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 are 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.
Business of the Company
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. The Company commenced mining bitcoin in 2018 and changed its name to
Marathon Digital Holdings, Inc. on March 1, 2021. As of September 30, 2022, the
Company is solely focused on the mining of bitcoin and ancillary opportunities
within the bitcoin ecosystem under the name Marathon Digital Holdings, Inc.
22
Significant developments for the three-month period ended September 30, 2022
The three-month period ended September 30, 2022, was particularly active from an
operations and a financial standpoint, with noteworthy events including:
Legal reserves:
In connection with a dispute concerning the settlement of certain restricted
stock unit awards previously granted to Merrick D. Okamoto, former Chief
Executive Officer and Chairman of the Company, on October 12, 2022, the Company
entered into a settlement agreement with Mr. Okamoto, pursuant to which the
Company agreed to pay Mr. Okamoto $24 million. Mr. Okamoto agreed to a
settlement and a broad release of known or unknown claims against the Company,
which relate to the Company's Amended 2018 Equity Incentive Plan or related
restricted stock unit award agreements. The Company entered into related
settlement agreements in respect to certain restricted stock unit awards
previously granted to five other individuals, including a director and our
current Chief Executive Officer and Chairman, which total approximately $1
million in the aggregate. The expense associated with this settlement totaled
approximately $25 million is listed on the statement of operation as Legal
reserves. The portion of this settlement that remained unpaid as of September
30, 2022 is listed on the balance sheet as Legal reserve payable and totaled
$21.2 million. All amounts due as a result of this settlement have been paid as
of October 15, 2022.
Compute North Bankruptcy:
On September 22 , 2022, Compute North filed for chapter 11 bankruptcy
protection. The Company has engaged creditor's counsel and is vigorously
defending and protecting its various assets at CN facilities and to minimize its
long-term financial exposure with regard to the CN Entities.
The Company's financial exposure to Compute North on the date of the Bankruptcy
was approximately $81 million, including:
? Approximately $10 million in convertible preferred stock of Compute North
Holdings, Inc.
? Approximately $21 million related to an unsecured senior promissory note with
Compute North LLC. This loan totaled $30 million at June 30, 2022 but was
amended in July with approximately $9 million in principal being applied as a
deposit for the Wolf Hollow site.
? Approximately $50 million in operating deposits to Compute North entities,
including the King Mountain Joint Venture and the Wolf Hollow site.
The Company assessed the impairment of these assets given the bankruptcy
proceedings and estimated that the preferred stock, the unsecured loan, and
approximately $8 million in deposits were fully impaired. As a result, the
company recorded an impairment charge of $39 million as of September 30, 2022,
reducing the overall exposure to Compute North to approximately $42 million,
primarily in deposits associated with King Mountain and Wolf Hollow. The full
recoverability of these deposits remains a risk given the ongoing bankruptcy
proceedings.
The bulk of the Company's current operations are hosted by a Compute North /
NextEra Joint Venture in McCamey, TX ("King Mountain") which is not directly
subject to the bankruptcy process but is impacted by the bankruptcy proceedings.
Energization of the site started in August and as of November 9, the Company has
approximately 64,000 bitcoin mining servers on site and operating.
In early July 2022, the Company expanded certain hosting arrangements with
Compute North in Granbury, TX ("Wolf Hollow"). As of November 9, the Company has
approximately 6,000 mining servers in operation. The Company's understanding is
that plans for additional deployments have been delayed due to uncertainties
associated with the Compute North Bankruptcy.
Applied Blockchain Hosting:
On July 12, 2022, the Company entered into an agreement to secure approximately
200 megawatts of hosting capacity for the Company's previously purchased miners,
including 90 megawatts of hosting capacity in Texas and at least 110 megawatts
of hosting capacity in North Dakota. The Company expects to have 66,000 miners,
representing approximately 9.2 EH/s, hosted across these facilities. Based on
current construction schedules, installations of the Company's miners are
expected to begin at these facilities during the fourth quarter of 2022 with all
miners installed by approximately mid-year 2023. As part of this agreement, the
Company has an option to increase hosting capabilities utilizing up to an
additional 70 megawatts in North Dakota.
23
Completion of the Hardin, MT exit
The company completed its previously disclosed exit from the Hardin, MT facility
("Hardin") in September. The Company had deployed approximately 30,000 mining
servers at Hardin. In conjunction with this exit, the Company sold approximately
22,000 bitcoin mining servers for cash proceeds of $46.5 million, recording a
gain on sale of $3.2 million. The company also recorded additional depreciation
of $4.1 million in the period related to approximately 1,800 bitcoin mining
servers that were previously deployed at Hardin that are no longer in operating
condition based on inspections of the assets at the facility and experience with
the assets formerly deployed at Hardin in the weeks following redeployment. In
addition to the depreciation expense recorded within the period, the company
determined that the useful lives of the remaining equipment formerly deployed at
Hardin should be reduced from 36 months to 24 months. These assets had a book
value of approximately $12 million at September 30, 2022. As such, the annual
depreciation on this equipment will increase to approximately $6 million from
approximately $4 million.
Critical Accounting Policies and Estimates
We believe that the following accounting policies, which are included in the
footnotes section of this report, are the most critical to aid you in fully
understanding and evaluating this management discussion and analysis:
? Digital currencies
? Revenue from contracts with customers
? Impairment of long-lived assets
Digital currencies
Digital currencies are included in current and other assets in the consolidated
balance sheets as intangible assets with indefinite useful life and 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 the price of Bitcoin declines to lower than the
carrying value, the Company has determined that it is more likely than not that
an impairment exists. The Company determines the amount of impairment to record
based on the fair value of bitcoin following the fair value measurement
framework in ASC 820 - Fair Value Measurement. If the fair value of bitcoin is
lower than the carrying amount the Company will record an impairment and
subsequent reversal of impairment losses is not permitted.
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 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. Please refer to
footnote 3 for a complete description of this policy.
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.
Non-GAAP Financial Measures
We provide investors with a reconciliation from net loss to the non-GAAP measure
known as Adjusted EBITDA as a component of Management's Discussion and Analysis.
For each period in question, we define "Adjusted EBITDA" as (a) GAAP net income
(or loss) plus (b) 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) impairments of patents and
(iii) impairment losses related to the Compute North Bankruptcy.
Adjusted EBITDA is not a measurement of financial performance under GAAP and, as
a result, this measure may not be comparable to similarly titled measures of
other companies. 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. Adjusted EBITDA is not meant to be considered in
isolation and should be read only in conjunction with our Quarterly Reports on
Form 10-Q and our Annual Reports on Form 10-K as filed with the Securities and
Exchange Commission. Management uses both Adjusted EBITDA and the supplemental
information provided herein as a means of understanding, managing, and
evaluating business performance and to help inform operating decision making. We
rely primarily on our Consolidated Condensed Financial Statements to understand,
manage, and evaluate our financial performance and use the non-GAAP financial
measures only supplementally.
Recent Issued Accounting Standards
See Note 2 to our Consolidated Condensed Financial Statements for a discussion
of recent accounting standards and pronouncements.
24
Results of Operations
For the three months ended September 30, 2022 and 2021
Three Months Ended September 30, Favorable
2022 2021 (Unfavorable)
Revenues $ 12,690,452 $ 51,707,483 $ (39,017,031 )
Cost of revenues - energy, hosting
and other (13,772,555 ) (5,922,811 ) (7,849,744 )
Cost of revenues - depreciation and
amortization (26,294,842 ) (4,340,198 ) (21,954,644 )
Total margin (27,376,945 ) 41,444,474 (68,821,419 )
General and administrative expenses (12,352,008 ) (99,235,984 ) 86,883,976
Gain on sale of equipment, net of
disposals
31,934,307 - 31,934,307
Legal reserves (24,960,000 ) - (24,960,000 )
Impairment of deposits due to vendor
bankruptcy filing (7,987,147 ) - (7,987,147 )
Realized and unrealized gains
(losses) on digital currencies held
in fund - 42,086,907 (42,086,907 )
Impairment of digital currencies (5,903,891 ) (6,731,890 ) 827,999
Total change in carrying value of
digital currencies (5,903,891 ) 35,355,017 (41,258,908 )
Impairment of loan and investment
due to vendor bankruptcy filing (31,012,853 ) - (31,012,853 )
Other non-operating income 238,159 261,273 (23,114 )
Net loss $ (75,422,407 ) $ (22,172,567 ) $ (53,249,840 )
Bitcoin ("BTC") production during
the period, in BTC 616 1,253 (637 )
Reconciliation to Adjusted EBITDA
Net loss $ (75,422,407 ) $ (22,172,567 ) $ (53,249,840 )
Exclude: Interest expense 3,752,301 287 3,752,014
Exclude: Income tax benefit (5,750,272 ) (2,940 ) (5,747,332 )
EBIT (77,420,378 ) (22,175,220 ) (55,245,158 )
Exclude: Depreciation and
amortization 26,294,842 4,340,198 21,954,644
EBITDA (51,125,536 ) (17,835,022 ) (33,290,514 )
Exclude: Stock compensation expense,
net of withholding tax 3,423,324 96,617,325 (93,194,001 )
Exclude: Impairment of deposits due
to vendor bankruptcy filing 7,987,147 - 7,987,147
Exclude: Impairment of loan and
investment due to vendor bankruptcy
filing 31,012,853 - 31,012,853
Adjusted EBITDA $ (8,702,212 ) $ 78,782,303 $ (87,484,515 )
25
Revenues and Costs of Revenues: We generated revenues of $12.7 million during
the three months ended September 30, 2022 compared with $51.7 million during the
three months ended September 30, 2021. The $39.0 million decrease in revenue was
primarily driven by a $26.3 million decrease in revenue resulting from lower
bitcoin production. This decrease in production resulted from downtime at Hardin
in July and delays in energization at King Mountain in July and August. Lower
market prices for bitcoin in the current-year period contributed an additional
$12.7 million decline in revenue vs the prior-year period. Cost of revenues -
energy, hosting and other during the three months ended September 30, 2022,
totaled $13.8 million compared with $5.9 million in the prior-year period. The
$7.9 million increase was driven by accelerated cost recognition associated with
the early exit from Hardin ($5.7 million) and higher production costs per
bitcoin mined ($5.1 million) partially offset by the impacts of decreased
production on costs ($3.2 million). Cost of revenues - depreciation and
amortization was $26.3 million in the current-year period compared with $4.3
million in the prior-year period, an increase of $22 million. This increase in
expense was primarily due to the acceleration of depreciation related to our
exit of the Hardin, MT facility ($11 million in infrastructure depreciation and
$4.1 million in mining server depreciation) and, to a lesser extent increased
depreciation costs associated with a higher number of mining servers in
operation.
Total Margin: Total margin was a loss of ($27.4) million in the current-year
period compared with income of $41.4 million in the prior-year period, a decline
of ($68.8) million. This decline was driven by the factors discussed above,
which are summarized in the table below (in millions):
Revenue:
? Impact of lower production $ (26.3 )
? Impact of lower bitcoin market prices (12.7 )
Cost of revenue - energy, hosting and other:
? Impact of lower bitcoin production 3.2
? Impact of accelerated cost recognition from Hardin exit (5.7 )
? Other increases (5.1 )
Cost of revenue - depreciation and amortization:
? Impact of accelerated cost recognition from Hardin exit (15.1 )
? Other, primarily increased mining servers in operation (6.9 )
$ (68.8 )
26
Gain on sales of equipment, net: On December 2, 2021, we entered into an
agreement with DCRBN Ventures Development and Acquisition LLC ("DCRBN") in which
the Company agreed to sell certain equipment to DCRBN starting in April 2022, in
conjunction with the development of commercial activities at the King Mountain
wind farm in McCamey, TX. During the three months ended September 30, 2022, the
Company sold equipment for cash proceeds totaling $43.6 million and realized a
pre-tax gain on the sale of such assets of $28.7 million. The Company also
completed its previously disclosed exit from the Hardin, MT facility during the
current-year period. In conjunction with this exit, the Company sold
approximately 22,000 bitcoin mining servers for cash proceeds of $46.5 million
and recorded a gain on sale, net of disposal losses of $3.2 million. There were
no such sales in the prior-year period.
General and administrative expenses: General and administrative expenses were
$12.4 million for the three months ended September 30, 2022, compared with
expenses of $99.2 million in the prior-year period. Our general and
administrative expenses included stock-based (non-cash) compensation expense of
$3.4 million in the current-year period and $96.6 million in the prior-year
period. General and administrative expenses excluding stock-based compensation
was $8.9 million in the current-year period compared with $2.6 million in the
prior-year period. The $6.3 million increase was primarily due to higher payroll
and benefits costs ($3.8 million) and increased insurance expense ($1 million).
Professional fees, travel costs and other expenses also increased due to the
increased scope of our operations in the current-year period.
Legal reserves: In connection with a dispute concerning the settlement of
certain restricted stock unit awards previously granted to the Company's former
Chief Executive Officer and Chairman, on October 12, 2022, the Company entered
into a settlement agreement pursuant to which the Company agreed to pay $24
million. Given the outcome of this settlement, the Company entered into related
settlement agreements in respect to five other recipients of the same restricted
stock unit awards, including a director and our current Chief Executive Officer
and Chairman. These related settlements totaled approximately $1 million in the
aggregate.
Impairment of assets related to vendor bankruptcy filing: On September 22, 2022,
Compute North filed for restructuring under Chapter 11 of the U.S. Bankruptcy
Code. During the three months ended September 30, 2022, the Company assessed the
impairment of assets associated with Compute North given their bankruptcy
proceedings. As a result, the company recorded an impairment charge of
approximately $8.0 million (related to deposits) as an operating expense and an
additional impairment charge of approximately $31 million (related to a loan and
preferred stock investment) as non-operating expenses.
Changes in carrying value of digital assets:
? Impairment of digital currencies: We incurred impairment of digital assets
during the three months ended September 30, 2022 of $5.9 million compared with
an impairment of $6.7 million in the prior-year period.
? Change in fair value of digital currencies held in fund: On June 10, 2022, the
company withdrew 4,769 bitcoin from its investment fund. As a result, there was
no change in the fair value of the digital assets held in the fund during the
three months ended September 30, 2022. During the prior-year quarter, the
change in fair value of the bitcoin held in the investment fund was a gain of
$42.1 million.
Other non-operating income: Other non-operating income declined by $23 thousand
from the prior-year period.
Interest expense: Interest expense increased $3.7 million from the prior year as
a result interest related to the convertible notes issued in November 2021 ($2.8
million) and interest on borrowings outstanding under the Company's Term loan
and revolving credit ("RLOC") facilities ($0.9 million).
Income tax benefit: The Company recorded an income tax benefit of $5.8 million
for the three-month period ended September 30, 2022 compared with an income tax
benefit of $3 thousand in the prior-year period.
Net loss: We recorded a net loss of ($75.4) million in the current-year period
compared with net loss of ($22.2) million in the prior period. The $53.2 million
decline was primarily driven by lower total margin ($68.8 million), the
impairment related to the Compute North bankruptcy ($39 million), legal reserves
($25 million), declines in the carrying value of our digital assets ($41.3
million), and increased interest expense ($3.7 million). Partially offsetting
these unfavorable variances was a significant reduction in general and
administrative expenses primarily associated with lower stock-based compensation
($86.9 million), gain on sale of equipment of $31.9 million and the net increase
in the income tax benefit.
Adjusted EBITDA: Adjusted EBITDA was a loss of ($8.3) million compared with a
positive Adjusted EBITDA of $78.8 million in the prior-year period. The $87.1
million decline was primarily driven by lower total margin excluding the impact
of depreciation and amortization ($46.9 million), declines in the carrying value
of our digital assets ($41.3 million), legal reserve ($25 million), and higher
general and administrative expenses excluding non-cash stock based compensation
costs ($6.3 million). Partially offsetting these unfavorable variances were gain
on the sale of equipment of $31.9 million.
27
For the nine months ended September 30, 2022 and 2021
Nine Months Ended September 30, Favorable
2022 2021 (Unfavorable)
Revenues $ 89,329,986 $ 90,182,155 $ (852,169 )
Cost of revenues - energy, hosting
and other (42,974,265 ) (11,647,457 ) (31,326,808 )
Cost of revenues - depreciation and
amortization (64,881,323 ) (8,015,801 ) (56,865,522 )
Total margin (18,525,602 ) 70,518,897 (89,044,499 )
General and administrative expenses (39,187,098 ) (159,411,404 ) 120,224,306
Gain on sale of equipment, net of
disposals
90,115,824 - 90,115,824
Legal reserves (24,960,000 ) - (24,960,000 )
Impairment of deposits due to vendor
bankruptcy filing (7,987,147 ) - (7,987,147 )
Impairment of patents (919,363 ) - (919,363 )
Realized and unrealized gains
(losses) on digital currencies held
in fund (85,016,208 ) 59,410,028 (144,426,236 )
Impairment of digital currencies (153,045,376 ) (18,472,750 ) (134,572,626 )
Total change in carrying value of
digital currencies (238,061,584 ) 40,937,278 (278,998,862 )
Impairment of loan and investment
due to vendor bankruptcy filing (31,012,853 ) - (31,012,853 )
Other non-operating income 632,132 254,024 378,108
Net loss $ (280,027,638 ) $ (47,700,445 ) $ (232,327,193 )
Bitcoin ("BTC") production during
the period, in BTC 2,582 2,099 483
Reconciliation to Adjusted EBITDA
Net loss $ (280,027,638 ) $ (47,700,445 ) $ (232,327,193 )
Exclude: Interest expense 10,314,659 2,694 10,311,965
Exclude: Income tax benefit (192,712 ) (3,454 ) (189,258 )
EBIT (269,905,691 ) (47,701,205 ) (222,204,486 )
Exclude: Depreciation and
amortization 64,881,323 8,015,801 56,865,522
EBITDA (205,024,368 ) (39,685,404 ) (165,338,964 )
Exclude: Stock compensation expense,
net of withholding tax 18,874,798 152,334,886 (133,460,088 )
Exclude: Impairment of deposits due
to vendor bankruptcy filing 7,987,147 - 7,987,147
Exclude: Impairment of loan and
investment due to vendor bankruptcy
filing 31,012,853 - 31,012,853
Exclude: Impairment of patents 919,363 - 919,363
Adjusted EBITDA $ (146,230,207 ) $ 112,649,482 $ (258,879,689 )
28
Revenues and Costs of revenue: We generated revenues of $89.3 million during the
nine months ended September 30, 2022 compared with $90.2 million during the
prior-year period. The $0.9 million decrease is primarily attributable to the
impact of lower market prices for bitcoin in the current-year ($21.6 million)
mostly offset by the impact of increased production when compared to the
prior-year period ($20.7 million). Cost of revenues - energy, hosting and other
during the three months ended September 30, 2022 totaled $43 million compared
with $11.6 million in the prior-year period. The $31.3 million increase was
driven by accelerated cost recognition associated with the early exit from
Hardin ($18.2 million) and higher production costs per bitcoin mined ($10.4
million) and to a lesser extent the impact of the higher costs associated with
increased production ($2.7 million). Cost of revenues - Depreciation and
amortization was $64.9 million in the current-year period compared with $8.0
million in the prior-year period, an increase of $56.8 million . This increase
in expense was primarily due to the acceleration of depreciation related to our
exit of the Hardin, MT facility ($31.9 million in infrastructure depreciation
and $4.1 million in mining server depreciation) and increased depreciation costs
associated with a higher number of mining servers in operation in the
current-year period.
Total Margin: Total margin was a loss of ($18.5) million in the current-year
period compared with income of $70.5 million in the prior-year period, a decline
of ($89.0) million. This decline was driven by the factors discussed above,
which are summarized in the table below (in millions):
Revenue:
? Impact of higher production $ 20.7
? Impact of lower bitcoin market prices (21.6 )
Cost of revenue - energy, hosting and other:
? Impact of higher bitcoin production (10.4 )
? Impact of accelerated cost recognition from Hardin exit (18.2 )
? Other increases (2.7 )
Cost of revenue - depreciation and amortization:
? Impact of accelerated cost recognition from Hardin exit (36.0 )
? Other, primarily increased mining servers in operation (20.8 )
$ (89.0 )
29
Gain on sales of equipment, net: On December 2, 2021, we entered into an
agreement with DCRBN Ventures Development and Acquisition LLC ("DCRBN") in which
the Company agreed to sell certain equipment to DCRBN starting in April 2022, in
conjunction with the development of commercial activities at the King Mountain
wind farm in McCamey, TX. During the nine months ended September 30, 2022, the
Company sold equipment for cash proceeds totaling $130.9 million and realized a
pre-tax gain on the sale of such assets of $86.9 million. The Company also
completed its previously disclosed exit from the Hardin, MT facility during the
current-year period. In conjunction with this exit, the Company sold
approximately 22,000 bitcoin mining servers for cash proceeds of $46.5 million
and recorded a gain on sale, net of disposal losses of $3.2 million. There were
no such sales in the prior-year period.
General and administrative expenses: General and administrative expenses were
$39.2 million for the nine months ended September 30, 2022 compared with
expenses of $159.4 million in the prior-year period, a decrease of $120.2
million. Our general and administrative expenses included stock-based (non-cash)
compensation expense of $18.9 million in the current-year period and $152.3
million in the prior-year period. General and administrative expenses excluding
stock-based compensation increased to $20.3 million in the current year period
compared with $7.1 million in the prior-year period. The $13.2 million increase
was primarily due to higher payroll and benefits costs ($5.4 million), increased
insurance expense ($2.2 million) and higher professional fees ($1.6 million).
Other expenses also increased due to the increased scope of our operations in
the current-year period.
Legal reserves: In connection with a dispute concerning the settlement of
certain restricted stock unit awards previously granted to the Company's former
Chief Executive Officer and Chairman, on October 12, 2022, the Company entered
into a settlement agreement pursuant to which the Company agreed to pay $24
million. Given the outcome of this settlement, the Company entered into related
settlement agreements in respect to five other recipients of the same restricted
stock unit awards, including a director and our current Chief Executive Officer
and Chairman. These related settlements totaled approximately $1 million in the
aggregate.
Impairment of assets related to vendor bankruptcy filing: On September 22, 2022,
Compute North filed for restructuring under Chapter 11 of the U.S. Bankruptcy
Code. During the period ended September 30, 2022, the Company assessed the
impairment of its assets associated with Compute North given their bankruptcy
proceedings. As a result, the company recorded an impairment charge of
approximately $8.0 million (related to deposits) as an operating expense and an
additional impairment charge of approximately $31 million (related to a loan and
preferred stock investment) as non-operating expenses.
Impairment of patents: The Company recorded an impairment of $0.9 million in the
current-year period related to certain patents no longer utilized in its
business operations.
Changes in carrying value of digital assets:
? Impairment of digital currencies: We incurred impairment of digital assets
during the nine months ended September 30, 2022, of $153 million compared with
an impairment of $18.2 million in the prior-year period, reflecting the overall
decline in value of bitcoin in the current-year period.
? Change in fair value of digital currencies held in fund: On June 10, 2022, the
Company withdrew 4,769 bitcoin from its investment fund. Total changes in the
fair value of investment fund from April 1 through the June 10 withdrawal date
resulted in a loss of ($85.0) million in the current year period. During the
prior-year period, the change in fair value of the bitcoin held in the
investment fund was a gain of $59.4 million.
Other non-operating income: Other non-operating income increased $378 thousand
from the prior-year period.
Interest expense: Interest expense increased $10.3 million from the prior year
as a result interest related to the convertible notes issued in November 2021
and interest on borrowings outstanding under the Company's Term loan and
revolving credit ("RLOC") facilities.
Income tax benefit: The company recorded a modest income tax benefit of $193
thousand in the current-year period compared with a benefit of $3 thousand in
the prior-year period.
Net loss: We recorded a net loss of $(280) million in the current-year period
compared with a net loss of $(47.7) million in the prior period. The $232.3
million decline was primarily driven by the $279 million decrease in the
carrying value of our digital assets, the $89 million decrease in total margin,
the impairment of assets related the Compute North bankruptcy ($39 million), the
legal reserve ($25 million), and higher interest expense ($10.3 million).
Partially offsetting these unfavorable variances was a significant decrease in
general and administrative expenses ($120.2 million) associated with lower
stock-based compensation and gain on sales of equipment ($90.1 million).
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Adjusted EBITDA: Adjusted EBITDA was a loss of $(145.8) million compared with a
positive Adjusted EBITDA of $112.6 million in the prior-year period. The $258.9
million decline was primarily driven by the $279 million decrease in the
carrying value of our digital assets, lower total margin excluding the impact of
depreciation and amortization $(32.2 million), legal reserves ($25 million), and
higher operating expenses excluding non-cash stock compensation costs ($13.2
million). The gain on the sales of equipment partially offset these unfavorable
variances.
Financial Condition and Liquidity: Cash, cash equivalents and restricted cash
totaled $64.1 million at September 30, 2022, a decrease of $204.4 million from
December 31, 2021. The decrease in cash, cash equivalents and restricted cash
was primarily driven by a $368.1 million use of cash from investing activities
resulting from significant levels of advances to vendors ($482.1 million) and,
to a lesser extent, equity investments ($44.0 million) and purchases of property
and equipment ($19.8 million). These uses of cash were partially offset by the
proceeds from assets sales of $177.4 million.
Cash flows from operating activities resulted in a use of funds of ($84.2)
million. Cash flows from operating activities before the impact of changes in
operating assets and liabilities (a $18.1 million source of funds) were more
than offset by a ($102.3) million use of funds from changes in operating assets
and liabilities, primarily due to changes in digital currencies (an $89.3
million use of funds) prepaid expenses (a $30.6 million use of funds) and
deposits (a $13.6 million use of fund) partially offset by the impact of higher
accounts payable, including a payable related to the legal reserve (a $21.2
million source of funds). This legal reserve payable was settled in cash in
October 2022.
Cash flows from financing activities resulted in a source of cash of $247.9
million, primarily from proceeds from the issuance of common stock ($198.7
million) and proceeds from borrowings outstanding under the Company's Term loan
agreement ($49.3 million).
We borrowed the initial $50 million under our Term Loan facility during the
three months ended September 30, 2022. There were no borrowings outstanding
under our revolving credit facility at September 30, 2022. The maximum
borrowings outstanding under the Company's revolving credit facility during the
three and nine months ended September 30, 2022, was $35 million and $70 million,
respectively.
The Company expects to have sufficient liquidity, including cash on hand and
available borrowing capacity to support ongoing operations. We will continue to
seek to fund our business activities through the capital markets, primarily
through periodic equity issuances using our At-The-Market facility.
Bitcoin Holdings: At September 30, 2022, we held approximately 10,670 bitcoin
with a total carrying value of $197.2 million on the balance sheet.
Approximately 3,828 bitcoin were being utilized as collateral for credit
facilities and were classified as "digital currencies, restricted". The
remaining bitcoin were classified as "Digital currencies" on the balance sheet.
The fair market value of our bitcoin holdings at September 30, 2022 was
approximately $207.3 million and the value of a single bitcoin was approximately
$19,432.
During the month of October 2022, the Company borrowed an additional $50 million
under its RLOC facility for general corporate purposes and provided an
additional 3,993 bitcoin as collateral for this borrowing. This increased the
Company's collateral balance to 7,821 bitcoin. On November 9, 2022, bitcoin
prices declined to a new yearly low on concerns of financial instability in the
crypto industry. As a result, the Company was required to provide an additional
1,669 bitcoin (valued at $16,212.50 per bitcoin) as collateral for its $50
million RLOC and $50 million term loan borrowings, bringing its total collateral
balance to 9,490 bitcoin (approximately $153.9 million). The Company's total
bitcoin holdings as of November 9, 2022, are approximately 11,440 bitcoin, of
which 1,950 (approximately $31.6 million) are unrestricted. Given the
uncertainty around bitcoin prices in the near-term, the Company has decided to
delay previously announced plans to refinance the RLOC with a term loan during
the month of November. This enables the Company to retain the optionality to
repay the RLOC borrowings in the near-term versus committing to a two-year term
loan borrowing which would carry prepayment penalties. The Company retains an
option to draw an additional $50 million on the term loan through April of
2023.
At September 30, 2021 we held a total of 7,035 bitcoin with a total carrying
value of $282.7 million on the balance sheet. The fair market value of our
bitcoin holdings at September 30, 2021 was approximately $308.1 million and the
value of a single bitcoin was approximately $43,791.
We expect to increase our bitcoin holdings over time primarily through mining
activities. As our mining activities increase, we will likely begin selling a
portion of bitcoin produced in future periods to fund monthly operating costs,
for treasury management purposes or for general corporate purposes.
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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MARATHON DIGITAL HOLDINGS, INC. 
