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. 23 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 Overview The Company was incorporated in the State of Nevada on February 23, 2010 under the name Verve Ventures, Inc. In October 2012, 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 March 31, 2023, the Company is solely focused on the mining of bitcoin and ancillary opportunities within the Bitcoin ecosystem under the name Marathon Digital Holdings, Inc. and operates primarily in the United States and with certain strategic joint ventures in the Middle East under development. Developments during the three months ended March 31, 2023 The Company has continued its focus on expanding its operational capabilities during the period both domestically and internationally. On January 27, 2023, the Company and FS Innovation, LLC (“FSI”) entered into a Shareholders’ Agreement (the “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 (collectively, the “Business”). 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 million in aggregate. FSI will appoint four directors to the board of the ADGM Entity, and the Company will appoint one director. Unless otherwise not permitted by applicable law, the digital assets mined by the ADGM Entity will be distributed to the Company and FSI twice a month in proportion to their respective equity interests in the ADGM Entity. There are market provisions in the Agreement with respect to financial and tax matters. 24 The Agreement shall terminate at the earlier of the mutual written agreement of the parties, winding up of the ADGM Entity or the ownership by a shareholder of all of the outstanding equity interests in the ADGM Entity. The Agreement contains market terms on transfer of shares by a shareholder, pre-emptive rights and certain tag along and drag along rights upon a sale of the ADGM Entity. Furthermore, there are five year restrictive covenants which, inter alia , prevent Marathon from competing in the UAE with the Business or with the business of FSI or any of certain related parties and prevent FSI from competing in the U.S. with the business of Marathon. The Company also made progress in installing and energizing its operations at various locations throughout the US, and in particular its two North Dakota sites. The Garden City, TX site is fully installed but is pending regulatory approval and was therefore not yet operational at March 31, 2023. Bitcoin production increased to 2,195 bitcoin during the three months ended March 31, 2023, an average of 24.4 bitcoin per day. During the three months ended March 31, 2022, we produced 1,259 bitcoin, an average of 14.0 bitcoin per day. The 74% increase in production was a result of increasing the scale of our operations, primarily from the commencement and ramp up of operations at our North Dakota sites. Bitcoin prices also rebounded significantly during the 2023 period, increasing from $16,548 per bitcoin at December 31, 2022 to $28,474 per bitcoin at March 31, 2023. This increase in the market value of bitcoin resulted in lower levels of impairment recorded during the period, and a higher market value of our bitcoin holdings at March 31, 2023 compared with December 31, 2022. The Company also commenced a program to sell some of its bitcoin as a means of offsetting monthly cash operating costs. We sold 2,900 bitcoin for total proceeds of $62,646 thousand, realizing gains on sales of bitcoin of $17,615 thousand during the three months ended March 31, 2023. There were no such sales in the prior-year period. The Company terminated its credit facilities with Silvergate Bank and responded to the closure of Signature Bank by diversifying its cash management services among several institutions. Key activities during the period related to these efforts included the following: ● 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. ● On March 12, 2023, Signature Bank was closed by 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 was being operated by the FDIC. The Company held approximately $142,000 thousand cash deposits at Signature Bridge Bank, N.A. when normal banking activities resumed on March 13, 2023. The Company reduced its balances at Signature Bridge Bank and its successor institution by transferring funds to other financial institutions and through other treasury management activities. The Company no longer has any deposits at Signature Bank or its successors. 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 ● Revenue from contracts with customers ● Long-lived assets ● Income taxes 25 Digital assets Digital assets (bitcoin) are included in current and other assets in the accompanying consolidated condensed balance sheet. 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 1 input under the ASC 820 - “Fair Value Measurement” (“ASC 820”) hierarchy as these were based on observable quoted prices in the Company’s principal market for identical assets. Subsequent reversal of impairment losses is not permitted. Purchases of digital assets by the Company are included within investing activities in the accompanying consolidated condensed 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 condensed statements of cash flows. The sales of digital assets are included within investing activities in the accompanying consolidated condensed statements of cash flows and any realized gains or losses from such sales are included in operating expenses in the consolidated condensed statements of operations. 26 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 an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle: ● Step 1: Identify the contract with the customer ● Step 2: Identify the performance obligations in the contract ● Step 3: Determine the transaction price ● Step 4: Allocate the transaction price to the performance obligations in the contract ● Step 5: Recognize the revenue when the Company satisfies a performance obligation In order to identify the performance obligations in a contract with a customer, an entity 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 ● 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 bitcoin transaction verification services to the bitcoin network through a Company-operated mining pool as the operator and a participant in a private pool (“Operator”) (such activity as Participant and Operator, collectively, “mining”) and to provide computing power to collectives of third-party bitcoin miners (such collectives, “mining pools”) as a participant (“Participant”). The Company currently mines in a self-operated pool, which was previously open to third-party pool participants from September 2021 until May 2022. 27 Operator As 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 a contract with a customer under ASC 606. The bitcoin network is not an entity such that it may not 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 engaged unrelated third-party mining enterprises (“pool participants”) to contribute computing power, and in exchange, remitted 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 controlled the service of providing transaction verification services to the network and requester as the Company’s wallet as Operator was recorded on the distributed ledger as the transaction verifier of record, the pool participants entered into contracts with the Company and not the network or requester, and the Company delegated mining work to pool participants. Therefore, the Company recorded 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 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 solved) and has been consistently applied in all periods presented. Participant When the Company is a Participant in a third-party operated mining pool, the Company provides hash rate that is an output of the Company’s ordinary activities in exchange for consideration. The Company considers the third-party mining pool operators its customers under Topic 606. These contracts are period-to-period contracts because they are terminable at any time by either party without compensation. A new contract is determined to exist each period (i.e., second, minute, hour) that neither the Company, nor the pool operator, terminates the arrangement. The consideration to which the Company is entitled is a fractional share of the block award and transaction fees; the amount of which is based on the proportion of the Company’s contributed hash rate to the total computing power contributed by all mining pool participants in solving the current algorithm as calculated and determined by the pool operator, usually through usage of a mining software, net of any pool fees due to the pool operator. The Company receives the consideration in aggregate typically within 24 hours of winning the block, and any disputes to the consideration to which the Company is entitled can be made by notifying and resolving the issues with the pool operators. However, there have not been any subsequent adjustments to the fees received, therefore the Company concludes that it is probable that a significant reversal of revenue recognized will not occur upon settlement. 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 computing power is the only performance obligation under our arrangements with third-party 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 fees in the Company’s digital wallet. Since the Company does not have visibility on its contributed computing power relative to the pool’s total computing power, which is one of the key inputs that determine the fractional block reward and transaction fees share to which it is entitled to; therefore, it only knows the amount of non-cash consideration to which it is entitled upon settlement of the Company’s earned fractional share into its digital wallet. Because of this and the fact that the Company’s fractional share substantively varies from block to block, it is not probable that a significant reversal of revenue will not occur until the uncertainty related to the Bitcoin to which the Company is entitled ultimately resolves at settlement. At settlement, the total block reward and transaction fees consideration earned by the pool operator are allocated and distributed (with no provision for, or risk of, clawback) by the pool operator to each participant based on each participant’s contribution of computing power. Consequently, at that point in time, the risk of significant revenue reversal abates such that consideration should be added to the transaction price (and revenue recognized accordingly). 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. 28 The Company uses its accounting convention to measure revenue based upon 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. 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. Long-lived assets 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 primarily 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. Management reviews the Company’s long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of their carrying amount to the undiscounted future cash flows expected to be generated thereby. If such assets are not recoverable based on that test, impairment is recorded in the amount by which the carrying amount of the assets exceeds their fair value as determined in accordance with ASC 820. Income taxes The primary objectives of accounting for income taxes are (i) to recognize the amount of income taxes payable or refundable for the current year, and (ii) to recognize 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, the Company evaluates tax positions and adjust related tax assets and liabilities in light of changing facts and circumstances. The Company records 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 Issued Accounting Standards See NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES to our consolidated condensed 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) losses on extinguishment of debt. 29 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. Results of Operations – Three months ended March 31, 2023 compared to the three months ended March 31, 2022 Financial Summary Table: Three Months Ended March 31, Favorable (in thousands) 2023 2022 (Unfavorable) Total revenues $ 51,132 $ 51,723 $ (591 ) Costs and expenses Cost of revenues Cost of revenues - energy, hosting and other (33,377 ) (12,522 ) (20,855 ) Cost of revenues - depreciation and amortization (17,733 ) (13,877 ) (3,856 ) Total cost of revenues (51,110 ) (26,399 ) (24,711 ) Operating expenses General and administrative expenses (15,344 ) (15,515 ) 171 Impairment of digital assets (6,151 ) (17,647 ) 11,496 Impairment of patents — (919 ) 919 Realized gains on digital assets and unrealized gains (losses) on digital assets loan receivable 17,615 (461 ) 18,076 Realized and unrealized gains (losses) on digital assets held within Investment Fund — (5,328 ) 5,328 Total operating expenses (3,880 ) (39,870 ) 35,990 Operating loss (3,858 ) (14,546 ) 10,688 Other non-operating income 791 247 544 Loss from extinguishment of debt (333 ) — (333 ) Interest expense (3,760 ) (2,814 ) (946 ) Loss before income taxes (7,160 ) (17,113 ) 9,953 Income tax benefit (expense) (75 ) 4,262 (4,337 ) Net loss $ (7,235 ) $ (12,851 ) $ 5,616 Supplemental information: Bitcoin (“BTC”) production during the period, in whole BTC 2,195 1,259 936 Average BTC per day, in whole BTC 24.4 14.0 10.4 Total margin (total revenues less total cost of revenues) $ 22 $ 25,324 $ (25,302 ) Total margin excluding depreciation and amortization $ 17,755 $ 39,201 $ (21,446 ) General and administrative expenses excluding stock-based compensation $ (11,399 ) $ (6,240 ) $ (5,159 ) Installed Hash Rate (Exahashes per second) - at end of period (1) 15.4 3.9 11.5 Energized Hash Rate (Exahashes per second) - at end of period (1) 11.5 3.9 7.6 Reconciliation to Adjusted EBITDA: Net (loss) $ (7,235 ) $ (12,851 ) $ 5,616 Exclude: Interest expense 3,760 2,814 946 Exclude: Income tax expense (benefit) 75 (4,262 ) 4,337 EBIT (3,400 ) (14,299 ) 10,899 Exclude: Depreciation and amortization 17,733 13,877 3,856 EBITDA 14,333 (422 ) 14,755 Stock compensation expense 3,945 9,275 (5,330 ) Loss from extinguishment of debt 333 — 333 Impairment of patents — 919 (919 ) Adjusted EBITDA $ 18,611 $ 9,772 $ 8,839 (1) The Company defines Energized Hash Rate as the total hash rate that could theoretically be generated if all mining rigs that have been operational / energized are currently in operation and running at 100% of the manufacturers’ specifications (includes mining servers that are offline for maintenance or similar reasons). The Company uses this metric as an indicator of progress in bringing rigs on-line. The Company defines Installed Hash Rate as the sum of Energized Hash Rate and hash rate that has been installed but is not yet operational (e.g. mining rigs that have been installed, but are not yet energized and in operation). The Company uses this metric as an indicator of progress in deploying mining rigs at its production sites. Hash rates are estimates based on the manufacturers’ specifications. All figures are rounded. The Company believes that these metrics are useful as an indicator of potential bitcoin production. However, these metrics cannot be tied directly to any production level expected to be actually achieved as (a) there may be delays in the energization of Installed Hash Rate (b) the Company cannot predict when installed and energized rigs may be offline for any reason, including curtailment or machine failure and (c) the Company cannot predict Global Hash Rate (and therefore the Company’s share of the Global Hash Rate), which has significant impact on the Company’s ability to generate bitcoin in any given period. 30 Revenues : We generated revenues of $51,132 thousand for the three months ended March 31, 2023 compared with $51,723 thousand in the prior-year period. The $591 thousand decrease in revenue was primarily driven by a $39,044 thousand decrease in revenue resulting from lower bitcoin prices in the current year period, partially offset by increased revenues of $38,453 thousand related to a 74% increase in production year-over-year. Average daily bitcoin production was 24.4 bitcoin in the current year period compared with 14.0 in the prior-year period, reflecting the increasing scale of our operations. Cost of revenues : Cost of revenues – energy, hosting and other during the three months ended March 31, 2023, totaled $33,377 thousand compared with $12,522 thousand in the prior-year period. The $20,855 thousand increase was driven by higher production costs of $17,022 thousand, and the impact of increased bitcoin production of $6,974 thousand partially offset by the absence of accelerated costs associated with the exit of the Hardin facility in the prior-year period of $3,141 thousand. Cost of revenues – depreciation and amortization during the three months ended March 31, 2023, totaled $17,733 thousand compared with $13,877 thousand in the prior-year period. The increase in depreciation was primarily related to an increase in mining rigs in operation related to the increased scale of the business partially offset by the absence of accelerated depreciation of $4,629 thousand recorded in the prior-year period related to the exit from Hardin. Total Margin : Total margin was a loss of $22 thousand in the current three months ended March 31, 2023 compared with income of $25,324 thousand in the prior-year period, a decline of $25,302 thousand. This decline was driven by the factors discussed above, which are summarized in the table below: Revenues: (in thousands) ● Impact of higher production activity $ 38,453 ● Impact of lower bitcoin market prices (39,044 ) Cost of revenues – energy, hosting and other: ● Impact of higher unit costs (17,022 ) ● Impact of accelerated cost recognition from Hardin exit 3,141 ● Impact of higher production activity (6,974 ) Cost of revenues – depreciation and amortization: ● Impact of accelerated cost recognition from Hardin exit 4,629 ● Other, primarily increased mining rigs in operation (8,485 ) $ (25,302 ) General and administrative expenses : General and administrative expenses were $15,344 thousand for the three months ended March 31, 2023, compared with expenses of $15,515 thousand in the prior-year period. Our general and administrative expenses included stock-based (non-cash) compensation expense of $3,945 thousand in the current period and $9,275 thousand in the prior-year period. The decrease in stock-based compensation is primarily related to generally lower value of the Company’s stock when compared to the prior year partially offset by additional restricted stock unit issuances associated with increases in headcount. General and administrative expenses excluding stock-based compensation was $11,399 thousand in the current period compared with $6,240 thousand in the prior-year period. This $5,159 thousand increase in expense was primarily due to the increases associated with the larger scale of the business, including higher cash compensation and benefits costs of $2,080 thousand (resulting primarily from an increase in headcount from 13 employees in the prior-year period to over 30 employees in 2023), increased professional fees of $2,358 thousand and increased insurance costs of $1,158 thousand. Impairment of digital assets: We incurred impairments of digital assets during the three months ended March 31, 2023 of $6,151 thousand compared with impairments of $17,647 thousand in the prior-year period. This decrease in impairment is primarily related to bitcoin prices that have generally been increasing during the current year period compared with prices that were generally decreasing during the prior-year period. Impairment of patents: The Company recorded an impairment of $919 thousand in the prior-year period related to certain patents no longer utilized in its business operations. 31 Realized gains on digital assets and unrealized gains (losses) digital assets loan receivable: The Company recognized realized gains of $17,615 thousand on the sale of approximately 2,900 bitcoin during the three months ended March 31, 2023. There were no such sales in the prior-year period. We incurred a loss of $461 thousand during the three months ended March 31, 2022 primarily a result of the decline in fair value of digital asset loan receivable prior to the repayment of the loan in June, 2022. Realized and unrealized gains (losses) on digital assets held within Investment Fund: The Company exited the fund in June 2022 and as such, there were no such gains or losses in the current year period. Total changes in the fair value of the Company’s investment fund during the three months ended March 31, 2022 resulted in an unrealized loss of $5,328 thousand. Other non-operating income (loss) : Other non-operating income was $791 thousand during the three months ended March 31, 2023 compared with $247 thousand in the prior-year period. The $544 favorable variance was primarily due to increased interest income. Loss on extinguishment of debt : On March 8, 2023 the Company paid $50,000 thousand to Silvergate Bank and terminated its term loan facility. On that same date, the Company and Silvergate Bank also agreed to terminate the Company’s revolving credit facility (“RLOC”). Although there were no prepayment penalties associated with these actions, the Company incurred a loss on extinguishment of debt of $333 thousand related to the write-off of the unamortized balance of debt issuance costs associated with the facilities. Interest expense : Interest expense increased $946 thousand from the prior-year period as a result of higher interest costs associated with the company’s term loan facility. The Company incurred interest costs on the $50,000 thousand outstanding balance on the term loan facility from January 1 through March 8, 2023. There were no borrowings on the term loan facility in the prior-year period. Income tax (expense) benefit : The Company recorded income tax expense of $75 thousand for the three months ended March 31, 2023 compared with an income tax benefit of $4,262 thousand in the prior-year period. The unfavorable tax variance of $4,337 thousand was primarily due to the establishment of a valuation allowance in the year ended December 31, 2022, as the Company determined it was more likely than not that they would not have sufficient future taxable income to realize the Company’s federal and state deferred tax assets. Net income (loss) : The Company recorded a net loss of $7,235 thousand for the three months ended March 31, 2023 compared with net loss of $12,851 thousand in the prior-year period. This $5,616 thousand improvement in net loss was primarily driven by the impact of the realized gain on sale of digital assets and favorable variances related to the impairment of digital assets and realized gains and losses on digital assets held within the investment fund partially offset by lower total margin. Adjusted EBITDA : Adjusted EBITDA was $18,611 thousand in the three months ended March 31, 2023 compared with $9,772 thousand in the prior-year period. The $8,839 thousand increase in adjusted EBITDA was primarily driven by positive impacts of realized gains on digital assets sold of $17,615 thousand and lower impairment of digital assets of $11,496 thousand. Adjusted EBITDA also benefited from the absence of several expenses recorded in the prior-year period, including realized and unrealized losses on digital assets held within the investment fund of $5,328 thousand and realized gains on digital assets and unrealized gains (losses) on digital assets loan receivable of $461 thousand. These favorable variances were partially offset by lower total margin excluding depreciation and amortization of $21,446 thousand and higher general and administrative expenses excluding stock-based compensation of $5,159 thousand. 32 Financial Condition and Liquidity Three Months Ended March 31, (in thousands) 2023 2022 Net cash used in operating activities $ (28,812 ) $ (26,062 ) Net cash used in investing activities (72,029 ) (209,425 ) Net cash provided by financing activities 113,218 85,473 Net (decrease) increase in cash, cash equivalents and restricted cash 12,377 (150,014 ) Cash, cash equivalents and restricted cash — beginning of period 112,505 268,556 Cash, cash equivalents and restricted cash — end of period $ 124,882 $ 118,542 Cash flows: Cash and cash equivalents totaled $124,882 thousand at March 31, 2023, an increase of $12,377 thousand from December 31, 2022. Restricted cash was zero at March 31, 2023, a decrease of $8,800 thousand as the Company replaced cash-collateralized letters of credit with cash deposits during the quarter as a result of the closure of Signature Bank. Cash flows from operating activities resulted in a use of funds of $28,812 thousand, as cash provided from operating activities before changes in operating assets and liabilities of $5,648 thousand was more than offset by a use of cash of $34,460 thousand from changes in operating assets and liabilities. Changes in cash flow from operating assets and liabilities were driven by uses of funds associated with bitcoin production revenues of $50,941 thousand and increases in deposits of $23,124 thousand resulting from deposits associated with hosting agreements and deposits made as replacements for letters of credit. Prepaid expenses also increased, resulting in a use of cash of $20,738 thousand as the Company prepaid certain expenses due in early April as a means of ensuring a smooth transition from Signature Bank in March 2023. These uses of funds were partially offset by proceeds from the sale of bitcoin of $62,646 thousand. Cash flows from investing activities resulted in a use of funds of $72,029 thousand, primarily resulting from investments made as part of the establishment of the ADGM Entity (a $43,194 thousand use of funds), advances to vendors of $11,565 thousand, and capital expenditures of $17,270 thousand. Cash flows from financing activities resulted in a source of cash of $113,218 thousand, primarily from proceeds from the issuance of common stock under the Company’s At-The-Market facility of $163,295 thousand partially offset by the repayment of the Company’s term loan facility of $50,000 thousand. There were no borrowings outstanding under the Company’s revolving credit facility during the three months ended March 31, 2023. On March 8, 2023, the Company terminated both its term loan and its RLOC facilities with Silvergate Bank. Bitcoin holdings as of March 31, 2023: At March 31, 2023, the Company held approximately 11,466 bitcoin on its balance sheet with a carrying value of $189,087 thousand. The fair value of a single bitcoin was approximately $28,474. As a result, the fair market value of our bitcoin holdings at March 31, 2023 was approximately $326,487 thousand. 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. We intend to add to our bitcoin holdings primarily through our production activities and we also will continue to sell bitcoin as a means of generating cash to fund 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 totaled $124,882 thousand at March 31, 2023. 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. 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. ● 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. ● 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). Off-balance Sheet Arrangements None. 33