LD Capital: Analysis and investment insights of Marathon Digital Holdings during the cold winter of Bitcoin mining
Original author: Yilan
The main businesses of listed blockchain concept stocks are mining, mining machine sales, chip manufacturing, digital asset management, blockchain technology provision, payment and trading platforms, etc. Due to differences in business models, they have varying degrees of BTC leverage. Effect, which means that their stock price fluctuations are usually more violent than the Bitcoin spot market and have different amplification factors. Among them, mining stocks (Mara, Riot, BTBT, etc.) are more effective than mining machine stocks or stocks with other business models. The BTC price amplifier, for example, MARA has a higher correlation and price elasticity with BTC prices than COIN (COIN vs. MARA correlation 0.76 vs. 0.83, annualized standard deviation 92% vs. 170%).
Correlation and standard deviation of each mining stock and BITO price (BITO fits BTC price)
The price of Mara rose by 100% during the rebound from June 15th to July 13th, while BTC only rose by 30%. However, Mara also fell by 55% in the subsequent correction of BTC (in addition to the reasons for the decline of BTC, After the second quarter financial report was announced on August 8, EPS -0.13 was far less than the expected -0.07 (which was also the driver of the price decline), and BTC fell by 12%. Looking at it this way, Mara’s amplification factor for BTC prices in this year’s market is close to 300%, although the annualized standard deviation is only 170%.
MARA vs. BTC price increase and decrease
Mara EPS History
This article mainly analyzes the operating status and investment risks of Marathon Digital (MARA), and compares it with other mining companies to determine whether Marathon is the target with the strongest short-selling trend.
one. Investment logic
1. Business model and operational status
Marathon’s main business is self-operated Bitcoin mining. The strategy is to (finance) purchase mining machines to deploy mining farms, pay the cash operating costs of production, and then hold Bitcoin as a long-term investment. The difference between the business models of buying mining machines for mining and hoarding coins (Mara, Hut 8, Riot) and producing and selling mining machines (Cannan) is that RD expenditures are small, but capital expenditures are large, and the income is not resilient, so you can only rely on increasing BTC mining. To make profits from efficiency and BTC appreciation, the debt ratio is high and the leverage is large. Therefore, the revenue of listed mining companies has a stronger correlation with the price of Bitcoin, and the price fluctuations are more violent. At the same time, the bear market faces the potential threat of insolvency. .
Marathon Fiscal Year 2022 Financial Position Illustrated
In terms of revenue, Marathon produced 4144 BTC in fiscal year 2022, with revenue of 117 mln. However, the revenue cannot cover the expenses at all. The annual mining energy and other expenses are 72 mln, and the depreciation and amortization of mining machines is 78 mln, plus personnel, maintenance, etc. Operating expenses were 630 mln, and net loss was 687 mlm. Therefore, the business model of financing the purchase of Bitcoin mining machines for mining will test the companys cash flow management capabilities in a bear market.
In terms of mining efficiency and operations, Marathons hash rate launched in the second quarter increased by 54% from 11.5 EH/s at the end of last year to 17.7 EH/s. Increased Bitcoin production by increasing hash rate faster and improving uptime (a total of 2,926 Bitcoins were produced in Q2, accounting for approximately 3.3% of Bitcoin network rewards during that period). In terms of operations, the companys high debt situation (insolvent in 22 Q4) has affected the health of the balance sheet. Although in Q1 and Q2, the stock price performed better due to the rebound in currency prices and the increase in mining efficiency due to the production of computing power. However, BTC prices continued to slump in Q3 23 and are expected to remain sluggish until at least next year. Therefore, Marathon repaid most of its convertible bonds in advance in September this year to reduce the adverse impact of loan interest on cash flow. The total remaining principal of the note is 331 million. The dollars remain unpaid.
Although the revenue situation improved due to increased computing power and increased efficiency in mining BTC, Marathon recorded a loss of US$21.3 million in the three months ended June 30, 2023, a loss of US$0.13 per share, compared with a net loss in the same period last year It was US$212.6 million, with a loss of US$1.94 per share. The situation improved, but it was still unprofitable. Huge electricity bills and mining farm deployment costs continued to weaken Marathons balance sheet amid tight cash flow.
2. Cash flow and cash burn
It can be seen from Marathons cash flow that the source of cash comes entirely from financing. In Q4 2022, the companys operating cash flow was -92 mln, investment cash flow was -22 mln, and financing cash flow was 163 mln, leaving the company with 48 mlns net cash flow can cope with interest taxes in the next quarter, etc. The cash flow brought by financing comes entirely from the additional issuance of common shares. With continuous issuance of shares, the market may lower the companys valuation, causing Marathon to face difficulties when raising funds in the future. Higher capital costs. Additionally, issuing more common stock could result in lower earnings per share (EPS) as earnings are distributed to more shareholders, which would also have a negative impact on Marathons valuation.
As of the end of the second quarter of 2023, Marathon still held cash and cash equivalents worth 113 mln, including 12,538 BTC. The cash expense of Marathon interest in 2023 Q2 reached 3 mln, which is almost the same as its book available net cash flow (Marathons The available net cash flow is only 3 mln, which is the remaining net cash flow after issuing additional ordinary shares worth 163 mln and 65 mln in Q1 and Q2 respectively). It can be seen that too much cash is used in operations and investments, and no new cash is generated. , so in addition to actively repaying to reduce interest burdens, Marathon also needs to continue to sell BTC to pay for operating expenses. Marathon did sell 63% of the BTC produced in 2023 Q2, totaling US$23.4 million.
3. The crazy expansion of the bull market has become a worry for the bear market - acquisitions and mine deployment
Marathon deployed and installed new S 19 mining machines in early August, and the domestic installed hash rate has reached the target of 23 EH/s. The newly installed mining farm is in City Garden, TX, and the hosting provider says it is close to launch. Marathon’s joint venture in Abu Dhabi has begun calculating hash rate and generating Bitcoin. However, based on the electricity cost of US$0.12/kwh, the currently deployed mining machines will only breakeven even if they are started under the current BTC price, and may even suffer a slight loss (just counting the variable cost of electricity).
Moreover, the overall mine construction investment cost remains high. The valuation of the mine acquisition in 2021 can even reach 1 million US dollars/MW, and the unit price of purchasing mining machines is between 55 – 105 USD/T. Under the double attack of falling currency prices and rising electricity bills, early asset investments have depreciated significantly, and income has also been significantly reduced, making it difficult for many mining companies to survive.
Marathon plans to continue to expand its leadership in Bitcoin mining in the coming quarters. But in fact, such expansion makes people more worried about its cash flow situation in a bear market. Whether it can continue to raise funds determines whether its expansion plan can be launched smoothly (the issuance of additional equity will reduce its per-share value).
4. Marathon’s debt situation and operating status
A downturn in the market will have a negative impact on companies with significant debt, especially in a high interest rate environment. Marathons liabilities bring additional interest burdens to cash flow, so Marathon chose to repay most of its convertible bonds early to cope with the current low Operating pressures caused by currency prices and next year’s BTC halving (Marathon’s $417 million convertible notes were redeemed at a discount of approximately 21%, which saved Marathon approximately $101 million in cash, excluding transaction costs. The transaction has a significant impact on existing The accretion to shareholders is approximately $0.55 per share.), while increasing Marathons financial/financing options. As debt loads decrease, companies are better positioned to weather short-term turmoil.
In the bear market, currency prices fell, mining machine orders, mining farm capital expenditures and debts put great pressure on company operations. In addition, fierce competition among miners and rising energy prices further exacerbated the survival crisis of mining companies. Even though 63% of the total Q2 output of BTC has been sold, Marathon CEO revealed in the Q2 conference call that he will continue to sell BTC to maintain the companys operations.
5. Current situation of miners’ bear market
Mining stocks face severe challenges in the bear market. The strong correlation and high elasticity characteristics of BTC also lead to greater downward pressure on its price in the bear market. Due to the highly leveraged operating model, listed mining companies with a single source of income also face the threat of bankruptcy. . Many listed Bitcoin mining companies borrowed heavily during the bull market in 2021, causing their profitability to be very negatively affected during the subsequent bear market. In fact, Core Scientific, which has the largest amount of borrowing and the highest debt-to-asset ratio among mining companies, has already borrowed money in 2022. It sought bankruptcy protection and debt restructuring at the end of the year. Throughout 2022 before bankruptcy, Core Scientific was selling BTC to cover operating costs such as its mining machine purchase costs, self-operated mine construction expenses, large-scale deployment of mining machine electricity bills, and loan interest. However, it eventually declared bankruptcy due to its aggressive expansion plan for 2022 (deployment of more than 320,000 mining machines by the end of 2022, with a daily loss of US$53,000 in photovoltaic costs) and the Celsius incident.
There is a significant divergence between the price of Bitcoin and the difficulty of the network. In the bull market, the market rewards miners for their future computing power, which has become an important narrative for miners to raise funds in the bull market. However, in the bear market, as the price of Bitcoin falls, the increase in computing power makes the economic situation of miners very serious. It is challenging because miners must purchase the mining machine orders they signed before while the price of BTC has dropped significantly and the computing power still continues to grow. Miners are already paying for the capex of their mining rigs, so from their perspective it makes sense to continue with growth plans as long as their marginal mining costs remain positive. This trend has further exacerbated the sharp decline in hash prices since the beginning of the year.
As the price of Bitcoin plummets, the valuations of most mining stocks have fallen severely. Some mining companies are raising funds by selling BTC and issuing common shares, significantly diluting the equity of existing shareholders. The issuance of additional shares to raise funds makes it very difficult to raise additional equity. It is dilutive and raising debt capital is expensive. With funds tight, miners are also looking for alternative solutions, such as providing hosting services to obtain higher revenue streams, selling equipment to obtain more cash, and even considering mergers and acquisitions. Mining companies that were conservative and not over-leveraged during the bull market now have the opportunity to adopt an opportunistic attitude. That is, miners with excellent cash flow management may have the opportunity to acquire other competitors at a low price due to debt.
In the case of MARA with a poor debt-to-capital ratio (i.e. when the probability of bankruptcy increases), the upward correlation with BTC may decrease. If Maras recent debt disposal allows its balance sheet to survive until the BTC bull market, given the current market situation (continues to decline), Marathons debt situation (debt to equity is too high), valuation situation (P/B is still relatively high) Judging from the big downside (MC/hashrate is higher than peers), the investment recommendation is a strong sell within 12 months, with a PB of 1 as a short target and a target stock price of around $3. At the current price of $8, it is 166% overvalued. However, based on its highest price elasticity, you can gain swing profits when the market rebounds and get better returns than buying BTC. There are two scenarios that could cause the stock price to rise: an acquisition and a short to mid-term BTC bear market rally.
two. Company background and business introduction
Marathon Digital Holdings,Inc. and its subsidiaries (the Company or Marathon) is a digital asset technology company focused on the blockchain ecosystem and the generation or mining of digital assets. The company was incorporated in Nevada on February 23, 2010 as Verve Ventures, Inc. In October 2012, the company began intellectual property licensing operations and simultaneously changed its name to Marathon Patent Group, Inc. In 2017, the company purchased digital asset mining equipment and established a data center in Canada for mining digital assets. However, the company ceased operations in Canada in 2020 and consolidated all operations into the United States at that time. The company has since expanded its Bitcoin mining activities in the United States and internationally. The company changed its name to Marathon Digital Holdings, Inc on March 1, 2021. As of June 30, 2023, the Companys primary operations were focused on Bitcoin mining and ancillary opportunities in the Bitcoin ecosystem. The strategy is to hold Bitcoin as a long-term investment after paying the cash operating costs of production. Holding Bitcoin is a strategy that serves as a store of value. It is supported by a powerful and public open source architecture that is not tied to any countrys monetary policy and therefore can be used as a store of value outside of government control. Marathon believes that because Bitcoin has a limited supply, it also provides additional opportunities for appreciation as it continues to be adopted. Opportunities to participate in other businesses related to the Bitcoin mining operation may also be explored when favorable market conditions and opportunities arise.
Ancillary businesses refer to businesses that are related to the Bitcoin ecosystem but are not directly related to mining itself. Affiliated businesses directly related to mining may include, but are not limited to, managing Bitcoin mining facilities for third party owners, providing consulting and advisory services to third parties seeking to establish and operate Bitcoin mining facilities, and operating under U.S. and international law Joint ventures to carry out Bitcoin mining projects within the region, such as the company’s project in Abu Dhabi (United Arab Emirates). Marathon will also seek to participate in Bitcoin-related projects, including but not limited to the development of immersive technology, hardware, firmware, mining pools and sidechains using blockchain cryptography, and may also participate in the development of immersive technologies, hardware, firmware, and sidechains using blockchain cryptography. Electricity generation projects such as gas capture to generate electricity for use in Bitcoin mining projects.
development path
On February 23, 2010, the company was registered in Nevada and named Verve Ventures, Inc;
On December 7, 2011, the company changed its name to American Strategic Minerals Corporation and is engaged in the exploration and potential development of uranium and vanadium minerals;
In 2012.6, the company terminated its mining business and began investing in real estate in Southern California;
In 2012.10, the company changed its name to Marathon Patent Group, Inc. and started intellectual property licensing business;
On November 1, 2017, the company signed a merger agreement with Global Bit Ventures, Inc. (GBV) to focus on mining the pan-blockchain; this node is an important symbol of Marathon Digitals transformation from being on the verge of bankruptcy to gradually becoming a leading mining company. Through the acquisition of GBV, Marathon obtained GBV’s own 1,300 Bitmain S 9 mining machines and 1,000 graphics card mining machines. After becoming familiar with the process, Marathon purchased another 1,400 S 9s and rented a 2 MW site for mining operations. Not long after that, the crypto market entered a bear market, and Marathon terminated its cooperation with GBV.
2019.9.30 – 2020.12.23,The company purchases pan-blockchain mines by signing contracts;
Starting from March 1, 2021, the company will be renamed Marathon Digital Holdings, Inc.
Important events in 2022
Significant Crypto Market Developments and Implications for Companies 2022 will be a challenging year for the entire crypto industry as macroeconomic conditions, including a high inflation and rising interest rate environment relative to recent years, cause stock markets to move lower. Weakness and widespread “risk-off” sentiment have had a negative impact on Bitcoin prices. In addition, the challenging macro environment in 2022 was further affected by a series of unexpected black swan events that impacted the entire industry, including:
The $LUNA-UST decoupling collapse in Q2 2022 led to the bankruptcies of significant players in the digital asset space, including Three Arrows Capital, Voyager, and Celsius;
The collapse of FTX in Q4 2022 resulted in additional credit-related bankruptcies and a significant decline in the price of Bitcoin and Bitcoin mining equipment. The impact of these black swan events on Marathons results of operations includes impairment of prepayments.
Impairment of Bitcoin Mining Equipment and Advances to Suppliers: During the fourth quarter of 2022, there was a significant decline in the fair value of Bitcoin mining equipment. As a result, the Company assessed whether it needed to make impairment provisions for Bitcoin mining equipment (held as fixed assets) and advances to suppliers (held as current assets, representing deposits for future deliveries of mining equipment). Marathon took impairment charges on both Bitcoin mining equipment and advances to suppliers, totaling approximately $332,933,000.
Digital Assets — Impairments and Decline in Book Value: Marathon experienced impairments of $173,215,000 during 2022, realized and unrealized losses of $85,017,000 on digital assets within investment funds, and losses on consolidated assets Unrealized losses on digital assets held on the balance sheet were $14,460,000.
Total Profit Decline: Marathons operating profitability declined due to lower Bitcoin prices and delays in expanding operations. Total profit for the year was a loss of $33,673,000, compared with a gain of $116,768,000 in the same period last year, a decrease of $150,441,000.
Immediate Impact of Supplier Bankruptcy Filings: On September 22, 2022, Compute North filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result, the company recorded an impairment charge of $39,000,000 in the third quarter of 2022. During the fourth quarter of 2022, the Company estimated that an additional $16,674,000 of deposits may have been impaired and therefore recorded additional impairment charges.
Digital Assets Used as Collateral—Fair Value Declines and Additional Collateral Requirements: On November 9, 2022, Bitcoin prices fell to new yearly lows amid concerns that an FTX collapse would lead to financial instability in the industry. As a result, the Company was required to post an additional 1,669 Bitcoins (valued at $16,213 per Bitcoin) as collateral for its outstanding borrowings under Silvergate Bank’s Term Loan and Revolving Credit (RLOC) facility , with a total collateral balance of 9,490 Bitcoins (or approximately $153,861,000 in fair value). As of November 9, 2022, the Company’s total Bitcoin holdings were 11,440 Bitcoins, of which 1,950 (approximately $31,615,000) were unrestricted. In November and December 2022, the Company repaid $5, 00,000, 000 of its RLOC borrowings. These repayments enable the Company to reduce the number of Bitcoins it uses as collateral to approximately 4,416 Bitcoins (fair value of approximately $73,074,000) as of December 31, 2022.
Impact of Bankruptcy and FTX Collapse on Marathons Primary Lender: Prior to the termination of the loan facility on March 8, 2023, Silvergate Bank was the lender to Marathons Term Loan and RLOC facilities, under which Marathon was entitled to borrow up to $200,000, 000 USD, provided that sufficient Bitcoin is used as collateral. On March 1, 2023, Silvergate Bank filed a disclosure with the SEC regarding its troubled financial condition, including concerns about its ability to continue as a going concern and a notice of delay in filing its Form 10-K due to a substantial decline in its customer deposits. Reduced and undercapitalized. This caused crypto customers to abandon the bank, creating both a credit void and reputational risk for crypto customers. On 8 March 2023, Silvergate announced its intention to cease operations and place the bank into voluntary liquidation. On February 6, 2023, Marathon provided Silvergate Bank with the required 30 days notice of Marathons intention to repay the outstanding balance of its Term Loan facility and of Marathons intention to terminate the Term Loan facility. Marathon and Silvergate banks later agreed to terminate the RLOC facility. On March 8, 2023, the Company repaid the Term Loan and terminated the RLOC facility with Silvergate Bank.
Signature Bank Closure: On March 12, 2023, Signature Bank was closed by its state licensing authority, the New York State Department of Financial Services. On the same day, the FDIC was appointed conservator and transferred all of Signature Banks deposits and substantially all of its assets to Signature Bridge Bank, a full-service bank operated by the FDIC. The company automatically became a customer of Signature Bridge Bank in this action. As of March 12, 2023, the Company held approximately $142, 000, 000 in cash on deposit with Signature Bridge Bank. Normal banking operations resumed on March 13, 2023.
Important events in 2023
On January 27, 2023, the Company and FS Innovation, LLC (FSI) signed a shareholders agreement (hereinafter referred to as the Agreement) regarding the establishment of Abu Dhabi Global Market Company (hereinafter referred to as the ADGM Entity), which The purpose is to jointly (a) establish and operate one or more mining facilities for digital assets; and (b) mine digital assets (collectively, the Business). ADGM Entitys initial project will include two 250 MW digital asset mining sites in Abu Dhabi. ADGM Entitys initial equity ownership will be 80% of FSI and 20% of Marathon, and will be in accordance with these during the 2023 development period. Pro rata capital contributions, both in cash and in kind, totaling approximately $4,060,000. FSI will appoint four directors to the ADGM Entitys board of directors, while the company will appoint one director. Unless otherwise provided by applicable law, digital assets mined by the ADGM Entity will be distributed monthly to the Company and FSI in proportion to their equity stake in the ADGM Entity. The agreement contains market provisions regarding financial and tax matters. The Agreement will be terminated earlier by unanimous written consent of the parties, the liquidation of the ADGM Entity or the shareholders possession of the entire outstanding equity interest in the ADGM Entity. The agreement contains market provisions regarding the transfer of shares by shareholders, rights of first refusal and certain incidental and attendant interests in the sale of the ADGM Entity. In addition, the agreement contains a five-year restrictive covenant that prohibits Marathon from competing with the business or business of FSI or certain related parties in the UAE, and prohibits FSI from competing with Marathons business in the United States.
September 20, 2023 Marathon has completed a previously announced privately negotiated transaction agreement with certain holders of 1.00% convertible senior notes due 2026. On average, these transactions represent a discount of approximately 21% to face value and save the company approximately $101 million in cash before transaction costs.
Marathon will exchange an aggregate principal amount of $417 million of notes held by holders for an aggregate of 31.7 million newly issued shares of Marathon common stock. As a result, the company reduced its long-term convertible debt by approximately 56% and saved approximately $101 million in cash before transaction costs. The remaining aggregate principal amount of the notes of $331 million remains outstanding.
three. financial analysis
1. Revenue growth
A business model based on BTC appreciation and increased mining efficiency has led to Marathon’s revenue starting to go negative after the crypto market entered a bear market post-2021.
In 2022, Marathon operating income was $117,753,000 compared to $159,163,000 in 2021. Revenue decreased $41,410,000 primarily due to a $77,286,000 decrease in revenue due to lower Bitcoin prices in 2022, partially offset by a $44,570,000 increase in revenue due to increased annual production. In 2022, revenue also fell by $8, 694, 000 as the company ceased operating mining pools that included third parties. Despite the overall annual increase in production, the company experienced significant production lulls in the second and third quarters due to the aforementioned delays in exiting Hardin and King Mountain electrification. Production in the third quarter was down 50% from the same period last year. Marathons best production quarters in 2022 are the first and fourth quarters.
As of December 31, 2022, it held approximately 12,232 Bitcoins on its balance sheet, with a book value of $190,717,000. Of these, approximately 4,416 Bitcoins ($68,875,000 book value) were used as collateral for borrowing and were classified as restricted digital assets. The remaining 7,816 Bitcoins, with a book value of $121,842,000, are unrestricted holdings and are classified as digital assets.
Marathon’s BTC balance fell for the first time in the first quarter of 2023 by 766 coins in response to a deteriorating balance sheet.
In the second quarter of 2023, as Bitcoin production increased by 314%, which greatly offset the 14% decrease in the average Bitcoin price during the same period that year, the second quarter revenue was US$81.8 million on a quarter-on-quarter basis, which was much higher than that in the second quarter of 2022. $24.9 million. However, its operating conditions are still not optimistic. Marathon sold 63% of the BTC produced in the second quarter (1,843 BTC) and recorded a loss of US$21.3 million in the three months ended June 30, 2023, with a loss per share of US$0.13, compared with a net loss of US$212.6 million in the same period last year, a loss of US$1.94 per share.
Proceeds from Bitcoin sales were $23.4 million, as the company sold 63% of the Bitcoin generated during the quarter to cover operating costs. In addition, due to the general increase in the price of Bitcoin during the current year, the impairment of the digital assets book value decreased by $8.4 million. Additionally, comparisons this year are aided by the absence of a $79 million digital asset investment fund loss and a $54 million gain on the sale of equipment compared to the same period last year.
Adjusted EBITDA was $25.6 million, compared with a loss of $167.1 million in the year-ago period. In addition to those gains and lower impairments, total gross profit before depreciation and amortization improved to $26.5 million, up from $8.2 million in the year-ago period.
Second quarter 2023 production highlights:
Bitcoin production: Q2-23 2926 coins, Q2-22 707 coins, an increase of 314%, Q2-23 2926 coins, Q1-23 2195 coins, an increase of 33%.
Average daily Bitcoin production: Q2-23 32.2 coins, Q2-22 7.8 coins, an increase of 314%, Q2-23 32.2 coins, Q1-23 24.4 coins, an increase of 32%.
Operational/Launch Hashrate (EH/s) 1: Q2– 23 17.7 EH/s, Q2– 22 0.7 EH/s, up 2429%, Q2– 23 17.7 EH/s, Q1– 23 11.5 EH/s, An increase of 54%.
Average operating hash rate (EH/s) 1: Q2–23 12.1 EH/s, N/A last year, Q2–23 12.1 EH/s, Q1–23 6.9 EH/s, an increase of 75%.
Installed Hash Rate (EH/s) 1: Q2–23 21.8 EH/s, N/A Q2–23 21.8 EH/s, Q1–23 15.4 EH/s, up 42%.
Although the commissioning of mining equipment has greatly improved mining efficiency compared with the same period last year, the price of BTC is still low and the aggressive expansion has caused Marathons operating expenses to be too high, and it is still on the verge of danger.
2. Breakdown of profits and costs
Marathon total profit was -$33.67 million in fiscal 2022, compared to $117 million in the same period in fiscal 2021, a decrease of $150 million.
Marathons cost of revenue, including energy, hosting and other costs, totaled $72.71 million in fiscal 2022, compared with $27.49 million in the same period in 2021. The $45.23 million increase was primarily due to higher production costs, which increased by $30 million per Bitcoin mined, $18.21 million in acceleration costs resulting from the early exit of Hardin, and the cost impact of higher Bitcoin production , an increase of $5.56 million. Partially offsetting these increased costs was an $8.69 million decrease in revenue costs from third-party mining pools that were decommissioned in 2022. Cost of Revenue - Depreciation and amortization was $78.71 million in 2022 compared to $14.9 million in the same period in 2021, an increase of $63,805,000. This was primarily due to accelerated depreciation related to Marathons exit from the Hardin, MT facility, which increased by $36,032,000, and an increase in depreciation costs of $27,773,000 related to additional mining equipment in operations.
Marathon recorded a net loss of $687 million in 2022, compared with a net loss of $37.09 million in the same period in 2021. Losses increased by $649 million, primarily due to a total decrease of $318 million in the carrying value of Marathons digital assets and impairments of Bitcoin mining equipment and prepayments to suppliers totaling $333 million.
Adjusted EBITDA was -$534 million, compared to $162 million in the same period in 2021. Depreciation and amortization of $86.64 million, legal reserves of $26.13 million, and general and administrative expenses, excluding an $18.57 million increase in non-cash stock compensation costs. Partially offsetting these headwinds were a gain on the sale of excavation equipment of $83.88 million and an increase in nonoperating income of $1.57 million.
The 2023 Q2 Marathon recorded a net loss of $19.13 million, compared to a net loss of $21.26 million in the same period last year. The improvement in net loss of approximately 91% was primarily due to favorable differences in gains on digital asset sales and digital asset impairments, as well as favorable differences related to digital asset impairments and digital asset losses within investment funds, partially offset by lower total profit Rate.
2023 Q2 Marathon adjusted EBITDA was $25.63 million, compared with -$167 million in the same period last year. The increase in adjusted EBITDA was primarily due to the positive impact of digital asset sales ( $23.35 million) and a reduction in digital asset impairment ($12.32 million). Adjusted EBITDA also benefited from the absence of several expenses recorded in the same period last year, including losses on digital assets within the digital asset fund and gains on digital asset sales and losses on digital asset loan receivables, which The favorable differential was partially offset by lower total profit margin, excluding depreciation and amortization, and higher management and administrative expenses excluding equity-based compensation.
Then analyze the impact of Marathon mining machine deployment on costs and profits. Mining machines are currently hosted by a third party, and Marathon pays them a fee.
McCamey, TX — Approximately 63,000 S 19 j Pros are currently deployed and operating at this location, with an additional 4,000 S 19 j Pros scheduled to be delivered and deployed in 2023. Marathons contract for the facility expires in August 2027.
Garden City, TX — Approximately 28, 000 S 19 XPs are currently installed at this site and are awaiting final regulatory approval to energize. Marathons current expansion plans include the deployment of 19 MW of immersion equipment in 2023, powered by new capacity and replacement air cooling units. The contract for the facility expires in July 2027.
Ellendale, ND — Approximately 57, 000 S 19 XPs are expected to be deployed at this location in the first half of 2023. Electrification is expected to begin by the end of the first quarter of 2023. The contract for the site expires in July 2027.
Jamestown, ND — Approximately 5,600 S 19 XPs are currently deployed and operating at this location, with plans to deploy an additional 10,400 air-cooled units in the first quarter of 2023. In addition to the installation of these air-cooled units, the company plans to deploy 768 immersed units at the site in the second quarter of 2023. Contracts for immersion deployments are due to expire in August 2026, and contracts for air-cooling equipment are due to expire in December 2027.
Granbury, TX — Approximately 12,500 S 19 j Pros and 4,400 XPs are currently deployed and energized at this facility. There are currently no plans to expand the facility.
Coshocton, OH — Approximately 2,800 S 19 Pros are currently deployed and operating at this facility. Marathons contract for the facility expires in June 2023 and does not intend to extend the contract beyond that termination date.
Plano, TX — Approximately 345 S 19 Pros are currently deployed and operating at this facility. There are currently no plans to expand the facility, and the contract for the facility is set to expire in June 2027.
Kearney, NE — Approximately 2,300 S 19 J Pros are currently deployed and operating at this location. The company plans to deploy an additional 1, 300 MicroBT devices at the site in 2023.
South Sioux City, SD — There are currently approximately 660 S 19 Pros deployed at this location. The companys contract for the facility expired in early 2023 and it exited the facility. On January 27, 2023, Marathon and FSI signed an agreement relating to the establishment of an Abu Dhabi Global Market company for the purpose of jointly (a) establishing and operating one or more digital asset mining facilities; and (b) mining digital assets. The ADGM entity’s first project will include two digital asset mining stations in Abu Dhabi, totaling 250 MW of immersed equipment, with an initial equity ratio of 80% vested in FSI and 20% vested in Marathon. The facility is expected to be operational in the second half of 2023.
Most of Marathons S 19 XPs were put into production in the first quarter of this year. Judging from the profitability of each mining machine, the current profit of each S 19 XPs is meager, US$0.08 per day. Therefore, the increase in computing power may not fundamentally improve Marathon’s profitability this year.
Since miner profitability = Bitcoin reward x BTC price - electricity cost - computing power price; therefore, the Bitcoin market price, electricity cost and computing power price are crucial to Marathons profitability.
· Bitcoin rewards
Bitcoin rewards are greatly affected by the halving event. Bitcoin halving is a phenomenon that occurs on the Bitcoin network every four years or so. Halving is also an important part of the Bitcoin protocol, which is used to control the overall supply and reduce the risk of inflation of digital assets using the proof-of-work consensus algorithm. At a predetermined block height, mining rewards are halved, hence the term halving. For Bitcoin, the reward was initially set at a monetary reward of 50 Bitcoins per block. Since its creation, the Bitcoin blockchain has undergone three halvings, as follows: (1) on November 28, 2012, at block height 210,000; (2) on July 9, 2016, At block height 420,000; (3) On May 11, 2020, at block height 630,000, when the reward was reduced to the current 6.25 Bitcoins per block. The next halving of the Bitcoin blockchain is expected to occur around March 2024, around block height 840, 000. This process will repeat until the total number of Bitcoin monetary rewards issued reaches 21,000,000 and the theoretical supply of new Bitcoins is exhausted, which is expected to occur in approximately 2140. The 2024 Bitcoin halving will reduce mining rewards, jeopardizing the profitability of miners with razor-thin margins. A significant improvement in profitability will only be seen if there is a significant increase in the price of BTC.
· Electricity costs
Looking at electricity costs, mining costs vary widely across countries, with European countries facing the highest fees due to rising electricity prices. The impact of rising energy prices on U.S. mining companies is smaller than that in Europe, but it has also intensified the power cost pressure on U.S. mining companies. The electricity price in Texas is US$0.12/kwh, which is 34% lower than the US average electricity price of US$0.18/kwh. Even so, it is difficult for most models of mining machines to reach breakeven under the current electricity and currency prices (this is without calculating subsidies. Some mines may still be profitable with the benefit of subsidies).
· Network hashrate and difficulty
Generally speaking, a Bitcoin mining rigs chance of solving a block on the Bitcoin blockchain and receiving a Bitcoin reward is a function of the mining rigs hash rate relative to the global network hash rate (i.e., the number of users using it during a given period of time). is a function of the sum of the computing power supporting the Bitcoin blockchain). As the demand for Bitcoin increases, the global network hash rate increases rapidly. Additionally, Bitcoin’s network difficulty has increased as more and more powerful mining rigs have been deployed. Network difficulty is a measure of how difficult it is to solve a block on the Bitcoin blockchain, and it is adjusted every 2016 blocks (approximately every two weeks) to ensure that the average time between each block remains ten minutes about. High difficulty means that solving blocks and being rewarded with new Bitcoins will require more computing power, which in turn makes the Bitcoin network more secure, limiting the possibility of one miner or mining pool taking control of the network. Therefore, as new and existing miners deploy additional hashrate, the global network hashrate will continue to increase, which means that if miners fail to deploy additional hashrate at a pace that keeps pace with the industry , then miners’ share of the global network hashrate (and therefore their chances of earning Bitcoin rewards) will decline. It can be seen that due to fierce competition among miners, the revenue per TH was US$0.25/TH at the beginning of 2022, and has now dropped to approximately US$0.06/TH.
Marathon, the listed miner with the largest share of the network’s hash power, has been continuously increasing its EH/s to remain mining competitive. Its operating hash rate increased from 13.2 EH/s in 22 Q3 to 17.7 EH/s in 23 Q2, and this year’s goal is to reach 23.1 EH/s.
Marathon Hashrate Growth Roadmap
Marathon operational hash rate growth
Therefore, combined with Bitcoin rewards, BTC prices, electricity costs, and computing power prices, if the halving is not accompanied by an increase in BTC prices, the reduction in electricity costs and rewards for miners will challenge their operations, which will have a higher Hashrate and more expansion. For radical mining companies, this is not a good thing.
3. Capital structure, financing situation and borrowing costs (data as of fiscal year 2022)
Here we focus on four dimensions, capital structure (debt-to-equity ratio), financing situation, and Capex (capital expenditure) situation.
Marathon Debt to Equity Ratio
Marathon debt-to-equity ratio: total debt/common equity= 783 mln/386 mln= 2.03 (FY 2022); total debt/common equity= 735 mln/594 mln= 1.23 (2023 Q2)
Even minus the early repayment of $414 mln worth of convertible debt this month, Marathons latest debt-to-equity ratio was 0.54
Financing situation: Total debt of 783 mln was recorded at the end of 2022, most of which was 747 mln of convertible bonds issued in 2021, and 414 mln was repaid in September 2023.
The cash flow generated by Marathon 2023 Q2 financing activities was US$410,655,000, which mainly came from the US$361,486,000 obtained by the company from the regular issuance of common stock under the companys market price trading plan and the borrowings issued under the long-term loan agreement. of US$49,250,000.
The maximum amount Marathon may borrow during the year ending December 31, 2022 is $70, 000, 000. Total borrowings and repayments under the revolving credit agreement were $120,000,000 during the year ended December 31, 2022, and there were no borrowings outstanding under the revolving credit agreement at December 31, 2022.
Cash flow generated from financing activities was US$1,037,333,000, mainly funded by the proceeds from the issuance of convertible bonds of US$728,406,000 and the issuance of common stock of US$312,196,000. Total borrowings and repayments under the Companys 2021 Revolving Credit Agreement for the year ended December 31, 2021 were $77,500,000. At December 31, 2021, there were no borrowings outstanding under the Revolving Credit Agreement. . Top of Form
Interest expense: Interest expense increased $13,410,000 due to the convertible bonds issued in November 2021, including $6,633,000 of higher interest related thereto and $3,664,000 of Amortization of debt issuance expenses and other interest expenses primarily related to the Companys term loan and revolving credit (RLOC) facilities. With its current cash and cash equivalents, Marathon has no pressure to repay interest expenses.
Marathon FY 2018 – FY 2022 Capital Structure
Marathons capital expenditures experienced significant changes between fiscal years 2018 - 2022, from $5 mln, $5 k, $83 mln, $708 mln to $525 mln. Especially starting in 2021, capital expenditures increased significantly, which corresponded with the large financings carried out by the company that year. Moderate capital expenditure can improve a companys production efficiency, promote innovation, and enhance market competitiveness. However, during market downturns, an increase in a companys fixed expenses, especially when accompanied by a significant reduction in revenue, often results in significant pressure on cash flow.
Marathon 2018 – 2022 fiscal year capital expenditures
Marathons capital expenditures experienced significant changes between fiscal years 2018 - 2022, from $5 mln, $5 k, $83 mln, $708 mln to $525 mln. Especially starting in 2021, capital expenditures increased significantly, which corresponded with the large financings carried out by the company that year. Moderate capital expenditure can improve a companys production efficiency, promote innovation, and enhance market competitiveness. However, during market downturns, an increase in a companys fixed expenses, especially when accompanied by a significant reduction in revenue, often results in significant pressure on cash flow.
Marathon 2018 – 2022 fiscal year capital expenditures
Competitor situation (see the valuation section for details, here we mainly look at the debt-to-equity ratio and capex)
Riots debt-to-equity ratio = 22 mln/1240 mln = 0.017 (2023 Q2), much lower than Marathons 1.23 (calculating the repaid convertible bonds not reflected in the latest financial report, Marathons debt-to-equity ratio is 0.54)
From fiscal year 2018 to 2022, Riots Capex was 20 mln, 6.4 mln, 41 mln, 421 mln, 343 mln respectively; Riot 23 Q2s capex was 56 mln
Hut 8 debt-to-equity ratio = 35 mln/259 mln = 0.135 (FY 2022), also much lower than Marathon’s 1.23 (calculating debt not repaid in the latest financial report Marathon’s debt-to-equity ratio is 0.54)
Canaan Technology FY2018 – FY2022 Capex
BTBT FY 2018 – 2022 Capex
It can be seen that the level of debt-to-equity ratio has a decisive impact on the viability of the company in a poor income environment. A higher historical Capex usually means that the debt-to-equity ratio will be higher even if debt repayment is not active. If C
