Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

August 8, 2023

0001507605 false --12-31 Q2 0001507605 2023-01-01 2023-06-30 0001507605 2023-08-04 0001507605 2023-06-30 0001507605 2022-12-31 0001507605 us-gaap:SeriesAPreferredStockMember 2023-06-30 0001507605 us-gaap:SeriesAPreferredStockMember 2022-12-31 0001507605 2023-04-01 2023-06-30 0001507605 2022-04-01 2022-06-30 0001507605 2022-01-01 2022-06-30 0001507605 us-gaap:CommonStockMember 2023-03-31 0001507605 us-gaap:AdditionalPaidInCapitalMember 2023-03-31 0001507605 us-gaap:RetainedEarningsMember 2023-03-31 0001507605 2023-03-31 0001507605 us-gaap:CommonStockMember 2022-12-31 0001507605 us-gaap:AdditionalPaidInCapitalMember 2022-12-31 0001507605 us-gaap:RetainedEarningsMember 2022-12-31 0001507605 us-gaap:CommonStockMember 2022-03-31 0001507605 us-gaap:AdditionalPaidInCapitalMember 2022-03-31 0001507605 us-gaap:RetainedEarningsMember 2022-03-31 0001507605 2022-03-31 0001507605 us-gaap:CommonStockMember 2021-12-31 0001507605 us-gaap:AdditionalPaidInCapitalMember 2021-12-31 0001507605 us-gaap:RetainedEarningsMember 2021-12-31 0001507605 2021-12-31 0001507605 us-gaap:CommonStockMember 2023-04-01 2023-06-30 0001507605 us-gaap:AdditionalPaidInCapitalMember 2023-04-01 2023-06-30 0001507605 us-gaap:RetainedEarningsMember 2023-04-01 2023-06-30 0001507605 us-gaap:CommonStockMember 2023-01-01 2023-06-30 0001507605 us-gaap:AdditionalPaidInCapitalMember 2023-01-01 2023-06-30 0001507605 us-gaap:RetainedEarningsMember 2023-01-01 2023-06-30 0001507605 us-gaap:CommonStockMember 2022-04-01 2022-06-30 0001507605 us-gaap:AdditionalPaidInCapitalMember 2022-04-01 2022-06-30 0001507605 us-gaap:RetainedEarningsMember 2022-04-01 2022-06-30 0001507605 us-gaap:CommonStockMember 2022-01-01 2022-06-30 0001507605 us-gaap:AdditionalPaidInCapitalMember 2022-01-01 2022-06-30 0001507605 us-gaap:RetainedEarningsMember 2022-01-01 2022-06-30 0001507605 us-gaap:CommonStockMember 2023-06-30 0001507605 us-gaap:AdditionalPaidInCapitalMember 2023-06-30 0001507605 us-gaap:RetainedEarningsMember 2023-06-30 0001507605 us-gaap:CommonStockMember 2022-06-30 0001507605 us-gaap:AdditionalPaidInCapitalMember 2022-06-30 0001507605 us-gaap:RetainedEarningsMember 2022-06-30 0001507605 2022-06-30 0001507605 srt:RestatementAdjustmentMember 2022-01-01 2022-03-31 0001507605 srt:RestatementAdjustmentMember 2022-01-01 2022-06-30 0001507605 srt:RestatementAdjustmentMember 2022-03-31 0001507605 srt:RestatementAdjustmentMember 2022-06-30 0001507605 us-gaap:ErrorCorrectionOtherMember srt:ScenarioPreviouslyReportedMember 2022-01-01 2022-03-31 0001507605 us-gaap:ErrorCorrectionOtherMember srt:RestatementAdjustmentMember 2022-01-01 2022-03-31 0001507605 us-gaap:ErrorCorrectionOtherMember 2022-01-01 2022-03-31 0001507605 us-gaap:ErrorCorrectionOtherMember srt:ScenarioPreviouslyReportedMember 2021-12-31 0001507605 us-gaap:ErrorCorrectionOtherMember srt:RestatementAdjustmentMember 2021-12-31 0001507605 us-gaap:ErrorCorrectionOtherMember 2021-12-31 0001507605 us-gaap:ErrorCorrectionOtherMember srt:ScenarioPreviouslyReportedMember 2022-03-31 0001507605 us-gaap:ErrorCorrectionOtherMember srt:RestatementAdjustmentMember 2022-03-31 0001507605 us-gaap:ErrorCorrectionOtherMember 2022-03-31 0001507605 srt:ScenarioPreviouslyReportedMember 2022-03-31 0001507605 srt:ScenarioPreviouslyReportedMember 2022-01-01 2022-03-31 0001507605 2022-01-01 2022-03-31 0001507605 srt:ScenarioPreviouslyReportedMember 2021-12-31 0001507605 srt:RestatementAdjustmentMember 2021-12-31 0001507605 2022-01-01 2022-12-31 0001507605 MARA:NYDIGDigitlAssetsFundIIILPMember 2021-01-24 2021-01-25 0001507605 MARA:NYDIGDigitlAssetsFundIIILPMember 2021-01-25 0001507605 2022-06-09 2022-06-10 0001507605 us-gaap:ConvertiblePreferredStockMember MARA:ComputerNorthHoldingsIncMember 2022-02-02 2022-02-03 0001507605 us-gaap:PreferredStockMember MARA:SafeAgreementMember 2022-05-03 0001507605 us-gaap:PreferredStockMember MARA:AuradineIncMember 2022-05-03 0001507605 us-gaap:PreferredStockMember MARA:AuradineIncMember 2022-05-02 2022-05-03 0001507605 us-gaap:PreferredStockMember MARA:AuradineIncMember 2022-09-26 2022-09-27 0001507605 us-gaap:PreferredStockMember MARA:AuradineIncMember 2022-09-27 0001507605 MARA:SAFEInvestmentMember 2023-06-30 0001507605 MARA:SAFEInvestmentMember 2022-12-31 0001507605 srt:MinimumMember MARA:InvestmentsAndJointVenturesMember 2023-06-30 0001507605 srt:MaximumMember MARA:InvestmentsAndJointVenturesMember 2023-06-30 0001507605 MARA:ADGMEntityMember 2023-06-30 0001507605 MARA:ParticipantMember 2023-04-01 2023-06-30 0001507605 MARA:ParticipantMember 2022-04-01 2022-06-30 0001507605 MARA:ParticipantMember 2023-01-01 2023-06-30 0001507605 MARA:ParticipantMember 2022-01-01 2022-06-30 0001507605 MARA:OperatorMember 2023-04-01 2023-06-30 0001507605 MARA:OperatorMember 2022-04-01 2022-06-30 0001507605 MARA:OperatorMember 2023-01-01 2023-06-30 0001507605 MARA:OperatorMember 2022-01-01 2022-06-30 0001507605 us-gaap:MiningPropertiesAndMineralRightsMember 2023-06-30 0001507605 us-gaap:MiningPropertiesAndMineralRightsMember 2022-12-31 0001507605 us-gaap:ContainersMember 2023-06-30 0001507605 us-gaap:ContainersMember 2022-12-31 0001507605 MARA:OtherMember 2023-06-30 0001507605 MARA:OtherMember 2022-12-31 0001507605 us-gaap:ConstructionInProgressMember 2023-06-30 0001507605 us-gaap:ConstructionInProgressMember 2022-12-31 0001507605 MARA:OtherAssetsLiabilitiesMember 2023-06-30 0001507605 MARA:OtherAssetsLiabilitiesMember 2022-12-31 0001507605 us-gaap:FairValueMeasurementsRecurringMember 2022-12-31 0001507605 us-gaap:FairValueInputsLevel1Member 2022-12-31 0001507605 us-gaap:FairValueInputsLevel2Member 2022-12-31 0001507605 us-gaap:FairValueInputsLevel3Member 2022-12-31 0001507605 us-gaap:FairValueMeasurementsNonrecurringMember 2023-06-30 0001507605 us-gaap:FairValueInputsLevel1Member 2023-06-30 0001507605 us-gaap:FairValueInputsLevel2Member 2023-06-30 0001507605 us-gaap:FairValueInputsLevel3Member 2023-06-30 0001507605 us-gaap:FairValueMeasurementsNonrecurringMember 2022-12-31 0001507605 MARA:ContainersAndWebsiteAndLeaseholdImprovementsMember 2022-12-31 0001507605 us-gaap:WarrantMember 2023-04-01 2023-06-30 0001507605 us-gaap:WarrantMember 2022-04-01 2022-06-30 0001507605 us-gaap:WarrantMember 2023-01-01 2023-06-30 0001507605 us-gaap:WarrantMember 2022-01-01 2022-06-30 0001507605 us-gaap:RestrictedStockUnitsRSUMember 2023-04-01 2023-06-30 0001507605 us-gaap:RestrictedStockUnitsRSUMember 2022-04-01 2022-06-30 0001507605 us-gaap:RestrictedStockUnitsRSUMember 2023-01-01 2023-06-30 0001507605 us-gaap:RestrictedStockUnitsRSUMember 2022-01-01 2022-06-30 0001507605 us-gaap:ConvertibleDebtSecuritiesMember 2023-04-01 2023-06-30 0001507605 us-gaap:ConvertibleDebtSecuritiesMember 2022-04-01 2022-06-30 0001507605 us-gaap:ConvertibleDebtSecuritiesMember 2023-01-01 2023-06-30 0001507605 us-gaap:ConvertibleDebtSecuritiesMember 2022-01-01 2022-06-30 0001507605 us-gaap:SeriesAPreferredStockMember 2023-04-01 2023-06-30 0001507605 us-gaap:SeriesAPreferredStockMember 2022-04-01 2022-06-30 0001507605 us-gaap:SeriesAPreferredStockMember 2023-01-01 2023-06-30 0001507605 us-gaap:SeriesAPreferredStockMember 2022-01-01 2022-06-30 0001507605 us-gaap:ConvertiblePreferredStockMember MARA:ComputerNorthHoldingsIncMember 2022-09-21 2022-09-22 0001507605 MARA:UnsecuredSeniorPromissoryNoteMember MARA:ComputerNorthLLCMember 2022-09-21 2022-09-22 0001507605 MARA:KingMountainAndWolfHollowMember 2022-09-21 2022-09-22 0001507605 2023-02-16 0001507605 MARA:AtTheMarketOfferingAgreementMember srt:MaximumMember 2022-02-09 2022-02-11 0001507605 MARA:AtTheMarketOfferingAgreementMember 2023-01-01 2023-06-30 0001507605 us-gaap:SeriesAPreferredStockMember MARA:SecuritiesPurchaseAgreementMember 2023-06-04 2023-06-05 0001507605 us-gaap:SeriesAPreferredStockMember MARA:SecuritiesPurchaseAgreementMember 2023-06-07 2023-06-08 0001507605 us-gaap:SeriesAPreferredStockMember MARA:SecuritiesPurchaseAgreementMember 2023-06-08 0001507605 us-gaap:RestrictedStockMember 2022-12-31 0001507605 us-gaap:RestrictedStockMember 2023-01-01 2023-06-30 0001507605 us-gaap:RestrictedStockMember 2023-06-30 0001507605 MARA:ConvertibleSeniorNotesDueTwoThousandAndTwentySixMember 2021-11-18 0001507605 2021-11-18 0001507605 MARA:ConvertibleSeniorNotesDueTwoThousandAndTwentySixMember 2023-06-30 0001507605 MARA:ConvertibleSeniorNotesDueTwoThousandAndTwentySixMember 2022-12-31 0001507605 2021-11-16 2021-11-18 0001507605 us-gaap:RevolvingCreditFacilityMember 2022-07-28 0001507605 us-gaap:RevolvingCreditFacilityMember 2022-07-27 2022-07-28 0001507605 MARA:TermCreditMember 2022-07-28 0001507605 country:US 2023-06-30 0001507605 country:US 2022-12-31 0001507605 2023-02-08 2023-02-09 0001507605 2023-02-15 2023-02-16 0001507605 MARA:HardinMTMember 2020-10-05 2020-10-06 0001507605 MARA:PlaintiffMichaelHoMember 2022-02-22 2022-02-24 0001507605 MARA:AuradineIncMember 2022-09-23 0001507605 us-gaap:SubsequentEventMember 2023-07-27 0001507605 us-gaap:SubsequentEventMember us-gaap:CommonStockMember 2023-07-26 2023-07-27 0001507605 us-gaap:SubsequentEventMember 2023-07-26 2023-07-27 0001507605 us-gaap:SubsequentEventMember MARA:ProposalFiveFavorMember 2023-07-27 0001507605 us-gaap:SubsequentEventMember MARA:ProposalFiveAgainstMember 2023-07-27 0001507605 us-gaap:SubsequentEventMember MARA:ProposalFiveAbstainMember 2023-07-27 0001507605 MARA:ProposalYesOneMember us-gaap:SubsequentEventMember us-gaap:CommonStockMember 2023-07-26 2023-07-27 0001507605 MARA:ProposalYesTwoMember us-gaap:SubsequentEventMember us-gaap:CommonStockMember 2023-07-26 2023-07-27 0001507605 MARA:ProposalYesThreeMember us-gaap:SubsequentEventMember us-gaap:CommonStockMember 2023-07-26 2023-07-27 0001507605 MARA:ProposalYesFourMember us-gaap:SubsequentEventMember us-gaap:CommonStockMember 2023-07-26 2023-07-27 0001507605 MARA:ProposalAgainstNOOneMember us-gaap:SubsequentEventMember us-gaap:CommonStockMember 2023-07-26 2023-07-27 0001507605 MARA:ProposalTwoAgainstNoMember us-gaap:SubsequentEventMember us-gaap:CommonStockMember 2023-07-26 2023-07-27 0001507605 MARA:ProposalThreeAgainstNoMember us-gaap:SubsequentEventMember us-gaap:CommonStockMember 2023-07-26 2023-07-27 0001507605 MARA:ProposalFourAgainstNoMember us-gaap:SubsequentEventMember us-gaap:CommonStockMember 2023-07-26 2023-07-27 0001507605 MARA:ProposalAbstainOneMember us-gaap:SubsequentEventMember us-gaap:CommonStockMember 2023-07-26 2023-07-27 0001507605 MARA:ProposalAbstainTwoMember us-gaap:SubsequentEventMember us-gaap:CommonStockMember 2023-07-26 2023-07-27 0001507605 MARA:ProposalThreeAbstainMember us-gaap:SubsequentEventMember us-gaap:CommonStockMember 2023-07-26 2023-07-27 0001507605 MARA:ProposalFourAbstainMember us-gaap:SubsequentEventMember us-gaap:CommonStockMember 2023-07-26 2023-07-27 0001507605 MARA:ProposalYesThreeMember us-gaap:SubsequentEventMember us-gaap:SeriesAPreferredStockMember 2023-07-26 2023-07-27 0001507605 MARA:ProposalThreeAgainstNoMember us-gaap:SubsequentEventMember us-gaap:SeriesAPreferredStockMember 2023-07-26 2023-07-27 0001507605 MARA:ProposalThreeAbstainMember us-gaap:SubsequentEventMember us-gaap:SeriesAPreferredStockMember 2023-07-26 2023-07-27 0001507605 us-gaap:CommonStockMember 2023-06-16 0001507605 us-gaap:SeriesAPreferredStockMember us-gaap:CommonStockMember 2023-06-16 2023-06-16 0001507605 MARA:ProposalThreeMember us-gaap:SubsequentEventMember us-gaap:SeriesAPreferredStockMember 2023-07-26 2023-07-27 iso4217:USD xbrli:shares iso4217:USD xbrli:shares xbrli:pure MARA:Integer MARA:Bitcoin

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2023

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

 

For the transition period from _______to______

 

001-36555

(Commission File Number)

 

MARATHON DIGITAL HOLDINGS, INC.

(Exact name of registrant as specified in charter)

 

Nevada   01-0949984

(State or other jurisdiction

of incorporation)

 

(I.R.S. Employer

Identification No.)

 

101 NE Third Avenue, Suite 1200, Fort Lauderdale, FL   33301
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: 800-804-1690

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.0001 per   MARA   The Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

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.

 

Large Accelerated Filer Accelerated Filer
Non-accelerated Filer Smaller Reporting Company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 174,266,313 shares of common stock are issued and outstanding as of August 4, 2023.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
PART I. - FINANCIAL INFORMATION  
Item 1. Financial Statements  
  Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 3
  Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2023 and 2022 4
  Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2023 and 2022 5
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022 6
  Notes to Condensed Consolidated Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk 44
Item 4. Controls and Procedures 45
     
PART II - OTHER INFORMATION  
Item 1. Legal Proceedings 46
Item 1A. Risk Factors 48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 48
Item 3. Defaults upon Senior Securities 48
Item 4. Mine Safety Disclosures 48
Item 5. Other Information 48
Item 6. Exhibits 49

 

OTHER PERTINENT INFORMATION

 

Unless specifically set forth to the contrary, “Marathon”, “we”, “us”, “our”, “Company” 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

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

    June 30,
2023
    December 31,
2022
 
    (unaudited)        
ASSETS                
Current assets:                
Cash and cash equivalents   $ 113,675     $ 103,705  
Restricted cash     14,286       8,800  
Digital assets     234,412       121,842  
Other receivable     759       18  
Deposits     7,508       2,350  
Prepaid expenses and other current assets     51,797       40,833  
Total current assets     422,437       277,548  
                 
Property and equipment, net     783,865       273,026  
Advances to vendors     7,351       488,299  
Investments     99,918       37,000  
Long-term deposits     55,070       40,903  
Long-term prepaids     4,037       8,317  
Right-of-use assets     559       1,276  
Digital assets, restricted           68,875  
Total long-term assets     950,800       917,696  
TOTAL ASSETS   $ 1,373,237     $ 1,195,244  
                 
LIABILITIES, SERIES A PREFERRED STOCK AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable   $ 7,150     $ 1,312  
Accrued expenses     20,390       22,295  
Legal reserve payable           1,171  
Operating lease liabilities     174       326  
Current portion of accrued interest     623       1,011  
Total current liabilities     28,337       26,115  
Long-term liabilities:                
Notes payable     734,231       732,289  
Term loan           49,882  
Operating lease liabilities     423       1,017  
Total long-term liabilities     734,654       783,188  
Series A Preferred Stock, 0.0001 par value, 50,000,000 shares authorized, 15,000 and no shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively (outstanding at redemption value)     15,750        
Stockholders’ Equity:                
Common stock, 0.0001 par value, 200,000,000 shares authorized; 174,209,038 and 145,565,916 issued and outstanding at June 30, 2023 and December 31, 2022, respectively     17       15  
Additional paid-in capital     1,461,188       1,226,267  
Accumulated deficit     (866,709 )     (840,341 )
Total stockholders’ equity     594,496       385,941  
TOTAL LIABILITIES, SERIES A PREFERRED STOCK AND STOCKHOLDERS’ EQUITY   $ 1,373,237     $ 1,195,244  

 

The accompanying notes are an integral part to these unaudited condensed consolidated financial statements.

 

3
 

 

MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)

 

    2023     2022     2023     2022  
    Three months ended June 30,     Six months ended June 30,  
    2023     2022     2023     2022  
          (As Restated)           (As Restated)  
Total revenues   $ 81,759     $ 24,923     $ 132,891     $ 76,646  
                                 
Costs and expenses                                
Cost of revenues                                
Cost of revenues - energy, hosting and other     (55,222 )     (16,686 )     (88,599 )     (29,208 )
Cost of revenues - depreciation and amortization     (37,275 )     (24,710 )     (55,008 )     (38,587 )
Total cost of revenues     (92,497 )     (41,396 )     (143,607 )     (67,795 )
Operating expenses                                
General and administrative expenses     (20,491 )     (10,469 )     (35,836 )     (25,983 )
Impairment of digital assets     (8,363 )     (131,581 )     (14,514 )     (154,898 )
Impairment of patents                       (919 )
Gains on digital assets and losses on digital assets loan receivable     23,354       (13,999 )     40,969       (14,460 )
Gain on sale of equipment, net of disposals           54,060             54,060  
Losses on digital assets held within investment fund           (79,689 )           (85,017 )
Total operating expenses     (5,500 )     (181,678 )     (9,381 )     (227,217 )
Operating loss     (16,238 )     (198,151 )     (20,097 )     (218,366 )
Other non-operating income     148       135       940       382  
Loss from extinguishment of debt                 (333 )      
Interest expense     (2,840 )     (3,748 )     (6,600 )     (6,561 )
Loss before income taxes     (18,930 )     (201,764 )     (26,090 )     (224,545 )
Income tax expense     (203 )     (10,862 )     (278 )     (5,190 )
Net loss     (19,133 )     (212,626 )     (26,368 )     (229,735 )
Add: Series A Preferred Stock accretion to redemption value     (2,121 )           (2,121 )      
Net loss attributable to common stockholders   $ (21,254 )   $ (212,626 )   $ (28,489 )   $ (229,735 )
                                 
Net loss attributable to common stockholders per common stock - basic and diluted   $ (0.13 )   $ (1.94 )   $ (0.17 )   $ (2.17 )
Weighted average common stock outstanding - basic and diluted     168,474,882       109,437,293       163,856,352       106,101,762  

 

The accompanying notes are an integral part to these unaudited condensed consolidated financial statements.

 

4
 

 

MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share and per share data)

(unaudited)

 

For the Three Months Ended June 30, 2023

 

      Number     Amount     Capital     Deficit     Equity
    Common Stock    

Additional

Paid-in

   

Accumulated

   

Total

Stockholders’

 
    Number     Amount     Capital     Deficit     Equity  
Balance as of Balance as of March 31, 2023     167,259,602     $ 17     $ 1,393,428     $ (847,576 )   $ 545,869  
Stock-based compensation, net of tax withholding     183,357             4,341             4,341  
Issuance of common stock, net of offering costs/At-the-market offering     6,766,079             65,540             65,540  
Series A Preferred Stock accretion to redemption value                 (2,121 )           (2,121 )
Net loss                       (19,133 )     (19,133 )
Balance as of June 30, 2023     174,209,038     $ 17     $ 1,461,188     $ (866,709 )   $ 594,496  

 

For the Six Months Ended June 30, 2023

 

    Common Stock    

Additional

Paid-in

   

Accumulated

   

Total

Stockholders’

 
    Number     Amount     Capital     Deficit     Equity  
Balance as of December 31, 2022     145,565,916     $ 15     $ 1,226,267     $ (840,341 )   $ 385,941  
Stock-based compensation, net of tax withholding     519,868             8,209             8,209  
Issuance of common stock, net of offering costs/At-the-market offering     28,123,254       2       228,833             228,835  
Series A Preferred Stock accretion to redemption value                 (2,121 )           (2,121 )
Net loss                       (26,368 )     (26,368 )
Balance as of June 30, 2023     174,209,038     $ 17     $ 1,461,188     $ (866,709 )   $ 594,496  

 

For the Three Months Ended June 30, 2022

 

    Common Stock    

Additional

Paid-in

   

Accumulated

   

Total

Stockholders’

 
    Number     Amount     Capital     Deficit     Equity  
Balance as of Balance as of March 31, 2022 (As Restated)     106,051,713     $ 11     $ 939,742     $ (163,359 )   $ 776,394  
Stock-based compensation, net of tax withholding     256,934             6,132             6,132  
Issuance of common stock, net of offering costs/At-the-market offering     7,556,588             70,848             70,848  
Net loss                       (212,626 )     (212,626 )
Balance as of Balance as of June 30, 2022 (As Restated)     113,865,235     $ 11     $ 1,016,722     $ (375,985 )   $ 640,748  

 

For the Six Months Ended June 30, 2022

 

    Common Stock    

Additional

Paid-in

   

Accumulated

   

Total

Stockholders’

 
    Number     Amount     Capital     Deficit     Equity  
Balance as of December 31, 2021     102,733,273     $ 10     $ 835,694     $ (146,250 )   $ 689,454  
Stock-based compensation, net of tax withholding     375,730             15,407             15,407  
Issuance of common stock, net of offering costs/At-the-market offering     10,556,232       1       161,041             161,042  
Common stock issued for long term service contract     200,000             4,580             4,580  
Net loss                       (229,735 )     (229,735 )
Balance as of Balance as of June 30, 2022 (As Restated)     113,865,235     $ 11     $ 1,016,722     $ (375,985 )   $ 640,748  

 

The accompanying notes are an integral part to these unaudited condensed consolidated financial statements.

 

5
 

 

MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

    2023     2022  
    Six Months Ended June 30,  
    2023     2022  
          (As Restated)  
OPERATING ACTIVITIES                
Net loss   $ (26,368 )   $ (229,735 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     55,008       38,587  
Amortization of prepaid service contract           15,533  
Deferred tax expense     278       5,183  
Losses on digital assets held within investment fund           85,017  
Gains on digital assets and losses on digital assets loan receivable     (40,969 )     14,460  
Impairment of digital assets     14,514       154,897  
Gain on sale of equipment, net of disposals           (54,060 )
Stock-based compensation     8,396       15,451  
Amortization of debt issuance costs     1,942       1,942  
Impairment of patents           919  
Loss from extinguishment of debt     333        
Other adjustments from operations, net     1,131       508  
Changes in operating assets and liabilities:                
Revenues from digital asset production     (132,891 )     (76,449 )
Deposits     (19,325 )     (5,548 )
Prepaid expenses and other assets     (6,963 )     (2,120 )
Accounts payable and accrued expenses     2,434       (5,214 )
Accrued interest     (388 )     (244 )
Net cash used in operating activities     (142,868 )     (40,873 )
INVESTING ACTIVITIES                
Advances to vendors     (61,834 )     (393,991 )
Purchase of property and equipment     (23,316 )     (13,752 )
Sale of property and equipment           87,240  
Proceeds from sale of digital assets     113,928        
Investments in joint venture     (62,729 )      
Purchase of equity investments           (14,000 )
Sale of digital currencies in investment fund           483  
Deconsolidation of fund           (500 )
Net cash used in investing activities     (33,951 )     (334,520 )
FINANCING ACTIVITIES                
Proceeds from issuance of common stock, net of issuance costs     228,833       161,042  
Proceeds from issuance of preferred stock, net of issuance costs     13,629        
Net change in revolving credit agreement borrowings           35,000  
Repayment of term loan borrowings     (50,000 )        
Value of shares withheld for taxes     (187 )     (44 )
Net cash provided by financing activities     192,275       195,998  
Net increase (decrease) in cash, cash equivalents and restricted cash     15,456       (179,395 )
Cash, cash equivalents and restricted cash — beginning of period     112,505       268,556  
Cash, cash equivalents and restricted cash — end of period   $ 127,961     $ 89,161  
                 
Supplemental Information                
Cash paid during the year for:                
Income taxes   $ 782     $ 20  
Interest   $ 4,524     $ 4,458  
Supplemental schedule of non-cash investing and financing activities:                
Series A Preferred Stock accretion to redemption value   $ 2,121     $  
Receivable due to share issuance   $     $ 4,720  
Operating lease assets obtained in exchange for new operating lease liabilities   $     $ 1,420  
Reclassifications from advances to vendor to property and equipment upon receipt of equipment   $ 542,517     $ 96,030  
Common stock issued for service and license agreements   $     $ 4,580  

 

The accompanying notes are an integral part to these unaudited condensed consolidated financial statements.

 

6
 

 

MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share and per bitcoin amounts)

(unaudited)

 

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Marathon Digital Holdings, Inc. and subsidiaries (the “Company” or “Marathon”) is a digital asset technology company that produces or “mines” digital assets with a focus on the blockchain ecosystem and the generation of digital assets. The Company incorporated in the State of Nevada on February 23, 2010 under the name Verve Ventures, Inc. In October 2012, the Company commenced its IP licensing operations, at which time the Company’s name was changed to Marathon Patent Group, Inc. The Company purchased digital asset mining machines and established a data center in Canada to mine digital assets in 2017. The Company ceased operations in Canada in 2020 and consolidated all operations in the U.S. at the time. The Company has since expanded bitcoin mining activities across the U.S. and internationally. The Company changed its name to Marathon Digital Holdings, Inc. on March 1, 2021. As of June 30, 2023, the Company is focused on the mining of bitcoin and ancillary opportunities within the Bitcoin ecosystem.

 

Ancillary businesses are those that relate to the Bitcoin ecosystem but are not directly related to the self-mining of bitcoin. The ancillary businesses that related directly to mining may include, but will not be limited to, management of bitcoin mining facilities for third party owners, advisory and consulting services to third parties seeking to set up and operate bitcoin mining facilities and joint ventures for bitcoin mining projects in domestic and international jurisdictions such as the Company’s project in Abu Dhabi, United Arab Emirates. The Company will also seek to be involved in Bitcoin related projects including, but not limited to, development of technologies in immersion, hardware, firmware, mining pools and side chains that use the blockchain cryptography. The Company may also become involved in electricity generation from renewable energy resources or methane gas capture to power bitcoin mining projects.

 

The term “Bitcoin” with a capital “B” is used to denote the Bitcoin protocol which implements a highly available, public, permanent, and decentralized ledger. The term “bitcoin” with a lower case “b” is used to denote the token, bitcoin.

 

 

NOTE 2 – VOLUNTARY CHANGE IN ACCOUNTING PRINCIPLE

 

During the quarter ended March 31, 2023 and effective January 1, 2023, we enacted a voluntary change in accounting principle from last-in-first-out (“LIFO”) to first-in-first-out (“FIFO”) in order to more accurately reflect the disposition of our digital assets. The change from LIFO to FIFO increased the carrying value of digital assets, resulting in additional impairment of digital assets during the quarter ended March 31, 2022. In accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), the change has been reflected in the consolidated statements of operations through retrospective application to the quarter ended March 31, 2022.

 

The impacts of the voluntary change in accounting principle from LIFO to FIFO are as follows:

SCHEDULE OF VOLUNTARY CHANGE IN ACCOUNTING PRINCIPLE

    For the three months ended  
    March 31, 2022 (unaudited)  
    (Restated)  
Condensed Consolidated Statements of Operation Impact        
Impairment of digital assets   $ (5,670 )
Income tax benefit   $ 1,412  
Net loss impact   $ (4,258 )

 

    For the six months ended  
    June 30, 2022 (unaudited)  
    (Restated)  
Condensed Consolidated Statements of Operation Impact        
Impairment of digital assets   $ (9,449 )
Income tax expense   $ 1,032  
Net loss impact   $ (8,417 )

 

    As of  
    March 31, 2022 (unaudited)  
    (Restated)  
Condensed Consolidated Balance Sheet Impact        
Digital assets   $ 4,076  
Deferred tax liabilities   $

981

 

 

7
 

 

    As of  
    June 30, 2022 (unaudited)  
    (Restated)  
Condensed Consolidated Balance Sheet Impact        
Digital assets   $ 297  
Deferred tax liabilities   $

1,361

 

 

NOTE 3 – RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERS ENDED MARCH 31, 2023 AND MARCH 31, 2022 AND VOLUNTARY CHANGE IN ACCOUNTING PRINCIPLE

 

Restatement Background

 

As disclosed in the Current Report on Form 8-K, dated August 8, 2023, and filed by the Company with the SEC immediately preceding filing of this Quarterly Report, the Company’s previously filed interim unaudited Consolidated Financial Statements for the three months ended March 31, 2023, as set forth in the Company’s Quarterly Report on Form 10-Q for the Three Months Ended March 31, 2023 which was filed with the SEC on May 10, 2023, should no longer be relied upon and a restatement is required for the previously issued Consolidated Financial Statements.

 

The Restatement of the financial information and the prior year period presented was necessary to correct the cash flow presentation for “Proceeds from sale of digital assets” from operating activities to investing activities.

 

Cash Flow Presentation

 

The Company corrected its presentation of “proceeds from sale of digital assets” by reclassifying from operating activities to investing activities as follows:

SCHEDULE OF RECLASSIFICATION FROM OPERATING ACTIVITIES TO INVESTING ACTIVITIES

    As Reported     Adjustment     As Restated  
    For the three months ended  
    March 31, 2023  
    As Reported     Adjustment     As Restated  
    (unaudited)           (unaudited)  
CASH FLOWS FROM OPERATING ACTIVITIES                        
Net loss   $ (7,235 )   $     $ (7,235 )
Adjustments to reconcile net loss to net cash used in operating activities:                        
Depreciation and amortization     17,733             17,733  
Deferred tax expense     75             75  
Gains on digital assets     (17,615 )           (17,615 )
Impairment of digital assets     6,151             6,151  
Stock-based compensation     3,945             3,945  
Amortization of debt issuance costs     971             971  
Loss from extinguishment of debt     333             333  
Other adjustments from operations, net     1,290             1,290  
Changes in operating assets and liabilities:                        
Revenues from digital asset production     (50,941 )           (50,941 )
Proceeds from sale of digital assets     62,646       (62,646 )      
Deposits     (23,124 )           (23,124 )
Prepaid expenses and other assets     (20,738 )           (20,738 )
Accounts payable and accrued expenses     (3,784 )           (3,784 )
Accrued interest     1,481             1,481  
Net cash used in operating activities     (28,812 )     (62,646 )     (91,458 )
CASH FLOWS FROM INVESTING ACTIVITIES                        
Advances to vendors     (11,565 )           (11,565 )
Purchase of property and equipment     (17,270 )           (17,270 )
Proceeds from sale of digital assets           62,646       62,646  
Investments in Joint Venture     (43,194 )           (43,194 )
Net cash used in investing activities     (72,029 )     62,646       (9,383 )
CASH FLOWS FROM FINANCING ACTIVITIES                        
Proceeds from issuance of common stock, net of issuance costs     163,295             163,295  
Repayment of term loan borrowings     (50,000 )           (50,000 )
Value of shares withheld for taxes     (77 )           (77 )
Net cash provided by financing activities     113,218             113,218  
                         
Net increase in cash, cash equivalents and restricted cash     12,377             12,377  
Cash, cash equivalents and restricted cash — beginning of period     112,505       -       112,505  
Cash and cash equivalents — end of period   $ 124,882       -     $ 124,882  

 

8
 

 

Change in Accounting Principle

 

During the quarter ended March 31, 2023, we made a voluntary change in accounting principle from LIFO to FIFO effective January 1, 2023, to better reflect the disposition of our digital assets (the “Principle Change”). The Principle Change increased the carrying value of digital assets for the quarter ended March 31, 2022, resulting in the recognition of additional impairment of digital assets.

 

The following tables for the Unaudited Interim Consolidated Condensed Balance Sheet, Consolidated Condensed Statement of Operations, and Consolidated Condensed Statement of Cash Flows present the impact of the Principle Change for the three months ended March 31, 2022.

SCHEDULE OF CHANGE IN ACCOUNTING PRINCIPLE FOR CONDENSED CONSOLIDATED BALANCE SHEET

    As Reported     Adjustments     As Restated  
    As of March 31, 2022  
    As Reported     Adjustments     As Restated  
    (unaudited)           (unaudited)  
ASSETS                        
Current assets:                        
Cash and cash equivalents   $ 117,942     $     $ 117,942  
Restricted cash     600             600  
Digital assets     129,448       4,076       133,524  
Digital assets held in Fund     218,439             218,439  
Other receivable     29,870             29,870  
Deposits     40,792             40,792  
Prepaid expenses and other current assets     52,765             52,765  
Total current assets     589,856       4,076       593,932  
                         
Other assets:                        
Property and equipment     333,317             333,317  
Advances to vendors     594,240             594,240  
Investments     13,520             13,520  
Long term prepaids     5,131             5,131  
Right-of-use assets     1,326             1,326  
Total other assets     947,534             947,534  
TOTAL ASSETS     1,537,390       4,076       1,541,466  
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY                        
Current liabilities:                        
Accounts payable     7,715             7,715  
Accrued expenses     4,642             4,642  
Operating lease liabilities     264             264  
Current portion of accrued interest     2,710             2,710  
Total current liabilities     15,331             15,331  
Long-term liabilities:                        
Notes payable     729,377             729,377  
Operating lease liabilities     1,071             1,071  
Deferred tax liabilities     18,312       981       19,293  
Total long-term liabilities     748,760       981       749,741  
                         
Stockholders’ Equity:                        
Preferred stock                  
Common stock     11             11  
Additional paid-in capital     939,742             939,742  
Accumulated deficit     (166,454 )     3,095       (163,359 )
Total stockholders’ equity     773,299       3,095       776,394  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 1,537,390     $ 4,076     $ 1,541,466  

 

9
 

 

SCHEDULE OF CHANGE IN ACCOUNTING PRINCIPLE FOR CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

    As Reported     Adjustment     As Restated  
    For the three months ended  
    March 31, 2022  
    As Reported     Adjustment     As Restated  
    (unaudited)           (unaudited)  
Total revenues   $ 51,723     $     $ 51,723  
                         
Costs and expenses                        
Cost of revenues                        
Cost of revenues - energy, hosting and other     (12,522 )           (12,522 )
Cost of revenues - depreciation and amortization     (13,877 )           (13,877 )
Total cost of revenues     (26,399 )           (26,399 )
Operating expenses                        
General and administrative expenses     (15,515 )           (15,515 )
Impairment of digital assets     (17,647 )     (5,670 )     (23,317 )
Impairment of patents     (919 )           (919 )
Gains on digital assets and losses on digital assets loan receivable     (461 )           (461 )
Losses on digital assets held within Investment Fund     (5,328 )           (5,328 )
Total operating expenses     (39,870 )     (5,670 )     (45,540 )
Operating loss     (14,546 )     (5,670 )     (20,216 )
Other non-operating income     247             247  
Interest expense     (2,814 )           (2,814 )
Loss before income taxes     (17,113 )     (5,670 )     (22,783 )
Income tax benefit     4,262       1,412       5,674  
Net loss   $ (12,851 )   $ (4,258 )   $ (17,109 )
                         
Net loss per share, basic and diluted:   $ (0.12 )     -     $ (0.17 )
Weighted average shares outstanding, basic and diluted:     103,102,596       -       103,102,596  

 

10
 

 

SCHEDULE OF CHANGE IN ACCOUNTING PRINCIPLE FOR CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

    As Reported     Adjustment     As Restated  
    For the three months ended  
    March 31, 2022  
    As Reported     Adjustment     As Restated  
    (unaudited)           (unaudited)  
CASH FLOWS FROM OPERATING ACTIVITIES                        
Net loss   $ (12,851 )   $ (4,258 )   $ (17,109 )
Adjustments to reconcile net loss to net cash used in operating activities:                        
Depreciation and amortization     13,877             13,877  
Amortization of prepaid service contract     4,662             4,662  
Deferred tax benefit     (4,262 )     (1,412 )     (5,674 )
Losses on digital assets held within Investment Fund     5,328             5,328  
Losses on digital assets loan receivable     461             461  
Impairment of digital assets     17,647       5,670       23,317  
Stock-based compensation     9,275             9,275  
Amortization of debt issuance costs     971             971  
Impairment of patents     919             919  
Other adjustments from operations, net     (215 )           (215 )
Changes in operating assets and liabilities:                        
Revenues from digital asset production     (51,874 )           (51,874 )
Deposits     (6,287 )           (6,287 )
Prepaid expenses and other assets     (4,889 )           (4,889 )
Accounts payable and accrued expenses     (667 )           (667 )
Accrued interest     1,843             1,843  
Net cash used in operating activities     (26,062 )           (26,062 )
CASH FLOWS FROM INVESTING ACTIVITIES                        
Advances to vendors     (192,391 )           (192,391 )
Purchase of property and equipment     (6,534 )           (6,534 )
Purchase of equity investments     (10,500 )           (10,500 )
Net cash used in investing activities     (209,425 )           (209,425 )
CASH FLOWS FROM FINANCING ACTIVITIES                        
Proceeds from issuance of common stock, net of issuance costs     85,473             85,473  
Net cash provided by financing activities     85,473             85,473  
                         
Net decrease in cash, cash equivalents and restricted cash     (150,014 )           (150,014 )
Cash and cash equivalents — beginning of period     268,556       -       268,556  
Cash, cash equivalents and restricted cash — end of period   $ 118,542       -     $ 118,542  

 

11
 

 

NOTE 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned and controlled subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. The Company has prepared the condensed consolidated financial statements in accordance with U.S. GAAP and regulations of the U.S. Securities and Exchange Commission applicable to interim financial information, which permit the omission of certain disclosure to the extent they have not changed materially since the latest annual financial statements. These condensed consolidated 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. The results of operations for the interim periods are not necessarily indicative of the results to be expected for any future fiscal periods in 2023 or for the full year ending December 31, 2023.

 

These financial statements should be read in conjunction with the financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 16, 2023.

 

Use of Estimates and Assumptions

 

The preparation of financial statements in conformity with U.S. 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, estimates of the useful lives of property and equipment, realization of long-lived assets, deferred income taxes, unrealized tax positions and realization of digital assets.

 

Cash and Cash Equivalents and Restricted Cash

 

The Company considers all highly liquid investments and other short-term investments with a maturity of three months or less, when purchased, to be cash equivalents. The Company maintains cash and cash equivalent balances at financial institutions that are insured by the FDIC. As of June 30, 2023, substantially all of the Company’s cash and cash equivalents were FDIC insured. In March 2023, the Company began to participate, to the extent practicable, in insured cash sweep programs which “sweep” its deposits across multiple FDIC insured accounts, each with deposits of no more than $250.

 

Restricted cash as of June 30, 2023, represents the net proceeds held in escrow from the issuance of Series A Preferred Stock (refer to NOTE 11 – STOCKHOLDERS’ EQUITY, Series A Preferred Stock, for further discussion). Restricted cash as of December 31, 2022, principally represented those cash balances that support commercial letters of credit and are restricted from withdrawal. During March 2023, the Company eliminated its outstanding letters of credit. The following table provides a reconciliation of the total cash, cash equivalents and restricted cash reported on the condensed consolidated balance sheets to the corresponding amounts reported on the condensed consolidated statements of cash flows.

 

    June 30,
2023
    December 31,
2022
 
Cash and cash equivalents   $ 113,675     $ 103,705  
Restricted cash     14,286       8,800  
Cash, cash equivalents and Restricted cash   $ 127,961     $ 112,505  

 

Digital Assets and Digital Assets, Restricted

 

Digital assets are included in current assets in the condensed consolidated balance sheets. In addition, digital assets provided as collateral for long-term loans were reported as Digital assets, restricted at December 31, 2022 and classified as long-term assets in the condensed consolidated balance sheets. During the first quarter of 2023, the long-term loan was terminated and the restrictions on digital assets lapsed (refer to NOTE 12 – DEBT, for further discussion). Digital assets are accounted for as indefinite-lived intangible assets, and are initially measured in accordance with FASB Accounting Standards Codification (“ASC”) Topic 350 – Intangibles-Goodwill and Other. The Company measures gains or losses on the disposition of digital assets in accordance with the first-in-first-out (“FIFO”) method of accounting.

 

Digital assets are not amortized, but are 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 intangible asset is impaired. Whenever the exchange-traded price of digital assets declines below its carrying value, the Company has determined that an impairment exists and records an impairment equal to the amount by which the carrying value exceeds the fair value. Refer to NOTE 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Out-of-Period Adjustment, for a discussion of an adjustment related to impairment of digital assets.

 

12
 

 

The following table presents the activities of digital assets and digital assets, restricted for the six months ended June 30, 2023:

 

Digital assets and digital assets, restricted at December 31, 2022   $ 190,717  
Additions of digital assets     132,557  
Impairment of digital assets     (14,514 )
Proceeds from sale of digital assets     (113,928 )
Gains on sale of digital assets     40,969  
Payment of advisory fees     (1,389 )
Digital assets at June 30, 2023   $ 234,412  

 

As of June 30, 2023, the Company held approximately 12,538 bitcoin, classified on the condensed consolidated balance sheets as “Digital assets”, with a carrying value of $234,412. At June 30, 2023, the fair market value of the Company’s bitcoin holdings was approximately $381,992 based on Level 1 inputs. As of December 31, 2022, the Company held approximately 12,232 bitcoin, relating to digital assets and digital assets, restricted, with a carrying value of $190,717 and a fair value of $202,409 based on Level 1 inputs.

 

Digital assets held in fund

 

On January 25, 2021, the Company entered into a limited partnership agreement with NYDIG Digital Assets Fund III, LP (the “Fund”) pursuant to which the Fund purchased 4,813 bitcoin for an aggregate purchase price of $150,000. The Company owned 100% of the limited partnership interests and consolidated the Fund under a voting interest model. The consolidated assets in the investment fund were included in current assets in the condensed consolidated balance sheets under the caption “Digital assets held in fund.”

 

The Fund qualified and operated as an investment company for accounting purposes pursuant to the accounting and reporting guidance under ASC 946 – Financial Services – Investment Companies, which requires fair value measurement of the Fund’s investments in digital assets. The Company retains the Fund’s investment company specific accounting principles under ASC 946 upon consolidation. The Company recorded changes in the fair value of the assets in the condensed consolidated statements of operations under the caption “Losses on digital assets held within Investment Fund.”

 

On June 10, 2022, the Company redeemed 100% of its limited partnership interest in the Fund in exchange for approximately 4,769 bitcoin with a fair market value of approximately $137,844. This bitcoin was transferred from the Fund’s custodial wallet to the Company’s digital wallet. Upon redemption, the Company no longer had a majority voting interest in the Fund and therefore deconsolidated the Fund in accordance with ASC 810 – Consolidation. The Company did not record any gain or loss upon deconsolidation as the digital assets in the Fund were measured at fair value. Subsequent to the transfer, the bitcoin transferred to the Company’s digital wallet was accounted for at cost less impairment in line with its digital assets measurement policy as described under “Digital Assets and Digital assets, restricted.”

 

Embedded Derivatives

 

The Company evaluates its financing and service arrangements to determine whether certain arrangements contain features that qualify as embedded derivatives requiring bifurcation in accordance with ASC 815 - Derivatives and Hedging. Embedded derivatives that are required to be bifurcated from the host instrument or arrangements are accounted for and valued as separate financial instruments. For derivatives that are assets or liabilities, the derivative instrument is initially recorded at its fair value and is then remeasured at each reporting date with changes in the fair value reported in the statements of operations. The Company classifies derivative assets or liabilities in the condensed consolidated balance sheets as current or non-current based on whether settlement of the instrument could be required within 12 months of the condensed consolidated balance sheet date.

 

13
 

 

Deposits

 

The Company contracts with service providers for hosting of its equipment and operational support in data centers where the Company’s equipment is deployed. These arrangements require advance payments to vendors in conjunction with the contractual obligations associated with these services. The Company classifies these payments as “Long-term deposits” on the condensed consolidated balance sheets.

 

Property and Equipment

 

Property and equipment are stated at cost, net of accumulated depreciation and impairment, as applicable. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The Company’s property and equipment is primarily composed of bitcoin mining rigs which are largely homogeneous and have approximately the same useful lives. Accordingly, the Company utilizes the group method of depreciation for its bitcoin mining rigs. The Company will update the estimated useful lives of its bitcoin mining server group periodically as information on the operations of the mining equipment indicates changes are required. The Company will assess and adjust the estimated useful lives of its mining equipment when there are indicators that the productivity of the mining assets is longer or shorter than the assigned estimated useful lives.

 

Investments

 

Investments, which may be made from time to time for strategic reasons (and not to engage in the business of investments), are included in non-current assets in the condensed consolidated balance sheets. Investments without a readily determinable fair value are recorded at cost minus impairment, plus or minus changes from observable price changes in orderly transactions for identical or similar investments of the same issuer, in accordance with the measurement alternative described in ASC 321 - Investments – Equity Securities. As part of the Company’s policy to maximize return on strategic investment opportunities, while preserving capital and limiting downside risk, the Company may at times enter into equity investments or simple agreements for future equity (“SAFE”). The nature and timing of the Company’s investments will depend on available capital at any particular time and the investment opportunities identified and available to the Company.

 

On February 3, 2022, the Company purchased convertible preferred stock of Compute North Holdings, Inc. with a purchase price of approximately $10,000. The acquisition of convertible preferred stock was accounted for as investments in equity securities without readily determinable fair value at cost minus impairment, as adjusted for observable price changes in orderly transactions for identical or similar investment of the same issuer, pursuant to ASC 321. The Company impaired this investment by approximately $10,000 following Compute North’s Chapter 11 Bankruptcy filing during September 2022 (See NOTE 10 – COMPUTE NORTH BANKRUPTCY).

 

On May 3, 2022, the Company converted $2,000 from its prior Auradine, Inc. SAFE investment into preferred stock while purchasing additional Auradine preferred stock with a purchase price of $3,500. At the same time, the Company entered into a commitment to acquire additional shares of Auradine preferred stock with a purchase price of $30,000. This forward contract was accounted for under ASC 321 as an equity security.

 

On September 27, 2022, the Company purchased additional shares of Auradine preferred stock with a purchase price of $30,000, bringing its total carrying amount of investment in Auradine, Inc. preferred stock to $35,500, with no noted impairments or other adjustments. The preferred stock is accounted for as investments in equity securities without a readily determinable fair value at cost minus impairment, as adjusted for observable price changes in orderly transactions for identical or similar investments from the same issuer, pursuant to ASC 321 (refer to NOTE 15 – RELATED PARTY TRANSACTIONS).

 

As of the six months ended June 30, 2023 and year ended December 31, 2022, the Company has one remaining SAFE investment with a carrying value of $1,000, with no noted impairments or other adjustments.

 

14
 

 

Equity Method Investments

 

The Company accounts for investments in which it owns between 20% and 50% of the common stock or has the ability to exercise significant influence, but not control, over the investee using the equity method of accounting in accordance with ASC 323 - Equity Method Investments and Joint Ventures. Under the equity method, an investor initially records an investment in the stock of an investee at cost and adjusts the carrying amount of the investment to recognize the investor’s share of the earnings or losses of the investee after the date of acquisition.

 

On January 27, 2023, the Company and FS Innovation, LLC (“FSI”) entered into a Shareholders’ Agreement regarding the formation of an Abu Dhabi Global Markets company (the “ADGM Entity”). The ADGM Entity did not start mining operations during the six months ended June 30, 2023, and did not have significant earnings or losses. As of June 30, 2023, the carrying value of the Company’s 20% ownership in the ADGM Entity was $62,918. The equity method investment is included in non-current assets in the condensed consolidated balance sheets under “Investments.”

 

Stock-based Compensation

 

The Company expenses stock-based compensation to employees and non-employees over the requisite service period based on the grant date fair value of the awards.

 

Impairment of Long-lived Assets

 

Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

 

Revenues From Contracts with Customers

 

The Company recognizes revenue under ASC 606 – Revenue from Contracts with Customers. The core principle of the revenue standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Refer to NOTE 5 – REVENUE FROM CONTRACTS WITH CUSTOMERS, for further discussion.

 

Income Taxes

 

Effective Tax Rate

 

The effective tax rate (“ETR”) from continuing operations was 1.07% and 1.07% for the three and six months ended June 30, 2023, respectively, and 5.38% and 2.31% for the three and six months ended June 30, 2022, respectively. The difference between the US statutory tax rate of 21% was primarily due to the change in valuation allowance as a result of current year activity.

 

15
 

 

Income Tax in Interim Periods

 

The Company records its tax expense or benefit on an interim basis using an estimated annual effective tax rate. This rate is applied to the current period ordinary income or loss to determine the income tax provision or benefit allocated to the interim period. The income tax effects of unusual or infrequent items are excluded from the estimated annual effective tax rate and are recognized in the impacted interim period.

 

Adjustments to the estimated annual effective income tax rate are recognized in the period when such estimates are revised.

 

Uncertainties

 

The Company files federal and state income tax returns. The 2019-2021 tax years generally remain subject to examination by the IRS and various state taxing authorities, although the Company is not currently under examination in any jurisdiction.

 

The Company does not currently expect any of its remaining unrecognized tax benefits to be recognized in the next twelve months.

 

Recent Accounting Pronouncements

 

The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequences of the change to its condensed consolidated financial statements and assures that there are proper controls in place to ascertain that the Company’s condensed consolidated financial statements properly reflect the change.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

On March 28, 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-01, Leases (Topic 842): Common Control Arrangements. The amendments in ASU 2023-01 improve current GAAP by clarifying the accounting for leasehold improvements associated with common control leases, thereby reducing diversity in practice. Additionally, the amendments provide investors and other allocators of capital with financial information that better reflects the economics of those transactions. The new standard is effective for the Company for its fiscal year beginning January 1, 2024, with early adoption permitted. The Company is currently evaluating the impact of adopting the standard.

 

On June 30, 2022, FASB issued ASU No. 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. ASU 2022-03 clarifies that a contractual sale restriction prohibiting the sale of an equity security is a characteristic of the reporting entity holding the equity security and is not included in the equity security’s unit of account. The new standard is effective for the Company for its fiscal year beginning January 1, 2024, with early adoption permitted. The Company is currently evaluating the impact of adopting the standard.

 

NOTE 5 – REVENUE FROM CONTRACTS WITH CUSTOMERS

 

The Company recognizes revenue in accordance with ASC 606. The core principle of the revenue standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:

 

Step 1: Identify the contract with the customer

 

Step 2: Identify the performance obligations in the contract

 

Step 3: Determine the transaction price

 

Step 4: Allocate the transaction price to the performance obligations in the contract

 

Step 5: Recognize revenue when the Company satisfies a performance obligation

 

16
 

 

In order to identify the performance obligations in a contract with a customer, an entity must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met:

 

The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct); and

 

The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).

 

If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.

 

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:

 

Variable consideration

 

Constraining estimates of variable consideration

 

The existence of a significant financing component in the contract

 

Noncash consideration

 

Consideration payable to a customer

 

Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

 

The transaction price is allocated to each performance obligation on a relative standalone selling price basis.

 

The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time, as appropriate.

 

Application of the five-step model to the Company’s mining operations

 

The Company’s ongoing major or central operation is to provide bitcoin transaction verification services to the bitcoin network through a Company-operated mining pool as the operator and a participant in a private pool (“Operator”) (such activity as Participant and Operator, collectively, “mining”) and to provide computing power to collectives of third-party bitcoin miners (such collectives, “mining pools”) as a participant (“Participant”). The Company currently mines in a self-operated pool, which was previously open to third-party pool participants from September 2021 until May 2022.

 

17
 

 

The following table presents the Company’s revenues disaggregated for those arrangements in which the Company is the Operator and Participant:

                         
    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2023     2022     2023     2022  
Revenues from contracts with customers                                
Participant   $ 3,185     $ 1,531     $ 21,061     $ 1,531  
Operator - Transaction fees     6,358       3,275       7,409       3,792  
Other revenue                                
Operator - Block rewards     72,216       20,117       104,421       71,323  
Total revenues   $ 81,759     $ 24,923     $ 132,891     $ 76,646  

 

Operator

 

As Operator, the Company provides transaction verification services. Transaction verification services are an output of the Company’s ordinary activities; therefore, the Company views the transaction requestor as a customer and accounts for the transaction fees it earns as revenue from a contract with a customer under ASC 606. The bitcoin network is not an entity such that it may not meet the definition of a customer; however, the Company has concluded it is appropriate to apply ASC 606 by analogy to block rewards earned from the network. A contract exists under ASC 606 at the point the Company successfully validates a transaction to the distributed ledger. At this point, the performance obligation to validate the requested transaction has been satisfied and a contract is deemed to exist as follows:

 

The transaction requester, the bitcoin network, and the Company have approved the contract and have evidenced they are committed to the transaction at the point of successfully validating and adding the transaction to the distributed ledger. The parties’ rights, the consideration to be transferred, and the payment terms are clear. The transaction has commercial substance and collection of the block reward and transaction fees to which the Company is entitled is probable because they are transferred to the Company as part of closing a successful block.

 

By successfully mining a block, the Company satisfies its lone performance obligation of providing transaction verification services and, thus, earns revenue at that point in time. The amount to which the Company is entitled for successfully validating a block of transactions is fixed at the point in time the contract is deemed to exist and the performance obligation is satisfied. Thus, there is no variable consideration.

 

The Company engaged unrelated third-party mining enterprises (“pool participants”) to contribute computing power, and in exchange, remitted transaction fees and block rewards to pool participants on a pro rata basis according to each respective pool participant’s contributed computing power (“hash rate”). The MaraPool wallet (owned by the Company as Operator) is recorded on the distributed ledger as the winner of proof of work block rewards and assignee of all validations and, therefore, the transaction verifier of record. The pool participants entered into contracts with the Company as Operator; they did not directly enter into contracts with the network or the requester and were not known verifiers of the transactions assigned to the pool. As Operator, the Company delegated mining work to the pool participants utilizing software that algorithmically assigned work to each individual miner. By virtue of its selection and operation of the software, the Company as Operator controlled delegation of work to the pool participants. This indicated that the Company directed the mining pool participants to contribute their hash rate to solve in areas that the Company designates. Therefore, the Company determined that it controlled the service of providing transaction verification services to the network and requester. Accordingly, the Company recorded all of the transaction fees and block rewards earned from transactions assigned to MaraPool as revenue, and the portion of the transaction fees and block rewards remitted to MaraPool participants as cost of revenues. The Company operated a mining pool that engaged third-party pool participants from September 2021 until May 2022.

 

During the three months ended June 30, 2023, the Company changed its operator accounting policy from measuring the block reward and transaction fees using the end of day spot rate for bitcoin to the quoted spot rate at the time the block reward and transaction fees are earned.

 

In accordance with ASC 606-10-32-21, the Company measures the estimated fair value of noncash consideration at contract inception, which is the same time the block reward and transaction fee is earned and the performance obligation to the requester and the network is fulfilled by successfully validating the applicable block of transactions. The Company applies the quoted spot rate for bitcoin determined using the Company’s primary trading platform for bitcoin at the time the block reward and transaction fee is earned to measure revenues.

 

18
 

 

Expenses associated with providing the bitcoin transaction verification services to the customers, such as rent, electricity cost, and transaction fees and block rewards are recorded as cost of revenues. Depreciation on digital asset mining equipment is recorded as a component of cost of revenues.

 

Participant

 

During the three months ended June 30, 2023, the Company changed its participant accounting policy from measuring the block reward and transaction fees upon receipt of the reward in the Company’s wallet measured at the end of day spot rate for bitcoin to the policy described below.

 

The Company participates in multiple third-party operated mining pools only when our Company-operated mining pool is not available. The payout methodologies differ depending on the payout third-party operated mining pool. Pay-Per-Share (PPS) and Full-Pay-Per-Share (FPPS) pools pay rewards based on a contractual formula, which primarily calculates the hash rate provided by the Company to the mining pool as a percentage of total network hash rate, and other inputs. For PPS and FPPS pools, the Company is entitled to consideration even if a block is not successfully placed by the mining pool operator. The Company also participates in third-party mining pools that pay rewards only when the pool successfully mines a block. For these pools, the Company only earns a reward when the third-party pool successfully mines a block and its reward is the fractional share of the successfully mined block and transaction fee based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the algorithm.

 

When the Company is a Participant in a third-party operated mining pool, the Company provides hash rate that is an output of the Company’s ordinary activities in exchange for consideration. The Company considers the third-party mining pool operators its customers under Topic 606. These contracts are period-to-period contracts because they are terminable at any time by either party without compensation. A new contract is determined to exist each period (e.g., second, minute, hour) that neither the Company, nor the pool operator, terminates the arrangement.

 

When the Company participates in PPS and FPPS pools, which pay rewards based on a contractual formula, the Company recognizes revenue based on the daily contributed hash rate and other inputs measured at the average daily spot rate of bitcoin determined using the Company’s primary trading platform for bitcoin. The Company participates in third-party operated pools only when our Company-operated mining pool is not available, therefore, the duration of contributed hash rate will fluctuate during any given day. Accordingly, we measure the reward for PPS and FPPS pools based on the daily average spot rate to match the contribution of hash rate which can occur throughout the day.

 

When the Company participates in third-party pools that pay rewards only when the pool successfully mines a block, the Company recognizes its fractional share of the block and transaction fees using the spot rate of bitcoin at the time that the block is successfully mined.

 

Providing computing power on mining rigs to solve complex cryptographic algorithms in support of blockchain mining (in a process known as “solving a block”) is the primary output of the Company’s ordinary activities. The provision of computing power is the only performance obligation under the Company’s arrangements with third-party mining pool operators. The transaction consideration the Company receives is non-cash (i.e., bitcoin) and entirely variable as it is unknown at each contract inception whether the Company will earn any consideration during the period, and if it does become entitled to consideration, how much consideration to which it will be entitled.

 

The Company satisfies its performance obligation to provide computing power to the pool operator over time as described in FASB ASC 606-10-25-27(a) as the pool operator simultaneously consumes and receives benefits from the Company’s provision of computing power, which it uses continuously as an input to the pool’s efforts to solve a block.

 

Expenses associated with providing computing power services to third-party operated mining pools, such as rent and electricity costs, are recorded as cost of revenues. Depreciation on digital asset mining equipment is also recorded as a component of cost of revenues.

 

19
 

 

NOTE 6 – ADVANCES TO VENDORS AND DEPOSITS

 

The Company contracts with bitcoin mining equipment manufacturers in procuring equipment necessary for the operation of its bitcoin mining operations. A typical agreement calls for a certain percentage of the total order to be paid in advance at specific intervals, usually within several days of execution of a specific contract and periodically thereafter with final payments due prior to each shipment date. The Company accounts for these payments as “Advances to vendors” on the condensed consolidated balance sheets.

 

As of June 30, 2023 and December 31, 2022, such advances totaled approximately $7,351 and $488,299, respectively.

 

In addition, the Company contracts with other service providers for the hosting of its equipment and operational support in data centers where the Company’s equipment is deployed. These arrangements also call for advance payments to be made to vendors in conjunction with the contractual obligations associated with these services. The Company classifies these payments as “Long-term deposits” on the condensed consolidated balance sheets.

 

NOTE 7 – PROPERTY AND EQUIPMENT

 

The components of property and equipment as of June 30, 2023 and December 31, 2022 are:

 

    Useful life
(Years)
    June 30,
2023
    December 31,
2022
 
Mining rigs     3     $ 535,932     $ 116,634  
Containers     10       6,206       1,614  
Other     7       216       206  
Construction in progress           313,141       171,194  
Total gross property, equipment             855,495       289,648  
Less: Accumulated depreciation             (71,630 )     (16,622 )
Property and equipment, net           $ 783,865     $ 273,026  

 

The Company’s depreciation expense related to property and equipment for the three months ended June 30, 2023 and 2022 was $37,275 and $24,710, respectively. The Company’s depreciation expense related to property and equipment for the six months ended June 30, 2023 and 2022 was $55,008 and $38,587, respectively.

 

NOTE 8 – FAIR VALUE MEASUREMENT

 

The Company measures certain financial and non-financial assets and liabilities at fair value on a recurring or non-recurring basis. The Company uses 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

 

20
 

 

The carrying amounts reported in the condensed consolidated balance sheets for cash and cash equivalents, restricted cash, other receivable, deposits, prepaid expenses and other current assets, property and equipment, advances to vendors, accounts payable, accrued expenses, and legal reserve payable, approximate their estimated fair market value based on the short-term maturity of these instruments.

 

Financial assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level of input that is significant to their fair value measurement. The Company measures the fair value of its marketable securities and investments by taking into consideration valuations obtained from third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs included reported trades and broker-dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities and other observable inputs.

 

Recurring measurement of fair value

 

As of June 30, 2023, the Company’s cash and cash equivalents was $113,675, none of which represented money market accounts. 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 December 31, 2022, respectively:

 

    Recurring fair value measured at December 31, 2022  
    Total carrying value at December 31, 2022    

Quoted prices in active markets

(Level 1)

   

Significant other observable inputs

(Level 2)

   

Significant unobservable inputs

(Level 3)

 
Assets:                        
Cash and cash equivalents (1)   $ 92,044     $ 92,044     $     $  

 

(1) Represents money market accounts. Excludes $11,661 of cash and cash equivalents as of December 31, 2022.

 

There were no transfers among Levels 1, 2 or 3 during the six months ended June 30, 2023.

 

21
 

 

Non-recurring measurement of fair value

 

The following tables present information about the Company’s assets and liabilities measured at fair value on a non-recurring basis and therefore, not included in the tables above. These assets include (a) digital assets and digital assets, restricted that are initially recorded at cost and subsequently impaired as the fair value falls below its carrying value; (b) mining rigs and advances to vendors that are written down to fair value due to the decrease in the cost of bitcoin mining rigs that was driven by the drop in bitcoin prices during the fourth quarter ended December 31, 2022. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (e.g., impairment). The Company’s estimated level within the fair value hierarchy of those assets and liabilities as of June 30, 2023 and December 31, 2022, respectively:

 

    Non-recurring fair value measured at June 30, 2023  
    Total carrying value at June 30, 2023    

Quoted prices in active markets

(Level 1)

   

Significant other observable inputs

(Level 2)

   

Significant unobservable inputs

(Level 3)

 
Assets:                        
Digital assets   $ 234,412     $ 381,992     $     $  
Liabilities:                                
Notes payable   $ 734,231     $ 405,594       -       -  

 

    Non-recurring fair value measured at December 31, 2022  
    Total carrying value at December 31, 2022    

Quoted prices in active markets

(Level 1)

   

Significant other observable inputs

(Level 2)

   

Significant unobservable inputs

(Level 3)

 
Assets:                        
Digital assets     121,842             129,335        
Property and equipment, net (1 )     271,280             271,280        
Advances to vendors     488,299             488,299        
Digital assets, restricted     68,875             73,074        
Liabilities:                                
Notes payable     732,289       166,842       -       -  

 

(1) Represents mining rigs. Excludes $1,746 of Property and equipment relating to containers, website and leasehold improvements.

 

During the three months ended March 31, 2023, the fair value of digital assets were transferred from Level 2 to Level 1, as a result of using the quoted price in the active market in accordance with ASC 820. There were no other transfers among Levels 1, 2 or 3 during the six months ended June 30, 2023. As of June 30, 2023 and December 31, 2022, there were no other assets and liabilities measured at fair value on a non-recurring basis.

 

NOTE 9 – NET LOSS PER SHARE

 

Net income per common share is calculated in accordance with ASC Topic 260 – Earnings Per Share. Basic income per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. For the three and six months ended June 30, 2023 and 2022, respectively, the Company incurred a loss position and as such, the computation of diluted net loss per share does not include dilutive common stock equivalents in the weighted average shares outstanding, as they would be anti-dilutive.

 

22
 

 

Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share are as follows:

 

 SCHEDULE OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE

    2023     2022     2023     2022  
   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
    2023     2022     2023     2022  
Warrants to purchase common stock     324,375       324,375       324,375       324,375  
Restricted stock units     2,668,247       1,098,100       1,449,591       1,063,410  
Convertible notes to exchange common stock     9,812,955       9,812,955       9,812,955       9,812,955  
Series A Preferred Stock     249,750             125,565        
Total dilutive shares     13,055,327       11,235,430       11,712,486       11,200,740  

 

The following table sets forth the computation of basic and diluted loss per share:

 

 SCHEDULE OF COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE

    2023     2022     2023     2022  
   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
    2023     2022     2023     2022  
          (As Restated)           (As Restated)  
Numerator:                        
Net loss   $ (19,133 )   $ (212,626 )   $ (26,368 )   $ (229,735 )
Add: Series A Preferred Stock accretion to redemption value   $ (2,121 )   $     $ (2,121 )   $  
Net loss attributable to common stockholders   $ (21,254 )   $ (212,626 )   $ (28,489 )   $ (229,735 )
Denominator:                                
Weighted average common stock outstanding - basic and diluted     168,474,882       109,437,293       163,856,352       106,101,762  
Net loss attributable to common stockholders per common stock - basic and diluted   $ (0.13 )   $ (1.94 )   $ (0.17 )   $ (2.17 )

 

NOTE 10 – COMPUTE NORTH BANKRUPTCY

 

On September 22, 2022, Compute North Holdings, Inc. (along with its affiliated debtors, collectively, “Compute North”, filed for chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of Texas under Chapter 11 of the U.S. Bankruptcy Code (11 U.S. Code section 101 et seq.). Marathon’s financial exposure to Compute North at the time of the bankruptcy filing included:

 

Approximately $10,000 in Convertible Preferred Stock of Compute North Holdings, Inc.

 

Approximately $21,000 related to an unsecured Senior Promissory note with Compute North LLC.

 

Approximately $50,000 in operating deposits with Compute North primarily related to the King Mountain and Wolf Hollow hosting facilities.

 

The Company recorded an impairment charge of $55,674 during 2022. On February 16, 2023, the Bankruptcy Court approved the Debtors Plan of Reorganization, pursuant to which Marathon’s claim was fixed at $40,000 as an unsecured claim to be paid out according to the timing and percentages within the approved Debtor’s plan. The Company has yet to receive the settlement funds.

 

NOTE 11 – STOCKHOLDERS’ EQUITY

 

Common Stock

 

Shelf Registration Statement on Form S-3 and At-The-Market Offering Agreement

 

On February 11, 2022, the Company entered into an At-The-Market Offering Agreement, or sales agreement, with H.C. Wainwright & Co., LLC relating to shares of the Company’s common stock. In accordance with the terms of the sales agreement, the Company may offer and sell shares of its common stock having an aggregate offering price of up to $750,000 from time to time through Wainwright acting as its sales agent. As of June 30, 2023, the Company has sold 70,264,987 shares of common stock for an aggregate purchase price of $590,321, net of offering costs, pursuant to this At-The-Market Offering Agreement.

 

23
 

 

Common Stock Warrants

 

A summary of the Company’s issued and outstanding stock warrants and changes during the period ended June 30, 2023 is as follows:

 

 SUMMARY OF OUTSTANDING STOCK WARRANTS

    Number of Warrants     Weighted Average Exercise Price     Weighted Average Remaining Contractual Life (in years)  
Outstanding as of December 31, 2022     324,375     $ 25.00       2.5  
Issued           0.00       0.0  
Expired           0.00       0.0  
Exercised           0.00       0.0  
Outstanding as of June 30, 2023     324,375     $ 25.00       2.0  

 

Restricted Stock

 

A summary of the restricted stock award activity (represented by restricted stock units (“RSUs”)) for the six months ended June 30, 2023 is as follows:

 

SUMMARY OF RESTRICTED STOCK AWARD ACTIVITY

    Number of Units     Weighted Average Grant Date Fair Value  
Nonvested at December 31, 2022     1,255,648     $ 22.60  
Granted     3,112,759       8.55  
Vested     (520,743 )     18.90  
Nonvested at June 30, 2023     3,847,664     $ 11.73  

 

Series A Preferred Stock

 

On June 5, 2023, the Company entered into a securities purchase agreement for the purchase of 15,000 shares of Series A redeemable convertible preferred stock. On June 8, 2023, upon closing of the offering, the Company issued 15,000 shares of Series A Preferred Stock for total gross proceeds of $14,286 before deducting the placement agent’s fees and other estimated offering expenses. Each share of Series A Preferred Stock had a purchase price of $952.38, representing an original issue discount of approximately 5% of the $1,000 stated value of each share. Each share of Series A Preferred Stock is convertible into shares of the Company’s common stock at an initial conversion price of $14.52 per share, at the option of the holder, at any time following the Company’s receipt of stockholder approval for an increase in its authorized shares of common stock. The Company will be permitted to compel conversion of the Series A Preferred Stock after the fulfillment of certain conditions and subject to certain limitations.

 

The Series A Preferred Stock permits the holders thereof to vote together with the holders of the Company’s common stock on a proposal to increase the authorized shares of the Company’s common stock at an annual or special meeting of the Company’s stockholders. The Series A Preferred Stock permits the holder to cast 500,000 votes per share of Series A Preferred Stock on such proposal. The Series A Preferred Stock will not be permitted to vote on any other matter. The holders of the Series A Preferred Stock agreed not to transfer their shares of preferred stock until after the meeting of Company stockholders. The holders of the Series A Preferred Stock agreed to vote their shares on such proposal in the same proportions as the shares of common stock. The holders of the Series A Preferred Stock have the right to require the Company to redeem their shares of preferred stock for cash at 105% of the stated value of such shares commencing after the earlier of the Company’s stockholders’ approval of the authorized share increase and 90 days after the closing of the issuance of the Series A Preferred Stock and until 120 days after such closing.

 

24
 

 

The Series A Preferred Stock was recorded outside of stockholder’s equity as mezzanine equity. At June 30, 2023, the Company increased the carrying value of Series A Preferred Stock to its redemption value and recorded the difference to additional paid-in capital. This method treats the end of the reporting period as if it were also the redemption date for the security.

 

NOTE 12 – DEBT

 

On November 18, 2021, the Company issued $650,000 principal of its 1.0% Convertible Senior Notes due 2026 (the “Notes”). The Notes were issued pursuant to, and are governed by, an indenture (the “Indenture”), dated as of November 18, 2021, between the Company and U.S. Bank National Association, as trustee (the “Trustee”). Pursuant to the purchase agreement between the Company and the initial purchasers of the Notes, the Company also granted the initial purchasers an option, for settlement within a period of 13 days from, and including, November 18, 2021 to purchase up to an additional $97,500 principal of Notes, which additional Notes were purchased on November 23, 2021, for an aggregate principal amount of Notes purchased of $747,500. All references in this disclosure to “Notes” includes the Notes issued on both November 18, 2021 and November 23, 2021. As of June 30, 2023 and December 31, 2022, notes outstanding, net of unamortized discounts of approximately $13,269 and $15,211, respectively, were $734,231 and $732,289, respectively.

 

The Notes accrue interest at a rate of 1.00% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on June 1, 2022. The Notes will mature on December 1, 2026, unless earlier repurchased, redeemed or converted, which scenarios the Company is currently contemplating and may consummate in advance of the maturity date. Before the close of business on the business day immediately before September 1, 2026, noteholders will have the right to convert their Notes only upon the occurrence of certain events. From and after September 1, 2026, noteholders may convert their Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election. The initial conversion rate is 13.1277 shares of common stock per one thousand dollar principal amount of Notes, which represents an initial conversion price of approximately $76.17 per share of common stock. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.

 

On July 28, 2022, the Company entered into a Revolving Credit and Security Agreement (the “Agreement”) with Silvergate Bank (the “Bank”) pursuant to which Silvergate had agreed to loan the Company up to $100,000 on a revolving basis pursuant to the terms of the Agreement. This facility refinanced and replaced an existing $100,000 facility the Company had in place with the Bank. On the same date, the Company also entered into a $100,000 principal term loan facility (the “Term Loan”) with Silvergate. See Form 10-K for the year ended December 31, 2022 for the terms of the facilities set forth in the Agreement and the Term Loan.

 

On February 6, 2023, the Company provided Silvergate Bank with the required 30-day notice stating the Company’s intent to prepay the outstanding balance on its term loan facility as well as the Company’s intent to terminate the term loan facility. The Company and Silvergate subsequently agreed to also terminate the revolving line of credit (“RLOC”) facility. On March 8, 2023, the term loan prepayment was completed, and the Company’s term loan and RLOC facilities with Silvergate Bank were terminated.

 

25
 

 

NOTE 13 – LEASES

 

Leases

 

The Company leases office space in the United States under operating lease agreements. The Company also entered into an arrangement with Applied Blockchain for the use of energized cryptocurrency mining facilities under which the Company pays for electricity per megawatt based on usage. The Company has determined that it has embedded operating leases at two of the facilities governed by this arrangement that commenced in January and March 2023, and has elected not to separate lease and non-lease components. Payments made for these two operating leases are therefore entirely variable and are based on usage of electricity, and the Company therefore does not record a right-of-use asset or lease liability associated with the leases. Variable lease cost during the six months ended June 30, 2023 are disclosed in the table below. Office space and mining facilities comprise the Company’s material underlying asset classes under operating lease agreements. The Company has no material finance leases.

 

As of June 30, 2023, the Company’s right-of-use (“ROU”) assets and total lease liabilities were $559 and $597, respectively. As of December 31, 2022, the Company’s ROU assets and total lease liabilities were $1,276 and $1,343, respectively. The Company has amortized right-of-use assets totaling $71 and $29 for the three months ended June 30, 2023 and 2022, respectively. The Company has amortized right-of-use assets totaling $167 and $48 for the six months ended June 30, 2023 and 2022, respectively.

 

Operating lease costs are recorded on a straight-line basis within operating expenses. The Company’s total lease expense is comprised of the following:

 

 SCHEDULE OF COMPONENTS OF LEASE COST

    2023     2022     2023     2022  
    For the Three Months Ended June 30,     For the Six Months Ended June 30,  
    2023     2022     2023     2022  
Operating leases                                
Operating lease cost   $ 74     $ 74     $ 185     $ 100  
Operating lease expense     74       74       185       100  
Short-term lease rent expense     11       8       20       15  
Variable lease cost     17,165             19,938        
Total rent expense   $ 17,250     $ 82     $ 20,143     $ 115  

 

Additional information regarding the Company’s leasing activities as a lessee is as follows:

 

 SUMMARY OF MINIMUM LEASE PAYMENTS

    For the Six Months Ended June 30,  
    2023     2022  
Operating cash flows from operating leases   $ 229     $ 27  
Weighted-average remaining lease term – operating leases     3.4       4.4  
Weighted-average discount rate – operating leases     5 %     5 %

 

Year   Amount  
2023 (remaining)   $ 133  
2024     166  
2025     143  
2026     147  
2027     63  
Thereafter      
Total   $ 652  

 

26
 

 

NOTE 14 – LEGAL PROCEEDINGS

 

Compute North Bankruptcy

 

On September 22, 2022, Compute North Holdings, Inc. (currently d/b/a Mining Project Wind Down Holdings, Inc.) and certain of its affiliates (collectively, “Compute North”) filed for chapter 11 bankruptcy protection. Compute North provided operating services to the Company and hosted its mining rigs at multiple facilities. The Company delivered miners to Compute North, which then installed the mining rigs at those facilities, operated and maintained the mining rigs, and provided energy to keep the miners operating. During the course of the chapter 11 cases, Compute North sold substantially all of their assets in a series of 363 sale transactions, including Compute North’s ownership interests in non-debtor entities that own or partially-own facilities that house the Company’s miners.

 

On November 23, 2022, the Company and certain of its affiliates timely filed proofs of claim asserting various claims against Compute North, including: (i) claims arising under hosting agreements between the Company and Compute North LLC; (ii) claims arising under that certain Senior Promissory Note, dated as of July 1, 2022, by and between the Company, as Lender, and Compute North LLC, as Borrower; (iii) claims arising from the breach of a letter of intent between us and Compute North LLC; and (iv) claims for daily lost revenue, profits and other damages against Compute North.

 

On February 9, 2023, the Bankruptcy Court approved a settlement stipulation between the Company and Compute North, pursuant to which the proofs of claim filed by the Company and certain of its affiliates were resolved, and the Company received a single allowed unsecured claim against Compute North LLC in the amount of $40,000 and its Preferred Equity Interests in Compute North Holdings, Inc. in the amount of 39,597 shares of Series C Preferred Stock was confirmed. In exchange, the Company agreed to vote in favor of Compute North’s chapter 11 plan.

 

On February 16, 2023, the Bankruptcy Court confirmed Compute North’s chapter 11 plan (the “Plan”), pursuant to which Compute North will liquidate its remaining assets and distribute proceeds arising therefrom in accordance with the waterfall set forth in the Plan. In its disclosure statement filed on December 19, 2022, the Compute North Debtors projected that holders of allowed general unsecured claims could recover anywhere between 8% to 65% on their claims, while holders of preferred equity interests are expected to recover nothing on their interests. The Plan became effective on March 31, 2023. At this time, the Company cannot predict the quantum of its potential recovery on account of its allowed general unsecured claim and preferred equity interests or the timing of when it would receive any distributions under the Plan on account of its claims and interests.

 

Putative Class Action Complaint

 

On March 30, 2023, a putative class action complaint was filed in the United States District Court for the District of Nevada, against the Company and present and former senior management, alleging claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) arising out of the Company’s announcement of accounting restatements on February 28, 2023. The defendants’ time to respond has been extended until after the appointment of a lead plaintiff. To date, no lead plaintiff has been appointed.

 

27
 

 

Derivative Complaints

 

On June 22, 2023, a shareholder derivative complaint was filed in the Circuit Court of the 17th Judicial Circuit for Broward County, Florida, against current members of the Company’s board of directors and senior management, alleging claims for breach of fiduciary duty and unjust enrichment based on allegations substantially similar to the allegations in the March 30, 2023 putative class action complaint.

 

On July 8, 2023, a second shareholder derivative complaint was filed in the United States District Court for the District of Nevada, against current and former members of the Company’s board of directors and senior management, alleging claims under Sections 14(a), 10(b), and 21D of the Exchange Act, and for breach of fiduciary duty, unjust enrichment, and waste of corporate assets, based on allegations substantially similar to the allegations in the March 30, 2023 putative class action complaint.

 

On July 12, 2023, a third shareholder derivative complaint was filed in the United States District Court for the District of Nevada, against current and former members of the Company’s board of directors and senior management, alleging claims under Section 14(a) of the Exchange Act and for breach of fiduciary duty, based on allegations substantially similar to the allegations in the March 30, 2023 putative class action complaint.

 

On July 13, 2023, a fourth shareholder derivative complaint was filed in the Circuit Court of the 17th Judicial Circuit for Broward County, Florida, against current members of the Company’s board of directors and senior management, alleging claims for breach of fiduciary duty, unjust enrichment, and waste of corporate assets, based on allegations substantially similar to the allegations in the March 30, 2023 putative class action complaint.

 

Information Subpoenas

 

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, Montana. 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 the Company’s Form 8-K dated October 13, 2020. The Company received an additional subpoena from the SEC on April 10, 2023, relating to, among other things, transactions with related parties. The Company understands that the SEC may be investigating whether or not there may have been any violations of the federal securities law. The Company is cooperating with the SEC.

 

Ho v. Marathon

 

On January 14, 2021, Plaintiff Michael Ho (“Plaintiff” or “Ho”) filed a Civil Complaint for Damages and Restitution (“Complaint”) against the Company. 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. The claims arise from the same set of facts. Ho alleges that the Company profited from commercially-sensitive information he shared with the Company and then it refused to compensate him for his role in securing the acquisition of a supplier of energy for the Company. On February 22, 2021, the Company responded to Mr. Ho’s Complaint with a general denial and the assertion of applicable affirmative defenses. Then, on February 25, 2021, the Company removed the action to the United States District Court in the Central District of California, where the action remains pending. The Company filed a motion for summary judgment/adjudication of all causes of action. On February 11, 2022, the Court granted the motion and dismissed Ho’s 2nd, 5th and 6th causes of action. Discovery is substantially closed. The Court held a pre-trial conference on February 24, 2022, where it vacated the March 3, 2022 trial date and ordered the parties to meet and confer on a new trial date. The Court discussed the various theories of damages maintained by the parties. In its ruling on the summary judgment motion and at the pre-trial conference on February 24, 2022, the Court noted that a jury is more likely to accept $150 as an appropriate damages amount if liability is found, as opposed to the various theories espoused by Ho that result in multi-million-dollar recoveries. Due to outstanding issues of fact and law, it is impossible to predict the outcome at this time; however, after consulting legal counsel, the Company is confident that it will prevail in this litigation, since it did not have a contract with Mr. Ho and he did not disclose any commercially-sensitive information under any mutual nondisclosure agreement that was used to structure any joint venture with energy providers. The trial has been rescheduled for January 29, 2024, and is scheduled for four days, including jury selection.

 

NOTE 15 – RELATED PARTY TRANSACTIONS

 

On September 23, 2022, the Company made an incremental $30,000 investment in Auradine, Inc., bringing its total holdings in Auradine to $35,500 based upon a previously issued and disclosed SAFE instrument. Said Ouissal, a director of the Company, currently owns approximately 5% of the issued and outstanding shares of Auradine, and Fred Thiel, the Company’s Chairman and CEO, sits on Auradine’s Board of Directors. On November 3, 2022, the Company’s Board met and determined that Said Ouissal was no longer deemed to be an independent director of the Company. As a result, Mr. Ouissal stepped down from all Board Committees.

 

28
 

 

NOTE 16 – SUBSEQUENT EVENTS

 

The Company has evaluated other subsequent events through the date the consolidated financial statements were available to be issued and has concluded that no such events or transactions took place that would require disclosure and in this Note 16 other than as disclosed below.

 

Results of the Company’s Annual Meeting and Amendment to the Company’s Articles of Incorporation

 

On July 27, 2023, the Company held an annual meeting of stockholders (the “Meeting”). As of the record date for the Meeting, 169,968,874 shares of common stock were issued and outstanding1. A total of 79,507,015 shares of common stock, constituting a quorum, were present and accounted for at the Meeting. At the Meeting, the Company’s stockholders approved the below proposals (with the Series A Preferred Stock voting alongside the common stock (15,000 shares with 500,000 votes per share voting on proposal 3 in the same proportions as the shares of common stock were voted)):

 

VOTES CAST COMMON STOCK:   Proposal #1     Proposal #2     Proposal #3     Proposal #4  
Common Stock   Director Election     Auditor Ratification     Common Stock Increase     Advisory Say on Pay  
Yes     24,503,546       71,483,564       56,331,569       22,719,406  
                                 
Against (No)           3,375,370       22,539,739       5,343,885  
                                 
Abstain     4,276,453       4,648,017       635,702       716,543  
                                 
VOTES CAST SERIES A PREFERRED (CONVERTED BASIS):                        
                         
Common Stock     Proposal #1       Proposal #2       Proposal #3       Proposal #4  
Yes     N/A       N/A       5,172,875,000       N/A  
                                 
Against (No)     N/A       N/A             N/A  
                                 
Abstain     N/A       N/A             N/A  
                                 
Total # of Common shares as of June 16, 2023     169,968,874                          
Total # of Series A (converted basis into Common shares) as of June 16, 2023     5,351,250,000                          
                                 
Common shares voted through the meeting     79,507,015                          
Preferred shares (converted basis) voted through the meeting on Proposal # 3 only     5,172,875,000                          
TOTAL     5,252,382,015                          

 

1. As no other matters were brought for a vote before the meeting, the votes on Proposal #5 of 14,846,275 shares in favor, 13,072,702 shares against, and 836,041 shares abstaining, have no impact.

 

29
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Unless otherwise indicated or the context otherwise requires, references to “Marathon,” and the “Company” refer to Marathon Digital Holdings, Inc. and its consolidated subsidiaries. All dollar amounts referenced in this Item 2 are in thousands, except per share, bitcoin, and per bitcoin amounts.

 

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 the Company’s 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 the Company’s 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 the Company that the Company believes is accurate. It is generally based on industry and other publications that are not produced for purposes of securities offerings or economic analysis. The Company has 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. The Company does not assume any obligation to update any forward-looking statement. As a result, investors should not place undue reliance on these forward-looking statements.

 

The following discussion and analysis are intended as a review of significant factors affecting the Company’s financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with the Company’s 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. 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.

 

Business Overview

 

Marathon is a digital asset technology company dedicated to securing and supporting the Bitcoin ecosystem. The business is focused on producing or “mining” bitcoin using one of the largest and most efficient fleets of highly specialized computers in the industry. The Company successfully leverages technology across the value chain to improve efficiency and increase market share. The Company is also committed to carbon neutrality and growing operations through predominately renewable sources of energy. The Company’s “asset-light” capital strategy has fueled significant market share gains while also helping build one of the largest bitcoin positions on the balance sheet among our North American publicly traded peers. As of June 30, 2023, the Company had nearly 150,000 mining rigs in operation and owned 12,538 bitcoin. With its strong balance sheet and significant scale, the Company’s strategy has recently evolved beyond “asset-light” to include joint ventures with our landmark project located in Abu Dhabi.

 

30
 

 

Recent Developments

 

The Company has continued its focus on expanding its operational capabilities during the period both domestically and internationally.

 

On January 27, 2023, Marathon Digital Holdings, Inc. (the “Company”) and FS Innovation, LLC (“FSI”) entered into a Shareholders’ Agreement (the “Agreement”) regarding the formation of an Abu Dhabi Global Markets company (the “ADGM Entity”), whose purpose shall be to jointly (a) establish and operate one or more mining facilities for digital assets; and (b) mine digital assets (collectively, the “Business”). The initial project by the ADGM Entity shall consist of two digital asset mining sites comprising 250 MW in Abu Dhabi, and the initial equity ownership in the ADGM Entity shall be 80% FSI and 20% the Company, and capital contributions will be made, subject to the satisfaction or waiver of certain conditions, during the 2023 development period in those proportions, consisting of both cash and in kind, in amounts of approximately $406,000 in aggregate. FSI will appoint four directors to the board of the ADGM Entity, and the Company will appoint one director.

 

Unless otherwise not permitted by applicable law, the digital assets mined by the ADGM Entity will be distributed to the Company and FSI twice a month in proportion to their respective equity interests in the ADGM Entity. There are market provisions in the Agreement with respect to financial and tax matters.

 

The Agreement shall terminate at the earlier of the mutual written agreement of the parties, winding up of the ADGM Entity or the ownership by a shareholder of all of the outstanding equity interests in the ADGM Entity. The Agreement contains market terms on transfer of shares by a shareholder, pre-emptive rights and certain tag along and drag along rights upon a sale of the ADGM Entity. Furthermore, there are five year restrictive covenants which, inter alia, prevent Marathon from competing in the UAE with the Business or with the business of FSI or any of certain related parties and prevent FSI from competing in the U.S. with the business of Marathon.

 

The Company also made progress in installing and energizing its operations at various locations throughout the US, and in particular its two North Dakota sites. The Garden City, TX site is fully installed but is pending regulatory approval and was therefore not yet operational at June 30, 2023. Bitcoin production increased to 2,926 bitcoin during the three months ended June 30, 2023, an average of 32.2 bitcoin per day. During the three months ended June 30, 2022, the Company produced 1,259 bitcoin, an average of 14.0 bitcoin per day. The 314% increase in production was primarily the result of increasing the scale of the Company’s operations.

 

Bitcoin prices also rebounded significantly during the 2023 period, increasing from $16,548 per bitcoin at December 31, 2022 to $30,467 per bitcoin at June 30, 2023. This increase in the market value of bitcoin resulted in lower levels of impairment recorded during the period, and a higher market value of the Company’s bitcoin holdings at June 30, 2023 compared with December 31, 2022.

 

The Company also commenced a program to sell some of its bitcoin as a means of offsetting monthly cash operating costs. The Company sold 4,754 bitcoin for total proceeds of $113,928, realizing gains on sales of bitcoin of $40,120 during the six months ended June 30, 2023. There were no such sales in the prior-year period.

 

The Company terminated its credit facilities with Silvergate Bank and responded to the closure of Signature Bank by diversifying its cash management services among multiple institutions. Key activities during the period related to these efforts included the following:

 

On February 6, 2023, the Company provided Silvergate Bank with the required 30-day notice stating the Company’s intent to prepay the outstanding balance on its term loan facility as well as the Company’s intent to terminate the term loan facility. The Company and Silvergate Bank subsequently agreed to terminate the RLOC facility. On March 8, 2023, the Company prepaid the term loan and terminated the RLOC facility with Silvergate Bank.

 

31
 

 

On March 12, 2023, Signature Bank was closed by the New York State Department of Financial Services. On that same date the FDIC was appointed as receiver and transferred all the deposits and substantially all of the assets of Signature Bank to Signature Bridge Bank, N.A., a full-service bank that was being operated by the FDIC. The Company held approximately $142,000 of cash deposits at Signature Bridge Bank, N.A. when normal banking activities resumed on March 13, 2023. The Company reduced its balances at Signature Bridge Bank and its successor institution by transferring funds to other financial institutions and through other treasury management activities. The Company no longer has any deposits at Signature Bank or its successor.

 

On June 5, 2023, the Company entered into a securities purchase agreement for the purchase of 15,000 shares of Series A redeemable convertible preferred stock. On June 8, 2023, upon closing of the offering, the Company issued 15,000 shares of Series A Preferred Stock for total gross proceeds of $14,286 before deducting the placement agent’s fees and other estimated offering expenses. Each share of Series A Preferred Stock had a purchase price of $952.38, representing an original issue discount of approximately 5% of the $1,000 stated value of each share. Each share of Series A Preferred Stock is convertible into shares of the Company’s common stock at an initial conversion price of $14.52 per share, at the option of the holder, at any time following the Company’s receipt of stockholder approval for an increase in its authorized shares of common stock. The Company will be permitted to compel conversion of the Series A Preferred Stock after the fulfillment of certain conditions and subject to certain limitations (see NOTE 11 – STOCKHOLDERS’ EQUITY, Series A Preferred Stock to the condensed consolidated financial statements for additional information).

 

Critical Accounting Policies and Estimates

 

The following accounting policies relate to the significant areas involving management’s judgments and estimates in the preparation of the Company’s financial statements, and are those that it believes are the most critical to aid the understanding and evaluation of this management discussion and analysis:

 

Digital assets

 

Revenue from contracts with customers

 

Long-lived assets

 

Income taxes

 

Digital assets

 

Digital assets (bitcoin) are included in current and other assets in the accompanying condensed consolidated balance sheets. Digital assets awarded to the Company through its mining activities are accounted for in accordance with the Company’s revenue recognition policy below.

 

Digital assets are accounted for as intangible assets with indefinite useful lives and are recorded at cost less impairment in accordance with ASC 350 – Intangibles-Goodwill and Other. 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. Whenever the exchange-traded price of digital assets declines below its carrying value, the Company has determined that it is more likely than not that an impairment exists and records impairment equal to the amount by which the carrying value exceeds the fair value at that point in time. The Company has deemed the price of digital assets to be a Level 1 input under the ASC 820 - Fair Value Measurement hierarchy as these were based on observable quoted prices in the Company’s principal market for identical assets. Subsequent reversal of impairment losses is not permitted.

 

32
 

 

Purchases of digital assets by the Company are included within investing activities in the accompanying condensed consolidated statements of cash flows, while digital assets awarded to the Company through its mining activities are included as a reconciling item within operating activities on the accompanying condensed consolidated statements of cash flows. The sales of digital assets are included within operating activities in the accompanying condensed consolidated statements of cash flows and any gains or losses from such sales are included in operating expenses in the condensed consolidated statements of operations.

 

Revenues from contracts with customers

 

The Company recognizes revenue in accordance with FASB ASC Topic 606 – Revenue from Contracts with Customers. The core principle of the revenue standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:

 

Step 1: Identify the contract with the customer

 

Step 2: Identify the performance obligations in the contract

 

Step 3: Determine the transaction price

 

Step 4: Allocate the transaction price to the performance obligations in the contract

 

Step 5: Recognize the revenue when the Company satisfies a performance obligation

 

In order to identify the performance obligations in a contract with a customer, an entity must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met:

 

  The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct); and
     
  The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).

 

If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.

 

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:

 

Variable consideration

 

Constraining estimates of variable consideration

 

The existence of a significant financing component in the contract