MARA Holdings, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS has been amended and restated to give effect to the restatement, as more fully described in NOTE 2 – RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENT to our accompanying audited Consolidated Financial Statements contained in this Form 10-K. For further detail regarding the Restatement, see EXPLANATORY NOTE and Part II, ITEM 9A. CONTROLS AND PROCEDURES contained in this Form 10-K. Business Overview 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 a 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 December 31, 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. 33 Significant crypto market developments and impacts to the Company The year ended December 31, 2022 was a challenging year for the crypto sector in general, as macroeconomic conditions (including higher inflation and a rising interest rates environment as compared to recent years) resulted in weaker equity markets and a general “risk off” sentiment that had a negative impact on bitcoin prices. This challenging set of circumstances was exacerbated by a series of unforeseen events which hit the sector, including: ● The de-pegging of $LUNA in the second quarter of 2022; ● The bankruptcies of key players in the digital assets sector, including Three Arrows Capital, Voyager, and Celsius; and ● The fourth quarter 2022 collapse of FTX, which drove additional credit related bankruptcies and a significant decline in bitcoin prices and bitcoin mining rig prices. The Company’s operating results, Consolidated Balance Sheets and stock price were adversely impacted by this series of events and the overall unfavorable macroeconomic climate in 2022. The resulting declines in financial performance and operational challenges faced by the Company in 2022 were primarily evident in the following areas: Operating results: ● Impairment of bitcoin mining rigs and advances to vendors: We experienced significant declines in the fair value of bitcoin mining rigs during the fourth quarter of 2022. As a result, the Company assessed the need for an impairment write-down of both bitcoin mining rigs (held as fixed assets) and advances to vendors (a current asset) representing deposits associated with the future delivery of mining rigs. We recognized impairment charges for both the bitcoin mining rigs and the advances to vendors – a total impairment of approximately $332,933 thousand. ● Digital assets - impairment and decline in carrying value: We experienced impairments of $173,215 thousand, realized and unrealized losses on digital assets held within Investment Fund of $85,017 thousand and, to a lesser extent unrealized losses of $14,460 thousand on digital assets held on our Consolidated Balance Sheets during the year ended December 31, 2022. ● Total margin decline: The profitability of our operations declined due to depressed bitcoin prices and delays in scaling our operations. Total margin was a loss of $33,673 thousand in the current-year period compared with income of $116,768 thousand in the prior-year period, a decline of $150,441 thousand. ● Direct impact of vendor bankruptcy filing : On September 22, 2022, Compute North filed for restructuring under chapter 11 of the U.S. Bankruptcy Code. As a result, the company recorded an impairment charge of $39,000 thousand during the third quarter of 2022. During the fourth quarter of 2022, the company estimated that an additional $16,674 thousand in deposits had likely been impaired and as such recorded an additional impairment charge. Fair value of digital assets and impacts to loan collateral and primary lender: ● Digital assets - fair value decline : At December 31, 2022, the fair value of a single bitcoin was approximately $16,548 thousand, a 64% decline in fair value from December 31, 2021, when a single bitcoin had a fair value of $46,306 thousand. At December 31, 2022, the Company held approximately 7,816 unrestricted bitcoin ($129,335 thousand fair value) on the Consolidated Balance Sheets. ● Digital assets utilized as collateral - fair value declines and additional collateral requirements: On November 9, 2022, bitcoin prices declined to a new yearly low on concerns of financial instability in the industry as a result of the FTX collapse. As a result, the Company was required to provide an additional 1,669 bitcoin (valued at $16,213 per bitcoin) as collateral for its outstanding borrowings under its Term Loan and revolving line of credit (“RLOC”) facilities with Silvergate Bank, for a total collateral balance of 9,490 bitcoin (or approximately $153,861 thousand fair value). The Company’s total bitcoin holdings as of November 9, 2022, were 11,440 bitcoin, of which 1,950 (approximately $31,615 thousand) were unrestricted. During November and December 2022, the Company repaid $50,000 thousand in RLOC borrowings. These repayments enabled the Company to reduce its bitcoin held as collateral to approximately 4,416 bitcoin (approximately $73,074 thousand fair value) by December 31, 2022. 34 ● Impact of bankruptcies and the collapse of FTX on our primary lender: Prior to the termination of the facilities on March 8, 2023, Silvergate Bank served as the lender for our Term Loan and RLOC facilities, through which we had the right to borrow up to $200,000 thousand provided we post sufficient collateral in bitcoin. On March 1, 2023, Silvergate Bank filed disclosures with the SEC regarding its troubled financial condition, including doubts about its ability to continue operating as a going concern, and notice to postpone the filing of its Annual Report on Form 10-K with the SEC due to a material decline in its client deposits and inadequate capitalization. This has led to leading crypto business clients leaving the bank, creating both a credit void as well as reputational risk for crypto clients. On March 8, 2023, Silvergate announced its intention to wind down operations and voluntarily liquidate the bank. On February 6, 2023, the Company provided Silvergate Bank with the required 30-day notice stating the Company’s intent to prepay the outstanding balance on its term loan facility as well as the Company’s intent to terminate the term loan facility. The Company and Silvergate Bank subsequently agreed to terminate the RLOC facility. On March 8, 2023, the Company prepaid the term loan and terminated the RLOC facility with Silvergate Bank. ● Signature Bank closure: On March 12, 2023, Signature Bank was closed by its state chartering authority, the New York State Department of Financial Services. On that same date the FDIC was appointed as receiver and transferred all the deposits and substantially all of the assets of Signature Bank to Signature Bridge Bank, N.A., a full-service bank that is being operated by the FDIC. The Company automatically became a customer of Signature Bridge Bank, N.A. as part of this action. The Company held approximately $142,000 thousand cash deposits at Signature Bridge Bank, N.A. as of March 12, 2023. Normal banking activities resumed on Monday, March 13, 2023. We anticipate that businesses in this and related business sectors may continue to experience economic volatility and operational challenges, and the first half of 2023 will likely continue to be a period of challenge and uncertainty in the industry. We are continuously monitoring the economic environment in which we operate and evaluating strategic opportunities which we may decide to undertake as part of our strategic growth initiatives; however, we offer no assurances that any strategic opportunities we choose to pursue will be successful or achieved on a time scale or within the budget we anticipate, if at all, in our competitive and evolving industry. See ITEM 1A. RISK FACTORS for additional discussion regarding potential impacts our competitive and evolving industry may have on our business. Critical Accounting Policies and Estimates The following accounting policies relate to the significant areas involving management’s judgments and estimates in the preparation of our financial statements, and are those that we believe are the most critical to aid your understanding and evaluation of this management discussion and analysis: ● Digital assets ● Digital assets loan receivable ● Revenue from contracts with customers ● Property and Equipment ● Impairment of long-lived assets ● Income taxes 35 Digital assets Digital assets (bitcoin) are included in current and other assets in the accompanying Consolidated Balance Sheets. Digital assets awarded to the Company through its mining activities are accounted for in accordance with the Company’s revenue recognition policy below. Digital assets are accounted for as intangible assets with indefinite useful lives and are recorded at cost less impairment in accordance with ASC 350 – “Intangibles-Goodwill and Other” (“ASC 350”). 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. Whenever the exchange-traded price of digital assets declines below its carrying value, the Company has determined that it is more likely than not that an impairment exists and records impairment equal to the amount by which the carrying value exceeds the fair value at that point in time. The Company has deemed the price of digital assets to be a level two input under the ASC 820 - “Fair Value Measurement” (“ASC 820”) hierarchy as there are multiple observable inputs (exchanges) that provide slightly differing benchmarks of digital asset value. Subsequent reversal of impairment losses is not permitted. Purchases of digital assets by the Company are included within investing activities in the accompanying Consolidated Statements of Cash Flows, while digital assets awarded to the Company through its mining activities are included as a reconciling item within operating activities on the accompanying Consolidated Statements of Cash Flows. The sales of digital assets are included within investing activities in the accompanying Consolidated Statements of Cash Flows and any realized gains or losses from such sales are included in other income (expense) in the Consolidated Statements of Other Comprehensive Income (Loss). Digital assets loan receivable When the Company loans digital assets to a borrower for a specific period of time in exchange for a fee akin to interest, the Company first evaluates whether to derecognize such loaned digital assets based on an evaluation of relevant control and asset derecognition considerations that include whether: ● the Company has transferred present rights to the economic benefits associated with the digital asset for a different right to receive digital assets in the future; ● the Company cannot sell, pledge, loan, or otherwise use the lent digital assets while the loan is outstanding, as those rights have been transferred to the borrower; ● inherent in the realization of the economic benefits associated with the digital asset loan receivable is exposure to credit risk of the borrower; and ● the borrower of the digital assets can deploy those assets at its discretion for the duration of the lending arrangement and bears the risk of loss or theft of those assets, and otherwise has the ability to direct the use of the assets transferred. If the Company concludes derecognition is appropriate, the Company derecognizes the loaned digital assets it no longer controls and recognizes a right to receive back in the future the loaned digital assets. The digital asset loan receivable is recorded at the fair value of the underlying loaned digital assets. Any difference between the fair value of the loaned digital assets and their pre-transfer carrying amount (i.e., derecognition amount) is recognized as a gain in the Consolidated Statements of Other Comprehensive Income (Loss). Throughout the loan period, the digital asset loan receivable continues to be measured at the fair value of the underlying loaned digital asset with changes recorded in operating income (loss) in current period earnings. When the digital assets on loan are returned to the Company, the receivable is derecognized and such loaned digital assets are re-recorded on the Company’s Consolidated Balance Sheets at the pre-derecognition carrying value of the digital asset loan receivable with no gain or loss realized at the derecognition of the loan. 36 At loan commencement and throughout the loan period, the Company considers and accounts for the credit risk of the borrower using the principles in Topic 326 – “Financial Instruments - Credit Losses” (“Topic 326”) to measure any credit impairment. The digital asset loan receivable is presented net of any allowance for credit losses. The Company utilizes the probability of default (“PD”) loss given default (“LGD”) approach to estimating the allowance for credit loss (“ACL”) at origination and subsequent reporting periods. In order to apply the PD LGD approach, management considers the lifetime of the digital asset loan receivable, the reasonable and supportable forecast period, and the PD LGD. The Company uses each instrument’s life of loan period for estimating current expected credit losses, unadjusted by any prepayment risk as any risk would be immaterial to either the repayment in kind or the accrued loan fee receivable. Revenues from contracts with customers The Company recognizes revenue in accordance with FASB ASC Topic 606 – “Revenue from Contracts with Customers” (“ASC 606”). The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle: ● Step 1: Identify the contract with the customer; ● Step 2: Identify the performance obligations in the contract; ● Step 3: Determine the transaction price; ● Step 4: Allocate the transaction price to the performance obligations in the contract; and ● Step 5: Recognize the revenue when the Company satisfies a performance obligation. In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract). If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following: ● Variable consideration 37 ● Constraining estimates of variable consideration ● The existence of a significant financing component in the contract ● Noncash consideration ● Consideration payable to a customer Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate. The Company’s ongoing major or central operation is to provide computing power to collectives of third-party bitcoin miners (such collectives, “mining pools”) as a participant (“Participant”) and bitcoin transaction verification services to the bitcoin network through a Company-operated mining pool as the operator and a participant (“Operator”) (such activity as Participant and Operator, collectively, “mining”). The Company currently mines in a self-operated pool, which was previously open to third-party pool participants from September 2021 until May 2022. Operator As an Operator, the Company provides transaction verification services. Transaction verification services are an output of the Company’s ordinary activities; therefore, the Company views the transaction requestor as a customer and accounts for the transaction fees it earns as revenue from contracts with customers under ASC 606. The bitcoin network is not an entity such that it may meet the definition of a customer; however, the Company has concluded it is appropriate to apply ASC 606 by analogy to block rewards earned from the network. A contract exists under ASC 606 at the point the Company successfully validates a transaction to the distributed ledger. At this point, the performance obligation to validate the requested transaction has been satisfied and a contract is deemed to exist. The Company also, from time to time, engages unrelated third-party mining enterprises (“pool participants”) to contribute computing power, and in exchange, remits transaction fees and block rewards to pool participants on a pro rata basis according to each respective pool participant’s contributed computing power (hash rate). The Company determined that it controls the service of providing transaction verification services to the network and requester as the Company’s wallet as Operator is recorded on the distributed ledger as the transaction verifier of record, the pool participants enter into contracts with the Company and not the network or requester, and the Company delegates mining work to pool participants. Therefore, the Company records all of the transaction fees and block rewards earned from transactions assigned to MaraPool as revenue, and the portion of the transaction fees and block rewards remitted to MaraPool participants as cost of revenues. ASC 606-10-32-21 requires entities to measure the estimated fair value of noncash consideration at contract inception, which is the same the time the block reward and transaction fee is earned and the performance obligation to the requester and the network is fulfilled by successfully validating the applicable block of transactions. For reasons of operational practicality, the Company applies an accounting convention to use the daily quoted closing U.S. dollar spot rate of bitcoin each day to determine the fair value of bitcoin earned as transaction fees and block rewards in the Company’s wallet during that day. This accounting convention does not result in materially different revenue recognition from using the fair value of the bitcoin earned at contract inception (i.e., the moment a block is earned) and has been consistently applied in all periods presented. 38 Participant As a Participant, the Company has entered into digital asset mining pools by executing contracts, with the mining pool operators to provide computing power to the mining pool. The contracts are terminable at any time by either party and the Company’s enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. In exchange for providing computing power, the Company is entitled to a fractional share of the fixed block award and transaction fees the mining pool operator receives, for successfully adding a block to the blockchain. The Company’s fractional share of the block reward and transaction fee is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the block. Providing computing power on rigs to solve complex cryptographic algorithms in support of blockchain mining (in a process known as “solving a block”) is the primary output of the Company’s ordinary activities. The provision of providing such computing power is the only performance obligation in the Company’s contracts with mining pool operators. The transaction consideration the Company receives is non-cash (i.e., bitcoin) and entirely variable as it is unknown at each contract inception whether the Company will earn any consideration during the period, and if it does become entitled to consideration, how much consideration it will be entitled to. In accordance with FASB ASC 606-10-32-11 and 32-12, the Company constrains the variable consideration to which it is entitled and does not recognize revenue for such amounts until it receives confirmation of the amount, usually via the settlement of the fractional share of block reward and transaction fee in the Company’s digital wallet (i.e., at that point, the variability is resolved and there is no longer the reasonable possibility of significant reversal of revenue). Before settlement occurs, estimation of the variable consideration to which the Company is entitled, which depends on inputs unknowable to the Company, carries the risk of a significant revenue reversal from mis-estimation. Settlement of consideration typically occurs within 24 hours of when a block is won unless such block is won over a weekend or holiday, in which case settlement can take up to 72 hours. The Company uses its accounting convention to recognize revenue using the daily quoted closing U.S. dollar spot rate of bitcoin on the day the transaction fees and block rewards are settled in the Company’s wallet. However, this accounting convention does not result in materially different revenue recognition from using the fair value of the bitcoin earned at contract inception and has been consistently applied in all periods presented. There is currently no definitive guidance under GAAP or alternative accounting framework for the accounting for digital assets recognized as revenue or held, and management expects to exercise significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the FASB, the Company may be required to change its policies, which could have an effect on the Company’s consolidated financial position and results from operations. Property and Equipment The Company has long-lived assets that consist primarily of property and equipment stated at cost, net of accumulated depreciation and impairment, as applicable. The depreciation charge is calculated on a straight-line basis and depends on the estimated useful lives of each type of asset and, in certain circumstances, estimates of fair values and residual values. The Company’s property and equipment is composed of bitcoin miners which are largely homogeneous and have approximately the same useful lives. Accordingly, the Company utilizes the group method of depreciation for its bitcoin miners. The Company updates the estimated useful lives of its asset group of bitcoin mining rigs periodically as information on the operations of the mining rigs indicates changes are required. The Company assesses and adjusts the estimated useful lives of its mining rigs when there are indicators that the productivity of the mining assets are higher or lower than the assigned estimated useful lives. 39 Impairment tests for items of property and equipment other than mining rigs are performed annually and the recoverable amounts in property equipment are determined based on the higher of value-in-use or fair value less costs to sell. Impairment of long-lived assets Management reviews long-lived assets that consist primarily of bitcoin mining rigs, and other long-lived assets such as patents held, 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. The Company determines the amount of impairment to record based on the fair value of the asset following the fair value measurement framework in ASC 820. Income taxes The primary objectives of accounting for income taxes are to recognize the amount of income taxes payable or refundable for the current year, and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. The Company accounts for income taxes in accordance with ASC 740 - “Income Taxes” (“ASC 740”), using the asset and liability method. Under this method, deferred tax assets and liabilities are calculated based on enacted tax rates and are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. Management must make assumptions, judgments and estimates to determine our income tax benefit or expense and our deferred tax assets and liabilities. We recognize tax positions when they are more likely than not of being sustained. Recognized tax positions are measured at the largest amount of benefit greater than 50 % likely of being realized. Each period, we evaluate tax positions and adjust related tax assets and liabilities in light of changing facts and circumstances. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. Accordingly, the need to establish such allowance is assessed periodically by considering matters such as future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and results of recent operations. Recent Accounting Pronouncements See NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES to our Consolidated Financial Statements for a discussion of recent accounting standards and pronouncements. 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 (loss) plus (b) adjustments to add back the impacts of (1) depreciation and amortization, (2) interest expense, (3) income tax expense (benefit) and (4) adjustments for non-cash and non-recurring items which currently include (i) stock compensation expense, (ii) impairments of patents and (iii) impairment losses related to the Compute North bankruptcy. 40 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 Interim 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. Operations Summary During the first quarter of 2022, the Company announced its intention of exiting the facility in Hardin, MT (“Hardin”). On July 28, 2022, the Company terminated its power purchase agreements and commenced the acceleration of its exit from Hardin. This exit was completed in September 2022. The Company had deployed approximately 30,000 mining rigs at Hardin. During the year ended December 31, 2022, the Company recorded accelerated hosting and depreciation costs related to this early exit from the Hardin facility. In addition to the accelerated depreciation expense, upon exiting the facility the Company determined that the useful lives of the remaining mining rigs formerly deployed at Hardin should be reduced from 36 months to 24 months. In late 2021, the Company contracted with a joint venture among Compute North and affiliates of NextEra Energy for hosting services in McCamey, TX and expected its mining rigs to begin coming online during the second quarter of 2022. King Mountain Upton Wind, LLC (“King Mountain”) had filed a petition on April 5, 2022 seeking a declaratory order to confirm its status as an exempt wholesale generator (“EWG”). In the Petition, King Mountain stated that it proposed to share ownership of interconnection facilities that are currently eligible facilities within the meaning of section 32(a)(2) of the Public Utility Holding Company Act (PUHCA) as tenants-in common with a retail energy customer. However, the approval of this petition was delayed until July 15, 2022, when the Federal Energy Regulatory Commission (“FERC”) found that King Mountain would retain its status as an EWG notwithstanding a proposal to share ownership of the Interconnection Facilities as tenants-in-common with a retail energy customer. As a result, the bulk of the Company’s rigs did not come online until the early part of the fourth quarter. On December 15, 2022, US Bitcoin Corp (“US Bitcoin”) replaced Compute North as a joint venture partner (and the operator of the facility) as a result of the Compute North bankruptcy. In July 2022, the Company expanded certain hosting arrangements with Compute North in Granbury, TX. On December 15, 2022, US Bitcoin Corp replaced Compute North as the operator of this facility as a result of the Compute North Bankruptcy. During the third and fourth quarters of 2022 the Company entered into a series of agreements to secure additional hosting capacity with Applied Digital as the partner at Garden City, TX, Ellendale, ND, and Jamestown, ND. These sites are expected to come online in phases during the first and second quarters of 2023. 41 Results of Operations – Year ended December 31, 2022 compared to December 31, 2021 (Restated) Financial Summary Table: Years ended December 31, (in thousands) 2022 2021 (Restated) Favorable (Unfavorable) Total revenues $ 117,753 $ 159,163 $ (41,410 ) Costs and expenses Cost of revenues Cost of revenues - energy, hosting and other (72,717 ) (27,491 ) (45,226 ) Cost of revenues - depreciation and amortization (78,709 ) (14,904 ) (63,805 ) Total cost of revenues (151,426 ) (42,395 ) (109,031 ) Operating expenses General and administrative expenses (56,739 ) (174,355 ) 117,616 Legal reserves (26,131 ) — (26,131 ) Impairment of deposits due to vendor bankruptcy filing (24,661 ) — (24,661 ) Impairment of digital assets (173,215 ) (30,329 ) (142,886 ) Impairment of patents (919 ) — (919 ) Impairment of mining equipment and advances to vendors (332,933 ) — (332,933 ) Realized and unrealized gains (losses) on digital assets loan receivable and digital assets (14,460 ) 557 (15,017 ) Gain on sale of equipment, net of disposals 83,880 — 83,880 Realized and unrealized gains (losses) on digital assets held within Investment Fund (85,017 ) 74,696 (159,713 ) Total operating expenses (630,195 ) (129,431 ) (500,764 ) Operating income (loss) (663,868 ) (12,663 ) (651,205 ) Other non-operating income (loss) 1,283 (287 ) 1,570 Impairment of loan and investment due to vendor bankruptcy filing (31,013 ) — (31,013 ) Interest expense (14,980 ) (1,570 ) (13,410 ) Income (loss) before income taxes (708,578 ) (14,520 ) (694,058 ) Income tax benefit (expense) 21,838 (22,576 ) 44,414 Net income (loss) $ (686,740 ) $ (37,096 ) $ (649,644 ) Supplemental information: Bitcoin (“BTC”) production during the period, in BTC 4,144 3,197 947 Total margin (revenues less total cost of revenues) $ (33,673 ) $ 116,768 $ (150,441 ) General and administrative expenses excluding stock-based compensation $ (32,144 ) $ (13,569 ) $ (18,575 ) Total impairments due to vendor bankruptcy filing $ (55,674 ) $ — $ (55,674 ) Total change in carrying value of digital assets $ (272,692 ) $ 44,924 $ (317,616 ) Reconciliation to Adjusted EBITDA: Net (loss) $ (686,740 ) $ (37,096 ) $ (649,644 ) Exclude: Interest expense 14,980 1,570 13,410 Exclude: Income tax expense (benefit) (21,838 ) 22,576 (44,414 ) EBIT (693,598 ) (12,950 ) (680,648 ) Exclude: Depreciation and amortization 78,709 14,904 63,805 EBITDA (614,889 ) 1,954 (616,843 ) Stock compensation expense 24,595 160,786 (136,191 ) Impairment of assets due to vendor bankruptcy filing 55,674 — 55,674 Impairment of patents 919 — 919 Adjusted EBITDA $ (533,701 ) $ 162,740 $ (696,441 ) 42 Revenues : We generated revenues of $117,753 thousand for the year ended December 31, 2022 compared with $159,163 thousand in 2021. The $41,410 thousand decrease in revenue was primarily driven by a $77,286 thousand decrease in revenue resulting from lower bitcoin prices in 2022, partially offset by increased revenues of $44,570 thousand related to a 30% increase in production year-over-year. Revenues also declined by $8,694 thousand in 2022 as the Company ceased operation of a mining pool that included third parties. Despite the overall increase in production for the year, the company experienced significant production downtime in the second and third quarters as a result of the aforementioned exit from Hardin and delays in energization at King Mountain. Production during the third quarter was down 50% from the prior year. Our best production quarters of 2022 were the first quarter and the fourth quarter. Cost of revenues : Cost of revenues – energy, hosting and other during the year ended December 31, 2022, totaled $72,717 thousand compared with $27,491 thousand in the prior-year period. The $45,226 thousand increase was driven by higher production costs of $30,134 thousand per bitcoin mined, accelerated costs of $18,218 thousand associated with the early exit from Hardin and to a lesser extent, the impact of increased bitcoin production on costs of $5,566 thousand. Partially offsetting these increased costs was an $8,694 thousand decline in cost of revenues related to the discontinuation of the third party mining pool in 2022. Cost of revenues – depreciation and amortization was $78,709 thousand in the current-year period compared with $14,904 thousand in the prior-year period, an increase of $63,805 thousand. This increase was primarily due to the depreciation acceleration of $36,032 thousand related to our exit of the Hardin, MT facility and increased depreciation costs of $27,773 thousand associated with a higher number of mining rigs in operation. Total Margin : Total margin was a loss of $33,673 thousand in the current-year period compared with income of $116,768 thousand in the prior-year period, a decline of $150,441 thousand. This decline was driven by the factors discussed above, which are summarized in the table below: Revenue: (in thousands) ● Impact of higher production activity $ 44,570 ● Impact of lower bitcoin market prices (77,286) ● Impact of discontinuation of third party mining pool vs prior year (8,694) Cost of revenue – energy, hosting and other: ● Impact of higher unit costs (30,134) ● Impact of accelerated cost recognition from Hardin exit (18,218) ● Impact of higher production activity (5,566) ● Impact of discontinuation of third party mining pool vs prior year 8,694 Cost of revenue – depreciation and amortization: ● Impact of accelerated cost recognition from Hardin exit (36,032) ● Other, primarily increased mining rigs in operation (27,773) $ (150,439) General and administrative expenses : General and administrative expenses were $56,739 thousand for the year ended December 31, 2022, compared with expenses of $174,355 thousand in the prior-year period. Our general and administrative expenses included stock-based (non-cash) compensation expense of $24,595 thousand in the current-year period and $160,786 thousand in the prior-year period. General and administrative expenses excluding stock-based compensation was $32,144 thousand in the current-year period compared with $13,569 thousand in the prior-year period. This $18,575 thousand increase in expense was primarily due to the increase in the scale of the business, including higher payroll and benefits costs of $7,173 thousand, increased professional fees of $3,590 thousand, increased insurance costs of $3,810 thousand, higher travel and conference costs of $2,186 thousand and higher costs in various other areas related to the increased scale of the business, including higher property taxes, banking fees, rent expense, computer costs and equipment repairs. 43 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, the Company entered into a settlement agreement pursuant to which the Company agreed to pay $24,000 thousand during the year ended December 31, 2022. The Company also entered into agreements in respect to seven other recipients of the same restricted stock unit awards. Payments related to these agreements during the year ended December 31, 2022 totaled approximately $2,131 thousand in the aggregate. Total impairments due to vendor bankruptcy filing: On September 22, 2022, Compute North filed for restructuring under chapter 11 of the U.S. Bankruptcy Code. During the year ended December 31, 2022, the Company assessed the impairment of assets associated with Compute North due to the bankruptcy proceedings. As a result, the Company recorded impairment charges of approximately $24,661 thousand in operating expenses (related to deposits) and approximately $31,013 thousand (related to certain loans and preferred stock investments) as non-operating expenses. Total change in carrying value of digital assets: ● Impairment of digital assets : We incurred impairments of digital assets during the year ended December 31, 2022 of $173,215 thousand compared with impairments of $30,329 thousand in the prior-year period. ● Realized and unrealized gains (losses) on digital assets loan receivable and digital assets : We incurred a loss of $14,460 thousand during the year ended December 31, 2022 compared with a gain of $557 thousand in the prior year period. The loss in the current year period was primarily a result of the decline in fair value of digital asset loan receivable prior to the repayment of the loan in June, 2022. The gain in the prior year period was primarily the result of a modest increase in the fair value of the loan receivable. ● Change in fair value of digital assets held in fund : On June 10, 2022, the company withdrew all remaining bitcoin from its investment fund. Total changes in the fair value of investment fund from January 1, 2022 through the June 10, 2022 withdrawal date resulted in an unrealized loss of $85,017 thousand in the current year period. During the prior-year period, the change in fair value of the bitcoin held in the investment fund was an unrealized gain of $74,696 thousand. Impairment of patents: The Company recorded an impairment of $919 thousand in the current-year period related to certain patents no longer utilized in its business operations. Impairment of fixed assets and advances to vendors: In accordance with ASC 360-10 – “Impairment and Disposal of Long-Lived Assets” (“ASC 360”), any long-lived asset group that is held and used must be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset group might not be recoverable. Due to the significant decrease in fair values of bitcoin mining rigs during the fourth quarter ended December 31, 2022, the Company assessed the need for an impairment write-down of both bitcoin mining rigs (held as fixed assets) and advances to vendors (a current asset) representing deposits associated with the future delivery of mining rigs. In accordance with ASC 360-10, the Company determined that both of these asset categories had carrying values in excess of fair value, and accordingly, the Company recognized impairment charges for both the bitcoin mining rigs of $208,622 thousand and the advances to vendors of $124,311 thousand – a total impairment of approximately $332,933 thousand for the year ended December 31, 2022. In addition, as part of its periodic review of its fixed asset groups, the Company decided to change the estimated useful life for its asset group of mining rigs from 5 years to 3 years, effective January 1, 2023. Gain on sales of equipment, net : In late 2021, the Company entered into an agreement with DCRBN Ventures Development and Acquisition LLC (“DCRBN”) in which the Company agreed to sell certain mining rigs to DCRBN in conjunction with the development of commercial activities at the McCamey, TX facility. In conjunction with its exit from the Hardin, MT facility, the Company also sold bitcoin mining rigs to various third parties. Total cash proceeds from these sales of assets for the year ended December 31, 2022 were $178,371 thousand and gains resulting from the asset sales totaled $83,880 thousand in the current-year period. There were no such sales in 2021. Other non-operating income (loss) : Other non-operating income was $1,283 thousand during the current year period compared to a loss of $287 thousand in the prior-year period. The $1,570 thousand favorable variances was primarily due to the absence of warrant expense of $1,048 thousand recorded in the prior-year period to a lesser extent, increased interest income and other income. Interest expense : Interest expense increased $13,410 thousand from the prior year as a result of higher interest related to the convertible notes issued in November 2021 of $6,633 thousand, amortization of debt issuance costs of $3,664 thousand and other interest costs primarily related to the Company’s Term loan and revolving credit (“RLOC”) facilities. 44 Income tax (expense) benefit : The Company recorded income tax benefit of $21,838 thousand for the year ended December 31, 2022 compared with an income tax expense of $22,576 thousand in the prior-year period. The primary drivers of the $44,414 thousand favorable tax variance were favorable federal impacts vs. the prior-year period of $145,657 thousand), favorable state tax impacts vs. the prior-year period of $18,684 thousand, and beneficial impacts of changes in executive compensation deduction limitations of $22,855 thousand partially offset by unfavorable impact of changes in our valuation allowance of $145,004 thousand Net loss : We recorded a net loss of $686,740 thousand in the current-year period compared with net loss of $37,096 thousand in the prior period. The $649,644 thousand decline in earnings was primarily driven by declines in the carrying value of our digital assets of $317,616 thousand in the aggregate, the impairment of mining rigs and advances to vendors of $332,933 thousand in the aggregate, lower total margin of $150,441 thousand, impairments of $55,674 thousand related to the Compute North bankruptcy, legal reserves of $26,131 thousand and increased interest expense of $13,410 thousand. Partially offsetting these unfavorable variances was a significant reduction in general and administrative expenses of $117,616 thousand primarily associated with lower stock-based compensation, gains on sales of rigs of $83,880 thousand, the $44,414 thousand favorable income tax variance and a slight increase in other non-operating income. Adjusted EBITDA : Adjusted EBITDA was a loss of $533,701 thousand compared with a positive adjusted EBITDA of $162,740 thousand in the prior-year period. The $696,441 thousand decline was primarily driven by declines in the carrying value of our digital assets of $317,616 thousand in the aggregate, the impairment of mining rigs and advances to vendors of $332,933 thousand in the aggregate, lower total margin excluding depreciation and amortization of $86,636 thousand, legal reserves of $26,131 thousand, and higher general and administrative expenses, excluding non-cash stock-based compensation costs of $18,575 thousand. Partially offsetting these unfavorable variances were gains on the sales of mining rigs of $83,880 thousand and increases in non-operating income of $1,570 thousand. Results of Operations – Year ended December 31, 2021 (Restated) compared to December 31, 2020 Financial Summary Table: Years ended December 31, (in thousands) 2021 (Restated) 2020 Favorable (Unfavorable) Total revenues $ 159,163 $ 4,357 $ 154,806 Costs and expenses Cost of revenues Cost of revenues - energy, hosting and other (27,491 ) (3,851 ) (23,640 ) Cost of revenues - depreciation and amortization (14,904 ) (3,064 ) (11,840 ) Total cost of revenues (42,395 ) (6,915 ) (35,480 ) Operating expenses General and administrative expenses (174,355 ) (6,404 ) (167,951 ) Impairment of digital assets (30,329 ) — (30,329 ) Impairment of mining equipment and advances to vendors — (871 ) 871 Realized and unrealized gains (losses) on digital assets loan receivable and digital assets 557 15 542 Realized and unrealized gains (losses) on digital assets held within Investment Fund 74,696 — 74,696 Total operating expenses (129,431 ) (7,260 ) (122,171 ) Operating income (loss) (12,663 ) (9,818 ) (2,845 ) Other non-operating income (loss) (287 ) (607 ) 320 Interest expense (1,570 ) (21 ) (1,549 ) Income (loss) before income taxes (14,520 ) (10,446 ) (4,074 ) Income tax benefit (expense) (22,576 ) (2 ) (22,574 ) Net income (loss) $ (37,096 ) $ (10,448 ) $ (26,648 ) Supplemental information: Bitcoin (“BTC”) production during the period, in BTC 3,197 338 2,859 Total margin (revenues less total cost of revenues) $ 116,768 $ (2,558 ) $ 119,326 General and administrative expenses excluding stock-based compensation $ (13,569 ) $ (5,226 ) $ (8,343 ) Total change in carrying value of digital assets $ 44,924 $ 15 $ 44,909 Reconciliation to Adjusted EBITDA: Net (loss) $ (37,096 ) $ (10,448 ) $ (26,648 ) Exclude: Interest expense 1,570 21 1,549 Exclude: Income tax expense 22,576 2 22,574 EBIT (12,950 ) (10,425 ) (2,525 ) Exclude: Depreciation and amortization 14,904 3,064 11,840 EBITDA 1,954 (7,361 ) 9,315 Stock compensation expense 160,786 1,178 159,608 Adjusted EBITDA $ 162,740 $ (6,183 ) $ 168,923 Revenues : We generated revenues of $159,163 thousand during the year ended December 31, 2021, compared with $4,357 thousand during the prior-year period. The $154,806 thousand increase was primarily attributable to the impact of significantly higher bitcoin prices, which resulted in a $109,253 thousand increase in revenue, increased production, which resulted in a $36,854 thousand increase in revenue, and, to a lesser extent a $8,699 thousand increase in revenues related to the Company’s operation of a mining pool that included third parties in 2021. 45 Cost of revenues : Cost of revenues - energy, hosting and other during the year ended December 31, 2021, totaled $27,491 thousand compared with $3,851 thousand in the prior-year period. The $23,640 thousand increase was driven by increased production of $32,574 thousand, and increased cost of revenues associated with the third party mining pool of $8,699 thousand partially offset by lower production costs per bitcoin mined of $17,633 thousand. Cost of revenues – depreciation and amortization was $14,904 thousand for the year ended December 31, 2021, compared with $3,064 thousand in 2020, an increase of $11,840 thousand resulting from a higher number of mining rigs in operation in 2021. Total Margin: Total margin was $116,768 thousand for the year ended December 31, 2021, compared with a loss of $2,558 thousand in 2020, an increase of $119,326 thousand. This increase was driven by the factors discussed above, which are summarized in the table below: Revenue: (in thousands) ● Impact of higher production activity $ 36,854 ● Impact of lower bitcoin market prices 109,253 ● Impact of third party mining pool 8,699 Cost of revenue – energy, hosting and other: ● Impact of higher production activity (32,574) ● Impact of third party mining pool (8,699) ● Impact of decreased cost per bitcoin mined 17,633 Cost of revenue – depreciation and amortization: ● Primarily increased mining rigs in operation (11,840) $ 119,326 General and administrative expenses : General and administrative expenses were $174,355 thousand for year ended December 31, 2021 compared with expenses of $6,404 thousand in 2020, an increase of $167,951 thousand. Our general and administrative expenses included stock-based (non-cash) compensation expense of $160,786 thousand in the year ended December 31, 2021 compared with $1,178 thousand in the prior-year period. General and administrative expenses excluding stock-based compensation increased to $13,569 thousand in 2021 from $5,226 thousand in 2020, reflecting the increased scope of our operations in 2021 compared to 2020. Total change in carrying value of digital assets: ● Impairment of digital assets : We incurred impairments of digital assets during the year ended December 31, 2021 of $30,329 thousand. There were no such impairments in 2020. ● Change in fair value of digital assets held in fund : On January 25, 2021, the company purchased $150,000 thousand in bitcoin through an investment fund. Total changes in the fair value of the investment fund from the date of inception through December 31, 2021 resulted in an unrealized gain of $74,696 thousand. Impairment of mining rigs: The Company recorded an impairment of $871 thousand on certain mining rigs in 2020. Other non-operating income : Other non-operating income was a loss of $287 thousand in 2021 and a loss of $607 thousand in 2020. Interest expense: Interest expense increased to $1,570 thousand for the year ended December 31, 2021 primarily as a result of interest related to the convertible notes issued in November 2021. Income tax expense : Income tax expense increased to $22,576 thousand in 2021 versus $2 thousand in 2020 primarily due to the impact executive compensation deduction limitations in 2021 and higher state income taxes partially offset by the impact of a higher valuation allowance in 2021. Net loss : We recorded a net loss of $37,096 thousand for the year ended December 31, 2021 compared with a net loss of $10,448 thousand in 2020. The $26,648 thousand decline was primarily driven by the $167,951 thousand increase in general and administrative expenses, the $30,329 thousand impairment of digital assets in 2021 and the $22,574 thousand increase in income tax expense in 2021, partially offset by the $119,326 thousand increase in total margin and the $74,696 thousand unrealized gain on the value of bitcoin held in the investment fund. 46 Adjusted EBITDA : Adjusted EBITDA for the year ended December 31, 2021 was $162,740 thousand compared with a adjusted EBITDA loss of $6,183 thousand in 2020. The $168,923 thousand increase in adjusted EBITDA was primarily driven by the $131,166 thousand increase in total margin excluding depreciation and amortization and the $74,696 thousand unrealized gain on the value of bitcoin held in the investment fund, partially offset by the $30,329 thousand impairment of digital assets in 2021, and a $8,343 thousand increase in operating expenses excluding non-cash stock compensation costs. Financial Condition and Liquidity For the year ended December 31, (in thousands) 2022 2021 (Restated) Net cash used in operating activities $ (176,481 ) $ (18,966 ) Net cash used in investing activities (390,228 ) (891,136 ) Net cash provided by financing activities 410,655 1,037,333 Net (decrease) increase in cash, cash equivalents and restricted cash (156,054 ) 127,231 Cash, cash equivalents and restricted cash — beginning of period 268,556 141,323 Cash, cash equivalents and restricted cash — end of period $ 112,502 $ 268,554 Cash flows for the year ended December 31, 2022: Cash, cash equivalents and restricted cash totaled $112,502 thousand at December 31, 2022, a decrease of $156,054 thousand from December 31, 2021. Cash flows from operating activities resulted in a use of funds of $176,481 thousand, primarily due to a $176,566 thousand use of cash from changes in operating assets and liabilities driven by bitcoin mining revenues, and, to a lesser extent prepaid expenses associated with new hosting arrangements (a $48,886 thousand use of funds) and deposits associated with new hosting arrangements (a $24,469 thousand use of funds). These uses of funds were partially offset by a source of funds from changes in accounts payable and other accrued expenses. Cash flows from investing activities resulted in a use of funds of $390,228 thousand, primarily resulting from advances of $483,840 thousand to vendors related to orders of ASICs miners for future deployment, a $44,000 thousand use of funds for investment purposes (primarily an increased investment in Auradine) and capitalized costs of $41,108 thousand associated with purchases of equipment, partially offset by proceeds of $178,371 thousand from the sales of bitcoin mining rigs. Cash flows from financing activities resulted in a source of cash of $410,655 thousand, primarily from proceeds from the periodic issuance of common stock under the Company’s At-The-Market facility of $361,486 thousand and proceeds from borrowings outstanding under the term loan agreement of $49,250 thousand. The maximum borrowings outstanding under the Company’s revolving credit facilities during the year ended December 31, 2022 was $70,000 thousand. Total borrowings and repayments under the RLOC facilities were $120,000 thousand during the year ended December 31, 2022 and there were no borrowings outstanding under the RLOC facility at December 31, 2022. Cash flows for the year ended December 31, 2021 : Cash, cash equivalents and restricted cash totaled $268,554 thousand at December 31, 2021, an increase of $127,233 thousand from December 31, 2020. Cash flows from operating activities resulted in a use of funds of $18,966 thousand. Cash flows from operating activities before the impact of changes in operating assets and liabilities was a $117,311 thousand source of funds primarily due to the impact of non-cash stock-based compensation. This source of funds was more than offset by a $136,277 thousand use of funds from changes in operating assets and liabilities. This was primarily caused by a use of funds from changes in digital assets (primarily due to revenues from bitcoin mining) partially offset by a source of funds resulting from changes in accounts payable and accrued expenses. 47 Cash flows from investing activities resulted in a use of funds of $891,136 thousand, primarily resulting from advances to vendors of $435,065 thousand, capitalized costs associated with equipment purchases of $273,851 thousand, purchases of digital assets in the investment fund of $150,000 thousand, and a loan receivable from Compute North of $30,000 thousand. Cash flows from financing activities resulted in a source of cash of $1,037,333 thousand, primarily from proceeds from the issuance of convertible debt of $728,406 thousand and common stock of $312,196 thousand. Total borrowings and repayments under the Company’s 2021 RLOC facility were $77,500 thousand during the year ended December 31, 2021 and there were no borrowings outstanding under the 2021 RLOC facility at December 31, 2021. Bitcoin holdings as of December 31, 2022: At December 31, 2022, the Company held approximately 12,232 bitcoin on its balance sheet with a carrying value of $190,717 thousand. Approximately 4,416 of these bitcoin ($68,875 thousand book value) were being utilized as collateral for borrowings and classified as digital assets restricted. The remaining 7,816 bitcoin, with $121,842 thousand book value, were unrestricted bitcoin holdings classified as digital assets. At December 31, 2022, the fair value of a single bitcoin was approximately $ 16,548 . As a result, the fair market value of our bitcoin holdings at December 31, 2022 was approximately (stated in thousands): ● Unrestricted bitcoin classified as Digital assets: $129,335 ● Bitcoin utilized as collateral and classified as Digital assets, restricted: $73,074 Bitcoin held as collateral for loans (“Digital assets, restricted”): The Company’s $ 49,882 thousand term loan and its $100,000 thousand RLOC facility are collateralized by bitcoin at a “loan-to-value” ratio of 65%, meaning that the initial collateral for a $50,000 thousand loan is bitcoin with a market value of $76,900 thousand. If the fair market value of bitcoin held as collateral declines such that the loan-to-value ratio is above 75%, or approximately $66,700 thousand for a $50,000 thousand loan, the Company is required to add collateral to bring the ratio back to 65%. If the value of the collateral increases such that the loan-to-value ratios falls below 65%, the Company can require a return of collateral to bring the ratio back to 65%. During the month of October 2022, the Company borrowed an additional $50,000 thousand under its RLOC facility for general corporate purposes and provided an additional 3,993 of bitcoin as collateral for this borrowing. This increased the Company’s collateral balance at that time (for its outstanding $49,882 thousand term loan and the additional $50,000 thousand RLOC borrowing) to 7,821 bitcoin. On November 9, 2022, bitcoin prices declined to a new yearly low on concerns of financial instability in the industry as a result of the FTX collapse. As a result, the Company was required to provide an additional 1,669 bitcoin (fair valued at $16,213 per bitcoin) as collateral for its outstanding borrowings, bringing its total collateral balance to 9,490 bitcoin (or approximately $153,900 thousand fair value). The Company’s total bitcoin holdings as of November 9, 2022, were 11,440 bitcoin, of which 1,950 (approximately $31,600 thousand) were unrestricted. During November and December 2022, the Company repaid the $50,000 thousand in RLOC borrowings. This repayment enabled the Company to reduce its bitcoin held as collateral to approximately 4,416 bitcoin (with a fair value of approximately $73,074 thousand) by December 31, 2022. Bitcoin holdings outlook: We expect that our future bitcoin holdings will generally increase but will fluctuate from time-to-time, both in number of bitcoin held and fair value in US dollars, depending upon operating and market conditions. For example, we would expect: ● Our bitcoin holdings and the value of those holdings will increase most significantly in periods where we experience both higher production and higher bitcoin prices. 48 ● Our bitcoin holdings and value of those holdings will be mixed in periods with either (1) higher production combined with lower bitcoin prices, or (2) lower production combined with higher bitcoin prices. ● Our bitcoin holdings and the value of those holdings will most likely decrease in periods where we experience both lower production and lower bitcoin prices. We intend to add to our bitcoin holdings primarily through our production activities and we also intend to sell bitcoin as a means of generating cash to cover monthly operating costs and for general corporate purposes. We do not intend to make any significant purchases of bitcoin on the open market as means of increasing our bitcoin holdings, although we may buy and sell bitcoin from time-to-time (separately from what is outlined above) for treasury management purposes. Liquidity outlook: Cash and cash equivalents, excluding restricted cash, totaled $103,705 thousand at December 31, 2022. The Company expects to have sufficient liquidity, including cash on hand, cash received from sales of our bitcoin holdings, and access to public capital markets to support ongoing operations. Our primary source of funding during 2022 and 2021 (other than the asset sales described above during 2022) has been capital markets activities (primarily through our At-The-Market facility and our 2021 convertible debt offering). We will continue to seek to fund our business activities, and especially our growth opportunities, through the public capital markets, primarily through periodic equity issuances using our At-The-Market facility. The risks to our liquidity outlook would include events that materially diminish our access to capital markets and/or the value of our bitcoin holdings and production capabilities, including: ● Failure to effectively execute our growth strategies. ● Additional challenges in the bitcoin mining space and/or additional contagion events (like the FTX collapse) that would damage the credibility of, and therefore investor confidence in, companies engaged in the digital assets space. ● Additional declines in bitcoin prices and/or production, which would impact both the value of our bitcoin holdings and our ongoing profitability. ● Significant increases in electricity costs if these cost increases were not accompanied by increases in the price of bitcoin, as this would also reduce profitability. ● Deteriorating macroeconomic conditions (for example a recession in 2023 that is deeper or longer than current expectations) Subsequent Events On January 27, 2023, the Company and FSI entered into an Agreement regarding formation of an Abu Dhabi Global Markets company (the “ADGM Entity”), whose purpose shall be to jointly (a) establish and operate one or more mining facilities for digital assets; and (b) mine digital assets. The initial project by the ADGM Entity shall consist of two digital asset mining sites comprising 250 MW in Abu Dhabi, and the initial equity ownership in the ADGM Entity shall be 80% FSI and 20% the Company, and capital contributions will be made, subject to the satisfaction or waiver of certain conditions, during the 2023 development period in those proportions, consisting of both cash and in kind, in amounts of approximately $406,000 thousand in aggregate. On February 6, 2023, the Company provided Silvergate Bank with the required 30-day notice stating the Company’s intent to prepay the outstanding balance on its term loan facility as well as the Company’s intent to terminate the term loan facility. The Company and Silvergate subsequently agreed to also terminate the revolving line of credit (“RLOC”) facility. On March 8, 2023, the term loan prepayment was completed, and the Company’s term loan and RLOC facilities with Silvergate Bank were terminated. On March 12, 2023, Signature Bank was closed by its state chartering authority, the New York State Department of Financial Services. On the same date the Federal Deposit Insurance Corporation (“FDIC”) was appointed as receiver and transferred all customer deposits and substantially all of the assets of Signature Bank to Signature Bridge Bank, N.A., a full-service bank that is being operated by the FDIC. The Company automatically became a customer of Signature Bridge Bank, N.A. as part of this action. The Company held approximately $142,000 thousand cash deposits at Signature Bridge Bank, N.A.as of March 12, 2023. Normal banking activities resumed on Monday, March 13, 2023. Off-Balance Sheet Arrangements None. 49