MARA Holdings, Inc. quarterly report, Q3 FY2021

MARA Holdings, Inc. (formerly Marathon Digital Holdings, Inc.) — Q3 2021 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2021. Financial statements are unaudited. The company mines bitcoin and was rapidly expanding its mining fleet and infrastructure.

Financial performance and position

Metric	Q3 2021	Q3 2020	Nine months 2021	Nine months 2020
Revenue	$51.7 million	$0.8 million	$90.2 million	$1.7 million
Operating loss	$64.3 million	$2.0 million	$106.7 million	$4.9 million
Net loss	$22.2 million	$2.0 million	$47.7 million	$5.2 million
Basic and diluted loss per share	$0.22	$0.06	$0.49	$0.28

Mining revenue rose sharply as the company deployed miners; management attributed the nine-month increase to a 1,381% increase in hash rate.
Approximate gross margin, calculated as revenue less cost of revenue, was 80% for Q3 and 78% for the first nine months. These figures exclude other operating expenses.
Operating expenses included $95.7 million of noncash stock-based compensation in Q3 and $147.6 million for the nine months, plus cryptocurrency impairment of $6.7 million and $18.5 million, respectively.
Q3 other income included a $41.9 million gain from the change in fair value of the NYDIG bitcoin investment fund. Nine-month other income was $59.0 million. These fair-value gains substantially reduced reported net losses relative to operating losses.
At September 30, cash and cash equivalents were $32.9 million, versus $141.3 million at year-end 2020. Current assets were $554.6 million and current liabilities $3.9 million, for reported working capital of $550.6 million.
Balance-sheet bitcoin and fund investment totaled approximately $282.7 million: $73.9 million of digital currencies, including $9.6 million restricted, and a $208.8 million NYDIG fund investment. The fund had been acquired for $150 million. The company reported approximately 7,035 bitcoin across these holdings at quarter-end.
For the nine months, operating cash use was $43.9 million, investing cash use $372.2 million, and financing cash provided $307.7 million. Investing outflows included $150.0 million for investment securities, $84.7 million for property and equipment, and $137.6 million in mining-server deposits.
Total liabilities were $3.9 million at quarter-end; the PPP loan had been forgiven, and no material debt was reported on the balance sheet. Total assets were $664.3 million. Common shares outstanding increased from 82.0 million at December 31, 2020 to 102.5 million at September 30, 2021.

Material changes and expansion

Mining revenue expanded from a small base as the company built out operations in Hardin, Montana. At September 30, the filing reported 25,272 miners installed and 2.735 EH/s of cumulative produced hash rate; subsequent to quarter-end it cited approximately 25,272 active miners and 2.74 EH/s.
The company raised $250 million gross in a January 2021 registered offering and received $324.8 million of net proceeds from common-stock/ATM offerings during the nine-month period. Share-based compensation and equity issuance materially increased shares outstanding.
The company purchased 4,812.66 bitcoin for $150 million through an NYDIG fund and entered an agreement to lend 300 bitcoin to NYDIG at 3% annual interest, with collateral and recall rights.
It committed to significant future mining expansion, including a 73,000-miner hosting arrangement with Compute North and additional Bitmain orders. At quarter-end, the company had paid $185.6 million in miner deposits; it had also advanced Compute North $30 million and paid deposits and expedite fees. Further contractual payments and delivery schedules extend into 2022.

Outlook, risks, contingencies, and unusual items

Management said existing cash should fund operations for at least the next 12 months, based on its revenue and profit projections. The filing provides no specific quantified revenue or earnings guidance.
On October 1, 2021, the company entered a one-year revolving credit facility of up to $100 million, secured by bitcoin and/or U.S. dollars. It carries a 65% maximum loan-to-value requirement, a minimum $25 million liquidity covenant, and a minimum debt-to-equity ratio of 0.5:1.
Management reported that the Hardin power station had operated below peak capacity at times, limiting mining. Planned upgrades beginning in November 2021 and continuing into 2022 were expected to require several three-to-five-day outages; management expects improvements to reduce future unplanned downtime.
Bitcoin prices and mining economics are material risks. Under the company’s accounting policy, digital currencies are carried at cost less impairment; impairment losses cannot be reversed when prices later rise. The company recorded $18.5 million of impairment for the first nine months.
The company disclosed an SEC subpoena to produce documents and communications concerning the Hardin facility and related agreements; it said it was cooperating and that the SEC may be investigating potential federal securities-law violations.
A separate lawsuit by Michael Ho remained in discovery, with trial scheduled for March 3, 2022. The company said the outcome could not be predicted. The previously reported Feinberg litigation dismissal was affirmed on appeal in April 2021.
Management concluded disclosure controls and procedures were effective as of September 30, 2021. COVID-19 was not expected to have a material impact on long-term plans, operations, or liquidity based on the company’s then-current assessment.

Important facts for investors to verify

Reconcile bitcoin holdings and carrying values across the NYDIG fund, restricted bitcoin loan, and directly held digital currencies; distinguish carrying value from market value.
Assess the effect of stock-based compensation and the NYDIG fund’s fair-value gains on reported results, and compare GAAP results with management’s non-GAAP measures.
Review funding needs and remaining payment commitments for miner purchases, Compute North advances, deposits, and hosting arrangements, including timing and counterparty performance.
Monitor mining-fleet deployment, power-station availability and upgrade downtime, and the effect of bitcoin prices, network difficulty, and mining costs on revenue and cash generation.
Track developments in the SEC subpoena matter and Ho litigation, and review the terms and collateral requirements of the post-quarter Silvergate credit facility.