MARA Holdings, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Unless otherwise indicated or the context otherwise requires, references to “Marathon,” and the “Company” refer to Marathon Digital Holdings, Inc. and its consolidated subsidiaries. All dollar amounts referenced in this Item 2 are in thousands, except per share, bitcoin, and per bitcoin amounts. 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 the Company’s 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 the Company’s 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 the Company that the Company believes is accurate. It is generally based on industry and other publications that are not produced for purposes of securities offerings or economic analysis. The Company has 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. The Company does not assume any obligation to update any forward-looking statement. As a result, investors should not place undue reliance on these forward-looking statements. The following discussion and analysis are intended as a review of significant factors affecting the Company’s financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with the Company’s 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. 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. Business Overview Marathon is a digital asset technology company dedicated to securing and supporting the Bitcoin ecosystem. The business is focused on producing or “mining” bitcoin using one of the largest and most efficient fleets of highly specialized computers in the industry. The Company successfully leverages technology across the value chain to improve efficiency and increase market share. The Company is also committed to carbon neutrality and growing operations through predominately renewable sources of energy. The Company’s “asset-light” capital strategy has fueled significant market share gains while also helping build one of the largest bitcoin positions on the balance sheet among our North American publicly traded peers. As of June 30, 2023, the Company had nearly 150,000 mining rigs in operation and owned 12,538 bitcoin. With its strong balance sheet and significant scale, the Company’s strategy has recently evolved beyond “asset-light” to include joint ventures with our landmark project located in Abu Dhabi. 30 Recent Developments The Company has continued its focus on expanding its operational capabilities during the period both domestically and internationally. On January 27, 2023, Marathon Digital Holdings, Inc. (the “Company”) and FS Innovation, LLC (“FSI”) entered into a Shareholders’ Agreement (the “Agreement”) regarding the 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 $406,000 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. 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 June 30, 2023. Bitcoin production increased to 2,926 bitcoin during the three months ended June 30, 2023, an average of 32.2 bitcoin per day. During the three months ended June 30, 2022, the Company produced 1,259 bitcoin, an average of 14.0 bitcoin per day. The 314% increase in production was primarily the result of increasing the scale of the Company’s operations. Bitcoin prices also rebounded significantly during the 2023 period, increasing from $16,548 per bitcoin at December 31, 2022 to $30,467 per bitcoin at June 30, 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 the Company’s bitcoin holdings at June 30, 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. The Company sold 4,754 bitcoin for total proceeds of $113,928, realizing gains on sales of bitcoin of $40,120 during the six months ended June 30, 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 multiple 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. 31 ● 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 of 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 successor. ● On June 5, 2023, the Company entered into a securities purchase agreement for the purchase of 15,000 shares of Series A redeemable convertible preferred stock. On June 8, 2023, upon closing of the offering, the Company issued 15,000 shares of Series A Preferred Stock for total gross proceeds of $14,286 before deducting the placement agent’s fees and other estimated offering expenses. Each share of Series A Preferred Stock had a purchase price of $952.38, representing an original issue discount of approximately 5% of the $1,000 stated value of each share. Each share of Series A Preferred Stock is convertible into shares of the Company’s common stock at an initial conversion price of $14.52 per share, at the option of the holder, at any time following the Company’s receipt of stockholder approval for an increase in its authorized shares of common stock. The Company will be permitted to compel conversion of the Series A Preferred Stock after the fulfillment of certain conditions and subject to certain limitations (see NOTE 11 – STOCKHOLDERS’ EQUITY, Series A Preferred Stock to the condensed consolidated financial statements for additional information). Critical Accounting Policies and Estimates The following accounting policies relate to the significant areas involving management’s judgments and estimates in the preparation of the Company’s financial statements, and are those that it believes are the most critical to aid the understanding and evaluation of this management discussion and analysis: ● Digital assets ● Revenue from contracts with customers ● Long-lived assets ● Income taxes Digital assets Digital assets (bitcoin) are included in current and other assets in the accompanying condensed 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 . 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 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. 32 Purchases of digital assets by the Company are included within investing activities in the accompanying condensed 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 condensed consolidated statements of cash flows. The sales of digital assets are included within operating activities in the accompanying condensed consolidated statements of cash flows and any gains or losses from such sales are included in operating expenses in the condensed consolidated statements of operations. Revenues from contracts with customers The Company recognizes revenue in accordance with FASB ASC Topic 606 – Revenue from Contracts with Customers . 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 33 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. 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. During the three months ended June 30, 2023, the Company changed its operator accounting policy from measuring the block reward and transaction fees using the end of day spot rate for bitcoin to the quoted spot rate at the time the block reward and transaction fees are earned. In accordance with ASC 606-10-32-21, the Company measures 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. The Company applies the quoted spot rate for bitcoin determined using the Company’s primary trading platform for bitcoin at the time the block reward and transaction fee is earned to measure revenues. Participant The Company participates in multiple third-party operated mining pools only when our Company-operated mining pool is not available. The payout methodologies differ depending on the payout third-party operated mining pool. Pay-Per-Share (PPS) and Full-Pay-Per-Share (FPPS) pools pay rewards based on a contractual formula, which primarily calculates the hash rate provided by the Company to the mining pool as a percentage of total network hash rate, and other inputs. For PPS and FPPS pools, the Company is entitled to consideration even if a block is not successfully placed by the mining pool operator. The Company also participates in third-party mining pools that pay rewards only when the pool successfully mines a block. For these pools, the Company only earns a reward when the third-party pool successfully mines a block and its reward is the fractional share of the successfully mined block and transaction fee 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 algorithm. 34 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. When the Company participates in PPS and FPPS pools, which pay rewards based on a contractual formula, the Company recognizes revenue based on the daily contributed hash rate and other inputs measured at the average daily spot rate of bitcoin determined using the Company’s primary trading platform for bitcoin. The Company participates in third-party operated pools only when our Company-operated mining pool is not available, therefore, the duration of contributed hash rate will fluctuate during any given day. Accordingly, we measure the reward for PPS and FPPS pools based on the daily average spot rate to match the contribution of hash rate which can occur throughout the day. When the Company participates in third-party pools that pay rewards only when the pool successfully mines a block, the Company recognizes its fractional share of the block and transaction fees using the spot rate of bitcoin at the time that the block is successfully mined. Providing computing power on mining 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 the Company’s 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. 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 mining rigs, which are largely homogeneous and have approximately the same useful lives. Accordingly, the Company utilizes the group method of depreciation for its bitcoin mining rigs. 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 that financial statements or tax returns. The Company accounts for income taxes in accordance with ASC 740 - Income Taxes , 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 the income tax benefit or expense and deferred tax assets and liabilities. The Company recognizes 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. 35 The Company records a valuation allowance to reduce deferred tax assets to the net amount that the Company believes 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 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES to the condensed consolidated financial statements for a discussion of recent accounting standards and pronouncements. Non-GAAP Financial Measures In addition to our results determined in accordance with GAAP, the Company also provides adjusted EBITDA and total margin excluding depreciation and amortization, which are non-GAAP measures. The Company provides investors with reconciliations from net loss to adjusted EBITDA and total margin to total margin excluding depreciation and amortization as components of Management’s Discussion and Analysis. The Company defines 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. The Company defines total margin excluding depreciation and amortization as (a) GAAP total margin less (b) depreciation and amortization. Adjusted EBITDA and total margin excluding depreciation and amortization are not financial measures of performance under GAAP and, as a result, these measures 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. These non-GAAP measures are 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 adjusted EBITDA, total margin excluding depreciation and amortization, and the supplemental information provided herein as a means of understanding, managing, and evaluating business performance and to help inform operating decision making. The Company relies primarily on our condensed consolidated financial statements to understand, manage, and evaluate our financial performance and use the non-GAAP financial measures only supplementally. 36 Results of Operations – Three months ended June 30, 2023 compared to the three months ended June 30, 2022 Financial Summary Table: Three Months Ended June 30, Favorable 2023 2022 (Unfavorable) (As Restated) Total revenues $ 81,759 $ 24,923 $ 56,836 Costs and expenses Cost of revenues Cost of revenues - energy, hosting and other (55,222 ) (16,686 ) (38,536 ) Cost of revenues - depreciation and amortization (37,275 ) (24,710 ) (12,565 ) Total cost of revenues (92,497 ) (41,396 ) (51,101 ) Operating expenses General and administrative expenses (20,491 ) (10,469 ) (10,022 ) Impairment of digital assets (8,363 ) (131,581 ) 123,218 Gains on digital assets and losses on digital assets loan receivable 23,354 (13,999 ) 37,353 Gain on sale of equipment, net of disposals — 54,060 (54,060 ) Losses on digital assets held within investment fund — (79,689 ) 79,689 Total operating expenses (5,500 ) (181,678 ) 176,178 Operating loss (16,238 ) (198,151 ) 181,913 Other non-operating income 148 135 13 Interest expense (2,840 ) (3,748 ) 908 Loss before income taxes (18,930 ) (201,764 ) 182,834 Income tax expense (203 ) (10,862 ) 10,659 Net loss $ (19,133 ) $ (212,626 ) $ 193,493 Supplemental information: bitcoin (“BTC”) production during the period, in whole BTC 2,926 707 2,219 Average BTC per day, in whole BTC 32.2 7.8 24.4 General and administrative expenses excluding stock-based compensation $ (16,040 ) $ (4,293 ) $ (11,747 ) Installed Hash Rate (Exahashes per second) - at end of period (1) 21.8 3.6 18.2 Energized Hash Rate (Exahashes per second) - at end of period (1) 17.7 0.7 17.0 Average operational Hash Rate (Exahashes per second) (2) 12.1 N/A N/A Reconciliation to Total margin excluding depreciation and amortization: Total revenues $ 81,759 $ 24,923 $ 56,836 Total cost of revenues (92,497 ) (41,396 ) (51,101 ) Total margin (total revenues less total cost of revenues) (10,738 ) (16,473 ) 5,735 Exclude: Depreciation and amortization (37,275 ) (24,710 ) (12,565 ) Total margin excluding depreciation and amortization $ 26,537 $ 8,237 $ 18,300 Reconciliation to Adjusted EBITDA: Net loss $ (19,133 ) $ (212,626 ) $ 193,493 Exclude: Interest expense 2,840 3,748 (908 ) Exclude: Income tax expense 203 10,862 (10,659 ) EBIT (16,090 ) (198,016 ) 181,926 Exclude: Depreciation and amortization 37,275 24,710 12,565 EBITDA 21,185 (173,306 ) 194,491 Exclude: Stock compensation expense 4,451 6,176 (1,725 ) Adjusted EBITDA $ 25,636 $ (167,130 ) $ 192,766 (1) The Company defines Energized Hash Rate as the total hash rate that could be generated if all installed and energized machines were running at 100% of manufacturers specifications. The Company uses this metric only as an indicator of progress in bringing mining rigs on-line. The Company defines Installed Hash Rate as the total hash rate that could be generated if all installed machines were running at 100% of manufacturers specifications. The Company uses this metric only as an indicator of progress in deploying mining rigs at its production sites. 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 mining 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 a significant impact on the Company’s ability to generate bitcoin in any given period. (2) Defined as the daily Average Operational Hash Rate online during the period. Data not available for prior periods. 37 Revenues : The Company generated revenues of $81,759 for the three months ended June 30, 2023 as compared with $24,923 in the prior-year period. The $56,836 or approximately 228% increase in revenue was primarily driven by an increase in production year-over-year of $78,224, partially offset by a $21,388 decrease resulting from lower bitcoin prices in the current year period. Average daily bitcoin production was 32.2 bitcoin in the current year period compared with 7.8 in the prior-year period, reflecting the increasing scale of the Company’s operations. Cost of revenues : Cost of revenues – energy, hosting and other during the three months ended June 30, 2023 totaled $55,222 as compared with $16,686 in the prior-year period. The $38,536 or approximately 231% increase was driven by the impact of increased bitcoin production of $51,229, partially offset by lower production costs of $3,343 and the absence of accelerated costs associated with the exit of the Hardin, Montana facility in the prior-year period of $9,350. Cost of revenues – depreciation and amortization during the three months ended June 30, 2023, totaled $37,275 as compared with $24,710 in the prior-year period. The $12,565 or approximately 51% increase in depreciation was primarily due 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 $15,306 recorded in the prior-year period related to the exit of the Hardin, Montana facility. Total Margin : Total margin was a loss of $10,738 in the current three months ended June 30, 2023 as compared with a loss of $16,473 in the prior-year period, a decline of $5,735 or approximately 35%. The following table summarizes the factors that impacted the decline in total margin for the three months ended June 30, 2023 compared to the prior-year period: Revenue: ● Higher production activity $ 78,224 ● Lower bitcoin market prices (21,388 ) Cost of revenue – energy, hosting and other: ● Lower unit costs 3,343 ● Accelerated cost recognition from Hardin exit 9,350 ● Higher production activity (51,229 ) Cost of revenue – depreciation and amortization: ● Accelerated cost recognition from Hardin exit 15,306 ● Other, primarily increased mining rigs in operation (27,871 ) $ 5,735 General and administrative expenses : General and administrative expenses were $20,491 for the three months ended June 30, 2023 as compared with expenses of $10,469 in the prior-year period, an increase of $10,022 or approximately 96%. Our general and administrative expenses included stock-based (non-cash) compensation expense of $4,451 in the current period and $6,176 in the prior-year period. The decrease in stock-based compensation is primarily related to lower average restricted stock unit grant date fair value, partially offset by additional restricted stock unit issuances associated with increases in headcount. General and administrative expenses excluding stock-based compensation was $16,040 in the current period as compared with $4,293 in the prior-year period. This $11,747 or approximately 274% increase in expense was primarily due to payroll, professional fees, higher property taxes, other third party costs related to the increasing scale of business and contributions in support of the Bitcoin ecosystem. Payroll increased primarily due to performance incentives and headcount, which increased from 17 employees in the prior-year period to over 40 employees in 2023. Impairment of digital assets: The Company incurred impairments of digital assets during the three months ended June 30, 2023 of $8,363 as compared with impairments of $131,581 in the prior-year period, a decrease of $123,218 or approximately 94%. 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. 38 Gains on digital assets and losses on digital assets loan receivable: The Company recognized gains of $23,354 on the sale of approximately 1,854 bitcoin during the three months ended June 30, 2023. There were no such sales in the prior-year period. The Company recognized a loss of $13,999 in the prior-year period as a result of a decline in fair value of digital assets loan receivable that was repaid in June, 2022. 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 June 30, 2022 resulted in a loss of $79,689. Other non-operating income : Other non-operating income was $148 during the three months ended June 30, 2023 as compared with $135 in the prior-year period. The $13 or approximately 10% favorable variance was primarily due to increased interest income. Interest expense : Interest expense decreased $908 or approximately 24% from the prior-year period as a result of lower interest costs primarily as a result of the absence of the line of credit facility during the three months ended June 30, 2023 as compared with the prior-year period. The Company terminated the line of credit facility during the three months ended March 31, 2023. Income tax expense : The Company recorded income tax expense of $203 for the three months ended June 30, 2023 as compared with an income tax expense of $10,862 in the prior-year period. The favorable tax variance of $10,659 or approximately 98% 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 loss : The Company recorded a net loss of $19,133 for the three months ended June 30, 2023 as compared with a net loss of $212,626 in the prior-year period. This $193,493 or approximately 91% improvement in net loss was primarily driven by the impact of the gain on sale of digital assets and favorable variances related to the impairment of digital assets and losses on digital assets held within the investment fund partially offset by lower total margin. Adjusted EBITDA : Adjusted EBITDA was $25,636 in the three months ended June 30, 2023 as compared with an adjusted EBITDA loss of $167,130 in the prior-year period. The $192,766 or approximately 115% increase in adjusted EBITDA was primarily driven by positive impacts of gains on digital assets sold of $23,354 and lower impairment of digital assets of $123,218. Adjusted EBITDA also benefited from the absence of several expenses recorded in the prior-year period, including losses on digital assets held within the investment fund of $79,689 and gains on digital assets and losses on digital assets loan receivable of $13,999. These favorable variances were partially offset by lower total margin excluding depreciation and amortization of $18,300 and higher general and administrative expenses excluding stock-based compensation of $11,747. 39 Results of Operations – Six months ended June 30, 2023 compared to the six months ended June 30, 2022 Financial Summary Table: Six Months Ended June 30, Favorable 2023 2022 (Unfavorable) (As Restated) Total revenues $ 132,891 $ 76,646 $ 56,245 Costs and expenses Cost of revenues Cost of revenues - energy, hosting and other (88,599 ) (29,208 ) (59,391 ) Cost of revenues - depreciation and amortization (55,008 ) (38,587 ) (16,421 ) Total cost of revenues (143,607 ) (67,795 ) (75,812 ) Operating expenses General and administrative expenses (35,836 ) (25,983 ) (9,853 ) Impairment of digital assets (14,514 ) (154,898 ) 140,384 Impairment of patents — (919 ) 919 Gains on digital assets and losses on digital assets loan receivable 40,969 (14,460 ) 55,429 Gain on sale of equipment, net of disposals — 54,060 (54,060 ) Losses on digital assets held within investment fund — (85,017 ) 85,017 Total operating expenses (9,381 ) (227,217 ) 217,836 Operating loss (20,097 ) (218,366 ) 198,269 Other non-operating income 940 382 558 Loss from extinguishment of debt (333 ) — (333 ) Interest expense (6,600 ) (6,561 ) (39 ) Loss before income taxes (26,090 ) (224,545 ) 198,455 Income tax expense (278 ) (5,190 ) 4,912 Net loss $ (26,368 ) $ (229,735 ) $ 203,367 Supplemental information: bitcoin (“BTC”) production during the period, in whole BTC 5,121 1,966 3,155 Average BTC per day, in whole BTC 28.3 10.9 17.4 General and administrative expenses excluding stock-based compensation $ (27,440 ) $ (10,532 ) $ (16,908 ) Installed Hash Rate (Exahashes per second) - at end of period 21.8 3.6 18.2 Energized Hash Rate (Exahashes per second) - at end of period 17.7 0.7 17.0 Average operational Hash Rate (Exahashes per second) 12.1 N/A N/A Reconciliation to Total margin excluding depreciation and amortization: Total revenues $ 132,891 $ 76,646 $ 56,245 Total cost of revenues (143,607 ) (67,795 ) (75,812 ) Total margin (total revenues less total cost of revenues) (10,716 ) 8,851 (19,567 ) Exclude: Depreciation and amortization (55,008 ) (38,587 ) (16,421 ) Total margin excluding depreciation and amortization $ 44,292 $ 47,438 $ (3,146 ) Reconciliation to Adjusted EBITDA: Net loss $ (26,368 ) $ (229,735 ) $ 203,367 Exclude: Interest expense 6,600 6,561 39 Exclude: Income tax expense 278 5,190 (4,912 ) EBIT (19,490 ) (217,984 ) 198,494 Exclude: Depreciation and amortization 55,008 38,587 16,421 EBITDA 35,518 (179,397 ) 214,915 Exclude: Stock compensation expense 8,396 15,451 (7,055 ) Exclude: Loss from extinguishment of debt 333 — 333 Exclude: Impairment of patents — 919 (919 ) Adjusted EBITDA $ 44,247 $ (163,027 ) $ 207,274 Revenues : The Company generated revenues of $132,891 for the six months ended June 30, 2023 as compared with $76,646 in the prior-year period. The $56,245 or approximately 73% increase in revenue was primarily driven by an increase in production year-over-year of $122,961, partially offset by a $66,716 decrease in revenue resulting from lower bitcoin prices in the current year period. Average daily bitcoin production was 28.3 bitcoin in the current year period compared with 10.9 in the prior-year period, reflecting the increasing scale of the Company’s operations. 40 Cost of revenues : Cost of revenues – energy, hosting and other during the six months ended June 30, 2023 totaled $88,599 as compared with $29,208 in the prior-year period. The $59,391 or approximately 203% increase was driven by the impact of increased bitcoin production of $67,069 and higher production costs of $4,813, partially offset by the absence of accelerated costs associated with the exit of the Hardin, Montana facility in the prior-year period of $12,491. Cost of revenues – depreciation and amortization during the six months ended June 30, 2023, totaled $55,008 as compared with $38,587 in the prior-year period. The $16,421 or approximately 43% increase was primarily due 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 $19,935 recorded in the prior-year period related to the exit of the Hardin, Montana facility. Total Margin : Total margin was a loss of $10,716 in the current six months ended June 30, 2023 as compared with income of $8,851 in the prior-year period, a decline of $19,567 or approximately 221%. The following table summarizes the factors that impacted the decline in total margin for the six months ended June 30, 2023 as compared to the prior-year period: Revenue: ● Higher production activity $ 122,961 ● Lower bitcoin market prices (66,716 ) Cost of revenue – energy, hosting and other: ● Higher unit costs (4,813 ) ● Accelerated cost recognition from Hardin exit 12,491 ● Higher production activity (67,069 ) Cost of revenue – depreciation and amortization: ● Accelerated cost recognition from Hardin exit 19,935 ● Other, primarily increased mining rigs in operation (36,356 ) $ (19,567 ) General and administrative expenses : General and administrative expenses were $35,836 for the six months ended June 30, 2023 as compared with expenses of $25,983 in the prior-year period, an increase of $9,853 or approximately 38%. Our general and administrative expenses included stock-based (non-cash) compensation expense of $8,396 in the current period and $15,451 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 $27,440 in the current period as compared with $10,532 in the prior-year period. This $16,908 or approximately 161% increase in expense was primarily due to payroll, professional fees, higher property taxes, and other third party costs related to the increasing scale of business. Payroll increased primarily due to performance incentives and headcount, which increased from 17 employees in the prior-year period to over 40 employees in 2023. Impairment of digital assets: The Company incurred impairments of digital assets during the six months ended June 30, 2023 of $14,514 as compared with $154,898 in the prior-year period. This $140,384 or approximately 91% 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 in the prior-year period related to certain patents no longer utilized in its business operations. Gains on digital assets and losses on digital assets loan receivable: The Company recognized gains of $40,969 on the sale of approximately 4,754 bitcoin during the six months ended June 30, 2023. There were no such sales in the prior-year period. The Company recognized a loss of $14,460 in the prior-year period as a result of the decline in fair value of digital asset loan receivable that was repaid in June, 2022. 41 Losses on digital assets held within Investment Fund: The Company exited the investment 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 six months ended June 30, 2023 resulted in a loss of $85,017. Other non-operating income : Other non-operating income was $940 during the six months ended June 30, 2023 as compared with $382 in the prior-year period. The $558 or approximately 146% favorable variance was primarily due to increased interest income. Loss on extinguishment of debt : On March 8, 2023 the Company paid $50,000 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 RLOC. Although there were no prepayment penalties associated with these actions, the Company incurred a loss on extinguishment of debt of $333 related to the write-off of the unamortized balance of debt issuance costs associated with the facilities. Interest expense : Interest expense remained relatively flat for the six months ended June 30, 2023 as compared with the prior year period. Income tax expense : The Company recorded income tax expense of $278 for the six months ended June 30, 2023 as compared with $5,190 in the prior-year period. The favorable tax variance of $4,912 or approximately 95% 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 loss : The Company recorded a net loss of $26,368 for the six months ended June 30, 2023 as compared with net loss of $229,735 in the prior-year period. This $203,367 or approximately 89% favorable variance in net loss was primarily driven by the impact of the gain on sale of digital assets and favorable variances related to the impairment of digital assets and losses on digital assets held within the investment fund and gain on digital assets and losses on digital assets loan receivable, partially offset by lower total margin. Adjusted EBITDA : Adjusted EBITDA was $44,247 in the six months ended June 30, 2023 as compared with an adjusted EBITDA loss of $163,027 in the prior-year period. The $207,274 increase in adjusted EBITDA was primarily driven by positive impacts of gains on digital assets sold of $40,969 and lower impairment of digital assets of $140,384. Adjusted EBITDA also benefited from the absence of several expenses recorded in the prior-year period, including losses on digital assets held within the investment fund of $85,017, gain on the sale of equipment, net of disposals of $54,060 and gains on digital assets and losses on digital assets loan receivable of $13,999. These favorable variances were partially offset by the absence of gain on sale of equipment, net of disposals and $16,908 higher general and administrative expenses excluding stock-based compensation during the six months ended June 30, 2023 as compared with the prior year period. 42 Financial Condition and Liquidity The following table presents a summary of our cash flow activity for the six months ended June 30, 2023 and 2022. Six Months Ended June 30, 2023 2022 Net cash used in operating activities $ (142,868 ) $ (40,873 ) Net cash used in investing activities (33,951 ) (334,520 ) Net cash provided by financing activities 192,275 195,998 Net increase (decrease) in cash, cash equivalents and restricted cash 15,456 (179,395 ) Cash, cash equivalents and restricted cash — beginning of period 112,505 268,556 Cash, cash equivalents and restricted cash — end of period $ 127,961 $ 89,161 Cash flows: Cash and cash equivalents totaled $127,961 at June 30, 2023, an increase of $15,456 from December 31, 2022. Restricted cash was $14,286 at June 30, 2023, representing the net proceeds held in escrow related to the issuance of Series A Preferred Stock during June 2023. The Company replaced cash-collateralized letters of credit with cash deposits which released restrictions on $8,800 of restricted cash during the quarter ended March 31, 2023, as a result of the closure of Signature Bank. Cash flows from operating activities resulted in a use of funds of $142,868, as cash provided from operating activities before changes in operating assets and liabilities of $14,265 was more than offset by a use of cash of $43,205 from changes in operating assets and liabilities. Changes in cash flow from operating assets and liabilities were driven by a use of funds associated with changes in digital assets ($132,557 due to the non-cash adjustment for bitcoin mining revenues), deposits ($19,325 resulting from increased deposits associated with hosting agreements) and deposits made as replacements for letters of credit ($5,486). Prepaid expenses also increased, resulting in a use of cash of $6,963 as the Company prepaid certain expenses due in early April as a means of ensuring a smooth transition from Signature Bank in March 2023. Cash flows from investing activities resulted in a use of funds of $33,951, primarily resulting from investments made as part of the establishment of the ADGM Entity (a $62,918 use of funds), advances to vendors of $61,834, and capital expenditures of $23,316, partially offset by proceeds from the sale of bitcoin of $113,928. Cash flows from financing activities resulted in a source of cash of $192,275, primarily from proceeds from the issuance of common stock under the Company’s At-The-Market facility of $228,833 partially offset by the repayment of the Company’s term loan facility of $50,000. There were no borrowings outstanding under the Company’s revolving credit facility during the six months ended June 30, 2023. On March 8, 2023, the Company terminated both its term loan and its RLOC facilities with Silvergate Bank. Bitcoin holdings as of June 30, 2023: At June 30, 2023, the Company held approximately 12,538 bitcoin on its balance sheet with a carrying value of $234,412. The fair value of a single bitcoin was approximately $30,467. As a result, the fair market value of our bitcoin holdings at June 30, 2023 was approximately $381,992. The Company expects that its 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. The Company intends to add to its bitcoin holdings primarily through its production activities and will also continue to sell bitcoin as a means of generating cash to fund monthly operating costs and for general corporate purposes. The Company does not intend to make any significant purchases of bitcoin on the open market as means of increasing its bitcoin holdings, although it 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 $127,961 and bitcoin was $381,992 at June 30, 2023. The combined value of cash and cash equivalents and bitcoin was $509,953. 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. The Company will continue to seek to fund its business activities, and especially its growth opportunities, through the public capital markets, primarily through periodic equity issuances using its At-The-Market facility. 43 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 its bitcoin holdings and its 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.