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.
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.
SCHEDULE OF RESTRICTED CASH
| |
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:
SCHEDULE OF ACTIVITIES OF DIGITAL CURRENCIES
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.
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:
SCHEDULE
OF DIGITAL CURRENCIES HELD IN FUND
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”).
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:
SCHEDULE OF ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON RECURRING BASIS
| |
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 | | |
$ | - | |
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:
SCHEDULE OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE
| |
| | | |
| | |
| |
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:
SCHEDULE
OF 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). |
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.
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.
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.
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:
SCHEDULE OF COMPONENTS OF PROPERTY, EQUIPMENT
|
|
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.
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:
SUMMARY OF OUTSTANDING STOCK WARRANTS
| |
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
SUMMARY OF RESTRICTED STOCK AWARD ACTIVITY
| |
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.
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE
9 – DEBT
On
November 18, 2021, the Company issued $650
million principal amount of its 1.00%
Convertible Senior Notes due 2026 (the “Notes”). The Notes were issued pursuant to, and are governed by, an indenture dated
as of November 18, 2021, between the Company and U.S. Bank National Association, as trustee. Pursuant to the purchase agreement between
the Company and the initial purchasers of the Notes, the Company also granted the initial purchasers an option to purchase up to an additional
$97.5
million principal amount of Notes. This option
was exercised and an additional $97.5
million principal amount of Notes were issued
on November 23, 2021. As of September 30, 2022 and December 31, 2021, notes outstanding, net of unamortized discounts of approximately
$16.2
million and $19.1
million, respectively, were $731.3
million and $728.4
million, respectively.
On
July 28, 2022, the Company entered into a Revolving Credit and Security Agreement (the “Agreement” or “RLOC”)
with Silvergate Bank (the “Bank”) pursuant to which Silvergate has agreed to loan the Company up to $100 million on a revolving
basis pursuant to the terms of the Agreement. This facility refinanced and replaced an existing $100 million facility the Company had
in place with the Bank. On the same date the Company also entered into a $100 million principal term loan facility (the “Term Loan”).
The terms of the facilities set forth in the RLOC and the Term Loan are as follows:
Initial
Term: |
|
Termination
is on August 5, 2024. |
|
|
|
Availability
of the facilities: |
|
The
RLOC shall be made available from time to time to the Company for periodic draws (provided no event of default then exists) from
its closing date up to and including the termination date of the Agreement.
The
Company may borrow up to $100 million on the term loan, with $50 million to be made as of the Closing Date (the “Initial Draw”),
and $50 million to be made, at Borrower’s request, on or before April 25, 2023 (the “Delayed Draw”), and subject
to satisfaction of the conditions set forth in the Term Loan Agreement. |
|
|
|
Origination
Fees for
the
facilities: |
|
RLOC:
0.35% of the Loan Commitment to the Bank (or $350 thousand); due at RLOC closing (and on each anniversary if the RLOC continues
for more than one year).
Term
Loan: An origination fee of $150 thousand and a contingent draw fee in the amount of $250 thousand (the, “Contingent Draw
Fee”) upon the execution of the Term Loan Agreement. This Contingent Draw Fee will be refunded to the Company if it borrows
the Delayed Draw by no later than November 25, 2022. |
|
|
|
Unused
Commitment
Fee
on the RLOC: |
|
0.25%
per annum of the portion of the unused Loan Commitment, payable monthly in arrears. |
|
|
|
Renewal
of the RLOC: |
|
The
RLOC may be renewed annually by agreement between the Bank and the Company, subject to (without limitation): (i) Company makes a
request for renewal, in writing, no less than sixty (60) days prior to the then current maturity date, (ii) no event of default then
exists, (iii) Company provides all necessary documentation to extend the RLOC, (iv) Company has paid all applicable fees related
to the loan renewal, and (v) the Bank has approved such extension request according to its internal credit policies as determined
by the Bank in its sole and absolute discretion. |
Interest
Rate and Payments
for
the facilities: |
|
RLOC:
Interest only to be paid monthly, with principal all due at maturity. The interest rate is defined as the higher of (i) the Floor
Rate and (ii) Prime Rate plus the Applicable Margin. “Floor Rate” shall mean, as of any date of determination: (a) five
and one-quarter percent (5.25%) for any days during an Interest Period the Loan to Value (“LTV”) Ratio is less than forty
percent (40%), (b) six percent (6.00%) for any days during an Interest Period the LTV Ratio is greater than or equal to forty percent
(40%) and less than fifty-five percent (55%), and (c) six and three-quarter percent (6.75%) for any day. The Applicable Margin means
at any time: (a) one and one-quarter percent (1.25%) for any days during an Interest Period the LTV Ratio is less than forty (40%),
(b) two percent (2.00%) for any days during an Interest Period the LTV Ratio is greater than or equal to forty (40%) and less than fifty-five
percent (55%), and (c) two and three-quarter percent (2.75%) for any days during an Interest Period the LTV Ratio is greater than
or equal to fifty-five percent (55%).
Term
Loan: Interest, which shall be due on the principal amount of the loan, at the higher of 5.75% and the Prime Rate plus 1.75%,
only to be paid monthly, with principal all due at maturity. |
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Collateral
for the facilities: |
|
The
RLOC and term loan facilities are secured by a pledge of a sufficient amount of Company’s right, title and interest in
and to bitcoin stored in a custody account for the benefit of the Bank (the “Collateral Account”). The Bank will establish
a Collateral Account with a regulated custodial entity (the “Custodian”) that has been approved by the Bank. The Bank
and Custodian will have a custodial agreement to perfect the security interest in the pledged Collateral Account which, among other
things, allows for 1) the Bank to monitor the balance of the Collateral Account and 2) allows the Bank to have exclusive control
over the Collateral Account including liquidation of the collateral in the event of Company’s default under the terms of the
RLOC. The Bank may also file a UCC financing statement on the pledged collateral. The Company bears the risk of loss from market value declines of its collateral
pursuant to its obligation to pledge additional bitcoin if its market value declines such that outstanding borrowings under the RLOC are
undercollateralized. The Company may also withdraw its collateral from the Collateral Account if market value of bitcoin increases and
outstanding borrowings under the RLOC are overcollateralized or if such borrowings are repaid in whole or in part. |
|
|
|
Minimum
Advance Rates
for
the facilities: |
|
At
origination, the Company must ensure the Collateral Account balance has sufficient bitcoin to cause the LTV ratio to equal 65% (or
less) (“Minimum Advance Rate”) on the unpaid principal balance of the facilities. If at any time the LTV ratio exceeds
75%, the Company must bring the rate of advance to the Minimum Advance Rate. |
|
|
|
Covenants
for the facilities: |
|
The
Company must maintain a minimum adjusted net worth of $350 million. The Company must maintain a minimum liquidity of $25 million. |
NOTE
10 – LEASES, COMMITMENTS AND CONTINGENCIES
Leases
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), and has since issued amendments thereto, related to the accounting
for leases (collectively referred to as “ASC 842”). ASC 842 establishes a right-of-use, or ROU model that requires a lessee
to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified
as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Effective January
1, 2019, the Company adopted ASU 842. The Company determines if an arrangement contains a lease at inception based on whether or not
the Company has the right to control the asset during the contract period and other facts and circumstances.
The
Company leases office space in the United States under operating lease agreements. Office space is the Company’s only material
underlying asset class under operating lease agreements. The Company has no material finance leases.
Effective
June 1, 2018, the Company rented its corporate office at 1180 North Town Center Drive, Suite 100, Las Vegas, Nevada 89144, on a month-to-month
basis.
Effective
February 14, 2022, the Company rented an office located at Tower 101, 101 NE Third Avenue, Fort Lauderdale, Florida, 33301, for a term
of 63 months.
Effective
March 1, 2022, the Company rented an office located at 300 Spectrum Center Drive, Irvine CA, 92618, for a term of 24 months.
Effective
May 1, 2022, the Company rented warehouse space located at 3306 5th Street SE, East Wenatchee, Washington, 98802, for a term
of 24 months.
Effective September 21, 2022, the Company rented warehouse space located at 512 N. Douglas Ave., Oklahoma City, OK, 73106, for a term
of 36 months.
As
of September 30, 2022, the Company’s right-of-use (“ROU”) assets and total lease liabilities were $1.4 million and
$1.1 million, respectively for leases in the United States. As of December 31, 2021, the Company’s ROU assets and total lease liabilities
were nil. The Company has made payments and amortized the right-of-use assets totaling $29 thousand and $48 thousand, respectively, for
the three- and nine-month periods ending September 30, 2022.
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Operation
lease costs are recorded on a straight-line basis within operating expenses. The Company’s total lease expense is comprised of
the following:
SCHEDULE
OF COMPONENTS OF LEASE COST
| |
| | | |
| | |
| |
For
the Nine Months Ended | |
| |
September
30, 2022 | | |
September
30, 2021 | |
Operating
leases | |
| | | |
| | |
Operating
lease cost | |
$ | 215,052 | | |
$ | 97,407 | |
Operating
lease expense | |
| 215,052 | | |
| 97,407 | |
Short-term
lease rent expense | |
| 21,455 | | |
| 23,867 | |
Total
rent expense | |
$ | 236,507 | | |
$ | 121,274 | |
| |
| | | |
| | |
| |
For
the Three Months Ended | |
| |
September
30, 2022 | | |
September
30, 2021 | |
Operating
leases | |
| | | |
| | |
Operating
lease cost | |
$ | 114,244 | | |
$ | - | |
Operating
lease expense | |
| 114,244 | | |
| - | |
Short-term
lease rent expense | |
| 7,158 | | |
| 9,579 | |
Total
rent expense | |
$ | 121,402 | | |
$ | 9,579 | |
Additional
information regarding the Company’s leasing activities as a lessee is as follow:
SUMMARY
OF MINIMUM LEASE PAYMENTS
| |
For
the Nine Months Ended | |
| |
September
30, 2022 | | |
September
30, 2021 | |
Operating
cash flows from operating leases | |
$ | 68,480 | | |
$ | - | |
Weighted-average
remaining lease term – operating leases | |
| 3.9 | | |
| - | |
Weighted-average
discount rate – operating leases | |
| 5.0 | % | |
| 0.0 | % |
As
of September 30, 2022, contractual minimum lease payments are as follows for the next five years.
SCHEDULE
OF CONTRACTUAL MINIMUM LEASE
| |
| | |
Year | |
Amount | |
2022
(remaining) | |
| 113,360 | |
2023 | |
| 459,651 | |
2024 | |
| 361,934 | |
2025 | |
| 311,779 | |
2026 | |
| 240,991 | |
Thereafter | |
| 101,824 | |
Total | |
| 1,589,539 | |
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Legal
Proceedings
Ho
Matter
On
January 14, 2021, Plaintiff Michael Ho (“Plaintiff” or “Ho”) filed a Civil Complaint for Damages and
Restitution (“Complaint”) against the Company and 10 Doe Defendants. The Complaint alleges six causes of action against
the Company, (1) Breach of Written Contract; (2) Breach of Implied Contract; (3) Quasi-Contract; (4) Services Rendered; (5)
Intentional Interference with Prospective Economic Relations; and (6) Negligent Interference with Prospective Economic Relations,
which is the one plead against “all Defendants” and is most likely to involve later named defendants. The claims arise
from the same set of facts, Ho alleges that the Company profited from commercially sensitive information he shared with the Company
and then it refused to compensate him for his role in securing the acquisition of a supplier of energy for the Company. On February
22, 2021, the Company responded to Mr. Ho’s Complaint with a general denial and the assertion of applicable affirmative
defenses. Then, on February 25, 2021, the Company removed the action to the United States District Court in the Central District of
California, where the action remains pending. The Company filed a motion for summary judgment/adjudication of all causes of action.
On February 11, 2022, the Court granted the motion and dismissed Ho’s 2nd, 5th and 6th causes of action. Discovery is
substantially closed. The Court held a pre-trial conference on February 24, 2022, where it vacated the March 3, 2022 trial date and
ordered the parties to meet and confer on a new trial date. The Court discussed the various theories of damages maintained by the
parties. In its ruling on the summary judgment motion and at the pre-trial conference on February 24, 2022, the Court noted that a
jury is more likely to accept $150,000
as an appropriate damages amount if liability is found, as opposed to the various theories espoused by Ho that result in
multi-million-dollar recoveries. Due to outstanding issues of fact and law, it is impossible to predict the outcome at this time;
however, after consulting legal counsel, the Company is confident that it will prevail in this litigation, since it did not have a
contract with Mr. Ho and he did not disclose any commercially sensitive information under any mutual nondisclosure agreement that
was used to structure any joint venture with energy providers. Trial is set to begin in February 2023.
Information
Subpoena
On
October 6, 2020, the Company entered into a series of agreements with multiple parties to design and build a data center for up to 100-megawatts
in Hardin, MT. In conjunction therewith, the Company filed a Current Report on Form 8-K on October 13, 2020. The 8-K disclosed that,
pursuant to a Data Facility Services Agreement, the Company issued 6,000,000 shares of restricted Common Stock, in transactions exempt
from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. During the quarter ended September 30, 2021, the Company
and certain of its executives received a subpoena to produce documents and communications concerning the Hardin, Montana data center
facility described in our Form 8-K dated October 13, 2020. We understand that the SEC may be investigating whether or not there may have
been any violations of the federal securities law. We are cooperating with the SEC.
Putative
Class Action Complaint
On
December 17, 2021, a putative class action complaint was filed in the United States District Court for the District of Nevada, against
the Company and present and former senior management. The complaint alleges securities fraud related to the disclosure of an SEC investigation
previously made by the Company on November 15, 2021. Plaintiff Tad Schlatre served the complaint on the Company on March 1, 2022. On
September 12, 2022, the court appointed Carlos Marina as lead plaintiff. On October 21, 2022, lead plaintiff voluntarily dismissed the
complaint without prejudice.
Derivative
Complaints
On
February 18, 2022, a shareholder derivative complaint was filed in the United States District Court for the District of Nevada, against
current and former members of the Company’s board of directors and senior management. The complaint is based on allegations substantially
similar to the allegations in the December 2021 putative class action complaint, related to the Company’s disclosure of an SEC
investigation previously made by the Company on November 15, 2021. On March 4, 2022, the complaint was served on the Company. On April
4, 2022, the defendants moved to dismiss the complaint.
On
May 5, 2022, a second shareholder derivative complaint was filed in the United States District Court for the District of Nevada, against
current and former members of the Company’s board of directors and senior management. The second shareholder derivative complaint
is based on allegations substantially similar to the allegations in the February 18, 2022 derivative complaint. On May 11, 2022, the
defendants moved to dismiss the second shareholder derivative complaint.
On
June 1, 2022, the Court entered an order consolidating the two derivative actions. A June 13, 2022 scheduling order provides for plaintiffs
to file a consolidated complaint and for renewed motions to dismiss the consolidated shareholder derivative complaint. The consolidated
complaint has not yet been filed.
In
the opinion of management, after consulting legal counsel, the ultimate disposition of these matters will not have a material adverse
effect on the Company and its related entities combined financial position, results of operations, or liquidity.
Compute
North Bankruptcy
On
September 22, 2022, Compute North filed
for chapter 11 bankruptcy protection. Compute North provides operating services to the Company and hosts our equipment in multiple facilities.
We deliver miners to Compute North, which then installs the equipment in several facilities, operates and maintains the equipment, and
provides energy to keep the miners operating. In chapter 11, Compute North is currently seeking to sell substantially all of its assets,
including its direct and indirect ownership interests in the facilities that house the Company’s miners. Compute North may also
seek to assume and assign the Compute North agreements to which the Company is party to one or more third-party purchasers of Compute
North’s assets or it may seek to reject such agreements. Accordingly, Compute North’s chapter 11 cases could cause a disruption
in services provided by Compute North to us and, therefore, could have an adverse effect on our operations in the facilities managed
by Compute North.
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
At
this stage of Compute North’s chapter 11 cases, it is difficult to predict whether Marathon will receive any meaningful recovery
on account of its claims.
NOTE
11 – RELATED PARTY MATTERS
On
September 23, 2022, the Company made an incremental $30
million investment in Auradine, Inc.,
bringing its total holdings in Auradine to $35.5
million based upon a previously issued and disclosed
SAFE instrument. Said Ouissal, a director of the Company, owns approximately 10%
of the issued and outstanding shares of Auradine, and Fred Thiel, the Company’s Chairman and CEO, sits on Auradine’s Board
of Directors. On November 3, 2022, the Company’s Board met and determined that Said Ouissal is no longer deemed to be an independent
director of the Company. As a result, Mr. Ouissal stepped down from the Audit and Compensation Committees.
NOTE
12 –REVISION OF CERTAIN PRIOR PERIOD AMOUNTS
We have revised amounts reported in previously issued financial statements
for the periods presented in this Quarterly report on Form 10-Q related to an immaterial error. The error relates to the non-consolidation
of an investment fund as described below. We evaluated the aggregate effects of the errors to our previously issued financial statements in accordance
with SEC Staff Accounting Bulletins No. 99 and No. 108 and, based upon quantitative and qualitative factors, determined that the errors
were not material to the previously issued financial statements and disclosures included in our Annual Reports on Form 10-K for the years
ended December 31, 2021, or for any quarterly periods included therein or through our Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2022.
On
January 25, 2021, the Company entered into a limited partnership agreement with NYDIG Digital Assets Fund III, LP
(“Fund”) whereas the Fund purchased approximately 4,812.66
bitcoin at an aggregate purchase price of $150
million. On June 10, 2022 the company withdrew approximately 4,768.5
bitcoin from the investment fund and the Fund was subsequently terminated. During the period of time when the company held its
investment in the Fund, it accounted for the results of the Fund, in their entirety, as a single line item on the balance sheet
(“Digital currencies held in fund”), statements of operations and statements of cash flows (“Change in fair value
of digital currencies held in fund”). Subsequent to the termination of the Fund, the Company concluded that this accounting
was incorrect and that it must consolidate the Fund, showing any assets, liabilities and expenses of the Fund as separate components
of its financial statements.
The
correction of this error has resulted in revisions to certain line items on the balance sheet as of December 31, 2021, the
statements of operations for the three and nine months ended September 30, 2021, and the statement of cash flows for the nine-month
period ended September 30, 2021. A reconciliation of the various financial statement captions that have been revised from the
previous period presentation follows:
SCHEDULE
OF RESTATEMENTS AND RECLASSIFICATIONS
| |
| | | |
| | | |
| | |
Balance
Sheet as of December 31, 2021 | |
As
reported | | |
Revision | | |
Revised | |
Cash and cash equivalents | |
| 268,522,019 | | |
| 33,818 | | |
| 268,555,837 | |
Digital
currencies held in fund | |
| - | | |
| 223,915,761 | | |
| 223,915,761 | |
Investment fund | |
| 223,778,545 | | |
| (223,778,545 | ) | |
| - | |
Prepaid expenses and other current assets | |
| 8,148,016 | | |
| 100 | | |
| 8,148,116 | |
Accounts
payable | |
| 10,772,523 | | |
| 94,880 | | |
| 10,867,403 | |
Accrued expenses | |
| 2,154,616 | | |
| 76,254 | | |
| 2,230,870 | |
| |
| (1) | | |
| | | |
| | | |
| (1) | | |
| | | |
| | |
Statements
of Operations | |
Three
months ended September 30, 2021 | | |
Nine
months ended September 30, 2021 | |
| |
| As
reported / reclassified (1) | | |
| Revision | | |
| Revised | | |
| As
reported / reclassified (1) | | |
| Revision | | |
| Revised | |
General
and administrative expenses | |
| (98,996,339 | ) | |
| (239,645 | ) | |
| (99,235,984 | ) | |
| (158,763,196 | ) | |
| (648,208 | ) | |
| (159,411,404 | ) |
Change in fair value of investment in NYDIG fund | |
| 41,850,203 | | |
| (41,850,203 | ) | |
| - | | |
| 58,765,274 | | |
| (58,765,274 | ) | |
| - | |
Realized and unrealized gains (losses) on digital currencies held in fund | |
| - | | |
| 42,086,907 | | |
| 42,086,907 | | |
| - | | |
| 59,410,028 | | |
| 59,410,028 | |
Operating
loss | |
| (64,283,755 | ) | |
| 41,847,262 | | |
| (22,436,493 | ) | |
| (106,717,049 | ) | |
| 58,761,820 | | |
| (47,955,229 | ) |
| |
| | | |
| | | |
| | |
Statement
of Cash Flows | |
Nine
months ended September 30, 2021 | |
| |
| As
reported | | |
| Revision | | |
| Revised | |
Realized
and unrealized gains on digital currencies held in fund | |
| - | | |
| (59,410,028 | ) | |
| (59,410,028 | ) |
Change in fair value of investment securities | |
| (58,765,274 | ) | |
| 58,765,274 | | |
| - | |
Accounts
payable and accrued expenses | |
| 2,374,766 | | |
| 144,039 | | |
| 2,518,805 | |
Net cash used in operating activities | |
| (43,914,493 | ) | |
| (442,677 | ) | |
| (44,357,170 | ) |
Sale of digital currencies in investment fund | |
| - | | |
| 500,715 | | |
| 500,715 | |
Net cash used in investing activities | |
| (372,223,134 | ) | |
| 442,677 | | |
| (371,780,457) | |
(1) | See reclassifications in Note 2 |
NOTE
13 – SUBSEQUENT EVENTS
During 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.
The Company has evaluated other subsequent
events through the date the consolidated financial statements were available to be issued and has concluded that no such events or
transactions took place that would require disclosure except as disclosed above and in Note 6 – Compute North Bankruptcy, Note
7 – Legal Reserves and Note 11 – Related Party matters.