10-Q 1 form10-q.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2022

 

or

  

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE ACT OF 1934

 

For the transition period from _______to______

 

MARATHON DIGITAL HOLDINGS, INC.

(Exact Name of Registrant as Specified in Charter)

 

Nevada   001-36555   01-0949984

(State or other jurisdiction

of incorporation)

 

(Commission

File Number)

 

(IRS Employer

Identification No.)

 

1180 North Town Center Drive, Suite 100 Las Vegas, NV   89144
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: 702-945-2773

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer Accelerated Filer
Non-accelerated Filer Smaller Reporting Company
Emerging growth company    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock   MARA   The Nasdaq Capital Market

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date, 116,842,289 shares of common stock are issued and outstanding as of November 14, 2022.

 

 

 

 
 

 

TABLE OF CONTENTS

 

    Page
PART I. - FINANCIAL INFORMATION  
Item 1. Financial Statements 3
  Consolidated Condensed Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021 3
  Consolidated Condensed Statements of Operations for the Three and Nine months Ended September 30, 2022 and 2021 (unaudited) 4
  Consolidated Condensed Statements of Stockholders’ Equity for the Three and Nine months Ended September 30, 2022 and 2021 (unaudited) 5
  Consolidated Condensed Statements of Cash Flows for the Nine months Ended September 30, 2022 and 2021 (unaudited) 6
  Notes to Unaudited Consolidated Condensed Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
Item 4. Controls and Procedures 32
     
PART II - OTHER INFORMATION  
Item 1. Legal Proceedings 33
Item 1A Risk Factors 34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
Item 3. Defaults upon Senior Securities 35
Item 4. Mine Safety Disclosures 35
Item 5. Other Information 35
Item 6. Exhibits 35

 

OTHER PERTINENT INFORMATION

 

Unless specifically set forth to the contrary, “Marathon Digital Holdings, Inc.,” “we,” “us,” “our” and similar terms refer to Marathon Digital Holdings, Inc., a Nevada corporation, and its subsidiaries.

 

2
 

 

Item 1. Financial Statements

 

MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

 

   2022   2021 
   September 30,   December 31, 
   2022   2021 
   (unaudited)     
ASSETS          
Current assets:          
Cash and cash equivalents  $55,339,400   $268,555,837 
Restricted cash   8,800,000    - 
Digital currencies   126,418,098    102,805,980 
Digital currencies loaned   -    20,437,284 
Digital currencies held in fund   -    223,915,761 
Receivable from sale of equipment   1,000,000    - 
Deposits   22,533,569    34,458,347 
Loan receivable   -    30,000,000 
Prepaid expenses and other current assets   26,015,943    8,148,116 
Total current assets   240,107,010    688,321,325 
           
Other assets:          
Property and equipment (net of accumulated depreciation of $26,809,659
and $21,311,461, respectively)
   403,522,538    276,242,794 
Advances to vendors   687,777,200    466,254,623 
Investments   36,999,994    3,000,000 
Digital currencies, restricted   

70,743,342

    - 
Long term deposits   

26,554,033

    - 
Long term prepaids   8,703,542    13,665,589 
Right-of-use assets   1,369,774    - 
Intangible assets (net of accumulated amortization of $280,497 at December 31, 2021)   -    931,226 
Total other assets   1,235,670,423    760,094,232 
TOTAL ASSETS  $1,475,777,433   $1,448,415,557 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities:          
Accounts payable   $19,051,369   $10,867,403 
Accrued expenses   2,140,544    2,230,870 
Legal reserve payable   21,199,549    - 
Operating lease liabilities   306,444    - 
Current portion of accrued bond interest   2,843,611    867,260 
Total current liabilities   45,541,517    13,965,533 
Long-term liabilities          
Convertible notes   731,318,578    728,405,922 
Term loan   49,863,008    - 
Operating lease liabilities   1,131,810    - 
Deferred tax liabilities   22,820,558    23,020,721 
Total long-term liabilities   805,133,954    751,426,643 
           
Commitments and Contingencies   -     -  
           
Stockholders’ Equity:          
Preferred stock, 0.0001 par value, 50,000,000 shares authorized, no shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively   -    - 
Common stock, 0.0001 par value; 200,000,000 shares authorized; 116,810,405 and 102,733,273 issued and outstanding at September 30, 2022 and December 31, 2021, respectively   11,681    10,273 
Additional paid-in capital   1,057,798,421    835,693,610 
Accumulated other comprehensive loss   (450,719)   (450,719)
Accumulated deficit   (432,257,421)   (152,229,783)
Total stockholders’ equity   625,101,962    683,023,381 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $1,475,777,433   $1,448,415,557 

 

The accompanying notes are an integral part to these unaudited consolidated condensed financial statements.

 

3
 

 

MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

 

   2022   2021   2022   2021 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2022   2021   2022   2021 
Total Revenues  $12,690,452   $51,707,483   $89,329,986   $90,182,155 
                     
Costs and expenses                    
Cost of revenues                    
Cost of revenues - energy, hosting and other   (13,772,555)   (5,922,811)   (42,974,265)   (11,647,457)
Cost of revenues - depreciation and amortization   (26,294,842)   (4,340,198)   (64,881,323)   (8,015,801)
Total costs and expenses   (40,067,397)   (10,263,009)   (107,855,588)   (19,663,258)
Operating expenses                    
General and administrative expenses   (12,352,008)   (99,235,984)   (39,187,098)   (159,411,404)
Legal reserves   (24,960,000)   -    (24,960,000)   - 
Impairment of deposits due to vendor bankruptcy filing   (7,987,147)   -    (7,987,147)   - 
Impairment of digital currencies   (5,903,891)   (6,731,890)   (153,045,376)   (18,472,750)
Impairment of patents   -    -    (919,363)   - 
Realized and unrealized gains (losses) on digital currencies held in fund   -    42,086,907    (85,016,208)   59,410,028 
Gain on sale of equipment, net of disposals   31,934,307    -    90,115,824    - 
Total operating expenses   (19,268,739)   (63,880,967)   (220,999,368)   (118,474,126)
Operating loss   (46,645,684)   (22,436,493)   (239,524,970)   (47,955,229)
Impairment of loan and investment due to vendor bankruptcy filing   

(31,012,853

)   -    

(31,012,853

)   - 
Other non-operating income   238,159    261,273    632,132    254,024 
Interest expense   (3,752,301)   (287)   (10,314,659)   (2,694)
Loss before income taxes  $(81,172,679)  $(22,175,507)  $(280,220,350)  $(47,703,899)
Income tax benefit   5,750,272    2,940    192,712    3,454 
Net loss  $(75,422,407)  $(22,172,567)  $(280,027,638)  $(47,700,445)
                     
Net loss per share, basic and diluted:  $(0.65)  $(0.22)  $(2.56)  $(0.49)
Weighted average shares outstanding, basic and diluted:   116,533,816    100,803,809    109,492,865    98,230,795 

 

The accompanying notes are an integral part to these unaudited consolidated condensed financial statements.

 

4
 

 

MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

   Number   Amount   Number   Amount   Capital   Deficit   Loss   Equity 
For the Nine Months Ended September 30, 2021
         
   Preferred Stock   Common Stock   Additional Paid-in   Accumulated   Accumulated
Other Comprehensive
   Total Stockholders’ 
   Number   Amount   Number   Amount   Capital   Deficit   Loss   Equity 
Balance as of December 31, 2020   -   $-    81,974,619   $8,197   $428,242,763   $(116,055,277)  $(450,719)  $311,744,964 
Stock based compensation, net of tax withholding   -    -    7,523,397    753    147,646,535    -    -    147,647,288 
Issuance of common stock, net of offering costs/At-the-market offering   -    -    12,500,000    1,250    237,428,370    -    -    237,429,620 
Options exercised on a cashless basis   -    -    23,500    3    (3)   -    -    - 
Warrant exercised for cash   -    -    170,904    17    160,145    -    -    160,162 
Common stock issued for cashless exercise of warrants             2,044    -    -              - 
Common stock issued for service and license agreements             312,094    31    11,134,808              11,134,839 
Net loss   -    -    -    -    -    (47,700,445)   -    (47,700,445)
Balance as of September 30, 2021   -   $-    102,506,558   $10,251   $824,612,618   $(163,755,722)  $(450,719)  $660,416,428 

 

For the Nine Months Ended September 30, 2022
                         
   Preferred Stock   Common Stock   Additional Paid-in   Accumulated   Accumulated
Other Comprehensive
   Total Stockholders’ 
   Number   Amount   Number   Amount   Capital   Deficit   Loss   Equity 
Balance as of December 31, 2021   -   $-    102,733,273   $10,273   $835,693,610   $(152,229,783)  $(450,719)  $683,023,381 
Stock based compensation, net of tax withholding   -    -    417,380    42    18,824,676    -    -    18,824,718 
Issuance of common stock, net of offering costs/At-the-market offering   -    -    13,459,752    1,346    198,700,156    -    -    198,701,502 
Common stock issued for long term service contract   -    -    200,000    20    4,579,979    -    -    4,579,999 
Net loss   -    -    -    -    -    (280,027,638)   -    (280,027,638)
Balance as of September 30, 2022   -   $-    116,810,405   $11,681   $1,057,798,421   $(432,257,421)  $(450,719)  $625,101,962 

 

For the Three Months Ended September 30, 2021
                                 
   Preferred Stock   Common Stock   Additional Paid-in   Accumulated   Accumulated
Other Comprehensive
   Total Stockholders’ 
   Number   Amount   Number   Amount   Capital   Deficit   Loss   Equity 
Balance as of June 30, 2021   -   $-    99,634,123   $9,963   $722,543,196   $(141,583,155)  $(450,719)  $580,519,285 
Stock based compensation, net of tax withholding   -    -    2,722,435    273    95,739,437    -    -    95,739,710 
Common stock issued for service and license agreements   -    -    150,000    15    6,329,985    -    -    6,330,000 
Net loss   -    -    -    -    -    (22,172,567)   -    (22,172,567)
Balance as of September 30, 2021   -   $-    102,506,558   $10,251   $824,612,618   $(163,755,722)  $(450,719)  $660,416,428 

 

For the Three Months Ended September 30, 2022
                                 
   Preferred Stock   Common Stock   Additional Paid-in   Accumulated   Accumulated
Other Comprehensive
   Total Stockholders’ 
   Number   Amount   Number   Amount   Capital   Deficit   Loss   Equity 
Balance as of June 30, 2022   -   $-    113,865,235   $11,387   $1,016,722,345   $(356,835,014)  $(450,719)  $659,447,999 
Stock based compensation, net of tax withholding   -    -    41,650    4    3,417,138    -    -    3,417,142 
Issuance of common stock, net of offering costs/At-the-market offering   -    -    2,903,520    290    37,658,938    -    -    37,659,228 
Net loss   -    -    -    -    -    (75,422,407)   -    (75,422,407)
Balance as of September 30, 2022   -   $-    116,810,405   $11,681   $1,057,798,421   $(432,257,421)  $(450,719)  $625,101,962 

 

The accompanying notes are an integral part to these unaudited consolidated condensed financial statements.

 

5
 

 

MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

 

   2022   2021 
   Nine Months Ended September 30, 
   2022   2021 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss  $(280,027,638)  $(47,700,445)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   64,881,323    8,015,801 
Amortization of prepaid service contract   22,781,073    - 
Gain on sale of assets, net of disposals   (90,115,824)   (8,571)
Deferred tax expense   (200,163)   - 
Realized and unrealized losses (gains) on digital currencies held in fund   85,016,208    (59,410,028)
Impairment of digital currencies   153,045,376    18,472,750 
Stock based compensation   18,877,144    152,335,353 
Amortization of bond issuance costs   2,956,016    - 
Impairment of patents   919,363    - 
Impairment of assets related to vendor bankruptcy filing   39,000,000    - 
Other adjustments from operations, net   897,837    365,026 
Changes in operating assets and liabilities:          
Digital currencies   (89,329,986)   (90,124,117)
Deposits   (13,629,429)   - 
Prepaid expenses and other assets   (30,583,448)   (28,700,147)
Accounts payable and accrued expenses   8,093,640    2,518,805 
Legal reserve payable   21,199,549    - 
Accrued interest   1,976,351    (121,596)
Net cash used in operating activities   (84,242,608)   (44,357,170)
CASH FLOWS FROM INVESTING ACTIVITIES          
Advances to vendors   (482,097,485)   (191,543,484)
Purchase of property and equipment   (19,829,237)   (30,737,688)
Sales of property and equipment   177,370,765    - 
Purchase of digital currencies in fund   -    (150,000,000)
Purchase of equity investments   (43,999,820)   - 
Sale of digital currencies in investment fund   482,872    500,715 
Net cash used in investing activities   (368,072,905)   (371,780,457)
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from issuance of common stock, net of issuance costs   198,701,502    312,196,846 
Proceeds from term loan borrowings, net of issuance costs   49,250,000    - 
Value of shares withheld for taxes   (52,426)   (4,688,065)
Proceeds received on exercise of options and warrants   -    160,162 
Net cash provided by financing activities   247,899,076    307,668,943 
           
Net decrease in cash, cash equivalents and restricted cash   (204,416,437)   (108,468,684)
Cash, cash equivalents and restricted cash — beginning of period   268,555,837    141,322,776 
Cash, cash equivalents and restricted cash — end of period  $64,139,400   $32,854,092 
           
Supplemental cash flow information:          
Interest paid  $5,382,292   $- 
           
Supplemental schedule of non-cash investing and financing activities:          
Options exercised into common stock  $-   $3 
Operating lease assets obtained in exchange for new operating lease liabilities  $1,538,573   $- 
Digital currencies transferred from fund  $137,843,761      
Unpaid proceeds from sale of property & equipment  $1,000,000   $- 
Reclassifications from advances to vendor to property and equipment upon receipt of equipment  $260,574,908  

$

53,932,636 
Common stock issued for service and license agreements  $4,579,999   $11,134,839 

 

The accompanying notes are an integral part to these unaudited consolidated condensed financial statements.

 

6
 

 

MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

 

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 was engaged in exploration and potential development of a 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. In 2018, the Company began its bitcoin mining operations by purchasing cryptocurrency mining machines and establishing a data center in Canada to mine digital assets. The Company ceased operating in Canada in 2020 and relocated all owned mining equipment out of Canada to the U.S. The Company has since expanded its activities in the mining of bitcoin across the U.S. The Company 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.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with the rules and regulations of the SEC. They include all adjustments that we consider necessary for a fair statement of the results for the interim periods presented. Such adjustments consisted only of normal recurring items unless otherwise disclosed. The September 30, 2022, Condensed Consolidated Balance Sheet was derived from audited financial statements but does not include all footnote disclosures from the annual financial statements.

 

These financial statements should be read in conjunction with the financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 10, 2022.

 

Basis of Presentation and Principles of Consolidation

 

The accompanying unaudited consolidated condensed financial statements, including the accounts of the Company’s subsidiaries, Marathon Crypto Mining, Inc., Crypto Currency Patent Holding Company and Soems Acquisition Corp. have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations. These consolidated condensed financial statements reflect all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position, the results of operations and cash flows of the Company for the periods presented. It is suggested that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s most recent Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year ended December 31, 2022.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications have no effect on the reported financial position, results of operations, or cash flows. Previously reported compensation and related taxes, consulting fees, and professional fees have now been reclassified within general and administrative expenses. In addition, previously reported change in fair value of warrant liability, realized gain on sale of digital currencies and interest income have now been reclassified as other non-operating income.

 

Use of Estimates and Assumptions

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made by management include, but are not limited to, estimating the useful lives of fixed assets, the assumptions used to calculate fair value of options granted, realization of long-lived assets, deferred income taxes, unrealized tax positions and the realization of digital currencies.

 

7
 

 

MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

Restricted Cash

 

Restricted cash principally represents those cash balances that support commercial letters of credit and are restricted from withdrawal. The following table provides a reconciliation of the total cash, cash equivalents and restricted cash reported on the Condensed Consolidated Balance Sheets to the corresponding amounts reported on the Condensed Consolidated Statements of Cash Flows.

 

  

As of

September 30, 2022

  

As of

September 30, 2021

 
Cash and cash equivalents  $55,339,400   $32,854,092 
Restricted cash   8,800,000    - 
Cash, cash equivalents and restricted cash  $64,139,400   $32,854,092 

 

Digital Currencies, Digital currencies, restricted and Digital currencies loaned

 

Digital currencies, and Digital currencies loaned are included in current assets in the consolidated balance sheets. Digital currencies are recorded as indefinite lived intangibles at cost less impairment in accordance with FASB ASC 350 – Intangibles-Goodwill and Other. Digital currencies, restricted represent collateral for long-term loans and as such are classified as a non-current asset.

 

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. When the exchange-traded price of digital currencies declines below its carrying value, the Company has determined that it is more likely than not that an impairment exists. When this occurs, the amount of impairment to record is determined based on the fair value of digital currencies in accordance with the fair value measurement framework in FASB ASC 820 – Fair Value Measurement “(ASC 820”). If the fair value of digital currency is lower than its carrying amount, the Company will record an impairment in an amount by which the carrying value exceeds the fair value of the digital currency. Subsequent reversal of impairment losses is not permitted.

 

The following table presents the activities of the digital currencies for the nine months ended September 30, 2022:

 

Digital currencies at December 31, 2021*  $123,243,264 
Additions of digital currencies   89,140,088 
Digital currencies transferred from fund   137,843,761 
Disposal of digital currency for charitable contribution   (20,297)
Impairment of digital currencies   (153,045,376)
Digital currencies at September 30, 2022  $197,161,440 

 

* Includes a loan of 600 bitcoin ($20,437,284) to NYDIG. On June 14, 2022 the Company terminated the loan and there are no loans of digital assets outstanding as of September 30, 2022.

 

Digital currencies at December 31, 2020  $2,271,656 
Additions of digital currencies   90,182,155 
Impairment of digital currencies   (18,472,750)
Interest received on digital currencies, restricted   5,962 
Sale of digital currencies, net   (55,429)
Digital currencies at September 30, 2021  $73,931,594 

 

At September 30, 2022, the Company held approximately 10,670 bitcoin with a carrying value of $197.2 million. The bitcoin were classified on the balance sheet as digital currencies (6,842 bitcoin or approximately $126.4 million carrying value) and digital currencies, restricted (3,828 bitcoin or approximately $70.8 million carrying value). At September 30, 2022, the fair market value of the Company’s bitcoin holdings was approximately $207.3 million, including digital currencies and digital currencies, restricted. Digital currencies, restricted is comprised of bitcoins held as collateral for term loan and revolving line of credit (“RLOC”) borrowings.

 

8
 

 

MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

Halving – The bitcoin blockchain and the cryptocurrency reward for solving a block is subject to periodic incremental halving. Halving is a process designed to control the overall supply and reduce the risk of inflation in cryptocurrencies using a Proof-of-Work consensus algorithm. At a predetermined block, the mining reward is cut in half, hence the term “Halving”. The last halving for bitcoin occurred on May 12, 2020. For example, the current fixed reward on the bitcoin network for solving a new block is six and one quarter (6.25) bitcoin per block, which decreased from twelve and a half (12.5) bitcoin per block in May 2020. It is estimated that the number of bitcoin per block will halve again in May 2024. Many factors influence the price of bitcoin and potential increases or decreases in prices in advance of or following a future halving is unknown.

 

Digital Currencies Held in Fund

 

On January 25, 2021, the Company entered into a limited partnership agreement with NYDIG Digital Assets Fund III, LP (“Fund”) wherein the Fund purchased 4,812.66 bitcoin in an aggregate purchase price of $150 million. The Company owned 100% of the limited partnership interests and consolidated the Fund under a voting interest model. The consolidated assets in the investment fund are included in current assets in the consolidated balance sheets under the caption “Digital currencies held in fund.

 

The Fund qualified and operated as an investment company for accounting purposes pursuant to the accounting and reporting guidance under ASC 946, Financial Services – Investment Companies, which requires fair value measurement of the Fund’s investments in digital assets. The digital assets held by the Fund were traded on a number of active markets globally, including the over-the-counter market and digital asset exchanges. A fair value measurement under ASC 820 for an asset assumes that the asset is exchanged in an orderly transaction between market participants either in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset (ASC 820-10-35-5). The fair value of the assets within the Fund were measured daily based on pricing obtained from CoinDesk Bitcoin Price Index at approximately 4pm New York time. Any changes in the fair value of the assets were recorded in the Consolidated Statement of Operations under the caption “Realized and unrealized gains (losses) of digital currencies held in fund.”

 

On June 10, 2022, the Company redeemed 100% of its limited partnership interest in the Fund in exchange for approximately 4,768.5 bitcoin (with a fair market value of approximately $137.8 million). This bitcoin was transferred from the Fund’s custodial wallet to the Company’s digital wallet. Upon redemption, the Company no longer had a majority voting interest in the Fund and therefore deconsolidated the Fund in accordance with ASC 810 – Consolidation. The Company did not record any gain or loss upon deconsolidation as the digital assets in the Fund were measured at fair value. Subsequent to the transfer, the bitcoin transferred to the Company’s digital wallet has been accounted for at cost less impairment in line with its digital currencies measurement policy as described under Digital Currencies, Digital currencies, restricted and Digital currencies loaned. The activity in the Fund for the nine months ended September 30, 2022 and twelve months ended December 31, 2021 was as follows:

 

Digital currencies held in fund at December 31, 2021  $223,915,761 
Sale of digital currencies   (482,872)
Realized and unrealized losses on digital currencies held in fund   (85,016,208)
Management expenses incurred by fund   (572,920)
Digital currencies transferred out of fund   (137,843,761)
Digital currencies held in fund at September 30, 2022  $- 
      
Digital currencies held in fund at December 31, 2020  $- 
Purchase of digital currencies held in fund   150,000,000 
Realized and unrealized gains on digital currencies held in fund   74,696,002 
Management expenses incurred by fund   (780,241)
Digital currencies held in fund at December 31, 2021  $223,915,761 

 

Investments

 

Investments, which may be made from time to time for strategic reasons (and not to engage in the business of investments) are included in non-current assets in the consolidated balance sheets. Investments are recorded at cost and the Company analyzes the value of investments on a quarterly basis. As part of the Company’s policy to maximize return on strategic investment opportunities, while preserving capital and limiting downside risk, the Company may at times enter into equity investments or Simple Agreements for Future Equity (“SAFE”) agreements. The nature and timing of the Company’s investments will depend on available capital at any particular time and the investment opportunities identified and available to the Company.

 

On December 21, 2021 and December 30, 2021, the Company entered into two separate SAFE agreements classified on the balance sheet as non-current assets. SAFE agreements are accounted for as equity securities without readily determinable fair value at cost minus impairment, as adjusted for observable price changes in orderly transactions for identical or similar investment of the same issue pursuant to Topic 321 Investments – Equity Securities (“ASC 321”).

 

9
 

 

MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

On February 3, 2022, the Company invested approximately $10 million in convertible preferred stock of Compute North Holdings, Inc. The acquisition of convertible preferred stock was accounted for as investments in equity securities without readily determinable fair value at cost minus impairment, as adjusted for observable price changes in orderly transactions for identical or similar investment of the same issue pursuant to ASC 321. This investment was subject to an impairment of $10.0 million following Compute North’s Chapter 11 Bankruptcy filing in September 2022 (See Note 6).

 

On May 3, 2022, the Company converted $2.0 million from a SAFE investment into preferred stock while purchasing an additional $3.5 million of preferred stock in Auradine, Inc. along with entering into a commitment to acquire $30.0 million of additional shares of preferred stock. This forward contract was accounted for under ASC 321 as an equity security. On September 27, 2022, pursuant to the forward contract, the Company increased its investment in the preferred stock of Auradine, Inc. by $30.0 million, bringing its total carrying amount of investment in Auradine, Inc. preferred stock to $35.5 million with no noted impairments or other adjustments (See Note 11).

 

As of September 30, 2022, the Company has one remaining SAFE investment with a carrying value of $1.0 million, with no noted impairments or other adjustments.

 

Fair Value of Financial Instruments

 

The Company measures at fair value certain of its financial and non-financial assets and liabilities by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:

 

  Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities
     
  Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data
     
  Level 3: Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.

 

The carrying amounts reported in the consolidated balance sheet for cash, accounts receivable, accounts payable, and accrued expenses, approximate their estimated fair market value based on the short-term maturity of these instruments. The carrying value of notes payable and other long-term liabilities approximate fair value as the related interest rates approximate rates currently available to the Company.

 

Financial assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level of input that is significant to their fair value measurement. The Company measures the fair value of its marketable securities and investments by taking into consideration valuations obtained from third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs included reported trades and broker-dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities and other observable inputs.

 

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis and the Company’s estimated level within the fair value hierarchy of those assets and liabilities as of September 30, 2022 and December 31, 2021, respectively:

 

   Fair value measured at September 30, 2022 
   Total carrying value at September 30,   Quoted prices in active markets   Significant other observable inputs   Significant unobservable inputs 
   2022   (Level 1)   (Level 2)   (Level 3) 
Assets                    
Money Market Accounts  $51,468,288   $51,468,288   $      -   $        - 

 

   Fair value measured at December 31, 2021 
   Total carrying value at
December 31,
   Quoted prices in active markets   Significant other observable inputs   Significant unobservable inputs 
   2021   (Level 1)   (Level 2)   (Level 3) 
Assets                    
Money Market Accounts  $266,635,158   $266,635,158   $-   $- 
Digital currencies held in fund  $223,915,761   $-   $223,915,761   $- 

 

10
 

 

MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

There were no transfers among Levels 1, 2 or 3 during the three and nine months ended September 30, 2022.

 

On June 10, 2022, the Company withdrew approximately 4,769 bitcoin from its investment in NYDIG Digital Assets Fund III, LP and transferred the bitcoin directly into the Company’s account. As a result, the Company will no longer receive “mark-to-market” accounting for the bitcoin formerly held in the Investment Fund and the 4,769 bitcoin will now be classified as “Digital currencies” on the balance sheet and subject to impairment analysis as an indefinite-lived intangible.

 

Net Income and Basic and Diluted Net Income per Share

 

Net income per common share is calculated in accordance with ASC Topic 260: Earnings Per Share (“ASC 260”). Basic income per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. For the three and nine months ended September 30, 2022, respectively, the Company incurred a loss position and as such the computation of diluted net loss per share does not include dilutive common stock equivalents in the weighted average shares outstanding, as they would be anti-dilutive.

 

Computation of potential shares for the diluted earnings (loss) per share calculation at September 30, 2022 and 2021 are as follows:

 

           
   As of September 30, 
   2022   2021 
Warrants to purchase common stock   324,375    457,837 
Restricted stock   1,113,132    95,179 
Options to purchase common stock   -    81,120 
Convertible notes to exchange common stock   9,812,955    - 
Total   11,250,462    634,136 

 

The following table sets forth the computation of basic and diluted loss per share:

 

   2022   2021   2022   2021 
  

For the Three Months Ended

September 30,

  

For the Nine Months Ended

September 30,

 
   2022   2021   2022   2021 
Net loss attributable to common shareholders  $(75,444,407)  $(22,172,567)  $(280,027,638)  $(47,700,445)
                     
Denominator:                    
Weighted average common shares - basic and diluted   116,533,816    100,803,809    109,492,865    98,230,795 
Loss per common share - basic and diluted  $(0.65)  $(0.22)  $(2.56)  $(0.49)

 

NOTE 3 – 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. The following five steps are applied to achieve that core principle:

 

  Step 1: Identify the contract with the customer
  Step 2: Identify the performance obligations in the contract
  Step 3: Determine the transaction price
  Step 4: Allocate the transaction price to the performance obligations in the contract
  Step 5: Recognize revenue when the Company satisfies a performance obligation

 

In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met:

 

  The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and
  the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).

 

11
 

 

MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.

 

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:

 

  Variable consideration
  Constraining estimates of variable consideration
  The existence of a significant financing component in the contract
  Noncash consideration
  Consideration payable to a customer

 

Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.

 

The Company’s ongoing major or central operations is to use computing power to solve cryptographic algorithms to record and publish Bitcoin (“BTC”) transactions to blockchain ledgers or provide BTC transaction verification services to the BTC network (such activity, collectively, “mining”). In return for verifying transactions to be added as a new block to the network (i.e., successfully ‘solving’ a block), the Company is entitled to receive transaction fees and block rewards in the form of BTCs. Transaction fees are specified in each block of transactions request and are paid by the requester. The Bitcoin blockchain protocol itself currently issues a block reward for each solved block at a current rate of 6.25 BTC per block. Such reward is expected to be reduced to half of that in 2024. The Company also mines in a self-operated private pool, which was open to third-party pool participants from September 2021 until May 2022. The third-party pool participants employed the Company’s services as a pool operator in exchange for a pool fee paid to the Company. As a private pool operator, the Company facilitated the contribution of hash rate by third-party pool participants who choose to join or leave the pool at will.

 

Block rewards - The inflow of bitcoin as a result of receiving a block reward meets the definition of revenue because it gives the miner economic benefits from rendering services or carrying out its mining activities. Therefore, the Company may account for the block reward as revenue.

 

The Company determined it should recognize block rewards it receives from successfully solving a block as revenue from a contract with a customer (i.e. BTC network or pool operators) under FASB ASC 606. The customers under each type of revenue (Participant vs. Private pool participants) are further noted below. All relevant facts and circumstances, including the network’s protocols, were considered in determining (1) whether the Company has a contract with a customer under FASB ASC 606-10-25-2 and (2) whether its mining activities on the network meet all the criteria in FASB ASC 606-10-25-1.

 

Block rewards are the Company’s most significant source of revenue. Block rewards included in revenues on the statements of operations were approximately $12.5 million and $50.8 million, respectively for the three months ended September 30, 2022, and September 30, 2021. Block rewards included in revenues on the statements of operations were approximately $88.1 and $85.6 million for the nine months ended September 30, 2022 and September 30, 2021.

 

Transaction Fees - The transaction fees are specified in each transaction request and paid by the requester to the miner in exchange for the successful processing of the transaction. The requester meets the definition of a customer in FASB ASC 606 and pursuant to AICPA Practice Guide “Accounting for and Auditing Digital Assets” because it has contracted with the miner to obtain a service (successful mining) that is an output of the miner’s ordinary activities in exchange for consideration.

 

Transaction fees included in revenues on the statements of operations were approximately $0.2 million and $0.9 million, for the three months ended September 30, 2022 and September 30, 2021, respectively. Transaction fees included in revenues on the statements of operations were approximately $1.2 million and $4.6 million for the nine months ended September 30, 2022 and September 30, 2021, respectively.

 

Pool Fees - Pool fees earned by the Company as an operator of a private pool are recognized as revenue from contracts with customers in accordance with FASB ASC 606.

 

Pool fees included in revenues on the statements of operations were approximately zero and $0.05 million, respectively for the three months ended September 30, 2022 and September 30, 2021. Pool fees included in revenues on the statements of operations were approximately $0.3 million and $0.05 million, respectively for the nine months ended September 30, 2022 and September 30, 2021. As of May 2022, third party miners were no longer participating in the Company’s mining pool. As such, the Company ceased recognizing pool fees.

 

12
 

 

MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

The Company earns revenues as:

 

  a participant in a third-party operated mining pool (“Participant”)
  a participant in a privately operated mining pool (“Private pool participant”)
  the operator of a private pool (“Operator”)

 

Participant

 

The Company has entered into contracts with third-party mining pool operators, whom the Company considers its customer under FASB ASC 606. The Company provides a service of computing power (i.e., generated hash rate) that is an output of the Company’s ordinary activities in exchange for consideration. These contracts are terminable at any time by either party and the Company’s enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. In exchange for providing computing power, the Company is entitled to consideration equal to a fractional share of the BTC reward (non-cash consideration, less any pool fees paid to the mining pool operator which are recorded as contra-revenues), for successfully adding a block to the blockchain. The Company’s fractional share of the block reward is based on the proportion of the Company’s contributed hash rate to the total computing power contributed by all mining pool participants in solving the current algorithm as calculated and determined by the pool operator, net of any pool fees.

 

The provision of computing power is the only performance obligation under our arrangements with the third-party mining pool operators. The transaction consideration the Company receives, is non-cash and variable in that the amount that it receives is dependent on the success of the mining pool regardless of whether any hash rate is contributed by the Company (the pool being the first to solve an algorithm). The non-cash consideration is measured at the estimated fair value of the contract inception. However, because it is not probable that a significant reversal of revenue will not occur, as the Company does not have visibility to exactly when a block is won and the pro rata share to which it is entitled (as it does when the Company is a participant in a privately operated pool where the Company is also the pool operator) all consideration is constrained until the Company receives confirmation of the consideration it earned, usually via the settlement of the block reward in the Company’s digital wallet, at which time revenue is recognized. The Company measures the non-cash consideration at the fair value on the date the block reward is received in the Company’s digital wallet when the contingency constraint on the transaction consideration is resolved, which is not materially different than the fair value at contract inception or the time the Company has earned the awards from the third-party mining pools. There is no significant financing component in these transactions.

 

Fair value of the digital asset award received is determined using the daily closing U.S. dollar spot rate of the related digital currency on the date received, which is not materially different than the fair value at contract inception.

 

Expenses associated with running the digital currency mining business, such as rent and electricity cost are recorded as cost of revenues. Depreciation on digital currency mining equipment is also recorded as a component of cost of revenues.

 

Private pool participant

 

The Company operates as a participant in its privately operated pool (“Marapool”). From September 2021 until May 2022, the Company operated as a participant in Marapool alongside third-party pool participants. The Company views the transaction requestor and the blockchain network as its customers under FASB ASC 606. The Company provides a service (successful mining) that is an output of the Company’s ordinary activities in exchange for consideration from the requester and the blockchain network (transaction fee and block reward, respectively). A contract with a customer exists at the point when the miner successfully validates a requesting customer’s transaction to the distributed ledger. At this point, the performance obligation has been satisfied (i.e., earned) in accordance with FASB ASC 606-10-25-30. Specifically, the inception of the contract and the point in time at which the consideration in that same contract is earned occurs simultaneously. Because of this, the additional criteria in FASB ASC 606-10-25-1 would be met as follows:

 

  Both the requester (a customer) and the miner have approved the contract and are committed to the transaction at the point of successfully validating and adding the transaction to the distributed ledger.
  Each party’s rights, the consideration to be transferred, and the payment terms are clear.
  The transaction has commercial substance (that is, the risk, timing, or amount of the miner’s future cash flows is expected to change as a result of the contract).
  Collection occurs in conjunction with the inception of the contract and the fulfillment of the performance obligation (i.e. successfully solving a block) and therefore, there is no risk of collectability.

 

By successfully mining a block, the miner satisfies its performance obligation to the requester and network, thus, should recognize revenue at that point in time, which is the same point in time as contract inception. The transaction consideration the Company receives, is non-cash consideration paid in BTC, and is comprised of transaction fees and block rewards. The transaction consideration is variable in that the amount of block reward earned is based on the pro rata share of the computing power the Company contributes in relation to the total computing power contributed by the pool. The non-cash consideration is measured at its estimated fair value at contract inception - that is, the date that the criteria in FASB ASC 606-10-25-1 are met. The Company is able to apply an estimate to the variable transaction consideration without risk of significant revenue reversal as the Company has visibility to the computing power it provides for a given transaction, and the exact timing of when its privately operated pool successfully solves for a block (as compared to when the Company is a participant in a third-party operated pool as discussed above). As the Company can estimate its pro rata share of block rewards and transaction fees prior to the receipt of the rewards in their digital wallet, the Company measures the non-cash consideration at the fair value when block reward and transaction fee are earned, which is the same point in time as contract inception.

 

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MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

Fair value of the digital asset award received is determined using the daily closing U.S. dollar spot rate of the related digital currency on the date the block reward and transaction fees are earned, which is not materially different than the fair value at contract inception, or the time the Company has earned the award from the requester and network. There is no significant financing component in these transactions.

 

Expenses associated with running the digital currency mining business, such as rent and electricity cost are recorded as cost of revenues. Depreciation on digital currency mining equipment is also recorded as a component of cost of revenues.

 

Operator

 

From September 2021 until May 2022, the Company entered into pool service contracts with third-party mining pool participants, whom the Company considered to be a customer under FASB ASC 606. In these contracts, the Company provided a facilitator service to connect miners to the blockchain network and to track hash rate generated by each pool participant in exchange for non-cash consideration equal to a percentage of the block reward and transaction fee earned by the individual pool participants as pool fees. These contracts were terminable at any time by either party and the Company’s enforceable right to compensation only began when the Company provided the facilitator services and access to the pool’s software licenses to the pool participants.

 

The Company’s performance obligations under the arrangement with third-party pool participants were to provide access to the pool’s software license and track the hash rate generated by each pool participant to enable calculation of the pro rata block reward and transaction fee payment to each pool participant. The transaction consideration the Company received is non-cash and variable in that the pool fees earned is based on the block reward and transaction fees earned by pool participants. The non-cash consideration is measured at the estimated fair value of the contract inception, which occurs simultaneously to when the Company has earned the pool fees (i.e., upon successful mining of a block). The Company is able to estimate variable consideration at the point in time it has earned the fees without risk of significant revenue reversal as the Company has visibility to the exact timing of when the pool successfully solves for a block as pool operator (as compared to when the Company is a participant in a third-party operated pool) and the block rewards and transaction fees each pool participant is entitled to base on contributed hash rate. As the Company can estimate the amount of pool fees prior to the receipt of the fees in the pool’s digital wallet, the Company measures the non-cash consideration at the fair value on the date the pool fees are earned (using the stated convention below), which occurs simultaneously to contract inception.

 

Fair value of the digital asset award received is determined using the daily closing U.S. dollar spot rate of the related digital currency on the date the pool fees are earned, which is not materially different than the fair value at contract inception which occurs simultaneously to the time the pool participants have earned the award from the requester and network. There is no significant financing component in these transactions.

 

Fees associated with the licensed software used in the operation of the private pool are recorded as cost of revenues.

 

NOTE 4 – ADVANCES TO VENDORS AND DEPOSITS

 

The Company contracts with bitcoin mining equipment manufacturers in procuring equipment necessary for the operation of its bitcoin mining operations. A typical agreement calls for a certain percentage of the total order to be paid in advance at specific intervals, usually within several days of execution of a specific contract and periodically thereafter with final payments due prior to each shipment date. We account for these payments as Advances to vendors on the balance sheet.

 

As of September 30, 2022 and December 31, 2021, such advances totaled approximately $687.8 million and $466.3 million, respectively.

 

In addition, the Company contracts with other service providers for hosting of its equipment and operational support in data centers where the company’s equipment is deployed. These arrangements also call for advance payments to be made to vendors in conjunction with the contractual obligations associated with these services. We classify these payments as Deposits on the balance sheet.

 

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MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

NOTE 5 – PROPERTY AND EQUIPMENT

 

The components of property and equipment as of September 30, 2022 and December 31, 2021 are:

 

    Useful life (Years)   September 30, 2022     December 31, 2021  
Website   7     273,122       121,787  
Mining equipment   5     169,237,948       163,866,560  
Construction in Progress   N/A     260,821,127       133,565,908  
Gross property and equipment, net         430,332,197       297,554,255  
Less: Accumulated depreciation and amortization         (26,809,659 )     (21,311,461 )
Property, equipment and intangible assets, net       $ 403,522,538     $ 276,242,794  

 

The Company’s depreciation expense related to property and equipment for the three months ended September 30, 2022 and September 30, 2021 was $26.3 million and $4.3 million, respectively. The Company’s depreciation expense related to property and equipment for the nine months ended September 30, 2022 and September 30, 2021 was $64.9 million and $8.0 million, respectively.

 

Amortization expense for the three months ended September 30, 2022 and September 30, 2021 was $11 thousand and $18 thousand, respectively. Amortization expense for the nine months ended September 30, 2022 and September 30, 2021 was $32 thousand and $54 thousand, respectively.

 

NOTE 6 – COMPUTE NORTH BANKRUPTCY

 

On September 22, 2022, Compute North Holdings, Inc. (along with its affiliated debtors, collectively, “Compute North”), filed for chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of Texas under Chapter 11 of the U.S. Bankruptcy Code (11 U.S. Code section 101 et seq.). Marathon’s financial exposure to Compute North at the time of the bankruptcy filing included:

 

-Approximately $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.
-Approximately $50 million in operating deposits with Compute North primarily related to the King Mountain and Wolf Hollow hosting facilities.

 

The Company assessed this financial exposure and recorded an impairment of the Convertible Preferred Stock, the unsecured Senior Promissory note and certain deposits totaling $39 million during the three months ended September 30, 2022. The ultimate outcome of the bankruptcy process, and its impact on the remaining deposits held by the Company, remains to be determined. The Company has engaged creditor’s counsel and is vigorously defending and protecting its various assets at the Compute North facilities as well as minimizing its long-term financial exposure with regard to Compute North.

 

NOTE 7 – LEGAL RESERVES

 

During the three months ended September 30, 2022, the Company recorded a $25 million legal reserve related to the fair value of certain stock grants used for personal income tax reporting purposes during 2021. The majority of this reserve was related to a claim made by the Company’s former Chairman and CEO. In working on this initial claim, the Company discovered that five other individuals were also impacted by the same issue, including one current board member and the current Chairman and CEO. The total amount of this portion of the reserve amounted to less than $1 million. Legal settlements that were accrued but remained unpaid as of September 30, 2022 were classified as “legal reserve payable”. All of these legal settlements were finalized and paid as of October 15, 2022.

 

NOTE 8 – STOCKHOLDERS’ EQUITY

 

Common Stock

 

Shelf Registration Statements on Form S-3 and At-The-Market Offering Agreements

 

On February 11, 2022, the Company entered into an At-The-Market Offering Agreement, or sales agreement, with H.C. Wainwright & Co., LLC (“Wainwright”) relating to shares of its common stock. In accordance with the terms of the sales agreement, the Company may offer and sell shares of our common stock having an aggregate offering price of up to $750 million from time to time through Wainwright acting as its sales agent. As of September 30, 2022, the Company had sold 13,459,752 shares of common stock for an aggregate purchase price of $198.7 million net of offering costs pursuant to this At-The-Market Offering Agreement.

 

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MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

Series B Convertible Preferred Stock

 

As of September 30, 2022, there were no shares of Series B Convertible Preferred Stock outstanding.

 

Series E Preferred Stock

 

As of September 30, 2022, there were no shares of Series E Convertible Preferred Stock outstanding.

 

Common Stock Warrants

 

A summary of the Company’s issued and outstanding stock warrants and changes during the nine months ended September 30, 2022 is as follows:

 

   Number of Warrants   Weighted Average
Exercise Price
   Weighted Average Remaining Contractual Life
(in years)
 
Outstanding as of December 31, 2021   326,779   $25.54    3.5 
Issued   -   $-    - 
Expired   (2,404)  $52.00    - 
Exercised   -   $-    - 
Outstanding as of September 30, 2022   324,375   $25.00    3.3 
Warrants exercisable as of September 30, 2022   324,375   $25.00    3.3 
                
The aggregate intrinsic value of warrants outstanding and exercisable at September 30, 2022 was       $-      

 

Common Stock Options

 

As of September 30, 2022 and December 31, 2021, there were no stock options outstanding.

 

Restricted Stock

 

A summary of the restricted stock award activity (represented by restricted stock units (RSUs) for the nine months ended September 30, 2022, as follows:

 

Restricted Stock Units

 

   Number of Units   Weighted Average Grant Date Fair Value 
Nonvested at December 31, 2021   642,094   $35.93 
Granted   959,918   $12.98 
Vested   (477,380)  $14.87 
Nonvested at September 30, 2022   1,124,632   $25.28 

 


During the third quarter of 2022, the Compensation Committee issued grants that will vest over the next four years and result in total stock compensation expense of approximately $2.1 million.

 

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