Business context and reporting period
This Form 10-Q covers the quarter and nine months ended September 30, 2022. The registrant was Marathon Digital Holdings, Inc. (ticker: MARA), focused on Bitcoin mining and related opportunities. The financial statements are unaudited.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $12.7 million | $51.7 million | $89.3 million | $90.2 million |
| Net loss | $75.4 million | $22.2 million | $280.0 million | $47.7 million |
| Loss per share, basic and diluted | $0.65 | $0.22 | $2.56 | $0.49 |
| Bitcoin mined | 616 BTC | 1,253 BTC | 2,582 BTC | 2,099 BTC |
Q3 cost of revenue was $40.1 million, producing a negative revenue-minus-cost-of-revenue margin of $27.4 million, versus a positive $41.4 million a year earlier. For the nine months, that margin was negative $18.5 million versus positive $70.5 million. The filing does not provide a clearly labeled gross-margin percentage.
- Cash flow: Nine-month operating cash outflow was $84.2 million; investing outflow was $368.1 million; financing inflow was $247.9 million. Cash, cash equivalents and restricted cash fell by $204.4 million to $64.1 million.
- Liquidity and assets: At September 30, cash and cash equivalents were $55.3 million, restricted cash $8.8 million, and current assets $240.1 million against current liabilities of $45.5 million. Advances to vendors were $687.8 million. Total assets were $1.476 billion and stockholders’ equity $625.1 million.
- Debt: Convertible notes, net, totaled $731.3 million; the term loan was $49.9 million. No RLOC borrowings were outstanding at quarter-end. The RLOC and term loan are secured by Bitcoin and carry variable-rate terms; the facilities include minimum liquidity and net-worth covenants.
- Bitcoin: The company held about 10,670 BTC at quarter-end, with a $197.2 million carrying value and approximately $207.3 million fair market value. About 3,828 BTC were restricted as collateral. Nine-month digital-currency impairment was $153.0 million.
- Adjusted EBITDA: The reconciliation table reports a loss of $8.7 million for Q3 and $146.2 million for the nine months, versus income of $78.8 million and $112.6 million in the comparable 2021 periods. The MD&A narrative gives slightly different current-period figures ($8.3 million and $145.8 million); investors should verify the reconciliation and calculation.
Material changes versus comparable periods
- Q3 revenue fell $39.0 million, primarily from lower Bitcoin production ($26.3 million) and lower Bitcoin prices ($12.7 million). Production was affected by Hardin downtime and delayed energization at King Mountain.
- Nine-month revenue was nearly unchanged: higher production contributed $20.7 million, largely offset by lower Bitcoin prices ($21.6 million). Higher energy/hosting costs and depreciation, including accelerated costs associated with the Hardin exit, drove the margin deterioration.
- Reported losses included substantial unusual items: $153.0 million of nine-month Bitcoin impairment; $39.0 million of Compute North-related impairment; a $25.0 million legal reserve; and $90.1 million of gains on equipment sales. General and administrative expense declined significantly year over year, largely because stock-based compensation was much lower.
- Common shares outstanding increased to 116.8 million at September 30 from 102.7 million at December 31, 2021. The company raised $198.7 million net through its at-the-market stock offering during the nine-month period.
- The company redeemed its investment in the NYDIG digital-asset fund in June 2022, taking about 4,769 BTC in-kind. Those holdings thereafter were carried at cost less impairment rather than measured at fair value through earnings.
Outlook, risks and unusual items
- Management expected cash on hand and available borrowing capacity to support ongoing operations and said it would continue to seek capital-market funding, primarily through periodic ATM equity sales. No quantified revenue, production or earnings guidance is provided.
- Compute North filed for Chapter 11 on September 22. Marathon recorded $39.0 million of impairments against its approximately $81 million exposure, leaving about $42 million, primarily in deposits, whose recovery remains uncertain. Bankruptcy-related disruption may affect hosting and mining operations.
- After quarter-end, Marathon borrowed another $50 million under its RLOC and pledged additional Bitcoin. By November 9, it had pledged 9,490 BTC against $100 million of RLOC and term-loan borrowings, leaving 1,950 BTC unrestricted. It delayed a planned RLOC refinancing, citing Bitcoin-price uncertainty, and retained an option to draw another $50 million on the term loan through April 2023. Further Bitcoin-price declines could trigger additional collateral requirements and liquidity pressure.
- Operations depend on reliable, cost-effective electricity, internet access, hosting providers and timely deployment. The filing cites deployment delays and power constraints as material risks.
- The $25 million legal reserve related principally to settlement of a dispute over stock awards. The amounts due were paid by October 15, 2022. A separate Ho lawsuit remained pending, with trial scheduled for February 2023; the SEC subpoena investigation and consolidated shareholder derivative actions were also disclosed. The putative securities class action was dismissed without prejudice in October 2022.
- Management concluded disclosure controls and procedures were not effective as of September 30, 2022, due to previously reported internal-control weaknesses. The company reported remediation efforts, including adding an Assistant Controller and reviewing external control support.
- A related-party investment in Auradine totaled $35.5 million; the company’s CEO sat on Auradine’s board and a Marathon director held an approximately 10% interest. That director was no longer considered independent as of November 3, 2022.
Key facts for investors to verify
- Compute North bankruptcy recovery, remaining deposits, and any impact on hosting continuity and miner deployment.
- Bitcoin collateral requirements, covenant headroom, available liquidity and the effect of further Bitcoin-price declines.
- Actual deployment schedules and mining output at King Mountain, Wolf Hollow and Applied Blockchain facilities.
- Reconciliation of the differing Adjusted EBITDA figures in the table and MD&A narrative, and the treatment of significant impairments and equipment-sale gains.
- Progress in remediating material internal-control weaknesses and developments in the disclosed legal matters.