MARATHON DIGITAL HOLDINGS, INC. 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 theSecurities and Exchange Commission .
Cautionary Note Regarding Forward-Looking Statements
This report and other documents that we file with theSecurities 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 theSecurities 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.
Business of the Company
We were incorporated in theState of Nevada onFebruary 23, 2010 under the nameVerve Ventures, Inc. As of the date of this filing, our name has been changed toMarathon Digital Holdings, Inc. OnDecember 7, 2011 , we changed our name toAmerican Strategic Minerals Corporation and were engaged in exploration and potential development of uranium and vanadium minerals business. InJune 2012 , we discontinued our minerals business and began to invest in real estate properties inSouthern California . InOctober 2012 , we discontinued our real estate business and we commenced our IP licensing operations, at which time the Company's name was changed toMarathon Patent Group, Inc. OnNovember 1, 2017 , we entered into a merger agreement withGlobal Bit Ventures, Inc. ("GBV"), which is focused on mining digital assets. We have since purchased our cryptocurrency mining machines and established a data center inCanada to mine digital assets. Following the merger, we intended to add GBV's existing technical capabilities and digital asset miners and expand our activities in the mining of new digital assets, while at the same time harvesting the value of our remaining IP assets. OnJune 28, 2018 , the board has determined that it is in the best interests of the Company and its shareholders to allow the Amended Merger Agreement to expire on its current termination date ofJune 28, 2018 without further negotiation or extension. The Board approved to issue 750,000 shares of our common stock to GBV as a termination fee for cancelling the proposed merger between the two companies. The fair value of the common stocks was$2,850,000 . 41 Recent Developments
See "Business - Recent Developments"
Critical Accounting Policies and Estimates
We believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis:
Digital Currencies
Digital currencies are included in current assets in the consolidated balance sheets as intangible assets with indefinite useful lives. Digital currencies are recorded at cost less impairment. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the digital currency at the time its fair value is being measured. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. AtDecember 31, 2021 , we carried$123.2 million of digital assets on our balance sheet, consisting of the approximately 3,321 bitcoins, and held$268.5 million in cash and cash equivalents, compared to$2.3 million of digital assets and$141.3 million in cash and cash equivalents atDecember 31, 2020 , reflecting the shift in our liquid assets. As ofMarch 9, 2022 , we held approximately 9,007 bitcoins, of which, 4,794 bitcoins were acquired at an aggregate purchase price of$150 million at an average purchase price of approximately$31,168 per bitcoin, inclusive of fees and expenses. We expect to purchase additional bitcoin in future periods, though we may also sell bitcoin in future periods as needed to generate Cash Assets for treasury management purposes.
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. OnJanuary 14, 2021 , the Company sold its inventory of approximately 5,900 S9, 13.5 TH/s miners. As such, management determined that those crypto-currency machines were impaired by a total of$871,302 based upon an assessment as ofDecember 31, 2020 . During the year endedDecember 31, 2019 we moved certain of our bitcoin miners to a new location inthe United States and recorded an impairment of$447,776 in our leasehold improvements inCanada .
Non-GAAP Financial Measures
We are providing supplemental financial measures for (i) non-GAAP income from operations that excludes the impact of depreciation and amortization of fixed assets, impairment losses on mined cryptocurrency, server maintenance contract amortization and stock compensation expense and (ii) non-GAAP net income and non-GAAP diluted earnings per share that exclude the impact of depreciation and amortization of fixed assets, impairment losses on mined cryptocurrency, change in fair value of warrant liability, server maintenance contract amortization and stock compensation expense, net of withholding taxes. These supplemental financial measures are not measurements of financial performance under generally accepted accounting principles inthe United States ("GAAP") and, as a result, these supplemental financial measures may not be comparable to similarly titled measures of other companies. Management uses these non-GAAP financial measures internally to help understand, manage, and evaluate our business performance and to help make operating decisions. We believe that these non-GAAP financial measures are also useful to investors and analysts in comparing our performance across reporting periods on a consistent basis. The first supplemental financial measure excludes non-cash operational expenses that we believe are not reflective of our general business performance such as (i) depreciation and amortization of fixed assets, (ii) significant impairment losses on mined cryptocurrency, (iii) server maintenance contract amortization and (iv) stock compensation expense, net of withholding taxes that could vary significantly in comparison to other companies. 42 The second set of supplemental financial measures excludes the impact of (i) depreciation and amortization of fixed assets, (ii) significant impairment losses on mined cryptocurrency, (iii) change in fair value of warrant liability (iv) server maintenance contract amortization and (v) stock compensation expense, net of withholding taxes. We believe the use of these non-GAAP financial measures can also facilitate comparison of our operating results to those of our competitors. Non-GAAP financial measures are subject to material limitations as they are not in accordance with, or a substitute for, measurements prepared in accordance with GAAP. For example, we expect that share-based compensation expense, which is excluded from the first two non-GAAP financial measures, will continue to be a significant recurring expense over the coming years and is an important part of the compensation provided to certain employees, officers, and directors. Similarly, we expect that depreciation and amortization of fixed assets will continue to be a recurring expense over the term of the useful life of the assets. We have also excluded impairment losses on mined cryptocurrency from the first two non-GAAP financial measures, which may occur in future periods as a result of our continued holdings of significant amounts of bitcoin. Our non-GAAP financial measures are not meant to be considered in isolation and should be read only in conjunction with our Consolidated Condensed Financial Statements, which have been prepared in accordance with GAAP. We rely primarily on such Consolidated Condensed Financial Statements to understand, manage, and evaluate our business performance and use the non-GAAP financial measures only supplementally. The following is a reconciliation of our non-GAAP income from operations for the three months and year endingDecember 31, 2021 , respectively, which excludes the impact of (i) depreciation and amortization of fixed assets (ii) impairment losses on mined cryptocurrency (iii) server maintenance contract amortization and (iv) stock compensation expense, net of withholding taxes, to its most directly comparable GAAP measures for the periods indicated: For the Three Months Ended For the Year Ended December 31, December 31, 2021 2020 2019 2021 2020 2019 Reconciliation of non-GAAP income from operations: Income (loss) from Operations$ 21,632,772 $ (4,953,470 )
6,888,201 1,212,871 529,015 14,904,002 3,064,212 994,481
Impairment of mined cryptocurrency 11,080,241 - - 29,552,991 - -
Server maintenance contract
amortization 1,207,647 968,712 - 3,278,927 976,842 -
Stock Compensation Expense, net of
withholding taxes 8,425,074 180,532 270,885 156,071,895 1,129,300 330,749
Non-GAAP income (loss) from operations
$ (457,272 ) $ 118,720,085 $ (4,662,750 ) $ (2,913,881 ) 43 The following are reconciliations of our non-GAAP net income and non-GAAP diluted earnings per share for the three months and year endingDecember 31, 2021 , respectively, in each case excluding the impact of (i) depreciation and amortization of fixed assets (ii) impairment losses on mined cryptocurrency (iii) change in fair value of warrant liability (iv) server maintenance contract amortization and (v) stock compensation expense, net of withholding taxes, to its most directly comparable GAAP measures for the periods indicated: For the Three Months Ended For the Twelve Months Ended December 31, December 31, 2021 2020 2019 2021 2020 2019 Reconciliation of non-GAAP net income: Net (loss) income$ 11,525,939 $ (5,234,227 ) $ (1,151,843 ) $ (36,174,506 ) $ (10,447,771 ) $ (3,699,060 ) Non-cash adjustments to Net Income (loss) Depreciation and Amortization of Fixed Assets 6,888,201 1,212,871 529,015 14,904,002 3,064,212 994,481 Impairment of mined cryptocurrency 11,080,241 - - 29,552,991 - - Change in fair value of warrant liability 821,061 290,938 (33,987 ) 1,048,286 309,588 (26,234 ) Server maintenance contract amortization 1,207,647 968,712 - 3,278,927 976,842 - Stock Compensation Expense, net of withholding taxes 8,425,074 180,532 270,885 156,071,895 1,129,300 330,749 Total Non-cash adjustments to Net Income (Loss)$ 28,422,224 $ 2,653,053
Non-GAAP net (loss) income$ 39,948,163 $ (2,581,174 ) $ (385,930 ) $ 168,681,595 $ (4,967,829 ) $ (2,400,064 ) Reconciliation of non-GAAP diluted earnings (loss) per share: Diluted (loss) earnings per share$ 0.11 $ (0.10 )
0.06 0.02 0.08 0.15 0.04 0.15
Impairment of mined cryptocurrency (per
diluted share) 0.10 - - 0.30 - -
Change in fair value of warrant
liability (per diluted share) 0.01 0.01 (0.01 ) 0.01 - -
Server maintenance contract
amortization (per diluted share) 0.01 0.02 - 0.03 0.01 -
Stock Compensation Expense, net of
withholding taxes (per diluted share) 0.07 - 0.04 1.57 0.01 0.05
Non-GAAP diluted earnings (loss) per
share $ 0.36 $ (0.05 ) $ (0.06 ) $ 1.70 $ (0.07 ) $ (0.33 )
44
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 Years Ended
We generated revenues of$150.5 million during the year endedDecember 31, 2021 as compared to$4.4 million during the year endedDecember 31, 2020 . For the year endedDecember 31, 2021 , this represented an increase of$146.1 million or 3,353%. Revenue for the years endedDecember 31, 2021 and 2020 were derived primarily from cryptocurrency mining. During 2021, the Company placed into service over 30,000 bitcoin mining machines while increasing the Company's hash rate by approximately 1800%. This increase resulted in the Company generating an average of 1.6 bitcoin per day inJanuary 2021 to generating approximately 15.6 bitcoin per day inDecember 2021 . We generated revenues of$4.4 million during the year endedDecember 31, 2020 as compared to$1.2 million during the year endedDecember 31, 2019 . For the year endedDecember 31, 2020 , this represented an increase of$3.2 million or 268%. Revenue for the years endedDecember 31, 2020 and 2019 were derived primarily from cryptocurrency mining. Direct cost of revenues during the year endedDecember 31, 2021 and 2020 amounted to approximately$33.7 million and$7.0 million , respectively. For the year endedDecember 31, 2021 , this represented an increase of$26.7 million or 381%. Direct costs of revenue include cohosting fees, electricity, depreciation and amortization expenses of the cryptocurrency mining machines and patents, contingent payments to patent enforcement legal costs, patent enforcement advisors and inventors as well as various non-contingent costs associated with enforcing the Company's patent rights and otherwise in developing and entering into settlement and licensing agreements that generate the Company's revenue. Direct cost of revenues during the year endedDecember 31, 2020 and 2019 amounted to approximately$7.0 million and$2.5 million , respectively. For the year endedDecember 31, 2020 , this represented an increase of$4.5 million or 182%. Direct costs of revenue include cohosting fees, electricity, depreciation and amortization expenses of the cryptocurrency mining machines and patents, contingent payments to patent enforcement legal costs, patent enforcement advisors and inventors as well as various non-contingent costs associated with enforcing the Company's patent rights and otherwise in developing and entering into settlement and licensing agreements that generate the Company's revenue. We incurred other operating expenses of$201.8 million for the year endedDecember 31, 2021 and$7.2 million for the year endedDecember 31, 2020 . For the year endedDecember 31, 2021 , this represented an increase of$194.6 million or 2,702%. These expenses primarily consisted of the impairment of mining equipment, compensation to our officers, directors and employees, professional fees and consulting incurred in connection with the day-to-day operation of our business. We incurred other operating expenses of$7.2 million for the year endedDecember 31, 2020 and$2.9 million for the year endedDecember 31, 2019 . For the year endedDecember 31, 2020 , this represented an increase of$4.3 million or 144%. These expenses primarily consisted of the impairment of mining equipment, compensation to our officers, directors and employees, professional fees and consulting incurred in connection with the day-to-day operation of our business and break-up fee to GBV. 45
The operating expenses consisted of the following:
Total Other Operating Expenses
For the Year Ended
December 31, 2021 December 31, 2020 December 31, 2019
Compensation and related taxes (1) $ 164,285,755 $ 4,730,143 $ 1,475,450
Consulting fees (2) 531,677 302,561 130,813
Professional fees (3) 5,268,485 733,741 422,335Other general and administrative (4) 2,216,489 551,672 465,783 Impairment of cryptocurrencies (5) 29,552,991 - - Impairment of equipment and leasehold improvements (6) -
871,302 447,776 Total$ 201,855,397 $ 7,189,419 $ 2,942,157
(1) Compensation expense and related taxes: Compensation expense includes cash
compensation and related payroll taxes and benefits, and non-cash equity
compensation expenses. For the year ended
compensation expense and related payroll taxes were
million, an increase of
equity-based compensation of
For the year ended
related payroll taxes were
million or 221%. During the years ended
recognized non-cash employee and board equity-based compensation of
million and
(2) Consulting fees: For the year ended
consulting fees of
of
incurred consulting fees of
increase of
primarily for investor relations and public relations services as well as
other consulting services. The increase in consulting fees for the year ended
due to the write-off of prepaid consulting fees from a prior period.
(3) Professional fees: For the year ended
professional fees were
increase of
2019, professional fees were
increase of
costs of professional outside accounting fees, legal fees and audit fees. The
increase in professional fees was mainly the result of legal fees related to
the Convertible Debt and ATM financing offerings.
(4) Other general and administrative expenses: For the year ended
2021 and 2020, other general and administrative expenses were
and
year ended
expenses were
non-categorized operating costs of the Company and include expenses related
to being a public company, rent, insurance, technology and other expenses
incurred to support the operations of the Company.
(5) Impairment of cryptocurrencies: For the year ended
2020, impairment of cryptocurrencies were
of
impairment of the bitcoin earned by the Company subject to FASB ASC 350
Intangibles -
(6) Impairment of equipment and leasehold improvements: For the years ended
equipment and leasehold improvements in the amounts of
million.
46
Operating Loss
We reported operating loss from continuing operations of
Other Income (Expenses) Total other income was$71.9 million for the year endedDecember 31, 2021 compared to total other expenses of$0.6 million for the year endedDecember 31, 2020 . Total other expenses were$0.6 million for the year endedDecember 31, 2020 compared to total other income of$0.7 million for the year endedDecember 31, 2019 . The changes are related to the unrealized gains associated with the purchase of 4,812.66 bitcoin held in an investment fund of one.
Net Loss Available to Common Shareholders
We reported net loss of
Liquidity and Capital Resources
The Company's consolidated financial statements have been prepared assuming that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As reflected in the consolidated financial statements, the Company had and accumulated deficit of approximately$152.2 million ,$116.1 million and$105.6 million atDecember 31, 2021 ,December 31, 2020 andDecember 31, 2019 , respectively, a net loss of approximately$36.2 million ,$10.4 million and$3.5 million , respectively, and approximately$18.2 million ,$7.8 million and$3.3 million net cash used in operating activities for the year endedDecember 31, 2021 ,December 31, 2020 andDecember 31, 2019 , respectively. Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. AtDecember 31, 2021 , the Company's cash and cash equivalents balances totaled$268.5 million compared to$141.3 million atDecember 31, 2020 . The increase in liquidity is due to the issuance of$747.5 million in convertible notes during 2021. Net working capital increased by$389.4 million , to working capital of$674.4 million atDecember 31, 2021 from working capital of$285.0 million atDecember 31, 2020 .
Cash used in operating activities was
Cash used in investing activities was$891.9 million ,$81.3 million and cash provided of$1.2 million for the year endedDecember 31, 2021 ,December 31, 2020 andDecember 31, 2019 , respectively.
Cash provided by financing activities was
47
During 2019, the Company issued 172,126 shares of common stock under the At The
Market Offering for the total proceeds of
During 2020, the Company issued 54,301,698 shares of common stock under the At The Market Offering for the total proceeds of$307,064,401 , net of offering
cost of$9,405,129 .
On
On
OnOctober 6, 2020 , the Company issued 6,000,000 shares of common stock in exchange for five years of services pursuant to the Power Purchase Agreement and Data Facility Services Agreement for the total proceeds of$0 , net of offering cost of$0 valued at the time of execution at$1.87 per share or$11,220,000 in aggregate.
Selected short-term and long-term contractual obligations and commitments.
December 31,2021 Less than 1-3 3-5 More than 1 year years years 5 years Total Contractual obligations Purchase agreements$ 632,635,125 $ - $ - $ -$ 632,635,125 Long-term debt 7,475,000 22,425,000 754,975,000 - 784,875,000 Total (estimated)$ 640,110,125 $ 22,425,000 $ 754,975,000 $ -$ 1,417,510,125
We believe that existing cash and cash equivalents held by us and cash and cash equivalents anticipated to be generated by us are sufficient to meet working capital requirements, anticipated capital expenditures, and contractual obligations for at least the next 12 months. As ofDecember 31, 2021 , we held approximately 8,115 bitcoin, including the 4,794 bitcoin held in the investment fund. A total of 4,812.66 bitcoin was purchased and placed into an investment fund inJanuary 2021 for an average price of$31,168 per bitcoin. During 2021, 18 bitcoin were liquidated as needed by the investment manager in order to pay the management fee and other operating expenses of the fund pursuant to the management agreement. We do not believe we will need to sell any of our bitcoins within the next twelve months to meet our working capital requirements, although we may from time to time sell bitcoins as part of treasury management operations, including to increase our cash balances. The Bitcoin market historically has been characterized by significant volatility in its price, limited liquidity and trading volumes compared to sovereign currencies markets, relative anonymity, a developing regulatory landscape, susceptibility to market abuse and manipulation, and various other risks inherent in its entirely electronic, virtual form and decentralized network. During times of instability in the Bitcoin market, we may not be able to sell our bitcoins at reasonable prices or at all. As a result, our bitcoins are less liquid than our existing cash and cash equivalents and may not be able to serve as a source of liquidity for us to the same extent as cash and cash equivalents. In addition, upon sale of our bitcoin, we may incur additional taxes related to any realized gains or we may incur capital losses as to which the tax deduction may be limited.
Off-Balance Sheet Arrangements
None. 48
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