MARATHON DIGITAL HOLDINGS, INC. Management report and analysis of the financial situation and operating results. (Form 10-Q)

0
This report on Form 10-Q ("Report") and other written and oral statements made
from time to time by us may contain so-called "forward-looking statements," all
of which are subject to risks and uncertainties. Forward-looking statements can
be identified by the use of words such as "expects," "plans," "will,"
"forecasts," "projects," "intends," "estimates," and other words of similar
meaning. One can identify them by the fact that they do not relate strictly to
historical or current facts. These statements are likely to address our growth
strategy, financial results and product and development programs. One must
carefully consider any such statement and should understand that many factors
could cause actual results to differ from our forward-looking statements. These
factors may include inaccurate assumptions and a broad variety of other risks
and uncertainties, including some that are known and some that are not. No
forward-looking statement can be guaranteed and actual future results may vary
materially.



Information regarding market and industry statistics contained in this Report is
included based on information available to us that we believe is accurate. It is
generally based on industry and other publications that are not produced for
purposes of securities offerings or economic analysis. We have not reviewed or
included data from all sources and cannot assure investors of the accuracy or
completeness of the data included in this Report. Forecasts and other
forward-looking information obtained from these sources are subject to the same
qualifications and the additional uncertainties accompanying any estimates of
future market size, revenue and market acceptance of products and services. We
do not assume any obligation to update any forward-looking statement. As a
result, investors should not place undue reliance on these forward-looking
statements.



The following discussion and analysis is intended as a review of significant
factors affecting our financial condition and results of operations for the
periods indicated. The discussion should be read in conjunction with our
consolidated financial statements and the notes presented herein. In addition to
historical information, the following Management's Discussion and Analysis of
Financial Condition and Results of Operations contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
significantly from those expressed, implied or anticipated in these
forward-looking statements as a result of certain factors discussed herein and
any other periodic reports filed and to be filed with the Securities and
Exchange Commission.



Caution Regarding Forward-Looking Statements



This report and other documents that we file with the Securities and Exchange
Commission contain forward-looking statements that are based on current
expectations, estimates, forecasts and projections about our future performance,
our business, our beliefs and our management's assumptions. Statements that are
not historical facts are forward-looking statements. Words such as "expect,"
"outlook," "forecast," "would," "could," "should," "project," "intend," "plan,"
"continue," "sustain", "on track", "believe," "seek," "estimate," "anticipate,"
"may," "assume," and variations of such words and similar expressions are often
used to identify such forward-looking statements, which are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward- looking statements are not guarantees of future performance and
involve risks, assumptions and uncertainties, including, but not limited to,
those described in our reports that we file or furnish with the Securities and
Exchange Commission. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those indicated or anticipated by such forward-looking
statements. Accordingly, you are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date they are made.
Except to the extent required by law, we undertake no obligation to update
publicly any forward-looking statements after the date they are made, whether as
a result of new information, future events, changes in assumptions or otherwise.



14






Business of the Company



Marathon Digital Holdings, Inc. (the "Company") was incorporated in the State of
Nevada on February 23, 2010 under the name Verve Ventures, Inc. On December 7,
2011, the Company changed its name to American Strategic Minerals Corporation
and were engaged in exploration and potential development of uranium and
vanadium minerals business. In June 2012, the Company discontinued the minerals
business and began to invest in real estate properties in Southern California.
In October 2012, the Company discontinued its real estate business and the
Company commenced IP licensing operations, at which time the Company's name was
changed to Marathon Patent Group, Inc. As of March 31, 2022, the Company no
longer holds any legacy IP assets and is solely focused on the mining of bitcoin
and ancillary opportunities within the bitcoin ecosystem under the name Marathon
Digital Holdings, Inc.



Covid 19 Pandemic


The impact of the worldwide spread of a novel strain of coronavirus ("COVID 19")
has been and continues to be unprecedented and unpredictable, although less of a
concern as it was one year ago, but based on the Company's current assessment,
the Company does not expect any material impact on its long-term strategic
plans, operations and its liquidity due to the worldwide spread of COVID-19.
However, the Company is continuing to assess the effect on its operations by
monitoring the spread of COVID-19 and the actions implemented to combat the
virus throughout the world and its assessment of the impact of COVID-19 may
change.



Recent developments


On March 31, 2022, Marathon Digital Holdings, Inc. (the "Company") amended its
previously announced agreements with affiliates of Beowulf Energy LLC, a
Delaware limited liability company (collectively and as applicable, "Beowulf"),
and Two Point One, LLC, a Delaware limited liability company ("2P1"), pursuant
to which Beowulf and 2P1 have been designing and developing a data center
facility of up to 110-megawatts (the "Facility") located next to, and supplied
energy directly from, Beowulf's power generation station in Hardin, MT. As part
of the Company's mandate to become carbon neutral by the end of the 2022 fiscal
year, the Company, Beowulf and 2P1 agreed to terminate the Data Facility
Services Agreement, the Power Purchase Agreement and the Ground Lease for the
Facility as of August 15, 2022, and the Company will redeploy its
Hardin-installed miners to renewable power facilities on or before September 30,
2022.


Effective March 31, 2022, Douglas Mellinger was appointed as a director to the
Board of Directors of Marathon Digital Holdings, Inc. (the "Company") to fill
the vacancy created by Merrick Okamoto's departure at the end of 2021. Effective
the same date, Hugh Gallagher was appointed as the Company's Chief Financial
Officer, and Simeon Salzman was appointed as its Chief Accounting Officer.



The Company began operating its own mining pool in May 2021. Prior to
participating in the Company's own mining pool, the Company's miners contributed
hashrate to F2Pool. BTC earned by the pool are allocated to pool participants
based on the proportion of hashrate contributed to the pool per participant at
the time of the reward. From May 2021 to December 2021, the Company's miners
contributed approximately 94% of the pool's total hashrate, with 3rd party
operators contributing approximately 6%. Effective April 30, 2022, third party
miners are no longer permitted to participate in the Company's mining pool, and
prospectively, the Company will be the only participant and contribute 100% of
the pool's hashrate. As such, the Company will no longer incur pool fees for
operating its own mining pool as the sole customer of the pool.



Critical Accounting Matters


We believe the following accounting policies are the most important to help you fully understand and evaluate this MD&A:



Digital Currencies



Digital currencies are included in current assets in the consolidated balance
sheets as intangible assets with indefinite useful lives. Digital currencies are
recorded at cost less impairment.



An intangible asset with an indefinite useful life is not amortized but assessed
for impairment annually, or more frequently, when events or changes in
circumstances occur indicating that it is more likely than not that the
indefinite-lived asset is impaired. Impairment exists when the carrying amount
exceeds its fair value, which is measured using the quoted price of the digital
currency at the time its fair value is being measured. In testing for
impairment, the Company has the option to first perform a qualitative assessment
to determine whether it is more likely than not that an impairment exists. If it
is determined that it is not more likely than not that an impairment exists, a
quantitative impairment test is not necessary. If the Company concludes
otherwise, it is required to perform a quantitative impairment test. To the
extent an impairment loss is recognized, the loss establishes the new cost basis
of the asset. Subsequent reversal of impairment losses is not permitted.



15






At March 31, 2022, we held approximately 4,579 self-mined bitcoin with a
carrying value of $155.6 million and carried on the balance sheet as digital
currencies ($135.1 million) and digital currencies, restricted ($20.5 million).
We also held approximately 4,794 bitcoin in an investment fund, which was valued
at $218.2 million as of March 31, 2022. We expect to increase our bitcoin
holdings over time primarily through mining activities, though we may purchase
or sell bitcoin in future periods as needed for treasury management or general
corporate purposes.



Revenue Recognition



The Company recognizes revenue under ASC 606, Revenue from Contracts with
Customers. The core principle of this revenue standard is that a company should
recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the company
expects to be entitled in exchange for those goods or services. The mining of
Bitcoin ("BTC") is a continuous process, with computers running calculations 24
hours per day, 7 days per week in support of the bitcoin blockchain, verifying
transactions and adding verified "blocks" of transactions to the blockchain.
When the mining pool in which the Company participates solves the equation to
verify a block, that block is added to the Bitcoin blockchain and the pool is
rewarded BTC in return. Blocks are added to the bitcoin blockchain on average
every 10 minutes, and each new block is a new contract / performance obligation.
The time between contract inception and receipt of consideration, as it relates
to a mining pool, is therefore not materially different.



The Company utilizes custodian services, provided by NYDIG, related to
allocating and disbursing the pool rewards after they are earned by the pool.
The mining rewards (in the form of BTC) are allocated to pool participants based
on the proportion of hashrate contributed to the pool per participant at the
time of the reward. NYDIG confirms this allocation among pool participants
within 24 hours of a block reward. As bitcoin's blockchain operates 24 hours a
day, 365 days a year, in the case where the pool receives mining rewards when
there is a federal holiday or over the weekend (Saturday/Sunday), NYDIG sends
the respective earnings report on the next available business day. Once
participants confirm the NYDIG calculations, the mining rewards are sent to each
participants digital wallet, at that time upon constructive receipt, the Company
will then effectively recognize revenue using the closing price during that
respective day multiplied by the bitcoin rewards received. The Company
aggregates all BTC rewards confirmed in any given day and records revenue in USD
at the prevailing market price at the end of the day. The value of the BTC
rewards, utilizing the prevailing market prices at constructive receipt, is not
materially different than the value recognized. Management utilizes various
pricing sources, including sources readily available to the general public (such
as Messari.io, Yahoo Finance and Blockchain.com) to ensure the reasonableness of
our assessment of valuation and we periodically review or back check this
assumption for reasonableness.



The Company began operating its own mining pool in May 2021. In addition to
mining within the pool, the Company, as pool operator, recognizes approximately
0.5% of any block reward as pool fee revenue. This fee is subtracted from BTC
rewarded prior to the allocation of the BTC reward among the pool participants
based on contributed hashrate. As a result, revenues associated directly with
bitcoin mining activities are recorded net of any pool fee with an offsetting
cost of revenue. Pool operator fees were approximately $0.3 million for the
three month period ended March 31, 2022. There were no pool operator fees
recorded in the comparable prior-year period. Effective April 30, 2022, third
party miners are no longer permitted to participate in the Company's mining
pool, and prospectively, the Company will be the only participant and contribute
100 % of the pool's hashrate. As such, the Company will no longer incur pool
fees for operating its own mining pool as the sole customer of the pool.



In addition to block rewards and pool operator fees, transaction verification fees are assigned per block reward and vary in amount. These transaction fees amounted to approximately $0.6 million for the three months ended
March 31, 2022 and $0.0 million for the comparable period of the previous year.

Impairment of long-lived assets



Management reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted future cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. During the
quarter ended March 31, 2022 the Company completed a final review of patents
which remained from our legacy as a patent company and determined that there was
no longer any value to these patents. As a result, the Company wrote those
patents off during the quarter, incurring an impairment of $919,363.



16






Non-GAAP Financial Measures


We provide additional non-GAAP financial measures for (i) Adjusted Net Income (ii) Adjusted EBITDA.


Adjusted net income



We define Adjusted Net Income as GAAP net income (or loss) for the period with
adjustments to add back the impacts of (1) stock compensation expense, net of
withholding taxes (2) changes in the fair market value of our investment fund
and (3) the tax effects of the aforementioned adjustments. This non-GAAP measure
is used by management to evaluate earnings performance from period-to-period
given that (i) we expect that share-based compensation expense will continue to
be a recurring expense that may vary significantly from period-to-period and
(ii) we also hold digital currencies in an investment fund that requires fair
value accounting of the bitcoin held in the fund. Given that this treatment is
fundamentally different from the accounting for our self-mined bitcoin (a
long-lived intangible that is evaluated for impairment but not reported at
market value) and can also vary significantly from period-to-period, we believe
our measure of Adjusted Net Income provides management and investors with a
meaningful view of earnings resulting from current operating activities.



                                              For the three months ended March 31,
                                           2022               2021            Variance
Net (loss) income                      $ (12,958,589 )   $   83,356,742     $ (96,315,331 )
Adjustments:
Stock Compensation Expense, net of
withholding taxes                          9,275,352         51,031,595       (41,756,243 )
Change in FMV of investment fund           5,541,642       (131,822,950 )  

137,364,592

Income tax impact of adjustments,
net                                       (3,681,985 )                -        (3,681,985 )
Adjusted net income (loss)             $  (1,823,580 )   $    2,565,387     $  (4,388,967 )

Adjusted net income (loss) per
share, basic:                          $       (0.02 )   $         0.03     $       (0.05 )
Adjusted net income (loss) per
share, diluted:                        $       (0.02 )   $         0.03    

$(0.05)

Weighted average shares outstanding,
basic:                                   103,102,596         94,350,216
Weighted average shares outstanding,
diluted:                                 103,102,596         96,251,240




17






Adjusted EBITDA


We define Adjusted EBITDA as GAAP net income (or loss) for the period with
adjustments to add back the impacts of (1) depreciation and amortization (2)
interest expense (3) income tax expense and (4) adjustments for non-cash and
non-recurring items which currently include (i) stock compensation expense, net
of withholding taxes (ii) changes in the fair market value of our investment
fund (iii) changes in fair value of warrant liability (iv) impairment of digital
currencies and (v) other impairments of long-lived assets. Adjusted EBITDA in
future periods would also likely include adjustments for unusual or infrequent
items that might impact the comparability of our financial results, for example
losses on early extinguishments of debt or unusually large gains or losses on
sales of assets if these items were to occur. This non-GAAP measure is used by
management in evaluating operating performance and we believe it to be a
meaningful non-GAAP measure used by investors to compare the Company's operating
performance with that of other companies within the industry.



                                              For the three months ended March 31,
                                           2022               2021            Variance
Net income (loss)                      $ (12,958,589 )   $   83,356,742     $ (96,315,331 )
Adjustments:
Depreciation and amortization             18,538,926          1,298,936    

17,239,990

Interest expense                           2,814,036              1,203    

2,812,833

Income tax expense (benefit)              (4,297,064 )                -        (4,297,064 )
EBTIDA                                 $   4,097,309     $   84,656,881     $ (80,559,572 )
Adjustments for non-cash and
non-recurring items:
Stock compensation expense, net of
withholding tax                            9,275,352         51,031,595       (41,756,243 )
Change in FMV of investment fund           5,541,642       (131,822,950 )  

137,364,592

Change in fair value of warrant
liability                                          -          1,591,895        (1,591,895 )
Impairment of digital currencies          19,551,254            662,199    
   18,889,055
Impairment of patents                        919,363                  -           919,363
Adjusted EBITDA                        $  39,384,920     $    6,119,620     $  33,265,300



Depreciation consists of a depreciation of fixed assets of approximately $13.9 millionamortization of prepaid service contracts of approximately $4.7 million and amortization of the intellectual property of $12,552
for the three-month period ending March 31, 2022.



These supplemental financial measures are not measurements of financial
performance under generally accepted accounting principles in the United States
("GAAP") and, as a result, these measures may not be comparable to similarly
titled measures of other companies. Management uses these non-GAAP financial
measures internally to help understand, manage, and evaluate our business
performance and to help make operating decisions. We believe that this
combination of reconciliations from GAAP net income to Non-GAAP measures is
important when taken together with the GAAP financial results in that they
provide a meaningful view of earnings performance for management and investors.
We also believe that these Non-GAAP measures provide additional information to
investors about the Company's performance because they eliminate certain items
not associated with current-period transactions and other significant discrete
items that might impact the comparison of period-to-period results



Non-GAAP financial measures are subject to material limitations as they are not
in accordance with, or a substitute for, measurements prepared in accordance
with GAAP. Our non-GAAP financial measures are not meant to be considered in
isolation and should be read only in conjunction with our Consolidated Condensed
Financial Statements, which have been prepared in accordance with GAAP. We rely
primarily on such Consolidated Condensed Financial Statements to understand,
manage, and evaluate our business performance and use the non-GAAP financial
measures only supplementally.



18





Recently issued accounting standards

See Note 2 to our Consolidated Financial Statements for a discussion of recent accounting standards and pronouncements.


Results of Operations


For the three months ended March 31, 2022 and 2021


                                          For the three months ended March 31,
                                       2022              2021             Variance            %
Revenues                           $  51,717,718     $   9,152,815     $   42,564,903            465 %

Cost of revenues (includes depreciation) 26,393,636 2,406,415 23,987,221

            997 %
Total margin (1)                      25,324,082         6,746,400         18,577,682            275 %
Operating and administrative
expenses                              34,450,350        53,801,814        (19,351,464 )          -36 %
Operating income (loss)               (9,126,268 )     (47,055,414 )       37,929,146            -81 %
Other income (loss)                   (5,315,349 )     130,413,359       (135,728,708 )         -104 %
Interest expense                      (2,814,036 )          (1,203 )       (2,812,833 )           NM
Income (loss) before income
taxes                                (17,255,653 )      83,356,742       (100,612,395 )         -121 %
Income tax expense (benefit)           4,297,064                 -          4,297,064             NM
Net income (loss)                    (12,958,589 )      83,356,742        

(96,315,331) -116%

Adjusted net income (loss)            (1,823,580 )       2,565,387         (4,388,967 )         -171 %
Total margin excluding
depreciation and amortization         43,863,008         8,045,337         35,817,672            445 %
Adjusted EBITDA                       39,384,920         6,119,620         33,265,300            544 %
Bitcoin self-mined during the
period                                   1,258.6             191.8            1,066.8            556 %



(1) Total margin is defined as revenue less cost of revenue

    NM - percent variance is not meaningful




19

Revenues, costs, total margin

We generated revenues of $51.7 million during the three months ended March 31,
2022 as compared to $9.2 million during the three months ended March 31, 2021.
This $42.6 million increase in revenue was driven by significantly higher mining
activity ($50.9 million) partially offset by lower revenue per bitcoin mined
($8.3 million) resulting from lower market prices for bitcoin compared with
the
prior year period.



Direct cost of revenues during the three months ended March 31, 2022 amounted to
$26.4 million compared with $2.4 million in the prior-year period. This $24
million increase in cost was driven by significantly higher mining activities
($13.4 million) and higher costs per bitcoin mined ($10.6 million). The increase
in cost per bitcoin mined was primarily related to higher depreciation and
amortization expenses related to significant increases in the number of mining
servers placed into service.



Total margin, defined as revenues less cost of revenue, totaled $25.3 million
compared with $6.7 million in the prior year period. This $18.6 million increase
in total margin was driven by higher mining activity ($37.5 million) partially
offset by lower revenue per bitcoin mined ($8.3 million) and higher cost of
revenue per bitcoin mined ($10.6 million).



Operating expenses


We incurred operating expenses of $34.5 million for the three months ended March
31, 2022 a decrease of $19.4 million or 36% from the prior-year period. Our
operating expenses fluctuated significantly due to non-cash expenses including
stock compensation, impairments of digital currencies and impairment of legacy
patents. The tables that follow provide additional details on the components of
our operating expenses and highlight the fluctuations is specific areas:



                                        For the Three Months Ended
                                   March 31, 2022      March 31, 2021

Remuneration and related taxes $10,342,967 $52,405,786
Professional fees

                        2,247,378              426,638
Other general and administrative         1,389,388              307,191
Impairment of digital currencies        19,551,254              662,199
Impairment of patents                      919,363                    -
Total                              $    34,450,350     $     53,801,814



Non-cash operating expenses consisted of the following items:


                                            For the Three Months Ended
                                       March 31, 2022       March 31, 2021

Remuneration in shares and related taxes $9,275,352 $51,031,141
Depreciation of digital currencies

            19,551,254              662,199
Impairment of patents                          919,363                    -
Total                                  $    29,745,969     $     51,693,340



Our operating expenses exclusive of the non-cash items listed above totaled $4.7
million for the three months ended March 31, 2022 an increase of $2.6 million
from the prior-year period primarily related to compensation and professional
fees associated with increased mining activities.



Other income (loss)



Other income (loss) was a net loss of ($5.3) million for the three months ended
March 31, 2022 compared with income of $130.4 million in the prior-year period.
The significant variance in other income (loss) was primarily related to
fluctuations in the fair market value impact of our investment fund, which
recorded a decrease in fair market value of $5.5 million in the current-year
period and an increase in fair value of $131.8 million in the prior-year period.



20






Interest expense


Interest expense increased $2.8 million of the prior year period due to convertible notes issued in November 2021.


Income tax expense (benefit)



Income tax expenses was a benefit of $4.3 million for the period ended March 31,
2022. Our effective tax rate from continuing operations was approximately 24.9%
for the three months ended March 31, 2022, and zero for the three months ended
March 31, 2021. The difference between the US statutory tax rate of 21% was
primarily due to state taxes.



Net income (loss)



Despite significant increases in operational activities and revenues resulting
from our bitcoin mining operations, we recorded a GAAP net loss of $(13.0)
million compared with GAAP net income of $83.4 million in the prior period. This
variance was primarily driven by the aforementioned fluctuation in fair value of
our investment fund partially offset by the higher mining activities and lower
compensation expenses.



Adjusted Net Income (loss)



Despite significant increases in operational activities and revenues resulting
from our bitcoin mining operations, we recorded an Adjusted net loss of $(1.8)
million compared with Adjusted net income of $2.6 million in the prior period.
This variance was primarily driven by increases in impairments of digital
currencies (and, to a lesser extent, an impairment of certain legacy patents)
partially offset by the benefits of higher toal margin and an income tax expense
benefit recorded in the current period.



Adjusted EBITDA



Adjusted EBITDA increased to $39.4 million, a $33.3 million increase from the
prior year period. This increase was primarily related to higher total margin
from increased mining activities in the quarter which, excluding the impact of
depreciation and amortization recorded as part of cost of revenues, increased
$35.8 million. This increase was partially offset by increases in operating
expenses exclusive of non-cash expenses.



Financial situation and liquidity



The company expects to have sufficient liquidity, including cash on hand,
available borrowing capacity and, to a lesser extent our bitcoin holdings, to
support ongoing operations. We will continue to seek to fund the growth in our
mining activities through the capital markets, including both debt and equity
issuances.



Cash and cash equivalents totaled $118.5 million at March 31, 2022, a decrease
of $150 million from December 31, 2021. The decrease in cash and cash
equivalents was primarily driven by significant increases in investing
activities related to increasing our mining activities, including advances to
vendor ($192.4 million) and to a lesser extent purchases of property and
equipment ($6.5 million) and deposits (6.3 million). We also invested a total of
$10.5 million in various equity investees during the period. These expenditures
were financed with a combination of cash on hand and proceeds from the issuance
of common stock ($85.5 million). Net cash used by operating activities was
$26.1
million during the period.



At March 31, 2022, we held approximately 4,579 self-mined bitcoin with a
carrying value of $155.6 million and carried on the balance sheet as digital
currencies ($135.1 million) and digital currencies, restricted ($20.5 million).
We also held approximately 4,794 bitcoin in an investment fund, which was valued
at $218.2 million as of March 31, 2022. We expect to increase our bitcoin
holdings over time primarily through mining activities, though we may purchase
or sell bitcoin in future periods as needed for treasury management or general
corporate purposes.


There was no outstanding borrowing under the $100 million revolving credit agreement March 31, 2022.

Off-balance sheet arrangements



We have not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
stockholder's equity or that are not reflected in our consolidated condensed
financial statements. Furthermore, we do not have any retained or contingent
interest in assets transferred to an unconsolidated entity that serves as
credit, liquidity or market risk support to such entity.

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