a majority of the Registrable Securities then outstanding; provided that the Company may in its sole discretion waive compliance with Section 2.12(c) (and the Company’s failure to object promptly in writing after notification of a proposed assignment allegedly in violation of Section 2.12(c) shall be deemed to be a waiver); and provided further that any provision hereof may be waived by any waiving party on such party’s own behalf, without the consent of any other party. Notwithstanding the foregoing, (a) this Agreement may not be amended, modified or terminated and the observance of any term hereof may not be waived with respect to any Investor without the written consent of such Investor, unless such amendment, modification, termination, or waiver applies to all Investors in the same fashion (it being agreed that a waiver of the provisions of Section 4 with respect to a particular transaction shall be deemed to apply to all Investors in the same fashion if such waiver does so by its terms, notwithstanding the fact that certain Investors may nonetheless, by agreement with the Company, purchase securities in such transaction) and (b) Sections 3.1 and 3.2, Section 4 and any other section of this Agreement applicable to the Major Investors (including this clause (b) of this Section 6.6) may be amended, modified, terminated or waived with only the written consent of the Company and the holders of at least a majority of the Registrable Securities then outstanding and held by the Major Investors. Notwithstanding the foregoing, Schedule A hereto may be amended by the Company from time to time to add transferees of any Registrable Securities in compliance with the terms of this Agreement without the consent of the other parties; and Schedule A hereto may also be amended by the Company after the date of this Agreement without the consent of the other parties to add information regarding any additional Investor who becomes a party to this Agreement in accordance with Section 6.9. The Company shall give prompt notice of any amendment, modification or termination hereof or waiver hereunder to any party hereto that did not consent in writing to such amendment, modification, termination, or waiver. Any amendment, modification, termination, or waiver effected in accordance with this Section 6.6 shall be binding on all parties hereto, regardless of whether any such party has consented thereto. No waivers of or exceptions to any term, condition, or provision of this Agreement, in any one (1) or more instances, shall be deemed to be or construed as a further or continuing waiver of any such term, condition, or provision.
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6.7 Severability. In case any one (1) or more of the provisions contained in this Agreement is for any reason held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of this Agreement, and such invalid, illegal, or unenforceable provision shall be reformed and construed so that it will be valid, legal, and enforceable to the maximum extent permitted by law.
6.8 Aggregation of Stock; Apportionment. All shares of Registrable Securities held or acquired by Affiliates shall be aggregated together for the purpose of determining the availability of any rights under this Agreement and such Affiliated Persons may apportion such rights as among themselves in any manner they deem appropriate.
6.9 Additional Investors. Notwithstanding anything to the contrary contained herein, if the Company issues additional shares of Series A Preferred Stock after the date hereof, pursuant to the Purchase Agreement, any purchaser of such shares of Series A Preferred Stock may become a party to this Agreement by executing and delivering an additional counterpart signature page to this Agreement, and thereafter shall be deemed an “Investor” for all purposes hereunder. No action or consent by the Investors shall be required for such joinder to this Agreement by such additional Investor, so long as such additional Investor has agreed in writing to be bound by all of the obligations as an “Investor” hereunder.
6.10 Entire Agreement. This Agreement (including any Schedules hereto) together with the other Transaction Agreements (as defined in the Purchase Agreement), constitutes the full and entire understanding and agreement among the parties with respect to the subject matter hereof, and any other written or oral agreement relating to the subject matter hereof existing between the parties is expressly canceled.
6.11 Dispute Resolution. The parties (a) hereby irrevocably and unconditionally submit to the jurisdiction of the state courts of California and to the jurisdiction of the United States District Court for the Northern District of California for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement, (b) agree not to commence any suit, action or other proceeding arising out of or based upon this Agreement except in the state courts of California or the United States District Court for the Northern District of California, and (c) hereby waive, and agree not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court.
WAIVER OF JURY TRIAL: EACH PARTY HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE OTHER TRANSACTION AGREEMENTS, THE SECURITIES OR THE SUBJECT MATTER HEREOF OR THEREOF. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS (INCLUDING NEGLIGENCE), BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THIS SECTION HAS BEEN FULLY DISCUSSED BY EACH OF THE PARTIES HERETO AND THESE PROVISIONS WILL NOT BE SUBJECT TO ANY EXCEPTIONS. EACH PARTY HERETO HEREBY FURTHER WARRANTS AND REPRESENTS THAT SUCH PARTY HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
6.12 Delays or Omissions. No delay or omission to exercise any right, power, or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power, or remedy of such nonbreaching or non-defaulting party, nor shall it be construed to be a waiver of or acquiescence to any such breach or default, or to any similar breach or default thereafter occurring, nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. All remedies, whether under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative.
[Signature Page Follows]
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IN WITNESS WHEREOF, the parties have executed this Investors’ Rights Agreement as of the date first written above.
| COMPANY: | ||
| AURADINE, INC. | ||
| By: | ||
| Name: | Barun Kar | |
| Title: | Chief Executive Officer | |
VOTING AGREEMENT
THIS VOTING AGREEMENT (this “Agreement”) is made and entered into as of April ____, 2022, by and among Auradine, Inc., a Delaware corporation (the “Company”), each holder of the Series A-1 Preferred Stock, $0.00001 par value per share, of the Company (the “Series A-1 Preferred Stock”), Series A-2 Preferred Stock, $0.00001 par value per share, of the Company (the “Series A-2 Preferred Stock”), Series A-3 Preferred Stock, $0.00001 par value per share, of the Company (the “Series A-3 Preferred Stock,”), and Series A-4 Preferred Stock, $0.00001 par value per share, of the Company (the “Series A-4 Preferred Stock,” referred to herein collectively with the Series A-1 Preferred Stock, the Series A-2 Preferred Stock and the Series A-3 Preferred Stock, as the “Series A Preferred Stock” or “Preferred Stock”) listed on Schedule A (together with any subsequent investors, or transferees, who become parties hereto as “Investors” pursuant to Sections 7.1(a) or 7.2 below, the “Investors”), and those certain stockholders of the Company listed on Schedule B (together with any subsequent stockholders, or any transferees, who become parties hereto as “Key Holders” pursuant to Section 7.1(b) or 7.2 below, the “Key Holders,” and together collectively with the Investors, the “Stockholders”).
RECITALS
A. Concurrently with the execution of this Agreement, the Company and the Investors are entering into a Series A Preferred Stock Purchase Agreement (the “Purchase Agreement”) providing for the sale of shares of the Series A Preferred Stock, and in connection with that agreement the parties desire to provide the Investors with the right, among other rights, to designate the election of certain members of the board of directors of the Company (the “Board”) in accordance with the terms of this Agreement.
B. The Amended and Restated Certificate of Incorporation of the Company (as the same may be amended and/or restated from time to time, the “Restated Certificate”) provides that (a) the holders of record of the shares of the Preferred Stock, exclusively and as a separate class, shall be entitled to elect two (2) directors of the Company (the “Preferred Directors”); (b) the holders of record of the shares of common stock, $0.00001 par value per share, of the Company (“Common Stock”), exclusively and as a separate class, shall be entitled to elect three (3) directors of the Company (the “Common Directors”); and (c) the holders of record of the shares of Common Stock and the Preferred Stock, voting together as a single class on an as converted basis, shall be entitled to elect the balance of the total number of directors of the Company (the “Mutual Directors”).
C. The parties also desire to enter into this Agreement to set forth their agreements and understandings with respect to how shares of the capital stock of the Company held by them will be voted on, or tendered, in connection with, an acquisition of the Company and voted on in connection with an increase in the number of shares of Common Stock required to provide for the conversion of the Preferred Stock.
NOW, THEREFORE, the parties agree as follows:
1. Voting Provisions Regarding the Board.
1.1 Shares. For purposes of this Agreement, the term “Shares” shall mean and include any securities of the Company that the holders of which are entitled to vote for members of the Board, including, without limitation, all shares of Common Stock and Preferred Stock, by whatever name called, now owned or subsequently acquired by a Stockholder, however acquired, whether through stock splits, stock dividends, reclassifications, recapitalizations, similar events or otherwise.
1.2 Board Composition. Each Stockholder agrees to vote, or cause to be voted, all Shares owned by such Stockholder, or over which such Stockholder has voting control, from time to time and at all times, in whatever manner as shall be necessary to ensure that at each annual or special meetings of stockholders at which an election of directors is held or pursuant to any written consent of the stockholders, subject to Section 5, the following persons shall be elected to the Board:
(a) As the first Preferred Director, one person designated from time to time by Celesta Capital IV, L.P. (“Celesta”), (I) for so long as such Stockholder and its Affiliates (as defined below) continue to own beneficially an aggregate of at least 5,125,942 shares of Common Stock (including shares of Common Stock issued or issuable upon conversion of the Preferred Stock), which number is subject to appropriate adjustment for any stock splits, stock dividends, combinations, recapitalizations and the like, and (II) provided that, in the Second Tranche Closing (as defined in the Purchase Agreement), Celesta purchases its entire number of Additional A-4 Shares (as defined in the Purchase Agreement) set forth opposite Celesta’s name on Exhibit A to the Purchase Agreement) as of the Initial Closing (as defined in the Purchase Agreement), which individual shall initially be Sriram Viswanathan;
(b) As the second Preferred Director, one person designated from time to time by Mayfield Select II, a Delaware Limited Partnership ( “Mayfield”), for so long as such Stockholder and its Affiliates continue to own beneficially an aggregate of at least 5,125,942 shares of Common Stock (including shares of Common Stock issued or issuable upon conversion of the Preferred Stock), which number is subject to appropriate adjustment for any stock splits, stock dividends, combinations, recapitalizations and the like, and (II) provided that, in the Second Tranche Closing (as defined in the Purchase Agreement), Mayfield purchases its entire number of Additional A-4 Shares set forth opposite Mayfield’s name on Exhibit A to the Purchase Agreement) as of the Initial Closing (as defined in the Purchase Agreement), which individual shall initially be Navin Chaddha;
(c) As a Mutual Director, one person designated from time to time by Marathon Digital Holdings, Inc. (“Marathon”), (I) for so long as such Stockholder and its Affiliates continue to own beneficially an aggregate of at least, (i) prior to the Second Tranche Closing (as defined in the Purchase Agreement), 1,888,505 shares of Common Stock (including shares of Common Stock issued or issuable upon conversion of the Preferred Stock), which number is subject to appropriate adjustment for any stock splits, stock dividends, combinations, recapitalizations and the like, and (ii) on or following the Second Tranche Closing, ten percent (10%) of the then outstanding capital stock of the Company, in each case treating for this purpose all shares of Common Stock issuable upon exercise of or conversion of outstanding options, warrants or convertible securities, as if exercised and/or converted or exchanged, and (II) provided that, in the Second Tranche Closing (as defined in the Purchase Agreement), Marathon purchases its entire number of Additional A-4 Shares set forth opposite Marathon’s name on Exhibit A to the Purchase Agreement), which individual shall initially be Fred Thiel;
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(d) As two (2) of the Common Directors, two (2) individuals designated from time to time by the holders of a majority of the shares of Common Stock held by the Key Holders who are then providing services to the Company as officers, employees or consultants, which individuals shall initially be (i) Said Ouissal and (ii) Rajiv Khemani (or, if Rajiv Khemani is serving as the Company’s Chief Executive Officer, Barun Kar); and
(e) As the remaining Common Director, the Company’s Chief Executive Officer, who as of the date of this Agreement is Barun Kar (the “CEO Director”), provided that if for any reason the CEO Director shall cease to serve as the Chief Executive Officer of the Company, each of the Stockholders shall promptly vote their respective Shares (i) to remove the former Chief Executive Officer of the Company from the Board if such person has not resigned as a member of the Board; and (ii) to elect such person’s replacement as Chief Executive Officer of the Company as the new CEO Director.
To the extent that any of clauses (a) through (e) above shall not be applicable, any member of the Board who would otherwise have been designated in accordance with the terms thereof shall instead be voted upon by all the Stockholders of the Company entitled to vote thereon in accordance with, and pursuant to, the Restated Certificate.
For purposes of this Agreement, an individual, firm, corporation, partnership, association, limited liability company, trust or any other entity (collectively, a “Person”) shall be deemed an “Affiliate” of another Person who, directly or indirectly, controls, is controlled by or is under common control with such Person, including, without limitation, any general partner, managing member, officer, director or trustee of such Person, or any venture capital fund or registered investment company now or hereafter existing that is controlled by one (1) or more general partners, managing members or investment advisers of, or shares the same management company or investment adviser with, such Person.
1.3 Failure to Designate a Board Member. In the absence of any designation from the Persons or groups with the right to designate a director as specified above, the director previously designated by them and then serving shall be reelected if willing to serve unless such individual has been removed as provided herein, and otherwise such Board seat shall remain vacant until otherwise filled as provided above.
1.4 Removal of Board Members. Each Stockholder also agrees to vote, or cause to be voted, all Shares owned by such Stockholder, or over which such Stockholder has voting control, from time to time and at all times, in whatever manner as shall be necessary to ensure that:
(a) no director elected pursuant to Section 1.2 of this Agreement may be removed from office other than for cause unless (i) such removal is directed or approved by the affirmative vote of the Person(s), or of the holders of at least a majority of the shares of stock, entitled under Section 1.2 to designate that director; or (ii) the Person(s) originally entitled to designate or approve such director or occupy such Board seat pursuant to Section 1.2 is no longer so entitled to designate or approve such director or occupy such Board seat;
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(b) any vacancies created by the resignation, removal or death of a director elected pursuant to Section 1.2 shall be filled pursuant to the provisions of this Section 1; and
(c) upon the request of any party entitled to designate a director as provided in Section 1.2 to remove such director, such director shall be removed.
All Stockholders agree to execute any written consents required to perform the obligations of this Section 1, and the Company agrees at the request of any Person or group entitled to designate directors to call a special meetings of stockholders for the purpose of electing directors.
1.5 No Liability for Election of Recommended Directors. No Stockholder, nor any Affiliate of any Stockholder, shall have any liability as a result of designating a person for election as a director for any act or omission by such designated person in his or her capacity as a director of the Company, nor shall any Stockholder have any liability as a result of voting for any such designee in accordance with the provisions of this Agreement.
2. Vote to Increase Authorized Common Stock. Each Stockholder agrees to vote or cause to be voted all Shares owned by such Stockholder, or over which such Stockholder has voting control, from time to time and at all times, in whatever manner as shall be necessary to increase the number of authorized shares of Common Stock from time to time to ensure that there will be sufficient shares of Common Stock available for conversion of all of the shares of Preferred Stock outstanding at any given time.
3. Drag-Along Right.
3.1 Definitions. A “Sale of the Company” shall mean either: (a) a transaction or series of related transactions in which a Person, or a group of related Persons, acquires from stockholders of the Company shares representing more than fifty percent (50%) of the outstanding voting power of the Company (a “Stock Sale”); (b) a transaction that qualifies as a “Deemed Liquidation Event” as defined in the Restated Certificate; or (c) the Company’s first underwritten public offering of its Common Stock (other than a registration statement relating either to the sale of securities to employees of the Company pursuant to its stock option, stock purchase or similar plan or an SEC Rule 145 transaction) (an “IPO”).
3.2 Actions to be Taken. In the event that (i) the holders of at least a majority of the shares of Preferred Stock (the “Selling Investors”); (ii) the Board, including at least one Preferred Director; and (iii) the holders of a majority of the then outstanding shares of Common Stock (other than those issued or issuable upon conversion of the shares of Preferred Stock) held by Key Holders who are then providing services to the Company as officers, employees or consultants voting as a separate class (collectively, (i)-(iii) are the “Electing Holders”) approve a Sale of the Company (which approval of the Electing Holders must be in writing), specifying that this Section 3 shall apply to such transaction, then, subject to satisfaction of each of the conditions set forth in Section 3.3 below, each Stockholder and the Company hereby agree:
(a) if such transaction requires stockholder approval, with respect to all Shares that such Stockholder owns or over which such Stockholder otherwise exercises voting power, to vote (in person, by proxy or by action by written consent, as applicable) all Shares in favor of, and adopt, such Sale of the Company (together with any related amendment or restatement to the Restated Certificate required to implement such Sale of the Company) and to vote in opposition to any and all other proposals that could reasonably be expected to delay or impair the ability of the Company to consummate such Sale of the Company;
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(b) if such transaction is a Stock Sale, to sell the same proportion of shares of capital stock of the Company beneficially held by such Stockholder as is being sold by the Selling Investors to the Person to whom the Selling Investors propose to sell their Shares, and, except as permitted in Section 3.3 below, on the same terms and conditions as the other stockholders of the Company;
(c) to execute and deliver all related documentation and take such other action in support of the Sale of the Company as shall reasonably be requested by the Company or the Selling Investors in order to carry out the terms and provision of this Section 3, including, without limitation, executing and delivering instruments of conveyance and transfer, and any purchase agreement, merger agreement, any associated indemnity agreement, or escrow agreement, any associated voting, support, or joinder agreement, consent, waiver, governmental filing, share certificates duly endorsed for transfer (free and clear of impermissible liens, claims and encumbrances), and any similar or related documents;
(d) not to deposit, and to cause their Affiliates not to deposit, except as provided in this Agreement, any Shares of the Company owned by such party or Affiliate in a voting trust or subject any Shares to any arrangement or agreement with respect to the voting of such Shares, unless specifically requested to do so by the acquirer in connection with the Sale of the Company;
(e) to refrain from (i) exercising any dissenters’ rights or rights of appraisal under applicable law at any time with respect to such Sale of the Company, or (ii) asserting any claim or commencing any suit challenging the Sale of the Company or this Agreement, or the consummation of the transactions contemplated thereby;
(f) if the consideration to be paid in exchange for the Shares pursuant to this Section 3 includes any securities and due receipt thereof by any Stockholder would require under applicable law (x) the registration or qualification of such securities or of any person as a broker or dealer or agent with respect to such securities; or (y) the provision to any Stockholder of any information other than such information as a prudent issuer would generally furnish in an offering made solely to “accredited investors” as defined in Regulation D promulgated under the Securities Act of 1933, as amended (the “Securities Act”), the Company may cause to be paid to any such Stockholder in lieu thereof, against surrender of the Shares which would have otherwise been sold by such Stockholder, an amount in cash equal to the fair value (as determined in good faith by the Board) of the securities which such Stockholder would otherwise receive as of the date of the issuance of such securities in exchange for the Shares; and
(g) in the event that the Selling Investors, in connection with such Sale of the Company, appoint a stockholder representative (the “Stockholder Representative”) with respect to matters affecting the Stockholders under the applicable definitive transaction agreements following consummation of such Sale of the Company, (x) to consent to (i) the appointment of such Stockholder Representative, (ii) the establishment of any applicable escrow, expense or similar fund in connection with any indemnification or similar obligations, and (iii) the payment of such Stockholder’s pro rata portion (from the applicable escrow or expense fund or otherwise) of any and all reasonable fees and expenses to such Stockholder Representative in connection with such Stockholder Representative’s services and duties in connection with such Sale of the Company and its related service as the representative of the Stockholders, and (y) not to assert any claim or commence any suit against the Stockholder Representative or any other Stockholder with respect to any action or inaction taken or failed to be taken by the Stockholder Representative, within the scope of the Stockholder Representative’s authority, in connection with its service as the Stockholder Representative, absent fraud, bad faith, gross negligence or willful misconduct.
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3.3 Conditions. Notwithstanding anything to the contrary set forth herein, a Stockholder will not be required to comply with Section 3.2 above in connection with any proposed Sale of the Company (the “Proposed Sale”), unless:
(a) any representations and warranties to be made by such Stockholder in connection with the Proposed Sale are limited to representations and warranties related to authority, ownership and the ability to convey title to such Shares, including, but not limited to, representations and warranties that (i) the Stockholder holds all right, title and interest in and to the Shares such Stockholder purports to hold, free and clear of all liens and encumbrances, (ii) the obligations of the Stockholder in connection with the transaction have been duly authorized, if applicable, (iii) the documents to be entered into by the Stockholder have been duly executed by the Stockholder and delivered to the acquirer and are enforceable (subject to customary limitations) against the Stockholder in accordance with their respective terms; and (iv) neither the execution and delivery of documents to be entered into by the Stockholder in connection with the transaction, nor the performance of the Stockholder’s obligations thereunder, will cause a breach or violation of the terms of any agreement to which the Stockholder is a party, or any law or judgment, order or decree of any court or governmental agency that applies to the Stockholder;
(b) such Stockholder is not required to agree (unless such Stockholder is a Company officer or employee) to any restrictive covenant in connection with the Proposed Sale (including, without limitation, any covenant not to compete or covenant not to solicit customers, employees or suppliers of any party to the Proposed Sale) or any release of claims other than a release in customary form of claims arising solely in such Stockholder’s capacity as a stockholder of the Company;
(c) such Stockholder and its Affiliates are not required to amend, extend or terminate any contractual or other relationship with the Company, the acquirer or their respective Affiliates, except that the Stockholder may be required to agree to terminate the investment-related documents between or among such Stockholder, the Company and/or other stockholders of the Company;
(d) the Stockholder is not liable for the breach of any representation, warranty or covenant made by any other Person in connection with the Proposed Sale, other than the Company (except to the extent that funds may be paid out of an escrow established to cover breach of representations, warranties and covenants of the Company as well as breach by any stockholder of any of identical representations, warranties and covenants provided by all stockholders);
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(e) liability shall be limited to such Stockholder’s applicable share (determined based on the respective proceeds payable to each Stockholder in connection with such Proposed Sale in accordance with the provisions of the Restated Certificate) of a negotiated aggregate indemnification amount that applies equally to all Stockholders but that in no event exceeds the amount of consideration otherwise payable to such Stockholder in connection with such Proposed Sale, except with respect to claims related to fraud by such Stockholder, the liability for which need not be limited as to such Stockholder;
(f) upon the consummation of the Proposed Sale (i) each holder of each class or series of the capital stock of the Company will receive the same form of consideration for their shares of such class or series as is received by other holders in respect of their shares of such same class or series of stock, (ii) each holder of a series of Preferred Stock will receive the same amount of consideration per share of such series of Preferred Stock as is received by other holders in respect of their shares of such same series, (iii) each holder of Common Stock will receive the same amount of consideration per share of Common Stock as is received by other holders in respect of their shares of Common Stock, and (iv) unless waived pursuant to the terms of the Restated Certificate and as may be required by law, the aggregate consideration receivable by all holders of the Preferred Stock and Common Stock shall be allocated among the holders of Preferred Stock and Common Stock on the basis of the relative liquidation preferences to which the holders of each respective series of Preferred Stock and the holders of Common Stock are entitled in a Deemed Liquidation Event (assuming for this purpose that the Proposed Sale is a Deemed Liquidation Event) in accordance with the Company’s Restated Certificate in effect immediately prior to the Proposed Sale; provided, however, that, notwithstanding the foregoing provisions of this Section 3.3(f), if the consideration to be paid in exchange for the Shares held by the Key Holder or Investor, as applicable, pursuant to this Section 3.3(f) includes any securities and due receipt thereof by any Key Holder or Investor would require under applicable law (x) the registration or qualification of such securities or of any person as a broker or dealer or agent with respect to such securities; or (y) the provision to any Key Holder or Investor of any information other than such information as a prudent issuer would generally furnish in an offering made solely to “accredited investors” as defined in Regulation D promulgated under the Securities Act, the Company may cause to be paid to any such Key Holder or Investor in lieu thereof, against surrender of the Shares held by the Key Holder or Investor, as applicable, which would have otherwise been sold by such Key Holder or Investor, an amount in cash equal to the fair value (as determined in good faith by the Board) of the securities which such Key Holder or Investor would otherwise receive as of the date of the issuance of such securities in exchange for the Shares held by the Key Holder or Investor, as applicable;
(g) subject to clause (f) above, requiring the same form of consideration to be available to the holders of any single class or series of capital stock, if any holders of any capital stock of the Company are given an option as to the form and amount of consideration to be received as a result of the Proposed Sale, all holders of such capital stock will be given the same option; provided, however, that nothing in this Section 3.3(g) shall entitle any holder to receive any form of consideration that such holder would be ineligible to receive as a result of such holder’s failure to satisfy any condition, requirement or limitation that is generally applicable to the Company’s stockholders.
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3.4 Restrictions on Sales of Control of the Company. No Stockholder shall be a party to any Stock Sale unless (a) all holders of Preferred Stock are allowed to participate in such transaction(s) and (b) the consideration received pursuant to such transaction is allocated among the parties thereto in the manner specified in the Company’s Restated Certificate in effect immediately prior to the Stock Sale (as if such transaction(s) were a Deemed Liquidation Event), unless the holders of at least the requisite percentage required to waive treatment of the transaction(s) as a Deemed Liquidation Event pursuant to the terms of the Restated Certificate, elect to allocate the consideration differently by written notice given to the Company at least ten (10) days prior to the effective date of any such transaction or series of related transactions.
4. Remedies.
4.1 Covenants of the Company. The Company agrees to use its best efforts, within the requirements of applicable law, to ensure that the rights granted under this Agreement are effective and that the parties enjoy the benefits of this Agreement. Such actions include, without limitation, the use of the Company’s best efforts to cause the nomination and election of the directors as provided in this Agreement.
4.2 Irrevocable Proxy and Power of Attorney. Each party to this Agreement hereby constitutes and appoints as the proxies of the party and hereby grants a power of attorney to the Chief Executive Officer of the Company, and a designee of the Selling Investors, and each of them, with full power of substitution, with respect to the matters set forth herein, including, without limitation, votes regarding the size and composition of the Board pursuant to Section 1, votes to increase authorized shares pursuant to Section 2 hereof and votes regarding any Sale of the Company pursuant to Section 3 hereof, and hereby authorizes each of them to represent and vote, if and only if the party (i) fails to vote, or (ii) attempts to vote (whether by proxy, in person or by written consent), in a manner which is inconsistent with the terms of this Agreement, all of such party’s Shares in favor of the election of persons as members of the Board determined pursuant to and in accordance with the terms and provisions of this Agreement or the increase of authorized shares or approval of any Sale of the Company pursuant to and in accordance with the terms and provisions of this Agreement or to take any action reasonably necessary to effect this Agreement. The power of attorney granted hereunder shall authorize the Chief Executive Officer of the Company to execute and deliver the documentation referred to in Section 3.2(c) on behalf of any party failing to do so within five (5) business days of a request by the Company. Each of the proxy and power of attorney granted pursuant to this Section 4.2 is given in consideration of the agreements and covenants of the Company and the parties in connection with the transactions contemplated by this Agreement and, as such, each is coupled with an interest and shall be irrevocable unless and until this Agreement terminates or expires pursuant to Section 6 hereof. Each party hereto hereby revokes any and all previous proxies or powers of attorney with respect to the Shares (except as provided in the Purchase Agreement) and shall not hereafter, unless and until this Agreement terminates or expires pursuant to Section 6 hereof, purport to grant any other proxy or power of attorney with respect to any of the Shares (except as provided in the Purchase Agreement), deposit any of the Shares into a voting trust or enter into any agreement (other than this Agreement), arrangement or understanding with any person, directly or indirectly, to vote, grant any proxy or give instructions with respect to the voting of any of the Shares, in each case, with respect to any of the matters set forth herein.
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4.3 Specific Enforcement. Each party acknowledges and agrees that each party hereto will be irreparably damaged in the event any of the provisions of this Agreement are not performed by the parties in accordance with their specific terms or are otherwise breached. Accordingly, it is agreed that each of the Company and the Stockholders shall be entitled to an injunction to prevent breaches of this Agreement, and to specific enforcement of this Agreement and its terms and provisions in any action instituted in any court of the United States or any state having subject matter jurisdiction.
4.4 Remedies Cumulative. All remedies, either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative.
5. “Bad Actor” Matters.
5.1 Definitions. For purposes of this Agreement:
(a) “Company Covered Person” means, with respect to the Company as an “issuer” for purposes of Rule 506 promulgated under the Securities Act, any Person listed in the first paragraph of Rule 506(d)(1).
(b) “Disqualified Designee” means any director designee to whom any Disqualification Event is applicable, except for a Disqualification Event as to which Rule 506(d)(2)(ii) or (iii) or (d)(3) is applicable.
(c) “Disqualification Event” means a “bad actor” disqualifying event described in Rule 506(d)(1)(i)-(viii) promulgated under the Securities Act.
(d) “Rule 506(d) Related Party” means, with respect to any Person, any other Person that is a beneficial owner of such first Person’s securities for purposes of Rule 506(d) under the Securities Act.
5.2 Representations.
(a) Each Person with the right to designate or participate in the designation of a director pursuant to this Agreement hereby represents that (i) such Person has exercised reasonable care to determine whether any Disqualification Event is applicable to such Person, any director designee designated by such Person pursuant to this Agreement or any of such Person’s Rule 506(d) Related Parties, except, if applicable, for a Disqualification Event as to which Rule 506(d)(2)(ii) or (iii) or (d)(3) is applicable and (ii) no Disqualification Event is applicable to such Person, any Board member designated by such Person pursuant to this Agreement or any of such Person’s Rule 506(d) Related Parties, except, if applicable, for a Disqualification Event as to which Rule 506(d)(2)(ii) or (iii) or (d)(3) is applicable. Notwithstanding anything to the contrary in this Agreement, each Investor makes no representation regarding any Person that may be deemed to be a beneficial owner of the Company’s voting equity securities held by such Investor solely by virtue of that Person being or becoming a party to (x) this Agreement, as may be subsequently amended, or (y) any other contract or written agreement to which the Company and such Investor are parties regarding (1) the voting power, which includes the power to vote or to direct the voting of, such security; and/or (2) the investment power, which includes the power to dispose, or to direct the disposition of, such security.
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(b) The Company hereby represents and warrants to the Investors that no Disqualification Event is applicable to the Company or, to the Company’s knowledge, any Company Covered Person, except for a Disqualification Event as to which Rule 506(d)(2)(ii)-(iv) or (d)(3) is applicable.
5.3 Covenants. Each Person with the right to designate or participate in the designation of a director pursuant to this Agreement covenants and agrees (i) not to designate or participate in the designation of any director designee who, to such Person’s knowledge, is a Disqualified Designee, (ii) to exercise reasonable care to determine whether any director designee designated by such person is a Disqualified Designee, (iii) that in the event such Person becomes aware that any individual previously designated by any such Person is or has become a Disqualified Designee, such Person shall as promptly as practicable take such actions as are necessary to remove such Disqualified Designee from the Board and designate a replacement designee who is not a Disqualified Designee, and (iv) to notify the Company promptly in writing in the event a Disqualification Event becomes applicable to such Person or any of its Rule 506(d) Related Parties, or, to such Person’s knowledge, to such Person’s initial designee named in Section 1, except, if applicable, for a Disqualification Event as to which Rule 506(d)(2)(ii) or (iii) or (d)(3) is applicable.
6. Term. This Agreement shall be effective as of the date hereof and shall continue in effect until and shall terminate upon the earliest to occur of (a) the consummation of the IPO or the Reverse Merger (as defined below); (b) the consummation of a Sale of the Company and distribution of proceeds to or escrow for the benefit of the Stockholders in accordance with the Restated Certificate, provided that the provisions of Section 3 hereof will continue after the closing of any Sale of the Company to the extent necessary to enforce the provisions of Section 3 with respect to such Sale of the Company; (c) termination of this Agreement in accordance with Section 7.8 below. For purposes of this Section 6, “Reverse Merger” means the merger of the Company with a company whose shares are registered under the Securities Exchange Act of 1934, as amended, and whose shares are listed for traded on a securities exchange (an “Acquiror”), or a merger with an affiliate of such Acquiror.
7. Miscellaneous.
7.1 Additional Parties.
(a) Notwithstanding anything to the contrary contained herein, if the Company issues additional shares of Preferred Stock after the date hereof, as a condition to the issuance of such shares the Company shall require that any purchaser of such shares become a party to this Agreement by executing and delivering (i) the Adoption Agreement attached to this Agreement as Exhibit A, or (ii) a counterpart signature page hereto agreeing to be bound by and subject to the terms of this Agreement as an Investor and Stockholder hereunder. In either event, each such person shall thereafter be deemed an Investor and Stockholder for all purposes under this Agreement.
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(b) In the event that (i) after the date of this Agreement but prior to the Second Tranche Closing, the Company enters into an agreement with any Person to issue shares of capital stock to such Person (other than to a purchaser of Preferred Stock described in Section 7.1(a) above), following which such Person shall hold Shares constituting 3.5% or more of the then outstanding capital stock of the Company (treating for this purpose all shares of Common Stock issuable upon exercise of or conversion of outstanding options, warrants or convertible securities, as if exercised and/or converted or exchanged), or (ii) after the date of the Second Tranche Closing, the Company enters into an agreement with any Person to issue shares of capital stock to such Person (other than to a purchaser of Preferred Stock described in Section 7.1(a) above), following which such Person shall hold Shares constituting 2.5% or more of the then outstanding capital stock of the Company (treating for this purpose all shares of Common Stock issuable upon exercise of or conversion of outstanding options, warrants or convertible securities, as if exercised and/or converted or exchanged), then, the Company shall cause such Person, as a condition precedent to entering into such agreement, to become a party to this Agreement by executing an Adoption Agreement in the form attached hereto as Exhibit A, agreeing to be bound by and subject to the terms of this Agreement as a Key Holder and Stockholder and thereafter such person shall be deemed a Stockholder for all purposes under this Agreement.
7.2 Transfers. Each transferee or assignee of any Shares subject to this Agreement shall continue to be subject to the terms hereof, and, as a condition precedent to the Company’s recognition of such transfer, each transferee or assignee shall agree in writing to be subject to each of the terms of this Agreement by executing and delivering an Adoption Agreement substantially in the form attached hereto as Exhibit A. Upon the execution and delivery of an Adoption Agreement by any transferee, such transferee shall be deemed to be a party hereto as if such transferee were the transferor and such transferee’s signature appeared on the signature pages of this Agreement and shall be deemed to be an Investor and Stockholder, or Key Holder and Stockholder, as applicable. The Company shall not permit the transfer of the Shares subject to this Agreement on its books or issue a new certificate representing any such Shares unless and until such transferee shall have complied with the terms of this Section 7.2. Each certificate instrument, or book entry representing the Shares subject to this Agreement if issued on or after the date of this Agreement shall be notated by the Company with the legend set forth in Section 7.12.
7.3 Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.
7.4 Governing Law. This Agreement shall be governed by the internal law of the State of Delaware, without regard to conflict of law principles that would result in the application of any law other than the law of the State of Delaware.
7.5 Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Counterparts may be delivered via electronic mail (including pdf or any electronic signature complying with the U.S. ESIGN Act of 2000, e.g., www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.
7.6 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.
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7.7 Notices.
(a) General. All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given upon the earlier of actual receipt or (a) personal delivery to the party to be notified, (b) when sent, if sent by electronic mail during normal business hours of the recipient, and if not sent during normal business hours, then on the recipient’s next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) business day after the business day of deposit with a nationally recognized overnight courier, freight prepaid, specifying next business day delivery, with written verification of receipt. All communications shall be sent to the respective parties at their address as set forth on Schedule A or Schedule B hereto, or (as to the Company) to the principal office of the Company and to the attention of the Chief Executive Officer, or, in any case, to such e-mail address or address as subsequently modified by written notice given in accordance with this Section 7.7. If notice is given to the Company, a copy (which copy shall not constitute notice) shall also be sent to Paul Hastings LLP, 1117 S. California Avenue, Palo Alto CA 94304, Attention: Jeff Hartlin, and if notice is given to Stockholders, a copy (which copy shall not constitute notice) shall also be given to Sage Law Group LLC, 1550 Wewatta Street, Suite 200, Denver, CO 80202, Attn: Rose Standifer, Email: rstandifer@sagelawgroup.com.
(b) Consent to Electronic Notice. Each Investor and Key Holder consents to the delivery of any stockholder notice pursuant to the General Corporation Law of the State of Delaware (the “DGCL”), as amended or superseded from time to time, by electronic transmission pursuant to Section 232 of the DGCL (or any successor thereto) at the electronic mail address set forth below such Investor’s or Key Holder’s name on the Schedules hereto, as updated from time to time by notice to the Company, or as on the books of the Company. To the extent that any notice given by means of electronic transmission is returned or undeliverable for any reason, the foregoing consent shall be deemed to have been revoked until a new or corrected electronic mail address has been provided, and such attempted electronic notice shall be ineffective and deemed to not have been given. Each Investor and Key Holder agrees to promptly notify the Company of any change in its electronic mail address, and that failure to do so shall not affect the foregoing.
7.8 Consent Required to Amend, Modify, Terminate or Waive. This Agreement may be amended, modified or terminated (other than pursuant to Section 6) and the observance of any term hereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only by a written instrument executed by (a) the Company; (b) the Key Holders holding a majority of the Shares then held by the Key Holders who are then providing services to the Company as officers, employees or consultants; and (c) the holders of a majority of the shares of Common Stock issued or issuable upon conversion of the shares of Preferred Stock held by the Investors (voting together as a single class). Notwithstanding the foregoing:
(a) this Agreement may not be amended, modified or terminated and the observance of any term of this Agreement may not be waived with respect to any Investor or Key Holder without the written consent of such Investor or Key Holder unless such amendment, modification, termination or waiver applies to all Investors or Key Holders, as the case may be, in the same fashion;
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(b) the provisions of Section 1.2(a) and this Section 7.8(b) may not be amended, modified, terminated or waived without the written consent of Celesta;
(c) the provisions of Section 1.2(b) and this Section 7.8(c) may not be amended, modified, terminated or waived without the written consent of Mayfield;
(d) the provisions of Section 1.2(c) and this Section 7.8(d) may not be amended, modified, terminated or waived without the written consent of Marathon;
(e) the consent of the Key Holders shall not be required for any amendment, modification, termination or waiver if such amendment, modification, termination, or waiver either (A) is not directly applicable to the rights of the Key Holders hereunder; or (B) does not adversely affect the rights of the Key Holders in a manner that is different than the effect on the rights of the other parties hereto;
(f) Schedule A and Schedule B hereto may be amended by the Company from time to time in accordance with (i) the Purchase Agreement to add information regarding additional Purchasers (as defined in the Purchase Agreement), or (ii) Sections 7.1 and 7.2 to add information about additional parties or permitted transferees, without the consent of the other parties hereto; and
(g) any provision hereof may be waived by the waiving party on such party’s own behalf, without the consent of any other party.
The Company shall give prompt written notice of any amendment, modification, termination, or waiver hereunder to any party that did not consent in writing thereto. Any amendment, modification, termination, or waiver effected in accordance with this Section 7.8 shall be binding on each party and all of such party’s successors and permitted assigns, whether or not any such party, successor or assignee entered into or approved such amendment, modification, termination or waiver. For purposes of this Section 7.8, the requirement of a written instrument may be satisfied in the form of an action by written consent of the Stockholders circulated by the Company and executed by the Stockholder parties specified, whether or not such action by written consent makes explicit reference to the terms of this Agreement.
7.9 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power or remedy of such non-breaching or non-defaulting party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default previously or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative.
7.10 Severability. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision.
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7.11 Entire Agreement. This Agreement (including the Exhibits hereto), the Restated Certificate and the other Transaction Agreements (as defined in the Purchase Agreement) constitute the full and entire understanding and agreement between the parties with respect to the subject matter hereof, and any other written or oral agreement relating to the subject matter hereof existing between the parties is expressly canceled.
7.12 Share Certificate Legend. Each certificate, instrument, or book entry representing any Shares issued after the date hereof shall be notated by the Company with a legend reading substantially as follows:
“The Shares REPRESENTED hereby are subject to a Voting Agreement, AS MAY BE AMENDED FROM TIME TO TIME (a copy of which may be obtained upon written request from the Company), and by accepting any interest in such Shares the person accepting such interest shall be deemed to agree to and shall become bound by all the provisions of that Voting Agreement, including certain restrictions on transfer and ownership set forth therein.”
The Company, by its execution of this Agreement, agrees that it will cause the certificates, instruments, or book entry evidencing the Shares issued after the date hereof to be notated with the legend required by this Section 7.12 of this Agreement, and it shall supply, free of charge, a copy of this Agreement to any holder of such Shares upon written request from such holder to the Company at its principal office. The parties to this Agreement do hereby agree that the failure to cause the certificates, instruments, or book entry evidencing the Shares to be notated with the legend required by this Section 7.12 herein and/or the failure of the Company to supply, free of charge, a copy of this Agreement as provided hereunder shall not affect the validity or enforcement of this Agreement.
7.13 Stock Splits, Dividends and Recapitalizations. In the event of any issuance of Shares or the voting securities of the Company hereafter to any of the Stockholders (including, without limitation, in connection with any stock split, stock dividend, recapitalization, reorganization, or the like), such Shares shall become subject to this Agreement and shall be notated with the legend set forth in Section 7.12.
7.14 Manner of Voting. The voting of Shares pursuant to this Agreement may be effected in person, by proxy, by written consent or in any other manner permitted by applicable law. For the avoidance of doubt, voting of the Shares pursuant to the Agreement need not make explicit reference to the terms of this Agreement.
7.15 Further Assurances. At any time or from time to time after the date hereof, the parties agree to cooperate with each other, and at the request of any other party, to execute and deliver any further instruments or documents and to take all such further action as the other party may reasonably request in order to carry out the intent of the parties hereunder.
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7.16 Dispute Resolution. The parties (a) hereby irrevocably and unconditionally submit to the jurisdiction of the state courts of California and to the jurisdiction of the United States District Court for the Northern District of California for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement, (b) agree not to commence any suit, action or other proceeding arising out of or based upon this Agreement except in the state courts of California or the United States District Court for the Northern District of California, and (c) hereby waive, and agree not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court.
Waiver of Jury Trial: EACH PARTY HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE OTHER TRANSACTION DOCUMENTS, THE SECURITIES OR THE SUBJECT MATTER HEREOF OR THEREOF. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS (INCLUDING NEGLIGENCE), BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THIS SECTION HAS BEEN FULLY DISCUSSED BY EACH OF THE PARTIES HERETO AND THESE PROVISIONS WILL NOT BE SUBJECT TO ANY EXCEPTIONS. EACH PARTY HERETO HEREBY FURTHER WARRANTS AND REPRESENTS THAT SUCH PARTY HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
7.17 Costs of Enforcement. If any party to this Agreement seeks to enforce its rights under this Agreement by legal proceedings, the non-prevailing party shall pay all costs and expenses incurred by the prevailing party, including, without limitation, all reasonable attorneys’ fees.
7.18 Aggregation of Stock. All Shares held or acquired by a Stockholder and/or its Affiliates shall be aggregated together for the purpose of determining the availability of any rights under this Agreement, and such Affiliated persons may apportion such rights as among themselves in any manner they deem appropriate.
[Signature Page Follows]
| 15 |
IN WITNESS WHEREOF, the parties have executed this Voting Agreement as of the date first written above.
| COMPANY: | AURADINE, INC. | |
| By: | ||
| Name: | Barun Kar | |
| Title: | Chief Executive Officer | |
SIGNATURE PAGE TO VOTING AGREEMENT
EXHIBIT A
ADOPTION AGREEMENT
This Adoption Agreement (“Adoption Agreement”) is executed on ___________________, 20__, by the undersigned (the “Holder”) pursuant to the terms of that certain Voting Agreement dated as of April ___, 2022 (the “Agreement”), by and among the Company and certain of its Stockholders, as such Agreement may be amended or amended and restated hereafter. Capitalized terms used but not defined in this Adoption Agreement shall have the respective meanings ascribed to such terms in the Agreement. By the execution of this Adoption Agreement, the Holder agrees as follows:
1.1 Acknowledgement. Holder acknowledges that Holder is acquiring certain shares of the capital stock of the Company (the “Stock”), for one of the following reasons (Check the correct box):
☐ As a transferee of Shares from a party in such party’s capacity as an “Investor” bound by the Agreement, and after such transfer, Holder shall be considered an “Investor” and a “Stockholder” for all purposes of the Agreement.
☐ As a transferee of Shares from a party in such party’s capacity as a “Key Holder” bound by the Agreement, and after such transfer, Holder shall be considered a “Key Holder” and a “Stockholder” for all purposes of the Agreement.
☐ As a new “Investor” in accordance with Section 7.1(a) of the Agreement, in which case Holder will be an “Investor” and a “Stockholder” for all purposes of the Agreement.
☐ In accordance with Section 7.1(b) of the Agreement, as a new party who is not a new “Investor,” in which case Holder will be a “Stockholder” for all purposes of the Agreement.
1.2 Agreement. Holder hereby (a) agrees that the Stock, and any other shares of capital stock or securities required by the Agreement to be bound thereby, shall be bound by and subject to the terms of the Agreement and (b) adopts the Agreement with the same force and effect as if Holder were originally a party thereto.
1.3 Notice. Any notice required or permitted by the Agreement shall be given to Holder at the address or facsimile number listed below Holder’s signature hereto.
| HOLDER: | ACCEPTED AND AGREED: | |||
| By: | AURADINE, INC. | |||
| Name: | ||||
| Title: | ||||
| Address: | By: | |||
| Name: | ||||
| E-mail Address: | Title: | |||
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Fred Thiel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Marathon Digital Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly for the period in which this quarterly report is being prepared; | |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; | |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
| a) | all significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | any fraud, whether material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. |
| Dated: November 14, 2022 | By: | /s/ Fred Thiel |
| Fred Thiel | ||
| Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Hugh Gallagher certify that:
1. I have reviewed this quarterly report on Form 10-Q of Marathon Digital Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly for the period in which this quarterly report is being prepared; | |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; | |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
| a) | all significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | any fraud, whether material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. |
| Dated: November 14, 2022 | By: | /s/ Hugh Gallagher |
| Hugh Gallagher | ||
| Chief Financial Officer (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
About the Quarterly Report of Marathon Digital Holdings, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Fred Thiel, Chief Executive Officer (Principal Executive Officer) of the Company, certifies, pursuant to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: November 14, 2022 | By: | /s/ Fred Thiel |
| Fred Thiel | ||
| Chief Executive Officer (Principal Executive Officer) |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Marathon Digital Holdings, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Hugh Gallagher, Chief Financial Officer, Secretary and Director (Principal Financial and Accounting Officer) of the Company, certifies, pursuant to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: November 14, 2022 | By: | /s/ Hugh Gallagher |
| Hugh Gallagher | ||
| Chief Financial Officer (Principal Financial Officer) |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Consolidated Condensed Balance Sheets (Parenthetical) - USD ($) |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Statement of Financial Position [Abstract] | ||
| Accumulated depreciation | $ 26,809,659 | $ 21,311,461 |
| Finite-Lived intangible assets, accumulated amortization | $ 280,497 | |
| Preferred stock, par value | $ 0.0001 | $ 0.0001 |
| Preferred stock, shares authorized | 50,000,000 | 50,000,000 |
| Preferred stock, shares issued | 0 | 0 |
| Preferred stock, shares outstanding | 0 | 0 |
| Common stock, par value | $ 0.0001 | $ 0.0001 |
| Common stock, shares authorized | 200,000,000 | 200,000,000 |
| Common stock, shares issued | 116,810,405 | 102,733,273 |
| Common stock, shares outstanding | 116,810,405 | 102,733,273 |
Consolidated Condensed Statements of Operations (Unaudited) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Income Statement [Abstract] | ||||
| Total Revenues | $ 12,690,452 | $ 51,707,483 | $ 89,329,986 | $ 90,182,155 |
| Cost of revenues | ||||
| Cost of revenues - energy, hosting and other | (13,772,555) | (5,922,811) | (42,974,265) | (11,647,457) |
| Cost of revenues - depreciation and amortization | (26,294,842) | (4,340,198) | (64,881,323) | (8,015,801) |
| Total costs and expenses | (40,067,397) | (10,263,009) | (107,855,588) | (19,663,258) |
| Operating expenses | ||||
| General and administrative expenses | (12,352,008) | (99,235,984) | (39,187,098) | (159,411,404) |
| Legal reserves | (24,960,000) | (24,960,000) | ||
| Impairment of deposits due to vendor bankruptcy filing | (7,987,147) | (7,987,147) | ||
| Impairment of digital currencies | (5,903,891) | (6,731,890) | (153,045,376) | (18,472,750) |
| Impairment of patents | (919,363) | |||
| Realized and unrealized gains (losses) on digital currencies held in fund | 42,086,907 | (85,016,208) | 59,410,028 | |
| Gain on sale of equipment, net of disposals | 31,934,307 | 90,115,824 | ||
| Total operating expenses | (19,268,739) | (63,880,967) | (220,999,368) | (118,474,126) |
| Operating loss | (46,645,684) | (22,436,493) | (239,524,970) | (47,955,229) |
| Impairment of loan and investment due to vendor bankruptcy filing | (31,012,853) | (31,012,853) | ||
| Other non-operating income | 238,159 | 261,273 | 632,132 | 254,024 |
| Interest expense | (3,752,301) | (287) | (10,314,659) | (2,694) |
| Loss before income taxes | (81,172,679) | (22,175,507) | (280,220,350) | (47,703,899) |
| Income tax benefit | 5,750,272 | 2,940 | 192,712 | 3,454 |
| Net loss | $ (75,422,407) | $ (22,172,567) | $ (280,027,638) | $ (47,700,445) |
| Net loss per share, basic and diluted: | $ (0.65) | $ (0.22) | $ (2.56) | $ (0.49) |
| Weighted average shares outstanding, basic and diluted: | 116,533,816 | 100,803,809 | 109,492,865 | 98,230,795 |
ORGANIZATION AND DESCRIPTION OF BUSINESS |
9 Months Ended |
|---|---|
Sep. 30, 2022 | |
| Accounting Policies [Abstract] | |
| ORGANIZATION AND DESCRIPTION OF BUSINESS | NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Marathon Digital Holdings, Inc. (the “Company”) was incorporated in the State of Nevada on February 23, 2010 under the name Verve Ventures, Inc. On December 7, 2011, the Company changed its name to American Strategic Minerals Corporation and was engaged in exploration and potential development of a minerals business. In June 2012, the Company discontinued the minerals business and began to invest in real estate properties in Southern California. In October 2012, the Company discontinued its real estate business and the Company commenced IP licensing operations, at which time the Company’s name was changed to Marathon Patent Group, Inc. In 2018, the Company began its bitcoin mining operations by purchasing cryptocurrency mining machines and establishing a data center in Canada to mine digital assets. The Company ceased operating in Canada in 2020 and relocated all owned mining equipment out of Canada to the U.S. The Company has since expanded its activities in the mining of bitcoin across the U.S. The Company changed its name to Marathon Digital Holdings, Inc. on March 1, 2021. As of September 30, 2022, the Company is solely focused on the mining of bitcoin and ancillary opportunities within the bitcoin ecosystem.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with the rules and regulations of the SEC. They include all adjustments that we consider necessary for a fair statement of the results for the interim periods presented. Such adjustments consisted only of normal recurring items unless otherwise disclosed. The September 30, 2022, Condensed Consolidated Balance Sheet was derived from audited financial statements but does not include all footnote disclosures from the annual financial statements.
These financial statements should be read in conjunction with the financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 10, 2022.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated condensed financial statements, including the accounts of the Company’s subsidiaries, Marathon Crypto Mining, Inc., Crypto Currency Patent Holding Company and Soems Acquisition Corp. have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations. These consolidated condensed financial statements reflect all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position, the results of operations and cash flows of the Company for the periods presented. It is suggested that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s most recent Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year ended December 31, 2022.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications have no effect on the reported financial position, results of operations, or cash flows. Previously reported compensation and related taxes, consulting fees, and professional fees have now been reclassified within general and administrative expenses. In addition, previously reported change in fair value of warrant liability, realized gain on sale of digital currencies and interest income have now been reclassified as other non-operating income.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made by management include, but are not limited to, estimating the useful lives of fixed assets, the assumptions used to calculate fair value of options granted, realization of long-lived assets, deferred income taxes, unrealized tax positions and the realization of digital currencies.
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Restricted Cash
Restricted cash principally represents those cash balances that support commercial letters of credit and are restricted from withdrawal. The following table provides a reconciliation of the total cash, cash equivalents and restricted cash reported on the Condensed Consolidated Balance Sheets to the corresponding amounts reported on the Condensed Consolidated Statements of Cash Flows.
Digital Currencies, Digital currencies, restricted and Digital currencies loaned
Digital currencies, and Digital currencies loaned are included in current assets in the consolidated balance sheets. Digital currencies are recorded as indefinite lived intangibles at cost less impairment in accordance with FASB ASC 350 – Intangibles-Goodwill and Other. Digital currencies, restricted represent collateral for long-term loans and as such are classified as a non-current asset.
An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. When the exchange-traded price of digital currencies declines below its carrying value, the Company has determined that it is more likely than not that an impairment exists. When this occurs, the amount of impairment to record is determined based on the fair value of digital currencies in accordance with the fair value measurement framework in FASB ASC 820 – Fair Value Measurement “(ASC 820”). If the fair value of digital currency is lower than its carrying amount, the Company will record an impairment in an amount by which the carrying value exceeds the fair value of the digital currency. Subsequent reversal of impairment losses is not permitted.
The following table presents the activities of the digital currencies for the nine months ended September 30, 2022:
At September 30, 2022, the Company held approximately 10,670 bitcoin with a carrying value of $197.2 million. The bitcoin were classified on the balance sheet as digital currencies (6,842 bitcoin or approximately $126.4 million carrying value) and digital currencies, restricted (3,828 bitcoin or approximately $70.8 million carrying value). At September 30, 2022, the fair market value of the Company’s bitcoin holdings was approximately $207.3 million, including digital currencies and digital currencies, restricted. Digital currencies, restricted is comprised of bitcoins held as collateral for term loan and revolving line of credit (“RLOC”) borrowings.
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Halving – The bitcoin blockchain and the cryptocurrency reward for solving a block is subject to periodic incremental halving. Halving is a process designed to control the overall supply and reduce the risk of inflation in cryptocurrencies using a Proof-of-Work consensus algorithm. At a predetermined block, the mining reward is cut in half, hence the term “Halving”. The last halving for bitcoin occurred on May 12, 2020. For example, the current fixed reward on the bitcoin network for solving a new block is six and one quarter (6.25) bitcoin per block, which decreased from twelve and a half (12.5) bitcoin per block in May 2020. It is estimated that the number of bitcoin per block will halve again in May 2024. Many factors influence the price of bitcoin and potential increases or decreases in prices in advance of or following a future halving is unknown.
Digital Currencies Held in Fund
On January 25, 2021, the Company entered into a limited partnership agreement with NYDIG Digital Assets Fund III, LP (“Fund”) wherein the Fund purchased 4,812.66 bitcoin in an aggregate purchase price of $150 million. The Company owned 100% of the limited partnership interests and consolidated the Fund under a voting interest model. The consolidated assets in the investment fund are included in current assets in the consolidated balance sheets under the caption “Digital currencies held in fund.”
The Fund qualified and operated as an investment company for accounting purposes pursuant to the accounting and reporting guidance under ASC 946, Financial Services – Investment Companies, which requires fair value measurement of the Fund’s investments in digital assets. The digital assets held by the Fund were traded on a number of active markets globally, including the over-the-counter market and digital asset exchanges. A fair value measurement under ASC 820 for an asset assumes that the asset is exchanged in an orderly transaction between market participants either in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset (ASC 820-10-35-5). The fair value of the assets within the Fund were measured daily based on pricing obtained from CoinDesk Bitcoin Price Index at approximately 4pm New York time. Any changes in the fair value of the assets were recorded in the Consolidated Statement of Operations under the caption “Realized and unrealized gains (losses) of digital currencies held in fund.”
On June 10, 2022, the Company redeemed 100% of its limited partnership interest in the Fund in exchange for approximately 4,768.5 bitcoin (with a fair market value of approximately $137.8 million). This bitcoin was transferred from the Fund’s custodial wallet to the Company’s digital wallet. Upon redemption, the Company no longer had a majority voting interest in the Fund and therefore deconsolidated the Fund in accordance with ASC 810 – Consolidation. The Company did not record any gain or loss upon deconsolidation as the digital assets in the Fund were measured at fair value. Subsequent to the transfer, the bitcoin transferred to the Company’s digital wallet has been accounted for at cost less impairment in line with its digital currencies measurement policy as described under Digital Currencies, Digital currencies, restricted and Digital currencies loaned. The activity in the Fund for the nine months ended September 30, 2022 and twelve months ended December 31, 2021 was as follows:
Investments
Investments, which may be made from time to time for strategic reasons (and not to engage in the business of investments) are included in non-current assets in the consolidated balance sheets. Investments are recorded at cost and the Company analyzes the value of investments on a quarterly basis. As part of the Company’s policy to maximize return on strategic investment opportunities, while preserving capital and limiting downside risk, the Company may at times enter into equity investments or Simple Agreements for Future Equity (“SAFE”) agreements. The nature and timing of the Company’s investments will depend on available capital at any particular time and the investment opportunities identified and available to the Company.
On December 21, 2021 and December 30, 2021, the Company entered into two separate SAFE agreements classified on the balance sheet as non-current assets. SAFE agreements are accounted for as equity securities without readily determinable fair value at cost minus impairment, as adjusted for observable price changes in orderly transactions for identical or similar investment of the same issue pursuant to Topic 321 Investments – Equity Securities (“ASC 321”).
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
On February 3, 2022, the Company invested approximately $10 million in convertible preferred stock of Compute North Holdings, Inc. The acquisition of convertible preferred stock was accounted for as investments in equity securities without readily determinable fair value at cost minus impairment, as adjusted for observable price changes in orderly transactions for identical or similar investment of the same issue pursuant to ASC 321. This investment was subject to an impairment of $10.0 million following Compute North’s Chapter 11 Bankruptcy filing in September 2022 (See Note 6).
On May 3, 2022, the Company converted $2.0 million from a SAFE investment into preferred stock while purchasing an additional $3.5 million of preferred stock in Auradine, Inc. along with entering into a commitment to acquire $30.0 million of additional shares of preferred stock. This forward contract was accounted for under ASC 321 as an equity security. On September 27, 2022, pursuant to the forward contract, the Company increased its investment in the preferred stock of Auradine, Inc. by $30.0 million, bringing its total carrying amount of investment in Auradine, Inc. preferred stock to $35.5 million with no noted impairments or other adjustments (See Note 11).
As of September 30, 2022, the Company has one remaining SAFE investment with a carrying value of $1.0 million, with no noted impairments or other adjustments.
Fair Value of Financial Instruments
The Company measures at fair value certain of its financial and non-financial assets and liabilities by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:
The carrying amounts reported in the consolidated balance sheet for cash, accounts receivable, accounts payable, and accrued expenses, approximate their estimated fair market value based on the short-term maturity of these instruments. The carrying value of notes payable and other long-term liabilities approximate fair value as the related interest rates approximate rates currently available to the Company.
Financial assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level of input that is significant to their fair value measurement. The Company measures the fair value of its marketable securities and investments by taking into consideration valuations obtained from third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs included reported trades and broker-dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities and other observable inputs.
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis and the Company’s estimated level within the fair value hierarchy of those assets and liabilities as of September 30, 2022 and December 31, 2021, respectively:
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
There were no transfers among Levels 1, 2 or 3 during the three and nine months ended September 30, 2022.
On June 10, 2022, the Company withdrew approximately 4,769 bitcoin from its investment in NYDIG Digital Assets Fund III, LP and transferred the bitcoin directly into the Company’s account. As a result, the Company will no longer receive “mark-to-market” accounting for the bitcoin formerly held in the Investment Fund and the 4,769 bitcoin will now be classified as “Digital currencies” on the balance sheet and subject to impairment analysis as an indefinite-lived intangible.
Net income per common share is calculated in accordance with ASC Topic 260: Earnings Per Share (“ASC 260”). Basic income per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. For the three and nine months ended September 30, 2022, respectively, the Company incurred a loss position and as such the computation of diluted net loss per share does not include dilutive common stock equivalents in the weighted average shares outstanding, as they would be anti-dilutive.
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REVENUES FROM CONTRACTS WITH CUSTOMERS |
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| Revenue from Contract with Customer [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| REVENUES FROM CONTRACTS WITH CUSTOMERS | NOTE 3 – REVENUES FROM CONTRACTS WITH CUSTOMERS
The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met:
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
The Company’s ongoing major or central operations is to use computing power to solve cryptographic algorithms to record and publish Bitcoin (“BTC”) transactions to blockchain ledgers or provide BTC transaction verification services to the BTC network (such activity, collectively, “mining”). In return for verifying transactions to be added as a new block to the network (i.e., successfully ‘solving’ a block), the Company is entitled to receive transaction fees and block rewards in the form of BTCs. Transaction fees are specified in each block of transactions request and are paid by the requester. The Bitcoin blockchain protocol itself currently issues a block reward for each solved block at a current rate of 6.25 BTC per block. Such reward is expected to be reduced to half of that in 2024. The Company also mines in a self-operated private pool, which was open to third-party pool participants from September 2021 until May 2022. The third-party pool participants employed the Company’s services as a pool operator in exchange for a pool fee paid to the Company. As a private pool operator, the Company facilitated the contribution of hash rate by third-party pool participants who choose to join or leave the pool at will.
Block rewards - The inflow of bitcoin as a result of receiving a block reward meets the definition of revenue because it gives the miner economic benefits from rendering services or carrying out its mining activities. Therefore, the Company may account for the block reward as revenue.
The Company determined it should recognize block rewards it receives from successfully solving a block as revenue from a contract with a customer (i.e. BTC network or pool operators) under FASB ASC 606. The customers under each type of revenue (Participant vs. Private pool participants) are further noted below. All relevant facts and circumstances, including the network’s protocols, were considered in determining (1) whether the Company has a contract with a customer under FASB ASC 606-10-25-2 and (2) whether its mining activities on the network meet all the criteria in FASB ASC 606-10-25-1.
Block rewards are the Company’s most significant source of revenue. Block rewards included in revenues on the statements of operations were approximately $12.5 million and $50.8 million, respectively for the three months ended September 30, 2022, and September 30, 2021. Block rewards included in revenues on the statements of operations were approximately $88.1 and $85.6 million for the nine months ended September 30, 2022 and September 30, 2021.
Transaction Fees - The transaction fees are specified in each transaction request and paid by the requester to the miner in exchange for the successful processing of the transaction. The requester meets the definition of a customer in FASB ASC 606 and pursuant to AICPA Practice Guide “Accounting for and Auditing Digital Assets” because it has contracted with the miner to obtain a service (successful mining) that is an output of the miner’s ordinary activities in exchange for consideration.
Transaction fees included in revenues on the statements of operations were approximately $0.2 million and $0.9 million, for the three months ended September 30, 2022 and September 30, 2021, respectively. Transaction fees included in revenues on the statements of operations were approximately $1.2 million and $4.6 million for the nine months ended September 30, 2022 and September 30, 2021, respectively.
Pool Fees - Pool fees earned by the Company as an operator of a private pool are recognized as revenue from contracts with customers in accordance with FASB ASC 606.
Pool fees included in revenues on the statements of operations were approximately zero and $0.05 million, respectively for the three months ended September 30, 2022 and September 30, 2021. Pool fees included in revenues on the statements of operations were approximately $0.3 million and $0.05 million, respectively for the nine months ended September 30, 2022 and September 30, 2021. As of May 2022, third party miners were no longer participating in the Company’s mining pool. As such, the Company ceased recognizing pool fees.
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The Company earns revenues as:
Participant
The Company has entered into contracts with third-party mining pool operators, whom the Company considers its customer under FASB ASC 606. The Company provides a service of computing power (i.e., generated hash rate) that is an output of the Company’s ordinary activities in exchange for consideration. These contracts are terminable at any time by either party and the Company’s enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. In exchange for providing computing power, the Company is entitled to consideration equal to a fractional share of the BTC reward (non-cash consideration, less any pool fees paid to the mining pool operator which are recorded as contra-revenues), for successfully adding a block to the blockchain. The Company’s fractional share of the block reward is based on the proportion of the Company’s contributed hash rate to the total computing power contributed by all mining pool participants in solving the current algorithm as calculated and determined by the pool operator, net of any pool fees.
The provision of computing power is the only performance obligation under our arrangements with the third-party mining pool operators. The transaction consideration the Company receives, is non-cash and variable in that the amount that it receives is dependent on the success of the mining pool regardless of whether any hash rate is contributed by the Company (the pool being the first to solve an algorithm). The non-cash consideration is measured at the estimated fair value of the contract inception. However, because it is not probable that a significant reversal of revenue will not occur, as the Company does not have visibility to exactly when a block is won and the pro rata share to which it is entitled (as it does when the Company is a participant in a privately operated pool where the Company is also the pool operator) all consideration is constrained until the Company receives confirmation of the consideration it earned, usually via the settlement of the block reward in the Company’s digital wallet, at which time revenue is recognized. The Company measures the non-cash consideration at the fair value on the date the block reward is received in the Company’s digital wallet when the contingency constraint on the transaction consideration is resolved, which is not materially different than the fair value at contract inception or the time the Company has earned the awards from the third-party mining pools. There is no significant financing component in these transactions.
Fair value of the digital asset award received is determined using the daily closing U.S. dollar spot rate of the related digital currency on the date received, which is not materially different than the fair value at contract inception.
Expenses associated with running the digital currency mining business, such as rent and electricity cost are recorded as cost of revenues. Depreciation on digital currency mining equipment is also recorded as a component of cost of revenues.
Private pool participant
The Company operates as a participant in its privately operated pool (“Marapool”). From September 2021 until May 2022, the Company operated as a participant in Marapool alongside third-party pool participants. The Company views the transaction requestor and the blockchain network as its customers under FASB ASC 606. The Company provides a service (successful mining) that is an output of the Company’s ordinary activities in exchange for consideration from the requester and the blockchain network (transaction fee and block reward, respectively). A contract with a customer exists at the point when the miner successfully validates a requesting customer’s transaction to the distributed ledger. At this point, the performance obligation has been satisfied (i.e., earned) in accordance with FASB ASC 606-10-25-30. Specifically, the inception of the contract and the point in time at which the consideration in that same contract is earned occurs simultaneously. Because of this, the additional criteria in FASB ASC 606-10-25-1 would be met as follows:
By successfully mining a block, the miner satisfies its performance obligation to the requester and network, thus, should recognize revenue at that point in time, which is the same point in time as contract inception. The transaction consideration the Company receives, is non-cash consideration paid in BTC, and is comprised of transaction fees and block rewards. The transaction consideration is variable in that the amount of block reward earned is based on the pro rata share of the computing power the Company contributes in relation to the total computing power contributed by the pool. The non-cash consideration is measured at its estimated fair value at contract inception - that is, the date that the criteria in FASB ASC 606-10-25-1 are met. The Company is able to apply an estimate to the variable transaction consideration without risk of significant revenue reversal as the Company has visibility to the computing power it provides for a given transaction, and the exact timing of when its privately operated pool successfully solves for a block (as compared to when the Company is a participant in a third-party operated pool as discussed above). As the Company can estimate its pro rata share of block rewards and transaction fees prior to the receipt of the rewards in their digital wallet, the Company measures the non-cash consideration at the fair value when block reward and transaction fee are earned, which is the same point in time as contract inception.
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Fair value of the digital asset award received is determined using the daily closing U.S. dollar spot rate of the related digital currency on the date the block reward and transaction fees are earned, which is not materially different than the fair value at contract inception, or the time the Company has earned the award from the requester and network. There is no significant financing component in these transactions.
Expenses associated with running the digital currency mining business, such as rent and electricity cost are recorded as cost of revenues. Depreciation on digital currency mining equipment is also recorded as a component of cost of revenues.
Operator
From September 2021 until May 2022, the Company entered into pool service contracts with third-party mining pool participants, whom the Company considered to be a customer under FASB ASC 606. In these contracts, the Company provided a facilitator service to connect miners to the blockchain network and to track hash rate generated by each pool participant in exchange for non-cash consideration equal to a percentage of the block reward and transaction fee earned by the individual pool participants as pool fees. These contracts were terminable at any time by either party and the Company’s enforceable right to compensation only began when the Company provided the facilitator services and access to the pool’s software licenses to the pool participants.
The Company’s performance obligations under the arrangement with third-party pool participants were to provide access to the pool’s software license and track the hash rate generated by each pool participant to enable calculation of the pro rata block reward and transaction fee payment to each pool participant. The transaction consideration the Company received is non-cash and variable in that the pool fees earned is based on the block reward and transaction fees earned by pool participants. The non-cash consideration is measured at the estimated fair value of the contract inception, which occurs simultaneously to when the Company has earned the pool fees (i.e., upon successful mining of a block). The Company is able to estimate variable consideration at the point in time it has earned the fees without risk of significant revenue reversal as the Company has visibility to the exact timing of when the pool successfully solves for a block as pool operator (as compared to when the Company is a participant in a third-party operated pool) and the block rewards and transaction fees each pool participant is entitled to base on contributed hash rate. As the Company can estimate the amount of pool fees prior to the receipt of the fees in the pool’s digital wallet, the Company measures the non-cash consideration at the fair value on the date the pool fees are earned (using the stated convention below), which occurs simultaneously to contract inception.
Fair value of the digital asset award received is determined using the daily closing U.S. dollar spot rate of the related digital currency on the date the pool fees are earned, which is not materially different than the fair value at contract inception which occurs simultaneously to the time the pool participants have earned the award from the requester and network. There is no significant financing component in these transactions.
Fees associated with the licensed software used in the operation of the private pool are recorded as cost of revenues.
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ADVANCES TO VENDORS AND DEPOSITS |
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Sep. 30, 2022 | |
| Advances To Vendors And Deposits | |
| ADVANCES TO VENDORS AND DEPOSITS | NOTE 4 – ADVANCES TO VENDORS AND DEPOSITS
The Company contracts with bitcoin mining equipment manufacturers in procuring equipment necessary for the operation of its bitcoin mining operations. A typical agreement calls for a certain percentage of the total order to be paid in advance at specific intervals, usually within several days of execution of a specific contract and periodically thereafter with final payments due prior to each shipment date. We account for these payments as Advances to vendors on the balance sheet.
As of September 30, 2022 and December 31, 2021, such advances totaled approximately $687.8 million and $466.3 million, respectively.
In addition, the Company contracts with other service providers for hosting of its equipment and operational support in data centers where the company’s equipment is deployed. These arrangements also call for advance payments to be made to vendors in conjunction with the contractual obligations associated with these services. We classify these payments as Deposits on the balance sheet.
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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PROPERTY AND EQUIPMENT |
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| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| PROPERTY AND EQUIPMENT | NOTE 5 – PROPERTY AND EQUIPMENT
The components of property and equipment as of September 30, 2022 and December 31, 2021 are:
The Company’s depreciation expense related to property and equipment for the three months ended September 30, 2022 and September 30, 2021 was $26.3 million and $4.3 million, respectively. The Company’s depreciation expense related to property and equipment for the nine months ended September 30, 2022 and September 30, 2021 was $64.9 million and $8.0 million, respectively.
Amortization expense for the three months ended September 30, 2022 and September 30, 2021 was $11 thousand and $18 thousand, respectively. Amortization expense for the nine months ended September 30, 2022 and September 30, 2021 was $32 thousand and $54 thousand, respectively.
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COMPUTE NORTH BANKRUPTCY |
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| Compute North Bankruptcy | |||||||
| COMPUTE NORTH BANKRUPTCY | NOTE 6 – COMPUTE NORTH BANKRUPTCY
On September 22, 2022, Compute North Holdings, Inc. (along with its affiliated debtors, collectively, “Compute North”), filed for chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of Texas under Chapter 11 of the U.S. Bankruptcy Code (11 U.S. Code section 101 et seq.). Marathon’s financial exposure to Compute North at the time of the bankruptcy filing included:
The Company assessed this financial exposure and recorded an impairment of the Convertible Preferred Stock, the unsecured Senior Promissory note and certain deposits totaling $39 million during the three months ended September 30, 2022. The ultimate outcome of the bankruptcy process, and its impact on the remaining deposits held by the Company, remains to be determined. The Company has engaged creditor’s counsel and is vigorously defending and protecting its various assets at the Compute North facilities as well as minimizing its long-term financial exposure with regard to Compute North.
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LEGAL RESERVES |
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Sep. 30, 2022 | |
| Commitments and Contingencies Disclosure [Abstract] | |
| LEGAL RESERVES | NOTE 7 – LEGAL RESERVES
During the three months ended September 30, 2022, the Company recorded a $25 million legal reserve related to the fair value of certain stock grants used for personal income tax reporting purposes during 2021. The majority of this reserve was related to a claim made by the Company’s former Chairman and CEO. In working on this initial claim, the Company discovered that five other individuals were also impacted by the same issue, including one current board member and the current Chairman and CEO. The total amount of this portion of the reserve amounted to less than $1 million. Legal settlements that were accrued but remained unpaid as of September 30, 2022 were classified as “legal reserve payable”. All of these legal settlements were finalized and paid as of October 15, 2022.
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STOCKHOLDERS’ EQUITY |
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| Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| STOCKHOLDERS’ EQUITY | NOTE 8 – STOCKHOLDERS’ EQUITY
Common Stock
Shelf Registration Statements on Form S-3 and At-The-Market Offering Agreements
On February 11, 2022, the Company entered into an At-The-Market Offering Agreement, or sales agreement, with H.C. Wainwright & Co., LLC (“Wainwright”) relating to shares of its common stock. In accordance with the terms of the sales agreement, the Company may offer and sell shares of our common stock having an aggregate offering price of up to $750 million from time to time through Wainwright acting as its sales agent. As of September 30, 2022, the Company had sold shares of common stock for an aggregate purchase price of $198.7 million net of offering costs pursuant to this At-The-Market Offering Agreement.
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Series B Convertible Preferred Stock
As of September 30, 2022, there were shares of Series B Convertible Preferred Stock outstanding.
Series E Preferred Stock
As of September 30, 2022, there were shares of Series E Convertible Preferred Stock outstanding.
Common Stock Warrants
A summary of the Company’s issued and outstanding stock warrants and changes during the nine months ended September 30, 2022 is as follows:
Common Stock Options
As of September 30, 2022 and December 31, 2021, there were stock options outstanding.
Restricted Stock
Restricted Stock Units
During the third quarter of 2022, the Compensation Committee issued grants that will vest over the next and result in total stock compensation expense of approximately $million.
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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DEBT |
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| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
| DEBT | NOTE 9 – DEBT
On November 18, 2021, the Company issued $650 million principal amount of its 1.00% Convertible Senior Notes due 2026 (the “Notes”). The Notes were issued pursuant to, and are governed by, an indenture dated as of November 18, 2021, between the Company and U.S. Bank National Association, as trustee. Pursuant to the purchase agreement between the Company and the initial purchasers of the Notes, the Company also granted the initial purchasers an option to purchase up to an additional $97.5 million principal amount of Notes. This option was exercised and an additional $97.5 million principal amount of Notes were issued on November 23, 2021. As of September 30, 2022 and December 31, 2021, notes outstanding, net of unamortized discounts of approximately $16.2 million and $19.1 million, respectively, were $731.3 million and $728.4 million, respectively.
On July 28, 2022, the Company entered into a Revolving Credit and Security Agreement (the “Agreement” or “RLOC”) with Silvergate Bank (the “Bank”) pursuant to which Silvergate has agreed to loan the Company up to $100 million on a revolving basis pursuant to the terms of the Agreement. This facility refinanced and replaced an existing $100 million facility the Company had in place with the Bank. On the same date the Company also entered into a $100 million principal term loan facility (the “Term Loan”). The terms of the facilities set forth in the RLOC and the Term Loan are as follows:
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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LEASES, COMMITMENTS AND CONTINGENCIES |
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| Leases Commitments And Contingencies | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| LEASES, COMMITMENTS AND CONTINGENCIES | NOTE 10 – LEASES, COMMITMENTS AND CONTINGENCIES
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), and has since issued amendments thereto, related to the accounting for leases (collectively referred to as “ASC 842”). ASC 842 establishes a right-of-use, or ROU model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Effective January 1, 2019, the Company adopted ASU 842. The Company determines if an arrangement contains a lease at inception based on whether or not the Company has the right to control the asset during the contract period and other facts and circumstances.
The Company leases office space in the United States under operating lease agreements. Office space is the Company’s only material underlying asset class under operating lease agreements. The Company has no material finance leases.
Effective June 1, 2018, the Company rented its corporate office at 1180 North Town Center Drive, Suite 100, Las Vegas, Nevada 89144, on a month-to-month basis.
Effective February 14, 2022, the Company rented an office located at Tower 101, 101 NE Third Avenue, Fort Lauderdale, Florida, 33301, for a term of 63 months.
Effective March 1, 2022, the Company rented an office located at 300 Spectrum Center Drive, Irvine CA, 92618, for a term of 24 months.
Effective May 1, 2022, the Company rented warehouse space located at 3306 5th Street SE, East Wenatchee, Washington, 98802, for a term of 24 months.
Effective September 21, 2022, the Company rented warehouse space located at 512 N. Douglas Ave., Oklahoma City, OK, 73106, for a term of 36 months.
As of September 30, 2022, the Company’s right-of-use (“ROU”) assets and total lease liabilities were $1.4 million and $1.1 million, respectively for leases in the United States. As of December 31, 2021, the Company’s ROU assets and total lease liabilities were nil. The Company has made payments and amortized the right-of-use assets totaling $29 thousand and $48 thousand, respectively, for the three- and nine-month periods ending September 30, 2022.
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Operation lease costs are recorded on a straight-line basis within operating expenses. The Company’s total lease expense is comprised of the following:
Additional information regarding the Company’s leasing activities as a lessee is as follow:
As of September 30, 2022, contractual minimum lease payments are as follows for the next five years.
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Legal Proceedings
Ho Matter
On January 14, 2021, Plaintiff Michael Ho (“Plaintiff” or “Ho”) filed a Civil Complaint for Damages and Restitution (“Complaint”) against the Company and 10 Doe Defendants. The Complaint alleges six causes of action against the Company, (1) Breach of Written Contract; (2) Breach of Implied Contract; (3) Quasi-Contract; (4) Services Rendered; (5) Intentional Interference with Prospective Economic Relations; and (6) Negligent Interference with Prospective Economic Relations, which is the one plead against “all Defendants” and is most likely to involve later named defendants. The claims arise from the same set of facts, Ho alleges that the Company profited from commercially sensitive information he shared with the Company and then it refused to compensate him for his role in securing the acquisition of a supplier of energy for the Company. On February 22, 2021, the Company responded to Mr. Ho’s Complaint with a general denial and the assertion of applicable affirmative defenses. Then, on February 25, 2021, the Company removed the action to the United States District Court in the Central District of California, where the action remains pending. The Company filed a motion for summary judgment/adjudication of all causes of action. On February 11, 2022, the Court granted the motion and dismissed Ho’s 2nd, 5th and 6th causes of action. Discovery is substantially closed. The Court held a pre-trial conference on February 24, 2022, where it vacated the March 3, 2022 trial date and ordered the parties to meet and confer on a new trial date. The Court discussed the various theories of damages maintained by the parties. In its ruling on the summary judgment motion and at the pre-trial conference on February 24, 2022, the Court noted that a jury is more likely to accept $150,000 as an appropriate damages amount if liability is found, as opposed to the various theories espoused by Ho that result in multi-million-dollar recoveries. Due to outstanding issues of fact and law, it is impossible to predict the outcome at this time; however, after consulting legal counsel, the Company is confident that it will prevail in this litigation, since it did not have a contract with Mr. Ho and he did not disclose any commercially sensitive information under any mutual nondisclosure agreement that was used to structure any joint venture with energy providers. Trial is set to begin in February 2023.
Information Subpoena
On October 6, 2020, the Company entered into a series of agreements with multiple parties to design and build a data center for up to 100-megawatts in Hardin, MT. In conjunction therewith, the Company filed a Current Report on Form 8-K on October 13, 2020. The 8-K disclosed that, pursuant to a Data Facility Services Agreement, the Company issued shares of restricted Common Stock, in transactions exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. During the quarter ended September 30, 2021, the Company and certain of its executives received a subpoena to produce documents and communications concerning the Hardin, Montana data center facility described in our Form 8-K dated October 13, 2020. We understand that the SEC may be investigating whether or not there may have been any violations of the federal securities law. We are cooperating with the SEC.
Putative Class Action Complaint
On December 17, 2021, a putative class action complaint was filed in the United States District Court for the District of Nevada, against the Company and present and former senior management. The complaint alleges securities fraud related to the disclosure of an SEC investigation previously made by the Company on November 15, 2021. Plaintiff Tad Schlatre served the complaint on the Company on March 1, 2022. On September 12, 2022, the court appointed Carlos Marina as lead plaintiff. On October 21, 2022, lead plaintiff voluntarily dismissed the complaint without prejudice.
Derivative Complaints
On February 18, 2022, a shareholder derivative complaint was filed in the United States District Court for the District of Nevada, against current and former members of the Company’s board of directors and senior management. The complaint is based on allegations substantially similar to the allegations in the December 2021 putative class action complaint, related to the Company’s disclosure of an SEC investigation previously made by the Company on November 15, 2021. On March 4, 2022, the complaint was served on the Company. On April 4, 2022, the defendants moved to dismiss the complaint.
On May 5, 2022, a second shareholder derivative complaint was filed in the United States District Court for the District of Nevada, against current and former members of the Company’s board of directors and senior management. The second shareholder derivative complaint is based on allegations substantially similar to the allegations in the February 18, 2022 derivative complaint. On May 11, 2022, the defendants moved to dismiss the second shareholder derivative complaint.
On June 1, 2022, the Court entered an order consolidating the two derivative actions. A June 13, 2022 scheduling order provides for plaintiffs to file a consolidated complaint and for renewed motions to dismiss the consolidated shareholder derivative complaint. The consolidated complaint has not yet been filed.
In the opinion of management, after consulting legal counsel, the ultimate disposition of these matters will not have a material adverse effect on the Company and its related entities combined financial position, results of operations, or liquidity.
Compute North Bankruptcy
On September 22, 2022, Compute North filed for chapter 11 bankruptcy protection. Compute North provides operating services to the Company and hosts our equipment in multiple facilities. We deliver miners to Compute North, which then installs the equipment in several facilities, operates and maintains the equipment, and provides energy to keep the miners operating. In chapter 11, Compute North is currently seeking to sell substantially all of its assets, including its direct and indirect ownership interests in the facilities that house the Company’s miners. Compute North may also seek to assume and assign the Compute North agreements to which the Company is party to one or more third-party purchasers of Compute North’s assets or it may seek to reject such agreements. Accordingly, Compute North’s chapter 11 cases could cause a disruption in services provided by Compute North to us and, therefore, could have an adverse effect on our operations in the facilities managed by Compute North.
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
At this stage of Compute North’s chapter 11 cases, it is difficult to predict whether Marathon will receive any meaningful recovery on account of its claims.
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RELATED PARTY MATTERS |
9 Months Ended |
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Sep. 30, 2022 | |
| Related Party Transactions [Abstract] | |
| RELATED PARTY MATTERS | NOTE 11 – RELATED PARTY MATTERS
On September 23, 2022, the Company made an incremental $30 million investment in Auradine, Inc., bringing its total holdings in Auradine to $35.5 million based upon a previously issued and disclosed SAFE instrument. Said Ouissal, a director of the Company, owns approximately % of the issued and outstanding shares of Auradine, and Fred Thiel, the Company’s Chairman and CEO, sits on Auradine’s Board of Directors. On November 3, 2022, the Company’s Board met and determined that Said Ouissal is no longer deemed to be an independent director of the Company. As a result, Mr. Ouissal stepped down from the Audit and Compensation Committees.
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REVISION OF CERTAIN PRIOR PERIOD AMOUNTS |
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| REVISION OF CERTAIN PRIOR PERIOD AMOUNTS | NOTE 12 –REVISION OF CERTAIN PRIOR PERIOD AMOUNTS
We have revised amounts reported in previously issued financial statements for the periods presented in this Quarterly report on Form 10-Q related to an immaterial error. The error relates to the non-consolidation of an investment fund as described below. We evaluated the aggregate effects of the errors to our previously issued financial statements in accordance with SEC Staff Accounting Bulletins No. 99 and No. 108 and, based upon quantitative and qualitative factors, determined that the errors were not material to the previously issued financial statements and disclosures included in our Annual Reports on Form 10-K for the years ended December 31, 2021, or for any quarterly periods included therein or through our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022.
On January 25, 2021, the Company entered into a limited partnership agreement with NYDIG Digital Assets Fund III, LP (“Fund”) whereas the Fund purchased approximately 4,812.66 bitcoin at an aggregate purchase price of $150 million. On June 10, 2022 the company withdrew approximately 4,768.5 bitcoin from the investment fund and the Fund was subsequently terminated. During the period of time when the company held its investment in the Fund, it accounted for the results of the Fund, in their entirety, as a single line item on the balance sheet (“Digital currencies held in fund”), statements of operations and statements of cash flows (“Change in fair value of digital currencies held in fund”). Subsequent to the termination of the Fund, the Company concluded that this accounting was incorrect and that it must consolidate the Fund, showing any assets, liabilities and expenses of the Fund as separate components of its financial statements.
The correction of this error has resulted in revisions to certain line items on the balance sheet as of December 31, 2021, the statements of operations for the three and nine months ended September 30, 2021, and the statement of cash flows for the nine-month period ended September 30, 2021. A reconciliation of the various financial statement captions that have been revised from the previous period presentation follows:
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SUBSEQUENT EVENTS |
9 Months Ended |
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Sep. 30, 2022 | |
| Subsequent Events [Abstract] | |
| SUBSEQUENT EVENTS | NOTE 13 – SUBSEQUENT EVENTS
During October 2022, the Company borrowed an additional $50 million under its RLOC facility for general corporate purposes and provided an additional 3,993 bitcoin as collateral for this borrowing. This increased the Company’s collateral balance to 7,821 bitcoin. On November 9, 2022, bitcoin prices declined to a new yearly low on concerns of financial instability in the crypto industry. As a result, the Company was required to provide an additional 1,669 bitcoin (valued at $16,212.50 per bitcoin) as collateral for its $50 million RLOC and $50 million term loan borrowings, bringing its total collateral balance to 9,490 bitcoin (approximately $153.9 million). The Company’s total bitcoin holdings as of November 9, 2022, are approximately 11,440 bitcoin, of which 1,950 (approximately $31.6 million) are unrestricted. Given the uncertainty around bitcoin prices in the near-term, the Company has decided to delay previously announced plans to refinance the RLOC with a term loan during the month of November. This enables the Company to retain the optionality to repay the RLOC borrowings in the near-term versus committing to a two-year term loan borrowing which would carry prepayment penalties. The Company retains an option to draw an additional $50 million on the term loan through April of 2023.
The Company has evaluated other subsequent events through the date the consolidated financial statements were available to be issued and has concluded that no such events or transactions took place that would require disclosure except as disclosed above and in Note 6 – Compute North Bankruptcy, Note 7 – Legal Reserves and Note 11 – Related Party matters. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
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| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basis of Presentation and Principles of Consolidation | Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated condensed financial statements, including the accounts of the Company’s subsidiaries, Marathon Crypto Mining, Inc., Crypto Currency Patent Holding Company and Soems Acquisition Corp. have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations. These consolidated condensed financial statements reflect all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position, the results of operations and cash flows of the Company for the periods presented. It is suggested that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s most recent Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year ended December 31, 2022.
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| Reclassifications | Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications have no effect on the reported financial position, results of operations, or cash flows. Previously reported compensation and related taxes, consulting fees, and professional fees have now been reclassified within general and administrative expenses. In addition, previously reported change in fair value of warrant liability, realized gain on sale of digital currencies and interest income have now been reclassified as other non-operating income.
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| Use of Estimates and Assumptions | Use of Estimates and Assumptions
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made by management include, but are not limited to, estimating the useful lives of fixed assets, the assumptions used to calculate fair value of options granted, realization of long-lived assets, deferred income taxes, unrealized tax positions and the realization of digital currencies.
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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| Restricted Cash | Restricted Cash
Restricted cash principally represents those cash balances that support commercial letters of credit and are restricted from withdrawal. The following table provides a reconciliation of the total cash, cash equivalents and restricted cash reported on the Condensed Consolidated Balance Sheets to the corresponding amounts reported on the Condensed Consolidated Statements of Cash Flows.
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| Digital Currencies, Digital currencies, restricted and Digital currencies loaned | Digital Currencies, Digital currencies, restricted and Digital currencies loaned
Digital currencies, and Digital currencies loaned are included in current assets in the consolidated balance sheets. Digital currencies are recorded as indefinite lived intangibles at cost less impairment in accordance with FASB ASC 350 – Intangibles-Goodwill and Other. Digital currencies, restricted represent collateral for long-term loans and as such are classified as a non-current asset.
An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. When the exchange-traded price of digital currencies declines below its carrying value, the Company has determined that it is more likely than not that an impairment exists. When this occurs, the amount of impairment to record is determined based on the fair value of digital currencies in accordance with the fair value measurement framework in FASB ASC 820 – Fair Value Measurement “(ASC 820”). If the fair value of digital currency is lower than its carrying amount, the Company will record an impairment in an amount by which the carrying value exceeds the fair value of the digital currency. Subsequent reversal of impairment losses is not permitted.
The following table presents the activities of the digital currencies for the nine months ended September 30, 2022:
At September 30, 2022, the Company held approximately 10,670 bitcoin with a carrying value of $197.2 million. The bitcoin were classified on the balance sheet as digital currencies (6,842 bitcoin or approximately $126.4 million carrying value) and digital currencies, restricted (3,828 bitcoin or approximately $70.8 million carrying value). At September 30, 2022, the fair market value of the Company’s bitcoin holdings was approximately $207.3 million, including digital currencies and digital currencies, restricted. Digital currencies, restricted is comprised of bitcoins held as collateral for term loan and revolving line of credit (“RLOC”) borrowings.
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Halving – The bitcoin blockchain and the cryptocurrency reward for solving a block is subject to periodic incremental halving. Halving is a process designed to control the overall supply and reduce the risk of inflation in cryptocurrencies using a Proof-of-Work consensus algorithm. At a predetermined block, the mining reward is cut in half, hence the term “Halving”. The last halving for bitcoin occurred on May 12, 2020. For example, the current fixed reward on the bitcoin network for solving a new block is six and one quarter (6.25) bitcoin per block, which decreased from twelve and a half (12.5) bitcoin per block in May 2020. It is estimated that the number of bitcoin per block will halve again in May 2024. Many factors influence the price of bitcoin and potential increases or decreases in prices in advance of or following a future halving is unknown.
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| Digital Currencies Held in Fund | Digital Currencies Held in Fund
On January 25, 2021, the Company entered into a limited partnership agreement with NYDIG Digital Assets Fund III, LP (“Fund”) wherein the Fund purchased 4,812.66 bitcoin in an aggregate purchase price of $150 million. The Company owned 100% of the limited partnership interests and consolidated the Fund under a voting interest model. The consolidated assets in the investment fund are included in current assets in the consolidated balance sheets under the caption “Digital currencies held in fund.”
The Fund qualified and operated as an investment company for accounting purposes pursuant to the accounting and reporting guidance under ASC 946, Financial Services – Investment Companies, which requires fair value measurement of the Fund’s investments in digital assets. The digital assets held by the Fund were traded on a number of active markets globally, including the over-the-counter market and digital asset exchanges. A fair value measurement under ASC 820 for an asset assumes that the asset is exchanged in an orderly transaction between market participants either in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset (ASC 820-10-35-5). The fair value of the assets within the Fund were measured daily based on pricing obtained from CoinDesk Bitcoin Price Index at approximately 4pm New York time. Any changes in the fair value of the assets were recorded in the Consolidated Statement of Operations under the caption “Realized and unrealized gains (losses) of digital currencies held in fund.”
On June 10, 2022, the Company redeemed 100% of its limited partnership interest in the Fund in exchange for approximately 4,768.5 bitcoin (with a fair market value of approximately $137.8 million). This bitcoin was transferred from the Fund’s custodial wallet to the Company’s digital wallet. Upon redemption, the Company no longer had a majority voting interest in the Fund and therefore deconsolidated the Fund in accordance with ASC 810 – Consolidation. The Company did not record any gain or loss upon deconsolidation as the digital assets in the Fund were measured at fair value. Subsequent to the transfer, the bitcoin transferred to the Company’s digital wallet has been accounted for at cost less impairment in line with its digital currencies measurement policy as described under Digital Currencies, Digital currencies, restricted and Digital currencies loaned. The activity in the Fund for the nine months ended September 30, 2022 and twelve months ended December 31, 2021 was as follows:
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| Investments | Investments
Investments, which may be made from time to time for strategic reasons (and not to engage in the business of investments) are included in non-current assets in the consolidated balance sheets. Investments are recorded at cost and the Company analyzes the value of investments on a quarterly basis. As part of the Company’s policy to maximize return on strategic investment opportunities, while preserving capital and limiting downside risk, the Company may at times enter into equity investments or Simple Agreements for Future Equity (“SAFE”) agreements. The nature and timing of the Company’s investments will depend on available capital at any particular time and the investment opportunities identified and available to the Company.
On December 21, 2021 and December 30, 2021, the Company entered into two separate SAFE agreements classified on the balance sheet as non-current assets. SAFE agreements are accounted for as equity securities without readily determinable fair value at cost minus impairment, as adjusted for observable price changes in orderly transactions for identical or similar investment of the same issue pursuant to Topic 321 Investments – Equity Securities (“ASC 321”).
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
On February 3, 2022, the Company invested approximately $10 million in convertible preferred stock of Compute North Holdings, Inc. The acquisition of convertible preferred stock was accounted for as investments in equity securities without readily determinable fair value at cost minus impairment, as adjusted for observable price changes in orderly transactions for identical or similar investment of the same issue pursuant to ASC 321. This investment was subject to an impairment of $10.0 million following Compute North’s Chapter 11 Bankruptcy filing in September 2022 (See Note 6).
On May 3, 2022, the Company converted $2.0 million from a SAFE investment into preferred stock while purchasing an additional $3.5 million of preferred stock in Auradine, Inc. along with entering into a commitment to acquire $30.0 million of additional shares of preferred stock. This forward contract was accounted for under ASC 321 as an equity security. On September 27, 2022, pursuant to the forward contract, the Company increased its investment in the preferred stock of Auradine, Inc. by $30.0 million, bringing its total carrying amount of investment in Auradine, Inc. preferred stock to $35.5 million with no noted impairments or other adjustments (See Note 11).
As of September 30, 2022, the Company has one remaining SAFE investment with a carrying value of $1.0 million, with no noted impairments or other adjustments.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value of Financial Instruments | Fair Value of Financial Instruments
The Company measures at fair value certain of its financial and non-financial assets and liabilities by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:
The carrying amounts reported in the consolidated balance sheet for cash, accounts receivable, accounts payable, and accrued expenses, approximate their estimated fair market value based on the short-term maturity of these instruments. The carrying value of notes payable and other long-term liabilities approximate fair value as the related interest rates approximate rates currently available to the Company.
Financial assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level of input that is significant to their fair value measurement. The Company measures the fair value of its marketable securities and investments by taking into consideration valuations obtained from third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs included reported trades and broker-dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities and other observable inputs.
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis and the Company’s estimated level within the fair value hierarchy of those assets and liabilities as of September 30, 2022 and December 31, 2021, respectively:
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
There were no transfers among Levels 1, 2 or 3 during the three and nine months ended September 30, 2022.
On June 10, 2022, the Company withdrew approximately 4,769 bitcoin from its investment in NYDIG Digital Assets Fund III, LP and transferred the bitcoin directly into the Company’s account. As a result, the Company will no longer receive “mark-to-market” accounting for the bitcoin formerly held in the Investment Fund and the 4,769 bitcoin will now be classified as “Digital currencies” on the balance sheet and subject to impairment analysis as an indefinite-lived intangible.
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| Net Income and Basic and Diluted Net Income per Share |
Net income per common share is calculated in accordance with ASC Topic 260: Earnings Per Share (“ASC 260”). Basic income per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. For the three and nine months ended September 30, 2022, respectively, the Company incurred a loss position and as such the computation of diluted net loss per share does not include dilutive common stock equivalents in the weighted average shares outstanding, as they would be anti-dilutive.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF RESTRICTED CASH |
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| SCHEDULE OF ACTIVITIES OF DIGITAL CURRENCIES | The following table presents the activities of the digital currencies for the nine months ended September 30, 2022:
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| SCHEDULE OF DIGITAL CURRENCIES HELD IN FUND |
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| SCHEDULE OF ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON RECURRING BASIS | The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis and the Company’s estimated level within the fair value hierarchy of those assets and liabilities as of September 30, 2022 and December 31, 2021, respectively:
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| SCHEDULE OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE |
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| SCHEDULE OF COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE |
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PROPERTY AND EQUIPMENT (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF COMPONENTS OF PROPERTY, EQUIPMENT | The components of property and equipment as of September 30, 2022 and December 31, 2021 are:
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STOCKHOLDERS’ EQUITY (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SUMMARY OF OUTSTANDING STOCK WARRANTS | A summary of the Company’s issued and outstanding stock warrants and changes during the nine months ended September 30, 2022 is as follows:
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| SUMMARY OF RESTRICTED STOCK AWARD ACTIVITY |
Restricted Stock Units
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LEASES, COMMITMENTS AND CONTINGENCIES (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Leases Commitments And Contingencies | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF COMPONENTS OF LEASE COST | Operation lease costs are recorded on a straight-line basis within operating expenses. The Company’s total lease expense is comprised of the following:
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| SUMMARY OF MINIMUM LEASE PAYMENTS | Additional information regarding the Company’s leasing activities as a lessee is as follow:
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| SCHEDULE OF CONTRACTUAL MINIMUM LEASE | As of September 30, 2022, contractual minimum lease payments are as follows for the next five years.
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REVISION OF CERTAIN PRIOR PERIOD AMOUNTS (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Changes and Error Corrections [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF RESTATEMENTS AND RECLASSIFICATIONS |
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SCHEDULE OF RESTRICTED CASH (Details) - USD ($) |
Sep. 30, 2022 |
Dec. 31, 2021 |
Sep. 30, 2021 |
|---|---|---|---|
| Accounting Policies [Abstract] | |||
| Cash and cash equivalents | $ 55,339,400 | $ 32,854,092 | |
| Restricted cash | 8,800,000 | ||
| Cash, cash equivalents and restricted cash | $ 64,139,400 | $ 32,854,092 |
SCHEDULE OF ACTIVITIES OF DIGITAL CURRENCIES (Details) - USD ($) |
9 Months Ended | ||||
|---|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
||||
| Accounting Policies [Abstract] | |||||
| Digital currencies, Digital currencies, restricted and Digital currencies loaned, Beginning balance | $ 123,243,264 | [1] | $ 2,271,656 | ||
| Additions of digital currencies | 89,140,088 | 90,182,155 | |||
| Digital currencies transferred from fund | 137,843,761 | ||||
| Disposal of digital currency for charitable contribution | (20,297) | ||||
| Impairment of digital currencies | (153,045,376) | (18,472,750) | |||
| Digital currencies, Digital currencies, restricted and Digital currencies loaned, Ending balance | $ 197,161,440 | 73,931,594 | |||
| Interest received on digital currencies, restricted | 5,962 | ||||
| Sale of digital currencies, net | $ (55,429) | ||||
| |||||
SCHEDULE OF ACTIVITIES OF DIGITAL CURRENCIES (Details) (Parenthetical) |
9 Months Ended |
|---|---|
|
Sep. 30, 2022
USD ($)
Bitcoin
| |
| Accounting Policies [Abstract] | |
| Digital currencies loan bitcoin | Bitcoin | 600 |
| Digital currencies loan | $ | $ 20,437,284 |
SCHEDULE OF ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON RECURRING BASIS (Details) - USD ($) |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Defined Benefit Plan Disclosure [Line Items] | ||
| Money Market Accounts | $ 51,468,288 | $ 266,635,158 |
| Previously Reported [Member] | ||
| Defined Benefit Plan Disclosure [Line Items] | ||
| Investment Fund | 223,915,761 | |
| Fair Value, Inputs, Level 1 [Member] | ||
| Defined Benefit Plan Disclosure [Line Items] | ||
| Money Market Accounts | 51,468,288 | 266,635,158 |
| Fair Value, Inputs, Level 1 [Member] | Previously Reported [Member] | ||
| Defined Benefit Plan Disclosure [Line Items] | ||
| Investment Fund | ||
| Fair Value, Inputs, Level 2 [Member] | ||
| Defined Benefit Plan Disclosure [Line Items] | ||
| Money Market Accounts | ||
| Fair Value, Inputs, Level 2 [Member] | Previously Reported [Member] | ||
| Defined Benefit Plan Disclosure [Line Items] | ||
| Investment Fund | 223,915,761 | |
| Fair Value, Inputs, Level 3 [Member] | ||
| Defined Benefit Plan Disclosure [Line Items] | ||
| Money Market Accounts | ||
| Fair Value, Inputs, Level 3 [Member] | Previously Reported [Member] | ||
| Defined Benefit Plan Disclosure [Line Items] | ||
| Investment Fund |
SCHEDULE OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE (Details) - shares |
9 Months Ended | |
|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Total | 11,250,462 | 634,136 |
| Warrants to Purchase Common Stock [Member] | ||
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Total | 324,375 | 457,837 |
| Restricted Stock [Member] | ||
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Total | 1,113,132 | 95,179 |
| Options to Purchase Common Stock [Member] | ||
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Total | 81,120 | |
| Convertible Debt Securities [Member] | ||
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Total | 9,812,955 | |
SCHEDULE OF COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Accounting Policies [Abstract] | ||||
| Net loss attributable to common shareholders | $ (75,444,407) | $ (22,172,567) | $ (280,027,638) | $ (47,700,445) |
| Denominator: | ||||
| Weighted average common shares - basic and diluted | 116,533,816 | 100,803,809 | 109,492,865 | 98,230,795 |
| Loss per common share - basic and diluted | $ (0.65) | $ (0.22) | $ (2.56) | $ (0.49) |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) |
9 Months Ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
|
Sep. 22, 2022
USD ($)
|
Jun. 10, 2022
USD ($)
|
Jun. 10, 2022
Bitcoin
|
May 03, 2022
USD ($)
|
Feb. 23, 2022
USD ($)
|
Jan. 25, 2021
USD ($)
Bitcoin
|
Sep. 30, 2022
USD ($)
Bitcoin
|
Sep. 27, 2022
USD ($)
|
Sep. 23, 2022
USD ($)
|
Feb. 03, 2022
USD ($)
|
Dec. 31, 2021
USD ($)
|
|
| Purchae of bitcoins | Bitcoin | 10,670 | ||||||||||
| Aggregate purchase price | $ 197,200,000 | ||||||||||
| Digital currencies | Bitcoin | 6,842 | ||||||||||
| Digital currencies, carrying value | $ 126,418,098 | $ 102,805,980 | |||||||||
| Fair value of digital currecies and restricted digital currecies | 207,300,000 | ||||||||||
| Fair market value of digital currencies | $ 137,800,000 | ||||||||||
| Investment | $ 36,999,994 | $ 3,000,000 | |||||||||
| Auradine Inc [Member] | |||||||||||
| Investment | $ 30,000,000 | ||||||||||
| Preferred Stock [Member] | Auradine Inc [Member] | |||||||||||
| Investment | $ 3,500,000 | $ 35,500,000 | |||||||||
| Payments to acquire investments | 30,000,000.0 | ||||||||||
| Increased investments | $ 30,000,000.0 | ||||||||||
| Preferred Stock [Member] | Safe Agreement [Member] | |||||||||||
| Investment | $ 2,000,000.0 | ||||||||||
| NYDIG Digital Assets Fund III LP [Member] | |||||||||||
| Partnership interest rate | 100.00% | ||||||||||
| NYDIG Digital Assets Fund III LP [Member] | |||||||||||
| Purchae of bitcoins | Bitcoin | 4,812.66 | ||||||||||
| Aggregate purchase price | $ 150,000,000 | ||||||||||
| Investments in bitcoin in digital assets | Bitcoin | 4,769 | ||||||||||
| Investments in bitcoin | Bitcoin | 4,769 | ||||||||||
| Computer North Holdings Inc [Member] | Convertible Preferred Stock [Member] | |||||||||||
| Investment | $ 10,000,000 | ||||||||||
| Bankruptcy claims amount of claims siled | $ 10,000,000 | $ 10,000,000.0 | |||||||||
| Restricted Stock [Member] | |||||||||||
| Restricted digital currencies | Bitcoin | 3,828 | ||||||||||
| Restricted digital currencies, carrying value | $ 70,800,000 | ||||||||||
| SAFE Investment [Member] | |||||||||||
| Investment | $ 1,000,000.0 | ||||||||||
REVENUES FROM CONTRACTS WITH CUSTOMERS (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Revenue from Contract with Customer [Abstract] | ||||
| Transaction fees | $ 200,000 | $ 900,000 | $ 1,200,000 | $ 4,600,000 |
| Pool fees | $ 0 | $ 50,000.00 | $ 300,000 | $ 50,000.00 |
ADVANCES TO VENDORS AND DEPOSITS (Details Narrative) - USD ($) |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Advances To Vendors And Deposits | ||
| Advances to vendor | $ 687,777,200 | $ 466,254,623 |
SCHEDULE OF COMPONENTS OF PROPERTY, EQUIPMENT (Details) - USD ($) |
9 Months Ended | |
|---|---|---|
Sep. 30, 2022 |
Dec. 31, 2021 |
|
| Property, Plant and Equipment [Line Items] | ||
| Gross property and equipment, net | $ 430,332,197 | $ 297,554,255 |
| Less: Accumulated depreciation and amortization | (26,809,659) | (21,311,461) |
| Property, equipment and intangible assets, net | $ 403,522,538 | 276,242,794 |
| Website [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Useful life (Years) | 7 years | |
| Gross property and equipment, net | $ 273,122 | 121,787 |
| Mining Equipment [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Useful life (Years) | 5 years | |
| Gross property and equipment, net | $ 169,237,948 | 163,866,560 |
| Construction in Progress [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Gross property and equipment, net | $ 260,821,127 | $ 133,565,908 |
PROPERTY AND EQUIPMENT (Details Narrative) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Property, Plant and Equipment [Abstract] | ||||
| Depreciation | $ 26,300 | $ 4,300 | $ 64,900 | $ 8,000 |
| Adjustment for amortization | $ 11 | $ 18 | $ 32 | $ 54 |
COMPUTE NORTH BANKRUPTCY (Details Narrative) - Convertible Preferred Stock [Member] - USD ($) $ in Millions |
Sep. 22, 2022 |
Feb. 23, 2022 |
|---|---|---|
| Computer North Holdings Inc [Member] | ||
| Bankruptcy claims amount of claims siled | $ 10.0 | $ 10.0 |
| Computer North LLC [Member] | ||
| Bankruptcy claims amount of claims siled | 21.0 | |
| King Mountain And Wolf Hollow [Member] | ||
| Bankruptcy claims amount of claims siled | $ 50.0 |
LEGAL RESERVES (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Loss Contingencies [Line Items] | ||||
| [custom:LegalReserve] | $ 24,960,000 | $ 24,960,000 | ||
| Former Chairman And Chief Executive Officer [Member] | ||||
| Loss Contingencies [Line Items] | ||||
| [custom:LegalReserve] | 25,000,000 | |||
| Former Chairman And Chief Executive Officer [Member] | Minimum [Member] | ||||
| Loss Contingencies [Line Items] | ||||
| [custom:LegalReserve] | $ 1,000,000 | |||
SUMMARY OF OUTSTANDING STOCK WARRANTS (Details) - USD ($) |
9 Months Ended | 12 Months Ended |
|---|---|---|
Sep. 30, 2022 |
Dec. 31, 2021 |
|
| Accumulated Other Comprehensive Income (Loss) [Line Items] | ||
| Number of warrants, balance beginning | 326,779 | |
| Weighted average exercise price, balance beginning | $ 25.54 | |
| Weighted average remaining contractual life, balance ending | 3 years 3 months 18 days | 3 years 6 months |
| Number of warrants issued | ||
| Weighted average exercise price issued | ||
| Number of warrants expired | (2,404) | |
| Weighted average exercise price expired | $ 52.00 | |
| Number of warrants exercised | ||
| Weighted average exercise price exercised | ||
| Number of warrants, balance ending | 324,375 | 326,779 |
| Weighted average exercise price, balance ending | $ 25.00 | $ 25.54 |
| Number of warrants exercisable | 324,375 | |
| Weighted average exercise price exercisable | $ 25.00 | |
| Weighted average remaining contractual life exercisable | 3 years 3 months 18 days | |
| Warrant [Member] | ||
| Accumulated Other Comprehensive Income (Loss) [Line Items] | ||
| Intrinsic value of options outstanding and exercisable |
SUMMARY OF RESTRICTED STOCK AWARD ACTIVITY (Details) - Restricted Stock [Member] |
9 Months Ended |
|---|---|
|
Sep. 30, 2022
$ / shares
shares
| |
| Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items] | |
| Number of restricted stock, beginning balance | shares | 642,094 |
| Weighted average grant date fair value, beginning balance | $ / shares | $ 35.93 |
| Number of restricted stock, beginning balance | shares | 959,918 |
| Weighted average grant date fair value, beginning balance | $ / shares | $ 12.98 |
| Number of restricted stock, beginning balance | shares | (477,380) |
| Weighted average grant date fair value, beginning balance | $ / shares | $ 14.87 |
| Number of restricted stock, beginning balance | shares | 1,124,632 |
| Weighted average grant date fair value, beginning balance | $ / shares | $ 25.28 |
STOCKHOLDERS’ EQUITY (Details Narrative) - USD ($) |
9 Months Ended | ||
|---|---|---|---|
Feb. 11, 2022 |
Sep. 30, 2022 |
Dec. 31, 2021 |
|
| Class of Stock [Line Items] | |||
| Preferred stock, shares outstanding | 0 | 0 | |
| Share-Based Payment Arrangement, Option [Member] | |||
| Class of Stock [Line Items] | |||
| Stock options outstanding | 0 | 0 | |
| Series B Convertible Preferred Stock [Member] | |||
| Class of Stock [Line Items] | |||
| Preferred stock, shares outstanding | 0 | ||
| Series E Convertible Preferred Stock [Member] | |||
| Class of Stock [Line Items] | |||
| Preferred stock, shares outstanding | 0 | ||
| At The Market Offering Agreement [Member] | |||
| Class of Stock [Line Items] | |||
| Sale of stock shares issued in transaction | 13,459,752 | ||
| Offering Costs | $ 198,700,000 | ||
| At The Market Offering Agreement [Member] | Maximum [Member] | |||
| Class of Stock [Line Items] | |||
| Sale of stock | $ 750 |
DEBT (Details Narrative) - USD ($) $ in Thousands |
Jul. 28, 2022 |
Sep. 30, 2022 |
Dec. 31, 2021 |
Nov. 23, 2021 |
Nov. 18, 2021 |
|---|---|---|---|---|---|
| Revolving Credit Facility [Member] | |||||
| Debt Instrument [Line Items] | |||||
| Maximum borrowing capacity | $ 100,000 | ||||
| Proceeds from bank loan | $ 100,000 | ||||
| Line of credit initial term | Aug. 05, 2024 | ||||
| Line of credit origination fee percentage | 0.35% | ||||
| Loan commitment to bank, origination fee | $ 350,000 | ||||
| Line of credit facility unused capacity commitment fee percentage | 0.25% | ||||
| Line of credit commitment fee and renewal description | (i) Company makes a request for renewal, in writing, no less than sixty (60) days prior to the then current maturity date, (ii) no event of default then exists, (iii) Company provides all necessary documentation to extend the RLOC, (iv) Company has paid all applicable fees related to the loan renewal, and (v) the Bank has approved such extension request according to its internal credit policies as determined by the Bank in its sole and absolute discretion. | ||||
| Line of credit interest rate descriptions | (a) five and one-quarter percent (5.25%) for any days during an Interest Period the Loan to Value (“LTV”) Ratio is less than forty percent (40%), (b) six percent (6.00%) for any days during an Interest Period the LTV Ratio is greater than or equal to forty percent (40%) and less than fifty-five percent (55%), and (c) six and three-quarter percent (6.75%) for any day. The Applicable Margin means at any time: (a) one and one-quarter percent (1.25%) for any days during an Interest Period the LTV Ratio is less than forty (40%), (b) two percent (2.00%) for any days during an Interest Period the LTV Ratio is greater than or equal to forty (40%) and less than fifty-five percent (55%), and (c) two and three-quarter percent (2.75%) for any days during an Interest Period the LTV Ratio is greater than or equal to fifty-five percent (55%). | ||||
| Revolving Credit Facility [Member] | Minimum [Member] | |||||
| Debt Instrument [Line Items] | |||||
| Minimum Advance Rate | 65.00% | ||||
| Revolving Credit Facility [Member] | Maximum [Member] | |||||
| Debt Instrument [Line Items] | |||||
| Minimum Advance Rate | 75.00% | ||||
| Term Credit [Member] | |||||
| Debt Instrument [Line Items] | |||||
| Maximum borrowing capacity | $ 100,000 | ||||
| Proceeds from bank loan | $ 50,000 | ||||
| Line of credit initial term | Aug. 05, 2024 | ||||
| Remaining borrowing capacity | $ 50,000 | ||||
| Loan commitment to bank, origination fee | 250 | ||||
| Origination fee amount | $ 150 | ||||
| Line of credit facility interest rate | 5.75% | ||||
| Net worth | $ 350,000 | ||||
| Minimum collateral amount | $ 25,000 | ||||
| Term Credit [Member] | Prime Rate [Member] | |||||
| Debt Instrument [Line Items] | |||||
| Line of credit facility unused capacity commitment fee percentage | 1.75% | ||||
| Convertible Senior Notes Due 2026 [Member] | |||||
| Debt Instrument [Line Items] | |||||
| Debt Instrument, Face Amount | $ 650,000 | ||||
| Debt Instrument, Interest Rate, Stated Percentage | 1.00% | ||||
| [custom:DebtInstrumentAdditionalOptionstoPurchase-0] | $ 97,500 | $ 97,500 | |||
| Debt Instrument, Unamortized Discount | $ 16,200 | $ 19,100 | |||
| Notes Payable | $ 731,300 | $ 728,400 |
SCHEDULE OF COMPONENTS OF LEASE COST (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Leases Commitments And Contingencies | ||||
| Operating lease cost | $ 114,244 | $ 215,052 | $ 97,407 | |
| Operating lease expense | 114,244 | 215,052 | 97,407 | |
| Short-term lease rent expense | 7,158 | 9,579 | 21,455 | 23,867 |
| Total rent expense | $ 121,402 | $ 9,579 | $ 236,507 | $ 121,274 |
SUMMARY OF MINIMUM LEASE PAYMENTS (Details) - USD ($) |
9 Months Ended | |
|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Leases Commitments And Contingencies | ||
| Operating cash flows from operating leases | $ 68,480 | |
| Weighted-average remaining lease term - operating leases | 3 years 10 months 24 days | |
| Weighted-average discount rate - operating leases | 5.00% | 0.00% |
SCHEDULE OF CONTRACTUAL MINIMUM LEASE (Details) |
Sep. 30, 2022
USD ($)
|
|---|---|
| Leases Commitments And Contingencies | |
| 2022 (remaining) | $ 113,360 |
| 2023 | 459,651 |
| 2024 | 361,934 |
| 2025 | 311,779 |
| 2026 | 240,991 |
| Thereafter | 101,824 |
| Total | $ 1,589,539 |
LEASES, COMMITMENTS AND CONTINGENCIES (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended | |||
|---|---|---|---|---|---|
Feb. 24, 2022 |
Oct. 06, 2020 |
Sep. 30, 2022 |
Sep. 30, 2022 |
Dec. 31, 2021 |
|
| Operating lease right of use asset | $ 1,369,774 | $ 1,369,774 | |||
| Payments for Rent | 29,000 | 29,000 | |||
| Amortized right-of-use assets | 48,000 | 48,000 | |||
| Hardin, MT [Member] | |||||
| Number of restricted stock issued | 6,000,000 | ||||
| Plaintiff Michael Ho [Member] | |||||
| Damages amount | $ 150,000 | ||||
| UNITED STATES | |||||
| Operating lease right of use asset | 1,400,000 | 1,400,000 | |||
| Operating lease liabilities | $ 1,100,000 | $ 1,100,000 |
RELATED PARTY MATTERS (Details Narrative) - USD ($) |
Sep. 30, 2022 |
Sep. 27, 2022 |
Sep. 23, 2022 |
Dec. 31, 2021 |
|---|---|---|---|---|
| Related Party Transaction [Line Items] | ||||
| Investments | $ 36,999,994 | $ 3,000,000 | ||
| Auradine Inc [Member] | ||||
| Related Party Transaction [Line Items] | ||||
| Investments | $ 30,000,000 | |||
| Previously issued investments | $ 35,500,000 | |||
| Shares outstanding percentage | 10.00% |
SCHEDULE OF RESTATEMENTS AND RECLASSIFICATIONS (Details) - USD ($) |
3 Months Ended | 9 Months Ended | |||||
|---|---|---|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
Dec. 31, 2021 |
|||
| New Accounting Pronouncements or Change in Accounting Principle [Line Items] | |||||||
| Cash and cash equivalents | $ 55,339,400 | $ 55,339,400 | $ 268,555,837 | ||||
| Digital currencies held in fund | 223,915,761 | ||||||
| Investment fund | |||||||
| Prepaid expenses and other current assets | 26,015,943 | 26,015,943 | 8,148,116 | ||||
| Accounts payable | 19,051,369 | 19,051,369 | 10,867,403 | ||||
| Accrued expenses | 2,140,544 | 2,140,544 | 2,230,870 | ||||
| General and administrative expenses | (12,352,008) | $ (99,235,984) | (39,187,098) | $ (159,411,404) | |||
| Change in fair value of investment in NYDIG fund | |||||||
| Realized and unrealized gains (losses) on digital currencies held in fund | 42,086,907 | (85,016,208) | 59,410,028 | ||||
| Operating loss | $ (46,645,684) | (22,436,493) | (239,524,970) | (47,955,229) | |||
| Realized and unrealized gains on digital currencies held in fund | 59,410,028 | ||||||
| Change in fair value of investment securities | |||||||
| Accounts payable and accrued expenses | 8,093,640 | 2,518,805 | |||||
| Net cash used in operating activities | (84,242,608) | (44,357,170) | |||||
| Sale of digital currencies in investment fund | 482,872 | 500,715 | |||||
| Net cash used in investing activities | $ (368,072,905) | (371,780,457) | |||||
| Previously Reported [Member] | |||||||
| New Accounting Pronouncements or Change in Accounting Principle [Line Items] | |||||||
| Cash and cash equivalents | 268,522,019 | ||||||
| Digital currencies held in fund | |||||||
| Investment fund | 223,778,545 | ||||||
| Prepaid expenses and other current assets | 8,148,016 | ||||||
| Accounts payable | 10,772,523 | ||||||
| Accrued expenses | 2,154,616 | ||||||
| General and administrative expenses | [1] | (98,996,339) | (158,763,196) | ||||
| Change in fair value of investment in NYDIG fund | [1] | 41,850,203 | 58,765,274 | ||||
| Realized and unrealized gains (losses) on digital currencies held in fund | [1] | ||||||
| Operating loss | [1] | (64,283,755) | (106,717,049) | ||||
| Realized and unrealized gains on digital currencies held in fund | |||||||
| Change in fair value of investment securities | (58,765,274) | ||||||
| Accounts payable and accrued expenses | 2,374,766 | ||||||
| Net cash used in operating activities | (43,914,493) | ||||||
| Sale of digital currencies in investment fund | |||||||
| Net cash used in investing activities | (372,223,134) | ||||||
| Revision of Prior Period, Adjustment [Member] | |||||||
| New Accounting Pronouncements or Change in Accounting Principle [Line Items] | |||||||
| Cash and cash equivalents | 33,818 | ||||||
| Digital currencies held in fund | 223,915,761 | ||||||
| Investment fund | (223,778,545) | ||||||
| Prepaid expenses and other current assets | 100 | ||||||
| Accounts payable | 94,880 | ||||||
| Accrued expenses | $ 76,254 | ||||||
| General and administrative expenses | (239,645) | (648,208) | |||||
| Change in fair value of investment in NYDIG fund | (41,850,203) | (58,765,274) | |||||
| Realized and unrealized gains (losses) on digital currencies held in fund | 42,086,907 | 59,410,028 | |||||
| Operating loss | $ 41,847,262 | 58,761,820 | |||||
| Realized and unrealized gains on digital currencies held in fund | (59,410,028) | ||||||
| Change in fair value of investment securities | 58,765,274 | ||||||
| Accounts payable and accrued expenses | 144,039 | ||||||
| Net cash used in operating activities | (442,677) | ||||||
| Sale of digital currencies in investment fund | 500,715 | ||||||
| Net cash used in investing activities | $ 442,677 | ||||||
| |||||||
REVISION OF CERTAIN PRIOR PERIOD AMOUNTS (Details Narrative) $ in Millions |
Jan. 25, 2021
USD ($)
Bitcoin
|
Sep. 30, 2022
USD ($)
|
|---|---|---|
| Aggregate purchase price | $ 197.2 | |
| NYDIG Digital Assets Fund III LP [Member] | ||
| Purchae of bitcoins | Bitcoin | 4,812.66 | |
| Aggregate purchase price | $ 150.0 |
SUBSEQUENT EVENTS (Details Narrative) - Subsequent Event [Member] - RLOC Facility [Member] - USD ($) $ in Millions |
1 Months Ended | |
|---|---|---|
Nov. 09, 2022 |
Oct. 31, 2022 |
|
| Subsequent Event [Line Items] | ||
| Line of credit, description | bitcoin prices declined to a new yearly low on concerns of financial instability in the crypto industry. As a result, the Company was required to provide an additional 1,669 bitcoin (valued at $16,212.50 per bitcoin) as collateral for its $50 million RLOC and $50 million term loan borrowings, bringing its total collateral balance to 9,490 bitcoin (approximately $153.9 million). The Company’s total bitcoin holdings as of November 9, 2022, are approximately 11,440 bitcoin, of which 1,950 (approximately $31.6 million) are unrestricted. | the Company borrowed an additional $50 million under its RLOC facility for general corporate purposes and provided an additional 3,993 bitcoin as collateral for this borrowing. This increased the Company’s collateral balance to 7,821 bitcoin. |
| Credit facility | $ 50.0 | |
| Credit facility collateral | $ 50.0 | |
| Loan borrowings | $ 50.0 | |
| Collateral balance | 153.9 | |
| Unrestricted [Member] | ||
| Subsequent Event [Line Items] | ||
| Collateral balance | $ 31.6 |
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