10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 12, 2024
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2024
or
For the transition period from _______to______
Commission File Number: 001-36555
(Exact name of registrant as specified in charter)
(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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(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 | ||||||||||||
The |
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.
☒ | Accelerated filer |
☐ | |||||||||
Non-accelerated filer |
☐ | Smaller reporting company |
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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 ☒
As of November 5, 2024, the number of outstanding shares of the registrant’s common stock, par value $0.0001 per share, was 321,831,487 .
TABLE OF CONTENTS
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Item 6. |
PART I
ITEM 1. FINANCIAL STATEMENTS
MARA HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |||||||||||||
2024 | 2023 | |||||||||||||
(in thousands, except share and per share data) | (unaudited) | |||||||||||||
ASSETS | ||||||||||||||
Current assets: | ||||||||||||||
Cash and cash equivalents | $ | $ | ||||||||||||
Restricted cash | ||||||||||||||
Digital assets | ||||||||||||||
Accounts receivable, net | ||||||||||||||
Deposits | ||||||||||||||
Prepaid expenses and other current assets | ||||||||||||||
Total current assets | ||||||||||||||
Digital assets |
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Property and equipment, net | ||||||||||||||
Advances to vendors | ||||||||||||||
Investments | ||||||||||||||
Long-term deposits | ||||||||||||||
Long-term prepaids | ||||||||||||||
Operating lease right-of-use assets | ||||||||||||||
Goodwill | ||||||||||||||
Intangible assets, net | ||||||||||||||
Deferred tax assets | ||||||||||||||
Total long-term assets | ||||||||||||||
TOTAL ASSETS | $ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||
Current liabilities: | ||||||||||||||
Accounts payable | $ | $ | ||||||||||||
Accrued expenses | ||||||||||||||
Derivative instrument, current portion | ||||||||||||||
Operating lease liabilities, current portion | ||||||||||||||
Finance lease liability, current portion | ||||||||||||||
Other current liabilities | ||||||||||||||
Total current liabilities | ||||||||||||||
Long-term liabilities: | ||||||||||||||
Notes payable | ||||||||||||||
Derivative instrument, net of current portion |
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Operating lease liabilities, net of current portion | ||||||||||||||
Finance lease liability, net of current portion | ||||||||||||||
Deferred tax liabilities | ||||||||||||||
Other long-term liabilities | ||||||||||||||
Total long-term liabilities | ||||||||||||||
See accompanying notes to the Condensed Consolidated Financial Statements
1
Commitments and Contingencies (Note 16) |
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Stockholders’ Equity: | ||||||||||||||
Preferred stock, par value $ |
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Common stock, par value $ |
||||||||||||||
Additional paid-in capital | ||||||||||||||
Accumulated deficit | ( |
( |
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Total stockholders’ equity | ||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ |
|
$ |
|
See accompanying notes to the Condensed Consolidated Financial Statements
2
MARA HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended September 30, |
Nine Months Ended September 30, | |||||||||||||||||||||||||
(in thousands, except share and per share data) | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||
Total revenues | $ |
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$ |
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$ |
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$ |
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||||||||||||||||||
Costs and expenses | ||||||||||||||||||||||||||
Cost of revenues | ||||||||||||||||||||||||||
Mining and hosting services |
( |
( |
( |
( |
||||||||||||||||||||||
Depreciation and amortization | ( |
( |
( |
( |
||||||||||||||||||||||
Total cost of revenues | ( |
( |
( |
( |
||||||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||||
General and administrative expenses | ( |
( |
( |
( |
||||||||||||||||||||||
Change in fair value of digital assets | ( |
|||||||||||||||||||||||||
Change in fair value of derivative instrument |
( |
( |
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Research and development |
( |
( |
( |
( |
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Early termination expenses |
( |
( |
||||||||||||||||||||||||
Amortization of intangible assets | ( |
( |
||||||||||||||||||||||||
Total operating expenses | ( |
( |
||||||||||||||||||||||||
Operating income (loss) |
( |
( |
( |
|
||||||||||||||||||||||
Gain (loss) on investments |
( |
|||||||||||||||||||||||||
Loss on hedge instruments |
( |
|||||||||||||||||||||||||
Equity in net earnings of unconsolidated affiliate | ( |
( |
( |
( |
||||||||||||||||||||||
Net gain from extinguishment of debt |
||||||||||||||||||||||||||
Interest income | ||||||||||||||||||||||||||
Interest expense | ( |
( |
( |
( |
||||||||||||||||||||||
Other non-operating income (loss) |
( |
|||||||||||||||||||||||||
Income (loss) before income taxes |
( |
( |
( |
|
||||||||||||||||||||||
Income tax benefit (expense) |
( |
( |
||||||||||||||||||||||||
Net income (loss) |
$ | ( |
$ | ( |
$ |
|
$ |
|
||||||||||||||||||
Series A preferred stock accretion to redemption value |
( |
|||||||||||||||||||||||||
Net income (loss) attributable to common stockholders |
$ | ( |
$ | ( |
$ |
|
$ |
|
||||||||||||||||||
Net income (loss) per share of common stock - basic |
$ | ( |
$ | $ | $ | |||||||||||||||||||||
Weighted average shares of common stock - basic |
||||||||||||||||||||||||||
Net income (loss) per share of common stock - diluted |
$ | ( |
$ | ( |
$ | $ | ||||||||||||||||||||
Weighted average shares of common stock - diluted |
||||||||||||||||||||||||||
See accompanying notes to the Condensed Consolidated Financial Statements
3
MARA HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
For the Three Months Ended September 30, 2024 | ||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||||||||||||
(in thousands, except share data) | Number | Amount | ||||||||||||||||||||||||||||||
Balance at June 30, 2024 |
|
$ |
|
$ |
|
$ | ( |
$ |
|
|||||||||||||||||||||||
Stock-based compensation, net of tax withholding | — | — | ||||||||||||||||||||||||||||||
Issuance of common stock, net of offering costs | — | |||||||||||||||||||||||||||||||
Repurchase of shares in settlement of restricted stock | ( |
— | ( |
— | ( |
|||||||||||||||||||||||||||
Net loss | — | — | — | ( |
( |
|||||||||||||||||||||||||||
Balance at September 30, 2024 |
|
$ |
|
$ |
|
$ | ( |
$ |
|
|||||||||||||||||||||||
For the Nine Months Ended September 30, 2024 | ||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||||||||||||
(in thousands, except share data) | Number | Amount | ||||||||||||||||||||||||||||||
Balance at December 31, 2023 |
|
$ |
|
$ |
|
$ | ( |
$ |
|
|||||||||||||||||||||||
Stock-based compensation, net of tax withholding | — | — | ||||||||||||||||||||||||||||||
Issuance of common stock, net of offering costs | — | |||||||||||||||||||||||||||||||
Repurchase of shares in settlement of restricted stock | ( |
— | ( |
— | ( |
|||||||||||||||||||||||||||
Net income | — | — | — | |||||||||||||||||||||||||||||
Balance at September 30, 2024 |
|
$ |
|
$ |
|
$ | ( |
$ |
|
See accompanying notes to the Condensed Consolidated Financial Statements
4
For the Three Months Ended September 30, 2023 | ||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||||||||||||
(in thousands, except share data) | Number | Amount | ||||||||||||||||||||||||||||||
Balance at June 30, 2023 |
|
$ |
|
$ |
|
$ | ( |
$ |
|
|||||||||||||||||||||||
Stock-based compensation, net of tax withholding | — | — | ||||||||||||||||||||||||||||||
Issuance of common stock, net of offering costs | — | |||||||||||||||||||||||||||||||
Exchange of convertible notes for common stock | — | |||||||||||||||||||||||||||||||
Net loss | — | — | — | ( |
( |
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Balance at September 30, 2023 |
|
$ |
|
$ |
|
$ | ( |
$ |
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For the Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||||||||||||
(in thousands, except share data) | Number | Amount | ||||||||||||||||||||||||||||||
Balance at December 31, 2022 |
|
$ |
|
$ |
|
$ | ( |
$ |
|
|||||||||||||||||||||||
Stock-based compensation, net of tax withholding | — | — | ||||||||||||||||||||||||||||||
Issuance of common stock, net of offering costs | — | |||||||||||||||||||||||||||||||
Series A Preferred Stock accretion to redemption value | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Exchange of convertible notes for common stock | — | |||||||||||||||||||||||||||||||
Cumulative effect of the adoption of |
— | — | — | |||||||||||||||||||||||||||||
Net income | — | — | — | |||||||||||||||||||||||||||||
Balance at September 30, 2023 |
|
$ |
|
$ |
|
$ | ( |
$ |
|
See accompanying notes to the Condensed Consolidated Financial Statements
5
MARA HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30, |
||||||||||||||
(in thousands) | 2024 | 2023 | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||
Net income |
$ | $ | ||||||||||||
Adjustments to reconcile net income to net cash used in operating activities: |
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Depreciation and amortization | ||||||||||||||
Deferred tax (benefit) expense |
( |
|||||||||||||
Change in fair value of digital assets | ( |
( |
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Gain on investments |
( |
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Loss on hedge instruments |
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Stock-based compensation | ||||||||||||||
Change in fair value of derivative instrument |
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Early termination expenses |
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Amortization of intangible assets | ||||||||||||||
Amortization of debt issuance costs | ||||||||||||||
Equity in net earnings of unconsolidated affiliate | ||||||||||||||
Gain on extinguishment of debt, net |
( |
|||||||||||||
Other adjustments from operations, net | ( |
|||||||||||||
Changes in operating assets and liabilities | ( |
( |
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Net cash used in operating activities |
( |
( |
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CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||
Advances to vendors | ( |
( |
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Acquisition, net of cash acquired | ( |
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Loan receivable | ( |
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Purchase of property and equipment | ( |
( |
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Proceeds from sale of property and equipment |
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Proceeds from sale of digital assets | ||||||||||||||
Purchase of digital assets | ( |
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Investment in equity method investments |
( |
( |
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Purchase of equity investments | ( |
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Net cash used in investing activities |
( |
( |
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CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||
Proceeds from issuance of common stock, net of issuance costs | ||||||||||||||
Proceeds from issuance of Series A preferred stock, net of issuance costs |
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Proceeds from issuance of convertible debt, net of issuance costs | ||||||||||||||
Redemption of Series A preferred stock |
( |
|||||||||||||
Repurchase of shares in settlement of restricted stock | ( |
|||||||||||||
Repayments of finance lease liabilities | ( |
|||||||||||||
Repayment of term loan borrowings | ( |
|||||||||||||
Value of shares withheld for taxes | ( |
( |
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Net cash provided by financing activities |
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Net decrease in cash, cash equivalents and restricted cash |
( |
( |
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Cash, cash equivalents and restricted cash — beginning of period |
||||||||||||||
Cash, cash equivalents and restricted cash — end of period |
$ | $ | ||||||||||||
See accompanying notes to the Condensed Consolidated Financial Statements
6
MARA HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
MARA Holdings, Inc. (together with its subsidiaries, the “Company” or “MARA”) is a global leader in digital asset compute that develops and deploys innovative technologies to build a more sustainable future. MARA secures the world’s preeminent blockchain ledger and supports the energy transformation by converting clean, stranded, or otherwise underutilized energy into economic value. The Company also offers advanced technology solutions to optimize data center operations, including next-generation liquid immersion cooling and firmware for bitcoin miners. The Company is primarily focused on computing for, acquiring, and holding digital assets as a long-term investment. Bitcoin is seeing increasing adoption, and due to its limited supply, the Company believes it offers opportunity for appreciation in value and long-term growth prospects for its business.
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 – 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 generally accepted accounting principles in the United States (“GAAP”) and regulations of the U.S. Securities and Exchange Commission (the “SEC”) applicable to interim financial information, which permit the omission of certain information to the extent it has 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, 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 2024 or for the full year ending December 31, 2024.
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, 2023, filed with the SEC on February 28, 2024, as amended by Amendment No. 1 on Form 10-K/A (the “Annual Report”), filed with the SEC on May 24, 2024.
Use of Estimates and Assumptions
Cash and Cash Equivalents
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 Federal Deposit Insurance Corporation (“FDIC”). During 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 $250.0 thousand. As of September 30, 2024, substantially all of the Company’s cash and cash equivalents were FDIC insured.
7
Restricted Cash
Restricted cash as of September 30, 2024 principally represented those cash balances that support commercial letters of credit and are restricted from withdrawal.
Digital Assets
On July 25, 2024, the Company adopted a full holding onto bitcoin (“HODL”) approach towards its bitcoin treasury policy, retaining all bitcoin mined in its operations, and may periodically make strategic open market purchases of bitcoin. As a result, bitcoin digital assets are included in non-current assets on the Condensed Consolidated Balance Sheets due to the Company’s intent to retain and hold bitcoin. Kaspa digital assets held with the intent to fund operating expenses are included in current assets on the Condensed Consolidated Balance Sheets. Proceeds from the sale of digital assets are included within investing activities in the accompanying Condensed Consolidated Statement of Cash Flows. Following the adoption of Accounting Standards Update (“ASU”) 2023-08, Accounting for and Disclosure of Crypto Assets, effective January 1, 2023, the Company measures digital assets at fair value with changes recognized in operating expenses on the Condensed Consolidated Statements of Operations. The Company tracks its cost basis of digital assets by-wallet in accordance with the first-in-first-out method of accounting. Refer to Note 5 – Digital Assets, for further information.
Accounts Receivable
Deposits
In addition to owned and operated sites, the Company contracts with other service providers for hosting of its equipment, operational support in data centers where the Company’s equipment is deployed, and construction of data centers on leased sites. These arrangements typically require advance payments to vendors pursuant to the contractual obligations associated with these services. The Company classifies these payments as “Deposits” or “Long-term deposits” on the Condensed Consolidated Balance Sheets.
Derivatives
The Company enters into derivative contracts to manage its exposure to fluctuations in the price of bitcoin and energy costs and not for any other purpose. In addition, 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 Accounting Standard Codification (“ASC”) 815 - Derivatives and Hedging. Embedded derivatives that are required to be bifurcated from the host instrument or arrangement are accounted for and valued as separate financial instruments. There were no embedded derivatives requiring separation from the host instrument as of September 30, 2024 and December 31, 2023.
The Company does not elect to designate derivatives as hedges for accounting purposes and as such, records derivatives at fair value with subsequent changes in fair value and settlements recognized in earnings. The Company classifies derivative assets or liabilities on 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 balance sheet date of the Balance Sheets and for derivatives with multiple settlements, based on the term of the contract.
Bitcoin Derivatives
From time to time the Company enters into derivative contracts to mitigate bitcoin market pricing volatility risk. During the nine months ended September 30, 2024, the Company recorded a $2.3 million loss on derivatives as a non-operating charge on the Condensed Consolidated Statements of Operations, all settled through cash payments. There were no derivative instruments to mitigate bitcoin market pricing volatility risk outstanding as of September 30, 2024 and December 31, 2023.
Energy Derivatives
The Company acquired a commodity swap contract as a result of its acquisition of GC Data Center Equity Holdings, LLC on January 12, 2024, refer to Note 3 - Acquisitions, for further information. The commodity swap contract hedges price variability in electricity purchases and expires on December 31, 2027. The commodity swap contract
8
The following table presents the changes in fair value of the derivative instrument:
(in thousands) | ||||||||
Balance at December 31, 2023 |
$ | |||||||
Commodity swap contract | ||||||||
Change in fair value of derivative instrument |
( |
|||||||
Balance at September 30, 2024 |
$ | ( |
||||||
Property and Equipment
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. Goodwill is not subject to amortization, and instead, assessed for impairment annually at the end of each fiscal year, or more frequently when events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount in accordance with ASC 350 - Intangibles - Goodwill and Other.
The Company has the option to first assess qualitative factors to determine whether events or circumstances indicate it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, in which case a quantitative impairment test is not required.
As provided for by ASU 2017-04, Simplifying the Test for Goodwill Impairment, the quantitative goodwill impairment test is performed by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not impaired. An impairment loss is recognized for any excess of the carrying amount of the reporting unit over its fair value up to the amount of goodwill allocated to the reporting unit. Income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit are considered when measuring the goodwill impairment loss, if applicable.
Finite-Lived Intangible Assets
Intangible assets are recorded at cost less any accumulated amortization and any accumulated impairment losses. Intangible assets acquired through business combinations are measured at fair value at the acquisition date.
Intangible assets with finite lives are comprised of customer relationships and intellectual property and are amortized over their estimated useful lives on an accelerated basis over the projected pattern of economic benefits. Finite-lived intangible assets are reviewed for impairment annually, or more frequently when events or changes in circumstances indicate that it is more likely than not that the fair value has been reduced to less than its carrying amount.
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805 - Business Combinations, by recognizing the identifiable tangible and intangible assets acquired and liabilities assumed, measured at the acquisition date fair value. The determination of fair value involves assumptions, estimates and judgments. The initial allocation of the purchase price is considered preliminary and
9
therefore subject to change until the end of the measurement period (up to one year from the acquisition date). Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net assets acquired. Contingent consideration is included within the purchase price and is initially recognized at fair value as of the acquisition date. Contingent consideration, classified as either an asset or a liability, is remeasured to fair value each reporting period, until the contingency is resolved. Changes in contingent consideration period-over-period are recognized in earnings.
Acquisition related expenses are recognized separately from the business combination and are expensed as incurred.
Investments
Investments, which may be made from time-to-time for strategic reasons, are included in non-current assets on the Condensed Consolidated Balance Sheets. Refer to Note 8 - Investments, for further information.
Equity Method Investments
Other Investments
Investments in which the Company does not have the ability to exercise significant influence and does not have readily determinable fair values, 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. However, the Company generally does not make investments for speculative purposes and does not intend to engage in the business of making 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. Refer to Note 12 – Stockholders' Equity, for further information.
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. The 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
The Company recognizes revenue under ASC 606 – Revenue from Contracts with Customers. The core principle of the revenue standard is that a reporting entity should recognize revenues 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 4 – Revenues, for further information.
10
Research and Development
Income Taxes
Effective Tax Rate
The effective tax rate (“ETR”) from continuing operations was 28.26 % and 142.36 % for the three and nine months ended September 30, 2024, respectively, and 23.03 % and 0.32 % for the three and nine months ended September 30, 2023, respectively. The difference between the U.S. statutory tax rate of 21% was primarily due to the change in valuation allowance as a result of current year activity.
During the nine months ended September 30, 2024, the Company concluded, based upon all available evidence, it was more likely than not that it would have sufficient future taxable income to realize the Company’s federal and state deferred tax assets. As a result, the Company released its valuation allowance associated with deferred tax assets and recognized a corresponding benefit from income taxes on the Condensed Consolidated Statements of Operations. The Company’s conclusion regarding the realizability of such deferred tax assets was based on the scheduled reversal of deferred tax liabilities.
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 2020-2023 tax years generally remain subject to examination by the Internal Revenue Service 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 may affect the Company’s financial reporting, the Company undertakes an analysis to determine any required changes 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.
In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 requires entities to disclose specific rate reconciliations, amount of income taxes separated by federal and individual jurisdiction, and the amount of income (loss) from continuing operations before income tax expense (benefit) disaggregated between federal, state, and foreign. The new standard is effective for the Company for its annual periods beginning January 1, 2025, with early adoption permitted. The Company is currently evaluating the impact of adopting the standard.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. ASU 2023-07 is designed to improve the reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses that are regularly provided to the Company’s chief operating decision–making group (the “CODM”). The new standard is effective for the
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Company for its annual periods beginning January 1, 2024 and for interim periods beginning January 1, 2025, with early adoption permitted. The Company is currently evaluating the impact of adopting the standard.
NOTE 3 – ACQUISITIONS
APLD - Rattlesnake Den I, LLC Acquisition (Garden City, Texas)
On April 1, 2024, the Company acquired an operational bitcoin mining site located in Garden City, Texas with 132 megawatts of operational capacity and 200 megawatts of nameplate capacity from APLD - Rattlesnake Den I, LLC (the “Garden City Acquisition”) for total cash consideration of $96.8 million, including working capital adjustments that were paid during the three months ended June 30, 2024. The acquisition is intended to improve efficiencies and the scale of operations through the integration of the Company’s technology stack and realization of synergies.
The following table summarizes the components of total purchase consideration:
(in thousands) | April 1, 2024 | |||||||
Initial cash consideration, net of cash acquired | $ | |||||||
Working capital adjustment |
||||||||
Total purchase consideration | $ | |||||||
The acquisition was accounted for as a business combination using the acquisition method of accounting in accordance with ASC 805 - Business Combinations.
The following table summarizes the preliminary allocation of the purchase price based on the estimated fair values of the assets acquired and liabilities assumed as of April 1, 2024:
(in thousands) | April 1, 2024 | |||||||
Assets | ||||||||
Other current assets | $ | |||||||
Property and equipment | ||||||||
Finance lease right-of-use asset | ||||||||
Goodwill | ||||||||
Total assets | $ | |||||||
Liabilities | ||||||||
Finance lease liability | $ | |||||||
Total liabilities | ||||||||
Total purchase consideration | $ |
Goodwill is calculated as the excess of the purchase price over the net assets acquired. The Company expects the goodwill balance to be deductible for tax purposes over a period of 15 years. Goodwill is primarily attributed to growth and efficiency opportunities as well as expected synergies from combining the operations of bitcoin mining sites with the Company.
The fair value of property and equipment was estimated by applying the cost approach, which estimates fair value using replacement or reproduction cost of an asset of comparable utility, adjusted for loss in value due to depreciation and economic obsolescence. The fair value of the finance lease liability was estimated using a discounted cash flow approach, which included assumptions regarding current market prices for similar assets, estimated term and discount rates.
GC Data Center Equity Holdings, LLC Acquisition (Granbury, Texas and Kearney, Nebraska)
On January 12, 2024, the Company acquired two operational bitcoin mining sites located in Granbury, Texas and Kearney, Nebraska, totaling 390 megawatts of nameplate capacity from GC Data Center Equity Holdings, LLC for total consideration of $189.6 million, including a working capital adjustment that was paid during the three months ended March 31, 2024, plus up to an additional $19.6 million of cash, which amount is contingent on the expansion of additional megawatt capacity at the acquired facilities by certain milestone dates during the three year period
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following the anniversary of closing. The acquisition is intended to improve efficiencies and the scale of operations through the integration of the Company’s technology stack and realization of synergies.
The Company will not be taking on any new hosting services customers at these locations and will transition to self-mining at these two sites as existing customer agreements expire or are terminated early.
The following table summarizes the components of total purchase consideration:
(in thousands) | January 12, 2024 | |||||||
Initial cash consideration, net of cash acquired | $ | |||||||
Working capital adjustments | ||||||||
Estimate fair value contingent earn-out and other |
||||||||
Total purchase consideration | $ | |||||||
The acquisition was accounted for as a business combination using the acquisition method of accounting in accordance with ASC 805 - Business Combinations.
The following table summarizes the preliminary allocation of the purchase price based on the estimated fair values of the assets acquired and liabilities assumed as of January 12, 2024:
(in thousands) | January 12, 2024 | |||||||
Assets | ||||||||
Accounts receivable | $ | |||||||
Other current assets | ||||||||
Property and equipment | ||||||||
Right-of-use asset | ||||||||
Goodwill | ||||||||
Customer relationships | ||||||||
Derivative instrument | ||||||||
Other non-current assets | ||||||||
Total assets | $ | |||||||
Liabilities | ||||||||
Accounts payable and accrued expenses | $ | |||||||
Lease liability | ||||||||
Other long-term liabilities | ||||||||
Total liabilities | ||||||||
Total purchase consideration | $ |
Goodwill is calculated as the excess of the purchase price over the net assets acquired. The Company expects the goodwill balance to be deductible for tax purposes over a period of 15 years. Goodwill is primarily attributed to growth and efficiency opportunities as well as expected synergies from combining the operations of bitcoin mining sites with the Company.
The gross contractual amounts receivable were $24.0 million, of which, $3.6 million is expected to be uncollectible.
The fair value of property and equipment was estimated by applying the cost approach, which estimates fair value using replacement or reproduction cost of an asset of comparable utility, adjusted for loss in value due to depreciation and economic obsolescence. The fair value of the derivative was estimated using a discounted cash flow approach that considers various assumptions including current market prices and electricity forward curves, time value, as well as other relevant economic measures. The fair value of the contingent earn-out was estimated using a discounted cash flow approach, which included assumptions regarding the probability-weighted cash flows of achieving certain capacity development milestones, which are considered Level 3 inputs. The fair value of the lease liability was estimated using a discounted cash flow approach, which included assumptions regarding current
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market prices for similar assets, estimated term and discount rates. Changes to the fair value of assets and liabilities are recorded on the Condensed Consolidated Statements of Operations.
The following table presents the changes in the estimated fair value of the GC Data Center Equity Holdings, LLC contingent consideration liability:
(in thousands) | ||||||||
Balance at December 31, 2023 |
$ | |||||||
Contingent consideration liability | ||||||||
Change in fair value of contingent earn-out | ( |
|||||||
Balance at September 30, 2024 |
$ |
Intangible assets were determined to meet the criterion for recognition apart from tangible assets acquired and liabilities assumed. The fair values of intangible assets were estimated based on various valuation techniques including the use of discounted cash flow analyses, and multi-period excess earnings valuation approaches, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. These valuation inputs included estimates and assumptions about forecasted future cash flows, long-term revenue growth rates, and discount rates. The fair value of the customer relationships intangible asset was determined using a discounted cash flow model that incorporates the excess earnings method and will be amortized on an accelerated basis over the projected pattern of economic benefits of approximately 4 years. As of September 30, 2024, the Company fully amortized customer relationships acquired for $22.0 million.
The results of the acquired facilities have been included in the Company’s Condensed Consolidated Statements of Operations as of the acquisition date.
The following table presents unaudited consolidated pro forma results as if the acquisitions of the acquired facilities of the Garden City Acquisition and GC Data Center Equity Holdings, LLC had occurred as of January 1, 2023 for the indicated periods:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
(in thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||
Revenue | $ | $ | $ | $ | ||||||||||||||||||||||
Income (loss) before income taxes |
( |
( |
( |
|||||||||||||||||||||||
Earnings per common share: |
||||||||||||||||||||||||||
Basic | $ | ( |
$ | ( |
$ | $ | ||||||||||||||||||||
Diluted | ( |
( |
The unaudited pro forma financial information reflects the acquisition of the acquired facilities by the application of pro forma adjustments to the Company’s historical financial statements as if the acquisition had occurred on January 1, 2023. The unaudited pro forma financial information should not be considered indicative of actual results that would have been achieved had the acquisition of the acquired facilities actually been consummated on the date indicated and does not purport to be indicative of the Company's future financial position or results of operations. These pro forma results include the impact of amortizing certain purchase accounting adjustments such as intangible assets and the impact of the acquisition on interest and income tax expense. No adjustments have been reflected in the pro forma financial information for anticipated growth and efficiency opportunities. There were no material nonrecurring pro forma adjustments directly attributable to the acquisition included within the unaudited pro forma financial information.
NOTE 4 – REVENUES
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;
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•Step 3: Determine the transaction price;
•Step 4: Allocate the transaction price to the performance obligations in the contract; and
•Step 5: Recognize 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
•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 under the accounting contract 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 and Hosting Operations
The Company’s ongoing major or central operation is to provide bitcoin transaction verification services to the transaction requestor, in addition to the Bitcoin network through a Company-operated mining pool as the operator (“Operator”) (such activity, “mining”) and to provide a service of performing hash calculations to third-party pool operators alongside collectives of third-party bitcoin miners (such collectives, “mining pools”) as a participant (“Participant”).
On January 12, 2024, the Company acquired two operational bitcoin mining sites for the purpose of improving efficiencies and the scale of the Company’s mining operations. The Company provides hosting services to institutional-scale crypto mining companies at these sites. The Company will not be taking on any new hosting services customers at these locations and will transition to self-mining at these two sites as existing customer agreements expire or are terminated early. Refer to Note 3 - Acquisitions, for further information.
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The following table presents the Company’s revenues disaggregated for those arrangements in which the Company is the Operator and Participant:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||
(in thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||
Revenues from contracts with customers | ||||||||||||||||||||||||||
Mining operator - transaction fees | $ | $ | $ | $ | ||||||||||||||||||||||
Mining participant | ||||||||||||||||||||||||||
Hosting services (1)
|
||||||||||||||||||||||||||
Total revenues from contracts with customers | ||||||||||||||||||||||||||
Mining operator - block rewards and other revenue | ||||||||||||||||||||||||||
Total revenues | $ | $ | $ | $ |
(1) Includes revenue beginning January 12, 2024, the date of the GC Data Center Equity Holdings, LLC acquisition. The Company made a strategic decision to exit hosting services business upon acquisition. Intercompany transactions have been eliminated in consolidation. Refer to Note 3 - Acquisitions, for further information.
Mining Operator
As Operator, the Company provides transaction verification services to the transaction requestor, in addition to the Bitcoin network. Transaction verification services are an output of the Company’s ordinary activities; therefore, the Company views the transaction requestor as a customer and recognizes the transaction fees as revenue from contracts with customers 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 that it is appropriate to apply ASC 606 by analogy to block rewards earned from the Bitcoin network. The Company is currently entitled to the block reward of 3.125 bitcoin, subsequent to the halving that occurred on April 19, 2024. Prior to the halving, the Company was entitled to the block reward of 6.25 bitcoin from each successful validation of a block. The Company is also entitled to the transaction fees paid by the transaction requester payable in bitcoin for each successful validation of a block. The Company assessed the following factors in the determination of the inception and duration of each individual contract to validate a block and satisfaction of its performance obligation as follows:
•For each individual contract, the parties’ rights, the transaction price, and the payment terms are fixed and known as of the inception of each individual contract.
•The transaction requestor and the Bitcoin network each have a unilateral enforceable right to terminate their respective contracts at any time without penalty.
•For each of these respective contracts, contract inception and completion occur simultaneously upon block validation; that is, the contract begins upon, and the duration of the contract does not extend beyond, the validation of an individual blockchain transaction; and each respective contract contains a single performance obligation to perform a transaction validation service and this performance obligation is satisfied at the point-in-time when a block is successfully validated.
From September 2021 until May 2022, the Company engaged unrelated third-party mining enterprises (“pool participants”) to contribute hash calculations, 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 hash calculations. 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 calculations to solve in areas that the Company designated. 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.
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In accordance with ASC 606-10-32-21, the Company measures the estimated fair value of the non-cash consideration (block reward and transaction fees) at contract inception, which is at the time the performance obligation to the requester and the network is fulfilled by successfully validating a block. The Company measures the non-cash consideration which is fixed as of the inception of each individual contract using the quoted spot rate for bitcoin determined using the Company’s primary trading platform for bitcoin at the time the Company successfully validates a block.
Expenses associated with providing bitcoin transaction verification services, such as hosting fees, electricity costs, and related fees are recorded as cost of revenues. Depreciation on digital asset mining equipment is also recorded as a component of cost of revenues.
Mining Participant
The Company participates in third-party operated mining pools. When the Company is a Participant in a third-party operated mining pool, the Company provides a service to perform hash calculations to the third-party pool operators. The Company considers the third-party mining pool operators to be its customers under Topic 606. Contract inception and the Company’s enforceable right to consideration begins when the Company commences providing hash calculation services to the mining pool operators. Each party to the contract has the unilateral right to terminate the contract at any time without any compensation to the other party for such termination. As such, the duration of a contract is less than a day and may be continuously renewed multiple times throughout the day. The implied renewal option is not a material right because there are no upfront or incremental fees in the initial contract and the terms, conditions, and compensation amount for the renewal options are at the then market rates.
The Company is entitled to non-cash compensation based on the pool operator’s payout model. The payout methodologies differ depending on the type of third-party operated mining pool. Full-Pay-Per-Share (“FPPS”) pools pay block rewards and transaction fees, less mining pool fees and Pay-Per-Share (“PPS”) pools pay block rewards less mining pool fees but no transaction fees. For FPPS and PPS pools, the Company is entitled to non-cash consideration even if a block is not successfully validated by the mining pool operators. Success-based mining pools pay a fractional share of the successfully mined block and transaction fees, reduced by pool operator expenses only if a block is successfully validated.
During 2023, the Company primarily participated in FPPS mining pools and, to a lesser extent, success-based mining pools. During 2022 and 2021, the Company primarily participated in success-based mining pools and, to a lesser extent, PPS mining pools.
FPPS Mining Pools
The Company primarily participates in mining pools that use the FPPS payout method for the year ended December 31, 2023. The Company is entitled to compensation once it begins to perform hash calculations for the pool operator in accordance with the operator’s specifications over a 24-hour period beginning midnight UTC and ending 23:59:59 UTC on a daily basis. The non-cash consideration that the Company is entitled to for providing hash calculations to the pool operator under the FPPS payout method is made up of block rewards and transaction fees less pool operator expenses determined as follows:
•The non-cash consideration in the form of a block reward is based on the total blocks expected to be generated on the Bitcoin network for the daily 24-hour period beginning midnight UTC and ending 23:59:59 UTC in accordance with the following formula: the daily hash calculations that the Company provided to the pool operator as a percent of the Bitcoin network’s implied hash calculations as determined by the network difficulty, multiplied by the total Bitcoin network block rewards expected to be generated for the same daily period.
•The non-cash consideration in the form of transaction fees paid by transaction requestors is based on the share of total actual fees paid over the daily 24-hour period beginning midnight UTC and ending 23:59:59 UTC in accordance with the following formula: total actual transaction fees generated on the Bitcoin network during the 24-hour period as a percent of total block rewards the Bitcoin network actually generated during the same 24-hour period, multiplied by the block rewards the Company earned for the same 24-hour period noted above.
•The block reward and transaction fees earned by the Company is reduced by mining pool fees charged by the operator for operating the pool based on a rate schedule per the mining pool contract. The mining pool fee is only incurred to the extent the Company performs hash calculations and generates revenue in accordance with the pool operator’s payout formula during the same 24-hour period beginning midnight UTC daily.
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The above non-cash consideration is variable in accordance with paragraphs ASC 606-10-32-5 to 606-10-32-7, since the amount of block reward earned depends on the amount of hash calculations the Company performs; the amount of transaction fees the Company is entitled to depends on the actual Bitcoin network transaction fees over the same 24-hour period; and the operator fees for the same 24-hour period are variable since they are determined based on the total block rewards and transaction fees in accordance with the pool operator’s agreement. While the non-cash consideration is variable, the Company has the ability to estimate the variable consideration at contract inception with reasonable certainty without the risk of significant revenue reversal. The Company does not constrain this variable consideration because it is probable that a significant reversal in the amount of revenue recognized from the contract will not occur when the uncertainty is subsequently resolved and recognizes the non-cash consideration on the same day that control is transferred, which is the same day as contract inception.
The Company measures the non-cash consideration based on the simple average daily spot rate of bitcoin determined using the Company’s primary trading platform for bitcoin over a 24-hour period beginning midnight UTC and ending 23:59:59 UTC on the day of contract inception. The Company recognizes non-cash consideration on the same day that control of the contracted service is transferred to the pool operator, which is the same day as the contract inception.
PPS Mining Pools
The Company participates in PPS pools that provide non-cash consideration similar to the FPPS pools except PPS pools do not include transaction fees, therefore, the non-cash consideration received by the Company is made up of block rewards less mining pool fees. While the non-cash consideration is variable, the Company has the ability to estimate the variable consideration at contract inception with reasonable certainty. The Company does not constrain this variable consideration because it is probable that a significant reversal in the amount of revenue recognized from the contract will not occur when the uncertainty is subsequently resolved and recognizes the non-cash consideration on the same day that control is transferred, which is the same day as contract inception.
The Company measures the non-cash consideration based on the simple average daily spot rate of bitcoin determined using the Company’s primary trading platform for bitcoin over a 24-hour period beginning midnight UTC and ending 23:59:59 UTC on the day of contract inception. The Company recognizes non-cash consideration on the same day that control of the contracted service is transferred to the pool operator, which is the same day as the contract inception.
Success-based Mining Pools
The Company also participates, to a lesser extent, in third-party mining pools that pay rewards only when the pool successfully validates 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 fees, reduced by pool operator expenses, based on the proportion of hash calculations the Company performed for the mining pool operator to the total hash calculations performed by all mining pool participants in validating the block during the 24-hour period beginning at midnight UTC and ending 23:59:59 UTC daily.
Contract inception and the Company’s enforceable right to consideration begins when the Company commences the performance of hash calculations for the mining pool operator. The non-cash consideration is variable in accordance with paragraphs ASC 606-10-32-5 to 606-10-32-7 as it depends on whether the third-party mining pool successfully validates a block during each 24-hour period. In addition, other inputs such as the amount of hash calculations and the Company’s fractional share of consideration earned by the pool operator also cause variability. The Company does not have the ability to estimate whether a block will be successfully validated with reasonable certainty at contract inception. The Company constrains the variable consideration at contract inception because it is not probable that a significant reversal in the amount of revenue recognized from the contract will not occur when the uncertainty is subsequently resolved. Once a block is successfully validated, the constraint is lifted. The Company recognizes the non-cash consideration on the same day that control is transferred, which is the same day as contract inception.
The Company’s policy was to measure non-cash consideration based on the spot rate of bitcoin at the time the pool successfully validates a block, which was not in accordance with ASC 606-10-32-21 which requires measurement to coincide with contract inception. Additionally, this measurement was not consistent with the measurement of non-cash consideration for FPPS and PPS pools. During the three months ended December 31, 2023, the Company corrected this error and changed its measurement of non-cash consideration to the simple average daily spot rate of bitcoin determined using the Company’s primary trading platform for bitcoin on the date of contract inception, which is the same day that control of the contracted service (hash calculations) is transferred to the pool operator. The change in measurement did not have a material impact to the results of operations for any of the periods presented.
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Expenses associated with providing hash calculation services to third-party operated mining pools, such as hosting fees, electricity costs, and related fees, are recorded as cost of revenues. Depreciation on digital asset mining equipment is also recorded as a component of cost of revenues.
Hosting Services
The Company operates two bitcoin mining sites, which were acquired on January 12, 2024, that provide hosting services to institutional-scale crypto mining companies. Hosting services include colocation and managed services. Colocation services include providing mining companies with sheltered data center space, electrical power, cooling, and internet connectivity. Managed services generally include providing customers with technical support and maintenance services, in addition to colocation services. The Company will not be taking on any new hosting services customers and will transition to self-mining at these two sites as existing customer agreements expire or are terminated early.
Colocation services revenue is recognized over time as the customer simultaneously receives and consumes the benefits of the Company’s performance. Managed services revenue is recognized at a point-in-time as the customer simultaneously receives and consumes the benefits of the Company’s performance. The transaction price for colocation services is variable based on the consumption of energy and the managed services price is a fixed rate per miner basis. The Company recognizes hosting services revenue to the extent that a significant reversal of such revenue will not occur. Hosting services customers are generally invoiced in advance of the month in which the Company satisfies its performance obligation, and deferred revenue is recorded for any upfront payments received in advance of the Company’s performance. The monthly transaction price is generally variable based on the amount of megawatt hours (“MWh”) consumed by the customers equipment and when other monthly contracted services are performed. At the end of each month, the customer is billed for the actual amount owed for services performed. The Company recognizes revenue for hosting services under the right-to-invoice practical expedient in ASC 606-10-55-18, which allows for the recognition of revenue over time as the Company’s right-to-invoice for final payment corresponds directly with the value of services transferred to the customer to-date.
Expenses associated with providing hosting services are recorded as cost of revenues and depreciation on hosting equipment is recorded as a separate component of cost of revenues.
NOTE 5 – DIGITAL ASSETS
Effective January 1, 2023, the Company early adopted ASU 2023-08, which requires entities to measure crypto assets at fair value with changes recognized in the Condensed Consolidated Statements of Operations each reporting period. The Company’s digital assets were within the scope of ASU 2023-08 and a cumulative-effect adjustment of $11.5 million as of the beginning of the fiscal year ended December 31, 2023 was recorded for the difference between the carrying amount of the Company’s digital assets and fair value.
The following table presents the Company’s significant digital asset holdings as of September 30, 2024 and December 31, 2023, respectively:
(in thousands, except for quantity) | Quantity | Cost Basis | Fair Value | |||||||||||||||||
Bitcoin | $ | $ | ||||||||||||||||||
Kaspa | ||||||||||||||||||||
Total digital assets held as of September 30, 2024 |
$ | $ |
(in thousands, except for quantity) | Quantity | Cost Basis | Fair Value | |||||||||||||||||
Bitcoin | $ | $ | ||||||||||||||||||
Total digital assets held as of December 31, 2023 |
$ | $ |
The Company earned 95 and 48 bitcoin that were pending distribution from the Company’s equity method investee, the ADGM Entity (as defined below), which are excluded from the Company’s holdings as of September 30, 2024 and December 31, 2023, respectively.
During the three months ended September 30, 2024, the Company purchased $100.0 million of bitcoin using cash on hand and an additional 4,144 bitcoin, or approximately $249.0 million, using the net proceeds from the issuance of the 2031 Notes (as defined below). Refer to Note 14 - Debt, for additional information.
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NOTE 6 – ADVANCES TO VENDORS AND DEPOSITS
The Company contracts with bitcoin mining equipment manufacturers to procure equipment necessary for the operation of its bitcoin mining operations. These agreements typically require a certain percentage of the value 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 September 30, 2024 and December 31, 2023, such advances totaled approximately $240.3 million and $95.6 million, 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 typically require advance payments to be made to vendors in conjunction with the contractual obligations associated with these services. The Company classifies these payments as “Deposits” and “Long-term deposits” on the Condensed Consolidated Balance Sheets.
As of September 30, 2024 and December 31, 2023, such deposits totaled approximately $82.7 million and $67.0 million, respectively.
NOTE 7 – PROPERTY AND EQUIPMENT
The components of property and equipment as of September 30, 2024 and December 31, 2023 are:
(in thousands, except useful life) | Useful life (Years) | September 30, 2024 | December 31, 2023 | |||||||||||||||||
Land (1)
|
— | $ | $ | |||||||||||||||||
Land improvements | ||||||||||||||||||||
Building and improvements | ||||||||||||||||||||
Mining rigs | ||||||||||||||||||||
Containers | ||||||||||||||||||||
Equipment | ||||||||||||||||||||
Software and hardware | ||||||||||||||||||||
Asset retirement obligation | ||||||||||||||||||||
Construction in progress | — | |||||||||||||||||||
Other | ||||||||||||||||||||
Total gross property, equipment | ||||||||||||||||||||
Less: Accumulated depreciation and amortization | ( |
( |
||||||||||||||||||
Property and equipment, net | $ | $ |
(1) Refer to Note 15 - Leases, for further information regarding the Company’s finance land lease.
The Company recorded an asset retirement obligation of $7.9 million for the Granbury data center land lease. The asset retirement obligation represents the estimated cost to return the site to its original state. The asset retirement obligation is being depreciated over the term of the lease which is approximately 8 years.
The Company’s accretion expense related to the asset retirement obligation for the three and nine months ended September 30, 2024 was $0.2 million and $0.7 million, respectively.
The Company’s depreciation expense related to property and equipment for the three months ended September 30, 2024 and 2023 was $101.1 million and $53.5 million, respectively. The Company’s depreciation expense related to property and equipment for the nine months ended September 30, 2024 and 2023 was $266.9 million and $108.6 million, respectively.
20
NOTE 8 – INVESTMENTS
As of September 30, 2024 and December 31, 2023, investments totaled approximately $154.0 million and $106.3 million, respectively. The following summarizes the Company’s current investments.
Equity Method Investments
The ADGM Entity
On January 27, 2023, the Company and Zero Two (formerly known as FS Innovation, LLC) entered into a Shareholders’ Agreement to form an Abu Dhabi Global Markets company (the “ADGM Entity”) in which the Company has a 20 % ownership interest, which is accounted for as an equity method investment. The ADGM Entity commenced mining operations in September 2023.
During the nine months ended September 30, 2024, the Company received a non-monetary dividend in the amount of $4.4 million associated with approximately 1,950 mining rigs distributed by Zero Two. The Company recorded the mining rigs to property and equipment at fair value and, accordingly, recognized an impairment of $4.1 million that reduced the Company’s investment in the ADGM Entity for the nine months ended September 30, 2024.
The Company’s share of net losses was $2.1 million and $0.8 million for the three and nine months ended September 30, 2024, respectively, and $0.6 million for both the three and nine months ended September 30, 2023. As of September 30, 2024, the Company’s investment in the ADGM Entity was $66.9 million and is reflected in “Investments” on the Condensed Consolidated Balance Sheets.
Other Investments
Other investments consist of strategic investments made from time to time in equity securities and SAFE investments.
Investments in Equity Securities
Auradine
As of September 30, 2024, the total carrying amount of the Company’s investment in Auradine, Inc. (“Auradine”) preferred stock was $50.7 million.
On September 26, 2024, the Company purchased additional shares of Auradine preferred stock with a purchase price of $0.8 million.
On January 10, 2024, the Company purchased additional shares of Auradine preferred stock with a purchase price of $8.0 million. The preferred stock purchased on January 10, 2024 was similar to the Company’s other investments in Auradine preferred stock and, as a result, the Company recorded $5.2 million to “Gain on investments” on the Condensed Consolidated Statements of Operations to adjust the carrying amount of its investments to an observable price in accordance with the measurement alternative in ASC 321.
SAFE Investments
During the nine months ended September 30, 2024, the Company entered into two SAFE agreements, for a total carrying value of $1.4 million. During the three months ended September 30, 2024, the Company wrote-down a previous SAFE investment of $1.0 million. As of December 31, 2023, the Company had one SAFE investment with a carrying value of $1.0 million, with no impairments or other adjustments.
21
NOTE 9 – GOODWILL AND INTANGIBLE ASSETS
Goodwill
The components of goodwill as of September 30, 2024 are as follows:
As of September 30, 2024 |
||||||||
GC Data Center Equity Holdings, LLC | $ | |||||||
Garden City Acquisition | ||||||||
Total goodwill |
$ |
The Company acquired goodwill from the GC Data Center Equity Holdings, LLC acquisition on January 12, 2024 and the Garden City Acquisition on April 1, 2024, refer to Note 3 – Acquisitions, for further information.
There was no goodwill as of December 31, 2023.
Intangible assets
The following table presents the Company’s intangible assets as of September 30, 2024:
As of September 30, 2024 |
||||||||||||||||||||
(in thousands) | Cost | Accumulated amortization | Net | |||||||||||||||||
Customer relationships | $ | $ | ( |
$ | ||||||||||||||||
Intellectual property |
( |
|||||||||||||||||||
Total intangible assets | $ | $ | ( |
$ |
In June 2024, the Company fully amortized customer relationships acquired in the GC Data Center Equity Holdings, LLC due to the Company’s strategic decision to exit hosting services business and termination of customer relationships during the period. Refer to Note 3 - Acquisitions, for further information.
There were no intangible assets as of December 31, 2023.
The following table presents the Company’s estimated future amortization of finite-lived intangible assets as of September 30, 2024:
Year |
Amount
(in thousands)
|
|||||||
2024 (remaining) | $ | |||||||
2025 | ||||||||
2026 | ||||||||
Thereafter | ||||||||
Total | $ |
NOTE 10 – 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.
22
The levels of the fair value hierarchy are:
Level 1: | Observable inputs such as quoted market prices in active markets for identical assets or liabilities | |||||||
Level 2: | Observable market-based inputs or unobservable inputs that are corroborated by market data | |||||||
Level 3: | Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions |
The carrying amounts reported on the Condensed Consolidated Balance Sheets for cash and cash equivalents, restricted cash, other receivables, 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. Additionally, the carrying amounts reported on the Condensed Consolidated Balance Sheets for the Company’s term loan, operating lease liabilities and other long-term liabilities approximate fair value as the related interest rates approximate rates currently available to the Company.
Financial assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level of input that is significant to their fair value measurement. The Company measures the fair value of its marketable securities and investments by taking into consideration valuations obtained from third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs included reported trades of and broker-dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities and other observable inputs.
Recurring measurement of fair value
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 for each of those assets and liabilities as of September 30, 2024 and December 31, 2023, respectively:
(in thousands) | Total carrying value at September 30, 2024 |
Quoted prices in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
|||||||||||||||||||
Assets: |
|||||||||||||||||||||||
Money market funds | $ | $ | $ | $ | |||||||||||||||||||
Digital assets | |||||||||||||||||||||||
Liabilities: | |||||||||||||||||||||||
Derivative instrument (1)
|
|||||||||||||||||||||||
Contingent consideration liability (2)
|
(in thousands) | Total carrying value at December 31, 2023 |
Quoted prices in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
|||||||||||||||||||
Assets: |
|||||||||||||||||||||||
Money market funds | $ | $ | $ | $ | |||||||||||||||||||
U.S. Treasury Bills | |||||||||||||||||||||||
Digital assets | |||||||||||||||||||||||
(1) The fair value of the derivative instrument was estimated using a discounted cash flow approach that considers various assumptions including current market prices and electricity forward curves, which are considered Level 2 inputs. Increases (decreases) in market prices and electricity forward curves could result in significant increases (decreases) in the fair value of derivative instruments. Refer to Note 2 - Summary of Significant Accounting Policies - Derivatives, for further information.
23
The Company includes the above money market funds and U.S. treasury bills in cash and cash equivalents on the Condensed Consolidated Balance Sheets. The Company’s U.S. treasury bills have original remaining maturities of three months or less when purchased.
Effective January 1, 2023, the Company early adopted ASU 2023-08, measuring digital assets at fair value on a recurring basis. There were no transfers among Levels 1, 2 or 3 during the nine months ended September 30, 2024.
Fair value of financial instruments not recognized at fair value
The following tables present information about the Company’s financial instruments that are not recognized at fair value on the Condensed Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023, respectively, is as follows:
(in thousands) | Total carrying value at September 30, 2024 |
Quoted prices in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
|||||||||||||||||||
Liabilities: |
|||||||||||||||||||||||
Notes payable |
$ | $ | $ | $ |
(in thousands) | Total carrying value at December 31, 2023 |
Quoted prices in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
|||||||||||||||||||
Liabilities: |
|||||||||||||||||||||||
Notes payable |
$ | $ | $ | $ |
NOTE 11 – NET INCOME (LOSS) PER SHARE
Net income (loss) per share is calculated in accordance with ASC 260 - Earnings Per Share. Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. For the three and nine months ended September 30, 2024 and 2023, the Company recorded net income (loss) and as such, the Company calculated the impact of dilutive common stock equivalents in determining diluted earnings per share.
24
The following table presents the total potential securities that were not included in the computation of diluted income (loss) per share, as their inclusion would have been anti-dilutive:
Three Months Ended September 30, |
Nine Months Ended September 30, | |||||||||||||||||||||||||
2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||
Warrants | ||||||||||||||||||||||||||
Restricted stock units | ||||||||||||||||||||||||||
Performance-based restricted stock units (1)
|
||||||||||||||||||||||||||
Convertible notes | ||||||||||||||||||||||||||
Series A Preferred Stock | ||||||||||||||||||||||||||
Total dilutive shares |
(1) Anti-dilutive performance-based restricted stock units are presented at 200 % as the total potential vested shares. Refer to Note 13 - Stock-based Compensation, for further information.
The following table sets forth the computation of basic and diluted income (loss) per share:
Three Months Ended September 30, |
Nine Months Ended September 30, | |||||||||||||||||||||||||
(in thousands, except share and per share data) | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||
Basic earnings per share of common stock: |
||||||||||||||||||||||||||
Net income (loss) per share of common stock - basic |
$ | ( |
$ | ( |
$ | $ | ||||||||||||||||||||
Weighted average shares of common stock - basic |
||||||||||||||||||||||||||
Net income (loss) per share of common stock - basic |
$ | ( |
$ | $ | $ | |||||||||||||||||||||
Diluted earnings per share of common stock: |
||||||||||||||||||||||||||
Net income (loss) per share of common stock - basic |
$ | ( |
$ | ( |
$ | $ | ||||||||||||||||||||
Add: Notes interest expense, net of tax | ||||||||||||||||||||||||||
Less: Gain from extinguishment of debt, net of tax |
( |
( |
||||||||||||||||||||||||
Net income (loss) per share of common stock - diluted |
$ | ( |
$ | ( |
$ | $ | ||||||||||||||||||||
Weighted average shares of common stock - basic |
||||||||||||||||||||||||||
Restricted stock units | ||||||||||||||||||||||||||
Performance-based restricted stock units | ||||||||||||||||||||||||||
Convertible notes | ||||||||||||||||||||||||||
Weighted average shares of common stock - diluted |
||||||||||||||||||||||||||
Net income (loss) per share of common stock - diluted |
$ | ( |
$ | ( |
$ | $ |
25
NOTE 12 – STOCKHOLDERS' EQUITY
Common Stock
On July 27, 2023, the Company’s shareholders approved an amendment to the Company’s articles of incorporation that increased the amount of common stock authorized for issuance to 500,000,000 with a par value of $0.0001 per share.
Shelf Registration Statements on Form S-3 and At-the-Market Offering Agreements
NOTE 13 – STOCK-BASED COMPENSATION
2018 Equity Incentive Plan
On January 1, 2018, the Board adopted the 2018 Equity Incentive Plan (as amended, the “2018 Plan”), which was subsequently approved by the Company’s shareholders on March 7, 2018. The 2018 Plan provides for the issuance of stock options, restricted stock, restricted stock units (“RSUs”), preferred stock and other awards to employees, directors, consultants and other service providers.
In June 2024, the Company’s shareholders approved an amendment to the 2018 Plan that increased the number of shares authorized for issuance thereunder by 15,000,000 shares. As of September 30, 2024, the Company had an aggregate of 16,525,736 shares of common stock reserved for future issuance under the 2018 Plan.
A summary of the Company’s stock-based compensation, by category, is as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, | |||||||||||||||||||||||||
(in thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||
Performance-based stock awards | $ | $ | $ | $ | ||||||||||||||||||||||
Service-based stock awards | ||||||||||||||||||||||||||
Total stock-based compensation | $ | $ | $ | $ |
Restricted Stock Units
The Company grants service-based RSUs to employees, directors, and consultants. RSUs granted to employees generally vest over a four-year period from the date of grant; however, in certain instances, all or a portion of a grant may vest immediately. RSUs granted to directors generally vest over a one-year period. The Company measures the fair value of RSUs at the grant date and recognizes expenses on a straight-line basis over the requisite service period from the date of grant for each separately-vesting tranche under the graded-vesting attribution method.
26
A summary of the Company’s service-based RSU activity for the nine months ended September 30, 2024, is as follows:
Number of RSUs | Weighted Average Grant Date Fair Value | ||||||||||
Nonvested at December 31, 2023 |
$ | ||||||||||
Granted | |||||||||||
Forfeited | ( |
||||||||||
Vested | ( |
||||||||||
Nonvested at September 30, 2024 |
$ |
As of September 30, 2024, there was approximately $67.2 million of aggregate unrecognized stock-based compensation related to unvested service-based RSUs that is expected to be recognized over the next 2.7 years.
Performance-based Restricted Stock Units
The Company granted performance-based restricted stock units (“PSUs”) on May 1, 2024 to employees which generally vest over a four-year period from the date of grant. Awards are issued in the form of RSUs and are granted pursuant to the 2018 Plan. The number of PSUs that are subject to vest is directly correlated with the Company’s achievements of a pre-determined metric relating to total stockholder return (“TSR”) for the period from January 1, 2024 through December 31, 2024 (the “Performance Period”).
Based on the Company’s TSR performance relative to the peer group for the Performance Period, the PSU awards will vest between 0 % to 200 % of the target amount over an approximate four-year period. Determination regarding the Company’s performance relative to the TSR metric will establish the maximum number of shares that are subject to vesting pursuant to the PSU awards. Once determined, (i) 25 % of the PSU awards will vest on January 31, 2025, and (ii) the balance of the awards will vest in 12 equal calendar quarters (with 6.25 % of the shares vesting each quarter). The Company measures the fair value of the PSUs at the grant date using the Monte Carlo simulation model.
The Monte Carlo simulation model requires the input of subjective assumptions, including risk-free interest rate, expected term, expected stock price volatility, market capitalization of peer group, and dividend yield. The risk-free interest rate assumption is based upon observed interest rates for constant maturity U.S. Treasury securities as of the grant date. Expected term is consistent with the Performance Period of the awards. Expected volatility is based on the historical volatility of the Company’s common stock over the estimated expected life. The Company does not pay a dividend, therefore, the dividend yield is assumed to be zero.
A summary of the Company’s PSU activity for the nine months ended September 30, 2024, is as follows:
Number of PSUs | Weighted Average Grant Date Fair Value | ||||||||||