This report on Form 10-Q (“Report”) and other written and oral statements made from time to time by us may contain so-called “forward-looking statements,” all of which are subject to risks and uncertainties.Forward-looking statements can be identified by the use of words such as “expects,” “plans,” “will,” “forecasts,” “projects,” “intends,” “estimates,” and other words of similar meaning.One can identify them by the fact that they do not relate strictly to historical or current facts.These statements are likely to address our growth strategy, financial results and product and development programs.
One must carefully consider any such statement and should understand that many factors could cause actual results to differ from our forward-looking statements.These factors may include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not.No forward-looking statement can be guaranteed and actual future results may vary materially.Information regarding market and industry statistics contained in this Report is included based on information available to us that we believe is accurate.
It is generally based on industry and other publications that are not produced for purposes of securities offerings or economic analysis.We have not reviewed or included data from all sources and cannot assure investors of the accuracy or completeness of the data included in this Report.Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services.We do not assume any obligation to update any forward-looking statement.As a result, investors should not place undue reliance on these forward-looking statements.The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated.The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein.In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties.
Our actual results could differ significantly from those expressed, implied or anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission .
Cautionary Note Regarding Forward-Looking Statements
This report and other documents that we file with the Securities and Exchange Commission contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management’s assumptions.Statements that are not historical facts are forward-looking statements.Words such as “expect,” “outlook,” “forecast,” “would,” “could,” “should,” “project,” “intend,” “plan,” “continue,” “sustain”, “on track”, “believe,” “seek,” “estimate,” “anticipate,” “may,” “assume,” and variations of such words and similar expressions are often used to identify such forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.These forward- looking statements are not guarantees of future performance and involve risks, assumptions and uncertainties, including, but not limited to, those described in our reports that we file or furnish with the Securities and Exchange Commission .Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements.Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made.Except to the extent required by law, we undertake no obligation to update publicly any forward-looking statements after the date they are made, whether as a result of new information, future events, changes in assumptions or otherwise.14 Business of the Company Marathon Digital Holdings, Inc.
(the “Company”) was incorporated in the State of Nevada on February 23, 2010 under the name Verve Ventures, Inc.On December 7, 2011 , the Company changed its name to American Strategic Minerals Corporation and were engaged in exploration and potential development of uranium and vanadium minerals business.In June 2012 , the Company discontinued the minerals business and began to invest in real estate properties in Southern California .In October 2012 , the Company discontinued its real estate business and the Company commenced IP licensing operations, at which time the Company’s name was changed to Marathon Patent Group, Inc.
As of March 31, 2022 , the Company no longer holds any legacy IP assets and is solely focused on the mining of bitcoin and ancillary opportunities within the bitcoin ecosystem under the name Marathon Digital Holdings, Inc.Covid 19 Pandemic
The impact of the worldwide spread of a novel strain of coronavirus (“COVID 19”) has been and continues to be unprecedented and unpredictable, although less of a concern as it was one year ago, but based on the Company’s current assessment, the Company does not expect any material impact on its long-term strategic plans, operations and its liquidity due to the worldwide spread of COVID-19.However, the Company is continuing to assess the effect on its operations by monitoring the spread of COVID-19 and the actions implemented to combat the virus throughout the world and its assessment of the impact of COVID-19 may
change.Recent developments
On March 31, 2022 , Marathon Digital Holdings, Inc.
(the “Company”) amended its previously announced agreements with affiliates of Beowulf Energy LLC , a Delaware limited liability company (collectively and as applicable, “Beowulf”), and Two Point One, LLC , a Delaware limited liability company (“2P1”), pursuant to which Beowulf and 2P1 have been designing and developing a data center facility of up to 110-megawatts (the “Facility”) located next to, and supplied energy directly from, Beowulf’s power generation station in Hardin, MT.As part of the Company’s mandate to become carbon neutral by the end of the 2022 fiscal year, the Company, Beowulf and 2P1 agreed to terminate the Data Facility Services Agreement, the Power Purchase Agreement and the Ground Lease for the Facility as of August 15, 2022 , and the Company will redeploy its Hardin -installed miners to renewable power facilities on or before September 30, 2022 .
Effective March 31, 2022 , Douglas Mellinger
was appointed as a director to the Board of Directors of Marathon Digital Holdings, Inc.(the “Company”) to fill the vacancy created by Merrick Okamoto’s
departure at the end of 2021.
Effective the same date, Hugh Gallagher
was appointed as the Company’s Chief Financial Officer, and Simeon Salzman
was appointed as its Chief Accounting Officer.The Company began operating its own mining pool in May 2021 .Prior to participating in the Company’s own mining pool, the Company’s miners contributed hashrate to F2Pool.BTC earned by the pool are allocated to pool participants based on the proportion of hashrate contributed to the pool per participant at the time of the reward.From May 2021 to December 2021 , the Company’s miners contributed approximately 94% of the pool’s total hashrate, with 3rd party operators contributing approximately 6%.Effective April 30, 2022 , third party miners are no longer permitted to participate in the Company’s mining pool, and prospectively, the Company will be the only participant and contribute 100% of the pool’s hashrate.As such, the Company will no longer incur pool fees for operating its own mining pool as the sole customer of the pool.
Critical Accounting Matters We believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis:
Digital Currencies Digital currencies are included in current assets in the consolidated balance sheets as intangible assets with indefinite useful lives.Digital currencies are recorded at cost less impairment.An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired.Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the digital currency at the time its fair value is being measured.In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists.If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary.
If the Company concludes otherwise, it is required to perform a quantitative impairment test.To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset.
Subsequent reversal of impairment losses is not permitted.15 At March 31, 2022 , we held approximately 4,579 self-mined bitcoin with a carrying value of $155.6 million and carried on the balance sheet as digital currencies ( $135.1 million ) and digital currencies, restricted ( $20.5 million ).We also held approximately 4,794 bitcoin in an investment fund, which was valued at $218.2 million as of March 31, 2022 .We expect to increase our bitcoin holdings over time primarily through mining activities, though we may purchase or sell bitcoin in future periods as needed for treasury management or general corporate purposes.Revenue Recognition The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers.
The core principle of this revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
The mining of Bitcoin (“BTC”) is a continuous process, with computers running calculations 24 hours per day, 7 days per week in support of the bitcoin blockchain, verifying transactions and adding verified “blocks” of transactions to the blockchain.When the mining pool in which the Company participates solves the equation to verify a block, that block is added to the Bitcoin blockchain and the pool is rewarded BTC in return.Blocks are added to the bitcoin blockchain on average every 10 minutes, and each new block is a new contract / performance obligation.The time between contract inception and receipt of consideration, as it relates to a mining pool, is therefore not materially different.
The Company utilizes custodian services, provided by NYDIG, related to allocating and disbursing the pool rewards after they are earned by the pool.The mining rewards (in the form of BTC) are allocated to pool participants based on the proportion of hashrate contributed to the pool per participant at the time of the reward.NYDIG confirms this allocation among pool participants within 24 hours of a block reward.As bitcoin’s blockchain operates 24 hours a day, 365 days a year, in the case where the pool receives mining rewards when there is a federal holiday or over the weekend (Saturday/Sunday), NYDIG sends the respective earnings report on the next available business day.
Once participants confirm the NYDIG calculations, the mining rewards are sent to each participants digital wallet, at that time upon constructive receipt, the Company will then effectively recognize revenue using the closing price during that respective day multiplied by the bitcoin rewards received.The Company aggregates all BTC rewards confirmed in any given day and records revenue in USD at the prevailing market price at the end of the day.The value of the BTC rewards, utilizing the prevailing market prices at constructive receipt, is not materially different than the value recognized.Management utilizes various pricing sources, including sources readily available to the general public (such as Messari.io, Yahoo Finance and Blockchain.com) to ensure the reasonableness of our assessment of valuation and we periodically review or back check this assumption for reasonableness.The Company began operating its own mining pool in May 2021 .In addition to mining within the pool, the Company, as pool operator, recognizes approximately 0.5% of any block reward as pool fee revenue.
This fee is subtracted from BTC rewarded prior to the allocation of the BTC reward among the pool participants based on contributed hashrate.As a result, revenues associated directly with bitcoin mining activities are recorded net of any pool fee with an offsetting cost of revenue.Pool operator fees were approximately $0.3 million for the three month period ended March 31, 2022 .There were no pool operator fees recorded in the comparable prior-year period.Effective April 30, 2022 , third party miners are no longer permitted to participate in the Company’s mining pool, and prospectively, the Company will be the only participant and contribute 100 % of the pool’s hashrate.As such, the Company will no longer incur pool fees for operating its own mining pool as the sole customer of the pool.
In addition to the block rewards and pool operator fees, transaction verification fees are awarded per block reward and vary in amount.These transaction fees were approximately $0.6 million for the three months ended March 31, 2022 and $0.0 million for the comparable prior-year period.
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.During the quarter ended March 31, 2022 the Company completed a final review of patents which remained from our legacy as a patent company and determined that there was no longer any value to these patents.
As a result, the Company wrote those patents off during the quarter, incurring an impairment of $919,363 .16 Non-GAAP Financial Measures
We are providing supplemental non-GAAP financial measures for (i) Adjusted Net Income (ii) Adjusted EBITDA.
Adjusted net income We define Adjusted Net Income as GAAP net income (or loss) for the period with adjustments to add back the impacts of (1) stock compensation expense, net of withholding taxes (2) changes in the fair market value of our investment fund and (3) the tax effects of the aforementioned adjustments.This non-GAAP measure is used by management to evaluate earnings performance from period-to-period given that (i) we expect that share-based compensation expense will continue to be a recurring expense that may vary significantly from period-to-period and (ii) we also hold digital currencies in an investment fund that requires fair value accounting of the bitcoin held in the fund.Given that this treatment is fundamentally different from the accounting for our self-mined bitcoin (a long-lived intangible that is evaluated for impairment but not reported at market value) and can also vary significantly from period-to-period, we believe our measure of Adjusted Net Income provides management and investors with a meaningful view of earnings resulting from current operating activities.For the three months ended March 31, 2022 2021 Variance Net (loss) income $ (12,958,589 ) $ 83,356,742 $ (96,315,331 ) Adjustments: Stock Compensation Expense, net of withholding taxes 9,275,352 51,031,595 (41,756,243 ) Change in FMV of investment fund 5,541,642 (131,822,950 )
137,364,592
Income tax impact of adjustments, net (3,681,985 ) – (3,681,985 ) Adjusted net income (loss) $ (1,823,580 ) $ 2,565,387 $ (4,388,967 ) Adjusted net income (loss) per share, basic: $ (0.02 ) $ 0.03 $ (0.05 ) Adjusted net income (loss) per share, diluted: $ (0.02 ) $ 0.03
$ (0.05 )
Weighted average shares outstanding, basic: 103,102,596 94,350,216 Weighted average shares outstanding, diluted: 103,102,596 96,251,240 17 Adjusted EBITDA
We define Adjusted EBITDA as GAAP net income (or loss) for the period with adjustments to add back the impacts of (1) depreciation and amortization (2) interest expense (3) income tax expense and (4) adjustments for non-cash and non-recurring items which currently include (i) stock compensation expense, net of withholding taxes (ii) changes in the fair market value of our investment fund (iii) changes in fair value of warrant liability (iv) impairment of digital currencies and (v) other impairments of long-lived assets.
Adjusted EBITDA in future periods would also likely include adjustments for unusual or infrequent items that might impact the comparability of our financial results, for example losses on early extinguishments of debt or unusually large gains or losses on sales of assets if these items were to occur.This non-GAAP measure is used by management in evaluating operating performance and we believe it to be a meaningful non-GAAP measure used by investors to compare the Company’s operating performance with that of other companies within the industry.For the three months ended March 31, 2022 2021 Variance Net income (loss) $ (12,958,589 ) $ 83,356,742 $ (96,315,331 ) Adjustments:
Depreciation and amortization 18,538,926 1,298,936
17,239,990
Interest expense 2,814,036 1,203
2,812,833
Income tax expense (benefit) (4,297,064 ) – (4,297,064 ) EBTIDA $ 4,097,309 $ 84,656,881 $ (80,559,572 ) Adjustments for non-cash and non-recurring items: Stock compensation expense, net of withholding tax 9,275,352 51,031,595 (41,756,243 ) Change in FMV of investment fund 5,541,642 (131,822,950 )
137,364,592
Change in fair value of warrant liability – 1,591,895 (1,591,895 ) Impairment of digital currencies 19,551,254 662,199
18,889,055 Impairment of patents 919,363 – 919,363 Adjusted EBITDA $ 39,384,920 $ 6,119,620 $ 33,265,300
Depreciation and amortization consists of depreciation on fixed assets of approximately $13.9 million , amortization of prepaid service contracts of approximately $4.7 million and amortization of intellectual property of $12,552 for the three month period ending March 31, 2022 .
These supplemental financial measures are not measurements of financial performance under generally accepted accounting principles in the United States (“GAAP”) and, as a result, these measures may not be comparable to similarly titled measures of other companies.
Management uses these non-GAAP financial measures internally to help understand, manage, and evaluate our business performance and to help make operating decisions.We believe that this combination of reconciliations from GAAP net income to Non-GAAP measures is important when taken together with the GAAP financial results in that they provide a meaningful view of earnings performance for management and investors.
We also believe that these Non-GAAP measures provide additional information to investors about the Company’s performance because they eliminate certain items not associated with current-period transactions and other significant discrete items that might impact the comparison of period-to-period results Non-GAAP financial measures are subject to material limitations as they are not in accordance with, or a substitute for, measurements prepared in accordance with GAAP.Our non-GAAP financial measures are not meant to be considered in isolation and should be read only in conjunction with our Consolidated Condensed Financial Statements, which have been prepared in accordance with GAAP.We rely primarily on such Consolidated Condensed Financial Statements to understand, manage, and evaluate our business performance and use the non-GAAP financial measures only supplementally.18
Recent Issued Accounting Standards
See Note 2 to our consolidated financial statements for a discussion of recent accounting standards and pronouncements.
Results of Operations
For the Three Months Ended March 31, 2022 and 2021
For the three months ended March 31, 2022 2021 Variance % Revenues $ 51,717,718 $ 9,152,815 $ 42,564,903 465 %
Cost of revenues (includes depreciation and amortization) 26,393,636 2,406,415 23,987,221
997 % Total margin (1) 25,324,082 6,746,400 18,577,682 275 % Operating and administrative expenses 34,450,350 53,801,814 (19,351,464 ) -36 % Operating income (loss) (9,126,268 ) (47,055,414 ) 37,929,146 -81 % Other income (loss) (5,315,349 ) 130,413,359 (135,728,708 ) -104 % Interest expense (2,814,036 ) (1,203 ) (2,812,833 ) NM Income (loss) before income taxes (17,255,653 ) 83,356,742 (100,612,395 ) -121 % Income tax expense (benefit) 4,297,064 – 4,297,064 NM Net income (loss) (12,958,589 ) 83,356,742
(96,315,331 ) -116 %
Adjusted net income (loss) (1,823,580 ) 2,565,387 (4,388,967 ) -171 % Total margin excluding depreciation and amortization 43,863,008 8,045,337 35,817,672 445 % Adjusted EBITDA 39,384,920 6,119,620 33,265,300 544 % Bitcoin self-mined during the period 1,258.6 191.8 1,066.8 556 %
(1) Total margin is defined as revenues less cost of revenues
NM – percent variance is not meaningful 19
Revenues, Costs, Total Margin
We generated revenues of $51.7 million during the three months ended March 31, 2022 as compared to $9.2 million during the three months ended March 31, 2021 .This $42.6 million increase in revenue was driven by significantly higher mining activity ( $50.9 million ) partially offset by lower revenue per bitcoin mined ( $8.3 million ) resulting from lower market prices for bitcoin compared with
the prior year period.Direct cost of revenues during the three months ended March 31, 2022 amounted to $26.4 million compared with $2.4 million in the prior-year period.
This $24 million increase in cost was driven by significantly higher mining activities ( $13.4 million ) and higher costs per bitcoin mined ( $10.6 million ).The increase in cost per bitcoin mined was primarily related to higher depreciation and amortization expenses related to significant increases in the number of mining servers placed into service.Total margin, defined as revenues less cost of revenue, totaled $25.3 million compared with $6.7 million in the prior year period.This $18.6 million increase in total margin was driven by higher mining activity ( $37.5 million ) partially offset by lower revenue per bitcoin mined ( $8.3 million ) and higher cost of revenue per bitcoin mined ( $10.6 million ).Operating expenses
We incurred operating expenses of $34.5 million for the three months ended March 31, 2022 a decrease of $19.4 million or 36% from the prior-year period.Our operating expenses fluctuated significantly due to non-cash expenses including stock compensation, impairments of digital currencies and impairment of legacy patents.
The tables that follow provide additional details on the components of our operating expenses and highlight the fluctuations is specific areas: For the Three Months Ended March 31, 2022 March 31, 2021
Compensation and related taxes $ 10,342,967 $ 52,405,786 Professional fees
2,247,378 426,638 Other general and administrative 1,389,388 307,191 Impairment of digital currencies 19,551,254 662,199 Impairment of patents 919,363 – Total $ 34,450,350 $ 53,801,814
Non-cash operating expenses consisted of the following:
For the Three Months Ended March 31, 2022 March 31, 2021
Stock compensation and related taxes $ 9,275,352 $ 51,031,141 Impairment of digital currencies
19,551,254 662,199 Impairment of patents 919,363 – Total $ 29,745,969 $ 51,693,340
Our operating expenses exclusive of the non-cash items listed above totaled $4.7 million for the three months ended March 31, 2022 an increase of $2.6 million from the prior-year period primarily related to compensation and professional fees associated with increased mining activities.Other income (loss) Other income (loss) was a net loss of ($5.3) million for the three months ended March 31, 2022 compared with income of $130.4 million in the prior-year period.The significant variance in other income (loss) was primarily related to fluctuations in the fair market value impact of our investment fund, which recorded a decrease in fair market value of $5.5 million in the current-year period and an increase in fair value of $131.8 million in the prior-year period.20 Interest expense
Interest expense increased $2.8 million from the prior year period as a result of the convertible notes issued in November 2021 .
Income tax expense (benefit) Income tax expenses was a benefit of $4.3 million for the period ended March 31, 2022 .Our effective tax rate from continuing operations was approximately 24.9% for the three months ended March 31, 2022 , and zero for the three months ended March 31, 2021 .The difference between the US statutory tax rate of 21% was primarily due to state taxes.
Net income (loss) Despite significant increases in operational activities and revenues resulting from our bitcoin mining operations, we recorded a GAAP net loss of $(13.0) million compared with GAAP net income of $83.4 million in the prior period.This variance was primarily driven by the aforementioned fluctuation in fair value of our investment fund partially offset by the higher mining activities and lower compensation expenses.Adjusted Net Income (loss) Despite significant increases in operational activities and revenues resulting from our bitcoin mining operations, we recorded an Adjusted net loss of $(1.8) million compared with Adjusted net income of $2.6 million in the prior period.This variance was primarily driven by increases in impairments of digital currencies (and, to a lesser extent, an impairment of certain legacy patents) partially offset by the benefits of higher toal margin and an income tax expense benefit recorded in the current period.Adjusted EBITDA Adjusted EBITDA increased to $39.4 million , a $33.3 million increase from the prior year period.This increase was primarily related to higher total margin from increased mining activities in the quarter which, excluding the impact of depreciation and amortization recorded as part of cost of revenues, increased $35.8 million .
This increase was partially offset by increases in operating expenses exclusive of non-cash expenses.
Financial Condition and Liquidity
The company expects to have sufficient liquidity, including cash on hand, available borrowing capacity and, to a lesser extent our bitcoin holdings, to support ongoing operations.
We will continue to seek to fund the growth in our mining activities through the capital markets, including both debt and equity issuances.Cash and cash equivalents totaled $118.5 million at March 31, 2022 , a decrease of $150 million from December 31, 2021 .The decrease in cash and cash equivalents was primarily driven by significant increases in investing activities related to increasing our mining activities, including advances to vendor ( $192.4 million ) and to a lesser extent purchases of property and equipment ( $6.5 million ) and deposits (6.3 million).We also invested a total of $10.5 million in various equity investees during the period.
These expenditures were financed with a combination of cash on hand and proceeds from the issuance of common stock ( $85.5 million ).
Net cash used by operating activities was
$26.1 million during the period.At March 31, 2022 , we held approximately 4,579 self-mined bitcoin with a carrying value of $155.6 million and carried on the balance sheet as digital currencies ( $135.1 million ) and digital currencies, restricted ( $20.5 million ).We also held approximately 4,794 bitcoin in an investment fund, which was valued at $218.2 million as of March 31, 2022 .We expect to increase our bitcoin holdings over time primarily through mining activities, though we may purchase or sell bitcoin in future periods as needed for treasury management or general corporate purposes.
There were no borrowings outstanding under the Company’s $100 million revolving credit agreement at March 31, 2022 .
Off-balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties.We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our consolidated condensed financial statements.Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity.
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