What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-06 compared with 2021-11-15 · 268 added, 403 removed, 96 unchanged (87% of the section changed)

50 unchanged sentences

of the Company

were incorporated in the State of Nevada on February 23, 2010 under the name Verve Ventures, Inc.

As of the date of this filing, our

name has been changed to Marathon Digital Holdings, Inc.

On December 7, 2011, we changed our name to American Strategic Minerals Corporation

and were engaged in exploration and potential development of uranium and vanadium minerals business.

In June 2012, we discontinued our

minerals business and began to invest in real estate properties in Southern California.

In October 2012, we discontinued our real estate

business when our former CEO joined the firm and we commenced our IP licensing operations, at which time the Company’s name was

changed to Marathon Patent Group, Inc.

On November 1, 2017, we entered into a merger agreement with Global Bit Ventures, Inc.

which is focused on mining digital assets.

We have since purchased our cryptocurrency mining machines and established a data center in

Canada to mine digital assets.

Following the merger, we intended to add GBV’s existing technical capabilities and digital asset

miners and expand our activities in the mining of new digital assets, while at the same time harvesting the value of our remaining IP

On June 28, 2018, the board has determined that it is in the best interests of the Company and its shareholders to allow the

Amended Merger Agreement to expire on its current termination date of June 28, 2018 without further negotiation or extension.

approved to issue 750,000 shares of our common stock to GBV as a termination fee for canceling the proposed merger between the two companies.

The fair value of the common stocks was $2,850,000.

Company believes that bitcoin is attractive because it can serve as a store of value, supported by a robust and public open source architecture,

that is untethered to sovereign monetary policy and can therefore serve as a hedge against inflation.

Bitcoin exists entirely in electronic

form, as virtually irreversible public transaction ledger entries on the blockchain, and transactions in bitcoin are recorded and authenticated

not by a central repository, but by a decentralized peer-to-peer network.

This decentralization avoids certain threats common to centralized

computer networks, such as denial of service attacks, and reduces the dependency of the bitcoin network on any single system.

bitcoin network as a whole is decentralized, the private keys used to access bitcoin balances are not widely distributed and are held

on hardware (which can be physically controlled by the holder or by a third party such as a custodian) or via software programs on third-party

servers and loss of such private keys results in an inability to access, and effective loss of, the corresponding bitcoin.

Consequently,

bitcoin holdings are susceptible to all of the risks inherent in holding any electronic data, such as power failure, data corruption,

security breach, communication failure, and user error, among others.

These risks, in turn, make bitcoin subject to theft, destruction,

or loss of value from hackers, corruption, or technology-specific factors such as viruses that do not affect conventional fiat currency.

In addition, the bitcoin network relies on open source developers to maintain and improve the bitcoin protocol.

Accordingly, bitcoin

may be subject to protocol design changes, governance disputes such as “forked” protocols, competing protocols, and other

open source-specific risks that do not affect conventional proprietary software.

Company believes that in the context of the economic and public health crisis precipitated by COVID-19 and the unprecedented government

financial stimulus measures adopted around the world, decreasing interest rates, as well as the breakdown of trust in and between political

institutions and political parties in the United States and globally, bitcoin represents a more attractive store of value than fiat currency,

and further that opportunity for appreciation in the value of bitcoin exists in the event that such factors lead to even more widespread

adoption of bitcoin as a treasury reserve alternative.

As of September 30, 2021

Purchase Agreements

Cumulative Fleet

Total miners ordered

Total miners shipped

Total miners installed

Total produced hashrate to date

January 6, 2021, the Company issued 566,279 shares pursuant to the 2018 Equity Incentive Plan for shares that vested as of December 31,

Subsequent to year end, the Company issued 170,904 and 23,500 shares of common stock pursuant to warrant and option exercises,

respectively.

January 12, 2021, the Company also announced that it had successfully completed its previously announced $200 million shelf offering

by utilizing its at-the-market (ATM) facility.

Pursuant to the terms of the offering 12,500,000 shares of common stock were issued at

a value of $20 per share.

As a result, the Company ended the 2020 fiscal year with $141.3 million in cash and 81,974,619 shares outstanding.

January 12, 2021, the Company, entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain purchasers

named therein (the “Purchasers”), pursuant to which the Company agreed to issue and sell, in a registered direct offering

(the “Offering”), 12,500,000 shares of its common stock (the “Securities”) at an offering price of $20.00 per

Purchase Agreement contains customary representations and warranties and agreements of the Company and the Purchasers and customary indemnification

rights and obligations of the parties.

The closing of the Offering occurred on January 15, 2021.

The Company received gross proceeds

of $250,000,000 in connection with the Offering, before deducting placement agent fees and related offering expenses.

to a letter agreement, dated August 2020 (the “Engagement Letter”), the Company engaged H.C.

Wainwright & Co., LLC (the

“Placement Agent”) as placement agent in connection with the Offering.

The Placement Agent agreed to use its reasonable best

efforts to arrange for the sale of the Securities.

The Company agreed to pay to the Placement Agent a cash fee of 5.0% of the aggregate

gross proceeds raised in the Offering.

The Company also issued to designees of the Placement Agent warrants to purchase up to 3.0% of

the aggregate number of shares of Common Stock sold in the transactions, or warrants to purchase up to 375,000 shares of Common Stock

(the “Placement Agent Warrants”).

The Placement Agent Warrants have an exercise price equal to 125% of the offering price

per share (or $25.00 per share).

The Company also agreed to pay the Placement Agent $50,000 for accountable expenses, to reimburse an

investor’s legal fees in an amount up to $7,500 and to pay $12,900 for the Placement Agent’s clearing fees.

Pursuant to the

terms of the Engagement Letter, the Placement Agent has the right, for a period of twelve months following the closing of the Offerings,

to act (i) as financial advisor in connection with any merger, consolidation or similar business combination by the Company and (ii)

as sole book-running manager, sole underwriter or sole placement agent in connection with certain debt and equity financing transactions

by the Company.

January 19, 2021, David Lieberman resigned as a director of the Company.

On the same date, the Company’s Board appointed Kevin

DeNuccio as a director to fill the vacancy created by Mr.

Lieberman’s resignation.

DeNuccio is the Founder and General Partner of Wild West Capital LLC since 2012 where he focused on angel investments, primarily in SAAS

software start-ups.

brings to Marathon more than 25 years of experience as a chief executive, global sales leader, public and private board member, and more

than a dozen angel investments, managing and growing leading technology businesses.

He served in senior executive positions with Verizon,

Cisco Systems, Ericsson, Redback Networks, Wang Laboratories and Unisys Corporation.

On January 25, 2021, the Company entered into

a limited partnership agreement with NYDIG Digital Assets Fund III, LP (“fund”) whereas the fund purchased 4,812.66 BTC in

an aggregate purchase price of $150 million.

The Company owns 100% of the limited partnership interest.

The investment fund is included

in current assets in the consolidated balance sheets.

February 11, 2021, the Company issued 4,701,442 shares of common stock pursuant to the 2018 Equity Incentive Plan.

March 1, 2021, the Company changed its name to Marathon Digital Holdings, Inc.

March 7, 2021, the Company entered into a termination agreement with the 9349-0001 Quebec Inc., to agree to terminate the outstanding

As of that date, the Company was fully released and discharged from any and all obligations under the Lease Agreement.

2017, the Company assumed a lease in connection with the mining operations in Quebec, Canada.

April 26, 2021, the Company appointed Fred Thiel as its new chief executive officer.

Thiel has succeeded Merrick Okamoto, who has

served as the Company’s chief executive officer since 2018, and who will serve as executive chairman of the board of directors

following the transition.

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.

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.

March 31, 2022, Marathon Digital Holdings, Inc.

(the “Company”) entered into a licensing agreement with DMG Blockchain Solutions,

to license DMG’s proprietary Blockseer pool technology for use in its new Marathon OFAC Pool .

Pursuant to the terms and conditions

of the Agreement, the Company will be granted an exclusive and irrevocable license to use the technology in the U.S., and DMG will receive:

$500,000 in restricted common stock of the Company (stock to be issued in a transaction exempt from registration under Section 4(a)(2)

under the Securities Act of 1933, as amended);

a monthly license fee with a sliding scale based on the MARAPool’s block rewards

and transaction fees received by the pool;

and technical support services to be provided on an as-needed basis with payment in US dollars.

As of September 30, 2021, DMG has received shares equivalent to $500,000 in restricted common stock of the Company.

May 20, 2021, the Company appointed Georges Antoun and Jay Leupp to its board of directors, effective immediately, as Peter Benz transitions

to become the company’s vice president of corporate development and Michael Berg steps down from his position of director to pursue

other projects.

As a result, Marathon’s board of directors now consists of five directors, including three independent directors

and two inside directors.

May 21, 2021, Marathon Digital Holdings, Inc.

(the “Company”) entered into a binding letter of intent with Compute North,

LLC to host 73,000 Bitcoin Miners over a staged in implementation between October 2021 and March 2022.

The hosting cost is $0.50 per

machine per month and the hosting rate will be $0.044 per kWh.

In order to build out the infrastructure without paying for the capital

expenditure, the Company will provide an 18 month bridge loan to Compute North of up to $67 million dollars, in tranches, based upon

specified requirements being met.

The terms of the contract are limited to three years with increases thereafter capped at three percent

per year thereafter.

The Company has also agreed to pay up to $14 million in expedite fees for construction/electrical and supply chain

expediting activities.

As of September 30, 2021, the Company paid $8 million of the $14 million in expedite fees recorded as a deposit

on the balance sheet .

On September 3, 2021, the Company entered into a master agreement with Compute North, LLC whereas the Company

will pay an initial deposit of $14.6 million in aggregate over five installments.

As of September 30, 2021, the Company paid $9.1 million

of the $14.6 million initial deposit recorded as a deposit on the balance sheet.

July 30, 2021, Marathon Digital Holdings, Inc.

(the “Company”) entered into a fully executed contract with Bitmain to purchase

an additional 30,000 S-19j Pro ASIC Miners, with 5,000 units scheduled to be delivered in each of January 2022, February 2022, March

2022, April 2022, May 2022, and June 2022.

The purchase price is $126,000,000 with (i) 25% of

the purchase price due paid within one day of execution of the contract, (ii) 35% of the purchase price of each batch due in consecutive

months with 35% of the January 2022 batch due immediately, and then 35% of each of the remaining five batches due on the 15 th

of each consecutive month starting August 15, 2021, through December 15, 2021 and (iii) the remaining 40% of the purchase price of each

batch due on the 15 th of each consecutive month starting November 15, 2021 and then 40% of each of the remaining five batches

due on the 15 th of each consecutive month through April 2022.

August 9, 2021, the Company appointed Sarita James and Said Ouissal to its board of directors, effective immediately.

As a result, Marathon’s

board of directors now consists of seven directors, including five independent directors and two inside directors.

August 23, 2021 , the Company issued 2,722,435 shares of common stock pursuant to the 2018 Equity Incentive Plan.

August 27, 2021, Marathon Digital Holdings, Inc.

(the “Company”) entered into a Master Securities Loan Agreement (the “Agreement”)

with NYDIG Funding, LLC (“NYDIG”).

Pursuant to the Agreement, the Company will loan its bitcoin (“BTC”) to NYDIG

with an interest rate of three percent (3%) per annum.

Interest accrues daily and is payable on a monthly basis.

The Agreement provides

that the Company may recall its BTC at any time.

NYDIG shall, prior to or concurrently with the transfer of the BTC to NYDIG, but in

no case later than the close of business on the day of such transfer, transfer to the Company collateral with a market value at least

equal to 100% of the market value of the loaned BTC, and the Company is granted a first priority lien on such collateral.

27, 2021, the Company loaned 300 BTC to NYDIG.

previously disclosed in the Company’s monthly production updates, there have been multiple instances of the power generating station

in Hardin, MT operating below peak capacity and thus limiting the Company’s ability to mine bitcoin during 2021.

To mitigate these

issues in the future, system upgrades will be performed on the power generating station beginning in November 2021 and continuing into

Each phase of this maintenance will require the plant, and therefore the Company’s mining operations in Hardin, MT, to be

offline for approximately three to five days.

The upgrades are intended to improve the power generating station’s efficacy and

efficiency, increase safety, mitigate the potential for unexpected downtime in the future, and ultimately improve the Company’s

ability to effectively mine bitcoin.

The Company believes that the impact of these upgrades on its mining operations will minimize future

downtime and thus counterbalance any maintenance downtime experienced as a result of these repairs.

Accounting Policies and Estimates

(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.

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.

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 3 rd 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

Accounting Matters

believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management

14 unchanged sentences

Subsequent reversal of impairment losses is not permitted.

September 30, 2021, we carried $282.7 million of digital assets on our balance sheet, which include cumulative impairments of $18.5 million,

consisting of the approximately 7,035 bitcoins, and held $32.9 million in cash and cash equivalents, compared to $2.3 million of digital

assets and $141.3 million in cash and cash equivalents at December 31, 2020, reflecting the shift in our liquid assets.

As of November

15, 2021, we held approximately 7,562 bitcoins, of which, 4,812.66 bitcoins were acquired at an aggregate purchase price

of $150 million at an average purchase price of approximately $31,168 per bitcoin, inclusive of fees and expenses.

These purchased

bitcoins are held in an investment fund of one where the Company is the sole limited partner.

We expect to purchase additional bitcoin

held by NYDIG Digital Assets Fund III, LP, the investment fund in future periods, though we may also sell bitcoin in future periods

as needed to generate Cash Assets for treasury management purposes.

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.

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.

Company utilizes custodian services, provided by NYDIG, related to allocating and disbursing the pool rewards after they are earned by

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

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

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.

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

addition to the block rewards and pool operator fees, transaction verification fees are awarded per block reward and vary in amount.

These transaction fees were approximately $0.6 million for the three months ended March 31, 2022 and $0.0 million for the comparable

prior-year period.

of Long-lived Assets

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

Financial Measures

are providing supplemental financial measures for (i) non-GAAP income from operations that excludes the impact of depreciation and amortization

of fixed assets, impairment losses on mined cryptocurrency, server maintenance contract amortization and stock compensation expense and

(ii) non-GAAP net income and non-GAAP diluted earnings per share that exclude the impact of depreciation and amortization of fixed assets,

impairment losses on mined cryptocurrency, change in fair value of warrant liability, server maintenance contract amortization and stock

compensation expense, net of withholding taxes.

These supplemental financial measures are not measurements of financial performance

under generally accepted accounting principles in the United States (“GAAP”) and, as a result, these supplemental financial

measures may not be comparable to similarly titled measures of other companies.

Management uses these non-GAAP financial measures internally

to help understand, manage, and evaluate our business performance and to help make operating decisions.

believe that these non-GAAP financial measures are also useful to investors and analysts in comparing our performance across reporting

periods on a consistent basis.

The first supplemental financial measure excludes non-cash operational expenses that we believe are not

reflective of our general business performance such as (i) depreciation and amortization of fixed assets, (ii) significant impairment

losses on mined cryptocurrency, (iii) server maintenance contract amortization and (iv) stock compensation expense, net of withholding

taxes that could vary significantly in comparison to other companies.

second set of supplemental financial measures excludes the impact of (i) depreciation and amortization of fixed assets, (ii) significant

impairment losses on mined cryptocurrency, (iii) change in fair value of warrant liability (iv) server maintenance contract amortization

and (v) stock compensation expense, net of withholding taxes.

We believe the use of these non-GAAP financial measures can also

facilitate comparison of our operating results to those of our competitors.

financial measures are subject to material limitations as they are not in accordance with, or a substitute for, measurements prepared

in accordance with GAAP.

For example, we expect that share-based compensation expense, which is excluded from the first two non-GAAP

financial measures, will continue to be a significant recurring expense over the coming years and is an important part of the compensation

provided to certain employees, officers, and directors.

Similarly, we expect that depreciation and amortization of fixed assets will

continue to be a recurring expense over the term of the useful life of the assets.

We have also excluded impairment losses on mined cryptocurrency

from the first two non-GAAP financial measures, which may occur in future periods as a result of our continued holdings of significant

amounts of bitcoin.

Our non-GAAP financial measures are not meant to be considered in isolation and should be read only in conjunction

with our Consolidated Condensed Financial Statements, which have been prepared in accordance with GAAP.

We rely primarily on such Consolidated

Condensed Financial Statements to understand, manage, and evaluate our business performance and use the non-GAAP financial measures only

supplementally.

following is a reconciliation of our non-GAAP income from operations, which excludes the impact of (i) depreciation and amortization

of fixed assets (ii) impairment losses on mined cryptocurrency (iii) server maintenance contract amortization and (iv) stock compensation

expense, net of withholding taxes, to its most directly comparable GAAP measures for the periods indicated:

For the Three Months Ended

For the Nine Months Ended

September 30,

Reconciliation of non-GAAP income from operations:

Operating loss

$ (64,283,755 )

$ (1,994,197 )

are providing supplemental non-GAAP financial measures for (i) Adjusted Net Income (ii) Adjusted EBITDA.

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

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.

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.

the three months ended March 31,

Net (loss) income

$ (12,958,589 )

$ (96,315,331 )

Depreciation and Amortization of Fixed Assets

Impairment of mined cryptocurrency

Server maintenance contract amortization

Stock Compensation Expense, net of withholding taxes

Non-GAAP income (loss) from operations

Stock Compensation Expense, net of withholding

(41,756,243 )

following are reconciliations of our non-GAAP net income and non-GAAP diluted earnings per share, in each case excluding the impact of

(i) depreciation and amortization of fixed assets (ii) impairment losses on mined cryptocurrency (iii) change in fair value of warrant

liability (iv) server maintenance contract amortization and (v) stock compensation expense, net of withholding taxes, to its most

directly comparable GAAP measures for the periods indicated:

For the Three Months Ended

For the Nine Months Ended

September 30,

Reconciliation of non-GAAP net income:

Change in FMV of investment fund

(131,822,950 )

Income tax impact of adjustments,

Adjusted net income (loss)

$ (1,823,580 )

$ (4,388,967 )

Adjusted net income (loss) per share, basic:

Adjusted net income (loss) per share, diluted:

Weighted average shares outstanding, basic:

Weighted average shares outstanding, diluted:

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.

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.

the three months ended March 31,

Net income (loss)

$ (12,958,589 )

Non-cash adjustments to Net Income (loss)

Depreciation and Amortization of Fixed Assets

Impairment of mined cryptocurrency

Change in fair value of warrant liability

Server maintenance contract amortization

Stock Compensation Expense, net of withholding taxes

Total Non-cash adjustments to Net Income (Loss)

$ (96,315,331 )

Depreciation and amortization

Interest expense

tax expense (benefit)

$ (80,559,572 )

Non-GAAP net (loss) income

Adjustments for non-cash

and non-recurring items:

Stock compensation expense,

net of withholding tax

(41,756,243 )

Change in FMV of investment

(131,822,950 )

Reconciliation of non-GAAP diluted earnings (loss) per share:

Diluted (loss) earnings per share

Depreciation and Amortization of Fixed Assets (per diluted share)

Impairment of mined cryptocurrency (per diluted share)

Change in fair value of warrant liability (per diluted share)

Server maintenance contract amortization (per diluted share)

Stock Compensation Expense, net of withholding taxes

(per diluted share)

Non-GAAP diluted earnings (loss) per share

Change in fair value of

warrant liability

Impairment of digital currencies

Impairment of patents

Adjusted EBITDA

Depreciation and amortization consists of depreciation on fixed assets of approximately $13.9 million, amortization

of prepaid service contracts of approximately $4.7 million and amortization of intellectual property of $12,552 for the three month period

ending March 31, 2022.

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.

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

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.

Issued Accounting Standards

1 unchanged sentence

of Operations

the Three and Nine Months Ended September 30, 2021 and 2020

generated revenues of $51.7 million and $90.2 million during the three and nine months ended September 30, 2021 as compared to $835,184

and $1.7 million during the three and nine months ended September 30, 2020.

For the three and nine months ended September 30, 2021, this

represented an increase of $50.9 million or 6,091% and $88.5 million or 5,162% over the same period in 2020.

Revenue for the three and

nine months ended September 30, 2021 and 2020 were derived primarily from cryptocurrency mining.

The increase in revenue is due to the

deployment of approximately 22,652 miners, increasing the Company’s hash rate by 1,381% for the nine month period

ending September 30, 2021.

cost of revenues during the three and nine months ended September 30, 2021 amounted to $10.3 million and $19.7 million and for the three

and nine months ended September 30, 2020, the direct cost of revenues amounted to $1.6 million and $3.5 million.

For the three and nine

months ended September 30, 2021, this represented an increase of $8.6 million or 527% and $16.1 million or 457% over the same period

Direct costs of revenue include depreciation and amortization expenses of the cryptocurrency mining machines and patents, contingent

payments to patent enforcement legal costs, patent enforcement advisors and inventors as well as various non-contingent costs associated

with enforcing the Company’s patent rights and otherwise in developing and entering into settlement and licensing agreements that

generate the Company’s revenue.

incurred other operating expenses of $105.7 million and $177.2 million for the three and nine months ended September 30, 2021 and $1.2

million and $3.1 million for the three and nine months ended September 30, 2020.

For the three and nine months ended September 30, 2021,

this represented an increase of $104.5 million or 8,760% and $174.2 million or 5,690% over 2020.

These expenses primarily consisted of

stock-based compensation, compensation to our officers, directors and employees, impairment of cryptocurrencies, professional fees and

consulting incurred in connection with the day-to-day operation of our business.

operating expenses consisted of the following:

Total Other Operating Expenses

For the Three Months Ended

For the Nine Months Ended

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

Compensation and related taxes (1)

the Three Months Ended March 31, 2022 and 2021

the three months ended March 31,

Cost of revenues (includes

depreciation and amortization)

Total margin (1)

Operating and administrative

(19,351,464 )

Consulting fees (2)

Professional fees (3)

Other general and administrative (4)

Impairment of cryptocurrencies (5)

Operating income (loss)

(47,055,414 )

Other income (loss)

(135,728,708 )

Non-Cash Other Operating Expenses

For the Three Months Ended

For the Nine Months Ended

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

Compensation and related taxes (1)

Interest expense

Income (loss) before income taxes

(17,255,653 )

Impairment of cryptocurrencies (5)

(100,612,395 )

Income tax expense (benefit)

Net income (loss)

(12,958,589 )

Compensation expense and related taxes:

Compensation expense includes cash compensation and related payroll taxes and benefits, and non-cash

equity compensation expenses.

For the three and nine months ended September 30, 2021, compensation expense and related payroll taxes

were $97.2 million and $153.7 million, an increase of $96.6 million or 15,712% and $151.8 million or 7,951% over the comparable periods

During the three and nine months ended September 30, 2021, we recognized non-cash employee and board equity-based compensation

of $95.7 million and $147.6 million, respectively, and $360,211 and $1,032,199 for the three and nine months ended September

30, 2020, respectively.

Consulting fees:

For the three and nine months ended September 30, 2021, we incurred consulting fees of $159,300 and $378,260, a decrease

of $100,263 or 39% and an increase of $52,572 or 16% over the comparable periods in 2020.

Consulting fees include both cash and non-cash

related consulting fees primarily for investor relations and public relations services as well as other consulting services.

(96,315,331 )

Adjusted net income (loss)

Total margin excluding depreciation and amortization

Adjusted EBITDA

Bitcoin self-mined during the period

Total margin is defined as revenues less cost of revenues

percent variance is not meaningful

Costs, Total Margin

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

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

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.

margin, defined as revenues less cost of revenue, totaled $25.3 million compared with $6.7 million in the prior year period.

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).

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

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:

the Three Months Ended

Compensation and related taxes

Professional fees

For the three and nine months ended September 30, 2021 professional fees were $857,921 and $3.3 million, an increase

of $651,553 or 316% and $2.8 million or 546% over the comparable periods in 2020.

Professional fees primarily reflect the costs of professional

outside accounting fees, legal fees and audit fees.

Other general and administrative expenses:

For the three and nine months ended September 30, 2021, other general and administrative expenses

were $797,574 and $1.4 million, an increase of $684,774 or 607% and $1.1 million or 344% over the comparable periods in 2020.

and administrative expenses reflect the other non-categorized operating costs of the Company and include expenses related to being a

public company, rent, insurance, technology and other expenses incurred to support the operations of the Company.

Impairment of cryptocurrencies:

For the three and nine months ended September 30, 2021, impairment of cryptocurrencies were $6.7 million

and $18.5 million, an increase of $6.7 million or 100% and $18.5 million or 100% over the comparable periods in 2020.

Impairment of cryptocurrencies

reflect the impairment of the bitcoin earned by the Company subject to FASB ASC 350 Intangibles – Goodwill and Other .

from Operations

reported a loss from operations of $64.3 million and $106.7 million for the three and nine months ended September 30, 2021, respectively.

We reported an operating loss of $2.0 million and $4.9 million for the three and nine months ended September 30, 2020, respectively.

(Expenses) Income

other income was $42.1 million and $59.0 million for the three and nine months ended September 30, 2021 and total other expenses were

$220 and $336,312 for the three and nine months ended September 30, 2020, respectively.

The increase in other income is due to the

change in fair value of the investment fund that holds the purchased 4,812.66 bitcoin subject to mark-to-market valuation.

qualifies and operates 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 bitcoin held in the investment fund was purchased for approximately $31,168 per bitcoin.

As of September 30, 2021, the fair market

value of bitcoin was approximately $43,529 per bitcoin.

Loss Available to Common Shareholders

reported a net loss of $22.2 million and $47.7 million for the three and nine months ended September 30, 2021 and a net loss of $2.0

million and $5.2 million for the three and nine months ended September 30, 2020.

and Capital Resources

Company’s condensed consolidated financial statements have been prepared assuming that it will continue as a going concern, which

contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.

reflected in the condensed consolidated financial statements, the Company had an accumulated deficit of approximately $163.8 million

at September 30, 2021, net loss of approximately $47.7 million and $43.9 million net cash used by operating activities for the nine months

ended September 30, 2021.

the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate

on an ongoing basis.

At September 30, 2021, the Company’s cash and cash equivalents balances totaled $32.9 million compared to

$141.3 million at December 31, 2020.

During the nine month period ending September 30, 2021 and September 30, 2020, the Company mined

approximately 2,099 and 181 bitcoin, respectively.

An increase of 1,918 bitcoin or 1,060%.

The average price

of a bitcoin during the first nine months of 2020 was $9,220.

The average price of a bitcoin during the first nine months of 2021

was $44,555, an increase of $35,335 or 383%.

September 30, 2021, we carried $282.7 million of digital assets on our balance sheet, which include cumulative impairments of $18.5 million,

consisting of the approximately 7,035 bitcoins, and held $32.9 million in cash and cash equivalents, compared to $2.3 million of digital

assets and $141.3 million in cash and cash equivalents at December 31, 2020, reflecting the shift in our liquid assets.

As of November

15, 2021, we held approximately 7,562 bitcoins, of which, 4,812.66 bitcoins were acquired at an aggregate purchase price

of $150 million at an average purchase price of approximately $31,168 per bitcoin, inclusive of fees and expenses.

These purchased

bitcoins are held in an investment fund of one where the Company is the sole limited partner.

We expect to purchase additional bitcoin

held by NYDIG Digital Assets Fund III, LP, the investment fund in future periods, though we may also sell bitcoin in future periods

as needed to generate Cash Assets for treasury management purposes.

working capital increased by $265.6 million, to working capital of $550.6 million at September 30, 2021 from working capital of $285.0

million at December 31, 2020.

used in operating activities was $43.9 million during the nine months ended September 30, 2021 compared to cash used in operating activities

of $3.4 million during the nine months ended September 30, 2020.

used in investing activities was $372.2 million during the nine months ended September 30, 2021 compared to cash used in investing activities

of $15.1 million for the nine months ended September 30, 2020.

provided by financing activities was $307.7 million during the nine months ended September 30, 2021 compared to cash provided by financing

activities of $35.1 million for the nine months ended September 30, 2020.

on our current revenue and profit projections, we believe that our existing cash will be sufficient to fund our operations through at

least the next twelve months.

Other general and administrative

Impairment of digital currencies

Impairment of patents

operating expenses consisted of the following:

the Three Months Ended

Stock compensation and related

Impairment of digital currencies

Impairment of patents

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.

income (loss)

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.

expense increased $2.8 million from the prior year period as a result of the convertible notes issued in November 2021.

tax expense (benefit)

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.

income (loss)

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.

Net Income (loss)

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.

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.

Condition and Liquidity

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.

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.

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.

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.

were no borrowings outstanding under the Company’s $100 million revolving credit agreement at March 31, 2022.

Sheet Arrangements

4 unchanged sentences

in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity.

Quantitative and Qualitative Disclosures About Market Risk.

required for smaller reporting companies.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis