Form 10-Q MARATHON DIGITAL HOLDING For: Jun 30
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
or
For the transition period from _______to______
(Commission File Number)
(Exact name of registrant as specified in charter)
(State or other jurisdiction
of incorporation) |
(I.R.S. Employer
Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s
telephone number, including area code:
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.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated Filer | ☐ | |
| Non-accelerated Filer | ☐ | Smaller Reporting Company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: shares of common stock are issued and outstanding as of August 4, 2023.
TABLE OF CONTENTS
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 | $ | $ | ||||||
| Restricted cash | ||||||||
| Digital assets | ||||||||
| Other receivable | ||||||||
| Deposits | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Advances to vendors | ||||||||
| Investments | ||||||||
| Long-term deposits | ||||||||
| Long-term prepaids | ||||||||
| Right-of-use assets | ||||||||
| Digital assets, restricted | ||||||||
| Total long-term assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES, SERIES A PREFERRED STOCK AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Legal reserve payable | ||||||||
| Operating lease liabilities | ||||||||
| Current portion of accrued interest | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Notes payable | ||||||||
| Term loan | ||||||||
| Operating lease liabilities | ||||||||
| Total long-term liabilities | ||||||||
| Series A Preferred Stock, par value, shares authorized, and shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively (outstanding at redemption value) | ||||||||
| Stockholders’ Equity: | ||||||||
| Common stock, par value, shares authorized; and issued and outstanding at June 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| TOTAL LIABILITIES, SERIES A PREFERRED STOCK AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
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)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (As Restated) | (As Restated) | |||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
| Costs and expenses | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| Cost of revenues - energy, hosting and other | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Cost of revenues - depreciation and amortization | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total cost of revenues | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Operating expenses | ||||||||||||||||
| General and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Impairment of digital assets | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Impairment of patents | ( | ) | ||||||||||||||
| Gains on digital assets and losses on digital assets loan receivable | ( | ) | ( | ) | ||||||||||||
| Gain on sale of equipment, net of disposals | ||||||||||||||||
| Losses on digital assets held within investment fund | ( | ) | ( | ) | ||||||||||||
| Total operating expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other non-operating income | ||||||||||||||||
| Loss from extinguishment of debt | ( | ) | ||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Add: Series A Preferred Stock accretion to redemption value | ( | ) | ( | ) | ||||||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss attributable to common stockholders per common stock - basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted average common stock outstanding - basic and diluted | ||||||||||||||||
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
| Common Stock | Additional
Paid-in | Accumulated
| Total
Stockholders’
| |||||||||||||||||
| Number | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance as of Balance as of March 31, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based compensation, net of tax withholding | ||||||||||||||||||||
| Issuance of common stock, net of offering costs/At-the-market offering | ||||||||||||||||||||
| Series A Preferred Stock accretion to redemption value | — | ( | ) | ( | ) | |||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance as of June 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
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 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based compensation, net of tax withholding | ||||||||||||||||||||
| Issuance of common stock, net of offering costs/At-the-market offering | ||||||||||||||||||||
| Series A Preferred Stock accretion to redemption value | — | ( | ) | ( | ) | |||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance as of June 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
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) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based compensation, net of tax withholding | ||||||||||||||||||||
| Issuance of common stock, net of offering costs/At-the-market offering | ||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance as of Balance as of June 30, 2022 (As Restated) | $ | $ | $ | ( | ) | $ | ||||||||||||||
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 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based compensation, net of tax withholding | ||||||||||||||||||||
| Issuance of common stock, net of offering costs/At-the-market offering | ||||||||||||||||||||
| Common stock issued for long term service contract | ||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance as of Balance as of June 30, 2022 (As Restated) | $ | $ | $ | ( | ) | $ | ||||||||||||||
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)
| Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| (As Restated) | ||||||||
| OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of prepaid service contract | ||||||||
| Deferred tax expense | ||||||||
| Losses on digital assets held within investment fund | ||||||||
| Gains on digital assets and losses on digital assets loan receivable | ( | ) | ||||||
| Impairment of digital assets | ||||||||
| Gain on sale of equipment, net of disposals | ( | ) | ||||||
| Stock-based compensation | ||||||||
| Amortization of debt issuance costs | ||||||||
| Impairment of patents | ||||||||
| Loss from extinguishment of debt | ||||||||
| Other adjustments from operations, net | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Revenues from digital asset production | ( | ) | ( | ) | ||||
| Deposits | ( | ) | ( | ) | ||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Accrued interest | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| INVESTING ACTIVITIES | ||||||||
| Advances to vendors | ( | ) | ( | ) | ||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Sale of property and equipment | ||||||||
| Proceeds from sale of digital assets | ||||||||
| Investments in joint venture | ( | ) | ||||||
| Purchase of equity investments | ( | ) | ||||||
| Sale of digital currencies in investment fund | ||||||||
| Deconsolidation of fund | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Proceeds from issuance of common stock, net of issuance costs | ||||||||
| Proceeds from issuance of preferred stock, net of issuance costs | ||||||||
| Net change in revolving credit agreement borrowings | ||||||||
| Repayment of term loan borrowings | ( | ) | ||||||
| Value of shares withheld for taxes | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ) | ||||||
| Cash, cash equivalents and restricted cash — beginning of period | ||||||||
| Cash, cash equivalents and restricted cash — end of period | $ | $ | ||||||
| Supplemental Information | ||||||||
| Cash paid during the year for: | ||||||||
| Income taxes | $ | $ | ||||||
| Interest | $ | $ | ||||||
| Supplemental schedule of non-cash investing and financing activities: | ||||||||
| Series A Preferred Stock accretion to redemption value | $ | 2,121 | $ | — | ||||
| Receivable due to share issuance | $ | $ | ||||||
| Operating lease assets obtained in exchange for new operating lease liabilities | $ | $ | ||||||
| Reclassifications from advances to vendor to property and equipment upon receipt of equipment | $ | $ | ||||||
| Common stock issued for service and license agreements | $ | $ | ||||||
The accompanying notes are an integral part to these unaudited 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:
| For the three months ended | ||||
| March 31, 2022 (unaudited) | ||||
| (Restated) | ||||
| Condensed Consolidated Statements of Operation Impact | ||||
| Impairment of digital assets | $ | ( | ) | |
| Income tax benefit | $ | |||
| Net loss impact | $ | ( | ) | |
| For the six months ended | ||||
| June 30, 2022 (unaudited) | ||||
| (Restated) | ||||
| Condensed Consolidated Statements of Operation Impact | ||||
| Impairment of digital assets | $ | ( | ) | |
| Income tax expense | $ | |||
| Net loss impact | $ | ( | ) | |
| As of | ||||
| March 31, 2022 (unaudited) | ||||
| (Restated) | ||||
| Condensed Consolidated Balance Sheet Impact | ||||
| Digital assets | $ | |||
| Deferred tax liabilities | $ | |||
| 7 |
| As of | ||||
| June 30, 2022 (unaudited) | ||||
| (Restated) | ||||
| Condensed Consolidated Balance Sheet Impact | ||||
| Digital assets | $ | |||
| Deferred tax liabilities | $ | |||
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:
| For the three months ended | ||||||||||||
| March 31, 2023 | ||||||||||||
| As Reported | Adjustment | As Restated | ||||||||||
| (unaudited) | (unaudited) | |||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
| Net loss | $ | ( | ) | $ | $ | ( | ) | |||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Deferred tax expense | ||||||||||||
| Gains on digital assets | ( | ) | ( | ) | ||||||||
| Impairment of digital assets | ||||||||||||
| Stock-based compensation | ||||||||||||
| Amortization of debt issuance costs | ||||||||||||
| Loss from extinguishment of debt | ||||||||||||
| Other adjustments from operations, net | ||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Revenues from digital asset production | ( | ) | ( | ) | ||||||||
| Proceeds from sale of digital assets | ( | ) | ||||||||||
| Deposits | ( | ) | ( | ) | ||||||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ||||||||
| Accrued interest | ||||||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
| Advances to vendors | ( | ) | ( | ) | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||||||
| Proceeds from sale of digital assets | ||||||||||||
| Investments in Joint Venture | ( | ) | ( | ) | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
| Proceeds from issuance of common stock, net of issuance costs | ||||||||||||
| Repayment of term loan borrowings | ( | ) | ( | ) | ||||||||
| Value of shares withheld for taxes | ( | ) | ( | ) | ||||||||
| Net cash provided by financing activities | ||||||||||||
| Net increase in cash, cash equivalents and restricted cash | ||||||||||||
| Cash, cash equivalents and restricted cash — beginning of period | ||||||||||||
| Cash and cash equivalents — end of period | $ | $ | ||||||||||
| 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.
| As of March 31, 2022 | ||||||||||||
| As Reported | Adjustments | As Restated | ||||||||||
| (unaudited) | (unaudited) | |||||||||||
| ASSETS | ||||||||||||
| Current assets: | ||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||
| Restricted cash | ||||||||||||
| Digital assets | ||||||||||||
| Digital assets held in Fund | 218,439 | — | 218,439 | |||||||||
| Other receivable | ||||||||||||
| Deposits | ||||||||||||
| Prepaid expenses and other current assets | ||||||||||||
| Total current assets | ||||||||||||
| Other assets: | ||||||||||||
| Property and equipment | ||||||||||||
| Advances to vendors | ||||||||||||
| Investments | ||||||||||||
| Long term prepaids | ||||||||||||
| Right-of-use assets | ||||||||||||
| Total other assets | ||||||||||||
| TOTAL ASSETS | ||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
| Current liabilities: | ||||||||||||
| Accounts payable | ||||||||||||
| Accrued expenses | ||||||||||||
| Operating lease liabilities | ||||||||||||
| Current portion of accrued interest | ||||||||||||
| Total current liabilities | ||||||||||||
| Long-term liabilities: | ||||||||||||
| Notes payable | ||||||||||||
| Operating lease liabilities | ||||||||||||
| Deferred tax liabilities | ||||||||||||
| Total long-term liabilities | ||||||||||||
| Stockholders’ Equity: | ||||||||||||
| Preferred stock | ||||||||||||
| Common stock | ||||||||||||
| Additional paid-in capital | ||||||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||||||
| Total stockholders’ equity | ||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | $ | |||||||||
| 9 |
| For the three months ended | ||||||||||||
| March 31, 2022 | ||||||||||||
| As Reported | Adjustment | As Restated | ||||||||||
| (unaudited) | (unaudited) | |||||||||||
| Total revenues | $ | $ | $ | |||||||||
| Costs and expenses | ||||||||||||
| Cost of revenues | ||||||||||||
| Cost of revenues - energy, hosting and other | ( | ) | ( | ) | ||||||||
| Cost of revenues - depreciation and amortization | ( | ) | ( | ) | ||||||||
| Total cost of revenues | ( | ) | ( | ) | ||||||||
| Operating expenses | ||||||||||||
| General and administrative expenses | ( | ) | ( | ) | ||||||||
| Impairment of digital assets | ( | ) | ( | ) | ( | ) | ||||||
| Impairment of patents | ( | ) | ( | ) | ||||||||
| Gains on digital assets and losses on digital assets loan receivable | ( | ) | ( | ) | ||||||||
| Losses on digital assets held within Investment Fund | ( | ) | ( | ) | ||||||||
| Total operating expenses | ( | ) | ( | ) | ( | ) | ||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ||||||
| Other non-operating income | ||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ||||||
| Income tax benefit | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net loss per share, basic and diluted: | $ | ) | $ | ) | ||||||||
| Weighted average shares outstanding, basic and diluted: | ||||||||||||
| 10 |
| For the three months ended | ||||||||||||
| March 31, 2022 | ||||||||||||
| As Reported | Adjustment | As Restated | ||||||||||
| (unaudited) | (unaudited) | |||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Amortization of prepaid service contract | ||||||||||||
| Deferred tax benefit | ( | ) | ( | ) | ( | ) | ||||||
| Losses on digital assets held within Investment Fund | ||||||||||||
| Losses on digital assets loan receivable | ||||||||||||
| Impairment of digital assets | ||||||||||||
| Stock-based compensation | ||||||||||||
| Amortization of debt issuance costs | ||||||||||||
| Impairment of patents | ||||||||||||
| Other adjustments from operations, net | ( | ) | ( | ) | ||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Revenues from digital asset production | ( | ) | ( | ) | ||||||||
| Deposits | ( | ) | ( | ) | ||||||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ||||||||
| Accrued interest | ||||||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
| Advances to vendors | ( | ) | ( | ) | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||||||
| Purchase of equity investments | ( | ) | ( | ) | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
| Proceeds from issuance of common stock, net of issuance costs | ||||||||||||
| Net cash provided by financing activities | ||||||||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ) | ( | ) | ||||||||
| Cash and cash equivalents — beginning of period | ||||||||||||
| Cash, cash equivalents and restricted cash — end of period | $ | $ | ||||||||||
| 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 $
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 | $ | $ | ||||||
| Restricted cash | ||||||||
| Cash, cash equivalents and Restricted cash | $ | $ | ||||||
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 | $ | |||
| Additions of digital assets | ||||
| Impairment of digital assets | ( | ) | ||
| Proceeds from sale of digital assets | ( | ) | ||
| Gains on sale of digital assets | ||||
| Payment of advisory fees | ( | ) | ||
| Digital assets at June 30, 2023 | $ |
As
of June 30, 2023, the Company held approximately
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
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
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
$
On
May 3, 2022, the Company converted $
On
September 27, 2022, the Company purchased additional shares of Auradine preferred stock with a purchase price of $
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 $
| 14 |
Equity Method Investments
The
Company accounts for investments in which it owns between
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
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
| 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 | $ | $ | $ | $ | ||||||||||||
| Operator - Transaction fees | ||||||||||||||||
| Other revenue | ||||||||||||||||
| Operator - Block rewards | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
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 $
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 | $ | $ | ||||||||||
| Containers | ||||||||||||
| Other | ||||||||||||
| Construction in progress | — | |||||||||||
| Total gross property, equipment | ||||||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||||||
| Property and equipment, net | $ | $ | ||||||||||
The
Company’s depreciation expense related to property and equipment for the three months ended June 30, 2023 and 2022 was $
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 $
| 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) | $ | $ | $ | $ | ||||||||||||
| (1) |
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 | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Notes payable | $ | $ | ||||||||||||||
| 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 | ||||||||||||||||
| Property and equipment, net (1 ) | ||||||||||||||||
| Advances to vendors | ||||||||||||||||
| Digital assets, restricted | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Notes payable | ||||||||||||||||
| (1) |
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
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 |
Three Months Ended
June 30, | Six Months Ended
June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Warrants to purchase common stock | ||||||||||||||||
| Restricted stock units | ||||||||||||||||
| Convertible notes to exchange common stock | ||||||||||||||||
| Series A Preferred Stock | ||||||||||||||||
| Total dilutive shares | ||||||||||||||||
Three Months Ended
June 30, | Six Months Ended
June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (As Restated) | (As Restated) | |||||||||||||||
| Numerator: | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Add: Series A Preferred Stock accretion to redemption value | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator: | ||||||||||||||||
| Weighted average common stock outstanding - basic and diluted | ||||||||||||||||
| Net loss attributable to common stockholders per common stock - basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
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
$ |
| – | Approximately
$ |
| – | Approximately
$ |
The
Company recorded an impairment charge of $
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 $
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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:
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | ||||||||||
| Outstanding as of December 31, 2022 | $ | |||||||||||
| Issued | 0.0 | |||||||||||
| Expired | 0.0 | |||||||||||
| Exercised | 0.0 | |||||||||||
| Outstanding as of June 30, 2023 | $ | |||||||||||
Restricted Stock
| Number of Units | Weighted Average Grant Date Fair Value | |||||||
| Nonvested at December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Nonvested at June 30, 2023 | $ | |||||||
Series A Preferred Stock
On
June 5, 2023, the Company entered into a securities purchase agreement for the purchase of shares of Series A redeemable convertible
preferred stock. On June 8, 2023, upon closing of the offering, the Company issued shares of Series A Preferred Stock for total
gross proceeds of $
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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 $
The
Notes accrue interest at a rate of
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 $
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.
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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 $
Operating lease costs are recorded on a straight-line basis within operating expenses. The Company’s total lease expense is comprised of the following:
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Operating leases | ||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||
| Operating lease expense | ||||||||||||||||
| Short-term lease rent expense | ||||||||||||||||
| Variable lease cost | ||||||||||||||||
| Total rent expense | $ | $ | $ | $ | ||||||||||||
Additional information regarding the Company’s leasing activities as a lessee is as follows:
| For the Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| Weighted-average remaining lease term – operating leases | ||||||||
| Weighted-average discount rate – operating leases | % | % | ||||||
| Year | Amount | |||
| 2023 (remaining) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
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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 $
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.
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.
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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 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 $
NOTE 15 – RELATED PARTY TRANSACTIONS
On
September 23, 2022, the Company made an incremental $
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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,
shares of common stock were issued and outstanding1.
A total of 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
| 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 | ||||||||||||||||
| Against (No) | ||||||||||||||||
| Abstain | ||||||||||||||||
| VOTES CAST SERIES A PREFERRED (CONVERTED BASIS): | ||||||||||||||||
| Common Stock | Proposal #1 | Proposal #2 | Proposal #3 | Proposal #4 | ||||||||||||
| Yes | N/A | N/A | 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 | ||||||||||||||||
| Total # of Series A (converted basis into Common shares) as of June 16, 2023 | ||||||||||||||||
| Common shares voted through the meeting | ||||||||||||||||
| Preferred shares (converted basis) voted through the meeting on Proposal # 3 only | ||||||||||||||||
| TOTAL | ||||||||||||||||
1. As no other matters were brought for a vote before the meeting, the votes on Proposal #5 of shares in favor, shares against, and shares abstaining, have no impact.
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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 technolo