NOTE 2 – RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

Restatement Background

As previously disclosed in the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on February 28, 2023, certain of the Company’s previously filed interim unaudited and annual audited Consolidated Financial Statements should no longer be relied upon and a restatement is required for these previously issued Consolidated Financial Statements. The Consolidated Financial Statements for the year ended December 31, 2022 include restated Consolidated Financial Statements for the year ended December 31, 2021. In addition, we have restated our Unaudited Quarterly Financial Data for the interim periods within the years 2021 and 2022 as presented in NOTE 16 – QUARTERLY FINANCIAL DATA (UNAUDITED).

Restatement of financial information and prior periods presented was necessary to correct for the following: (i) Revenue Recognition – Principal versus Agent, (ii) Impairment of Digital Assets, (iii) NYDIG Digital Assets Fund III, LP – Consolidation Gross versus Net Presentation, (iv) NYDIG Digital Assets Fund III, LP – Financial Statement Reclassification (v) Disposal of Assets (vi) Other Adjustments, and (vii) the income tax adjustments due to the forementioned errors .

Revenue Recognition – Principal versus Agent

The Company corrected its previous conclusion that as the operator of Marapool (“Operator”), third-party mining pool participants (“pool participants”) are its customer. The Company previously viewed such pool participants as principal to the delivery of transaction verification services to the network and requester and therefore recognized revenue net of amount remitted to pool participants’ pro rata entitlement to block rewards and transaction fees. The Company has since corrected its revenue recognition policy and concluded that the Company’s customers are the transaction requestor and the blockchain network, and that the Company controls the transaction verification services as an Operator. This results in recognition of all transaction fees and block rewards earned from transaction verification services performed by the Company in its role as an Operator of MaraPool as revenue from contracts with customers under Topic 606, with the portion of the transaction fees and block rewards remitted to MaraPool participants as cost of revenues.

The impacts of the Revenue Recognition – Principal versus Agent correction are as follows:

ERROR CORRECTION OF REVENUE RECOGNITION 

Impairment of Digital Assets

The Company corrected its calculation of impairment on digital assets that used the U.S. Dollar bitcoin spot rate at a standard cutoff time instead of the lowest U.S. Dollar bitcoin spot rate at any point in time during the day. The Company’s correction of this calculation results in it recognizing impairment in an amount by which the carrying value exceeds the fair value of the digital assets at any point in time during the day.

The impacts of the Impairment of Digital Assets correction are as follows:

ERROR CORRECTION OF DIGITAL ASSETS 

NYDIG Digital Assets Fund III, LP – Consolidation Gross versus Net Presentation

Marathon accounted for its investment in the NYDIG Digital Assets Fund III, LP (“Fund”) at fair value with changes in fair value recognized in net income, resulting in the recognition of the Fund’s assets net of liabilities, and unrealized and realized gains net of expenses. Management subsequently determined that the Company should have consolidated the Fund under the voting interest model and therefore should have presented assets of the Fund, liabilities, gains, and expenses on a gross basis.

Marathon previously revised certain period amounts included in it’s Form 10-Q for interim period ended September 30, 2022 as stated within NOTE 16 – QUARTERLY FINANCIAL DATA (UNAUDITED). However, the error has been reflected throughout this document for purposes of comparability within the restatement adjustments.

NYDIG Digital Assets Fund III, LP – Financial Statement Reclassification

Realized and unrealized gains (losses) on digital assets held in investment fund were incorrectly classified as other non-operating income. A reclassification was required to correctly classify realized and unrealized gains (losses) on digital assets held in investment fund as operating income for all periods presented.

The impacts of the Fund errors are as follows:

ERROR CORRECTION OF FUNDS 

Disposal of Assets

The Company identified an error in its calculation on gain on sale of mining equipment due to exclusion of capitalized shipping and customs costs that should have been allocated to the sold mining equipment. This error if uncorrected would have resulted in an over-impairment of remaining mining equipment (not sold) when such mining equipment was subsequently impaired.

The impacts of this error are as follows:

ERROR CORRECTION OF DISPOSAL OF ASSETS 

Other Adjustments

The Company corrected other errors relating to (i) accruals for legal expenses, (ii) valuation of bifurcated derivatives related to the SAFE investments, (iii) accumulated comprehensive income and other income, and (iv) classification of prepaid expenses between short-term and long-term, as follows:

ERROR CORRECTION OF OTHER ADJUSTMENTS 

Income Tax Adjustments

As a result of the adjustments to the restated financial statements presented, our income tax expense decreased by approximately $781 thousand for the year ended December 31, 2021, primarily due to changes in deferred taxes as a result of the cumulative impact of the restatement. See NOTE 7 – INCOME TAXES, for additional details regarding income taxes.

 ERROR CORRECTION OF INCOME TAX EFFECT

Accounting Policy Adjustments

The Company also recorded adjustments to the Consolidated Financial Statements relating to the full retrospective adoption of crypto loan derecognition guidance issued by the SEC in December 2022, which includes considerations under ASU 2016-13, “Financial Instruments - Credit Losses (ASC 326) Measurement of Credit Losses on Financial Instruments”. See further discussion in NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES and NOTE 5 – DIGITAL ASSET LOAN RECEIVABLE, NET OF ALLOWANCE.

Restated Consolidated Financial Statements

For the restated year ended December 31, 2021, the following tables shows the effects, by financial statement line item, on the Company’s Consolidated Balance Sheets, Consolidated Statements of Other Comprehensive Income (Loss) and Consolidated Statements of Cash Flows of: 1) the corrections as described above, and 2) the full retrospective adoption of crypto loan derecognition guidance issued by the SEC in December 2022, which includes considerations under ASU 2016-13, “Financial Instruments - Credit Losses (ASC 326) Measurement of Credit Losses on Financial Instruments”.

SCHEDULE OF RESTATEMENTS 

Restated Consolidated Balance Sheets (in thousands)

Restated Consolidated Statements of Other Comprehensive Income (Loss)

Restated Consolidated Statements of Cash Flows (in thousands)