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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