The main business of listed blockchain concept stocks is divided into 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 intense than the Bitcoin spot market and have different amplification factors. Among them, mining stocks (Mara, Riot, BTBT, etc.) are more effective BTC price amplifiers compared to mining machine stocks or other business model stocks. For example, compared to COIN, MARA has higher correlation and price elasticity to BTC prices (COIN vs. MARA correlation 0.76 vs. 0.83, annualized standard deviation 92% vs. 170%).

The correlation and standard deviation of the prices of various mining stocks and BITO (fitted to BTC price).

Mara's price increased by 100% during the rebound from June 15th to July 13th, while BTC only increased by 30%. However, Mara also fell by 55% during BTC's subsequent correction (in addition to the reason for BTC's decline, the release of Q2 financial report on August 8th with an EPS of -0.13, far below the expected -0.07, was also a driving force for the price decline), while BTC fell by 12%. Looking at it this way, Mara's amplification factor to BTC's price in this year's market is close to 300%, although the annualized standard deviation is only 170%.

Mara EPS History

This article mainly analyzes the operating status and investment risks of Marathon Digital (MARA), compares it with other mining companies, and determines whether Mara is the strongest target for short selling trends.

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, hold Bitcoin as a long-term investment after paying for production and operating costs in cash. The difference between the business models of purchasing mining machines for mining and hoarding coins (Mara, Hut 8, Riot) and producing and selling mining machines (Cannan) is that the former has less research and development expenses but higher capital expenditures, and the income is not resilient, relying only on increasing BTC mining efficiency and BTC appreciation for profit. The debt ratio is relatively high and the leverage is large, so the revenue of mining-listed companies is more closely related to the price of Bitcoin, and the price fluctuations are more severe. At the same time, they face the potential threat of insolvency in a bear market.

Marathon2022 Financial Status Analysis for Fiscal Year

Regarding revenue, Marathon produced 4,144 BTC and generated revenue of 117 million in the 2022 fiscal year. However, the revenue was not enough to cover the expenses. The total expenses for mining energy and other costs were 72 million, while the depreciation and amortization of mining machines were 78 million. In addition, there were personnel, maintenance, and other operating expenses of 630 million, resulting in a net loss of 687 million. Therefore, the business model of financing the purchase of Bitcoin mining machines is highly challenging for companies' cash flow management during bear markets.

Regarding mining efficiency and operations, Marathon's hash rate launched in the second quarter increased by 54% compared to the end of last year, reaching 17.7 EH/s. By increasing the hash rate faster and improving operating time, the company increased its Bitcoin production (producing a total of 2926 Bitcoins in the second quarter, accounting for about 3.3% of the Bitcoin network rewards during that period). In terms of operations, the company's high debt situation (insolvency in Q4 22) has affected the health of its balance sheet. Although Q1 and Q2 performed well due to the rise in coin prices and increased mining efficiency, the BTC price has been continuously low in Q3 23 and is expected to remain low until at least next year. Therefore, Marathon repaid most of its convertible bonds in September this year to reduce the adverse impact of loan interest on cash flow. The remaining principal amount of the bond is still $331 million unpaid.

Although the efficiency of mining BTC has improved due to the increase in computing power, Marathon recorded a loss of $21.3 million, or $0.13 per share, in the three months ending June 30, 2023. This is an improvement compared to the net loss of $212.6 million, or $1.94 per share, in the same period last year. However, the company still cannot make a profit, and the high electricity and deployment costs continue to weaken Marathon's balance sheet in the face of tight cash flow.

2. Cash Flow and Cash Burn Situation

From Marathon's cash flow, it can be seen that the source of cash comes entirely from financing. In Q4 2022, the company's operating cash flow was -92mln, investment cash flow was -22mln, and financing cash flow was 163mln, resulting in a net cash flow of 48mln to cover the next quarter's interest and taxes. The cash flow from financing comes entirely from the issuance of common stock, continuously issuing stocks, which may lower the market valuation of the company and lead to higher capital costs in the future when Marathon raises funds. In addition, issuing more common stock may lead to a decrease in earnings per share (EPS) because profits have to be distributed to more shareholders, which will have a negative impact on Marathon's valuation.

As of the end of Q2 2023, Marathon still holds $113 million worth of cash and cash equivalents, including 12,538 BTC. The cash expenditure for Marathon's interest in Q2 2023 reached $3 million, which is almost the same as its available net cash flow (Marathon's available net cash flow is only $3 million, even after issuing $163 million and $65 million worth of common stock in Q1 and Q2, respectively). This indicates that Marathon has used too much cash for operations and investments, and there is no new cash generation. Therefore, in addition to actively repaying to reduce interest burden, Marathon also needs to continue selling BTC to pay for operating expenses. Marathon did sell 63% of its produced BTC in Q2 2023, totaling $23.4 million.

3. The Crazy Expansion of Bull Market Becomes the Worry of Bear Market - Acquisition and Mine Deployment

Marathon deployed and installed new S19 miners in early August, and the installed hash rate in China has reached the target of 23EH/s. The newly installed mining facility is located in City Garden, TX, and the hosting provider has indicated that it is close to being operational. Marathon's joint venture in Abu Dhabi has started calculating hash rates and generating Bitcoin. However, at the current BTC price and with electricity costs of $0.12/kwh, the deployed miners will only break even and may even incur some losses due to variable costs associated with electricity.

Moreover, the overall investment cost of mining farm construction remains high. In 2021, the valuation of mergers and acquisitions of mining farms can even reach 1 million USD/MW, with the unit price of buying mining machines ranging from 55-105 USD/T. However, under the double pressure of falling coin prices and rising electricity costs, the depreciation of early asset investment and the significant reduction in income have made it difficult for many mining companies to continue.

Marathon plans to continue expanding its leadership position in the Bitcoin mining industry in the coming quarters. However, such expansion is actually more worrying for its cash flow situation in a bear market. Whether it can continue to finance its expansion plan will determine whether it can proceed smoothly (the practice of issuing new equity will reduce its per share value).

4. Marathon Debt Situation and Operational Status

The market downturn will have a negative impact on companies with significant debt, especially in a high-interest rate environment. Marathon's debt adds additional interest burden to its cash flow, so Marathon has chosen to prepay most of its convertible bonds to cope with the current low currency price and operational pressure caused by next year's BTC halving. (Marathon's $417 million convertible notes were exchanged at a discount of approximately 21%, saving Marathon about $101 million in cash, excluding transaction costs. The transaction adds value to existing shareholders of approximately $0.55 per share.) At the same time, Marathon's financial/funding options are increased. With the reduction of debt burden, the company is better able to cope with short-term volatility.

In the bear market, the falling cryptocurrency prices, mining machine orders, mining capital expenditures, and debt have brought great pressure to the company's operations. In addition, the fierce competition among miners and the rising energy prices have further exacerbated the survival crisis of mining enterprises. Even though Marathon CEO has already sold 63% of the Q2 output of BTC, he revealed in the Q2 conference call that the company will continue to sell BTC to maintain its operations.

5. Current Situation of Mining Bear Market

Mining stocks face severe challenges in bear markets, and the strong correlation and high elasticity of BTC also lead to greater downward pressure on their prices in bear markets. Due to the high-leverage operating model and single-source revenue of mining-listed companies, there is also a bankruptcy threat. Many Bitcoin mining-listed companies borrowed heavily during the bull market in 2021, resulting in very negative impacts on their profitability during the subsequent bear market. In fact, Core Scientific, which had the largest borrowing amount and the highest debt-to-asset ratio among mining companies, sought bankruptcy protection and debt restructuring at the end of 2022. Throughout 2022 before bankruptcy, Core Scientific sold BTC to cope with its mining machine purchase costs, self-operated mining farm construction expenses, large-scale deployment of mining machine electricity costs, and loan interest and other operating costs. However, it ultimately declared bankruptcy due to its aggressive expansion plan in 2022 (deploying over 320,000 mining machines at the end of 2022, with a daily loss of $53,000 in electricity costs) and the Celsius incident impact.

There is a significant discrepancy between the price of Bitcoin and the network difficulty. In a bull market, the future computing power rewarded to miners becomes an important narrative for miners to raise funds. However, in a bear market, the growth of computing power makes the economic situation of miners very challenging as they must purchase the mining machine orders they previously signed while BTC prices are falling and computing power continues to grow. Miners have already paid for the capital expenditure of the mining machine, so from their perspective, as long as their marginal mining cost is still positive, it makes sense to continue with their growth plans. This trend has further exacerbated the sharp decline in hash prices since the beginning of this year.

With the sharp decline in the price of Bitcoin, the valuations of most mining stocks have plummeted. Some mining companies are raising funds by selling BTC, issuing common stock, significantly diluting existing shareholders' equity, and issuing additional shares to raise funds, which is highly dilutive. Raising debt capital is also expensive. In the face of financial constraints, miners are also seeking alternative solutions, such as providing custody services to generate higher income streams, selling equipment to generate more cash, and even considering mergers and acquisitions. Conservative mining companies that did not over-leverage during the bull market now have the opportunity to take an opportunistic approach, that is, cash flow management of excellent mining companies or the opportunity to acquire competitors who are in debt distress at a low price.

When the debt-to-capital ratio of MARA is poor (i.e. the probability of bankruptcy increases), its correlation with BTC may decrease. If MARA's recent debt management allows its balance sheet to survive healthily until the BTC bull market, given the current market situation (continuing downward), Marathon's debt situation (high debt-to-equity ratio), valuation situation (P/B still has significant downside potential, MC/hashrate higher than peers), the investment recommendation is to strongly sell within 12 months, with a bearish target of PB 1 and a target stock price of around $3. Based on the current price of $8, it is overvalued by 166%. However, based on its highest price elasticity, it can be used to gain short-term profits during rebound periods, achieving better returns than buying BTC. There are two situations that may cause the stock price to rise: acquisition and short-term rebound in the BTC bear market.

Marathon Digital Holdings, Inc. and its subsidiaries (hereinafter referred to as "the Company" or "Marathon") is a digital asset technology company that focuses on the generation or "mining" of blockchain ecosystems and digital assets.

In October 2012, the company began its intellectual property licensing operations and was renamed Marathon Patent Group, Inc.

The company was renamed Marathon Digital Holdings, Inc. on March 1, 2021.

As of June 30, 2023, the company's main business is focused on Bitcoin mining and affiliated opportunities within the Bitcoin ecosystem. The strategy is to hold Bitcoin as a long-term investment after paying for cash operating costs generated from payments. Holding Bitcoin is a strategy as a store of value supported by a powerful and open-source architecture that is not tied to any country's monetary policy, and therefore can serve as a store of value outside of government control.

附属业务是指与比特币生态系统有关但不直接与自身挖矿有关的业务。与挖矿直接相关的附属业务可能包括但不限于管理第三方所有者的比特币挖矿设施、向寻求建立和运营比特币挖矿设施的第三方提供咨询和咨询服务，以及在美国境内和国际法域内开展比特币挖矿项目的合资企业，如公司在阿布扎比（阿拉伯联合酋长国）的项目。

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 encryption technology. It may also participate in power generation projects using renewable energy resources or methane gas capture for Bitcoin mining.

Development History

On February 23, 2010, the company was registered and established in Nevada under the name Verve Ventures, Inc.;

On December 7th, 2011, the company was renamed American Strategic Minerals Corporation and engaged in exploration and potential development of uranium and vanadium minerals.

In June 2012, the company terminated its mining business and began investing in real estate in Southern California.

In October 2012, the company was renamed Marathon Patent Group, Inc. and began its intellectual property licensing business.

On November 1, 2017, the company signed a merger agreement with Global Bit Ventures, Inc. ("GBV"), focusing on mining the blockchain. This milestone marked Marathon Digital's transition from near bankruptcy to becoming a leading mining company. Marathon acquired GBV's 1,300 Bitmain S9 miners and 1,000 GPU miners. After familiarizing themselves with the process, Marathon purchased an additional 1,400 S9 miners and leased a 2 MW facility for mining operations. Shortly thereafter, the cryptocurrency market entered a bear market and Marathon terminated its partnership with GBV.

2019.9.30–2020.12.23, the company purchased a pan-blockchain mine by signing a contract.

Significant developments in the encryption market and their impact on the company. 2022 is a challenging year for the entire encryption industry due to macroeconomic conditions, including high inflation and rising interest rates, which have weakened the stock market and created a general sense of "safe haven" sentiment, negatively affecting Bitcoin prices.

In addition, in 2022, the macroeconomic challenging environment was further impacted by a series of unexpected black swan events, which have shaken the entire industry, including:

In the second quarter of 2022, the bankruptcy of important participants in the digital asset field, including Three Arrows Capital, Voyager, and Celsius, was caused by the LUNA-UST anchor collapse.

Total profit decline: Due to the decline in Bitcoin prices and the delay in expanding business, Marathon's operating profitability has declined. The total profit for this year was a loss of 33,673,000 US dollars, compared to a profit of 116,768,000 US dollars in the same period last year, a decrease of 150,441,000 US dollars.

Collateralizing Digital Assets - Fair Value Declines and Additional Collateral Requirements: On November 9, 2022, due to concerns over FTX's collapse leading to financial instability in the industry, the price of Bitcoin dropped to a new annual low. As a result, the company was required to provide an additional 1,669 Bitcoins (valued at $16,213 per Bitcoin) as collateral for its outstanding loans under Silvergate Bank's Term Loan and Revolving Line of Credit (RLOC) facilities, bringing the total collateral balance to 9,490 Bitcoins (or approximately $153,861,000 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 $50,000,000 of RLOC loans. These repayments allowed the company to reduce its Bitcoin collateral to approximately 4,416 Bitcoins (fair value of approximately $73,074,000) as of December 31, 2022.

The impact of bankruptcy and FTX collapse on Marathon's main lenders: Prior to the termination of the loan facilities on March 8, 2023, Silvergate Bank was the lender for Marathon Term Loan and RLOC facilities. Under these facilities, Marathon has the right to borrow up to $200,000,000, provided that sufficient Bitcoin is used as collateral.

On March 1, 2023, Silvergate Bank submitted a disclosure to the SEC regarding its distressed financial situation, including doubts about its ability to continue as a going concern, and notified a delay in submitting its 10-K form due to a significant decrease in customer deposits and insufficient capital. This led to the abandonment of the bank by its cryptocurrency business clients, creating a credit void and reputational risk for them.

On March 8th, 2023, Silvergate announced its intention to cease operations and voluntarily liquidate the bank.

On February 6, 2023, Marathon provided the required 30-day notice to Silvergate Bank, indicating Marathon's intention to repay the outstanding balance of its Term Loan facility and terminate the Term Loan facility. Marathon and Silvergate Bank 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 as the receiver and transferred all of Signature Bank's deposits and almost 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 deposits at Signature Bridge Bank. Normal banking operations resumed on March 13, 2023.

2023 Important Events

On January 27, 2023, the company signed a shareholder agreement with FS Innovation, LLC ("FSI") to establish Abu Dhabi Global Market Entity ("ADGM Entity") for the purpose of jointly (a) establishing and operating one or more digital asset mining facilities; and (b) mining digital assets (collectively referred to as "business").

The initial project of ADGM Entity will include two digital asset mining sites with a total capacity of 250 MW in Abu Dhabi. The initial equity ownership of ADGM Entity will be 80% for FSI and 20% for Marathon, and capital contributions will be made in cash and in-kind according to these proportions during the development period until 2023, with a total amount of approximately $4,060,000.

FSI will appoint four directors to the board of ADGM Entity, while the company will appoint one director. Unless otherwise required by applicable law, the digital assets mined by ADGM Entity will be distributed monthly to the company and FSI based on their respective equity interests in ADGM Entity.

In addition, the agreement also includes a five-year restrictive covenant, which includes prohibiting Marathon from competing with the business or FSI or certain related parties in the UAE, and prohibiting FSI from competing with Marathon's business in the United States, among other terms.

Three. Financial Analysis

Based on the appreciation of BTC and the improvement of mining efficiency, Marathon's business model resulted in negative growth in revenue starting from 2021 when the cryptocurrency market entered a bear market.

In 2022, due to the company ceasing operations of mining pools, including third-party ones, revenue also decreased by $8,694,000. Despite an overall increase in annual production, the company experienced significant production stagnation in the second and third quarters due to the aforementioned delays in electrifying Hardin and King Mountain. Production in the third quarter decreased by 50% compared to the same period last year. Marathon's best production quarters in 2022 are the first and fourth quarters.

As of December 31, 2022, the company holds 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) are used as collateral for loans and classified as restricted digital assets. The remaining 7,816 bitcoins, with a book value of $121,842,000, are unrestricted holdings and classified as digital assets.

In the first quarter of 2023, the BTC balance of Marathon decreased by 766 coins for the first time to address the deteriorating balance sheet.

The sales revenue of Bitcoin was $23.4 million, as the company sold 63% of the Bitcoin generated in the quarter to pay for operating costs. In addition, due to the general increase in Bitcoin prices during the current year, the impairment of the book value of digital assets decreased by $8.4 million. Furthermore, compared with the same period last year, there is no longer a loss of $79 million in the digital asset investment fund and a revenue of $54 million from equipment sales, which also contributes to this year's comparison.

2023 Q2 production highlights.

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%.

Hash rate (EH/s) for operation/launch: Q2-23 17.7 EH/s, Q2-22 0.7 EH/s, growth of 2429%, Q2-23 17.7 EH/s, Q1-23 11.5 EH/s, growth of 54%.

The average operating hash rate (EH/s) 1: Q2-23 12.1 EH/s, not applicable for the same period last year, Q2-23 12.1 EH/s, Q1-23 6.9 EH/s, an increase of 75%.

Hash rate installation (EH/s) 1: Q2-23 21.8 EH/s, not applicable for the same period last year, Q2-23 21.8 EH/s, Q1-23 15.4 EH/s, an increase of 42%.

Although the production of mining equipment has greatly improved mining efficiency compared to the same period last year, the low price of BTC and aggressive expansion have led to Marathon's operating expenses being too high, still on the brink of danger.

2. Profit and Cost Breakdown

Marathon's revenue and cost for the fiscal year 2022, including energy, hosting, and other costs, totaled $72.71 million, compared to $27.49 million in the same period of 2021. The $45.23 million increase was mainly due to higher production costs, which increased the production cost per bitcoin by $30 million, the accelerated cost of $18.21 million due to the early exit from Hardin, and the impact of higher bitcoin production on costs, which increased by $5.56 million.

Partially offsetting these increased costs is a $8.69 million decrease in revenue costs from third-party mining pools that will be discontinued in 2022. Revenue costs - depreciation and amortization were $78.71 million in 2022, compared to $14.90 million in the same period in 2021, an increase of $63,805,000. This was primarily due to accelerated depreciation related to Marathon's exit from the Hardin, MT facility, which increased by $36,032,000, and an increase in depreciation costs related to more mining equipment in operation, which increased by $27,773,000.

In 2022, Marathon recorded a net loss of $687 million in its Marathon business, compared to a net loss of $37.09 million in the same period in 2021. The increase in loss was $649 million, mainly due to the total decrease in the book value of Marathon's digital assets by $318 million, and the total impairment of Bitcoin mining equipment and prepayments made to suppliers by $333 million.

The adjusted EBITDA was -534 million US dollars, compared to 162 million US dollars in the same period of 2021. Depreciation and amortization were 86.64 million US dollars, legal reserves were 26.13 million US dollars, and there was an increase in general and administrative expenses, excluding non-cash stock compensation costs, of 18.57 million US dollars. Partly offsetting these unfavorable factors were gains from the sale of mining equipment of 83.88 million US dollars and an increase in non-operating income of 1.57 million US dollars.

2023Q2 Marathon recorded a net loss of $19.13 million, compared to a net loss of $21.26 million in the same period last year. Approximately 91% of the improvement in net loss was due to the favorable difference between the proceeds from the sale of digital assets and the impairment of digital assets, as well as the favorable difference related to the impairment of digital assets and losses on digital assets within investment funds, partially offsetting the lower overall profit margin.

Analyze the impact of Marathon's mining machine deployment on costs and profits. Currently, the mining machines are hosted by third parties, and Marathon pays them fees.

Nebraska Kearney, NE - Currently deploying and operating about 2,300 S19 J Pros at the location. The company plans to deploy an additional 1,300 MicroBT devices at the location in 2023.

Most of Marathon's production in the first quarter of this year were S19 XPs. From the profitability of each mining machine, it can be seen that currently S19 XPs are making a meager profit of $0.08 per day. Therefore, an increase in computing power may not fundamentally improve Marathon's profitability this year.

Due to the fact that miner profitability equals Bitcoin reward multiplied by BTC price minus electricity cost and mining equipment cost, Bitcoin market price, electricity cost, and mining equipment cost are crucial to Marathon's profitability.

· Bitcoin Reward

(1) On November 28, 2012, at block height 210,000;

(3) On May 11, 2020, at block height 630,000, the reward was reduced to 6.25 bitcoins per block.

From the perspective of electricity costs, there is a significant difference in mining costs among different countries. European countries face the highest costs due to the rise in electricity prices. The impact of rising energy prices on American mining companies is relatively smaller compared to Europe, but it also exacerbates the pressure on electricity costs for American mining companies. The electricity price in Texas is 0.12 USD/kwh, which is 34% lower than the average electricity price in the United States of 0.18 USD/kwh. However, even with this lower electricity price, most models of mining machines are still unable to reach breakeven under the current electricity and currency prices (without considering subsidies, some mining farms may still be profitable with the advantage of subsidies).

· Network Hash Rate and Difficulty

Generally speaking, the opportunity for Bitcoin mining devices to solve blocks on the Bitcoin blockchain and receive Bitcoin rewards is a function of the hash rate of the mining devices relative to the global network hash rate (i.e. the total computing power used to support the Bitcoin blockchain at a specific time).

With the increasing demand for Bitcoin, the global network hash rate has rapidly increased. In addition, with the deployment of more and more powerful mining equipment, the network difficulty of Bitcoin has also increased. Network difficulty is an indicator that measures the difficulty of solving a block on the Bitcoin blockchain. It is adjusted every 2016 blocks (approximately every two weeks) to ensure that the average time between each block remains around ten minutes.

High difficulty means that solving blocks and obtaining new Bitcoin rewards will require more computing power, which in turn makes the Bitcoin network more secure and limits the possibility of a miner or mining pool controlling the network.

Therefore, as new and existing miners deploy additional hash rate, the global network hash rate will continue to increase. This means that if miners fail to deploy additional hash rate at a pace that is synchronized with the industry, their share in the global network hash rate (and therefore their chances of earning Bitcoin rewards) will decrease. It can be seen that due to intense competition among miners, the income per TH was $0.25/TH at the beginning of 2022, and has now dropped to about $0.06/TH.

As the largest listed mining company in network computing power, Marathon has been continuously increasing its EH/s to maintain its mining competitiveness. Its operational hash rate has increased from 13.2EH/s in 22Q3 to 17.7EH/s in 23Q2, with a target of reaching 23.1EH/s this year.

Therefore, considering the Bitcoin reward, BTC price, electricity cost, and computing power price, if the halving does not come with a rise in BTC price, the reduction in electricity cost and reward will challenge the operation of miners. This is not a good thing for mining enterprises with higher Hashrate and more aggressive expansion.

Here we focus on four dimensions: capital structure (debt-to-equity ratio), financing situation, and Capex (capital expenditure) situation.

Marathon Debt-to-Equity Ratio: total debt/common equity=783mln/386mln=2.03 (FY2022); total debt/common equity=735mln/594mln=1.23 (2023Q2).

Funding situation: A total debt of 783 million was recorded at the end of 2022, with the majority being 747 million convertible bonds issued in 2021. 414 million will be repaid in September 2023.

Marathon 2023Q2 financing activities generated a cash flow of $410,655,000, mainly from the issuance of common stock under the company's market trading plan, which generated $361,486,000, and the issuance of loans under a long-term loan agreement, which generated $49,250,000.

Marathon's maximum borrowable amount for the annual period ending December 31, 2022 is $70,000,000. The total borrowing and repayment under the revolving credit agreement for the annual period ending December 31, 2022 is $120,000,000, and as of December 31, 2022, there are no outstanding borrowings under the revolving credit agreement.

The cash flow generated from financing activities was USD 1,037,333,000. The main source of funds was the proceeds from the issuance of convertible bonds, which amounted to USD 728,406,000, and the issuance of common stock, which amounted to USD 312,196,000. As of December 31, 2021, the total borrowing and repayment under the company's 2021 revolving credit agreement was USD 77,500,000. As of December 31, 2021, there were no outstanding borrowings under the revolving credit agreement.

Interest expenses: Due to the increase in interest payments related to the convertible bonds issued in November 2021, the interest expenses increased by $13,410,000, including $6,633,000 of higher interest and $3,664,000 of debt issuance costs amortization and other interest expenses mainly related to the company's term loans and revolving credit facilities ("RLOC"). Based on the current cash and cash equivalents, Marathon has no pressure to repay interest expenses.

Marathon 2018-2022 Capital Structure

During the 2018-2022 fiscal years, Marathon's capital expenditures underwent significant changes, from 5 million USD, 5 thousand USD, 83 million USD, 708 million USD to 525 million USD. Especially starting from 2021, capital expenditures increased significantly, corresponding to the large financing the company carried out that year. Moderate capital expenditures can improve the company's production efficiency, promote innovation, and enhance market competitiveness. However, in a market downturn, the increase in fixed expenses, especially when accompanied by a significant decrease in revenue, often puts enormous pressure on cash flow.

Marathon 2018-2022 Capital Expenditure Status

During the fiscal years of 2018-2022, Marathon's capital expenditures underwent significant changes, from 5 million USD, 5 thousand USD, 83 million USD, 708 million USD to 525 million USD. Especially starting from 2021, capital expenditures increased significantly, corresponding to the large financing the company conducted that year. Moderate capital expenditures can improve the company's production efficiency, drive innovation, and enhance market competitiveness. However, in a market downturn, the increase in fixed expenses, especially when accompanied by a significant decrease in revenue, often leads to enormous pressure on cash flow.

Marathon 2018-2022 Capital Expenditure Status

Competitor situation (see valuation section for details, here mainly looking at debt-to-equity ratio and capex).

During the 2018-2022 fiscal years, Riot's Capex was 20mln, 6.4mln, 41mln, 421mln, and 343mln respectively. Riot's Capex for Q2 2023 was 56mln.

ARGO P/B 10.95 is overvalued.

Based on the high P/B ratio, unprofitable computing power growth, and high debt-to-equity ratio, the investment recommendation for Marathon is to strongly sell within 12 months. During this period, if BTC clearly rebounds, it is possible to go long on Mara to obtain greater leverage returns.

When the debt-to-capital ratio of MARA is poor (i.e. the probability of bankruptcy increases), its correlation with BTC may decrease. If MARA's recent debt management allows its balance sheet to survive healthily until the BTC bull market, given the current market conditions (continuing downward trend), Marathon's debt situation (high debt-to-equity ratio), valuation situation (P/B still has significant downside potential, MC/hashrate higher than peers), the investment recommendation is to strongly sell within 12 months, with a bearish target of PB 1 and a target stock price of around $3. Based on the current price of $8, it is overvalued by 166%. However, based on its highest price elasticity, short-term trading can be done during rebound trends, which can yield better returns than buying BTC.

Five. Risk

Altman Z-Score is used to evaluate the financial health and bankruptcy risk of a company, mainly to assess the likelihood of a company going bankrupt within the next two years. The Z-score takes into account various financial ratios and provides a single numerical score, divided into three different categories, each reflecting a different degree of bankruptcy risk.

Chapter 6. Summary

It is undeniable that the growth of hashrate has indeed brought significant mining efficiency improvement to Marathon. If the financial situation can be maintained, Marathon will reap the benefits of mining layout in the bull market, coupled with the reversal of the dilemma of the stock price falling the most among its peers during the bear market, achieving a double hit. However, based on its Altman-z score in the possible bankruptcy range, although debt-to-equity conversion has to some extent eased the debt crisis, high capex and previously laid out mining machines are significantly unprofitable. Looking at the overall bear market trend, it is necessary to short Mara, but it is possible to speculate on a phase of rebound.

Is Mara the strongest target for shorting trends? Argo seems to be more overvalued than Mara. However, compared to Riot and Hut8, Mara is indeed the strongest target for shorting trends. Compared to BTBT, BTBT has less debt risk, but its P/B value is more overvalued.

For mining companies, 2024 will be a more difficult year. Maintaining prices while halving production will lead to deeper losses for mining companies (low coin prices will reduce income and cost expenses cannot be reduced, resulting in a decrease in the value of assets on the balance sheet). This is a common situation faced by miners in bear markets. Generally speaking, the clearance of miners is an important signal for the beginning of a bull market.

In 2022, several regulatory events occurred at the state and federal levels in the United States. As for the states, these actions were diverse. New York became the first state to restrict the expansion of Bitcoin mining and issued a new mining operation law that prohibits the use of carbon-based energy. The law requires that new Bitcoin mining operations must use 100% renewable energy in the next two years. However, existing mining operations have been exempted, allowing them to continue mining, but they may not be able to expand or reapply for certain licenses.

Despite these actions, some other regions still maintain or implement policies that encourage the development of Bitcoin mining companies:

Kentucky offers energy and tax incentives for companies setting up bitcoin mining operations in the state.

In the latest coordination bill, there is a methane emission reduction plan, which may become the main driving force for "off-grid" mining, providing additional incentives for oil and gas companies to use ASICs to reduce methane emissions. The $1.55 billion in subsidies and kickback funds provided to companies will be immediately available, providing excellent opportunities for existing companies involved in peak gas.