MARA Holdings, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. This report on Form 10-Q (“Report”) and other written and oral statements made from time to time by us may contain so-called “forward-looking statements,” all of which are subject to risks and uncertainties. Forward-looking statements can be identified by the use of words such as “expects,” “plans,” “will,” “forecasts,” “projects,” “intends,” “estimates,” and other words of similar meaning. One can identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address our growth strategy, financial results and product and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ from our forward-looking statements. These factors may include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed, and actual future results may vary materially. Information regarding market and industry statistics contained in this Report is included based on information available to us that we believe is accurate. It is generally based on industry and other publications that are not produced for purposes of securities offerings or economic analysis. We have not reviewed or included data from all sources and cannot assure investors of the accuracy or completeness of the data included in this Report. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. We do not assume any obligation to update any forward-looking statement. As a result, investors should not place undue reliance on these forward-looking statements. The following discussion and analysis are intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those expressed, implied or anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission. Cautionary Note Regarding Forward-Looking Statements This report and other documents that we file with the Securities and Exchange Commission contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management’s assumptions. Statements that are not historical facts are forward-looking statements. Words such as “expect,” “outlook,” “forecast,” “would,” “could,” “should,” “project,” “intend,” “plan,” “continue,” “sustain”, “on track”, “believe,” “seek,” “estimate,” “anticipate,” “may,” “assume,” and variations of such words and similar expressions are often used to identify such forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward- looking statements are not guarantees of future performance and involve risks, assumptions and uncertainties, including, but not limited to, those described in our reports that we file or furnish with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. Except to the extent required by law, we undertake no obligation to update publicly any forward-looking statements after the date they are made, whether as a result of new information, future events, changes in assumptions or otherwise. Business of the Company The Company was incorporated in the State of Nevada on February 23, 2010 under the name Verve Ventures, Inc. On December 7, 2011, the Company changed its name to American Strategic Minerals Corporation and were engaged in exploration and potential development of uranium and vanadium minerals business. In June 2012, the Company discontinued the minerals business and began to invest in real estate properties in Southern California. In October 2012, the Company discontinued its real estate business and the Company commenced IP licensing operations, at which time the Company’s name was changed to Marathon Patent Group, Inc. The Company commenced mining bitcoin in 2018 and changed its name to Marathon Digital Holdings, Inc. on March 1, 2021. As of September 30, 2022, the Company is solely focused on the mining of bitcoin and ancillary opportunities within the bitcoin ecosystem under the name Marathon Digital Holdings, Inc. 22 Significant developments for the three-month period ended September 30, 2022 The three-month period ended September 30, 2022, was particularly active from an operations and a financial standpoint, with noteworthy events including: Legal reserves: In connection with a dispute concerning the settlement of certain restricted stock unit awards previously granted to Merrick D. Okamoto, former Chief Executive Officer and Chairman of the Company, on October 12, 2022, the Company entered into a settlement agreement with Mr. Okamoto, pursuant to which the Company agreed to pay Mr. Okamoto $24 million. Mr. Okamoto agreed to a settlement and a broad release of known or unknown claims against the Company, which relate to the Company’s Amended 2018 Equity Incentive Plan or related restricted stock unit award agreements. The Company entered into related settlement agreements in respect to certain restricted stock unit awards previously granted to five other individuals, including a director and our current Chief Executive Officer and Chairman, which total approximately $1 million in the aggregate. The expense associated with this settlement totaled approximately $25 million is listed on the statement of operation as Legal reserves. The portion of this settlement that remained unpaid as of September 30, 2022 is listed on the balance sheet as Legal reserve payable and totaled $21.2 million. All amounts due as a result of this settlement have been paid as of October 15, 2022. Compute North Bankruptcy: On September 22 , 2022, Compute North filed for chapter 11 bankruptcy protection. The Company has engaged creditor’s counsel and is vigorously defending and protecting its various assets at CN facilities and to minimize its long-term financial exposure with regard to the CN Entities. The Company’s financial exposure to Compute North on the date of the Bankruptcy was approximately $81 million, including: ● Approximately $10 million in convertible preferred stock of Compute North Holdings, Inc. ● Approximately $21 million related to an unsecured senior promissory note with Compute North LLC. This loan totaled $30 million at June 30, 2022 but was amended in July with approximately $9 million in principal being applied as a deposit for the Wolf Hollow site. ● Approximately $50 million in operating deposits to Compute North entities, including the King Mountain Joint Venture and the Wolf Hollow site. The Company assessed the impairment of these assets given the bankruptcy proceedings and estimated that the preferred stock, the unsecured loan, and approximately $8 million in deposits were fully impaired. As a result, the company recorded an impairment charge of $39 million as of September 30, 2022, reducing the overall exposure to Compute North to approximately $42 million, primarily in deposits associated with King Mountain and Wolf Hollow. The full recoverability of these deposits remains a risk given the ongoing bankruptcy proceedings. The bulk of the Company’s current operations are hosted by a Compute North / NextEra Joint Venture in McCamey, TX (“King Mountain”) which is not directly subject to the bankruptcy process but is impacted by the bankruptcy proceedings. Energization of the site started in August and as of November 9, the Company has approximately 64,000 bitcoin mining servers on site and operating. In early July 2022, the Company expanded certain hosting arrangements with Compute North in Granbury, TX (“Wolf Hollow”). As of November 9, the Company has approximately 6,000 mining servers in operation. The Company’s understanding is that plans for additional deployments have been delayed due to uncertainties associated with the Compute North Bankruptcy. Applied Blockchain Hosting : On July 12, 2022, the Company entered into an agreement to secure approximately 200 megawatts of hosting capacity for the Company’s previously purchased miners, including 90 megawatts of hosting capacity in Texas and at least 110 megawatts of hosting capacity in North Dakota. The Company expects to have 66,000 miners, representing approximately 9.2 EH/s, hosted across these facilities. Based on current construction schedules, installations of the Company’s miners are expected to begin at these facilities during the fourth quarter of 2022 with all miners installed by approximately mid-year 2023. As part of this agreement, the Company has an option to increase hosting capabilities utilizing up to an additional 70 megawatts in North Dakota. 23 Completion of the Hardin, MT exit The company completed its previously disclosed exit from the Hardin, MT facility (“Hardin”) in September. The Company had deployed approximately 30,000 mining servers at Hardin. In conjunction with this exit, the Company sold approximately 22,000 bitcoin mining servers for cash proceeds of $46.5 million, recording a gain on sale of $3.2 million. The company also recorded additional depreciation of $4.1 million in the period related to approximately 1,800 bitcoin mining servers that were previously deployed at Hardin that are no longer in operating condition based on inspections of the assets at the facility and experience with the assets formerly deployed at Hardin in the weeks following redeployment. In addition to the depreciation expense recorded within the period, the company determined that the useful lives of the remaining equipment formerly deployed at Hardin should be reduced from 36 months to 24 months. These assets had a book value of approximately $12 million at September 30, 2022. As such, the annual depreciation on this equipment will increase to approximately $6 million from approximately $4 million. Critical Accounting Policies and Estimates We believe that the following accounting policies, which are included in the footnotes section of this report, are the most critical to aid you in fully understanding and evaluating this management discussion and analysis: ● Digital currencies ● Revenue from contracts with customers ● Impairment of long-lived assets Digital currencies Digital currencies are included in current and other assets in the consolidated balance sheets as intangible assets with indefinite useful life and are recorded at cost less impairment. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the digital currency at the time its fair value is being measured. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that the price of Bitcoin declines to lower than the carrying value, the Company has determined that it is more likely than not that an impairment exists. The Company determines the amount of impairment to record based on the fair value of bitcoin following the fair value measurement framework in ASC 820 – Fair Value Measurement. If the fair value of bitcoin is lower than the carrying amount the Company will record an impairment and subsequent reversal of impairment losses is not permitted. Revenues from contracts with customers The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Please refer to footnote 3 for a complete description of this policy. Impairment of long-lived assets Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Non-GAAP Financial Measures We provide investors with a reconciliation from net loss to the non-GAAP measure known as Adjusted EBITDA as a component of Management’s Discussion and Analysis. For each period in question, we define “Adjusted EBITDA” as (a) GAAP net income (or loss) plus (b) adjustments to add back the impacts of (1) depreciation and amortization, (2) interest expense, (3) income tax expense and (4) adjustments for non-cash and non-recurring items which currently include (i) stock compensation expense, net of withholding taxes, (ii) impairments of patents and (iii) impairment losses related to the Compute North Bankruptcy. Adjusted EBITDA is not a measurement of financial performance under GAAP and, as a result, this measure may not be comparable to similarly titled measures of other companies. Non-GAAP financial measures are subject to material limitations as they are not in accordance with, or a substitute for, measurements prepared in accordance with GAAP. Adjusted EBITDA is not meant to be considered in isolation and should be read only in conjunction with our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K as filed with the Securities and Exchange Commission. Management uses both Adjusted EBITDA and the supplemental information provided herein as a means of understanding, managing, and evaluating business performance and to help inform operating decision making. We rely primarily on our Consolidated Condensed Financial Statements to understand, manage, and evaluate our financial performance and use the non-GAAP financial measures only supplementally. Recent Issued Accounting Standards See Note 2 to our Consolidated Condensed Financial Statements for a discussion of recent accounting standards and pronouncements. 24 Results of Operations For the three months ended September 30, 2022 and 2021 Three Months Ended September 30, Favorable 2022 2021 (Unfavorable) Revenues $ 12,690,452 $ 51,707,483 $ (39,017,031 ) Cost of revenues - energy, hosting and other (13,772,555 ) (5,922,811 ) (7,849,744 ) Cost of revenues - depreciation and amortization (26,294,842 ) (4,340,198 ) (21,954,644 ) Total margin (27,376,945 ) 41,444,474 (68,821,419 ) General and administrative expenses (12,352,008 ) (99,235,984 ) 86,883,976 Gain on sale of equipment, net of disposals 31,934,307 - 31,934,307 Legal reserves (24,960,000 ) - (24,960,000 ) Impairment of deposits due to vendor bankruptcy filing (7,987,147 ) - (7,987,147 ) Realized and unrealized gains (losses) on digital currencies held in fund - 42,086,907 (42,086,907 ) Impairment of digital currencies (5,903,891 ) (6,731,890 ) 827,999 Total change in carrying value of digital currencies (5,903,891 ) 35,355,017 (41,258,908 ) Impairment of loan and investment due to vendor bankruptcy filing (31,012,853 ) - (31,012,853 ) Other non-operating income 238,159 261,273 (23,114 ) Net loss $ (75,422,407 ) $ (22,172,567 ) $ (53,249,840 ) Bitcoin (“BTC”) production during the period, in BTC 616 1,253 (637 ) Reconciliation to Adjusted EBITDA Net loss $ (75,422,407 ) $ (22,172,567 ) $ (53,249,840 ) Exclude: Interest expense 3,752,301 287 3,752,014 Exclude: Income tax benefit (5,750,272 ) (2,940 ) (5,747,332 ) EBIT (77,420,378 ) (22,175,220 ) (55,245,158 ) Exclude: Depreciation and amortization 26,294,842 4,340,198 21,954,644 EBITDA (51,125,536 ) (17,835,022 ) (33,290,514 ) Exclude: Stock compensation expense, net of withholding tax 3,423,324 96,617,325 (93,194,001 ) Exclude: Impairment of deposits due to vendor bankruptcy filing 7,987,147 - 7,987,147 Exclude: Impairment of loan and investment due to vendor bankruptcy filing 31,012,853 - 31,012,853 Adjusted EBITDA $ (8,702,212 ) $ 78,782,303 $ (87,484,515 ) 25 Revenues and Costs of Revenues : We generated revenues of $12.7 million during the three months ended September 30, 2022 compared with $51.7 million during the three months ended September 30, 2021. The $39.0 million decrease in revenue was primarily driven by a $26.3 million decrease in revenue resulting from lower bitcoin production. This decrease in production resulted from downtime at Hardin in July and delays in energization at King Mountain in July and August. Lower market prices for bitcoin in the current-year period contributed an additional $12.7 million decline in revenue vs the prior-year period. Cost of revenues – energy, hosting and other during the three months ended September 30, 2022, totaled $13.8 million compared with $5.9 million in the prior-year period. The $7.9 million increase was driven by accelerated cost recognition associated with the early exit from Hardin ($5.7 million) and higher production costs per bitcoin mined ($5.1 million) partially offset by the impacts of decreased production on costs ($3.2 million). Cost of revenues - depreciation and amortization was $26.3 million in the current-year period compared with $4.3 million in the prior-year period, an increase of $22 million. This increase in expense was primarily due to the acceleration of depreciation related to our exit of the Hardin, MT facility ($11 million in infrastructure depreciation and $4.1 million in mining server depreciation) and, to a lesser extent increased depreciation costs associated with a higher number of mining servers in operation. Total Margin : Total margin was a loss of ($27.4) million in the current-year period compared with income of $41.4 million in the prior-year period, a decline of ($68.8) million. This decline was driven by the factors discussed above, which are summarized in the table below (in millions): Revenue: ● Impact of lower production $ (26.3 ) ● Impact of lower bitcoin market prices (12.7 ) Cost of revenue – energy, hosting and other: ● Impact of lower bitcoin production 3.2 ● Impact of accelerated cost recognition from Hardin exit (5.7 ) ● Other increases (5.1 ) Cost of revenue – depreciation and amortization: ● Impact of accelerated cost recognition from Hardin exit (15.1 ) ● Other, primarily increased mining servers in operation (6.9 ) $ (68.8 ) 26 Gain on sales of equipment, net : On December 2, 2021, we entered into an agreement with DCRBN Ventures Development and Acquisition LLC (“DCRBN”) in which the Company agreed to sell certain equipment to DCRBN starting in April 2022, in conjunction with the development of commercial activities at the King Mountain wind farm in McCamey, TX. During the three months ended September 30, 2022, the Company sold equipment for cash proceeds totaling $43.6 million and realized a pre-tax gain on the sale of such assets of $28.7 million. The Company also completed its previously disclosed exit from the Hardin, MT facility during the current-year period. In conjunction with this exit, the Company sold approximately 22,000 bitcoin mining servers for cash proceeds of $46.5 million and recorded a gain on sale, net of disposal losses of $3.2 million. There were no such sales in the prior-year period. General and administrative expenses : General and administrative expenses were $12.4 million for the three months ended September 30, 2022, compared with expenses of $99.2 million in the prior-year period. Our general and administrative expenses included stock-based (non-cash) compensation expense of $3.4 million in the current-year period and $96.6 million in the prior-year period. General and administrative expenses excluding stock-based compensation was $8.9 million in the current-year period compared with $2.6 million in the prior-year period. The $6.3 million increase was primarily due to higher payroll and benefits costs ($3.8 million) and increased insurance expense ($1 million). Professional fees, travel costs and other expenses also increased due to the increased scope of our operations in the current-year period. Legal reserves : In connection with a dispute concerning the settlement of certain restricted stock unit awards previously granted to the Company’s former Chief Executive Officer and Chairman, on October 12, 2022, the Company entered into a settlement agreement pursuant to which the Company agreed to pay $24 million. Given the outcome of this settlement, the Company entered into related settlement agreements in respect to five other recipients of the same restricted stock unit awards, including a director and our current Chief Executive Officer and Chairman. These related settlements totaled approximately $1 million in the aggregate. Impairment of assets related to vendor bankruptcy filing : On September 22, 2022, Compute North filed for restructuring under Chapter 11 of the U.S. Bankruptcy Code. During the three months ended September 30, 2022, the Company assessed the impairment of assets associated with Compute North given their bankruptcy proceedings. As a result, the company recorded an impairment charge of approximately $8.0 million (related to deposits) as an operating expense and an additional impairment charge of approximately $31 million (related to a loan and preferred stock investment) as non-operating expenses. Changes in carrying value of digital assets: ● Impairment of digital currencies : We incurred impairment of digital assets during the three months ended September 30, 2022 of $5.9 million compared with an impairment of $6.7 million in the prior-year period. ● Change in fair value of digital currencies held in fund : On June 10, 2022, the company withdrew 4,769 bitcoin from its investment fund. As a result, there was no change in the fair value of the digital assets held in the fund during the three months ended September 30, 2022. During the prior-year quarter, the change in fair value of the bitcoin held in the investment fund was a gain of $42.1 million. Other non-operating income : Other non-operating income declined by $23 thousand from the prior-year period. Interest expense : Interest expense increased $3.7 million from the prior year as a result interest related to the convertible notes issued in November 2021 ($2.8 million) and interest on borrowings outstanding under the Company’s Term loan and revolving credit (“RLOC”) facilities ($0.9 million). Income tax benefit : The Company recorded an income tax benefit of $5.8 million for the three-month period ended September 30, 2022 compared with an income tax benefit of $3 thousand in the prior-year period. Net loss : We recorded a net loss of ($75.4) million in the current-year period compared with net loss of ($22.2) million in the prior period. The $53.2 million decline was primarily driven by lower total margin ($68.8 million), the impairment related to the Compute North bankruptcy ($39 million), legal reserves ($25 million), declines in the carrying value of our digital assets ($41.3 million), and increased interest expense ($3.7 million). Partially offsetting these unfavorable variances was a significant reduction in general and administrative expenses primarily associated with lower stock-based compensation ($86.9 million), gain on sale of equipment of $31.9 million and the net increase in the income tax benefit. Adjusted EBITDA : Adjusted EBITDA was a loss of ($8.3) million compared with a positive Adjusted EBITDA of $78.8 million in the prior-year period. The $87.1 million decline was primarily driven by lower total margin excluding the impact of depreciation and amortization ($46.9 million), declines in the carrying value of our digital assets ($41.3 million), legal reserve ($25 million), and higher general and administrative expenses excluding non-cash stock based compensation costs ($6.3 million). Partially offsetting these unfavorable variances were gain on the sale of equipment of $31.9 million. 27 For the nine months ended September 30, 2022 and 2021 Nine Months Ended September 30, Favorable 2022 2021 (Unfavorable) Revenues $ 89,329,986 $ 90,182,155 $ (852,169 ) Cost of revenues - energy, hosting and other (42,974,265 ) (11,647,457 ) (31,326,808 ) Cost of revenues - depreciation and amortization (64,881,323 ) (8,015,801 ) (56,865,522 ) Total margin (18,525,602 ) 70,518,897 (89,044,499 ) General and administrative expenses (39,187,098 ) (159,411,404 ) 120,224,306 Gain on sale of equipment, net of disposals 90,115,824 - 90,115,824 Legal reserves (24,960,000 ) - (24,960,000 ) Impairment of deposits due to vendor bankruptcy filing (7,987,147 ) - (7,987,147 ) Impairment of patents (919,363 ) - (919,363 ) Realized and unrealized gains (losses) on digital currencies held in fund (85,016,208 ) 59,410,028 (144,426,236 ) Impairment of digital currencies (153,045,376 ) (18,472,750 ) (134,572,626 ) Total change in carrying value of digital currencies (238,061,584 ) 40,937,278 (278,998,862 ) Impairment of loan and investment due to vendor bankruptcy filing (31,012,853 ) - (31,012,853 ) Other non-operating income 632,132 254,024 378,108 Net loss $ (280,027,638 ) $ (47,700,445 ) $ (232,327,193 ) Bitcoin (“BTC”) production during the period, in BTC 2,582 2,099 483 Reconciliation to Adjusted EBITDA Net loss $ (280,027,638 ) $ (47,700,445 ) $ (232,327,193 ) Exclude: Interest expense 10,314,659 2,694 10,311,965 Exclude: Income tax benefit (192,712 ) (3,454 ) (189,258 ) EBIT (269,905,691 ) (47,701,205 ) (222,204,486 ) Exclude: Depreciation and amortization 64,881,323 8,015,801 56,865,522 EBITDA (205,024,368 ) (39,685,404 ) (165,338,964 ) Exclude: Stock compensation expense, net of withholding tax 18,874,798 152,334,886 (133,460,088 ) Exclude: Impairment of deposits due to vendor bankruptcy filing 7,987,147 - 7,987,147 Exclude: Impairment of loan and investment due to vendor bankruptcy filing 31,012,853 - 31,012,853 Exclude: Impairment of patents 919,363 - 919,363 Adjusted EBITDA $ (146,230,207 ) $ 112,649,482 $ (258,879,689 ) 28 Revenues and Costs of revenue : We generated revenues of $89.3 million during the nine months ended September 30, 2022 compared with $90.2 million during the prior-year period. The $0.9 million decrease is primarily attributable to the impact of lower market prices for bitcoin in the current-year ($21.6 million) mostly offset by the impact of increased production when compared to the prior-year period ($20.7 million). Cost of revenues – energy, hosting and other during the three months ended September 30, 2022 totaled $43 million compared with $11.6 million in the prior-year period. The $31.3 million increase was driven by accelerated cost recognition associated with the early exit from Hardin ($18.2 million) and higher production costs per bitcoin mined ($10.4 million) and to a lesser extent the impact of the higher costs associated with increased production ($2.7 million). Cost of revenues – Depreciation and amortization was $64.9 million in the current-year period compared with $8.0 million in the prior-year period, an increase of $56.8 million . This increase in expense was primarily due to the acceleration of depreciation related to our exit of the Hardin, MT facility ($31.9 million in infrastructure depreciation and $4.1 million in mining server depreciation) and increased depreciation costs associated with a higher number of mining servers in operation in the current-year period. Total Margin : Total margin was a loss of ($18.5) million in the current-year period compared with income of $70.5 million in the prior-year period, a decline of ($89.0) million. This decline was driven by the factors discussed above, which are summarized in the table below (in millions): Revenue: ● Impact of higher production $ 20.7 ● Impact of lower bitcoin market prices (21.6 ) Cost of revenue – energy, hosting and other: ● Impact of higher bitcoin production (10.4 ) ● Impact of accelerated cost recognition from Hardin exit (18.2 ) ● Other increases (2.7 ) Cost of revenue – depreciation and amortization: ● Impact of accelerated cost recognition from Hardin exit (36.0 ) ● Other, primarily increased mining servers in operation (20.8 ) $ (89.0 ) 29 Gain on sales of equipment, net : On December 2, 2021, we entered into an agreement with DCRBN Ventures Development and Acquisition LLC (“DCRBN”) in which the Company agreed to sell certain equipment to DCRBN starting in April 2022, in conjunction with the development of commercial activities at the King Mountain wind farm in McCamey, TX. During the nine months ended September 30, 2022, the Company sold equipment for cash proceeds totaling $130.9 million and realized a pre-tax gain on the sale of such assets of $86.9 million. The Company also completed its previously disclosed exit from the Hardin, MT facility during the current-year period. In conjunction with this exit, the Company sold approximately 22,000 bitcoin mining servers for cash proceeds of $46.5 million and recorded a gain on sale, net of disposal losses of $3.2 million. There were no such sales in the prior-year period. General and administrative expenses : General and administrative expenses were $39.2 million for the nine months ended September 30, 2022 compared with expenses of $159.4 million in the prior-year period, a decrease of $120.2 million. Our general and administrative expenses included stock-based (non-cash) compensation expense of $18.9 million in the current-year period and $152.3 million in the prior-year period. General and administrative expenses excluding stock-based compensation increased to $20.3 million in the current year period compared with $7.1 million in the prior-year period. The $13.2 million increase was primarily due to higher payroll and benefits costs ($5.4 million), increased insurance expense ($2.2 million) and higher professional fees ($1.6 million). Other expenses also increased due to the increased scope of our operations in the current-year period. Legal reserves : In connection with a dispute concerning the settlement of certain restricted stock unit awards previously granted to the Company’s former Chief Executive Officer and Chairman, on October 12, 2022, the Company entered into a settlement agreement pursuant to which the Company agreed to pay $24 million. Given the outcome of this settlement, the Company entered into related settlement agreements in respect to five other recipients of the same restricted stock unit awards, including a director and our current Chief Executive Officer and Chairman. These related settlements totaled approximately $1 million in the aggregate. Impairment of assets related to vendor bankruptcy filing : On September 22 , 2022, Compute North filed for restructuring under Chapter 11 of the U.S. Bankruptcy Code. During the period ended September 30, 2022, the Company assessed the impairment of its assets associated with Compute North given their bankruptcy proceedings. As a result, the company recorded an impairment charge of approximately $8.0 million (related to deposits) as an operating expense and an additional impairment charge of approximately $31 million (related to a loan and preferred stock investment) as non-operating expenses. Impairment of patents : The Company recorded an impairment of $0.9 million in the current-year period related to certain patents no longer utilized in its business operations. Changes in carrying value of digital assets: ● Impairment of digital currencies : We incurred impairment of digital assets during the nine months ended September 30, 2022, of $153 million compared with an impairment of $18.2 million in the prior-year period, reflecting the overall decline in value of bitcoin in the current-year period. ● Change in fair value of digital currencies held in fund : On June 10, 2022, the Company withdrew 4,769 bitcoin from its investment fund. Total changes in the fair value of investment fund from April 1 through the June 10 withdrawal date resulted in a loss of ($85.0) million in the current year period. During the prior-year period, the change in fair value of the bitcoin held in the investment fund was a gain of $59.4 million. Other non-operating income : Other non-operating income increased $378 thousand from the prior-year period. Interest expense : Interest expense increased $10.3 million from the prior year as a result interest related to the convertible notes issued in November 2021 and interest on borrowings outstanding under the Company’s Term loan and revolving credit (“RLOC”) facilities. Income tax benefit : The company recorded a modest income tax benefit of $193 thousand in the current-year period compared with a benefit of $3 thousand in the prior-year period. Net loss : We recorded a net loss of $(280) million in the current-year period compared with a net loss of $(47.7) million in the prior period. The $232.3 million decline was primarily driven by the $279 million decrease in the carrying value of our digital assets, the $89 million decrease in total margin, the impairment of assets related the Compute North bankruptcy ($39 million), the legal reserve ($25 million), and higher interest expense ($10.3 million). Partially offsetting these unfavorable variances was a significant decrease in general and administrative expenses ($120.2 million) associated with lower stock-based compensation and gain on sales of equipment ($90.1 million). 30 Adjusted EBITDA : Adjusted EBITDA was a loss of $(145.8) million compared with a positive Adjusted EBITDA of $112.6 million in the prior-year period. The $258.9 million decline was primarily driven by the $279 million decrease in the carrying value of our digital assets, lower total margin excluding the impact of depreciation and amortization $(32.2 million), legal reserves ($25 million), and higher operating expenses excluding non-cash stock compensation costs ($13.2 million). The gain on the sales of equipment partially offset these unfavorable variances. Financial Condition and Liquidity: Cash, cash equivalents and restricted cash totaled $64.1 million at September 30, 2022, a decrease of $204.4 million from December 31, 2021. The decrease in cash, cash equivalents and restricted cash was primarily driven by a $368.1 million use of cash from investing activities resulting from significant levels of advances to vendors ($482.1 million) and, to a lesser extent, equity investments ($44.0 million) and purchases of property and equipment ($19.8 million). These uses of cash were partially offset by the proceeds from assets sales of $177.4 million. Cash flows from operating activities resulted in a use of funds of ($84.2) million. Cash flows from operating activities before the impact of changes in operating assets and liabilities (a $18.1 million source of funds) were more than offset by a ($102.3) million use of funds from changes in operating assets and liabilities, primarily due to changes in digital currencies (an $89.3 million use of funds) prepaid expenses (a $30.6 million use of funds) and deposits (a $13.6 million use of fund) partially offset by the impact of higher accounts payable, including a payable related to the legal reserve (a $21.2 million source of funds). This legal reserve payable was settled in cash in October 2022. Cash flows from financing activities resulted in a source of cash of $247.9 million, primarily from proceeds from the issuance of common stock ($198.7 million) and proceeds from borrowings outstanding under the Company’s Term loan agreement ($49.3 million). We borrowed the initial $50 million under our Term Loan facility during the three months ended September 30, 2022. There were no borrowings outstanding under our revolving credit facility at September 30, 2022. The maximum borrowings outstanding under the Company’s revolving credit facility during the three and nine months ended September 30, 2022, was $35 million and $70 million, respectively. The Company expects to have sufficient liquidity, including cash on hand and available borrowing capacity to support ongoing operations. We will continue to seek to fund our business activities through the capital markets, primarily through periodic equity issuances using our At-The-Market facility. Bitcoin Holdings : At September 30, 2022, we held approximately 10,670 bitcoin with a total carrying value of $197.2 million on the balance sheet. Approximately 3,828 bitcoin were being utilized as collateral for credit facilities and were classified as “digital currencies, restricted”. The remaining bitcoin were classified as “Digital currencies” on the balance sheet. The fair market value of our bitcoin holdings at September 30, 2022 was approximately $207.3 million and the value of a single bitcoin was approximately $19,432. During the month of October 2022, the Company borrowed an additional $50 million under its RLOC facility for general corporate purposes and provided an additional 3,993 bitcoin as collateral for this borrowing. This increased the Company’s collateral balance to 7,821 bitcoin. On November 9, 2022, bitcoin prices declined to a new yearly low on concerns of financial instability in the crypto industry. As a result, the Company was required to provide an additional 1,669 bitcoin (valued at $16,212.50 per bitcoin) as collateral for its $50 million RLOC and $50 million term loan borrowings, bringing its total collateral balance to 9,490 bitcoin (approximately $153.9 million). The Company’s total bitcoin holdings as of November 9, 2022, are approximately 11,440 bitcoin, of which 1,950 (approximately $31.6 million) are unrestricted. Given the uncertainty around bitcoin prices in the near-term, the Company has decided to delay previously announced plans to refinance the RLOC with a term loan during the month of November. This enables the Company to retain the optionality to repay the RLOC borrowings in the near-term versus committing to a two-year term loan borrowing which would carry prepayment penalties. The Company retains an option to draw an additional $50 million on the term loan through April of 2023. At September 30, 2021 we held a total of 7,035 bitcoin with a total carrying value of $282.7 million on the balance sheet. The fair market value of our bitcoin holdings at September 30, 2021 was approximately $308.1 million and the value of a single bitcoin was approximately $43,791. We expect to increase our bitcoin holdings over time primarily through mining activities. As our mining activities increase, we will likely begin selling a portion of bitcoin produced in future periods to fund monthly operating costs, for treasury management purposes or for general corporate purposes. Off-balance Sheet Arrangements We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our consolidated condensed financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. 31