10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 9, 2022
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
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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 August 9, 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
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Digital currencies | ||||||||
| Digital currencies, restricted | ||||||||
| Digital currencies loaned | ||||||||
| Digital currencies held in fund | ||||||||
| Deposits | ||||||||
| Loan receivable | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Other assets: | ||||||||
| Property and equipment (net
of accumulated depreciation and impairment charges of $ |
||||||||
| Assets held for sale | ||||||||
| Advances to vendor | ||||||||
| Investments | ||||||||
| 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 | ||||||||
| Short term borrowings - revolving credit line | ||||||||
| Operating lease liabilities | ||||||||
| Accrued interest | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities | ||||||||
| Convertible notes | ||||||||
| 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 June 30, 2022 and December 31, 2021, respectively | ||||||||
| Common stock, par value; shares authorized; and issued and outstanding at June 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 | $ | $ | ||||||
Certain prior period amounts have been reclassified to conform to current period presentation.
The accompanying notes are an integral part to these unaudited consolidated condensed financial statements.
| 3 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(unaudited)
| Three Months Ended June 30, | Six Months Ended June 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 | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Impairment of digital currencies | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Impairment of patents | ( |
) | ||||||||||||||
| ( |
) | ( |
) | ( |
) | ( |
) | |||||||||
| Other Operating income (expenses) | ||||||||||||||||
| Change in fair value of digital currencies held in fund | ( |
) | ( |
) | ( |
) | ||||||||||
| Gain on sale of equipment | ||||||||||||||||
| ( |
) | ( |
) | ( |
) | |||||||||||
| Operating income (loss) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Non-Operating income (expenses) | ( |
) | ||||||||||||||
| Interest expense | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Loss before income taxes | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Income tax (expense) benefit | ( |
) | ( |
) | ||||||||||||
| Net loss | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Net loss per share, basic and diluted: | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Weighted average shares outstanding, basic and diluted: | ||||||||||||||||
Certain prior period amounts have been reclassified to conform to current period presentation .
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 Six Months Ended June 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 for cash | ( |
) | ||||||||||||||||||||||||||||||
| 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 June 30, 2021 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
| For the Six Months Ended June 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 June 30, 2022 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
| For the Three Months Ended June 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 March 31, 2021 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
| Stock based compensation, net of tax withholding | ||||||||||||||||||||||||||||||||
| Common stock issued for cashless exercise of warrants | ||||||||||||||||||||||||||||||||
| Common stock issued for service and license agreements | ||||||||||||||||||||||||||||||||
| Net loss | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
| For the Three Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Accumulated
Other Comprehensive |
Total Stockholders’ | |||||||||||||||||||||||||||
| Number | Amount | Number | Amount | Capital | Deficit | Deficit | Equity | |||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
| 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 June 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)
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of prepaid service contract | ||||||||
| Gain on sale of assets | ( |
) | ||||||
| Deferred tax expense | ||||||||
| Change in fair value of digital currencies held in fund | ( |
) | ||||||
| Impairment of digital currencies | ||||||||
| Stock based compensation | ||||||||
| Amortization of bond issuance costs | ||||||||
| Impairment of patents | ||||||||
| Other adjustments from operations, net | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Digital currencies | ( |
) | ( |
) | ||||
| Deposits | ( |
) | ||||||
| Prepaid expenses and other assets | ( |
) | ( |
) | ||||
| Accounts payable and accrued expenses | ( |
) | ||||||
| Accrued interest | ( |
) | ||||||
| Net cash used in operating activities | ( |
) | ( |
) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Advances to vendor | ( |
) | ( |
) | ||||
| Purchase of property and equipment | ( |
) | ( |
) | ||||
| Sale of property and equipment | ||||||||
| Purchase of digital currencies held 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 | ||||||||
| Net change in revolving credit agreement borrowings | ||||||||
| Value of shares withheld for taxes | ( |
) | ( |
) | ||||
| Proceeds received on exercise of options and warrants | ||||||||
| Net cash provided by financing activities | ||||||||
| Net (decrease) increase 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 schedule of non-cash investing and financing activities: | ||||||||
| Receivable due to share issuance | $ | $ | ||||||
| Options exercised into common stock | $ | $ | ||||||
| Unpaid advances to vendor | $ | $ | ||||||
| Operating lease assets obtained in exchange for new operating lease liabilities | $ | $ | ||||||
| Common stock issued for service and license agreements | $ | $ | ||||||
Certain prior period amounts have been reclassified to conform to current period presentation.
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. The Company changed its name to Marathon Digital Holdings, Inc. on March 1, 2021. 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 US. The Company has since expanded its activities in the mining of bitcoin. As of June 30, 2022, the Company no longer holds any legacy IP assets and 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 June 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 2021 Annual Report.
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.
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.
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 June 30, 2022 |
As
of June 30, 2021 |
|||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Cash, cash equivalents and restricted cash | $ | $ | ||||||
Reclassifications and corrections
For purposes of comparability, certain prior-period amounts have been reclassified to conform to the current-period presentation, including corrections of immaterial errors in prior periods.
| 7 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Digital Currencies, Digital currencies, restricted and Digital currencies loaned
Digital currencies, Digital currencies, restricted and Digital currencies loaned are included in current assets in the consolidated balance sheets. Digital currencies 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. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.
The following table presents the activities of the digital currencies for the six months ended June 30, 2022:
| Digital currencies, Digital currencies, restricted and Digital currencies loaned at December 31, 2021* | $ | |||
| Additions of digital currencies | ||||
| Digital currencies transferred from fund | ||||
| Impairment of digital currencies | ( |
) | ||
| Digital currencies, Digital currencies, restricted and Digital currencies loaned at June 30, 2022 | $ |
| * |
At
June 30, 2022, we held approximately
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) bitcoins per block, which decreased from twelve and a half (12.5) bitcoins per block in May 2020. It is estimated that the number of bitcoins per block will halve again in about four (4) years. 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
In 2016, the FASB issued Accounting Standards Update (ASU) 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, that requires entities to generally measure investments in equity securities at fair value and recognize changes in fair value in net income.
On
January 25, 2021, the Company entered into a limited partnership agreement with NYDIG Digital Assets Fund III, LP (“Fund”)
whereas the Fund purchased
The Fund qualifies and operates 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 are traded on a number of active markets globally, including the over the counter (“OTC”) 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 are determined at the end of each reporting period based on pricing obtained from CoinDesk Bitcoin Price Index at approximately 4pm New York time. Any changes in the fair value of the assets are recorded in the Consolidated Statement of Operations under the caption “Change in fair value of investment in NYDIG fund.” The Company transferred all of its bitcoin holdings from the Fund to its own account on June 10, 2022.
| Digital currencies held in fund at December 31, 2021 | $ | |||
| Sale of digital currencies | ( |
) | ||
| Change in fair value of digital currencies held in fund | ( |
) | ||
| Management expenses incurred by fund | ( |
) | ||
| Digital currencies transferred out of fund | ( |
) | ||
| Digital currencies held in fund at June 30, 2022 | $ |
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 these investments value 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 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 Simple Agreement for Future Equity
(“SAFE”) agreements classified on the balance sheet as non-current assets. The 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. The investment in SAFE agreements is presented on the balance sheet at June 30, 2022 and December 31, 2021 as a
component of the-caption “Investments” at a collective carrying value of $
| 8 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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 of and broker-dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities and other observable inputs.
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis and the Company’s estimated level within the fair value hierarchy of those assets and liabilities as of June 30, 2022 and December 31, 2021, respectively:
| Fair value measured at June 30, 2022 | ||||||||||||||||
| Total carrying
value at June 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
|
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 | $ | $ | $ | $ | ||||||||||||
There were no transfers among Levels 1, 2 or 3 during the three and six months ended June 30, 2022.
On
June 10, 2022 the company withdrew approximately
| 9 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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 six month period ending June 30, 2022, the Company incurred a loss position and as such the computation of diluted net income (loss) per share does not include dilutive common stock equivalents in the weighted average shares outstanding, as they would be anti-dilutive.
| As of June 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 June 30, | For the Six Months Ended June 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). |
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.
| 10 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Providing computing power in bitcoin transaction verification services to the network is the only performance obligation under our arrangements with the network. The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date received, which is not materially different than the fair value at the time of contract inception. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the Company successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions.
Fair value of the digital asset award received is determined using the daily closing U.S. dollar spot rate of the related digital currency on the date of receipt.
Expenses associated with running the digital currency mining business, such as rent and electricity cost are also recorded as cost of revenues. Depreciation on digital currency mining equipment is recorded as a component of cost of revenues.
Block rewards
Block rewards earned by a bitcoin miner are recognized as revenue, but the evaluation is required to determine if the block rewards earned should be recognized as revenue from contracts with customers under FASB ASC 606 or as other revenue.
The Company evaluated whether its mining activities represent a contract with a customer to provide services and, determined it should recognize block rewards it receives from the network as revenue from a customer under FASB ASC 606. 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.
The inflow of bitcoin as a result of the block reward would meet the definition of revenue because it gives rise to economic benefits to the miner from rendering services or carrying out activities.
Therefore, the Company may account for the block reward as revenue.
Block
rewards are the Company’s most significant source of revenue. Block rewards included in revenues on the statements of operations
were approximately $
Transaction Fees
Transaction fees earned by the Company are recognized as revenue from customers in accordance with FASB ASC 606 and pursuant to AICPA Practice Guide “Accounting for and Auditing Digital Assets”. The transaction fees are specified in each transaction request and paid by the requester to the Company, acting as the successful miner, in exchange for the successful processing of the transaction.
The requester meets the definition of a customer in FASB ASC 606 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. 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 in accordance with FASB ASC 606-10-25-30. 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 of the fees is probable because it is completed as part of closing a successful block. |
By successfully mining a block, the miner satisfies its performance obligation to the requester and, thus, should recognize revenue at that point in time.
The payment of transaction fees in bitcoin constitutes non-cash consideration under FASB ASC 606-10-32-21. This 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. If fair value cannot be reasonably estimated in accordance with FASB ASC 606-10-32-22, the consideration should be measured indirectly by reference to the stand-alone selling price of the miner’s services.
Transaction
fees were approximately $
| 11 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Pool Fees
The
Company is a pool operator and acts as an agent, and not as a principal. The Company did not have control over any third party contributing
hashrate to its pool. It merely facilitated the contribution of hash rate by third party pool participants who could choose to
join or leave a pool as they wish. As the pool operator, the Company recognized
From
May 2021 until April 30, 2022, the Company operated a mining pool that included certain third parties. Pool fees included in
revenues on the statements of operations were approximately $
NOTE 4 – ADVANCES TO VENDORS AND DEPOSITS
The Company contracts with bitcoin mining server 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 (1) within several days of execution of a specific contract (2) approximately six months before each shipment date and (3) approximately one month before each shipment date. We account for these payments as Advances to vendor on the balance sheet.
As
of June 30, 2022 and December 31, 2021, such advances totalled 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.
NOTE 5 – PROPERTY AND EQUIPMENT
The components of property and equipment as of June 30, 2022 and December 31, 2021 are:
| Useful life (Years) | June 30, 2022 | December 31, 2021 | ||||||||
| Website | ||||||||||
| Mining equipment | ||||||||||
| Construction in Progress | N/A | |||||||||
| Mining patent | ||||||||||
| Gross property, equipment and intangible assets | ||||||||||
| Less: Accumulated depreciation and amortization | ( |
) | ( |
) | ||||||
| Property, equipment and intangible assets, net | $ | $ | ||||||||
The
Company’s depreciation expense related to property and equipment for the three and six months ended June 30, 2022 and June 30,
2021 was $
NOTE 6 – ASSETS HELD FOR SALE
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 June 30, 2022, the Company sold equipment for cash proceeds totalling $
NOTE 7 - STOCKHOLDERS’ EQUITY
Common Stock
Shelf Registration Statements on Form S-3 and At The Market Offering Agreements
On
February 11, 2022, we entered into an At The Market Offering Agreement, or sales agreement, with H.C. Wainwright & Co., LLC relating
to shares of our common stock. In accordance with the terms of the sales agreement, we may offer and sell shares of our common stock
having an aggregate offering price of up to $
| 12 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Series B Convertible Preferred Stock
As of June 30, 2022, there were shares of Series B Convertible Preferred Stock outstanding.
Series E Preferred Stock
There were shares of Series E Convertible Preferred Stock outstanding as of June 30, 2022.
Common Stock Warrants
A summary of the status of the Company’s outstanding stock warrants and changes during the six months ended June 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 June 30, 2022 | $ | |||||||||||
| Warrants exercisable as of June 30, 2022 | $ | |||||||||||
| The aggregate intrinsic value of warrants outstanding and exercisable at June 30, 2022 was | $ | |||||||||||
Common Stock Options
As of June 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 June 30, 2022 | $ | |||||||
During the second quarter of 2022, the Compensation Committee issued grants that will vest over the next and result in total stock compensation expense of approximately $ million.
| 13 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 8 - DEBT, COMMITMENTS AND CONTINGENCIES
Debt
On
October 1, 2021, the Company entered into a Revolving Credit and Security Agreement (the “Agreement”) with Silvergate
Bank pursuant to which Silvergate has agreed to loan the Company up to $
On
November 18, 2021, the Company issued $
As
of June 30, 2022 and December 31, 2021, notes outstanding, net of unamortized discounts of approximately $
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.
As
of June 30, 2022, the Company’s right-of-use (“ROU”) assets and total lease liabilities were $
| 14 |
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 Six Months Ended | ||||||||
| June 30, 2022 | June 30, 2021 | |||||||
| Operating leases | ||||||||
| Operating lease cost | $ | $ | ||||||
| Operating lease expense | ||||||||
| Short-term lease rent expense | ||||||||
| Total rent expense | $ | $ | ||||||
| For the Three Months Ended | ||||||||
| June 30, 2022 | June 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 Six Months Ended | ||||||||
| June 30, 2022 | June 30, 2021 | |||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| Weighted-average remaining lease term – operating leases | ||||||||
| Weighted-average discount rate – operating leases | % | % | ||||||
As of June 30, 2022, contractual minimum lease payments are as follows for the next five years.
| Year | Amount | |||
| 2022 (remaining) | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | ||||
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 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 discloses 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. Multiple alleged shareholders have moved for appointment as lead plaintiff. Those motions remain pending before the Court.
| 15 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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 five matters will not have a material adverse effect on the Company and its related entities combined financial position, results of operations, or liquidity.
NOTE 9 – SUBSEQUENT EVENTS
On
July 5, 2022, the Company expanded certain hosting arrangements to include an additional 42 megawatts of hosting capacity at a
facility near Granbury, Texas. The Company expects to have an additional
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
On July 15, 2022 the Federal Energy
Regulatory Commission found that King Mountain Upton Wind, LLC (King Mountain) would retain its status as an exempt wholesale
generator notwithstanding a proposal to share ownership of the Interconnection Facilities as tenants-in-common with a retail energy
customer. This action enabled the energization of a modular data center adjacent to the Generating Facility. Approximately
On
July 19, 2022, the Company sold its final shipment of equipment in accordance with its April agreement with DCRBN. The equipment was
sold to DCRBN in conjunction with the development of commercial activities at the King Mountain wind farm in McCamey, TX. The Company
recorded cash proceeds totalling $
On
July 28, 2022 the Company terminated its power purchase agreements and commenced the acceleration of its exit from Hardin. As a result,
the Company further accelerated the cost of a prepaid service contract ($
| 16 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
On
July 28, 2022, the Company entered into a Revolving Credit and Security Agreement (the
“Agreement”) with Silvergate Bank (the “Bank”) pursuant to which Silvergate has agreed to loan the Company up
to $
| Initial Term: | Termination
is on |
|
| Availability: | 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. | |
| Origination Fee: | ||
| Unused Commitment Fee: | ||
| Renewal: | The
RLOC may be renewed annually by agreement between the Bank and the Company, subject to (without limitation): |
| Interest Rate and Payments: | 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: |
|
| Collateral: | The RLOC will be 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. | |
| Minimum Advance Rate: | At
origination, the Company must ensure the Collateral Account balance has sufficient bitcoin to cause a Loan to Value (the “LTV”)
ratio of |
|
| Covenants: | The
Company must maintain a minimum adjusted net worth of $ |
On that same date, the Company entered into a Term Credit and Security Agreement (“Term Loan Agreement”) and Term Credit Note with the Bank with the following terms:
| Initial Term: | Termination
is on |
|
| Availability: | Up
to $ |
|
| Fees: | An
origination fee of $ |
| Interest Rate and Payments: | Interest,
which shall be due on the principal amount of the loan, at the higher of |
|
| Collateral: | The Term Loan will be 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 Term Loan. the Bank may also file a UCC financing statement on the pledged collateral. | |
| Covenants: | The
Company must maintain a minimum adjusted net worth of $ |
| 17 |
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 is 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.
| 18 |
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 June 30, 2022, the Company no longer holds any legacy IP assets and is solely focused on the mining of bitcoin and ancillary opportunities within the bitcoin ecosystem under the name Marathon Digital Holdings, Inc.
Recent developments
During the three-month period ended June 30, 2022, deteriorating macroeconomic conditions contributed to a significant downturn in financial markets. These conditions were more pronounced in businesses exposed to digital assets, including bitcoin mining. Many digital asset companies executed cost savings measures, reduced expansion plans and capital expenditures, sold digital assets and in some cases executed layoffs of staff. Holders of digital assets including bitcoin experienced a significant decrease in the value of their digital asset holdings during the period. The price of bitcoin dropped from $45,539 on April 1, 2022 to a low of $19,018 on June 18, 2022, and was $19,785 on June 30, 2022. The Company faced these same challenges, along with operational issues at our Hardin, MT facility and delays in the energization of a bitcoin mining facility in Texas. The Company did not sell any bitcoin during the period as a means of raising cash, although we did execute a previously-contracted sale of equipment during the quarter, details of which are included below. Despite the economic and operational challenges experienced during the quarter, the Company ended the period with $89.7 million in cash on hand and continues to expect to have sufficient liquidity sources in the future to support ongoing operations. Our primarily sources of liquidity are expected to be cash on hand, available borrowing capacity with our Revolving and Term Loan facilities with Silvergate Bank, our ATM facility and our bitcoin holdings.
A brief discussion of some of the more significant recent events impacting the Company’s operations follows.
On June 11, 2022, a severe storm passed through Hardin damaging the power generating facility that supplies the data center with power. As a result, the Company’s bitcoin production at the plant was significantly reduced. Anticipated repairs to the plant were persistently delayed until July 14, at which point the plant resumed operations at reduced power levels and operating capacity. Additional outages continued to occur at the plant throughout July, and the Company decided to accelerate its exit from Hardin, moving the date up from the planned date of August 15 to July 28. As a result, the Company further accelerated the cost of a prepaid service contract and the remaining depreciation and amortization related to the infrastructure assets at Hardin during the month of July. The data center infrastructure assets and the prepaid service contract have therefore been fully depreciated or amortized as of July 31, 2022. The bitcoin mining servers that are on site are in the process of being inventoried and removed from the facility and will be sold or redeployed to other locations in the near future.
On June 10, 2022 the Company withdrew approximately 4,769 bitcoin from its investment in NYDIG Digital Assets Fund III, LP, the (“Investment Fund”) and transferred the bitcoin directly into the Company’s account. As a result, the Company will no longer receive “mark-to-market” accounting for the bitcoin formerly held in the Investment Fund and the 4,769 bitcoin will now be classified as “Digital currencies” on the balance sheet and subject to impairment analysis as a indefinite-lived intangible.
On June 14, 2022 the Company terminated its loan of 600 bitcoin with NYDIG. The Company decided to terminate the bitcoin loan in response to recent market conditions and its desire to hold all of its bitcoin directly so it could fully utilize these holdings for corporate purposes as needed, including as collateral for credit facilities.
On July 5, 2022, the Company expanded certain hosting arrangements to include an additional 42 megawatts of hosting capacity at a facility near Granbury, Texas. The Company expects to have an additional 14,000 miners installed at this facility, bringing the total number of miners installed near Granbury to 26,000 or approximately 3.6 EH/s. Based on current construction schedules these miners are expected to be installed before the end of 2022.
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. The Company also secured an additional 12 megawatts of hosting capacity with a variety of other providers and expects to install approximately 4,000 miners, representing approximately 0.8 EH/s, with these hosting providers, starting in August 2022.
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On July 15, 2022 the Federal Energy Regulatory Commission found that King Mountain Upton Wind, LLC would retain its status as an exempt wholesale generator notwithstanding a proposal to share ownership of the Interconnection Facilities as tenants-in-common with a retail energy customer. King Mountain had filed a petition on April 5, 2022 seeking a declaratory order to confirm its status as an exempt wholesale generator. In the Petition, King Mountain stated that it proposed to share ownership of interconnection facilities that are currently eligible facilities within the meaning of section 32(a)(2) of the Public Utility Holding Company Act as tenants-in common with a retail energy customer. King Mountain stated that it intended to sell wholesale electricity from the Generating Facility to a third party, who would then sell electricity at retail to the owner of a modular data center which would operate adjacent to the Generating Facility and supply it with renewable energy. This action enabled the energization a modular data center adjacent to the Generating Facility. Approximately 69,000 of the Company’s bitcoin mining machines are located at this data center and energization enabled this equipment to come online starting on August 5, 2022.
Non-GAAP Financial Measures
We provide investors with a reconciliation from net income 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, (ii) net of withholding taxes and (iii) impairments of patents (if any).
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.
Results of Operations
For the Three Months ended June 30, 2022 and 2021
| Three Months Ended June 30, | Favorable | |||||||||||
| 2022 | 2021 | (Unfavorable) | ||||||||||
| Revenues | $ | 24,921,816 | $ | 29,321,857 | $ | (4,400,041 | ) | |||||
| Cost of revenues - energy, hosting and other | (16,684,759 | ) | (4,056,168 | ) | (12,628,591 | ) | ||||||
| Cost of revenues - depreciation and amortization | (24,709,797 | ) | (2,937,666 | ) | (21,772,131 | ) | ||||||
| Total margin | (16,472,740 | ) | 22,328,023 | (38,800,763 | ) | |||||||
| Gain on sale of equipment | 58,181,516 | - | 58,181,516 | |||||||||
| General and administrative expenses | (12,641,331 | ) | (6,831,040 | ) | (5,810,291 | ) | ||||||
| Changes in carrying value of digital assets: | ||||||||||||
| Change in fair value of digital currencies held in fund | (79,688,590 | ) | (114,704,596 | ) | 35,016,006 | |||||||
| Impairment of digital currencies | (127,590,231 | ) | (11,078,660 | ) | (116,511,571 | ) | ||||||
| (207,278,821 | ) | (125,783,256 | ) | (81,495,565 | ) | |||||||
| Non-operating income | 165,280 | 1,400,872 | (1,235,592 | ) | ||||||||
| Net loss | (191,646,642 | ) | (108,884,620 | ) | (82,762,022 | ) | ||||||
| Bitcoin (“BTC”) production during the period, in BTC | 707 | 654 | 53 | |||||||||
| Reconciliation to Adjusted EBITDA | ||||||||||||
| Net loss | $ | (191,646,642 | ) | $ | (108,884,620 | ) | $ | (82,762,022 | ) | |||
| Exclude: Interest expense | 3,748,322 | 1,203 | 3,747,119 | |||||||||
| Exclude: Income tax expense (benefit) | 9,852,224 | (1,984 | ) | 9,854,208 | ||||||||
| EBIT | (178,046,096 | ) | (108,885,401 | ) | (69,160,695 | ) | ||||||
| Exclude: Depreciation and amortization | 24,709,797 | 2,937,666 | 21,772,131 | |||||||||
| EBITDA | (153,336,299 | ) | (105,947,735 | ) | (47,388,564 | ) | ||||||
| Exclude: Stock compensation expense, net of withholding tax | 6,132,224 | 875,971 | 5,256,253 | |||||||||
| Adjusted EBITDA | $ | (147,204,075 | ) | $ | (105,071,764 | ) | $ | (42,132,311 | ) | |||
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Revenues and Total Margin
We generated revenues of $24.9 million during the three months ended June 30, 2022 compared with $29.3 million during the three months ended June 30, 2021. This $4.4 million decrease in revenue was driven by lower revenue per bitcoin mined ($6.8 million) resulting from lower market prices for bitcoin in the current-year period when compared with the prior-year period. This decrease was partially offset by an 8% increase in bitcoin production activity (a $2.4 million increase in revenues) from the prior-year period. Cost of revenues – energy, hosting and other during the three months ended June 30, 2022 amounted to $16.7 million compared with $4.1 million in the prior-year period. This $12.6 million increase was driven by accelerated cost recognition associated with the early exit from Hardin ($9.4 million) and to a lesser extent higher costs per bitcoin mined. Total margin, which we define as revenues less cost of revenues – energy, hosting and other and cost of revenues – depreciation and amortization, totalled a loss of $16.5 million compared with an income position of $22.3 million in the prior-year period. This $38.8 million decrease in total margin was driven primarily by the impact of accelerated costs related to the Hardin exit and the lower revenue per bitcoin mined.
Notwithstanding the increased mining activities vs. the prior-year period, our production of bitcoin during the three months ended June 30, 2022 was negatively impacted by ongoing maintenance issues and the storm at our Hardin, MT facility as well as the delays in energizing our bitcoin mining equipment at the King Mountain data center in Texas.
Gain on sale of assets
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 June 30, 2022, the Company sold equipment for cash proceeds totalling $87.2 million and realized a pre-tax gain on the sale of such assets of $58.2 million. There were no such sales in the prior-year period.
General and administrative expenses
General and administrative expenses were $12.6 million for the three months ended June 30, 2022, an increase of $5.8 million from the prior-year period. Our general and administrative expenses increased primarily as a result of higher stock-based (non-cash) compensation expense, which increased to $6.2 million from $0.9 million in the prior-year period; and higher costs associated with increased business activities.
Changes in carrying value of digital assets:
| ● | Impairment of digital currencies recorded in operating expenses: We incurred significant impairment of digital assets during the three months ended June 30, 2022 as the price of bitcoin declined to a low of $19,018 on June 18, 2022. Total impairment expense was $127.6 million for the three months ended June 30, 2022 compared with an impairment expense of $11.1 million for the prior-year period. |
| ● | Change in fair value of digital currencies recorded in operating income (expense): 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 $79.7 million in the current year period. During the prior-year quarter, the change in fair value of the bitcoin held in the investment fund was a loss of $114.9 million. |
Non-operating income
Non-operating income decreased primarily due to changes in the fair value of a stock warrant liability recorded in the prior-year period.
Depreciation and amortization
Depreciation and amortization, which we classify as “Cost of revenues – depreciation and amortization” in our statements of operations, increased significantly when compared to the prior-year period primarily due to the acceleration of depreciation related to our exit of the Hardin, MT facility (a $15.8 million increase in depreciation) and, to a lesser extent increased depreciation costs associated with a higher number of mining servers in operation ($4.7 million).
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 revolving credit agreement ($0.9 million).
Income tax expense
Income tax expense was $9.8 million for the period ended June 30, 2022. We recorded tax expense despite a pre-tax loss from operations due to a valuation adjustment related to the certain deferred tax benefits.
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Net loss
We recorded a net loss of $(191.6) million in the current year period compared with net loss of $(108.9) million in the prior period. This $82.7 million decline was primarily driven by the impact of declines in the carrying value of our digital assets ($81.5 million), higher depreciation expense ($21.8 million), lower total margin $(17.0 million), increased income tax expense ($9.8 million), higher operating expenses ($5.8 million) increased interest expense ($3.7 million) partially offset by the gain on the sale of equipment of $58.1 million.
Adjusted EBITDA
Adjusted EBITDA was a loss of $(147.2) million compared with a loss of $(105.1) million in the prior-year period.
This $42.1 million decline was primarily driven by the impact of declines in the carrying value of our digital assets ($81.5 million) and lower total margin $(17.0 million) partially offset by the gain on the sale of equipment ($58.1 million).
Results of Operations
For the Six Months ended June 30, 2022 and 2021
| Six Months Ended June 30, | Favorable | |||||||||||
| 2022 | 2021 | (Unfavorable) | ||||||||||
| Revenues | $ | 76,639,534 | $ | 38,474,672 | $ | 38,164,862 | ||||||
| Cost of revenues - energy, hosting and other | (29,201,710 | ) | (5,724,646 | ) | (23,477,064 | ) | ||||||
| Cost of revenues - depreciation and amortization | (38,586,480 | ) | (3,675,603 | ) | (34,910,877 | ) | ||||||
| Total margin | 8,851,344 | 29,074,423 | (20,223,079 | ) | ||||||||
| Gain on sale of equipment | 58,181,516 | - | 58,181,516 | |||||||||
| General and administrative expenses | (26,835,089 | ) | (60,175,421 | ) | 33,340,332 | |||||||
| Changes in carrying value of digital assets: | ||||||||||||
| Change in fair value of digital currencies held in fund | (85,016,208 | ) | 17,323,121 | (102,339,329 | ) | |||||||
| Impairment of digital currencies | (147,141,486 | ) | (11,740,859 | ) | (135,400,627 | ) | ||||||
| (232,157,694 | ) | 5,582,262 | (237,739,956 | ) | ||||||||
| Non-operating income (expenses) | 393,973 | (7,250 | ) | 401,223 | ||||||||
| Net loss | (204,605,231 | ) | (25,527,878 | ) | (179,077,353 | ) | ||||||
| Bitcoin ("BTC") production during the period, in BTC | 1,966 | 846 | 1,119 | |||||||||
| Reconciliation to Adjusted EBITDA | ||||||||||||
| Net loss | $ | (204,605,231 | ) | $ | (25,527,878 | ) | $ | (179,077,353 | ) | |||
| Exclude: Interest expense | 6,562,358 | 2,406 | 6,559,952 | |||||||||
| Exclude: Income tax expense (benefit) | 5,557,560 | (514 | ) | 5,558,074 | ||||||||
| EBIT | (192,485,313 | ) | (25,525,986 | ) | (166,959,327 | ) | ||||||
| Exclude: Depreciation and amortization | 38,586,480 | 3,675,603 | 34,910,877 | |||||||||
| EBITDA | (153,898,833 | ) | (21,850,383 | ) | (132,048,450 | ) | ||||||
| Exclude: Stock compensation expense, net of withholding tax | 15,407,576 | 51,907,111 | (36,499,535 | ) | ||||||||
| Exclude: Impairment of patents | 919,363 | - | 919,363 | |||||||||
| Adjusted EBITDA | $ | (137,571,894 | ) | $ | 30,056,728 | $ | (167,628,622 | ) | ||||
Revenues and Total Margin
We generated revenues of $76.6 million during the six months ended June 30, 2022 compared with $38.5 million during the six months ended June 30, 2021. This increase in revenue was driven by a 132% increase in bitcoin production ($50.9 million) partially offset by lower revenue per bitcoin mined ($12.7 million) resulting from lower market prices for bitcoin in the current-year period when compared with the prior-year period. Cost of revenues – energy, hosting and other during the six months ended June 30, 2022 amounted to $29.2 million compared with $5.7 million in the prior-year period. This $23.5 million increase was driven by higher costs per bitcoin mined ($15.9 million, including the impact of accelerated costs related to the exit from Hardin) and increased costs associated with higher bitcoin production ($7.6 million). Total margin, which we define as revenues less cost of revenues – energy, hosting and other and cost of revenues – depreciation and amortization, totalled $8.9 million compared with $29.1 million in the prior-year period. This $20.2 million decrease in total margin was driven primarily by the impact of accelerated costs related to the Hardin exit partially offset by the increase in bitcoin production.
Notwithstanding the increased mining activities vs. the prior-year period, our production of bitcoin during the six months ended June 30, 2022 was negatively impacted by ongoing maintenance issues and the storm at our Hardin, MT facility as well as the delays in energizing our bitcoin mining equipment at the King Mountain data center in Texas.
Gain on sale of assets
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 six months ended June 30, 2022, the Company sold equipment for cash proceeds totalling $87.2 million and realized a pre-tax gain on the sale of such assets of $58.2 million. There were no such sales in the prior-year period.
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General and administrative expenses
General and administrative expenses were $26.8 million for the six months ended June 30, 2022 compared with $60.2 million for the prior year period, a decrease of $33.4 million from the prior-year period. This decrease was primarily the result of a $36.5 million decrease in stock-based (non-cash) compensation expense partially offset by higher costs associated with increased business activities.
Changes in carrying value of digital assets:
| ● | Impairment of digital currencies recorded in operating expenses: We incurred significant impairment of digital assets during the six months ended June 30, 2022 as the price of bitcoin hit new lows in June 2022. Total impairment expense was $147.1 million for the six months ended June 30, 2022 compared with an impairment expense of $11.7 million for the prior-year period. |
| ● | Change in fair value of digital currencies recorded in operating income (expense): During the month of June the company withdrew 4,769 bitcoin from its investment fund. Total year to day changes in the fair value of investment fund 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 an increase in fair value of $17.3 million. |
Non-operating income (loss)
Non-operating income increased primarily due to changes in the fair value of a stock warrant liability recorded in the prior-year period.
Depreciation and amortization
Depreciation and amortization, which we classify as “Cost of revenues – depreciation and amortization” in our statements of operations, increased $34.9 million when compared to the prior-year period primarily due to the acceleration of depreciation related to our exit of the Hardin, MT facility (a $19.9 million) and increased depreciation costs associated with a higher number of mining servers in operation when compared with the prior year period ($10.8 million).
Interest expense
Interest expense increased $6.6 million from the prior-year as a result interest related to the convertible notes issued in November 2021 ($5.7 million) and interest on borrowings outstanding under the Company’s revolving credit agreement ($0.9 million).
Income tax expense (benefit)
Income tax expense was $5.5 million for the six months ended June 30, 2022 compared with a small tax benefit in the prior year. We recorded tax expense despite a pre-tax loss from operations due to a valuation adjustment related to the certain deferred tax benefits record in the current year period.
Net loss
We recorded a net loss of $(204.6) million in the current year period compared with net loss of $(25.5) million in the prior period. This $179.1 million decline was primarily driven by the impact of declines in the carrying value of our digital assets ($237.7 million), higher depreciation expense ($34.9 million), and to a lesser extent higher interest expense and income tax expense. Partially offsetting these unfavorable variances was the gain on the sale of equipment ($58.1 million), lower general and administrative expenses ($33.3 million), and higher total margin ($14.7 million).
Adjusted EBITDA
Adjusted EBITDA was a loss of $(137.6) million compared with positive Adjusted EBITDA of $30.1 million in the prior year period. This $167.6 million decline was primarily driven by the impact of declines in the carrying value of our digital assets ($232.2 million) partially offset by the gain on the sale of equipment ($58.2 million), higher total margin ($14.7 million).
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Financial Condition and Liquidity
Cash, cash equivalents and restricted cash totalled $89.7 million at June 30, 2022, a decrease of $178.9 million from December 31, 2021. The decrease in cash, cash equivalents and restricted cash was primarily driven by a $334.0 million use of cash from investing activities resulting primarily from significant levels of advances to vendors related to bitcoin mining server orders ($394.0 million) and, to a lesser extent, purchases of property and equipment ($13.8 million) and equity investments ($14.0 million) partially offset by proceeds from assets sales ($87.2 million).
Cash flows from financing activities resulted in a source of cash of $196.0 million, primarily from proceeds from the issuance of common stock ($161.0 million) and proceeds from borrowings outstanding under the Company’s $100 million revolving credit agreement ($35.0 million).
Cash flows from operating activities resulted in a use of funds of $40.8 million. Positive cash flow impacts of operating activities before the impact of changes in operating assets and liabilities (a $47.9 million source of funds) were more than offset by a $88.7 million use of funds from changes in operating assets and liabilities, primarily due to changes in digital currencies (a $76.5 million use of funds).
We had $35 million outstanding under its revolving credit agreement at June 30, 2022. The maximum borrowings outstanding under the credit agreement during the six months ended June 30, 2022, was $70 million.
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 the growth in our business activities through the capital markets, including both debt and equity issuances.
Bitcoin Holdings
At June 30, 2022, we held approximately 10,055 bitcoin with a total carrying value of $190.4 million on the balance sheet. Approximately 2,820 bitcoin were being utilized as collateral for revolving credit borrowings 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 June 30, 2022 was approximately $198.9 million and the value of a single bitcoin was approximately $19,785.
At June 30, 2021 we held a total of 5,784 bitcoin with a total carrying value of $195.9 million on the balance sheet. The fair market value of our bitcoin holdings at June 30, 2021 was approximately $202.7 million and the value of a single bitcoin was approximately $35,041.
We expect to increase our bitcoin holdings over time primarily through mining activities. As our mining activities increase, we may sell a portion of bitcoin produced in future periods to fund monthly operations, 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of June 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 $5.34 to $28.92 with an average price per share of $13.38. We would have risk on our commercial credit facility had we drawn down upon it as the interest rate changes at the greater of 6% or the prime rate plus 2.75%. 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 Revolving Line of Credit 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.
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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 June 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 June 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 June 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 Controler 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 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.
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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. Multiple alleged shareholders have moved for appointment as lead plaintiff. Those motions remain pending before the Court.
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 five matters will not have a material adverse effect on the Company and its related entities combined financial position, results of operations, or liquidity.
Other than as disclosed herein, we know of no other material, active or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceedings or pending litigation other than in the normal course of business.
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 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.
| 10.1 | Forms of Revolving Credit Agreement, Revolving Credit Note, Term Loan Agreement and Term Loan Note |
| 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 | XBRL Instance Document** |
| 101.sch | XBRL Taxonomy Schema Document** |
| 101.cal | XBRL Taxonomy Calculation Document** |
| 101.def | XBRL Taxonomy Linkbase Document** |
| 101.lab | XBRL Taxonomy Label Linkbase Document** |
| 101.pre | 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: August 9, 2022
| MARATHON DIGITAL HOLDINGS, INC. | ||
| By: | /s/ Fred Thiel | |
| Name: | Fred Thiel | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
| By: | /s/ Simeon Salzman | |
| Name: | Simeon Salzman |
|
| Title: | Chief Accounting Officer | |
| (Principal Financial and Accounting Officer) | ||
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