MARA Holdings, Inc. (Marathon Digital Holdings, Inc.) — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unless noted, dollar amounts are in millions; the filing presents financial statements in thousands. The company mines bitcoin and pursues related Bitcoin ecosystem opportunities.
Financial results and position
- Q2 revenue: $81.8 million, up 228% from $24.9 million. For the first half, revenue was $132.9 million, up 73% from $76.6 million.
- Profitability: Q2 net loss was $19.1 million (loss of $0.13 per share), compared with a $212.6 million loss in Q2 2022. First-half net loss was $26.4 million ($0.17 per share), versus $229.7 million. Q2 operating margin was negative $10.7 million; first-half operating margin was negative $10.7 million.
- Margins and adjusted EBITDA: Q2 margin excluding depreciation and amortization, a non-GAAP measure, was $26.5 million; adjusted EBITDA was $25.6 million. First-half figures were $44.3 million and $44.2 million, respectively. First-half margin excluding depreciation and amortization declined from $47.4 million a year earlier.
- Cash flow: First-half operating cash use was $142.9 million and investing cash use was $34.0 million; financing provided $192.3 million. Cash, cash equivalents and restricted cash increased $15.5 million to $128.0 million. Operating cash use reflects, among other things, bitcoin mined and recorded as revenue but not received in cash.
- Liquidity and assets: At June 30, cash and cash equivalents were $113.7 million and restricted cash was $14.3 million. The company held 12,538 bitcoin, carried at $234.4 million but with reported fair value of $382.0 million. Management cited combined cash and bitcoin fair value of $510.0 million as liquidity resources.
- Debt: Notes payable had a carrying value of $734.2 million, principally the 1.00% convertible senior notes due December 2026. The $50.0 million Silvergate term loan was repaid and its revolving facility terminated in March 2023. Current liabilities were $28.3 million.
- Scale and investment: Property and equipment, net, rose to $783.9 million from $273.0 million at year-end, as equipment was deployed. Advances to vendors fell to $7.4 million from $488.3 million, largely as equipment was received. The Abu Dhabi joint-venture investment was carried at $62.9 million.
Changes versus the prior comparable period
- Revenue growth chiefly reflected higher mining output and operating scale, partly offset by lower average bitcoin prices versus the prior-year periods. Q2 production rose to 2,926 bitcoin from 707 in the MD&A comparison table; first-half production was 5,121 versus 1,966.
- Energy, hosting and other costs and depreciation increased with expanded operations. In the first half, cost of revenue exceeded revenue by $10.7 million, compared with a positive $8.9 million margin a year earlier.
- Lower digital-asset impairment charges and gains on bitcoin sales improved reported losses. First-half bitcoin sales generated $113.9 million proceeds and $41.0 million of reported gains; the company said it intends to sell bitcoin to help fund operating costs.
- General and administrative expense increased to $20.5 million in Q2 and $35.8 million for the first half. Excluding stock-based compensation, management reported respective year-over-year increases of 274% and 161%, citing headcount, payroll, professional fees, property taxes and other growth-related costs.
- Common shares outstanding increased to 174.2 million from 145.6 million at December 31, 2022. First-half ATM stock issuance provided $228.8 million net. The company also issued $14.3 million gross proceeds of Series A preferred stock.
Outlook, risks, contingencies and unusual items
- Outlook: No numerical earnings or production guidance is provided. Management expects liquidity from cash, bitcoin sales and public capital markets to support operations and growth, and expects to continue using its ATM equity facility. Production and bitcoin holdings remain exposed to operating conditions and bitcoin-market movements.
- Expansion: The Abu Dhabi venture is planned to develop two mining sites totaling 250 MW. Marathon owns 20%; the filing describes approximately $406 million in aggregate contributions by the partners during the 2023 development period, subject to conditions. The venture had not started mining by June 30.
- Bitcoin and operating risks: Bitcoin price declines can reduce liquidity and profitability and trigger impairment; recorded impairment cannot be reversed under the company’s accounting policy. Electricity costs, mining difficulty, equipment availability, hosting arrangements and access to capital markets are also risks. The filing cites $332.9 million of mining-rig and vendor-advance impairment in Q4 2022 and warns further declines could lead to additional impairment or idling rigs.
- Restatement and accounting: The company said its previously filed Q1 2023 interim statements should no longer be relied upon. It corrected cash-flow classification of bitcoin-sale proceeds from operating to investing activities. It also changed its digital-asset accounting method from LIFO to FIFO, retrospectively restating 2022 comparative results.
- Controls: Management concluded disclosure controls were not effective at June 30, 2023, citing material weaknesses involving GAAP application, IT access and change management, and revenue controls. Remediation was ongoing, with no assurance it would succeed.
- Legal and regulatory matters: The company disclosed a putative securities class action and four derivative complaints relating to restatement allegations, an SEC subpoena concerning, among other things, related-party transactions, and the pending Ho litigation, scheduled for trial in January 2024. The company is cooperating with the SEC. Its $40 million unsecured claim in the Compute North bankruptcy is subject to uncertain recovery and timing; the filing cites estimated creditor recoveries of 8%–65%.
- Preferred stock: Series A shares carry a $1,000 stated value, are convertible at an initial $14.52 per common share after stockholder approval of an authorized-share increase, and include a holder redemption right at 105% of stated value under specified timing and conditions. The shares were classified outside permanent equity.
Key facts for investors to verify
- Reconcile the filing’s Q2 production disclosures: the MD&A comparison table gives 2,926 bitcoin in 2023 and 707 in 2022, while another narrative passage states 1,259 bitcoin for Q2 2022. Confirm the correct comparative figure.
- Track progress and costs of the 250-MW Abu Dhabi project, including the conditions, timing and funding of the partners’ planned contributions.
- Monitor cash burn, bitcoin-sale volumes, ATM issuance and resulting dilution; distinguish cash from restricted cash and bitcoin fair value from its GAAP carrying value.
- Assess remediation of material weaknesses and any further accounting corrections, and follow the SEC inquiry, shareholder litigation and Compute North recovery.
- Review the convertible notes’ terms and potential dilution, and the preferred stock’s conversion and redemption provisions.