Terawulf Inc 10-Q for FY2023 Q1
Terawulf Inc. (WULF)
About this 10-Q
Terawulf Inc filed this 10-Q on May 15, 2023, covering the quarter ended March 31, 2023 (FY2023 Q1).
Headline figures
Quarter ended March 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $11.53M
- up 5214.7% from $217K a year earlier
- Net loss
- $26.26M
- compared with a net loss of $18.18M a year earlier
- Diluted EPS
- -$0.16
- compared with -$0.18 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
For the transition period from to
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(Exact name of registrant as specified in its charter)
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Securities registered pursuant to 12(b) of the Exchange Act:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ | Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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TERAWULF INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
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Forward-Looking Statements
This Quarterly Report contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management, and expected market growth are forward-looking statements. These forward- looking statements are contained principally in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis.” Without limiting the generality of the preceding sentence, any time we use the words “expects,” intends,” “will,” “anticipates,” “believes,” “confident,” “continue,” “propose,” “seeks,” “could,” “may,” “should,” “estimates,” “forecasts,” “might,” “goals,” “objectives,” “targets,” “planned,” “projects,” and, in each case, their negative or other various or comparable terminology and similar expressions, we intend to clearly express that the information deals with possible future events and is forward-looking in nature. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. For TeraWulf, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include, without limitation:
| ● | conditions in the cryptocurrency mining industry, including any prolonged substantial reduction in cryptocurrency prices, and specifically, the value of bitcoin, which could cause a decline in the demand for TeraWulf’s services; |
| ● | competition among the various providers of data mining services; |
| ● | the need to raise additional capital to meet our business requirements in the future, which may be costly or difficult to obtain or may not be obtained (in whole or in part) and, if obtained, could significantly dilute the ownership interests of TeraWulf’s shareholders; |
| ● | the ability to implement certain business objectives and the ability to timely and cost-effectively execute integrated projects; |
| ● | adverse geopolitical or economic conditions, including a high inflationary environment; |
| ● | security threats or unauthorized or impermissible access to our datacenters, our operations or our digital wallet; |
| ● | counterparty risk with respect to our digital asset custodian and our mining pool provider; |
| ● | employment workforce factors, including the loss of key employees; |
| ● | changes in governmental safety, health, environmental and other regulations, which could require significant expenditures; |
| ● | liability related to the use of TeraWulf’s services; |
| ● | currency exchange rate fluctuations; and |
| ● | other risks, uncertainties and factors included or incorporated by reference in this Quarterly Report, including those set forth under “Risk Factors” and those included under the heading “Risk Factors” in our annual report on Form 10-K, filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 31, 2023 (the “Original 10-K”), as amended by our annual report on Form 10-K/A, filed with the SEC on May 5, 2023, for the fiscal year ended December 31, 2022 (the “10-K/A” and together with the Original 10-K, the “Annual Report on Form 10-K”). |
These forward-looking statements reflect our views with respect to future events as of the date of this Quarterly Report and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report and, except as required by law, we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Quarterly Report. We anticipate that subsequent events and developments will cause our views to change. You should read this Quarterly Report completely and with
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the understanding that our actual future results may be materially different from what we expect. Our forward-looking statements do not reflect the potential impact of any future acquisitions, merger, dispositions, joint ventures or investments we may undertake. We qualify all of our forward-looking statements by these cautionary statements.
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PART I: FINANCIAL INFORMATION
ITEM 1.Financial Statements
TERAWULF INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2023 AND DECEMBER 31, 2022
(In thousands, except number of shares and par value)
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| March 31, 2023 |
| December 31, 2022 | ||
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents | | $ | | | $ | |
Restricted cash | |
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Digital currency, net | | | | | | |
Prepaid expenses | |
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Other current assets | |
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Total current assets | |
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Equity in net assets of investee | |
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Property, plant and equipment, net | |
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Right-of-use asset | |
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Other assets | |
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TOTAL ASSETS | | $ | | | $ | |
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LIABILITIES AND STOCKHOLDERS' EQUITY | |
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CURRENT LIABILITIES: | |
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Accounts payable | | $ | | | $ | |
Accrued construction liabilities | |
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Other accrued liabilities | |
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Share based liabilities due to related party | |
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Other amounts due to related parties | |
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Contingent value rights | |
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Current portion of operating lease liability | |
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Insurance premium financing payable | | | | | | |
Convertible promissory notes | | | — | | | |
Current portion of long-term debt | | | — | | | |
Total current liabilities | |
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Operating lease liability, net of current portion | |
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Long-term debt | |
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TOTAL LIABILITIES | |
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Commitments and Contingencies (See Note 12) | |
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STOCKHOLDERS' EQUITY: | |
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Preferred stock, $ | |
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Common stock, $ | |
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Common stock to be issued | | | | | | — |
Additional paid-in capital | |
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Accumulated deficit | |
| ( | | | ( |
Total stockholders' equity | |
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | | | $ | |
See Notes to Consolidated Financial Statements.
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TERAWULF INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022
(In thousands, except number of shares and loss per common share; unaudited)
| | Three Months Ended | | ||||
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| March 31, | | ||||
| | 2023 | | 2022 | | ||
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Revenue | | $ | | | $ | | |
Cost of revenue (exclusive of depreciation shown below) | | | | | | | |
Gross profit |
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Cost of operations: |
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Operating expenses | | | | | | | |
Operating expenses - related party | | | | | | | |
Selling, general and administrative expenses | | | | | | | |
Selling, general and administrative expenses - related party | | | | | | | |
Depreciation | | | | | | | |
Realized gain on sale of digital currency | | | ( | | | — | |
Impairment of digital currency | | | | | | | |
Total cost of operations |
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Operating loss |
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Interest expense | | | ( | | | ( | |
Loss before income tax and equity in net loss of investee |
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Income tax (expense) benefit | | | — | | | — | |
Equity in net loss of investee, net of tax | | | ( | | | ( | |
Loss from continuing operations |
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Loss from discontinued operations, net of tax | | | ( | | | ( | |
Net loss | | | ( | | | ( | |
Preferred stock dividends | | | ( | | | ( | |
Net loss attributable to common stockholders | | $ | ( | | $ | ( | |
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Loss per common share: | |
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Continuing operations | | ( | | ( | | ||
Discontinued operations | |
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Basic and diluted | | ( | | ( | | ||
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Weighted average common shares outstanding: | | | | | | | |
Basic and diluted | | | | | | | |
See Notes to Consolidated Financial Statements.
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TERAWULF INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022
(In thousands, except number of shares; unaudited)
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| Preferred Stock | | Common Stock |
| Additional |
| Common Stock | | Accumulated |
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| Number |
| Amount |
| Number |
| Amount |
| Paid-in Capital |
| to be Issued | | Deficit |
| Total | ||||||
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Balances as of December 31, 2022 | | | | $ | | | | | $ | | | $ | | | $ | — | | $ | ( | | $ | |
Common stock reacquired in exchange for warrants | | — | | | — | | ( | | | ( | | | ( | | | — | | | — | |
| ( |
Warrant issuance in conjunction with debt modification | | — | | | — | | — | | | — | | | | | | — | | | — | | | |
Warrant offerings | | — | | | — | | — | | | — | | | | | | — | | | — | | | |
Common stock offering, net of issuance costs | | — | | | — | | | | | | | | | | | — | | | — | | | |
Common stock to be issued, net of issuance costs | | — | | | — | | — | | | — | | | — | | | | | | — | | | |
Convertible promissory notes converted to common stock | | — | | | — | | | | | | | | | | | — | | | — | | | |
Stock-based compensation expense and issuance of stock | | — | | | — | | | | | — | | | | | | — | | | — | | | |
Net loss | | — | | | — | | — | | | — | | | — | | | — | | | ( | |
| ( |
Balances as of March 31, 2023 |
| | | $ | | | | | $ | | | $ | | | $ | | | $ | ( | | $ | |
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| Preferred Stock | | Common Stock |
| Additional |
| Common Stock | | Accumulated |
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| Number |
| Amount |
| Number |
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| Paid-in Capital |
| to be Issued | | Deficit |
| Total | ||||||
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Balances as of December 31, 2021 | | — | | $ | — | | | | $ | | | $ | | | $ | — | | $ | ( | | $ | |
Issuance of Series A Convertible Preferred Stock, net of issuance costs | | | | | | | — | | | — | | | — | | | — | | | — | | | |
Common stock offering, net of issuance costs | | — | | | — | | | | | | | | | | | — | | | — | | | |
Preferred stock dividends | | — | | | — | | — | | | — | | | — | | | — | | | ( | | | ( |
Net loss | | — | | | — | | — | | | — | | | — | | | — | | | ( | | | ( |
Balances as of March 31, 2022 |
| | | $ | | | | | $ | | | $ | | | $ | — | | $ | ( | | $ | |
See Notes to Consolidated Financial Statements.
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TERAWULF INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022
(In thousands; unaudited)
| | Three Months Ended | | ||||
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| March 31, |
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| | 2023 | | 2022 | | ||
CASH FLOWS FROM OPERATING ACTIVITIES: | |
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Net loss | | $ | ( | | $ | ( | |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Amortization of debt issuance costs, commitment fees and accretion of debt discount |
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Related party expense to be settled with respect to common stock | | | | | | — | |
Common stock issued for interest expense | | | | | | — | |
Stock-based compensation expense | | | | | | — | |
Depreciation | | | | | | | |
Amortization of right-of-use asset | | | | | | | |
Increase in digital currency from mining | | | ( | | | ( | |
Impairment of digital currency | | | | | | | |
Realized gain on sale of digital currency | | | ( | | | — | |
Proceeds from sale of digital currency | | | | | | — | |
Equity in net loss of investee, net of tax |
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Loss from discontinued operations, net of tax |
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Changes in operating assets and liabilities: |
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Decrease (increase) in prepaid expenses |
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Decrease in amounts due from related parties | | | — | | | | |
Increase in other current assets |
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Increase in other assets |
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Decrease in accounts payable |
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(Decrease) increase in other accrued liabilities |
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Increase in other amounts due to related parties |
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Decrease in operating lease liability |
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Net cash used in operating activities from continuing operations |
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Net cash used in operating activities from discontinued operations |
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Net cash used in operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Investments in joint venture, including direct payments made on behalf of joint venture |
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Reimbursable payments for deposits on plant and equipment made on behalf of a joint venture or joint venture partner |
| | — | | | ( |
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Reimbursement of payments for deposits on plant and equipment made on behalf of a joint venture or joint venture partner |
| | — | | | |
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Purchase of and deposits on plant and equipment |
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Payment of contingent value rights liability | | | ( | | | — | |
Net cash used in investing activities |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from insurance premium financing | | | | | | | |
Principal payments on insurance premium financing | | | ( | | | ( | |
Proceeds from issuance of common stock, net of issuance costs paid of $ |
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Proceeds from common stock to be issued, net of issuance costs of $ | | | | | | — | |
Proceeds from warrant issuances | | | | | | — | |
Proceeds from issuance of preferred stock |
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Proceeds from issuance of convertible promissory note | | | | | | — | |
Net cash provided by financing activities |
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Net change in cash and cash equivalents and restricted cash |
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Cash and cash equivalents and restricted cash at beginning of period |
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Cash and cash equivalents and restricted cash at end of period | | $ | | | $ | | |
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Cash paid during the period for: | |
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Interest | | $ | | | $ | | |
Income taxes | | $ | — | | $ | — | |
See Notes to Consolidated Financial Statements.
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NOTE 1 – ORGANIZATION
Organization
TeraWulf, Inc. (“TeraWulf” or the “Company”) is a digital asset technology company with a core business of digital infrastructure and energy development to enable sustainable bitcoin mining. TeraWulf’s principal operations consist of operating, developing and constructing bitcoin mining facilities in the United States that are fueled by clean, low cost and reliable power sources. The Company operates a portfolio of bitcoin mining facilities, either wholly-owned or through joint ventures, that each deploy a series of powerful computers that solve complex cryptographic algorithms, which computing power is provided to a mining pool operator to mine bitcoin and validate transactions on the bitcoin network. TeraWulf’s revenue is substantially derived from pay-per-share base amounts and transaction fee rewards earned in bitcoin from the mining pool as compensation for providing the computing power. The Company also leverages its available digital infrastructure to provide miner hosting services to third parties whereby the Company holds an option to purchase the hosted miners in the future. While the Company may choose to mine other cryptocurrencies in the future, it has no plans to do so currently.
TeraWulf’s
On December 13, 2021, TeraWulf Inc. completed a strategic business combination (the “Merger”) with IKONICS Corporation, a Minnesota corporation (“IKONICS”) pursuant to which, among other things, the Company effectively acquired IKONICS and became a publicly traded company on the National Association of Securities Dealers Automated Quotations (“Nasdaq”), which was the primary purpose of the business combination. IKONICS’ traditional business was the development and manufacturing of high-quality photochemical imaging systems for sale primarily to a wide range of printers and decorators of surfaces. Customers’ applications were primarily screen printing and abrasive etching. TeraWulf initially classified the IKONICS business as held for sale and discontinued operations in its consolidated financial statements. During the year ended December 31, 2022, the Company completed sales of substantially all of IKONICS’ historical net assets (see Note 3). Subsequent to the asset sales, IKONICS’ name was changed to RM 101 Inc. (“RM 101”).
Risks and Uncertainties
Liquidity and Financial Condition
The Company incurred a net loss attributable to common stockholders of $
In accordance with development of its bitcoin mining facilities, during the three months ended March 31, 2023, the Company invested approximately $
During the three months ended March 31, 2023, the Company accomplished several notable steps toward achieving near term positive cash flows from operations, namely: (1) the Company amended its long-term debt agreement (see Note 9) to, among other changes,
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TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
remove the fixed principal amortization through April 7, 2024 and, potentially, beyond, (2) through the issuance of shares of our common stock, par value $
COVID-19
Although the World Health Organization declared on May 5, 2023 that it no longer considers COVID-19 a global health emergency, the Company may from time to time experience disruptions to its business operations resulting from continued COVID-19-related supply interruptions, including miner delivery interruptions. The Company may also experience COVID-19-related delays in construction and obtaining necessary equipment in a timely fashion. To date, the Company has experienced certain, but minimal, delays due to COVID-19 among its suppliers and contractors.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. In the opinion of the Company, the accompanying unaudited interim consolidated financial statements reflect all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair statement of such interim results. All significant intercompany accounts and transactions have been eliminated. Certain prior period amounts have been reclassified to conform with current period presentation.
Certain amounts in the unaudited interim consolidated statement of cash flows for the three months ended March 31, 2022 were restated as previously disclosed in the restated unaudited interim consolidated statement of cash flows for the three months ended March 31, 2022 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The misstatements related solely to incorrectly calculating the impact of noncash activity on purchase and deposits on plant and equipment, resulting in an understatement of net cash used in investing activities and a corresponding overstatement of net cash used in operating activities as originally included in the respective interim unaudited consolidated statements of cash flows.
The results for the unaudited interim consolidated statements of operations are not necessarily indicative of results to be expected for the year ending December 31, 2023 or for any future interim period. The unaudited interim consolidated financial statements do not include all the information and notes required by U.S. GAAP for complete financial statements. The accompanying unaudited interim financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
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TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for (but are not limited to) such items as the fair values of assets acquired and liabilities assumed in business combinations, the fair value of contingent consideration issued in a business combination, the establishment of useful lives for property, plant and equipment and intangible assets, the impairment of goodwill and held for sale assets, the fair value of equity securities or warrants to purchase common stock issued individually or as a component of a debt or equity offering, the fair value of changes to the conversion terms of embedded conversion features, the fair value and requisite service periods of stock-based compensation, the fair value of assets received in nonmonetary transactions, the establishment of right-of-use assets and lease liabilities that arise from leasing arrangements, the timing of commencement of capitalization for plant and equipment, impairment of indefinite-lived intangible assets, impairment of long-lived assets, recoverability of deferred tax assets and the recording of various accruals. These estimates are made after considering past and current events and assumptions about future events. Actual results could differ from those estimates.
Supplemental Cash Flow Information
The following table shows supplemental cash flow information (in thousands):
| | Three Months Ended | | ||||
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| March 31, |
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| | 2023 | | 2022 | | ||
Supplemental disclosure of non-cash activities: | |
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Contribution of plant and equipment or deposits on plant and equipment to joint venture | | $ | | | $ | — | |
Common stock issuance costs in accounts payable | | $ | | | $ | | |
Preferred stock issuance costs in other accrued liabilities or accounts payable | | $ | — | | $ | | |
Purchases of and deposits on plant and equipment in accounts payable, accrued construction liabilities, other accrued liabilities and long-term debt | | $ | | | $ | | |
Investment in joint venture in other accrued liabilities, other amounts due to related parties and long-term debt | | $ | | | $ | | |
Preferred stock dividends in other accrued liabilities | | $ | — | | $ | | |
Preferred stock proceeds receivable in other current assets | | $ | — | | $ | | |
Convertible promissory notes converted to common stock | | $ | | | $ | — | |
Common stock warrants issued for discount on long-term debt | | $ | | | $ | — | |
Decrease to investment in joint venture and increase in plant and equipment for distribution or transfer of nonmonetary assets | | $ | | | $ | — | |
Common stock reacquired in exchange for warrants | | $ | | | $ | — | |
Cash and Cash Equivalents
Highly liquid instruments with an original maturity of three months or less are classified as cash equivalents. The Company currently maintains cash and cash equivalent balances primarily at two financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Company’s accounts at these institutions are insured, up to $
On March 12, 2023, Signature Bank (“SBNY”) was closed by its state chartering authority, the New York State Department of Financial Services. On the same date the FDIC was appointed as receiver and transferred all customer deposits and substantially all of the assets of SBNY to Signature Bridge Bank, N.A., a full-service bank that is being operated by the FDIC. The FDIC, the U.S. Treasury, and the Federal Reserve jointly announced that all depositors of SBNY would be made whole, regardless of deposit insurance limits. The Company automatically became a customer of Signature Bridge Bank, N.A. as part of this action. Normal
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TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
banking activities resumed on Monday, March 13, 2023. On March 29, 2023, the Company was advised by the FDIC that the Company’s bank accounts would be closed on April 5, 2023 and any remaining funds as of that date would be distributed to the Company by check. As of March 31, 2023, the Company held approximately $
Restricted Cash
The Company considers cash and marketable securities to be restricted when withdrawal or general use is legally restricted. The Company reports restricted cash in the consolidated balance sheets and determines current or non-current classification based on the expected duration of the restriction. The restricted cash included in the consolidated balance sheet as of March 31, 2023 is restricted as to use due to being held as a construction escrow by a third party escrow agent. The restricted cash included in the consolidated balance sheet as of December 31, 2022 is restricted as to use primarily due to being held in escrow in accordance with an asset purchase agreement governing the sale of certain RM 101 assets (see Note 3).
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets that total to the amounts shown in the consolidated statements of cash flows (in thousands):
| | March 31, 2023 |
| December 31, 2022 | ||
Cash and cash equivalents |
| $ | |
| $ | |
Restricted cash | |
| | |
| |
Cash and cash equivalents and restricted cash | | $ | | | $ | |
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision–making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision–making group (“CODM”) is composed of the chief executive officer, chief operating officer and chief strategy officer. Currently, the Company solely operates in the Digital Currency Mining segment. The Company’s mining operations are located in the United States, and the Company has employees only in the United States and views its mining operations as
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets (generally
Interest related to construction of assets is capitalized when the financial statement effect of capitalization is material, construction of the asset has begun, and interest is being incurred. Interest capitalization ends at the earlier of the asset being substantially complete and ready for its intended use or when interest costs are no longer being incurred.
Leases
The Company determines if an arrangement is a lease at inception and, if so, classifies the lease as an operating or finance lease. Operating leases are included in right-of-use (“ROU”) asset, current portion of operating lease liability, and operating lease liability, net of current portion in the consolidated balance sheets. Finance leases would be included in property, plant and equipment, current portion of finance lease liabilities, and finance lease liabilities, net of current portion in the consolidated balance sheets. The Company
12
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
does not recognize a ROU asset or lease liability for short-term leases having initial terms of 12 months or less and instead recognizes rent expense on a straight-line basis over the lease term. In an arrangement that is determined to be a lease, the Company includes both the lease and nonlease components as a single component and accounts for it as a lease when the Company would otherwise recognize the cost associated with both the lease and nonlease components in a similar fashion.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at commencement date, and subsequently remeasured upon changes to the underlying lease arrangement, based on the present value of lease payments over the lease term. If the lease does not provide an implicit rate or if the implicit rate is not determinable, the Company generally uses an estimate of its incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at the commencement date. The ROU asset also includes any lease prepayments made and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
Costs associated with operating lease ROU assets are recognized on a straight-line basis within operating expenses or selling, general and administrative, as appropriate, over the term of the lease. Variable lease costs are recognized as incurred and primarily consist of common area maintenance charges not included in the measurement of right-of-use assets and operating lease liabilities. Finance ROU lease assets are amortized within operating expenses or selling, general and administrative expenses, as appropriate, on a straight-line basis over the shorter of the estimated useful lives of the assets or, in the instance where title does not transfer at the end of the lease term, the lease term. The interest component of a finance lease is included in interest expense and recognized using the effective interest method over the lease term.
As of March 31, 2023 and December 31, 2022, the Company is not a counterparty to any finance leases.
Debt Modification
The Company evaluates amendments to its debt instruments in accordance with applicable U.S. GAAP. This evaluation includes comparing (1) if applicable, the change in fair value of an embedded conversion option to that of the carrying amount of the debt immediately prior to amendment and (2) the net present value of future cash flows of the amended debt to that of the original debt to determine, in each case, if a change greater than
Convertible Instruments
The Company accounts for its issuance of convertible debt and convertible equity instruments in accordance with applicable U.S. GAAP. In connection with that accounting, the Company assesses the various terms and features of the agreement in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 480 “Distinguishing Liabilities from Equity” (“ASC 480”) and ASC 815 “Derivatives and Hedging Activities” (“ASC 815”). ASC 480 requires liability accounting for certain financial instruments, including shares that embody an unconditional obligation to transfer a variable number of shares, provided that the monetary value of the obligation is based solely or predominantly on one of the following three characteristics: (1) a fixed monetary amount known at inception, (2) variations in something other than the fair value of the issuer’s equity shares or (3) variations in the fair value of the issuer’s equity shares, but the monetary value to the counterparty moves in the opposite direction as the value of the issuer’s shares. In accordance with ASC 815, the Company assesses the various terms and features of the agreement
13
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
to determine whether or not they contain embedded derivative instruments that are required under ASC 815 to be accounted for separately from the host contract and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results.
Warrants
The Company applies ASC 480 and ASC 815 to assist in the determination of whether warrants issued for the purchase of Common Stock should be classified as liabilities or equity. Warrants that are determined to require liability classification are measured at fair value upon issuance and are subsequently remeasured to their then fair value at each subsequent reporting period with changes in fair value recorded in current earnings. Warrants that are determined to require equity classification are measured at fair value upon issuance and are not subsequently remeasured unless they are required to be reclassified. All warrants granted by the Company to date are classified as equity.
Nonmonetary Transactions
The Company accounts for goods and services exchanged in nonmonetary transactions at fair value unless the underlying exchange transaction lacks commercial substance or the fair value of the assets received or relinquished is not reasonably determinable, in which case the nonmonetary exchange would be measured based on the recorded amount of the nonmonetary asset relinquished.
Stock Issuance Costs
Stock issuance costs are recorded as a reduction to issuance proceeds. Stock issuance costs incurred prior to the closing of the related issuances, including under shelf registration statements, are recorded in other assets in the consolidated balance sheets if the closing of the related issuance is deemed probable.
Held for Sale and Discontinued Operations Classification
The Company classifies a business as held for sale in the period in which management commits to a plan to sell the business, the business is available for immediate sale in its present condition, an active program to complete the plan to sell the business is initiated, the sale of the business within one year is probable and the business is being marketed at a reasonable price in relation to its fair value.
Newly acquired businesses that meet the held-for-sale classification criteria upon acquisition are reported as discontinued operations. Upon a business’ classification as held for sale, net assets are measured for impairment. Goodwill impairment is measured in accordance with the method described in the accounting policy entitled “Goodwill and Indefinite-lived Intangible Assets.” An impairment loss is recorded for long-lived assets held for sale when the carrying amount of the asset exceeds its fair value less cost to sell. Other assets and liabilities are generally measured for impairment by comparing their carrying values to their respective fair values. A long-lived asset is not depreciated or amortized while it is classified as held for sale.
Revenue Recognition
The Company recognizes revenue under the FASB ASC 606 “Revenue from Contracts with Customers” (“ASC 606”). The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
| ● | Step 1: Identify the contract with the customer |
| ● | Step 2: Identify the performance obligations in the contract |
| ● | Step 3: Determine the transaction price |
| ● | Step 4: Allocate the transaction price to the performance obligations in the contract |
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TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
| ● | Step 5: Recognize revenue when the Company satisfies a performance obligation |
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
| ● | Variable consideration |
| ● | Constraining estimates of variable consideration |
| ● | The existence of a significant financing component in the contract |
| ● | Noncash consideration |
| ● | Consideration payable to a customer |
Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
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TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Mining Pool
The Company has entered into an arrangement with a cryptocurrency mining pool (the Foundry USA Pool) to provide computing power to the mining pool in exchange for consideration. The arrangement is terminable at any time without substantial penalty by either party and the contract term is deemed to be 24 hours. The Company’s enforceable right to compensation only begins when and continues while the Company provides computing power to its customer, the mining pool operator. The mining pool applies the Full Pay Per Share (“FPPS”) model. Under the FPPS model, in exchange for providing computing power to the pool, the Company is entitled to pay-per-share base amount and transaction fee reward compensation, calculated on a daily basis, at an amount that approximates the total bitcoin that could have been mined and transaction fees that could have been awarded using the Company’s computing power, based upon the then current blockchain difficulty. Under this model, the Company is entitled to compensation regardless of whether the pool operator successfully records a block to the bitcoin blockchain.
Providing computing power to a mining pool for cryptocurrency transaction verification services is an output of the Company’s ordinary activities. The provision of such computing power is the sole performance obligation. The transaction consideration the Company receives, if any, is non-cash consideration and is all variable. Because cryptocurrency is considered non-cash consideration, fair value of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency in the Company’s principal market at the time of contract inception, which is deemed daily. Revenue is recognized when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. After every 24-hour contract term, the mining pool transfers the cryptocurrency consideration to our designated cryptocurrency wallet.
There is no significant financing component in these transactions. There may be, however, consideration payable to the customer in the form of a pool operator fee; this fee, if any, is deducted from the bitcoin the Company receives and is recorded as contra-revenue, as it does not represent a payment for a distinct good or service.
Data Center Hosting
The Company’s current hosting contracts are service contracts with a single performance obligation. The service the Company provides primarily includes hosting the customers’ miners in a physically secure data center with electrical power, internet connectivity, ambient air cooling and available maintenance resources. Hosting revenue is recognized over time as the customer simultaneously receives and consumes the benefits of the Company’s performance. The Company recognizes hosting revenue to the extent that a significant reversal of such revenue will not occur. Data center hosting customers are invoiced and payments are due on a monthly basis. While the majority of consideration is paid in cash, certain consideration is payable in cryptocurrency. Because cryptocurrency is considered non-cash consideration, fair value of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency in the Company’s principal market at the time of contract inception. The Company has
Cryptocurrencies
Cryptocurrencies, including bitcoin, are included in current assets in the consolidated balance sheets due to the Company’s ability to
sell it in a highly liquid marketplace and its intent to liquidate its cryptocurrencies to support operations when needed. Cryptocurrencies earned by the Company through the provision of computing power to a mining pool and hosting activities are accounted for in connection with the Company’s revenue recognition policy disclosed above.
Cryptocurrencies are accounted for as intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed for impairment on a continuous basis through the entirety of its holding period. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the cryptocurrency at the time its fair value is being measured, which is based on the intraday low quoted price of the cryptocurrency reported in the Company’s principal market. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.
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TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Sales of cryptocurrencies by the Company and cryptocurrencies awarded to the Company, including as compensation for data center hosting services, are included within cash flows from operating activities on the consolidated statements of cash flows. The Company accounts for its gains or losses in accordance with the first in first out (“FIFO”) method of accounting.
Cost of Revenue
Cost of revenue for mining pool revenue is comprised primarily of direct costs of electricity, but excludes depreciation which is separately stated. Cost of revenue for data center hosting is comprised primarily of direct costs of electricity, labor and internet provision.
Stock-based Compensation
The Company periodically issues restricted stock units to employees and non-employees in non-capital raising transactions for services. In accordance with the authoritative guidance for share-based payments FASB ASC 718 “Compensation – Stock Compensation,” the Company measures stock-based compensation cost at the grant date, based on the estimated fair value of the award. For restricted stock units (“RSUs”) with time based vesting, the fair value is determined by the Company’s stock price on the date of grant. For RSUs with vesting based on market conditions, the effect of the market condition is considered in the determination of fair value on the grant date using a Monte Carlo simulation model. The Company has not issued stock options. Expense for RSUs and stock options is recognized on a straight-line basis over the employee’s or non-employee’s service period, including the derived service period for RSUs with market conditions. Stock-based compensation for RSUs with market conditions is recorded over the derived service period unless the market condition is satisfied in advance of the derived service period, in which case a cumulative catch-up is recognized as of the date of achievement. Stock-based compensation for RSUs with market conditions is recorded regardless of whether the market conditions are met unless the service conditions are not met. The Company accounts for forfeitures as they occur. The Company recognizes excess tax benefits or deficiencies on vesting or settlement of awards as discrete items within income tax benefit or provision within net income (loss) and the related cash flows are classified within operating activities.
Power Curtailment Credits
Payments received for participation in demand response programs are recorded as a reduction in cost of revenue in the consolidated statements of operations. The Company recorded power curtailment credits of approximately $
Loss per Share
The Company computes earnings (loss) per share using the two-class method required for participating securities. The two-class method requires income available to common stockholders for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed.
Basic loss per share of common stock is computed by dividing the Company’s net loss attributed to common stockholders (adjusted for preferred stock dividends declared or accumulated) by the weighted average number of shares of common stock outstanding during the period. Convertible preferred stock, which are participating securities because they share in a pro rata basis any dividends declared on common stock but because they do not have the obligation to share in the loss of the Company, are excluded from the calculation of basic net loss per share. Diluted loss per share reflects the effect on weighted average shares outstanding of the number of additional shares outstanding if potentially dilutive instruments, if any, were converted into common stock using the treasury stock method or as-converted method as appropriate. The computation of diluted loss per share does not include dilutive instruments in the weighted average shares outstanding, as they would be anti-dilutive. The Company’s dilutive instruments or participating securities as of March 31, 2023 include convertible preferred stock, common stock warrants and RSUs issued for services. The Company’s dilutive instruments or participating securities as of December 31, 2022 include convertible preferred stock, convertible promissory notes, common stock warrants and RSUs issued for services. If the entire liquidation preference of the Convertible Preferred Stock (as defined in Note 13) was converted at its conversion price as of March 31, 2023, the Company would issue approximately
17
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Concentrations
The Company or its joint venture have contracted with
NOTE 3 – BUSINESS COMBINATION, ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
On December 13, 2021, the Company completed the Merger with RM 101 (formerly known as IKONICS Corporation) pursuant to which, among other things, the Company effectively acquired RM 101 and became a publicly traded company on the Nasdaq. The consideration in the Merger included, among other things, contractual contingent value rights (“CVR”) per a Contingent Value Rights Agreement (the “CVR Agreement”). Pursuant to the CVR Agreement, each shareholder of RM 101 as of immediately prior to the Merger, received
In August 2022, RM 101 sold a certain property, including a warehouse, to a third party for $
In August 2022, RM 101 sold (i) certain property, including a warehouse and a building which houses manufacturing, operations and administration, (ii) substantially all of its working capital and (iii) its historical business to a third party for $
In accordance with the CVR Agreement, on March 1, 2023, the Company made an initial distribution of $
Upon acquisition, the RM 101 business met the assets held-for-sale and discontinued operations criteria and is reflected as discontinued operations held for sale in these consolidated financial statements. The Company determined that the RM 101 business qualified as assets held for sale as management committed to a plan to sell the business, the business was in readily sellable form and it was deemed probable that the business would be sold in a twelve-month period. All net assets held for sale had been sold as of December 31, 2022.
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TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
| Three Months Ended | ||||
| March 31, | ||||
| 2023 |
| 2022 | ||
Net sales | $ | — | | $ | |
Cost of goods sold |
| — | |
| |
Gross profit |
| — | |
| |
Selling, general and administrative expenses |
| | |
| |
Research and development expenses |
| — | |
| |
Impairment on remeasurement or classification as held for sale |
| — | |
| |
Loss from discontinued operations before other income | | ( | |
| ( |
Other income | | | | | |
Loss from discontinued operations before income tax |
| ( | | | ( |
Income tax benefit |
| — | |
| |
Loss from discontinued operations, net of tax | $ | ( | | $ | ( |
Loss from discontinued operations, net of tax in the consolidated statement of operations for the three months ended March 31, 2022 also includes a $
NOTE 4 – FAIR VALUE MEASUREMENTS
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-level fair value hierarchy prioritizing the inputs to valuation techniques is used to measure fair value. The levels are as follows: (Level 1) observable inputs such as quoted prices in active markets for identical assets or liabilities; (Level 2) observable inputs for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable either directly or indirectly from market data; and (Level 3) unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
The following table illustrates the financial instruments measured at fair value on a non-recurring basis segregated by hierarchy fair value levels as of March 31, 2023 (in thousands):
| | | | | | | | | | | | | | | |
| | | | | | | | Significant | | Significant | | | | ||
| | | | | Quoted Prices | | Other | | Other | | | | |||
| | | | | in Active | | Observable | | Unobservable | | | | |||
| | | | | Markets | | Inputs | | Inputs | | Remeasurement | ||||
|
| Carrying Value |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Gain | |||||
Contingent consideration liability - Contingent Value Rights | | $ | | | $ | — | | $ | | | $ | — | | $ | — |
| | $ | | | $ | — | | $ | | | $ | — | | $ | — |
The following table illustrates the financial instruments measured at fair value on a non-recurring basis segregated by hierarchy fair value levels as of December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | |
| | | | | | | | Significant | | Significant | | | | ||
| | | | | Quoted Prices | | Other | | Other | | | | |||
| | | | | in Active | | Observable | | Unobservable | | | | |||
| | | | | Markets | | Inputs | | Inputs | | Remeasurement | ||||
|
| Carrying Value |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Gain | |||||
Contingent consideration liability - Contingent Value Rights (1) | | $ | | | $ | — | | $ | | | $ | — | | $ | |
| | $ | | | $ | — | | $ | | | $ | — | | $ | |
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TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
| (1) | During the three months ended March 31, 2022, the Company changed the valuation approach from the use of other unobservable inputs to other observable inputs based on information obtained through the active marketing and sale of the underlying assets. |
The Company has determined the long-term debt fair value as of March 31, 2023 is approximately $
The Company utilized a Black-Scholes option pricing model and the application of a discount for lack of marketability (“DLOM”) to value its Common Stock warrants issued in connection with the New Term Facility and to value its Common Stock warrants issued in connection with the Fifth Amendment (each as defined in Note 9). The DLOM is applied due primarily to contractual restrictions on the exercise of the respective warrants. The estimated fair value of the warrants is determined using Level 3 inputs. Inherent in the model and fair value estimate are assumptions related to expected share-price volatility, expected life, risk-free interest rate, dividend yield and DLOM. The Company estimates volatility based on public company peer group volatility over the contractual term of the warrants. The risk-free interest rate is based on the U.S. Treasury rate on the grant date for a maturity similar to the expected life of the warrants, which is assumed to be equivalent to their contractual term. The dividend rate is based on the historical rate, which the Company anticipates remaining at zero. The Company applied a DLOM of
NOTE 5 – BITCOIN
The following table presents the Company’s bitcoin activity (in thousands):
| | Three Months Ended | ||||
| | March 31, | ||||
| | 2023 | | 2022 | ||
Beginning balance | | $ | | | $ | — |
Bitcoin received from mining pool and hosting services | | | | | | |
Impairment | |
| ( | |
| ( |
Disposition | | | ( | | | — |
Ending balance | | $ | | | $ | |
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TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 6 — PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consisted of the following (in thousands):
|
| March 31, 2023 |
| December 31, 2022 | ||
Miners | | $ | | | $ | |
Construction in process | | | | | | |
Leasehold improvements | | | | | | |
Equipment | |
| | |
| |
Deposits on miners | |
| | |
| |
| |
| | |
| |
Less: accumulated depreciation | |
| ( | |
| ( |
| | $ | | | $ | |
The Company capitalizes a portion of the interest on funds borrowed to finance its capital expenditures. Capitalized interest is recorded as part of an asset’s cost and is depreciated over the same period as the related asset. Capitalized interest costs were $
Depreciation expense was $
NOTE 7 — LEASES
Effective in May 2021, the Company entered into a ground lease (the “Ground Lease”) related to its planned bitcoin mining facility in New York with a counterparty which is a related party due to control by a member of Company management. The Ground Lease includes fixed payments and contingent payments, including an annual escalation based on the change in the Consumer Price Index as well as the Company’s proportionate share of the landlord’s cost to own, operate and maintain the premises. The Ground Lease originally had an initial term of
21
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The following is a maturity analysis of the annual undiscounted cash flows of the estimated operating lease liabilities as of March 31, 2023 (in thousands):
| | | |
Year ending December 31: |
| |
|
2023 | | $ | |
2024 | |
| |
2025 | |
| |
2026 | |
| |
2027 | |
| |
Thereafter | |
| |
| | $ | |
A reconciliation of the undiscounted cash flows to the operating lease liabilities recognized in the consolidated balance sheet as of March 31, 2023 follows (in thousands):
| | | |
Undiscounted cash flows of the operating lease |
| $ | |
Unamortized discount | |
| |
Total operating lease liability | |
| |
Current portion of operating lease liability | |
| |
Operating lease liability, net of current portion | | $ | |
During the three months ended March 31, 2022, the Company entered into a short term lease arrangement for digital currency mining equipment. The term of the operating lease was
NOTE 8 – INCOME TAXES
The Company’s tax provision or benefit from income taxes for interim periods is determined using an estimate of the Company’s annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. The Company has an effective tax rate of
ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of available evidence, it is more likely than not that some or a portion or all the deferred tax assets will not be realized. As of March 31, 2023 and 2022, the Company estimated a portion of its deferred tax assets will be utilized to offset the Company’s deferred tax liabilities. Based upon the level of historical U.S. losses and future projections over the period in which the remaining deferred tax assets are deductible, at this time, management believes it is more likely than not that the Company will not realize the benefits of the remaining deductible temporary differences, and as a result the Company has recorded a valuation allowance as of March 31, 2023 and 2022 for the amount of deferred tax assets that will not be realized.
The Company has
22
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 9 – DEBT
Long-Term Debt
Long-term debt consists of the following (in thousands):
| | | | | | |
| | March 31, 2023 |
| December 31, 2022 | ||
Term loan | | $ | |
| $ | |
Debt issuance costs and debt discount | |
| ( | |
| ( |
| |
| | |
| |
Less long-term debt due within one year | |
| — | |
| |
Total long-term debt, net of portion due within one year | | $ | | | $ | |
On December 1, 2021, the Company entered into a Loan, Guaranty and Security Agreement with Wilmington Trust, National Association as administrative agent (the “LGSA”). The LGSA consists of a $
In connection with the LGSA, the Company issued to the holders of the Term Loans
In July 2022, the Company entered into an amendment to the LGSA (the “First Amendment”). This amendment provides for an additional $
23
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
$
In connection with the New Term Facility, the Company paid an upfront fee of $
The Company determined that debt modification accounting applied in connection with the New Term Facility. Third party and upfront fees were allocated pro rata between the First Amendment Term Loan and the Delayed Draw Term Loan Commitment. Third-party fees of $
Fees paid and the fair value of the Common Stock warrants related to the Delayed Draw Term Loan Commitment, an aggregate $
In October 2022, the Company entered into a third amendment (the “Third Amendment”) to the LGSA. The Third Amendment divided the initial funding of up to $
On January 27, 2023, the Company entered into a binding term sheet with the LGSA lenders (the “Term Sheet”) pursuant to which the parties agreed, subject to certain conditions, to make certain amendments to LGSA regarding amortization of LGSA principal and amending certain governance rights. On March 1, 2023, the Company entered into the Fifth Amendment. The Fifth Amendment eliminates mandatory amortization of the term loans under the LGSA through April 7, 2024, as long as the Company received aggregate net proceeds of at least $
24
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
which will automatically extend to the maturity of the Term Loans on December 1, 2024 in the event the Company repays at least $
The Company determined that debt modification accounting applied in connection with the Fifth Amendment. Because the First Amendment and the Fifth Amendment occurred within a twelve-month period, the debt terms that existed just prior to the First Amendment were applied in determining the appropriateness of the debt modification accounting model. The allocated value of the Penny Warrants and Dollar Warrants, an aggregate $
The LGSA, as amended, requires the Company to maintain or meet certain affirmative, negative and reporting covenants. The affirmative covenants include, among other things, a requirement for the Company to maintain insurance coverage, maintain mining equipment and comply in all material respects with the Company’s Nautilus joint venture agreement (see Note 11), each as defined. The negative covenants restrict or limit the Company’s ability to, among other things, incur debt, create liens, divest or acquire assets, make restricted payments and permit the Company’s interest in the Nautilus joint venture to be reduced below
For the aggregate LGSA long-term debt for the three months ended March 31, 2023, the Company amortized $
Principal maturities of outstanding long-term debt as of March 31, 2023 are as follows (in thousands):
Year ending December 31: |
| |
|
2023 | | $ | — |
2024 | |
| |
Total principal maturities | | $ | |
NOTE 10 – STANDBY EQUITY PURCHASE AGREEMENT AND CONVERTIBLE PROMISSORY NOTE
Standby Equity Purchase Agreement
On June 2, 2022, the Company entered into a Standby Equity Purchase Agreement (“SEPA”) with YA II PN, Ltd. (“Yorkville”). Pursuant to the SEPA, the Company had the right, but not the obligation, to sell to Yorkville, subject to certain limitations and conditions, up to $
25
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
commencing on June 2, 2022 and terminating on the earliest of (i) the first day of the month following the
Yorkville Convertible Promissory Note
On June 2, 2022, the Company issued the Promissory Note to Yorkville, which was issued with a
Convertible Promissory Notes
In November 2022, the Company issued convertible promissory notes (the “Convertible Notes”) in an aggregate principal amount of approximately $
26
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Notes are included in convertible promissory notes in the consolidated balance sheet as of December 31, 2022. On January 30, 2023, the Convertible Notes were amended to change the conversion date to the third business day following the Shareholder Approval Date (as defined in Note 14). In March 2023, the Convertible Notes and accrued but unpaid interest were converted into
On January 30, 2023, the Company entered into a convertible promissory note (the “January Convertible Note”) to an accredited investor in a privately negotiated transaction as part of a private placement exempt from registration under Section 4(a)(2) and/or Regulation D under the Securities Act in an aggregate principal amount of $
NOTE 11 – JOINT VENTURE
On May 13, 2021, the Company and a subsidiary of Talen Energy Corporation (“Talen”) (each a “Member” and collectively the “Members”) entered into a joint venture, Nautilus Cryptomine LLC (“Nautilus”), to develop, construct and operate up to
On August 27, 2022, the Members entered into an amended and restated Joint Venture agreement (“the “A&R Agreement”) whereby, among other changes, the unit ownership will be determined by infrastructure contributions while distributions of mined bitcoin will be determined by each Member’s respective hashrate contributions. Members are allowed to make contributions of miners up to the effective electrical capacity of their owned infrastructure percentage. Each party retains access to
On March 23, 2023, the Company entered into a second amended and restated limited liability company agreement for Nautilus
(the “Second A&R Nautilus Agreement”). Under the Second A&R Nautilus Agreement, the Company holds a
27
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Facility by up to an additional 50 MW, funded solely by the Talen Member, for a total capacity of up to 300 MW. Upon such election, Nautilus will call additional capital for expansion and enter into an additional energy supply agreement with Talen Member or its affiliate for the additional capacity, subject to any regulatory approvals and third-party consents.
On March 19, 2021, TeraCub executed an agreement for the purchase of bitcoin miners from MinerVA Semiconductor Corp. (“MinerVa”) for a total of
On June 15, 2021, Nautilus entered into
In December 2022, the Company entered into a Payment Netting Agreement with Nautilus, Talen and the related party FOA and CSA agreement counterparties whereby certain amounts were owed by Nautilus to each of the FOA and CSA counterparties, including for the termination of the FOA agreement. These amounts were offset to arrive at a net result whereby the Company owed the related party FOA counterparty (see Note 16) approximately $
28
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The Company’s direct payments to MinerVA and Bitmain, among others, on behalf of Nautilus for the three months ended March 31, 2022, are included in investments in joint venture related to direct payments made on behalf of joint venture in the consolidated statement of cash flows. A reconciliation of amounts included within this footnote to captions in the consolidated statement of cash flows for the three months ended March 31, 2023 and 2022 follows (in thousands):
| | Three Months Ended | ||||
| | March 31, | ||||
| | 2023 |
| 2022 | ||
Payment of TeraWulf | | $ | — | | $ | ( |
Investments in joint venture related to direct payments made on behalf of joint venture | | | — | | | ( |
Direct investments in joint venture and payments made on plant and equipment contributed to joint venture | | | ( | | | ( |
Investments in joint venture, including direct payments made on behalf of joint venture | | $ | ( | | $ | ( |
| | | | | | |
Payment of Talen | | $ | — | | $ | ( |
Other reimbursable payments | | | — | | | — |
Reimbursable payments for deposits on plant and equipment made on behalf of joint venture or a joint venture partner | | $ | — | | $ | ( |
| | | | | | |
Talen reimbursement of | | $ | — | | $ | |
Other reimbursable payments | | | — | | | — |
Reimbursement of payments for deposits on plant and equipment made on behalf of joint venture or a joint venture partner | | $ | — | | $ | |
Nautilus is a VIE accounted for using the equity method of accounting. The table below summarizes the Company’s interest in Nautilus and the Company’s maximum exposure to loss as a result of its involvement with the VIE as of December 31, 2022 (in thousands, except for percentages):
|
| |
| | |
| | |
| | |
| | |
| Commitment to |
| | | |
| | | | | | | | | | | | | Company’s | | Future | | Company’s | |||
| | | | | | | | | | Net loss | | Variable | | Additional | | Maximum | ||||
| | % | | Initial | | Additional | | Inception | | Interest in | | Contributions | | Exposure to Loss | ||||||
Entity | | Ownership | | Investment | | Investment, Net | | to Date | | Entity | | (1) | | in Entity (2) | ||||||
Nautilus |
| | % | $ | | | $ | | | $ | | | $ | | | $ | — | | $ | |
| (1) | The Members may mutually agree on changes to the Pennsylvania bitcoin mining facility, which could increase the amount of contributions the Company is required to provide. The Members may seek alternate financing for the Pennsylvania bitcoin mining facility, which could reduce the amount of investments each Member may be required to provide. |
| (2) | The maximum exposure at March 31, 2023 is determined by adding the Company’s variable interest in the entity and any explicit or implicit arrangements that could require the Company to provide additional financial support. The amount represents the contractually required capital contributions of the Company which are required for the initial phase of the Pennsylvania bitcoin mining facility buildout. |
Due to the change in Member ownership percentage and governance rights under the A&R Agreement, Talen determined it controlled the Joint Venture from an accounting perspective and thereby was required to fair value the identifiable assets and liabilities of the Joint Venture for its internal accounting purposes. Under the CSA, Talen is responsible for maintaining the books and records of the Joint Venture and elected to push down the fair value adjustments to Nautilus’ books and records. The Company accounts for the Joint Venture as an equity method investment and the change in ownership percentage does not impact the Company’s method of accounting or basis. Therefore, there is a basis difference between the books and records of Nautilus and the Company’s accounting
29
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
basis in the Joint Venture. The condensed results of operations for the three months ended March 31, 2023 and 2022 and the condensed financial position as of March 31, 2023 and December 31, 2022 of Nautilus are summarized below (in thousands):
| | | | | | |
|
| Three Months Ended | ||||
| | March 31, | ||||
| | 2023 (1) |
| 2022 | ||
Condensed statement of operations information: |
| | | | | |
Revenue | | $ | | | $ | — |
Operating expense | |
| | |
| |
Net loss | | $ | ( | | $ | ( |
| | | | | | |
|
| March 31, 2023 (1) |
| December 31, 2022 (1) | ||
Condensed balance sheet information: |
| |
|
| |
|
Current assets | | $ | | | $ | |
Noncurrent assets | |
| | |
| |
Total assets | | $ | | | $ | |
| | | | | | |
Current liabilities | | $ | | | $ | |
Noncurrent liabilities | | | | | | |
Equity | |
| | |
| |
Total liabilities and equity | | $ | | | $ | |
| (1) | The condensed statement of operations information for the three months ended March 31, 2023 and the condensed balance sheet information as of March 31, 2023 and December 31, 2022 reflect the impact of the Talen-estimated fair value measurements of Nautilus which, resulting from the application of ASC 805 “Business Combinations,” have been pushed down to the books and records of Nautilus by Talen, as discussed above. The Company’s basis in the assets and liabilities of Nautilus continue to be recorded at historical value on the accompanying consolidated balance sheets. |
In March 2022, the Company entered into an exchange agreement with Nautilus and the Nautilus co-venturer whereby the Company purchased
In September 2022, the Company, as allowed under the A&R Agreement and because its Lake Mariner Facility was operational, transferred
In February and March 2023, the Company, as allowed under the A&R Agreement, transferred control of approximately
30
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31, 2023 and recorded a loss of $
As contemplated in the A&R Agreement, members are allowed to make contributions of miners up to the effective electrical capacity of their owned infrastructure percentage. During the three months ended March 31, 2023 and the year ended December 31, 2022, the Company contributed to Nautilus certain miners with a fair value, determined based on miner vendor contracts, of $
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Litigation
The Company is not a party to any material legal proceedings and is not aware of any pending or threatened claims. From time to time, the Company may be subject to various legal proceedings, regulatory inquiries and claims that arise in the ordinary course of its business activities.
Bitmain Miner Purchase Agreements
On December 7, 2021, the Company entered into a Non-fixed Price Sales and Purchase Agreement with Bitmain for the purchase of
On December 15, 2021, the Company entered into a Non-fixed Price Sales and Purchase Agreement with Bitmain for the purchase of
In September 2022, the Company entered into
In November 2022, the Company entered into
31
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
In December 2022, the Company entered into a Future Sales and Purchase Agreement with Bitmain for the aggregate purchase of
Other Commitments
In February 2022, the Company entered into an agreement with the Power Authority of the State of New York (“NYPA”) for the purchase of up to
NOTE 13 – CONVERTIBLE PREFERRED STOCK
TeraWulf Convertible Preferred Stock
In March 2022, TeraWulf entered into Series A Convertible Preferred Stock Subscription Agreements (the “Subscription Agreements”) with certain accredited and institutional investors (collectively, the “Holders”). Pursuant to the Subscription Agreements, the Company sold
Holders of the Convertible Preferred Stock will accumulate cumulative dividends at an annual rate of
The Holders of the Convertible Preferred Stock will have a right to effect an optional conversion of all or any whole number of shares of the Convertible Preferred Stock at any time and from time to time. The Company will have a right to effect a mandatory conversion of the Convertible Preferred Stock after the third anniversary of the issuance date if the Last Reported Sale Price (as defined in the Company’s Series A Convertible Preferred Certificate of Designations) per share of Common Stock exceeds
32
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
and the Stock Price, as defined, on such date. The Conversion rate will not exceed
NOTE 14 – COMMON STOCK
On February 23, 2023 (the “Shareholder Approval Date”), the Company held a Special Meeting of Stockholders.
Accordingly, TeraWulf’s Certificate of Incorporation as of March 31, 2023 provides for authorized shares of
In March 2022, the Company concluded a private placement of
In April 2022, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Cantor Fitzgerald & Co., as underwriter (the “Underwriter”), pursuant to which the Company issued and sold to the Underwriter an aggregate of
In April 2022, the Company concluded a private placement of
In April 2022, the Company entered into a sales agreement (the “April ATM Sales Agreement”) with Cantor Fitzgerald & Co., B. Riley Securities, Inc. and D.A. Davidson & Co. (together the “ATM Agents”), pursuant to which the Company may offer and sell, from time to time, through or to the ATM Agents, shares of the Company’s Common Stock, par value $
33
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
In October 2022, the Company entered into unit subscription agreements with certain accredited investors in privately negotiated transactions (collectively, the “October Purchasers”) as part of a private placement (the “October Private Placement”) exempt from registration under the Securities Act of 1933, as amended. Pursuant to the Unit Subscription Agreements, the Company sold
In December 2022, the Company entered into subscription agreements or unit subscription agreements with certain accredited and institutional investors in privately negotiated transactions (the “December Purchasers”) as part of a private placement (the “December Private Placement”) exempt from registration under the Securities Act of 1933, as amended. Pursuant to these agreements, the Company issued for an aggregate purchase price of $
On January 30, 2023, the Company entered into (a) subscription agreements (the “Warrant Subscription Agreements”) with certain accredited investor entities controlled by members of Company management (the “Warrant Investors”) pursuant to which such Warrant Investors purchased from the Company
34
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
On January 30, 2023, the Company entered into an exchange agreement (the “Exchange Agreement”) with an entity controlled by a member of management (the “Exchanging Shareholder”). Pursuant to the Exchange Agreement, the Exchanging Shareholder exchanged a total of
In February 2023, the Company commenced an underwritten public offering of
In February 2023, the Company entered into subscription agreements with certain accredited investors (the “February Common Stock Investors”), pursuant to which the February Common Stock Investors purchased
During the three months ended March 31, 2023,
NOTE 15 – STOCK-BASED COMPENSATION
On May 13, 2021, the Company made effective the 2021 Omnibus Incentive Plan (the “Plan”) for purpose of attracting and retaining employees, consultants and directors of the Company and its affiliates by providing each the opportunity to acquire an equity interest in the Company or other incentive compensation in order to align the interests of such individuals with those of the Company’s stockholders. The Plan provides for a maximum number of shares to be issued, limitations of shares to be delivered for incentive stock options and a maximum compensation amount for any non-employee member of the board of directors, among other provisions. The form of grants under the Plan includes stock options, stock appreciation rights, restricted stock and RSUs. For the three months ended March 31, 2023 and 2022, stock-based compensation expense was $
35
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The following table summarizes the activities for unvested Company RSUs granted to employees and Board of Directors members during the three months ended March 31, 2023:
|
| Unvested Restricted Stock Units | ||||
| | Number of Shares | | Weighted-Average Grant-Date Fair Value | ||
Unvested as of December 31, 2022 |
| | |
| $ | |
Granted | | | |
| $ | |
Vested | | | ( |
| $ | |
Forfeited/canceled | | | — | | $ | - |
Unvested as of March 31, 2023 | | | | | $ | |
RSUs granted as set out in the table above include RSUs representing
The following table summarizes the activities for unvested Company RSUs granted to non-employees, excluding Board of Directors members, during the three months ended March 31, 2023:
|
| Unvested Restricted Stock Units | ||||
| | Number of Shares | | Weighted-Average Grant-Date Fair Value | ||
Unvested as of December 31, 2022 |
| | |
| $ | |
Granted | | | | | $ | |
Vested | | | ( | | $ | |
Forfeited/canceled | | | — | | $ | - |
Unvested as of March 31, 2023 | | | | | $ | |
RSUs granted as set out in the table above include RSUs representing
NOTE 16 – RELATED PARTY TRANSACTIONS
On April 27, 2021, the Company entered into an Administrative and Infrastructure Services Agreement (the “Services Agreement”) with Beowulf Electricity & Data Inc. (“Beowulf E&D”), a related party due to control by a member of Company management. Under the Services Agreement, Beowulf E&D will provide, or cause its affiliates to provide, to TeraWulf certain services necessary to construct and operate certain bitcoin mining facilities developed or anticipated to be developed by the Company and support the Company’s ongoing business, including, among others, services related to construction, technical and engineering, operations and maintenance, procurement, information technology, finance and accounting, human resources, legal, risk management and external affairs consultation. The Services Agreement has an initial term of and provides for certain fixed, passthrough and incentive payments to Beowulf E&D, including issuing to certain designated employees of Beowulf E&D awards with respect to shares of TeraWulf Common Stock upon the consummation of an initial public offering of TeraWulf or the consummation of a merger following which TeraWulf is listed on a nationally recognized securities exchange and, thereafter, upon achievement of certain milestones regarding bitcoin mining capacity deployed at the bitcoin mining facilities. For the base fee, the Company originally agreed to pay Beowulf E&D in monthly installments an annual fee for the first year in the amount of $
36
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 29, 2023, TeraWulf and Beowulf E&D entered into an Amendment No. 1 to the Services Agreement, pursuant to which TeraWulf agreed to pay Beowulf E&D, effective as of January 1, 2023, a reduced annual base fee equal to $
The Services Agreement also provides for performance related milestones and related incentive compensation. In connection with the listing of its Common Stock on a nationally recognized stock exchange in December 2021, pursuant to the Services Agreement, the Company agreed to issue awards valued at $
NOTE 17 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events through May 15, 2023, which is also the date these consolidated financial statements were available to be issued, and has determined that there were no subsequent events which require disclosure.
37
ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with a review of the other Items included in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. All figures presented below represent results from continuing operations, unless otherwise specified. Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Consolidated Financial Statements. Certain statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations may be deemed to be forward-looking statements. See “Forward-Looking Statements.”
Recent Developments
As previously disclosed in a current report on Form 8-K filed with the SEC on March 17, 2023, on March 17, 2023, TeraWulf received a letter from the Listing Qualifications Department (the “Staff”) of Nasdaq, notifying the Company that, based upon the closing bid price of the Company’s Common Stock, for the last 30 consecutive business days, TeraWulf’s Common Stock did not meet the minimum bid price of $1.00 per share required by Nasdaq Listing Rule 5550(a)(2), initiating an automatic 180 calendar-day grace period for the Company to regain compliance. The notice had no immediate effect on the listing or trading of our Common Stock, and it continued to trade on the Nasdaq Capital Market under the symbol “WULF.” In accordance with Nasdaq Listing Rule 5810(c)(3)(A), TeraWulf had a period of 180 calendar days from the date of the notification, or until September 13, 2023, to regain compliance with the minimum bid price requirement. On April 24, 2023, the Staff notified TeraWulf that it had determined that for 10 consecutive business days, from April 10, 2023 to April 21, 2023, the closing bid price of the Company’s Common Stock had been at $1.00 per share or greater, and that as a result, TeraWulf had regained compliance with Nasdaq Listing Rule 5550(a)(2).
General
TeraWulf is a vertically-integrated owner and operator of environmentally clean bitcoin mining facilities in the United States. Founded and led by an experienced group of energy & power professionals, the Company is actively operating and constructing, consistent with its sustainable energy mandate, two bitcoin mining facilities, the Lake Mariner Facility and the Nautilus Cryptomine Facility, in the States of New York and Pennsylvania, respectively. TeraWulf will own and operate its bitcoin mining facility sites and expects to consume over 91% zero-carbon energy, with a target of achieving 100%. In connection with the planned buildout, TeraWulf entered into a power purchase agreement at the Nautilus Cryptomine Facility and will receive power at approximately 2.0 cents/kWh. Moreover, the Lake Mariner Facility is located a mere 40 miles from the Robert Moses Niagara Power Plant, an approximate 2,600MW hydroelectric generating facility, the largest generating facility in New York State, and one of the largest in the country, with 24/7 access to low-cost carbon-free electricity. With the Nautilus Cryptomine Facility power purchase agreement, and the strategic location of the Lake Mariner Facility addition, TeraWulf expects to achieve an average long-term cost of electricity of approximately 3.5 cents/kWh, competitively positioning the Company to be a leading, low-cost and zero-carbon bitcoin mining operator in the United States.
Lake Mariner Facility
Located at a site adjacent to the decommissioned coal-fired Somerset Generating Station in Barker, New York, the Lake Mariner Facility has secured an initial 90 MW of energy to support its bitcoin mining capacity through an agreement with NYPA with the potential to expand into an additional 410 MW of energy supply. TeraWulf began mining bitcoin at the Lake Mariner Facility in March 2022 with 10 MW of mining capacity located on the turbine deck of the former coal-fired power plant and energized its first dedicated mining building (“Building 1”), housing approximately 50 MW of mining capacity, during the third quarter of 2022. During the third quarter of 2022, and in conjunction with the Nautilus joint venture amendment discussed below, the Company expanded its self-mining capacity in Building 1 by transferring miners previously purchased for use at the Nautilus facility in order to accelerate revenue growth. Construction is largely complete at the Company’s second dedicated mining building (“Building 2”), which is also scheduled to house approximately 50MW of mining capacity and is targeted for completion in the second quarter of 2023.
Nautilus Cryptomine Facility
The Nautilus Cryptomine Facility is a joint venture between TeraWulf and Talen (the “Nautilus Joint Venture”). The Nautilus Cryptomine Facility, located in Salem Township, Luzerne County, Pennsylvania, is adjacent to the 2.5 GW nuclear-powered Susquehanna Station, 2.3 GW of which are owned and operated by Talen. The Nautilus Cryptomine Facility has secured as its power
38
supply zero-carbon nuclear energy received directly from a substation connected to the Susquehanna Station’s electrical generators over a five-year term with two successive three-year renewal options. The Nautilus Cryptomine Facility is located “behind the meter” and not connected to the electrical distribution grid, therefore avoiding transmission and distribution charges typically paid by other large power consumers. At the time of this Quarterly Report, the Nautilus Cryptomine Facility has access to up to 300 MW of bitcoin mining capacity from the Susquehanna Station and is expected to be the first bitcoin mining facility site that is powered by 100% “behind the meter” zero-carbon nuclear energy. TeraWulf began installation of miners at the Nautilus Cryptomine Facility in the fourth quarter of 2022, and began mining bitcoin in the first quarter of 2023. In August 2022, the Company and Talen amended their joint venture agreement thereby reducing TeraWulf’s stake in the facility to 25% and right-sizing TeraWulf’s miners and infrastructure to enable maximum utilization of 50 MW of power at approximately 2.0 cents/kWh for five years. In March 2023, the Company and Talen further amended their joint venture agreement (the “Second A&R Nautilus Agreement”). Under the Second A&R Nautilus Agreement, the Company holds a 25% equity interest in Nautilus and Talen holds a 75% equity interest in Nautilus, each subject to adjustment based on relative capital contributions. Distributions are made periodically in accordance with each Member’s respective hash rate contributions after deducting primarily each Member’s share of power and operational costs. Pursuant to the terms of the Second A&R Nautilus Agreement, the Nautilus Cryptomine Facility initially requires 200 MW of electric capacity. Prior to May 13, 2024, the Company may elect to expand the energy requirement of the Nautilus Cryptomine Facility by up to 50MW, funded solely by the Company. If the Company makes such an election, the Talen Member may, within twelve months thereof, elect to expand the energy requirement of the Nautilus Cryptomine Facility by up to an additional 50 MW, funded solely by the Talen Member, for a total capacity of up to 300 MW. Upon such election, Nautilus will call additional capital for expansion and enter into an additional energy supply agreement with Talen Member or its affiliate for the additional capacity, subject to any regulatory approvals and third-party consents.
TeraWulf expects to generate revenues primarily by sustainably mining bitcoin at its bitcoin mining facility sites. Incremental proceeds may be generated through the hedging of mined bitcoin and the commercial optimization of TeraWulf’s flexible load. The Company will also leverage its available digital infrastructure to provide miner hosting services to third parties whereby the Company targets holding an option to purchase the hosted miners in the future.
We believe TeraWulf is an important and low-cost player in the bitcoin network due to our vertical integration, ramp of large-scale operations, market-leading zero-carbon power supply arrangements and a seasoned, dedicated senior management team.
The Business Combination
TeraWulf completed its business combination with IKONICS Corporation (“IKONICS”) on December 13, 2021 (the “Closing Date”) pursuant to which, among other things, TeraCub Inc. (“TeraCub,” formerly known as TeraWulf Inc.) would effectively acquire IKONICS and become a publicly traded company on the Nasdaq, which was the primary purpose of the business combination. Under the terms of the Merger Agreement, each share of IKONICS common stock issued and outstanding immediately prior to the Closing Date was automatically converted into and exchanged for (i) one validly issued, fully paid and nonassessable share of Common Stock of TeraWulf, (ii) one contingent value right (“CVR”) pursuant to a CVR Agreement, and (iii) the right to receive $5.00 in cash, without interest. TeraCub common stock issued and outstanding immediately prior to the Closing Date was automatically converted into the right to receive a number of validly issued, fully paid and nonassessable shares of TeraWulf such that the TeraCub common stockholders prior to conversion would effectively control 98% of the total outstanding shares of TeraWulf immediately subsequent to the Closing Date.
Pursuant to the CVR Agreement, each shareholder of IKONICS as of immediately prior to the Closing Date, received one CVR for each outstanding share of common stock of IKONICS then held. The holders of the CVRs are entitled to receive 95% of the Net Proceeds (as defined in the CVR Agreement), if any, from the sale, transfer, disposition, spin-off, or license of all or any part of the pre-merger business of IKONICS completed within 18 months following the date of the merger, subject to a reserve of up to 10% of the Gross Proceeds (as defined in the CVR Agreement) from such transaction and such other amount to be retained to satisfy Retained Liabilities, as defined. The CVRs do not confer to their holders any voting or equity or ownership interest in IKONICS or TeraWulf and are not transferable, except in limited circumstances, and are not listed on any quotation system or traded on any securities exchange. The CVR Agreement will terminate after all payment obligations to the holders thereof have been satisfied. Holders of CVRs will not be eligible to receive payment for dispositions, if any, of any part of the pre-merger business of IKONICS after the eighteen-month anniversary of the Closing Date. As of March 31, 2023, the CVR liability included in the Company’s consolidated balance sheet is $7.0 million. During the year ended December 31, 2022, the Company completed sales of all IKONICS net assets held for sale for net proceeds of $13.3 million, of which $7.0 million remained in escrow under provisions of an asset
39
purchase agreement as of December 31, 2022. In February 2023, all escrowed funds were released to the Company. Subsequent to the asset sales, IKONICS’ name was changed to RM 101 Inc. (“RM 101”) and the entity has no remaining operations or employees.
Upon the consummation of the business combination, RM 101 common stock ceased trading on the Nasdaq and TeraWulf Common Stock began trading on the Nasdaq on December 14, 2021 under the ticker symbol “WULF.”
COVID-19
Although the World Health Organization declared on May 5, 2023 that it no longer considers COVID-19 a global health emergency, the Company may from time to time experience disruptions to its business operations resulting from continued COVID-19-related supply interruptions, including miner delivery interruptions. The Company may also experience COVID-19-related delays in construction and obtaining necessary equipment in a timely fashion. To date, the Company has experienced certain, but minimal, delays due to COVID-19 among its suppliers and contractors.
Results of Operations
Since the Company’s inception on February 8, 2021, the Company’s primary activities have been focused on capital acquisition, merger negotiation and consummation, joint venture negotiation and participation, miner procurement, electricity procurement, construction commencement and management, commencement of mining operations, ongoing mining operations, public company readiness and general corporate activities. The Company’s plan of operation for the next twelve months is to continue to increase the mining capacity at its operating mining facilities and complete the construction of its other bitcoin mining facilities, both wholly owned and owned through the Nautilus Joint Venture.
Continuing Operations
All items included in loss from continuing operations in the consolidated statements of operations for the three months ended March 31, 2023 and 2022 relate to its wholly-owned operations of its sole business segment, digital currency mining, due to the Company presenting the RM 101 business as discontinued operations for the three months ended March 31, 2023 and 2022.
Revenue and Cost of Revenue
The following table presents revenue and cost of revenue (exclusive of depreciation) (in thousands):
| | Three Months Ended | ||||
|
| March 31, | ||||
| | 2023 | | 2022 | ||
Revenue |
| $ | 11,533 |
| $ | 217 |
Cost of revenue (exclusive of depreciation) | | $ | 5,002 | | $ | 32 |
For the three months ended March 31, 2023 and 2022, revenue was $11.5 million and $217,000, respectively, an increase of $11.3 million. The increase was due primarily to the increase in mining capacity due to infrastructure constructed and placed in service between the three months ended March 31, 2023 and 2022 and additionally to the commencement of miner hosting arrangements at the Lake Mariner Facility subsequent to the three months ended March 31, 2022. During the three months ended March 31, 2023, revenue from mining was $9.2 million and revenue from hosting was $2.3 million.
For the three months ended March 31, 2023 and 2022, cost of revenue (exclusive of depreciation) was $5.0 million and $32,000, respectively, an increase of approximately $5.0 million. The increase was primarily due to the increase in mining capacity due to infrastructure constructed and placed in service between the three months ended March 31, 2023 and 2022 and additionally to the commencement of miner hosting arrangements at the Lake Mariner Facility subsequent to the three months ended March 31, 2022. Cost of revenues is comprised primarily of power expense and, to a lesser degree, the cost of services provided under our miner hosting agreements. The Company records payments received for demand response programs as a reduction in cost of revenue; the amount of aggregate payments received were not significant during the three months ended March 31, 2023 and 2022. The Company is expanding its enrollment in such available programs.
40
Costs and Expenses
The following table presents operating expenses (in thousands):
| | Three Months Ended | ||||
|
| March 31, | ||||
| | 2023 | | 2022 | ||
Operating expenses |
| $ | 308 |
| $ | 480 |
Operating expenses - related party | | | 597 | | | 62 |
| | $ | 905 | | $ | 542 |
For the three months ended March 31, 2023 and 2022, operating expenses (including related party expenses) was $905,000 and $542,000, respectively, a net increase of $363,000. Operating expenses decreased due to lower equipment lease expense. Operating expenses – related party increased due increased staffing at the Lake Mariner Facility related to infrastructure constructed and placed in service between the three months ended March 31, 2023 and 2022 and additionally to an increase in ground lease costs.
The following table presents selling, general and administrative expenses (in thousands):
| | Three Months Ended | ||||
| | March 31, | ||||
| | 2023 | | 2022 | ||
Selling, general and administrative expenses |
| $ | 6,492 |
| $ | 5,985 |
Selling, general and administrative expenses - related party | | | 2,898 | | | 2,816 |
| | $ | 9,390 | | $ | 8,801 |
For the three months ended March 31, 2023 and 2022, selling, general and administrative expenses (including related party expenses) was $9.4 million and $8.8 million, respectively, a net increase of $0.6 million. Selling, general and administrative expenses are comprised primarily of professional fees, legal fees, employee compensation and benefits, stock-based compensation to employees and consultants, insurance and general corporate expenses. The increase was primarily due to stock-based compensation of $876,000 for the three months ended March 31, 2023 as compared to $0 for the three months ended March 31, 2022. The Company has undertaken cost reduction initiatives targeted at reducing its overall operating expense that is expected to benefit its operating profitability going forward.
Depreciation for the three months ended March 31, 2023 and 2022 was $5.4 million and $4,000, respectively. The increase was primarily due to the increase in mining capacity due to infrastructure constructed and placed in service between the three months ended March 31, 2023 and 2022.
Impairment of digital currency for the three months ended March 31, 2023 and 2022 was $627,000 and $5,000, respectively. Impairment of digital currency represents the decline in bitcoin prices during the Company’s holding period of its bitcoin. Bitcoin impairment is not reversed during its holding period but instead a gain, if any, is recognized upon its liquidation. Realized gain on sale of digital currency, representing such gains on bitcoin liquidation, for the three months ended March 31, 2023 and 2022 was $603,000 and $0, respectively. In each case, the increase was due to increased bitcoins both earned and sold due to the increase in mining capacity between the three months ended March 31, 2023 and 2022.
Interest expense for the three months ended March 31, 2023 and 2022 was $6.8 million and $5.3 million, an increase of $1.5 million. Interest expense relates primarily to the Company’s term loan financing in the principal amount of $146.0 million during the three months ended March 31, 2023 as compared to $123.5 million during the three months ended March 31, 2022. The increase in interest expense is primarily due to an increase of approximately $600,000 of interest related to the stated interest rate on the term loan financing and to an increase of approximately $1.5 million of amortization of debt issuance costs and debt discount related to the term loan financing, offset by an increase in interest capitalized to property, plant and equipment, net in the consolidated balance sheets of approximately $300,000 and an increase in interest capitalized to equity in net assts of investee in the consolidated balance sheets of approximately $400,000, in each case for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. The Company’s term loan financing has a maturity date of December 31, 2024.
Income tax (expense) benefit was $0 for the three months ended March 31, 2023 and 2022. Based upon the level of historical U.S. losses and future projections over the period in which the net deferred tax assets are deductible, at this time, management
41
believes it is more likely than not that the Company will not realize the benefits of the remaining deductible temporary differences, and as a result the Company has recorded a full valuation allowance against its gross deferred tax assets as of March 31 2023 and 2022.
Equity in net loss of investee, net of tax
Equity in net loss of investee, net of tax for the three months ended March 31, 2023 and 2022 was $10.2 million and $788,000, respectively. For the three months ended March 31, 2023 , the amount includes an impairment loss of $8.9 million on the distribution of miners from Nautilus to the Company whereby the miners were marked to fair value from book value on the date distributed. The impairment loss was the result of decreasing prices for miners between initial purchase and distribution. In each case, the remaining amounts represent TeraWulf’s proportional share of losses of Nautilus, which commenced principal operations in February 2023.
Loss from discontinued operations, net of tax
Loss from discontinued operations, net of tax for the three months ended March 31, 2023 and 2022 was $35,000 and $2.9 million, respectively. For the three months ended March 31, 2022, the loss from discontinued operations, net of tax reported is comprised primarily of an impairment loss on discontinued operations of 3.9 million to write down the related carrying amounts of RM 101 to their fair values less estimated cost to sell, offset by a remeasurement gain of $1.4 million on the CVRs, which represents the contingent consideration purchase price component of the RM 101 acquisition. For the three months ended March 31, 2023, all assets of RM 101 had been sold prior to the start of the period and RM 101 had no operations or employees.
Liquidity and Capital Resources
As of March 31, 2023, the Company had balances of cash and cash equivalents and restricted cash of $17.0 million, a working capital deficiency of $33.9 million, total stockholders’ equity of $146.3 million and an accumulated deficit of $212.7 million. The Company incurred a net loss attributable to common stockholders of $26.5 million for the three months ended March 31, 2023. The Company has commenced mining activities at the Lake Mariner Facility and at the Nautilus Cryptomine Facility, however not yet to the scale required to support its principal operations. The Company has relied primarily on proceeds from its issuances of debt and equity and sale of bitcoin mined to fund its principal operations. The principal uses of cash are for the buildout of mining facilities, debt service and general corporate activities and, to a lesser extent, investments in Nautilus joint venture related to mining facility buildout and general corporate activities. Cash flow information is as follows (in thousands):
| | | | | | | |
| | Three Months Ended | | ||||
| | March 31, | | ||||
| | 2023 | | 2022 |
| ||
Cash provided by (used in): | |
| | |
| | |
Operating activities: | |
| | |
| | |
Continuing operations | | $ | (8,623) | | $ | (15,202) | |
Discontinued operations | |
| (90) | |
| (50) | |
Total operating activities | |
| (8,713) | |
| (15,252) | |
Investing activities | |
| (16,170) | |
| (46,817) | |
Financing activities | |
| 33,546 | |
| 19,200 | |
Net change in cash and cash equivalents and restricted cash | | $ | 8,663 | | $ | (42,869) | |
Certain amounts in the unaudited interim consolidated statement of cash flows for the three months ended March 31, 2022 were restated as previously disclosed in the restated unaudited interim consolidated statement of cash flows for the three months ended March 31, 2022 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Cash used in operating activities for continuing operations was $8.6 million and $15.2 million for the three months ended March 31, 2023 and 2022, respectively. For the three months ended March 31, 2023, cash used in operations results from a net loss of $26.3 million less non-cash expenses, net of $20.7 million, adjusted for changes in certain asset and liability balances and increased by proceeds from sale of bitcoin of $9.9 million. The non-cash expenses were primarily comprised of (i) $35,000 of loss from discontinued operations, net of tax related to Rm 101’s business, the assets of which were substantially sold as of December 31, 2022, (ii) $10.2 million related to the Company’s equity in net loss, net of tax of Nautilus, (iii) $3.5 million related to amortization of debt
42
issuance cost and accretion of debt discount, (iv) impairment of digital currency and realized gain on sale of digital currency of $24,000 on a net basis, (v) stock-based compensation of $876,000, (vi) depreciation of $5.4 million, (vii) common stock issued for interest expense of $26,000, (viii) amortization of right-of-use asset of $250,000 and (ix) related party expense to be settled with respect to common stock of $313,000. The changes in certain assets and liabilities were primarily comprised of a net increase in current liabilities (which includes accounts payable, other accrued liabilities and other amounts due to related parties) of $3.5 million, a net increase in current assets (which includes prepaid expenses, amounts due from related parties and other current assets) of $476,000 and an increase in other assets of $83,000.
Cash used in investing activities for continuing operations was $16.2 million and $46.8 for the three months ended March 31, 2023 and 2022, respectively. The Company invested $2.3 million and $19.1 million, on a net basis, in its joint venture and $10.0 million and $27.7 million in the buildout of its mining facilities at the Lake Mariner Facility for the three months ended March 31, 2023 and 2022, respectively. Additionally, during the three months ended March 31, 2023, the Company make payments related to the CVRs of $3.9 million.
Cash provided by financing activities for continuing operations was $33.5 million and $19.2 for the three months ended March 31, 2023 and 2022, respectively. Proceeds from Common Stock issued or to be issued, net of issuance costs, were $31.0 million and $6.8 million for the three months ended March 31, 2023 and 2022, respectively. The Company made principal payments in excess of proceeds from insurance premium financings of $1.2 million for the three months ended March 31, 2023 while the Company received proceeds from insurance premium financings in excess of payments thereon of $3.1 million for the three months ended March 31, 2022. In addition, for the three months ended March 31, 2023, the Company received proceeds from warrant issuances of $2.5 million and proceeds from issuance of a convertible promissory note of $1.3 million. For the three months ended March 31, 2022, the Company issued shares of Series A Preferred stock for proceeds, net of issuance costs, of $9.3 million.
Contractual Obligations and Other Commitments
The Company is counterparty to six miner purchase agreements with Bitmain Technologies Limited. The Company has satisfied all contractual financial commitments under these contracts as of March 31, 2023.
The Company is counterparty to an amended and restated Talen joint venture agreement dated August 27, 2022. Under this joint venture agreement, the Company has invested $149.5 million on a net basis and has right-sized its equity ownership interest to 25% of the joint venture. The Company does not expect any additional material capital contributions to be required.
Financial Condition
There is limited historical financial information about the Company upon which to base an evaluation of its performance. The Company has commenced mining activities at both the Laker Mariner Facility and the Nautilus Cryptomine Facility, however not yet to the scale required to support its principal operations. The Company has relied primarily on proceeds from its issuances of debt and equity and sale of bitcoin mined to fund its principal operations. Until TeraWulf is able to generate positive cash flows from operations, TeraWulf expects to fund its business operations and infrastructure buildout primarily through cash on the balance sheet, sales of mined bitcoin or through the provision of miner hosting services and, if needed, the issuance of equity securities.
During the three months ended March 31, 2023, the Company accomplished several notable steps toward achieving near term positive cash flows from operations, namely: (1) the Company amended its long-term debt agreement to, among other changes, remove the fixed principal amortization through April 7, 2024 and, potentially, beyond, (2) through the issuance of Common Stock, Common Stock warrants and convertible promissory notes, the Company received net proceeds of approximately $34.7 million as previously disclosed, which along with cash flow from operations, is expected to be substantially sufficient to satisfy the Company’s final capital expenditure requirements, other obligations and operating expenses in the months prior to achieving a free cash flow positive enterprise (3) mining activities commenced at the Nautilus Cryptomine Facility and the Company deems that it has funded all known and expected capital commitments at that facility, (4) the Company received substantially all contracted miners from the miner suppliers and has no remaining outstanding financial commitments under the miner purchase agreements, (5) the received miners are sufficient to fully utilize mining capacity both in service and under construction at the Lake Mariner Facility and the Nautilus Cryptomine Facility and (6) the remaining construction activities at the Lake Mariner Facility and the Nautilus Cryptomine Facility are currently ongoing and expected to be completed in the second quarter of 2023. Additionally, if a business need requires its use, the Company has an active At Market Issuance Sales Agreement for sale of shares of Common Stock having an aggregate offering price of up to $200.0 million (the “ATM Offering”). The issuance of Common Stock under this agreement would be made pursuant to the Company’s effective registration statement on Form S-3 (Registration statement No. 333-262226). The Company has determined that it is probable that these actions
43
and conditions will allow the Company to generate positive cash flows from operations and be able to realize its assets and discharge its liabilities and commitments in the normal course of business and, therefore, there is not substantial doubt about the Company’s ability to continue as a going concern through at least the next twelve months. The consolidated financial statements do not include any adjustments that might result from TeraWulf’s possible inability to continue as a going concern.
Critical Accounting Policies and Estimates
The above discussion and analysis of the Company’s financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the Company’s consolidated financial statements requires the application of accounting policies and the use of estimates. The accounting policies most important to the preparation of the consolidated financial statements and estimates that require management’s most difficult, subjective or complex judgments are described below.
See Note 2 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q and Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 for a summary of the Company’s significant accounting policies.
Variable Interest Entities
Variable interest entities (“VIE”) are legal entities in which equity investors do not have (i) sufficient equity at risk for the legal entity to finance its activities without additional subordinated financial support, or (ii) as a group, the power, through voting or similar rights, to direct the activities of the legal entity that most significantly impact the entity’s economic performance, or (iii) the obligation to absorb the expected losses of the legal entity or the right to receive expected residual returns of the legal entity. The Company would consolidate any VIE in which it has a controlling financial interest through being deemed to be the primary beneficiary of the VIE. The primary beneficiary of a VIE has both of the following characteristics: (1) the power to direct the activities of the VIE that most significantly impact its economic performance; and (2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could be significant to the VIE. If both characteristics are met, the Company considers itself to be the primary beneficiary and therefore will consolidate that VIE into its consolidated financial statements.
The Company determines whether it is the primary beneficiary of a VIE upon initial involvement with a VIE and reassesses whether it is the primary beneficiary of a VIE on an ongoing basis. The determination of whether an entity is a VIE and whether the Company is the primary beneficiary of a VIE is based upon facts and circumstances for the VIE and requires significant judgments such as whether the entity is a VIE, whether the Company’s interest in a VIE is a variable interest, the determination of the activities that most significantly impact the economic performance of the entity, whether the Company controls those activities, and whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE.
In 2021, the Company entered into a joint venture, Nautilus Cryptomine LLC (“Nautilus”), with an unrelated co-venturer to develop, construct and operate a bitcoin mining facility in Pennsylvania. Due to the initial nature of the joint venture and the continued commitment for additional financing, the Company determined Nautilus is a VIE. While the Company has the ability to exercise significant influence over Nautilus, the Company has determined that it does not have the power to direct the activities that most significantly impact the economic performance of Nautilus. Initially, the power to direct the activities of Nautilus that most significantly impact Nautilus’ economic performance were shared equally by both parties within the joint venture due to the requirement for both equity holders to approve many of the key operating decisions and when not equally shared, were predominantly under the control of the co-venturer, including through the co-venturer’s majority representation on the board of managers. As such, the Company has determined that it is not the primary beneficiary of Nautilus and, therefore, has accounted for this entity under the equity method of accounting. Risks associated with the Company’s involvement with Nautilus include a commitment to potentially fund additional equity investments. During the three months ended March 31, 2023, the Company reduced its ownership interest in Nautilus to 25.0%.
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Mining Pool
The Company has entered into an arrangement with a cryptocurrency mining pool (the Foundry USA Pool) to provide computing power to the mining pool in exchange for consideration. The arrangement is terminable at any time without substantial penalty by either party and the contract term is deemed to be 24 hours. The Company’s enforceable right to compensation only begins when and continues while the Company provides computing power to its customer, the mining pool operator. The mining pool applies the Full Pay Per Share (“FPPS”) model. Under the FPPS model, in exchange for providing computing power to the pool, the Company is entitled to pay-per-share base amount and transaction fee reward compensation, calculated on a daily basis, at an amount that approximates the total bitcoin that could have been mined and transaction fees that could have been awarded using the Company’s computing power, based upon the then current blockchain difficulty. Under this model, the Company is entitled to compensation regardless of whether the pool operator successfully records a block to the bitcoin blockchain.
Providing computing power to a mining pool for cryptocurrency transaction verification services is an output of the Company’s ordinary activities. The provision of such computing power is the sole performance obligation. The transaction consideration the Company receives, if any, is non-cash consideration and is all variable. Because cryptocurrency is considered non-cash consideration, fair value of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency in the Company’s principal market at the time of contract inception, which is deemed daily. Revenue is recognized when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. After every 24-hour contract term, the mining pool transfers the cryptocurrency consideration to our designated cryptocurrency wallet.
There is no significant financing component in these transactions. There may be, however, consideration payable to the customer in the form of a pool operator fee; this fee, if any, is deducted from the proceeds the Company receives and is recorded as contra-revenue, as it does not represent a payment for a distinct good or service.
Data Center Hosting
The Company’s current hosting contracts are service contracts with a single performance obligation. The service the Company provides primarily includes hosting the customers’ miners in a physically secure data center with electrical power, internet connectivity, ambient air cooling and available maintenance resources. Hosting revenue is recognized over time as the customer simultaneously receives and consumes the benefits of the Company’s performance. The Company recognizes hosting revenue to the extent that a significant reversal of such revenue will not occur. Data center hosting customers are invoiced and payments are due on a monthly basis. While the majority of consideration is paid in cash, certain consideration is payable in cryptocurrency. Because cryptocurrency is considered non-cash consideration, fair value of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency in the Company’s principal market at the time of contract inception. The Company has one data center hosting contract with a customer, which expires in December 2023, for which the quoted price of bitcoin in the Company’s principal market at the time of contract inception was approximately $38,000. The Company recorded miner hosting revenue of $2.3 million and $0 during the three months ended March 31, 2023 and 2022, respectively.
Cryptocurrencies
Cryptocurrencies, including bitcoin, are included in current assets in the consolidated balance sheets due to the Company’s ability to sell it in a highly liquid marketplace and its intent to liquidate its cryptocurrencies to support operations when needed. Cryptocurrencies earned by the Company through the provision of computing power to a mining pool and hosting activities are accounted for in connection with the Company’s revenue recognition policy disclosed above.
Cryptocurrencies are accounted for as intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed for impairment on a continuous basis through the entirety of its holding period. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the cryptocurrency at the time its fair value is being measured, which is based on the intraday low quoted price of the cryptocurrency reported in the Company’s principal market. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.
Sales of cryptocurrencies by the Company and cryptocurrencies awarded to the Company, including as compensation for data center hosting services, are included within cash flows from operating activities on the consolidated statements of cash flows. The Company accounts for its gains or losses in accordance with the first in first out (“FIFO”) method of accounting.
45
Issuance of Debt with Common Stock or Warrants; Debt Modification
On December 1, 2021, TeraCub entered into a the LGSA, which consists of a $123.5 million term loan facility. In connection with the LGSA, the Company issued to the holders of the Term Loan 839,398 shares of Common Stock, which is a quantity of Common Stock representing 1.5% of the outstanding shares of the publicly registered shares of TeraWulf subsequent to the Closing. The allocation of proceeds between the debt instrument and any other components included in the debt issuance, including Common Stock, is generally based on the relative fair value allocation method. In applying the relative fair value allocation method, the determination of the fair value of the Common Stock issued and the fair value of the Term Loan independent of the Common Stock issued requires significant judgment. As a measure of sensitivity, a 10% change in the estimated fair value of the Term Loan component would result in a $1.9 million change in the fair value allocated to each of the Term Loan and equity components.
In July 2022, the Company entered into the First Amendment to the LGSA, which included an additional borrowing of $15.0 million and the issuance of warrants to purchase 3,472,640 shares of Common Stock at $0.01 per share. The accounting for debt modifications is complex and requires significant judgment. Potential accounting outcomes include troubled debt restructuring accounting, extinguishment accounting or modification accounting, each with different implications for the consolidated financial statements. The Company has determined that modification accounting is applicable. Additionally, debt modification accounting requires the determination of the fair value of the warrants issued, which requires significant judgment. As a measure of sensitivity, a 10% change in the estimated fair value of the warrants would result in a $0.3 million change in the recorded value of the borrowing under the First Amendment.
In October 2022, the Company entered into the Third Amendment to the LGSA, which included an additional borrowing of $7.5 million and the issuance of warrants to purchase 2,667,678 shares of Common Stock at $0.01 per share. The accounting for debt modifications is complex and requires significant judgment. Potential accounting outcomes include troubled debt restructuring accounting, extinguishment accounting or modification accounting, each with different implications for the consolidated financial statements. The Company has determined that modification accounting is applicable. Additionally, debt modification accounting requires the determination of the fair value of the warrants issued, which requires significant judgment. As a measure of sensitivity, a 10% change in the estimated fair value of the warrants would result in a $0.2 million change in the recorded value of the borrowing under the Third Amendment.
In March 2023, the Company entered into the Fifth Amendment to the LGSA, which included the issuance of warrants to purchase 27,436,126 shares of Common Stock at $0.01 per share and 13,718,064 shares of Common Stock at $1.00 per share. The accounting for debt modifications is complex and requires significant judgment. Potential accounting outcomes include troubled debt restructuring accounting, extinguishment accounting or modification accounting, each with different implications for the consolidated financial statements. The Company has determined that modification accounting is applicable. Additionally, debt modification accounting requires the determination of the fair value of the warrants issued, which requires significant judgment. As a measure of sensitivity, a 10% change in the estimated fair value of the warrants would result in a $1.6 million change in the recorded value of the borrowing under the Third Amendment.
Convertible Instruments
The Company accounts for its issuance of convertible debt and convertible equity instruments in accordance with applicable U.S. GAAP. In connection with that accounting, the Company assesses the various terms and features of the agreement in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 480 “Distinguishing Liabilities from Equity” (“ASC 480”) and ASC 815 “Derivatives and Hedging Activities” (“ASC 815”). ASC 480 requires liability accounting for certain financial instruments, including shares that embody an unconditional obligation to transfer a variable number of shares, provided that the monetary value of the obligation is based solely or predominantly on one of the following three characteristics: (1) a fixed monetary amount known at inception, (2) variations in something other than the fair value of the issuer’s equity shares or (3) variations in the fair value of the issuer’s equity shares, but the monetary value to the counterparty moves in the opposite direction as the value of the issuer’s shares. In accordance with ASC 815, the Company assesses the various terms and features of the agreement to determine whether or not they contain embedded derivative instruments that are required under ASC 815 to be accounted for separately from the host contract and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results.
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Income Taxes
The Company accounts for income taxes pursuant to the provision of Accounting Standards Codification (“ASC”) 740-10, “Accounting for Income Taxes” which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred tax asset will not be realized. The Company follows the provision of the ASC 740-10 related to Accounting for Uncertain Income Tax Positions. When tax returns are filed, it is more likely than not that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely that not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with the tax positions taken that exceeds the amount measured as described above should be reflected as a liability for uncertain tax benefits in the Company’s balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The most critical estimate for income taxes is the determination of whether to record a valuation allowance for any net deferred tax asset, including net loss carryforwards, whereby management must estimate whether it is more likely than not that the deferred tax asset would be realized.
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ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk |
As a smaller reporting company, we are not required to provide this information.
ITEM 4. | Controls and Procedures |
Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of such period, are effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act are:
| ● | Recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and |
| ● | Accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. |
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the three months ended March 31, 2023 that have materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. | Legal Proceedings |
From time to time, TeraWulf may be involved in various legal and administrative proceedings, lawsuits and claims incidental to the conduct of its business. Some of these proceedings, lawsuits or claims may be material and involve highly complex issues that are subject to substantial uncertainties and could result in damages, fines, penalties, non-monetary sanctions or relief. TeraWulf recognizes provisions for claims or pending litigation when it determines that an unfavorable outcome is probable, and the amount of loss can be reasonably estimated. Due to the inherent uncertain nature of litigation, the ultimate outcome or actual cost of settlement may materially vary from estimates. TeraWulf was not subject to any material pending legal and administrative proceedings, lawsuits or claims during the period covered by this Quarterly Report. TeraWulf’s business and operations are also subject to extensive regulation, which may result in regulatory proceedings against TeraWulf.
ITEM 1A. | Risk Factors |
Our business faces many risks. Before deciding whether to invest in our Common Stock, in addition to the other information set forth in this quarterly report on Form 10-Q, you should carefully consider the risk factors discussed in our Annual Report on Form 10-K. If any of the risks or uncertainties described therein actually occurs, our business, financial condition, results of operations or cash flow could be materially and adversely affected. This could cause the trading price of our Common Stock to decline, resulting in a loss of all or part of your investment. The risks and uncertainties we have described are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. There have been no material changes to the risk factors set forth in our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q.
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
ITEM 3. | Defaults Upon Senior Securities. |
None.
ITEM 4. | Mine Safety Disclosures. |
None.
ITEM 5. Other Information.
None.
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PART IV
ITEM 6. | Exhibits, Financial Statement Schedules |
Exhibit Number |
| Description |
|---|---|---|
| | |
| | |
(3.1) | | |
| | |
(3.2) | | |
| | |
(3.3) | | |
| | |
(3.4) | | |
| | |
(4.1) | | |
| | |
(4.2) | | |
| | |
(10.1)† | | |
| | |
(10.2) | | |
| | |
(10.3)† | | |
| | |
(10.4)† | | |
| | |
(10.5)† | | |
| | |
(10.6)† | | |
| | |
**31.1 | | |
| | |
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Exhibit Number |
| Description |
|---|---|---|
| | |
**31.2 | | |
| | |
***32.1 | | |
| | |
***32.2 | | |
| | |
**99.1 | | Financial Statements for the year ended December 31, 2022 of Nautilus Cryptomine LLC |
| | |
**101 | | Financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in Inline Extensible Business Reporting Language (iXBRL); (i) Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022, (ii) Consolidated Statements of Operations for the Three Months ended March 31, 2023 and 2022, (iii) Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2023 and 2022, (iv) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022, and (v) Notes to Consolidated Financial Statements. |
| | |
**104 | | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101). |
( ) | Exhibits previously filed in the Company’s SEC filings as specifically noted. |
† | Certain portions of this exhibit have been redacted pursuant to Item 601(b)(2)(ii) and Item 601(b)(10)(iv) of Regulation S-K, as applicable. The Company agrees to furnish supplementally an unredacted copy of the exhibit to the Commission upon its request. |
** | Filed herewith. |
*** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| TERAWULF INC. | |
| | |
May 15, 2023 | By: | /s/ Paul B. Prager |
(Date) | | Paul B. Prager (Principal Executive Officer) |
| By: | /s/ Patrick A. Fleury |
| | Patrick A. Fleury (Principal Financial Officer) |
| | |
| By: | /s/ Kenneth J. Deane |
| | Kenneth J. Deane (Principal Accounting Officer) |
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Exhibit 31.1
TERAWULF INC.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Paul B. Prager, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of TeraWulf Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
c. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
May 15, 2023 | /s/ Paul B. Prager |
| Paul B. Prager |
| Chief Executive Officer |
| TeraWulf Inc. |
Exhibit 31.2
TERAWULF INC.
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Patrick A. Fleury, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of TeraWulf Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
c. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
May 15, 2023 | /s/ Patrick A. Fleury |
| Patrick A. Fleury |
| Chief Financial Officer |
| TeraWulf Inc. |
Exhibit 32.1
TERWULF INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of TeraWulf Inc. (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Paul B. Prager, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
· | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
· | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
May 15, 2023 | /s/ Paul B. Prager |
| Paul B. Prager |
| Chief Executive Officer |
| TeraWulf Inc. |
The foregoing certification is being furnished as an exhibit to the Report pursuant to Item 601(b)(32) of Regulation S-K and Section 1350 of Title 18 of the United States Code and, accordingly, is not being filed with the U.S. Securities and Exchange Commission as part of the Report and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Report, irrespective of any general incorporation language contained in such filing).
Exhibit 32.2
TERAWULF INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of TeraWulf Inc. (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Patrick A. Fleury, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
· | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
· | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
May 15, 2023 | /s/ Patrick A. Fleury |
| Patrick A. Fleury |
| Chief Financial Officer |
| TeraWulf Inc. |
The foregoing certification is being furnished as an exhibit to the Report pursuant to Item 601(b)(32) of Regulation S-K and Section 1350 of Title 18 of the United States Code and, accordingly, is not being filed with the U.S. Securities and Exchange Commission as part of the Report and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Report, irrespective of any general incorporation language contained in such filing).
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| NAUTILUS CRYPTOMINE LLC TABLE OF CONTENTS Page INDEPENDENT AUDITORS' REPORT ................................................................................................................................................................................. 1 FINANCIAL STATEMENTS Statement of Operations........................................................................................................................................................................................................... 3 Balance Sheet............................................................................................................................................................................................................................ 4 Statement of Cash Flows ......................................................................................................................................................................................................... 5 Statement of Members' Equity ................................................................................................................................................................................................ 6 NOTES TO THE FINANCIAL STATEMENTS 1. Formation, Organization and Operations...................................................................................................................................................................... 7 2. Basis of Presentation and Summary of Significant Accounting Policies.................................................................................................................. 8 3. Property, Plant and Equipment....................................................................................................................................................................................... 9 4. Intangible Assets............................................................................................................................................................................................................... 10 5. Commitments and Contingencies .................................................................................................................................................................................. 10 6. Members' Equity ............................................................................................................................................................................................................... 10 7. Supplemental Cash Flow Information............................................................................................................................................................................ 10 8. Related Party and Affiliate Transactions ....................................................................................................................................................................... 11 9. Subsequent Events .......................................................................................................................................................................................................... 12 GLOSSARY OF TERMS AND ABBREVIATIONS................................................................................................................................................................ 13 |
| Marcum LLP n 777 S. Figueroa Street n Suite 2900 n Los Angeles, California 90017 n Phone 310.432.7400 n www.marcumllp.com INDEPENDENT AUDITORS’ REPORT To the Board of Managers and Members of Nautilus Cryptomine LLC Opinion We have audited the financial statements of Nautilus Cryptomine LLC, which comprise the balance sheet as of December 31, 2022, and the related statements of operations, of comprehensive income, changes in members’ equity, and cash flows for the year then ended, and the related notes to the financial statements. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of Nautilus Cryptomine LLC as of December 31, 2022, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Basis for Opinion We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of Nautilus Cryptomine LLC and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Responsibilities of Management for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about Nautilus Cryptomine LLC’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued. 1 |
| Auditors’ Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements. In performing an audit in accordance with GAAS, we: Exercise professional judgment and maintain professional skepticism throughout the audit. Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Nautilus Cryptomine LLC’s internal control. Accordingly, no such opinion is expressed. Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about Nautilus Cryptomine LLC’s ability to continue as a going concern for a reasonable period of time. We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the audit. Los Angeles, CA April 27, 2023 2 |
| NAUTILUS CRYPTOMINE LLC STATEMENT OF OPERATIONS (Thousands of Dollars) Four Months Ended Eight Months Ended December 31, 2022 August 31, 2022 Revenues $ 19 $ — Expenses Development (976) (1,880) Selling, general and administrative (4,047) (3,845) Depreciation and amortization (42) (29) Impairment of cryptocurrencies (5) — Gain (loss) on sale of cryptocurrencies 1 — Net Income (Loss) $ (5,050) $ (5,754) Successor Predecessor The accompanying Notes to the Financial Statements are an integral part of the financial statements. 3 |
| NAUTILUS CRYPTOMINE LLC BALANCE SHEET (Thousands of Dollars) December 31, 2022 Assets Cash $ 19,074 Restricted cash 5,000 Deferred lease with affiliate 3,603 Digital assets, Bitcoin 4 Prepaid expenses 1,305 Total current assets 28,986 Intangible asset - submetering agreement 61,000 Property and equipment, net 93,552 Total Assets $ 183,538 Liabilities and Equity Accounts payable $ 4,761 Accrued expenses 8,103 Total Liabilities 12,864 Members' Equity 170,674 Total Liabilities and Equity $ 183,538 The accompanying Notes to the Financial Statements are an integral part of the financial statements. 4 |
| NAUTILUS CRYPTOMINE LLC STATEMENT OF CASH FLOWS (Thousands of Dollars) Successor Predecessor Four Months Ended Eight Months Ended December 31, 2022 August 31, 2022 Operating Activities Net income (loss) $ (5,050) $ (5,754) Reconciliation adjustments: Depreciation and amortization 42 29 Bitcoin mining revenue (19) — Impairments of cryptocurrencies 5 — Other (1) — Change in assets and liabilities: Deferred lease asset with affiliate (1,822) (1,781) Digital assets, Bitcoin and prepaid expenses 233 183 Accounts payable and accrued expenses 5,095 1,184 Other liabilities 2 (1) Net cash provided by (used in) operating activities (1,515) (6,140) Investing Activities Expenditures for property, plant and equipment (44,786) (75,542) Net cash provided by (used in) investing activities (44,786) (75,542) Financing Activities Contributions from Members 56,764 91,293 Net cash provided by (used in) financing activities 56,764 91,293 Net Increase (Decrease) in Cash and Restricted Cash 10,463 9,611 Cash and restricted cash at beginning of period 13,611 4,000 Cash and restricted cash at end of period $ 24,074 $ 13,611 The accompanying Notes to the Financial Statements are an integral part of the financial statements. 5 |
| NAUTILUS CRYPTOMINE LLC STATEMENT OF MEMBERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 2022 (Thousands of Dollars) TeraWulf (Thales) LLC Cumulus Coin LLC Total Members' Equity Opening Balance, December 31, 2021 - Predecessor $ 104,223 $ 104,223 $ 208,446 Net income (loss) (2,877) (2,877) (5,754) Cash contributions from Members 36,234 55,059 91,293 Effect of Cumulus Coin LLC acquisition (73,580) (85,183) (158,763) August 31, 2022 - Predecessor $ 64,000 $ 71,222 $ 135,222 Net income (loss) (1,402) (3,648) (5,050) Non-cash distributions to Members (33,499) (31,231) (64,730) Cash contributions from Members 7,993 48,771 56,764 Non-cash contributions from Members 16,905 34,254 51,159 Effect of Cumulus Digital Holdings consolidation by Talen Energy Supply 105 (2,796) (2,691) December 31, 2022 - Successor $ 54,102 $ 116,572 $ 170,674 The accompanying Notes to the Financial Statements are an integral part of the financial statements. 6 |
| NAUTILUS CRYPOTOMINE LLC NOTES TO THE FINANCIAL STATEMENTS Capitalized terms and abbreviations appearing in the Notes to the Financial Statements are defined in the glossary. Dollars are in thousands, unless otherwise noted. The terms "Nautilus," "the Company," "we," "us" and "our" refer to Nautilus Cryptomine LLC, unless the context clearly indicates otherwise. 1. Formation, Organization and Operations TeraWulf (Thales) LLC (a) Cumulus Coin LLC (a) Nautilus Cryptomine LLC (a) At December 31, 2022, TeraWulf (Thales) LLC holds a 25% ownership interest and Cumulus Coin holds a 75% ownership interest. Nautilus was formed in 2021 as a joint venture between TeraWulf and Cumulus Coin to develop, construct, own and operate a cryptomining facility in Berwick, Pennsylvania. Until August 2022, TeraWulf and Cumulus Coin each owned 50% of the equity interests in Nautilus and each party was responsible for funding its pro rata share of obligations under the Nautilus LLC Agreement. In August 2022, Cumulus Coin and TeraWulf executed an amendment to the Nautilus LLC Agreement, pursuant to which Cumulus Coin agreed, among other things, to provide increased funding to Nautilus in exchange for increasing Cumulus Coin’s ownership percentage. The agreement also included increased governance rights for Cumulus Coin, as well as provisions allowing each Member to cover capital contribution shortfalls by the other in exchange for increased ownership. Because the agreement resulted in Cumulus Coin acquiring majority ownership and control of Nautilus, a change of control occurred between our ownership group, which was accounted for as a business combination. As a result of the change of control, our assets and liabilities were re-measured at fair value through Push-Down Accounting. See Note 3 for additional information on fair value adjustments. At December 31, 2022, TeraWulf (Thales) LLC holds a 25% ownership interest and Cumulus Coin holds a 75% ownership interest. Phase I of the project is for the construction of an up to 200 MW capacity digital currency mining facility and Phase II, if executed, could expand the project to a 300 MW capacity facility. Nautilus commenced cryptocurrency mining operations in February 2023. As of December 31, 2022, Nautilus had a non-material amount of operating revenue as a result of initial testing while it moves to beginning commercial operation in 2023. In 2022, the cryptomining facility was not in operation while Nautilus pursued development, procurement, and equipment testing activities. In May 2022, Talen Energy Supply, which as of December 31, 2022 indirectly owns a controlling interest in Cumulus Coin, filed a voluntary petition under chapter 11 of the U.S. Bankruptcy Code in U.S. Bankruptcy Court for the Southern District of Texas. The bankruptcy filing included most of Talen Energy Supply’s direct and indirect subsidiaries, but did not include Cumulus Coin or its affiliates: Cumulus Coin Holdings (the direct parent of Cumulus Coin); Cumulus Digital (the direct parent of Cumulus Coin Holdings), Cumulus Digital Holdings (the direct parent of Cumulus Digital); or Cumulus Digital’s other subsidiaries Cumulus Data Holdings and Cumulus Data. A plan of reorganization for the Talen debtors was approved by the bankruptcy court in December 2022, and the Talen debtors are expected to emerge from bankruptcy in the second quarter of 2023. Significant Business Risks Nautilus is subject to business risks that could cause our future results to differ from historical results and could adversely affect our business, prospects, or financial condition include but are not limited to: • Delays in, or the unavailability of, required funding from our joint venture partners, and (or) our inability to obtain agreement on management decisions for our business and projects, which could result in interruption and (or) suspension of our business operations; • The impact on our business due to the increased oversight of the cryptocurrency industry from federal and state regulatory agencies; • Our ability to obtain cryptocurrency miners and other necessary hardware to support any expansion of our cryptocurrency mining operations and (or) repair or replace existing miners, due to the limited number of such equipment suppliers and intermittent global supply chain constraints (including the recent shortage of semiconductors); • Malfunction and (or) technological obsolescence of our existing cryptocurrency miners and other hardware; • The impact of current and future trade restrictions including tariffs, quotas, trade sanctions, embargoes, safeguards and customs restrictions on cryptocurrency miners or hardware necessary for our operations that are manufactured overseas; • The effects of Bitcoin price variability, which is subject to risk and has historically been subject to wide swings and significant volatility; 7 |
| • Market conditions of, and overall sentiment towards, cryptocurrency assets, including the negative impacts caused by the extreme price volatility and disruption caused by the recent bankruptcies within the industry; • The growth in total network hash rate and the increase in the associated Bitcoin mining difficulty level, as well as the block reward “halving event” which occurs after a certain number of Bitcoins are mined, which affect the amount of block rewards received and revenue generation; • The credit risk that may arise from operating in the cryptocurrency market place, including but not limited to, with our brokers, custodians, banks, the general marketplace, and connected trading venues and exchanges; • Changes in state, federal and other laws and regulations, as well as interpretations thereof, applicable to our current and future operations and power supply, including: (i) regulatory changes or actions that may alter the nature of an investment in us or restrict or prohibit the use of cryptocurrencies altogether or otherwise in a manner that adversely affects our business, prospects or operations and power supply; and (ii) future regulation over the environmental impact of both cryptocurrency mining and the manufacture of new miners, which could restrict or prohibit our mining activity altogether or otherwise affect the availability of new miners; • The limited precedent for financial accounting of digital assets, and the impact of any changes in future accounting and (or) tax requirements for transactions involving digital assets, which may require that we change how we account for our digital assets; • Operational risks associated with potential disruptions or failures due to: (i) the effects of extreme weather; (ii) potential power outages, other critical systems failures, and internet; and (iii) acts of war, sabotage and other events outside of our control; • Increasing scrutiny from investors, lenders, customers, and government regulators, related to the actual or perceived environmental impact of Bitcoin mining, including environmental concerns raised by private individuals and governmental actors related to the energy resources consumed in the Bitcoin mining process which may result in a significant reduction or complete halting of any Bitcoin mining activities; • The highly competitive nature of the industry in which we operate and competition against companies with greater financial and other resources, including companies that operate in countries with more flexible regulatory frameworks; • Our ability to innovate and keep pace with rapid technological changes in the cryptocurrency mining industry; and • The impact of cybersecurity breaches or similar incidents which could result in, a loss of our digital assets, or damage to our reputation. 2. Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation The financial statements have been prepared in accordance with GAAP. In the opinion of Nautilus, the accompanying Financial Statements include recurring adjustments that occur in the normal course of business and considered necessary for a fair statement of such results. Periods presented prior to Cumulus Coin's acquisition of a controlling interest in Nautilus in August 2022, which was accounted for as a business combination, as described in Note 1, January 1, 2022 through August 31, 2022 are considered and labeled "predecessor" while post business combination periods, September 1, 2022 through December 31, 2022 are considered and labeled "successor." Summary of Significant Accounting Policies Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent 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. Fair Value Method. Nautilus is not subject to any material fair value determinations as of December 31, 2022. The carrying value of certain assets and liabilities on the Balance Sheet, including “Accounts payable and other accrued liabilities” approximate fair value. See Note 3 for information on a nonrecurring fair value recognition that occurred in 2022. Concentrations of Credit Risk. Nautilus is subject to concentrations of credit risk primarily within its cash and cash equivalents. Cash and restricted and cash equivalents are generally held in accounts where the amounts deposited exceed the maximum deposit insurance provided by the Federal Deposit Insurance Corporation. Cash and restricted cash and cash equivalents are primarily deposited in accounts with major financial institutions with investment grade credit ratings. In certain instances, funds are invested in highly liquid U.S. Treasury securities or other obligations with original maturities of less than 90 days that are issued by or guaranteed by the U.S. Government. Income Taxes. Nautilus is a partnership for tax purposes. Accordingly, any effect of income taxes and uncertainty in income taxes is recognized by the Members of Nautilus. Restricted Cash. Bank deposits that are restricted by agreement are presented as "Restricted cash" on the Balance Sheet. See Note 7 for additional information. 8 |
| Property, Plant and Equipment. Expenditures for intangible assets such as software are capitalized at cost. Intangible assets acquired in a business combination are recognized at fair value. In each case, such amounts are presented as "Property, plant and equipment" on the Balance Sheet. Reductions in the carrying value of intangible assets with finite useful lives are accumulated over the estimated useful life of each intangible asset using an amortization pattern in which the economic benefits of each intangible asset is utilized. Such periodic reduction is presented as a charge to “Depreciation and amortization” on the Statement of Operations. See Note 3 for additional information on property, plant and equipment. Intangible Assets. Expenditures for intangible assets for electricity submetering arrangement are capitalized at cost or, if required, at fair value. Such amounts are presented as "Intangible assets" on the Balance Sheet. Reductions in the carrying value of intangible assets with finite useful lives are accumulated over the estimated useful life of each intangible asset using an amortization pattern in which the economic benefits of each intangible asset is utilized. Such periodic reduction is presented as a charge to "Depreciation and amortization" on the Statement of Operations. See Note 4 for additional information on intangible assets. Impairments. Long-lived assets are assessed for impairment whenever changes in facts and circumstances indicate the carrying value of the asset group may not be recoverable. Indicators of impairment may include changes in the economic environment, negative financial trends, physical damage to assets or decisions of management regarding strategic initiatives. Individual assets are grouped for impairment purposes at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other assets and liabilities, where applicable. If there is an indication the carrying value of an asset group may not be recovered, management reviews the expected future cash flows of the asset group. If the sum of the undiscounted pre-tax cash flows is less than the carrying value of the asset group, the asset group is written down to its estimated fair value. Fair value may be determined by a variety of valuation methods including third-party appraisals, market prices of similar assets, and present value techniques. Impairment charges are presented in the Consolidated Statement of Operations in the period in which the impairment condition arises. If facts and circumstances indicate the carrying value of an asset under construction will have no future economic benefit, such amounts are presented as a charge in the period in which such projects are abandoned, canceled, or management otherwise determines the costs to be unrecoverable. There were no impairment charges recognized, other than those related to cryptocurrency as a result of initial testing that were non-material, for the year ended December 31, 2022. Leases. Right-of-use assets and lease liabilities represent our right to use an underlying asset for the lease term, while lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized on commencement of the lease based on the present value of lease payments over the lease term. The discount rate for a lease is the rate implicit in the lease unless that rate cannot be readily determined. In such a case, the discount rate utilized will be the Company's incremental secured borrowing rate over a similar time period and economic environment as the lease, based on information available at the lease commencement date. Nautilus has entered into a Ground Lease Agreement with Cumulus Data with an initial lease term of five years that commenced on June 15, 2022. In 2022, Nautilus began accruing certain costs related to this agreement on the Balance Sheet that are presented as "Deferred lease with affiliate" and "Accounts payable." See Note 8 for additional information. 3. Property, Plant and Equipment December 31, 2022 Cost Accumulated Provision Carrying Value Construction work in progress (a) $ 92,958 $ — $ 92,958 Capitalized software 369 (40) 329 Other 296 (31) 265 Property, plant and equipment, net $ 93,623 $ (71) $ 93,552 (a) Includes $62 million of mining equipment. In August 2022, in the predecessor period, as a result of amendments to the Nautilus LLC agreement, Cumulus Coin consolidated Nautilus, which resulted in the re-measurement of Nautilus's assets and liabilities at fair value. In September 2022, the preferred equity interests held by Talen Energy Supply and Talen Growth in Cumulus Data Holdings and Cumulus Coin Holdings were converted into common equity interests in Cumulus Digital Holdings. This equity conversion resulted in Cumulus Digital Holdings being consolidated by Talen Energy Supply As a result, in the September 2022 successor period, further fair value adjustments were recognized at Nautilus related to Talen Energy Supply's consolidation of Cumulus Digital Holdings. The non-cash fair value adjustments were: Intangible assets $ 31,730 Property, plant and equipment (a) (193,184) Net fair value adjustment increase (decrease) (b) $ (161,454) (a) Represents construction work-in-progress. (b) The total represents $158 million recognized in August 2022 and $3 million recognized in September 2022. 9 |
| The estimated fair value adjustments were primarily determined by a discounted cash flow technique. The technique utilized significant unobservable inputs including discount rates varying from 13.5% to 14.5%. The range of discount rates and other discounted cash flow assumptions that were utilized are believed to be consistent with those used by principal market participants. Such assumptions consider available evidence regarding the prospects of future cash flows for Nautilus, including, but not limited to estimated available future expected operating revenues and useful lives, capacity prices, energy prices, Bitcoin prices, operating costs and capital expenditures. The estimated useful lives of Other property, plant and equipment is four years while for capitalized software is five years. 4. Intangible Assets December 31, 2022 Cost Electricity submetering under ground lease $ 61,000 See Note 3 for information on fair value adjustments recognized to this intangible asset in 2022. The straight-line amortization of this intangible commenced with the start of operation in February 2023 and is expected to continue until June 2027. Estimated intangible asset amortization expense for each of the next five years is: 2023 2024 2025 2026 2027 Estimated amortization expense $ 12,317 $ 14,077 $ 14,077 $ 14,077 $ 6,452 5. Commitments and Contingencies Litigation As of December 31, 2022, Nautilus is not party to any legal proceedings, claims, and (or) litigation that would have a material adverse effect on its financial condition or results of operations. 6. Members' Equity Under the terms of the Nautilus LLC Agreement, the business and affairs of Nautilus are managed by a Board of Managers designated by the Members. Each Member is entitled to designated one manager for each 17% ownership percentage held by such Member, provided that TeraWulf shall be entitled to appoint one manager so long as its ownership percentage is 15% or greater. In conjunction with the amendment of the Nautilus LLC Agreement, revenues attributable to each Member will be based on hash rates from miners contributed by Cumulus Coin and TeraWulf. See Note 1 for additional information on the organizational structure and formation details of Nautilus and Members interests in Nautilus. 7. Supplemental Cash Flow Information Supplemental information for the Statements of Cash Flows for the periods in 2022 were: Successor Predecessor Four Months Ended Eight Months Ended December 31, 2022 August 31, 2022 Non-cash investing and financing activities Capital expenditure payables increase (decrease) $ (21,218) $ 21,897 Non-cash distributions to Members that reduced property, plant and equipment (a) (b) $ (65,584) $ — Non-cash contribution by Members that increased property, plant and equipment (c) (d) 45,851 — Non-cash contribution by Cumulus Member that increased prepaid expenses (e) 750 — Non-cash contribution by Members for settlement of certain costs under service agreements (f) 5,412 — (a) Includes credits of $32 million provided to each Member related to the termination of one of Nautilus's miner contracts. (b) Includes a $2 million distribution to TeraWulf Member for the value of a certain number of miners that was transferred to TeraWulf. (c) Relates to the contribution of miners by the members including certain incurred shipping costs in the fourth quarter 2022. (d) After the amendment of the Nautilus LLC Agreement in August 2022, members separately contribute miners to Nautilus. (e) Relates to the prepayment of annual fee under the Nautilus Corporate Services Agreement from an non-cash equity contribution. (f) Relates to the settlement of payables with the Members that were settled from non-cash equity contributions. In the first quarter 2023, the Members contributed miners with an estimated aggregate value of $52 million. As this value is an estimate, such amount is subject to revision. These contributions will be presented within the Statement of Members Equity as “Non-cash contributions from Members." 10 |
| Additionally, Nautilus distributed miners to TeraWulf Member that had an estimated aggregate value of $3 million. As this value is an estimate, such amount is subject to revision. These distributions will be presented within the Statement of Members Equity as “Non-cash distributions to members." See Note 8 for additional information on the number of miners contributed by each Member. See Note 3 for information on non-cash fair value adjustments recognized in 2022. 8. Related Party and Affiliate Transactions The Company is party to significant related party and affiliate transactions for its operations. Transactions executed under affiliated agreements and presented on the Statements of Operations for the periods in 2022 were: Successor Predecessor Four Months Ended Eight Months Ended Financial Statement Presentation Affiliate Agreement December 31, 2022 August 31, 2022 Support services - Beowulf Selling, general and administrative Beowulf E&D Facility Operations $ 3,208 $ 2,021 Support services - Cumulus Digital Selling, general and administrative Nautilus Corporate Services $ 837 1,801 Related party and affiliate balances presented on the Balance Sheet at December 31 were: Affiliate 2022 Assets Deferred lease with affiliate Cumulus Data $ 3,603 Prepaid expense Cumulus Digital 750 Liabilities Accounts payable Cumulus Data $ 3,603 Accrued expenses Talen Energy Supply 45 Ground Lease Nautilus has executed a Ground Lease Agreement for land and other facilities in Pennsylvania with Cumulus Data that commenced its five-year initial term on June 15, 2022. The lease includes extension options for terms of three years, six months, and three years, at the election of Nautilus. Under the Ground Lease Agreement, Nautilus pays base rent to Cumulus Data of approximately $132 thousand per month, plus additional rent which includes, among other things, reimbursement of costs incurred by Cumulus Data to construct the Nautilus substation and certain other shared infrastructure. The additional rent for substation costs is amortized using an interest rate of 8% per annum over a time period of 11 years. Additional rent is charged by Cumulus Data monthly on an estimated basis, subject to an annual true-up. In December 2022, the Ground Lease Agreement was amended to defer the payment of approximately $4 million of rent payable by Nautilus through December 31, 2022. The deferred rent is payable in four equal monthly installments commencing in March 2023. The amendment also added the six-month extension to the lease term in between the first and second three-year renewal terms as described above, during which no rent would be payable other than in respect of sub-metered electricity delivered to the facility. The $4 million in deferred rent is presented on the Balance Sheet as of December 31, 2022 in both "Deferred lease with affiliate" and "Accounts payable." After Nautilus elected to increase submetering by 50 MW in March 2023, the Ground Lease Agreement currently provides for submetering of 150 MW of electricity to Nautilus for the initial term of the lease. Nautilus will pay: (i) $20/MWh for the first 100 MW of such submetered electricity, which is funded based on consumption of the Members; and (ii) $44.05 for the next 50 MW, which is funded by Cumulus Coin. The Ground Lease Agreement allows Nautilus to elect to increase the amount of submetered electricity it may take up to 300 MW. Under the terms of the Ground Lease Agreement, the submetered electricity for usage above 150 MW or during an extended term would be a market-based fixed price during the remainder of the initial term or extended term, as applicable, at the time of the election. Facility Operations Agreements Nautilus executed the Beowulf FOA with Beowulf E&D in May 2021 pursuant to which Beowulf E&D agreed to provide, or cause to be provided, certain infrastructure, construction, operations and maintenance and administrative services necessary to build out and operate the Nautilus facility and support Nautilus’ ongoing business at the Nautilus facility. Nautilus agreed to pay Beowulf E&D an annual fee in the amount of $750 thousand, payable annually in advance. Nautilus also agreed to reimburse Beowulf E&D for all out-of-pocket fees, expenses and capital costs (with respect to such capital costs, solely to the extent approved in writing by Nautilus in advance) paid by Beowulf E&D or its affiliates attributable to activities relating to the services, including, among others, the portion of the salaries, wages and related employee benefits and costs (including taxes and contributions) and other compensation paid to Beowulf E&D employees directly allocable to the time spent by such Beowulf E&D employees, independent contractors and subcontractors providing the services, with reimbursement to be prepaid monthly by Nautilus and reconciled monthly. 11 |
| In August 2022, the Beowulf FOA was amended to allow Nautilus to terminate the FOA at its convenience in exchange for a termination fee of approximately $2 million. In December 2022, the Beowulf FOA was terminated and all amounts owed thereunder to Beowulf E&D were paid pursuant to the PNA described below. In connection with termination of the Beowulf FOA, Nautilus executed the Talen FOA with Talen Energy Supply. The Talen FOA is on substantially the same terms as the Beowulf FOA, except that Talen Energy Supply will not be entitled to the $750 thousand annual fee described above. Nautilus Corporate Services Agreement Nautilus is a party to the Nautilus CSA with Cumulus Digital pursuant to which Cumulus Digital will provide, or arrange for Nautilus, corporate and administrative services including day-to-day corporate-level management and support services such as accounting and financial reporting, development planning, real estate, information technology, financial planning and analysis, banking, treasury, regulatory, legal, supply chain and secretarial and administrative functions. Nautilus agreed to pay an annual fee in the amount of $750 thousand, payable annually in advance. Nautilus will also provide reimbursement for all out-of-pocket fees, expenses and capital costs (with respect to such capital costs, solely to the extent approved in writing by Nautilus in advance) attributable to activities relating to the services, including, among others, the portion of the salaries, wages and related employee benefits and costs (including taxes and contributions) and other compensation paid to employees directly allocable to the time spent by such employees, independent contractors and subcontractors providing the services, which reimbursement will be prepaid monthly by Nautilus. At December 31, 2022, Nautilus has $750 thousand in "Prepaid expenses" on the Balance Sheet for this annual fee. The term of the Nautilus CSA will continue until the earliest of: (i) its termination by mutual consent of both parties; (ii) the sale by Cumulus and its affiliates of their interests in Nautilus; (iii) the consummation of an initial public offering of Nautilus; or (iv) the termination of the agreement by either party in the event of a default by the other party. Payment Netting Agreement In December 2022, Nautilus, Cumulus Coin, Cumulus Digital, TeraWulf and Beowulf E&D entered into a PNA pursuant to which the parties agreed to offset and (or) assume various amounts owed: (i) by Nautilus to Cumulus Digital under the Nautilus CSA; (ii) by Nautilus to Beowulf E&D under the Beowulf FOA; (iii) by Cumulus Coin and TeraWulf to Nautilus under the Nautilus LLC agreement. Among other things, Cumulus Coin agreed to assume approximately $2 million of Nautilus’ payment obligation to Cumulus Digital under the Nautilus CSA and approximately $400 thousand of TeraWulf’s deferred rent obligations under the amendment to the Ground Lease Agreement discussed above. Pursuant to the PNA and after incorporating the agreed offsets and payment assumptions among the parties, Cumulus Coin made a cash payment of approximately $2 million to Beowulf E&D, and TeraWulf agreed to make a cash payment of approximately $2 million to Beowulf E&D. Miner Distributions and Contributions In March 2022, an exchange agreement was executed between Nautilus and TeraWulf whereby TeraWulf would withdraw 2,500 miners from Nautilus and replace them at a later date. Upon the execution of the amendment to the Nautilus LLC Agreement in August 2022, TeraWulf was not required to return or replace the miners. Accordingly, the transaction was presented as a distribution to TeraWulf's equity interest in Nautilus and a reduction to Nautilus "Property, plant and equipment" in the valuation adjustments related to Push-Down Accounting. In September 2022, Cumulus Coin and TeraWulf agreed TeraWulf could withdraw another 2,500 miners, which was presented as a distribution to TeraWulf's equity interest in Nautilus and a reduction to Nautilus "Property, plant and equipment" on the Balance Sheet. After the amendment of the Nautilus LLC Agreement in August 2022, each Member must separately contribute miners to the company. In the fourth quarter 2022, Cumulus Member contributed 8,104 miners and TeraWulf Member contributed 3,780 miners. The contributions are presented within the Statement of Members Equity as “Non-cash contributions from Members." In the first quarter 2023, Cumulus Member contributed 12,285 miners and TeraWulf Member contributed 9,546 miners. Additionally, Nautilus distributed 4,870 miners to TeraWulf Member. These contributions and distributions are expected to be presented within the Statement of Members Equity as “Non-cash contributions (distributions) from members." See Note 7 for information on the estimated aggregate value of these miners. 9. Subsequent Events Nautilus evaluated subsequent events through April 27, 2023, the date the financial statements are available to be issued; all significant subsequent events, if any, are included in their respective notes to the financial statements. 12 |
| GLOSSARY OF TERMS AND ABBREVIATIONS Legal Entities Beowulf E&D. Beowulf Electricity & Data Inc., a subsidiary of TeraWulf. Cumulus Coin. Cumulus Coin LLC, a direct subsidiary of Cumulus Coin Holdings. Cumulus Coin Holdings. Cumulus Coin Holdings LLC, a direct subsidiary of Cumulus Digital and the parent of Cumulus Coin. Cumulus Data. Cumulus Data LLC, formerly Susquehanna Data LLC, a direct subsidiary of Cumulus Data Holdings that is developing a data center campus in Luzerne County, PA and is the lessor under the Ground Lease Agreement. The company's name was changed in October 2021. Cumulus Data Holdings. Cumulus Data Holdings LLC, a direct subsidiary of Cumulus Digital, and the parent of Cumulus Data. Cumulus Digital. Cumulus Digital LLC, a direct subsidiary of Cumulus Digital Holdings and the parent of Cumulus Data Holdings and Cumulus Coin Holdings. Cumulus Digital Holdings. Cumulus Digital Holdings, LLC, a direct subsidiary of Talen Energy Supply that owns Cumulus Digital. As of December 31, 2022, Talen Energy Supply owns approximately 75% of the membership interests in Cumulus Digital Holdings, with the remainder held by affiliates of Orion and Riverstone Cumulus Member. Cumulus Coin. Members. Collectively, Cumulus Member and TeraWulf Member. Nautilus. Nautilus Cryptomine LLC, a joint venture owned by Cumulus Coin and by TeraWulf that is in the process of beginning a cryptomining project. Riverstone. Riverstone Holdings LLC. Talen Energy Supply. Talen Energy Supply, LLC. TeraWulf. TeraWulf (Thales) LLC, a TeraWulf Inc. subsidiary, an unaffiliated third party that owns an equity interest in Nautilus. TeraWulf Member. TeraWulf. Other Terms and Abbreviations Beowulf FOA. Facility Operations Agreement executed in May 2021 between Nautilus and Beowulf E&D that was terminated in December 2022. See Note 8 for additional information. Bitcoin. A virtual digital currency, with no central issuing authority, used in peer-to-peer online transactions. FASB. Financial Accounting Standards Board. GAAP. Generally Accepted Accounting Principles in the United States. Ground Lease Agreement. Agreement executed in May 2021 (as amended, amended and restated or otherwise modified from time to time), between Nautilus and Cumulus Data for certain premises located in Pennsylvania. The agreement also provides for sub-metering of electricity. See Note 8 for additional information. MW. Megawatt, one million watts of electric power. MWh. Megawatts of electric power per hour. Nautilus CSA. Corporate Services Agreement dated May 13, 2021 (as amended, amended and restated or otherwise modified from time to time) between Cumulus Digital, as assignee of Talen Energy Supply and Nautilus whereby Talen Energy Supply is to provide corporate and administrative services. See Note 8 for additional information. Nautilus LLC Agreement. The Limited Liability Company Agreement of Nautilus Cryptomine LLC, originally effective as of May 13, 2021 and as may be amended, amended and restated or otherwise modified from time to time.. Orion. Orion Energy Partners, whose affiliates are third-party lenders involved in a debt arrangement with Cumulus Coin. PNA. In December 2022, Nautilus, Cumulus Coin, Cumulus Digital, TeraWulf and Beowulf E&D entered into a PNA pursuant to which the parties agreed to offset and (or) assume various amounts owed: (i) by Nautilus to Cumulus Digital under the Nautilus CSA; (ii) by Nautilus to Beowulf E&D under the Beowulf FOA; (iii) by Cumulus Coin and TeraWulf to Nautilus under the Nautilus LLC agreement. SEC. Securities and Exchange Commission. Push-Down Accounting. Use of the acquirer's basis in the preparation of the acquiree’s separate financial statements. 13 |
| Talen FOA. Facility Operations Agreement executed in December 2022 between Talen Energy Supply and Nautilus to replace the Beowulf FOA. See Note 8 for additional information. 14 |
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