Quarterly report pursuant to Section 13 or 15(d)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
9 Months Ended
Sep. 30, 2022
Accounting Policies [Abstract]  
Basis of Presentation and Principles of Consolidation

Basis of Presentation and Principles of Consolidation

 

The accompanying unaudited consolidated condensed financial statements, including the accounts of the Company’s subsidiaries, Marathon Crypto Mining, Inc., Crypto Currency Patent Holding Company and Soems Acquisition Corp. have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations. These consolidated condensed financial statements reflect all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position, the results of operations and cash flows of the Company for the periods presented. It is suggested that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s most recent Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year ended December 31, 2022.

 

Reclassifications

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications have no effect on the reported financial position, results of operations, or cash flows. Previously reported compensation and related taxes, consulting fees, and professional fees have now been reclassified within general and administrative expenses. In addition, previously reported change in fair value of warrant liability, realized gain on sale of digital currencies and interest income have now been reclassified as other non-operating income.

 

Use of Estimates and Assumptions

Use of Estimates and Assumptions

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made by management include, but are not limited to, estimating the useful lives of fixed assets, the assumptions used to calculate fair value of options granted, realization of long-lived assets, deferred income taxes, unrealized tax positions and the realization of digital currencies.

 

 

MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

Restricted Cash

Restricted Cash

 

Restricted cash principally represents those cash balances that support commercial letters of credit and are restricted from withdrawal. The following table provides a reconciliation of the total cash, cash equivalents and restricted cash reported on the Condensed Consolidated Balance Sheets to the corresponding amounts reported on the Condensed Consolidated Statements of Cash Flows.

 

   

As of

September 30, 2022

   

As of

September 30, 2021

 
Cash and cash equivalents   $ 55,339,400     $ 32,854,092  
Restricted cash     8,800,000       -  
Cash, cash equivalents and restricted cash   $ 64,139,400     $ 32,854,092  

 

Digital Currencies, Digital currencies, restricted and Digital currencies loaned

Digital Currencies, Digital currencies, restricted and Digital currencies loaned

 

Digital currencies, and Digital currencies loaned are included in current assets in the consolidated balance sheets. Digital currencies are recorded as indefinite lived intangibles at cost less impairment in accordance with FASB ASC 350 – Intangibles-Goodwill and Other. Digital currencies, restricted represent collateral for long-term loans and as such are classified as a non-current asset.

 

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. When the exchange-traded price of digital currencies declines below its carrying value, the Company has determined that it is more likely than not that an impairment exists. When this occurs, the amount of impairment to record is determined based on the fair value of digital currencies in accordance with the fair value measurement framework in FASB ASC 820 – Fair Value Measurement “(ASC 820”). If the fair value of digital currency is lower than its carrying amount, the Company will record an impairment in an amount by which the carrying value exceeds the fair value of the digital currency. Subsequent reversal of impairment losses is not permitted.

 

The following table presents the activities of the digital currencies for the nine months ended September 30, 2022:

 

Digital currencies at December 31, 2021*   $ 123,243,264  
Additions of digital currencies     89,140,088  
Digital currencies transferred from fund     137,843,761  
Disposal of digital currency for charitable contribution     (20,297 )
Impairment of digital currencies     (153,045,376 )
Digital currencies at September 30, 2022   $ 197,161,440  

 

* Includes a loan of 600 bitcoin ($20,437,284) to NYDIG. On June 14, 2022 the Company terminated the loan and there are no loans of digital assets outstanding as of September 30, 2022.

 

Digital currencies at December 31, 2020   $ 2,271,656  
Additions of digital currencies     90,182,155  
Impairment of digital currencies     (18,472,750 )
Interest received on digital currencies, restricted     5,962  
Sale of digital currencies, net     (55,429 )
Digital currencies at September 30, 2021   $ 73,931,594  

 

At September 30, 2022, the Company held approximately 10,670 bitcoin with a carrying value of $197.2 million. The bitcoin were classified on the balance sheet as digital currencies (6,842 bitcoin or approximately $126.4 million carrying value) and digital currencies, restricted (3,828 bitcoin or approximately $70.8 million carrying value). At September 30, 2022, the fair market value of the Company’s bitcoin holdings was approximately $207.3 million, including digital currencies and digital currencies, restricted. Digital currencies, restricted is comprised of bitcoins held as collateral for term loan and revolving line of credit (“RLOC”) borrowings.

 

 

MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

Halving – The bitcoin blockchain and the cryptocurrency reward for solving a block is subject to periodic incremental halving. Halving is a process designed to control the overall supply and reduce the risk of inflation in cryptocurrencies using a Proof-of-Work consensus algorithm. At a predetermined block, the mining reward is cut in half, hence the term “Halving”. The last halving for bitcoin occurred on May 12, 2020. For example, the current fixed reward on the bitcoin network for solving a new block is six and one quarter (6.25) bitcoin per block, which decreased from twelve and a half (12.5) bitcoin per block in May 2020. It is estimated that the number of bitcoin per block will halve again in May 2024. Many factors influence the price of bitcoin and potential increases or decreases in prices in advance of or following a future halving is unknown.

 

Digital Currencies Held in Fund

Digital Currencies Held in Fund

 

On January 25, 2021, the Company entered into a limited partnership agreement with NYDIG Digital Assets Fund III, LP (“Fund”) wherein the Fund purchased 4,812.66 bitcoin in an aggregate purchase price of $150 million. The Company owned 100% of the limited partnership interests and consolidated the Fund under a voting interest model. The consolidated assets in the investment fund are included in current assets in the consolidated balance sheets under the caption “Digital currencies held in fund.

 

The Fund qualified and operated as an investment company for accounting purposes pursuant to the accounting and reporting guidance under ASC 946, Financial Services – Investment Companies, which requires fair value measurement of the Fund’s investments in digital assets. The digital assets held by the Fund were traded on a number of active markets globally, including the over-the-counter market and digital asset exchanges. A fair value measurement under ASC 820 for an asset assumes that the asset is exchanged in an orderly transaction between market participants either in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset (ASC 820-10-35-5). The fair value of the assets within the Fund were measured daily based on pricing obtained from CoinDesk Bitcoin Price Index at approximately 4pm New York time. Any changes in the fair value of the assets were recorded in the Consolidated Statement of Operations under the caption “Realized and unrealized gains (losses) of digital currencies held in fund.”

 

On June 10, 2022, the Company redeemed 100% of its limited partnership interest in the Fund in exchange for approximately 4,768.5 bitcoin (with a fair market value of approximately $137.8 million). This bitcoin was transferred from the Fund’s custodial wallet to the Company’s digital wallet. Upon redemption, the Company no longer had a majority voting interest in the Fund and therefore deconsolidated the Fund in accordance with ASC 810 – Consolidation. The Company did not record any gain or loss upon deconsolidation as the digital assets in the Fund were measured at fair value. Subsequent to the transfer, the bitcoin transferred to the Company’s digital wallet has been accounted for at cost less impairment in line with its digital currencies measurement policy as described under Digital Currencies, Digital currencies, restricted and Digital currencies loaned. The activity in the Fund for the nine months ended September 30, 2022 and twelve months ended December 31, 2021 was as follows:

 

Digital currencies held in fund at December 31, 2021   $ 223,915,761  
Sale of digital currencies     (482,872 )
Realized and unrealized losses on digital currencies held in fund     (85,016,208 )
Management expenses incurred by fund     (572,920 )
Digital currencies transferred out of fund     (137,843,761 )
Digital currencies held in fund at September 30, 2022   $ -  
         
Digital currencies held in fund at December 31, 2020   $ -  
Purchase of digital currencies held in fund     150,000,000  
Realized and unrealized gains on digital currencies held in fund     74,696,002  
Management expenses incurred by fund     (780,241 )
Digital currencies held in fund at December 31, 2021   $ 223,915,761  

 

Investments

Investments

 

Investments, which may be made from time to time for strategic reasons (and not to engage in the business of investments) are included in non-current assets in the consolidated balance sheets. Investments are recorded at cost and the Company analyzes the value of investments on a quarterly basis. As part of the Company’s policy to maximize return on strategic investment opportunities, while preserving capital and limiting downside risk, the Company may at times enter into equity investments or Simple Agreements for Future Equity (“SAFE”) agreements. The nature and timing of the Company’s investments will depend on available capital at any particular time and the investment opportunities identified and available to the Company.

 

On December 21, 2021 and December 30, 2021, the Company entered into two separate SAFE agreements classified on the balance sheet as non-current assets. SAFE agreements are accounted for as equity securities without readily determinable fair value at cost minus impairment, as adjusted for observable price changes in orderly transactions for identical or similar investment of the same issue pursuant to Topic 321 Investments – Equity Securities (“ASC 321”).

 

 

MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

On February 3, 2022, the Company invested approximately $10 million in convertible preferred stock of Compute North Holdings, Inc. The acquisition of convertible preferred stock was accounted for as investments in equity securities without readily determinable fair value at cost minus impairment, as adjusted for observable price changes in orderly transactions for identical or similar investment of the same issue pursuant to ASC 321. This investment was subject to an impairment of $10.0 million following Compute North’s Chapter 11 Bankruptcy filing in September 2022 (See Note 6).

 

On May 3, 2022, the Company converted $2.0 million from a SAFE investment into preferred stock while purchasing an additional $3.5 million of preferred stock in Auradine, Inc. along with entering into a commitment to acquire $30.0 million of additional shares of preferred stock. This forward contract was accounted for under ASC 321 as an equity security. On September 27, 2022, pursuant to the forward contract, the Company increased its investment in the preferred stock of Auradine, Inc. by $30.0 million, bringing its total carrying amount of investment in Auradine, Inc. preferred stock to $35.5 million with no noted impairments or other adjustments (See Note 11).

 

As of September 30, 2022, the Company has one remaining SAFE investment with a carrying value of $1.0 million, with no noted impairments or other adjustments.

 

Fair Value of Financial Instruments

Fair Value of Financial Instruments

 

The Company measures at fair value certain of its financial and non-financial assets and liabilities by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:

 

  Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities
     
  Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data
     
  Level 3: Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.

 

The carrying amounts reported in the consolidated balance sheet for cash, accounts receivable, accounts payable, and accrued expenses, approximate their estimated fair market value based on the short-term maturity of these instruments. The carrying value of notes payable and other long-term liabilities approximate fair value as the related interest rates approximate rates currently available to the Company.

 

Financial assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level of input that is significant to their fair value measurement. The Company measures the fair value of its marketable securities and investments by taking into consideration valuations obtained from third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs included reported trades and broker-dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities and other observable inputs.

 

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis and the Company’s estimated level within the fair value hierarchy of those assets and liabilities as of September 30, 2022 and December 31, 2021, respectively:

 

    Fair value measured at September 30, 2022  
    Total carrying value at September 30,     Quoted prices in active markets     Significant other observable inputs     Significant unobservable inputs  
    2022     (Level 1)     (Level 2)     (Level 3)  
Assets                                
Money Market Accounts   $ 51,468,288     $ 51,468,288     $       -     $         -  

 

    Fair value measured at December 31, 2021  
    Total carrying value at
December 31,
    Quoted prices in active markets     Significant other observable inputs     Significant unobservable inputs  
    2021     (Level 1)     (Level 2)     (Level 3)  
Assets                                
Money Market Accounts   $ 266,635,158     $ 266,635,158     $ -     $ -  
Digital currencies held in fund   $ 223,915,761     $ -     $ 223,915,761     $ -  

 

 

MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

There were no transfers among Levels 1, 2 or 3 during the three and nine months ended September 30, 2022.

 

On June 10, 2022, the Company withdrew approximately 4,769 bitcoin from its investment in NYDIG Digital Assets Fund III, LP and transferred the bitcoin directly into the Company’s account. As a result, the Company will no longer receive “mark-to-market” accounting for the bitcoin formerly held in the Investment Fund and the 4,769 bitcoin will now be classified as “Digital currencies” on the balance sheet and subject to impairment analysis as an indefinite-lived intangible.

 

Net Income and Basic and Diluted Net Income per Share

Net Income and Basic and Diluted Net Income per Share

 

Net income per common share is calculated in accordance with ASC Topic 260: Earnings Per Share (“ASC 260”). Basic income per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. For the three and nine months ended September 30, 2022, respectively, the Company incurred a loss position and as such the computation of diluted net loss per share does not include dilutive common stock equivalents in the weighted average shares outstanding, as they would be anti-dilutive.

 

Computation of potential shares for the diluted earnings (loss) per share calculation at September 30, 2022 and 2021 are as follows:

 

                 
    As of September 30,  
    2022     2021  
Warrants to purchase common stock     324,375       457,837  
Restricted stock     1,113,132       95,179  
Options to purchase common stock     -       81,120  
Convertible notes to exchange common stock     9,812,955       -  
Total     11,250,462       634,136  

 

The following table sets forth the computation of basic and diluted loss per share:

 

    2022     2021     2022     2021  
   

For the Three Months Ended

September 30,

   

For the Nine Months Ended

September 30,

 
    2022     2021     2022     2021  
Net loss attributable to common shareholders   $ (75,444,407 )   $ (22,172,567 )   $ (280,027,638 )   $ (47,700,445 )
                                 
Denominator:                                
Weighted average common shares - basic and diluted     116,533,816       100,803,809       109,492,865       98,230,795  
Loss per common share - basic and diluted   $ (0.65 )   $ (0.22 )   $ (2.56 )   $ (0.49 )