10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 15, 2021
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)
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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
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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
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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.
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| ☒ | 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. ☐
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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 November 15, 2021.
TABLE OF CONTENTS
OTHER PERTINENT INFORMATION
Unless specifically set forth to the contrary, “Marathon Digital Holdings, Inc.,” “we,” “us,” “our” and similar terms refer to Marathon Digital Holdings, Inc., a Nevada corporation, and its subsidiaries.
| 2 |
Item 1. Financial Statements
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Digital currencies | ||||||||
| Digital currencies, restricted | - | |||||||
| Other receivable | - | |||||||
| Deposit | ||||||||
| Investment fund | - | |||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Other assets: | ||||||||
| Property and equipment, net of accumulated depreciation and impairment charges of $ |
||||||||
| Prepaid service contract | ||||||||
| Right-of-use assets | - | |||||||
| Intangible assets, net of accumulated amortization of $ |
||||||||
| Total other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Current portion of lease liability | - | |||||||
| Warrant liability | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities | ||||||||
| SBA PPP loan payable | - | |||||||
| Total long-term liabilities | - | |||||||
| Total liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred stock, par value, shares authorized, shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively | - | - | ||||||
| Common stock, par value; shares authorized; and issued and outstanding at September 30, 2021 and December 31, 2020, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( |
) | ( |
) | ||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Total stockholders’ equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part to these unaudited consolidated condensed financial statements.
| 3 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues | ||||||||||||||||
| Cryptocurrency mining revenue | $ | $ | $ | $ | ||||||||||||
| Total revenues | ||||||||||||||||
| Operating costs and expenses | ||||||||||||||||
| Cost of revenue | ||||||||||||||||
| Compensation and related taxes | ||||||||||||||||
| Consulting fees | ||||||||||||||||
| Professional fees | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Impairment of mined cryptocurrency | - | - | ||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other income (expenses) | ||||||||||||||||
| Other income | - | |||||||||||||||
| Loss on conversion of note | - | - | - | ( |
) | |||||||||||
| Change in fair value of investment in NYDIG fund | - | - | ||||||||||||||
| Realized gain (loss) on sale of digital currencies | ||||||||||||||||
| Change in fair value of warrant liability | ( |
) | ( |
) | ( |
) | ||||||||||
| Change in fair value of mining payable | - | - | - | ( |
) | |||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( |
) | - | ( |
) | ( |
) | |||||||||
| Total other (expenses) income | ( |
) | ( |
) | ||||||||||||
| Loss before income taxes | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Income tax expense | - | - | - | - | ||||||||||||
| Net loss | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Net loss per share, basic and diluted: | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Weighted average shares outstanding, basic and diluted: | ||||||||||||||||
The accompanying notes are an integral part to these unaudited consolidated condensed financial statements.
| 4 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
For the Three Months Ended September 30, 2021
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive |
Total Stockholders’ | |||||||||||||||||||||||||||
| Number | Amount | Number | Amount | Capital | Deficit | Income (Loss) | Equity | |||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
| Stock based compensation, net of withholding taxes | - | - | - | - | ||||||||||||||||||||||||||||
| Common stock issued for service and license agreements | - | - | ||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | ( |
) | - | ( |
) | ||||||||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
For the Three Months Ended September 30, 2020
| Preferred Stock | Common Stock | Additional Paid-in |
Accumulated | Accumulated Other Comprehensive |
Total Stockholders’ | |||||||||||||||||||||||||||
| Number | Amount | Number | Amount | Capital | Deficit | Income (Loss) | Equity | |||||||||||||||||||||||||
| Balance as of June 30, 2020 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Issuance of common stock, net of offering costs/At-the-market offering | - | - | - | - | ||||||||||||||||||||||||||||
| Issue common stock and warrant for cash | - | - | - | - | ||||||||||||||||||||||||||||
| Warrant exercised for cash | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( |
) | - | ( |
) | ||||||||||||||||||||||
| Balance as of September 30, 2020 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
For the Nine Months Ended September 30, 2021
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive |
Total Stockholders’ | |||||||||||||||||||||||||||
| Number | Amount | Number | Amount | Capital | Deficit | Income (Loss) | Equity | |||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
| Stock based compensation, net of withholding taxes | - | - | - | - | ||||||||||||||||||||||||||||
| Issuance of common stock, net of offering costs/At-the-market offering | - | - | - | - | ||||||||||||||||||||||||||||
| Options exercised on cashless basis | - | - | ( |
) | - | - | - | |||||||||||||||||||||||||
| Warrant exercised for cash | - | - | - | - | ||||||||||||||||||||||||||||
| Common stock issued for cashless exercise of warrants | - | - | - | - | - | |||||||||||||||||||||||||||
| Common stock issued for service and license agreements | - | - | - | - | ||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( |
) | - | ( |
) | ||||||||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
For the Nine months Ended September 30, 2020
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated |
Accumulated Other Comprehensive |
Total Stockholders’ | |||||||||||||||||||||||||||
| Number | Amount | Number | Amount | Capital | Deficit |
Income (Loss) |
Equity | |||||||||||||||||||||||||
| Balance as of December 31, 2019 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
| Stock based compensation | - | - | - | - | ||||||||||||||||||||||||||||
| Issuance of common stock, net of offering costs/At-the-market offering | - | - | - | - | ||||||||||||||||||||||||||||
| Common stock issued for purchase of mining servers | - | - | - | - | ||||||||||||||||||||||||||||
| Common stock issued for note conversion | - | - | - | - | ||||||||||||||||||||||||||||
| Issue common stock and warrant for cash | - | - | ||||||||||||||||||||||||||||||
| Warrant exercised for cash | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( |
) | - | ( |
) | ||||||||||||||||||||||
| Balance as of September 30, 2020 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
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)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income (loss) | ( |
) | $ | ( |
) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization of patents and website | ||||||||
| Amortization of leasehold improvements | - | |||||||
| Realized gain (loss) on sale of digital currencies | ( |
) | ( |
) | ||||
| Change in fair value of warrant liability | ||||||||
| Change in fair value of mining payable | - | |||||||
| Change in fair value of investment securities | ( |
) | - | |||||
| Gain on PPP loan forgiveness | ( |
) | - | |||||
| Impairment of cryptocurrencies | - | |||||||
| Stock based compensation | ||||||||
| Amortization of right-of-use assets | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Digital currencies | ( |
) | ( |
) | ||||
| Lease liability | ( |
) | ( |
) | ||||
| Prepaid expenses and other assets | ( |
) | ||||||
| Accounts payable and accrued expenses | ||||||||
| Net cash used in operating activities | ( |
) | ( |
) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Sale of digital currencies | ||||||||
| Interest received from digital currencies, restricted | ( |
) | - | |||||
| Purchase of investment securities | ( |
) | - | |||||
| Purchase of property and equipment | ( |
) | ( |
) | ||||
| Deposits for the purchase of mining servers | ( |
) | ( |
) | ||||
| Net cash used in investing activities | ( |
) | ( |
) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds received on issuance of notes payable | - | |||||||
| Proceeds from issuance of common stock/At-the-market offering | ||||||||
| Offering costs for the issuance of common stock/At-the-market offering | ( |
) | ( |
) | ||||
| Value of shares withheld for taxes | ( |
) | - | |||||
| Proceeds from issuance of common stock and warrant, net | - | |||||||
| Proceeds received on exercise of options and warrants | ||||||||
| Net cash provided by financing activities | ||||||||
| Net (decrease) increase in cash and cash equivalents | ( |
) | ||||||
| Cash and cash equivalents — beginning of period | ||||||||
| Cash and cash equivalents — end of period | $ | |||||||
| Supplemental schedule of non-cash investing and financing activities: | ||||||||
| Common stock issued for purchase of mining servers | $ | $ | ||||||
| Reduction of share commitment for purchase of mining servers | $ | $ | ||||||
| Options exercised into common stock | $ | $ | ||||||
| Common stock issued for note conversion | $ | $ | ||||||
| Common stock issued for service and license agreements | $ | $ | ||||||
The accompanying notes are an integral part to these unaudited consolidated condensed financial statements.
| 6 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization
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 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
when the former CEO joined the firm and the Company commenced IP licensing operations, at which time the Company’s name was changed
to Marathon Patent Group, Inc. On November 1, 2017, the Company entered into a merger agreement with Global Bit Ventures, Inc. (“GBV”),
which is focused on mining digital assets. The Company purchased cryptocurrency mining machines and established a data center in Canada
to mine digital assets. The Company expanded its activities in the mining of new digital assets, while at the same time harvesting the
value of its remaining IP assets. As of September 30, 2021, the Company has since terminated the lease in Canada and deployed over
In
the third quarter of 2020, the Company entered into a Long Term Purchase Contract with Bitmaintech PTE., LTD (“Bitmain”)
for the purchase of
Subject
to the timely payment of the purchase price,
On October 6, 2020, the Company entered into a series of agreements with affiliates of Beowulf Energy LLC, a Delaware limited liability company (collectively and as applicable, “Beowulf”) and Two Point One, LLC, a Delaware limited liability company (“2Pl”; Marathon, Beowulf and 2Pl each a “Party” and, collectively, the “Parties”). Beowulf and 2Pl have been designing and developing a data center facility of up to 100-megawatts (the “Facility”) that will be located next to, and supplied energy directly from, Beowulf’s power generating station in Hardin, MT (the “Hardin Station”). The Facility is being developed in two phases to reach its 100 MW capacity, and the Hardin Station will supply the Facility exclusively with energy to operate Bitcoin mining servers.
The
projected build out cost for Phase I is approximately $
| 7 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Beowulf
and 2P1 provide operation and maintenance services for the Facility pursuant to a Data Facility Services Agreement, in exchange for an
initial issuance of shares of Marathon’s common stock to each of Beowulf and 2Pl valued at the time of execution at $
On
October 23, 2020, the Company executed a contract with Bitmain to purchase an additional
On
December 8, 2020, the Company executed a contract with Bitmain to purchase an additional
On
December 23, 2020, the Company executed a contract with Bitmain to purchase an additional
| 8 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
On
December 31, 2020, the Company sold shares of common stock pursuant to the At The Market offering. Proceeds of $
Effective December 31, 2020, the Board of Directors of the Company ratified the following arrangements approved by its Compensation Committee:
Merrick
Okamoto, CEO was awarded a cash bonus of $
On January 12, 2021, the Company, entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain purchasers named therein (the “Purchasers”), pursuant to which the Company agreed to issue and sell, in a registered direct offering (the “Offering”), shares of its common stock (the “Securities”) at an offering price of per share.
The
Purchase Agreement contains customary representations and warranties and agreements of the Company and the Purchasers and customary indemnification
rights and obligations of the parties. The closing of the Offering occurred on January 15, 2021. The Company received gross proceeds
of $
On
January 25, 2021, the Company announced that it has purchased
On February 11, 2021, the Company issued shares of common stock pursuant to the 2018 Equity Incentive Plan.
Effective March 1, 2021, the Company changed its name to Marathon Digital Holdings, Inc.
On March 7, 2021, the Company entered into a termination agreement with the 9349-0001 Quebec Inc., to agree to terminate the outstanding lease. As of that date, the Company was fully released and discharged from any and all obligations under the Lease Agreement. In November 2017, the Company assumed a lease in connection with the mining operations in Quebec, Canada.
| 9 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
On
May 21, 2021,
On
July 30, 2021, Marathon Digital Holdings, Inc. (the “Company”) entered into a fully executed contract with Bitmain to purchase
an additional
On August 27, 2021, Marathon Digital Holdings, Inc. (the “Company”) entered into a Master Securities Loan Agreement (the “Agreement”) with NYDIG Funding, LLC (“NYDIG”). Pursuant to the Agreement, the Company will loan its bitcoin (“BTC”) to NYDIG with an interest rate of three percent (3%) per annum. Interest accrues daily and is payable on a monthly basis. The Agreement provides that the Company may recall its BTC at any time. NYDIG shall, prior to or concurrently with the transfer of the of the BTC to NYDIG, but in no case later than the close of business on the day of such transfer, transfer to the Company collateral with a market value at least equal to 100% of the market value of the loaned BTC, and the Company is granted a first priority lien on such collateral. As of August 27, 2021, the Company loaned 300 BTC to NYDIG.
Risks and Uncertainties
The impact of the worldwide spread of a novel strain of coronavirus (“COVID 19”) has been and continues to be unprecedented and unpredictable, but based on the Company’s current assessment, the Company does not expect any material impact on its long-term strategic plans, operations and its liquidity due to the worldwide spread of COVID-19. However, the Company is continuing to assess the effect on its operations by monitoring the spread of COVID-19 and the actions implemented to combat the virus throughout the world and its assessment of the impact of COVID-19 may change.
| 10 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 (U.S. 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, 2021.
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 patent assets and fixed assets, the assumptions used to calculate fair value of warrants and options granted, realization of long-lived assets, deferred income taxes, unrealized tax positions and the realization of digital currencies.
Significant Accounting Policies
There have been no material changes to the Company’s significant accounting policies to those previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Digital Currencies
Digital currencies 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.
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.
The following table presents the activities of the digital currencies for the nine months ended September 30, 2021:
| Digital currencies at December 31, 2020 | $ | |||
| Additions of digital currencies | ||||
| Realized gain on sale of digital currencies | ||||
| Impairment of cryptocurrencies | ( |
) | ||
| Interest received on cryptocurrencies, restricted | ||||
| Sale of digital currencies | ( |
) | ||
| Digital currencies at September 30, 2021 | $ |
On
August 27, 2021, Marathon Digital Holdings, Inc. (the “Company”) entered into a Master Securities Loan Agreement (the “Agreement”)
with NYDIG Funding, LLC (“NYDIG”). Pursuant to the Agreement, the Company will loan its bitcoin (“BTC”) to NYDIG
with an interest rate of three percent (
| 11 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Investment 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
Each 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 each 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). An entity must have access to the principal (or most advantageous) market at the measurement date (ASC 820-10-35-6A).
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.
| 12 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis and the Company’s estimated level within the fair value hierarchy of those assets and liabilities as of September 30, 2021 and December 31, 2020, respectively:
| Fair value measured at September 30, 2021 | ||||||||||||||||
|
Total carrying value at September 30, |
Quoted prices in active markets | Significant other observable inputs | Significant unobservable inputs | |||||||||||||
| 2021 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Assets | ||||||||||||||||
| Investment Fund | $ | $ | ||||||||||||||
| Liabilities | ||||||||||||||||
| Warrant liability | $ | $ | - | $ | - | $ | ||||||||||
| Fair value measured at December 31, 2020 | ||||||||||||||||
| Total carrying value at December 31, | Quoted prices in active markets | Significant other observable inputs | Significant unobservable inputs | |||||||||||||
| 2020 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Liabilities | ||||||||||||||||
| Warrant liability | $ | $ | $ | $ | ||||||||||||
There were no transfers between Level 1, 2 or 3 during the three months ended September 30, 2021.
Fair value of warrant liabilities
At
September 30, 2021, the Company had an outstanding warrant liability in the amount of $
| Fair value | ||||
| Outstanding as of December 31, 2020 | $ | |||
| Change in fair value of warrants | ||||
| Outstanding as of September 30, 2021 | $ | |||
Non-recurring measurement of Fair Value
The
Company accounts for its digital currencies as indefinite-lived intangible assets in accordance with Accounting Standards Codification
(“ASC”) 350, Intangibles – Goodwill and Other. The Company’s digital currencies are initially recorded
at fair value upon receipt (or “carrying value”). On a quarterly basis, they are measured at carrying value, net of any impairment
losses incurred since receipt. Pursuant to guidance from ASC 820, Fair Value Measurement, the Company is required to determine
the non-recurring fair value measurement used to determine impairment of the digital currencies held on the balance sheet. The Company
will record impairment losses as the fair value falls below the carrying value of the digital currencies. The digital currencies can
only be marked down when impaired and not marked up when their value increases. The resulting carrying value represents the fair value
of the asset. The last impairment date for the digital currencies was September 30, 2021. The Company had an outstanding carrying balance
of digital assets of approximately $
| 13 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Net
loss for the three and nine months ended September 30, 2021 is ($
| As of September 30, | ||||||||
| 2021 | 2020 | |||||||
| Warrants to purchase common stock | ||||||||
| Restricted stock | ||||||||
| Options to purchase common stock | ||||||||
| Total | ||||||||
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net loss attributable to common shareholders | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Denominator: | ||||||||||||||||
| Weighted average common shares - basic and diluted | ||||||||||||||||
| Income (loss) per common share - basic and diluted | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Recent Accounting Pronouncements
The Company adopted Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”)” effective as of January 1, 2021, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company believes that its income tax positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in material changes to its financial position.
In 2020, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to address the complexity in accounting for certain financial instruments with characteristics of liabilities and equity. Amongst other provisions, the amendments in this ASU significantly change the guidance on the issuer’s accounting for convertible instruments and the guidance on the derivative scope exception for contracts in an entity’s own equity such that fewer conversion features will require separate recognition, and fewer freestanding instruments, like warrants, will require liability treatment. This guidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company adopted ASU 2020-06 early as of January 1, 2021. Such adoption did not result in any material changes to its financial position, results of operations or cash flows.
Any new accounting standards, not disclosed above, that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.
| 14 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 3 – DEPOSIT, PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS
On May 11, 2020, the Company signed a Contract Addendum with Compute North, to pause and suspend services under its Colocation Agreement. This suspended all production of Bitcoin using our S-9 miners.
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.
On
May 11, 2020, the Company purchased 700 new generation M305+ASIC Miners from MicroBT for approximately $
The
Company purchased
On
July 29, 2020, the Company announced the purchase of
On
August 13, 2020, the Company entered into a Long Term Purchase Contract with Bitmaintech PTE., LTD (“Bitmain”) for the purchase
of
| 15 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
On February 1, 2021, Marathon announced that Bitmain had shipped approximately 4,000 S-19 Pro ASIC miners to the Company’s mining facility in Hardin, MT, all of which were delivered as scheduled.
In addition to the initial 4,000 miners delivered to the Hardin facility in February, Bitmain has shipped another 22,960 miners to Hardin. Marathon has received over 26,900 miners as of September 30, 2021 and subsequent to quarter end increased its active mining fleet to approximately 25,272 miners, generating approximately 2.74 EH/s.
As
of September 30, 2021, approximately $
On
May 21, 2021, the Company entered into a binding letter of intent with Compute North, LLC to host
The components of property, equipment and intangible assets as of September 30, 2021 and December 31, 2020 are:
| Useful life (Years) |
September 30, 2021 | December 31, 2020 | ||||||||||
| 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 for the three months ended September 30, 2021 and 2020 were $
NOTE 4 - STOCKHOLDERS’ EQUITY
Common Stock
On January 1, 2018, our Board adopted the 2018 Equity Incentive Plan, subsequently approved by the stockholders on March 7, 2018, pursuant to which up to shares of common stock, stock options, restricted stock, preferred stock, stock-based awards and other awards are reserved for issuance as awards to employees, directors, consultants, advisors and other service providers. In August 2021, the Plan was increased by an additional 7.5 million shares which were registered pursuant to a Registration Statement on Form S-8.
| 16 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Registered Direct Offering
On January 12, 2021, the Company, entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain purchasers named therein (the “Purchasers”), pursuant to which the Company agreed to issue and sell, in a registered direct offering (the “Offering”), shares of its common stock (the “Securities”) at an offering price ofper share.
The
Purchase Agreement contains customary representations and warranties and agreements of the Company and the Purchasers and customary indemnification
rights and obligations of the parties. The closing of the Offering occurred on January 15, 2021. The Company received gross proceeds
of $
Pursuant
to a letter agreement, dated August 2020 (the “Engagement Letter”), the Company engaged H.C. Wainwright & Co., LLC
(the “Placement Agent”) as placement agent in connection with the Offering. The Placement Agent agreed to use its
reasonable best efforts to arrange for the sale of the Securities. The Company agreed to pay to the Placement Agent a cash fee of
5.0% of the aggregate gross proceeds raised in the Offering.
Series B Convertible Preferred Stock
As of September 30, 2021, there were no shares of Series B Convertible Preferred Stock outstanding.
Series E Preferred Stock
There was no Series E Convertible Preferred Stock outstanding as of September 30, 2021.
Common Stock Warrants
A summary of the status of the Company’s outstanding stock warrants and changes during the nine months ended September 30, 2021 is as follows:
| Number of Warrants |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life |
||||||||||
| Outstanding as of December 31, 2020 | $ | |||||||||||
| Issued | ||||||||||||
| Expired | ||||||||||||
| Exercised | ( |
) | ||||||||||
| Outstanding as of September 30, 2021 | $ | |||||||||||
| Warrants exercisable as of September 30, 2021 | $ | |||||||||||
| The aggregate intrinsic value of warrants outstanding and exercisable at September 30, 2021 was | $ | |||||||||||
| 17 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Common Stock Options
|
Number of Shares |
Weighted Average |
Weighted Average Remaining Contractual Life |
||||||||||
| Outstanding as of December 31, 2020 | $ | |||||||||||
| Exercised | ( |
) | - | |||||||||
| Outstanding as of September 30, 2021 | $ | |||||||||||
| Options vested and expected to vest as of September 30, 2021 | $ | |||||||||||
| Options vested and exercisable as of September 30, 2021 | $ |
|
||||||||||
| The aggregate intrinsic value of options outstanding and exercisable at September 30, 2021 was | $ | |||||||||||
Restricted Stock
On
January 6, 2021, the Company issued shares pursuant to the 2018 Equity Incentive Plan for shares that vested as of December 31,
2020. Subsequent to year end, the Company issued
| Number of Units | Weighted Average Grant Date Fair Value |
|||||||
| Nonvested at December 31, 2020 | $ | |||||||
| Granted | $ | |||||||
| Vested | ( |
) | $ | |||||
| Nonvested at September 30, 2021 | $ | |||||||
The Company anticipates incurring non-cash stock based compensation expense of $, $ and $ on December 31, 2021, March 31, 2022 and June 30, 2022, respectively related to the nonvested shares.
NOTE 5 - DEBT, COMMITMENTS AND CONTINGENCIES
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. The monthly rent is $
The
Company also assumed a lease in connection with the mining operations in Quebec, Canada. Operating leases are included in operating lease
right-of-use assets, operating lease liabilities, and noncurrent operating lease liabilities on the balance sheets. On March 7, 2021,
the Company entered into a termination agreement with the 9349-0001 Quebec Inc., to agree to terminate the outstanding lease. As of that
date, the Company was fully released and discharged from any and all obligations under the Lease Agreement. Due to the lease termination,
the Company incurred a loss on cancellation in an amount of approximately $
Operation lease costs are recorded on a straight-line basis within operating expenses. The Company’s total lease expense is comprised of the following:
| 18 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Additional information regarding the Company’s leasing activities as a lessee is as follow:
| For the Three Months Ended | ||||||||
| September 30, 2021 | September 30, 2020 | |||||||
| Operating leases | ||||||||
| Operating lease cost | $ | $ | ||||||
| Operating lease expense | - | |||||||
| Short-term lease rent expense | ||||||||
| Total rent expense | $ | $ | ||||||
| For the Nine months Ended | ||||||||
| September 30, 2021 | September 30, 2020 | |||||||
| Operating leases | ||||||||
| Operating lease cost | $ | $ | ||||||
| Operating lease expense | ||||||||
| Short-term lease rent expense | ||||||||
| Total rent expense | $ | $ | ||||||
Additional information regarding the Company’s leasing activities as a lessee is as follow:
| For the Nine months Ended | ||||||||
| September 30, 2021 | September 30, 2020 | |||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| Weighted-average remaining lease term – operating leases | ||||||||
| Weighted-average discount rate – operating leases | % | % | ||||||
As of September 30, 2021, contractual minimal lease payments are nil.
Legal Proceedings
Feinberg Litigation
On March 27, 2018, Jeffrey Feinberg, purportedly joined by the Jeffrey L. Feinberg Personal Trust and the Jeffrey L. Feinberg Family Trust, filed a complaint against the Company and certain of its former officers and directors. The complaint was filed in the Supreme Court of the State of New York, County of New York. The plaintiffs purported to state claims under Sections 11, 12(a)(2) and 15 of the federal Securities Act of 1933 and common law claims for “actual fraud and fraudulent concealment,” constructive fraud, and negligent misrepresentation, seeking unspecified money damages (including punitive damages), as well as costs and attorneys’ fees, and equitable or injunctive relief. On June 15, 2018, the defendants filed a motion to dismiss all claims asserted in the complaint and, on July 27, 2018, the plaintiffs filed an opposition to that motion. The court heard argument on the motion and, on January 15, 2019, the court granted the motion to dismiss, allowing 30 days for the filing of an amended complaint. On February 15, 2019, Jeffrey Feinberg, individually and as trustee of the Jeffrey L. Feinberg Personal Trust, and Terrence K. Ankner, as trustee of the Jeffrey L. Feinberg Family Trust, filed an amended complaint that purports to state the same claims and seeks the same relief sought in the original complaint. On March 7 and 22, 2019, defendants filed motions to dismiss the amended complaint and on April 5, 2019, plaintiffs filed an opposition to those motions. The court heard oral argument on the motions to dismiss on July 9, 2019, and at the conclusion of the argument the court took the motions under submission. On March 13, 2020, the court issued its Decision in which it granted the motions to dismiss in full and ordered that the case be dismissed with prejudice. On or about May 4, 2020, the plaintiffs filed a notice of appeal. Plaintiffs filed their opening appellate brief on January 4, 2021, and defendants filed their responsive appellate briefs on February 3, 2021. Oral argument on the appeal was conducted on April 1, 2021. On April 22, 2021, the court’s Appellate Division issued its Decision and Order affirming the dismissal of the case.
| 19 |
MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Ho Matter
On January 14, 2021, Plaintiff Michael Ho (“Plaintiff” or “Ho”) filed a Civil Complaint for Damages and Restitution (“Complaint”) against Marathon Patent Group, Inc., now known as Marathon Digital Holdings, Inc. (the “Company”) and 10 Doe Defendants in the Superior Court of the State of California for the County of Riverside. 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. Claims 5 and 6 are pled against “all Defendants” and may involve later named defendants. The Complaint seeks damages, restitution, punitive damages, and costs of suit. The claims arise from the same set of facts. Ho alleges that the Company profited from commercially-sensitive information he shared with the Company, purportedly under a mutual non-disclosure agreement, and that the Company failed 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 parties are currently engaged in discovery, including written discovery and depositions. The Company will move to have Plaintiff’s claims dismissed before trial. Trial is set to begin on March 3, 2022. 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.
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.
NOTE 6 – Subsequent Events
On
October 1, 2021, Marathon Digital Holdings, Inc. (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: | One
( |
| 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 one- year anniversary of the loan date. |
| Origination Fee: | |
| Unused Commitment Fee: | |
| Renewal: |
The RLOC may be renewed annually by agreement between the Bank and the Company, subject to (without limitation): (i) Company makes a request for renewal, in writing, no less than sixty (60) days prior to the then current maturity date, (ii) no event of default then exists, (iii) Company provides all necessary documentation to extend the RLOC, (iv) Company has paid all applicable fees related to the loan renewal, and (v) the Bank has approved such extension request according to its internal credit policies as determined by the Bank in its sole and absolute discretion.
If
the Bank approves a request by Company to renew the RLOC upon any maturity, then a Renewal Fee of |
| Payments: | Interest only to be paid monthly, with principal all due at maturity. |
| Collateral: | The RLOC will be secured by a pledge of a sufficient amount of Company’s right, title and interest in and to bitcoin and/or U.S. Dollar (“USD”) 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 (and/or US$) to cause a Loan to Value
(the “LTV”) ratio of |
| Covenants: |
| 20 |
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.
| 21 |
Business of the Company
We were incorporated in the State of Nevada on February 23, 2010 under the name Verve Ventures, Inc. As of the date of this filing, our name has been changed to Marathon Digital Holdings, Inc. On December 7, 2011, we changed our name to American Strategic Minerals Corporation and were engaged in exploration and potential development of uranium and vanadium minerals business. In June 2012, we discontinued our minerals business and began to invest in real estate properties in Southern California. In October 2012, we discontinued our real estate business when our former CEO joined the firm and we commenced our IP licensing operations, at which time the Company’s name was changed to Marathon Patent Group, Inc. On November 1, 2017, we entered into a merger agreement with Global Bit Ventures, Inc. (“GBV”), which is focused on mining digital assets. We have since purchased our cryptocurrency mining machines and established a data center in Canada to mine digital assets. Following the merger, we intended to add GBV’s existing technical capabilities and digital asset miners and expand our activities in the mining of new digital assets, while at the same time harvesting the value of our remaining IP assets. On June 28, 2018, the board has determined that it is in the best interests of the Company and its shareholders to allow the Amended Merger Agreement to expire on its current termination date of June 28, 2018 without further negotiation or extension. The Board approved to issue 750,000 shares of our common stock to GBV as a termination fee for canceling the proposed merger between the two companies. The fair value of the common stocks was $2,850,000.
The Company believes that bitcoin is attractive because it can serve as a store of value, supported by a robust and public open source architecture, that is untethered to sovereign monetary policy and can therefore serve as a hedge against inflation. Bitcoin exists entirely in electronic form, as virtually irreversible public transaction ledger entries on the blockchain, and transactions in bitcoin are recorded and authenticated not by a central repository, but by a decentralized peer-to-peer network. This decentralization avoids certain threats common to centralized computer networks, such as denial of service attacks, and reduces the dependency of the bitcoin network on any single system. While the bitcoin network as a whole is decentralized, the private keys used to access bitcoin balances are not widely distributed and are held on hardware (which can be physically controlled by the holder or by a third party such as a custodian) or via software programs on third-party servers and loss of such private keys results in an inability to access, and effective loss of, the corresponding bitcoin. Consequently, bitcoin holdings are susceptible to all of the risks inherent in holding any electronic data, such as power failure, data corruption, security breach, communication failure, and user error, among others. These risks, in turn, make bitcoin subject to theft, destruction, or loss of value from hackers, corruption, or technology-specific factors such as viruses that do not affect conventional fiat currency. In addition, the bitcoin network relies on open source developers to maintain and improve the bitcoin protocol. Accordingly, bitcoin may be subject to protocol design changes, governance disputes such as “forked” protocols, competing protocols, and other open source-specific risks that do not affect conventional proprietary software.
The Company believes that in the context of the economic and public health crisis precipitated by COVID-19 and the unprecedented government financial stimulus measures adopted around the world, decreasing interest rates, as well as the breakdown of trust in and between political institutions and political parties in the United States and globally, bitcoin represents a more attractive store of value than fiat currency, and further that opportunity for appreciation in the value of bitcoin exists in the event that such factors lead to even more widespread adoption of bitcoin as a treasury reserve alternative.
| As of September 30, 2021 | ||||||||||||
| Existing Operations |
Purchase Agreements | Cumulative Fleet | ||||||||||
| Total miners ordered | 2,620 | 130,500 | 133,120 | |||||||||
| Total miners shipped | 2,620 | 26,960 | 29,580 | |||||||||
| Total miners installed | 2,620 | 22,652 | 25,272 | |||||||||
| Total produced hashrate to date | 243 PH/s | 2,492 PH/s | 2,735 PH/s | |||||||||
Recent Developments
On January 6, 2021, the Company issued 566,279 shares pursuant to the 2018 Equity Incentive Plan for shares that vested as of December 31, 2020. Subsequent to year end, the Company issued 170,904 and 23,500 shares of common stock pursuant to warrant and option exercises, respectively.
On January 12, 2021, the Company also announced that it had successfully completed its previously announced $200 million shelf offering by utilizing its at-the-market (ATM) facility. Pursuant to the terms of the offering 12,500,000 shares of common stock were issued at a value of $20 per share. As a result, the Company ended the 2020 fiscal year with $141.3 million in cash and 81,974,619 shares outstanding.
On January 12, 2021, the Company, entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain purchasers named therein (the “Purchasers”), pursuant to which the Company agreed to issue and sell, in a registered direct offering (the “Offering”), 12,500,000 shares of its common stock (the “Securities”) at an offering price of $20.00 per share.
| 22 |
The Purchase Agreement contains customary representations and warranties and agreements of the Company and the Purchasers and customary indemnification rights and obligations of the parties. The closing of the Offering occurred on January 15, 2021. The Company received gross proceeds of $250,000,000 in connection with the Offering, before deducting placement agent fees and related offering expenses.
Pursuant to a letter agreement, dated August 2020 (the “Engagement Letter”), the Company engaged H.C. Wainwright & Co., LLC (the “Placement Agent”) as placement agent in connection with the Offering. The Placement Agent agreed to use its reasonable best efforts to arrange for the sale of the Securities. The Company agreed to pay to the Placement Agent a cash fee of 5.0% of the aggregate gross proceeds raised in the Offering. The Company also issued to designees of the Placement Agent warrants to purchase up to 3.0% of the aggregate number of shares of Common Stock sold in the transactions, or warrants to purchase up to 375,000 shares of Common Stock (the “Placement Agent Warrants”). The Placement Agent Warrants have an exercise price equal to 125% of the offering price per share (or $25.00 per share). The Company also agreed to pay the Placement Agent $50,000 for accountable expenses, to reimburse an investor’s legal fees in an amount up to $7,500 and to pay $12,900 for the Placement Agent’s clearing fees. Pursuant to the terms of the Engagement Letter, the Placement Agent has the right, for a period of twelve months following the closing of the Offerings, to act (i) as financial advisor in connection with any merger, consolidation or similar business combination by the Company and (ii) as sole book-running manager, sole underwriter or sole placement agent in connection with certain debt and equity financing transactions by the Company.
Effective January 19, 2021, David Lieberman resigned as a director of the Company. On the same date, the Company’s Board appointed Kevin DeNuccio as a director to fill the vacancy created by Mr. Lieberman’s resignation.
Mr. DeNuccio is the Founder and General Partner of Wild West Capital LLC since 2012 where he focused on angel investments, primarily in SAAS software start-ups.
He brings to Marathon more than 25 years of experience as a chief executive, global sales leader, public and private board member, and more than a dozen angel investments, managing and growing leading technology businesses. He served in senior executive positions with Verizon, Cisco Systems, Ericsson, Redback Networks, Wang Laboratories and Unisys Corporation.
On January 25, 2021, the Company entered into a limited partnership agreement with NYDIG Digital Assets Fund III, LP (“fund”) whereas the fund purchased 4,812.66 BTC in an aggregate purchase price of $150 million. The Company owns 100% of the limited partnership interest. The investment fund is included in current assets in the consolidated balance sheets.
On February 11, 2021, the Company issued 4,701,442 shares of common stock pursuant to the 2018 Equity Incentive Plan.
Effective March 1, 2021, the Company changed its name to Marathon Digital Holdings, Inc.
On March 7, 2021, the Company entered into a termination agreement with the 9349-0001 Quebec Inc., to agree to terminate the outstanding lease. As of that date, the Company was fully released and discharged from any and all obligations under the Lease Agreement. In November 2017, the Company assumed a lease in connection with the mining operations in Quebec, Canada.
On April 26, 2021, the Company appointed Fred Thiel as its new chief executive officer. Mr. Thiel has succeeded Merrick Okamoto, who has served as the Company’s chief executive officer since 2018, and who will serve as executive chairman of the board of directors following the transition.
On March 25, 2021, Marathon Digital Holdings, Inc. (the “Company”) entered into a licensing agreement with DMG Blockchain Solutions, Inc. to license DMG’s proprietary Blockseer pool technology for use in its new Marathon OFAC Pool . Pursuant to the terms and conditions of the Agreement, the Company will be granted an exclusive and irrevocable license to use the technology in the U.S., and DMG will receive: $500,000 in restricted common stock of the Company (stock to be issued in a transaction exempt from registration under Section 4(a)(2) under the Securities Act of 1933, as amended); a monthly license fee with a sliding scale based on the MARAPool’s block rewards and transaction fees received by the pool; and technical support services to be provided on an as-needed basis with payment in US dollars. As of September 30, 2021, DMG has received shares equivalent to $500,000 in restricted common stock of the Company.
On May 20, 2021, the Company appointed Georges Antoun and Jay Leupp to its board of directors, effective immediately, as Peter Benz transitions to become the company’s vice president of corporate development and Michael Berg steps down from his position of director to pursue other projects. As a result, Marathon’s board of directors now consists of five directors, including three independent directors and two inside directors.
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On May 21, 2021, Marathon Digital Holdings, Inc. (the “Company”) entered into a binding letter of intent with Compute North, LLC to host 73,000 Bitcoin Miners over a staged in implementation between October 2021 and March 2022. The hosting cost is $0.50 per machine per month and the hosting rate will be $0.044 per kWh. In order to build out the infrastructure without paying for the capital expenditure, the Company will provide an 18 month bridge loan to Compute North of up to $67 million dollars, in tranches, based upon specified requirements being met. The terms of the contract are limited to three years with increases thereafter capped at three percent per year thereafter. The Company has also agreed to pay up to $14 million in expedite fees for construction/electrical and supply chain expediting activities. As of September 30, 2021, the Company paid $8 million of the $14 million in expedite fees recorded as a deposit on the balance sheet . On September 3, 2021, the Company entered into a master agreement with Compute North, LLC whereas the Company will pay an initial deposit of $14.6 million in aggregate over five installments. As of September 30, 2021, the Company paid $9.1 million of the $14.6 million initial deposit recorded as a deposit on the balance sheet.
On July 30, 2021, Marathon Digital Holdings, Inc. (the “Company”) entered into a fully executed contract with Bitmain to purchase an additional 30,000 S-19j Pro ASIC Miners, with 5,000 units scheduled to be delivered in each of January 2022, February 2022, March 2022, April 2022, May 2022, and June 2022. The purchase price is $126,000,000 with (i) 25% of the purchase price due paid within one day of execution of the contract, (ii) 35% of the purchase price of each batch due in consecutive months with 35% of the January 2022 batch due immediately, and then 35% of each of the remaining five batches due on the 15th of each consecutive month starting August 15, 2021, through December 15, 2021 and (iii) the remaining 40% of the purchase price of each batch due on the 15th of each consecutive month starting November 15, 2021 and then 40% of each of the remaining five batches due on the 15th of each consecutive month through April 2022.
On August 9, 2021, the Company appointed Sarita James and Said Ouissal to its board of directors, effective immediately. As a result, Marathon’s board of directors now consists of seven directors, including five independent directors and two inside directors.
On August 23, 2021 , the Company issued 2,722,435 shares of common stock pursuant to the 2018 Equity Incentive Plan.
On August 27, 2021, Marathon Digital Holdings, Inc. (the “Company”) entered into a Master Securities Loan Agreement (the “Agreement”) with NYDIG Funding, LLC (“NYDIG”). Pursuant to the Agreement, the Company will loan its bitcoin (“BTC”) to NYDIG with an interest rate of three percent (3%) per annum. Interest accrues daily and is payable on a monthly basis. The Agreement provides that the Company may recall its BTC at any time. NYDIG shall, prior to or concurrently with the transfer of the BTC to NYDIG, but in no case later than the close of business on the day of such transfer, transfer to the Company collateral with a market value at least equal to 100% of the market value of the loaned BTC, and the Company is granted a first priority lien on such collateral. As of August 27, 2021, the Company loaned 300 BTC to NYDIG.
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As previously disclosed in the Company’s monthly production updates, there have been multiple instances of the power generating station in Hardin, MT operating below peak capacity and thus limiting the Company’s ability to mine bitcoin during 2021. To mitigate these issues in the future, system upgrades will be performed on the power generating station beginning in November 2021 and continuing into 2022. Each phase of this maintenance will require the plant, and therefore the Company’s mining operations in Hardin, MT, to be offline for approximately three to five days. The upgrades are intended to improve the power generating station’s efficacy and efficiency, increase safety, mitigate the potential for unexpected downtime in the future, and ultimately improve the Company’s ability to effectively mine bitcoin. The Company believes that the impact of these upgrades on its mining operations will minimize future downtime and thus counterbalance any maintenance downtime experienced as a result of these repairs.
Critical Accounting Policies and Estimates
We believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis:
Digital Currencies
Digital currencies are included in current assets in the consolidated balance sheets as intangible assets with indefinite useful lives. 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, which is measured using the quoted price of the digital currency at the time its fair value is being measured. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that 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.
At September 30, 2021, we carried $282.7 million of digital assets on our balance sheet, which include cumulative impairments of $18.5 million, consisting of the approximately 7,035 bitcoins, and held $32.9 million in cash and cash equivalents, compared to $2.3 million of digital assets and $141.3 million in cash and cash equivalents at December 31, 2020, reflecting the shift in our liquid assets. As of November 15, 2021, we held approximately 7,562 bitcoins, of which, 4,812.66 bitcoins were acquired at an aggregate purchase price of $150 million at an average purchase price of approximately $31,168 per bitcoin, inclusive of fees and expenses. These purchased bitcoins are held in an investment fund of one where the Company is the sole limited partner. We expect to purchase additional bitcoin held by NYDIG Digital Assets Fund III, LP, the investment fund in future periods, though we may also sell bitcoin in future periods as needed to generate Cash Assets for treasury management purposes.
Non-GAAP Financial Measures
We are providing supplemental financial measures for (i) non-GAAP income from operations that excludes the impact of depreciation and amortization of fixed assets, impairment losses on mined cryptocurrency, server maintenance contract amortization and stock compensation expense and (ii) non-GAAP net income and non-GAAP diluted earnings per share that exclude the impact of depreciation and amortization of fixed assets, impairment losses on mined cryptocurrency, change in fair value of warrant liability, server maintenance contract amortization and stock compensation expense, net of withholding taxes. These supplemental financial measures are not measurements of financial performance under generally accepted accounting principles in the United States (“GAAP”) and, as a result, these supplemental financial measures may not be comparable to similarly titled measures of other companies. Management uses these non-GAAP financial measures internally to help understand, manage, and evaluate our business performance and to help make operating decisions.
We believe that these non-GAAP financial measures are also useful to investors and analysts in comparing our performance across reporting periods on a consistent basis. The first supplemental financial measure excludes non-cash operational expenses that we believe are not reflective of our general business performance such as (i) depreciation and amortization of fixed assets, (ii) significant impairment losses on mined cryptocurrency, (iii) server maintenance contract amortization and (iv) stock compensation expense, net of withholding taxes that could vary significantly in comparison to other companies.
The second set of supplemental financial measures excludes the impact of (i) depreciation and amortization of fixed assets, (ii) significant impairment losses on mined cryptocurrency, (iii) change in fair value of warrant liability (iv) server maintenance contract amortization and (v) stock compensation expense, net of withholding taxes. We believe the use of these non-GAAP financial measures can also facilitate comparison of our operating results to those of our competitors.
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. For example, we expect that share-based compensation expense, which is excluded from the first two non-GAAP financial measures, will continue to be a significant recurring expense over the coming years and is an important part of the compensation provided to certain employees, officers, and directors. Similarly, we expect that depreciation and amortization of fixed assets will continue to be a recurring expense over the term of the useful life of the assets. We have also excluded impairment losses on mined cryptocurrency from the first two non-GAAP financial measures, which may occur in future periods as a result of our continued holdings of significant amounts of bitcoin. Our non-GAAP financial measures are not meant to be considered in isolation and should be read only in conjunction with our Consolidated Condensed Financial Statements, which have been prepared in accordance with GAAP. We rely primarily on such Consolidated Condensed Financial Statements to understand, manage, and evaluate our business performance and use the non-GAAP financial measures only supplementally.
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The following is a reconciliation of our non-GAAP income from operations, which excludes the impact of (i) depreciation and amortization of fixed assets (ii) impairment losses on mined cryptocurrency (iii) server maintenance contract amortization and (iv) stock compensation expense, net of withholding taxes, to its most directly comparable GAAP measures for the periods indicated:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Reconciliation of non-GAAP income from operations: | ||||||||||||||||
| Operating loss | $ | (64,283,755 | ) | $ | (1,994,197 | ) | $ | (106,717,049 | ) | $ | (4,877,232 | ) | ||||
| Depreciation and Amortization of Fixed Assets | 4,340,198 | 805,483 | 8,015,801 | 1,851,341 | ||||||||||||
| Impairment of mined cryptocurrency | 6,731,890 | - | 18,472,750 | - | ||||||||||||
| Server maintenance contract amortization | 949,280 | - | 2,071,280 | - | ||||||||||||
| Stock Compensation Expense, net of withholding taxes | 95,739,710 | 360,211 | 147,647,288 | 1,032,199 | ||||||||||||
| Non-GAAP income (loss) from operations | $ | 43,477,323 | $ | (828,503 | ) | $ | 69,490,070 | $ | (1,993,692 | ) | ||||||
The following are reconciliations of our non-GAAP net income and non-GAAP diluted earnings per share, in each case excluding the impact of (i) depreciation and amortization of fixed assets (ii) impairment losses on mined cryptocurrency (iii) change in fair value of warrant liability (iv) server maintenance contract amortization and (v) stock compensation expense, net of withholding taxes, to its most directly comparable GAAP measures for the periods indicated:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Reconciliation of non-GAAP net income: | ||||||||||||||||
| Net loss | $ | (22,172,567 | ) | $ | (1,994,417 | ) | $ | (47,700,445 | ) | $ | (5,213,544 | ) | ||||
| Non-cash adjustments to Net Income (loss) | ||||||||||||||||
| Depreciation and Amortization of Fixed Assets | 4,340,198 | 805,483 | 8,015,801 | 1,851,341 | ||||||||||||
| Impairment of mined cryptocurrency | 6,731,890 | - | 18,472,750 | - | ||||||||||||
| Change in fair value of warrant liability | (168,666 | ) | 21,875 | 227,225 | 18,651 | |||||||||||
| Server maintenance contract amortization | 949,280 | - | 2,071,280 | - | ||||||||||||
| Stock Compensation Expense, net of withholding taxes | 95,739,710 | 360,211 | 147,647,288 | 1,032,199 | ||||||||||||
| Total Non-cash adjustments to Net Income (Loss) | $ | 107,592,412 | $ | 1,187,569 | $ | 176,434,344 | $ | 2,902,191 | ||||||||
| Non-GAAP net (loss) income | $ | 85,419,845 | $ | (806,848 | ) | $ | 128,733,899 | $ | (2,311,353 | ) | ||||||
| Reconciliation of non-GAAP diluted earnings (loss) per share: | ||||||||||||||||
| Diluted (loss) earnings per share | $ | (0.22 | ) | $ | (0.06 | ) | $ | (0.49 | ) | $ | (0.28 | ) | ||||
| Depreciation and Amortization of Fixed Assets (per diluted share) | 0.04 | 0.03 | 0.08 | 0.10 | ||||||||||||
| Impairment of mined cryptocurrency (per diluted share) | 0.07 | - | 0.19 | - | ||||||||||||
| Change in fair value of warrant liability (per diluted share) | - | - | - | - | ||||||||||||
| Server maintenance contract amortization (per diluted share) | 0.01 | - | 0.02 | - | ||||||||||||
| Stock Compensation Expense, net of withholding taxes (per diluted share) | 0.95 | 0.01 | 1.50 | 0.05 | ||||||||||||
| Non-GAAP diluted earnings (loss) per share | $ | 0.85 | $ | (0.02 | ) | $ | 1.30 | $ | (0.13 | ) | ||||||
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Recent Issued Accounting Standards
See Note 2 to our consolidated financial statements for a discussion of recent accounting standards and pronouncements.
Results of Operations
For the Three and Nine Months Ended September 30, 2021 and 2020
We generated revenues of $51.7 million and $90.2 million during the three and nine months ended September 30, 2021 as compared to $835,184 and $1.7 million during the three and nine months ended September 30, 2020. For the three and nine months ended September 30, 2021, this represented an increase of $50.9 million or 6,091% and $88.5 million or 5,162% over the same period in 2020. Revenue for the three and nine months ended September 30, 2021 and 2020 were derived primarily from cryptocurrency mining. The increase in revenue is due to the deployment of approximately 22,652 miners, increasing the Company’s hash rate by 1,381% for the nine month period ending September 30, 2021.
Direct cost of revenues during the three and nine months ended September 30, 2021 amounted to $10.3 million and $19.7 million and for the three and nine months ended September 30, 2020, the direct cost of revenues amounted to $1.6 million and $3.5 million. For the three and nine months ended September 30, 2021, this represented an increase of $8.6 million or 527% and $16.1 million or 457% over the same period in 2020. Direct costs of revenue include depreciation and amortization expenses of the cryptocurrency mining machines and patents, contingent payments to patent enforcement legal costs, patent enforcement advisors and inventors as well as various non-contingent costs associated with enforcing the Company’s patent rights and otherwise in developing and entering into settlement and licensing agreements that generate the Company’s revenue.
We incurred other operating expenses of $105.7 million and $177.2 million for the three and nine months ended September 30, 2021 and $1.2 million and $3.1 million for the three and nine months ended September 30, 2020. For the three and nine months ended September 30, 2021, this represented an increase of $104.5 million or 8,760% and $174.2 million or 5,690% over 2020. These expenses primarily consisted of stock-based compensation, compensation to our officers, directors and employees, impairment of cryptocurrencies, professional fees and consulting incurred in connection with the day-to-day operation of our business.
The operating expenses consisted of the following:
| Total Other Operating Expenses | Total Other Operating Expenses | |||||||||||||||
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| Compensation and related taxes (1) | $ | 97,181,544 | $ | 614,604 | $ | 153,670,098 | $ | 1,908,741 | ||||||||
| Consulting fees (2) | 159,300 | 259,563 | 378,260 | 325,688 | ||||||||||||
| Professional fees (3) | 857,921 | 206,368 | 3,331,728 | 515,562 | ||||||||||||
| Other general and administrative (4) | 797,574 | 112,800 | 1,383,110 | 311,303 | ||||||||||||
| Impairment of cryptocurrencies (5) | 6,731,890 | - | 18,472,750 | - | ||||||||||||
| Total | $ | 105,728,229 | $ | 1,193,335 | $ | 177,235,946 | $ | 3,061,294 | ||||||||
| Non-Cash Other Operating Expenses | Non-Cash Other Operating Expenses | |||||||||||||||
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| Compensation and related taxes (1) | $ | 95,739,710 | $ | 360,211 | $ | 147,647,288 | $ | 1,032,199 | ||||||||
| Impairment of cryptocurrencies (5) | 6,731,890 | - | 18,472,750 | - | ||||||||||||
| Total | $ | 102,471,600 | $ | 360,211 | $ | 166,120,038 | $ | 1,032,199 | ||||||||
(1) Compensation expense and related taxes: Compensation expense includes cash compensation and related payroll taxes and benefits, and non-cash equity compensation expenses. For the three and nine months ended September 30, 2021, compensation expense and related payroll taxes were $97.2 million and $153.7 million, an increase of $96.6 million or 15,712% and $151.8 million or 7,951% over the comparable periods in 2020. During the three and nine months ended September 30, 2021, we recognized non-cash employee and board equity-based compensation of $95.7 million and $147.6 million, respectively, and $360,211 and $1,032,199 for the three and nine months ended September 30, 2020, respectively.
(2) Consulting fees: For the three and nine months ended September 30, 2021, we incurred consulting fees of $159,300 and $378,260, a decrease of $100,263 or 39% and an increase of $52,572 or 16% over the comparable periods in 2020. Consulting fees include both cash and non-cash related consulting fees primarily for investor relations and public relations services as well as other consulting services.
(3) Professional fees: For the three and nine months ended September 30, 2021 professional fees were $857,921 and $3.3 million, an increase of $651,553 or 316% and $2.8 million or 546% over the comparable periods in 2020. Professional fees primarily reflect the costs of professional outside accounting fees, legal fees and audit fees.
(4) Other general and administrative expenses: For the three and nine months ended September 30, 2021, other general and administrative expenses were $797,574 and $1.4 million, an increase of $684,774 or 607% and $1.1 million or 344% over the comparable periods in 2020. General and administrative expenses reflect the other non-categorized operating costs of the Company and include expenses related to being a public company, rent, insurance, technology and other expenses incurred to support the operations of the Company.
(5) Impairment of cryptocurrencies: For the three and nine months ended September 30, 2021, impairment of cryptocurrencies were $6.7 million and $18.5 million, an increase of $6.7 million or 100% and $18.5 million or 100% over the comparable periods in 2020. Impairment of cryptocurrencies reflect the impairment of the bitcoin earned by the Company subject to FASB ASC 350 Intangibles – Goodwill and Other.
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Loss from Operations
We reported a loss from operations of $64.3 million and $106.7 million for the three and nine months ended September 30, 2021, respectively. We reported an operating loss of $2.0 million and $4.9 million for the three and nine months ended September 30, 2020, respectively.
Other (Expenses) Income
Total other income was $42.1 million and $59.0 million for the three and nine months ended September 30, 2021 and total other expenses were $220 and $336,312 for the three and nine months ended September 30, 2020, respectively. The increase in other income is due to the change in fair value of the investment fund that holds the purchased 4,812.66 bitcoin subject to mark-to-market valuation. Each 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 bitcoin held in the investment fund was purchased for approximately $31,168 per bitcoin. As of September 30, 2021, the fair market value of bitcoin was approximately $43,529 per bitcoin.
Net Loss Available to Common Shareholders
We reported a net loss of $22.2 million and $47.7 million for the three and nine months ended September 30, 2021 and a net loss of $2.0 million and $5.2 million for the three and nine months ended September 30, 2020.
Liquidity and Capital Resources
The Company’s condensed consolidated financial statements have been prepared assuming that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As reflected in the condensed consolidated financial statements, the Company had an accumulated deficit of approximately $163.8 million at September 30, 2021, net loss of approximately $47.7 million and $43.9 million net cash used by operating activities for the nine months ended September 30, 2021.
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. At September 30, 2021, the Company’s cash and cash equivalents balances totaled $32.9 million compared to $141.3 million at December 31, 2020. During the nine month period ending September 30, 2021 and September 30, 2020, the Company mined approximately 2,099 and 181 bitcoin, respectively. An increase of 1,918 bitcoin or 1,060%. The average price of a bitcoin during the first nine months of 2020 was $9,220. The average price of a bitcoin during the first nine months of 2021 was $44,555, an increase of $35,335 or 383%.
At September 30, 2021, we carried $282.7 million of digital assets on our balance sheet, which include cumulative impairments of $18.5 million, consisting of the approximately 7,035 bitcoins, and held $32.9 million in cash and cash equivalents, compared to $2.3 million of digital assets and $141.3 million in cash and cash equivalents at December 31, 2020, reflecting the shift in our liquid assets. As of November 15, 2021, we held approximately 7,562 bitcoins, of which, 4,812.66 bitcoins were acquired at an aggregate purchase price of $150 million at an average purchase price of approximately $31,168 per bitcoin, inclusive of fees and expenses. These purchased bitcoins are held in an investment fund of one where the Company is the sole limited partner. We expect to purchase additional bitcoin held by NYDIG Digital Assets Fund III, LP, the investment fund in future periods, though we may also sell bitcoin in future periods as needed to generate Cash Assets for treasury management purposes.
Net working capital increased by $265.6 million, to working capital of $550.6 million at September 30, 2021 from working capital of $285.0 million at December 31, 2020.
Cash used in operating activities was $43.9 million during the nine months ended September 30, 2021 compared to cash used in operating activities of $3.4 million during the nine months ended September 30, 2020.
Cash used in investing activities was $372.2 million during the nine months ended September 30, 2021 compared to cash used in investing activities of $15.1 million for the nine months ended September 30, 2020.
Cash provided by financing activities was $307.7 million during the nine months ended September 30, 2021 compared to cash provided by financing activities of $35.1 million for the nine months ended September 30, 2020.
Based on our current revenue and profit projections, we believe that our existing cash will be sufficient to fund our operations through at least the next twelve months.
Off-balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our consolidated condensed financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not required for smaller reporting companies.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures .
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States. Management assessed the effectiveness of our internal control over financial reporting as of September 30, 2021. 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 effective.
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 whistleblower 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 no changes in our internal control over financial reporting during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings .
Feinberg Litigation
On March 27, 2018, Jeffrey Feinberg, purportedly joined by the Jeffrey L. Feinberg Personal Trust and the Jeffrey L. Feinberg Family Trust, filed a complaint against the Company and certain of its former officers and directors. The complaint was filed in the Supreme Court of the State of New York, County of New York. The plaintiffs purported to state claims under Sections 11, 12(a)(2) and 15 of the federal Securities Act of 1933 and common law claims for “actual fraud and fraudulent concealment,” constructive fraud, and negligent misrepresentation, seeking unspecified money damages (including punitive damages), as well as costs and attorneys’ fees, and equitable or injunctive relief. On June 15, 2018, the defendants filed a motion to dismiss all claims asserted in the complaint and, on July 27, 2018, the plaintiffs filed an opposition to that motion. The court heard argument on the motion and, on January 15, 2019, the court granted the motion to dismiss, allowing 30 days for the filing of an amended complaint. On February 15, 2019, Jeffrey Feinberg, individually and as trustee of the Jeffrey L. Feinberg Personal Trust, and Terrence K. Ankner, as trustee of the Jeffrey L. Feinberg Family Trust, filed an amended complaint that purports to state the same claims and seeks the same relief sought in the original complaint. On March 7 and 22, 2019, defendants filed motions to dismiss the amended complaint and on April 5, 2019, plaintiffs filed an opposition to those motions. The court heard oral argument on the motions to dismiss on July 9, 2019, and at the conclusion of the argument the court took the motions under submission. On March 13, 2020, the court issued its Decision in which it granted the motions to dismiss in full and ordered that the case be dismissed with prejudice. On or about May 4, 2020, the plaintiffs filed a notice of appeal. Plaintiffs filed their opening appellate brief on January 4, 2021, and defendants filed their responsive appellate briefs on February 3, 2021. Oral argument on the appeal was conducted on April 1, 2021. On April 22, 2021, the court’s Appellate Division issued its Decision and Order affirming the dismissal of the case.
Ho Matter
On January 14, 2021, Plaintiff Michael Ho (“Plaintiff” or “Ho”) filed a Civil Complaint for Damages and Restitution (“Complaint”) against Marathon Patent Group, Inc., now known as Marathon Digital Holdings, Inc. (the “Company”) and 10 Doe Defendants in the Superior Court of the State of California for the County of Riverside. 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. Claims 5 and 6 are pled against “all Defendants” and may involve later named defendants. The Complaint seeks damages, restitution, punitive damages, and costs of suit. The claims arise from the same set of facts. Ho alleges that the Company profited from commercially-sensitive information he shared with the Company, purportedly under a mutual non-disclosure agreement, and that the Company failed 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 parties are currently engaged in discovery, including written discovery and depositions. The Company will move to have Plaintiff’s claims dismissed before trial. Trial is set to begin on March 3, 2022. 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 .
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.
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.
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Item 1A. Risk Factors.
Not required for smaller reporting companies.
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.
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10.1 |
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10.2 |
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| 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 | Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101). |
* Furnished herewith
** Filed herein
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 15, 2021
| 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 Financial Officer | |
| (Principal Financial and Accounting Officer) | ||
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