Terawulf Inc 10-Q for FY2022 Q1
Terawulf Inc. (WULF)
About this 10-Q
Terawulf Inc filed this 10-Q on May 16, 2022, covering the quarter ended March 31, 2022 (FY2022 Q1).
Headline figures
Quarter ended March 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $217K
- Net loss
- $18.18M
- Diluted EPS
- -$0.18
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
For the transition period from to
Commission file number
(Exact name of registrant as specified in its charter)
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incorporation or organization) | | Identification No.) |
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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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There were
TERAWULF INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
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Consolidated Financial Statements: | | |
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Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021 | | 4 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 28 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk | | 38 |
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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds. | | 38 |
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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 “Use of Proceeds.” 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, which could cause a decline in the demand for TeraWulf’s services; |
| ● | competition among the various providers of data mining services; |
| ● | economic or political conditions in the countries in which TeraWulf plans to do business, including civil uprisings, riots, terrorism, kidnappings, the taking of property without fair compensation and legislative changes; |
| ● | currency exchange rate fluctuations; |
| ● | employment workforce factors, including the loss of key employees; |
| ● | the ability to implement certain business objectives and the ability to timely and cost-effectively execute integrated projects; |
| ● | changes in governmental safety, health, environmental and other regulations, which could require significant expenditures; |
| ● | liability related to the use of TeraWulf’s services; |
| ● | the ability to successfully complete merger, acquisition or divestiture plans, regulatory or other limitations imposed as a result of a merger, acquisition or divestiture, and the success of the business following a merger, acquisition or divestiture; 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 registration statement on Form S-4, which is incorporated by reference into this Quarterly Report. |
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 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.
3
TERAWULF INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2022 AND DECEMBER 31, 2021
(In thousands, except number of shares, per share amounts and par value)
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| March 31, 2022 |
| December 31, 2021 | ||
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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Amounts due from related parties | | | — | | | |
Other current assets | |
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Current assets held for sale | |
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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 | | | | | | — |
Current liabilities held for sale | |
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Total current liabilities | |
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Operating lease liability, net of current portion | |
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Deferred tax liabilities, net | | | | | | |
Long-term debt | |
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TOTAL LIABILITIES | |
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Commitments and Contingencies (See Note 11) | |
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STOCKHOLDERS' EQUITY: | |
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Preferred stock, $ | |
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Common stock, $ | |
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Additional paid-in capital | |
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Accumulated deficit | |
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Total stockholders' equity | |
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | | | $ | |
See Notes to Consolidated Financial Statements.
4
TERAWULF INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND THE PERIOD FEBRUARY 8, 2021 (DATE OF INCEPTION) TO MARCH 31, 2021
(In thousands, except number of shares and loss per common share)
| | | Three Months Ended | | | Period February 8, 2021 (date of inception) to | |
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| | March 31, | | | March 31, |
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| | 2022 | | 2021 | | ||
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Revenue | | $ | | | $ | — | |
Cost of revenue |
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Gross profit |
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Cost of operations: |
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Operating expenses |
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Operating expenses - related party | | | | | | | |
Selling, general and administrative expenses |
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Selling, general and administrative expenses - related party | | | | | | | |
Depreciation | | | | | | — | |
Impairment of digital currency | | | | | | — | |
Total cost of operations |
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Operating loss |
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Interest expense |
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Loss before income tax and equity in net loss of investee |
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Income tax benefit |
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Equity in net loss of investee, net of tax |
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Loss from continuing operations |
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Loss from discontinued operations, net of tax |
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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: | |
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Basic and diluted | |
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See Notes to Consolidated Financial Statements.
5
TERAWULF INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND THE PERIOD FEBRUARY 8, 2021 (DATE OF INCEPTION) TO MARCH 31, 2021
(In thousands, except number of shares)
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| Preferred Stock | | Common Stock |
| Additional |
| Accumulated |
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| Amount | | Number |
| Amount |
| Paid-in Capital |
| Deficit |
| Total | |||||
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Balances as of December 31, 2021 |
| — | | $ | — | | | | $ | | | $ | | | $ | ( | | $ | |
Issuance of Series A Convertible Preferred Stock, net of issuance costs |
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Issuance of common stock, net of issuance costs |
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Preferred stock dividends | | — | | | — | | — | | | — | | | — | | | ( | | | ( |
Net loss |
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Balances as of March 31, 2022 |
| | | $ | | | | | $ | | | $ | | | $ | ( | | $ | |
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| Preferred Stock | | Common Stock |
| Additional |
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| Number |
| Amount | | Number |
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| Paid-in Capital |
| Deficit |
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Balances as of February 8, 2021 |
| | | $ | | | | | $ | | | $ | | | $ | | | $ | |
Issuance of common stock, net of issuance costs | | — | | | — | | | | | | | | | | | — | | | |
Net loss |
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Balances as of March 31, 2021 |
| — | | $ | — | | | | $ | | | $ | | | $ | ( | | $ | |
See Notes to Consolidated Financial Statements.
6
TERAWULF INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND THE PERIOD FEBRUARY 8, 2021 (DATE OF INCEPTION) TO MARCH 31, 2021
(In thousands)
| | | Three Months Ended | | | Period February 8, 2021 (date of inception) to | |
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| | March 31, | | | March 31, |
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| | 2022 | | 2021 | | ||
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 and accretion of debt discount |
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Depreciation | | | | | | — | |
Increase in digital currency from mining | | | ( | | | — | |
Impairment of digital currency | | | | | | — | |
Equity in net loss of investee, net of tax |
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Loss from operations of discontinued operations, net of tax |
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Changes in operating assets and liabilities: |
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Increase in prepaid expenses |
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Decrease in amounts due from related parties | | | | | | — | |
Increase in other current assets |
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Decrease in right-of-use asset |
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Increase in other assets |
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(Decrease) increase in accounts payable |
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Decrease in accrued construction liabilities |
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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 partner |
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Reimbursement of payments for deposits on plant and equipment made on behalf of a joint venture partner |
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Purchase of and deposits on plant and equipment |
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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 issuance of preferred stock, net of issuance costs paid of $ |
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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.
7
NOTE 1 – ORGANIZATION
Organization
On December 13, 2021 (the “Closing Date”), TeraWulf Inc. (formerly known as Telluride Holdco, Inc.), a Delaware corporation, completed the previously announced strategic business combination pursuant to the agreement and plan of merger, dated as of June 24, 2021 (as amended, supplemented or otherwise modified prior to the Closing Date, the “Merger Agreement”), by and among TeraWulf Inc., IKONICS Corporation, a Minnesota corporation (“IKONICS”), TeraCub Inc. (formerly known as TeraWulf Inc.), a Delaware corporation that was formed on February 8, 2021 (“TeraCub”) and certain holding companies and subsidiaries created to effect the merger. In connection with the consummation of the Mergers, Telluride Holdco, Inc. was renamed TeraWulf Inc., and TeraWulf Inc. was renamed TeraCub Inc. TeraWulf Inc. and its subsidiaries are referred to in these consolidated financial statements as “TeraWulf” or the “Company.”
TeraWulf’s planned principal operations consist of developing, constructing and operating bitcoin mining facilities in the United States that are fueled by clean, low cost and reliable power sources. TeraWulf has commenced mining at one bitcoin mining facility and expects to operate 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 to mine bitcoin and validate transactions on the bitcoin network. Substantially all of TeraWulf’s revenue will be derived from
TeraWulf’s
In May 2021, TeraWulf created
IKONICS’ traditional business has been 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 are primarily screen printing and abrasive etching. More recently, IKONICS has augmented its customer offerings with inkjet receptive films, ancillary chemicals and related equipment to provide a full line of products and services to its customers. TeraWulf has classified the IKONICS business as held for sale and discontinued operations in these consolidated financial statements (see Note 4).
8
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, 2022, the Company invested approximately $
COVID-19
The Company’s results of operations could be adversely affected by general conditions in the economy and in the global financial markets, including conditions that are outside of the Company’s control, such as the outbreak and global spread of the novel coronavirus disease (“COVID-19”). The COVID-19 pandemic that was declared on March 11, 2020 has caused significant economic dislocation in the United States and globally as governments across the world, including the United States, introduced measures aimed at preventing the spread of COVID-19. The spread of COVID-19 and the imposition of related public health measures have resulted in, and are expected to continue to result in, increased volatility and uncertainty in the cryptocurrency space. Any severe or prolonged economic downturn, as result of the COVID-19 pandemic or otherwise, could result in a variety of risks to the business and management cannot anticipate all the ways in which the current economic climate and financial market conditions could adversely impact its business.
9
The Company may experience disruptions to its business operations resulting from supply interruptions (including miner delivery interruptions), quarantines, self-isolations, or other movement and restrictions on the ability of its employees or its counterparties to perform their jobs and provide services. The Company may also experience delays in construction and obtaining necessary equipment in a timely fashion. If the Company is unable to effectively set up and service its miners, its ability to mine bitcoin will be adversely affected. The future impact of the COVID-19 pandemic is still highly uncertain and there is no assurance that the COVID-19 pandemic or any other pandemic, or other unfavorable global economic, business or political conditions, will not materially and adversely affect the Company’s business, prospects, financial condition, and operating results.
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.
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, 2022 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 Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
The unaudited interim consolidated financial statements include the accounts of the Company as described in Note 1. All significant intercompany accounts and transactions have been eliminated.
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 issued as a component of a debt offering, 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, 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):
10
| | | Three Months Ended | | | Period February 8, 2021 (date of inception) to | |
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| | March 31, | | | March 31, |
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| | 2022 | | 2021 | | ||
Supplemental disclosure of non-cash activities: | |
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Common stock issuance costs in accounts payable or other accrued liabilities | | $ | | | $ | | |
Preferred stock issuance costs in 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 and long-term debt | | $ | | | $ | — | |
Preferred stock dividends in other accrued liabilities | | $ | | | $ | — | |
Preferred stock proceeds receivable in other current assets | | $ | | | $ | — | |
Cash and Cash Equivalents
Highly liquid instruments with an original maturity of three months or less are classified as cash equivalents. The Company maintains cash and cash equivalent balances primarily at one financial institution that is insured by the Federal Deposit Insurance Corporation (“FDIC”). The Company’s accounts at this institution are insured, up to $
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, 2022 and December 31, 2021 is restricted as to use due to being held as a construction escrow by a third-party escrow agent.
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, 2022 |
| December 31, 2021 | ||
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. The Company currently operates in the Digital Currency Mining segment and through its ownership of IKONICS operates in the Imaging Technology 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
11
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 liabilities, and long-term lease operating liabilities in the consolidated balance sheets. Finance leases are included in property, plant and equipment, current portion of finance lease liabilities, and long-term finance lease liabilities in the consolidated balance sheets. The Company 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. Finance ROU lease assets are amortized within operating expenses or selling, general and administrative, 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, 2022 and December 31, 2021, the Company is not a counterparty to any finance leases.
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 issuance, 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.
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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. An impairment loss is recorded for goodwill when a reporting unit's goodwill carrying value exceeds its implied fair value. 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 shall not be depreciated or amortized while it is classified as held for sale.
Revenue Recognition
The Company recognizes revenue under the Financial Accounting Standards Board (“FASB”) ASC 606 “Revenue from Contracts with Customers.” 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 |
| ● | 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
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price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
Mining pools
The Company has entered into an arrangement with a cryptocurrency mining pool to provide computing power to the mining pool. The arrangement is terminable at any time by either party and our enforceable right to compensation only begins when the Company provides computing power to 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 compensation, calculated on a daily basis, at an amount that approximates the total bitcoin that could have been mined 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. Fair value of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency at the time of contract inception, which is deemed to be daily.
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 will be deducted from the proceeds the Company receives and will be recorded as contra-revenue, as it does not represent a payment for a distinct good or service.
Providing computing power in cryptocurrency transaction verification services is an output of the Company’s ordinary activities. The provision of providing such computing power is a performance obligation. The transaction consideration the Company receives is non-cash consideration and is all variable. Fair value of the cryptocurrency award received for cryptocurrency transaction verification services is determined using the quoted price of the related cryptocurrency at the time of receipt. There is no significant financing component in these transactions.
Cryptocurrencies
Cryptocurrencies, including bitcoin, are included in current assets in the consolidated balance sheets. Cryptocurrencies purchased will be recorded at cost and cryptocurrencies awarded to the Company through mining activities will be accounted for in connection with the Company’s revenue recognition policy disclosed above.
Cryptocurrencies will be 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 daily basis. 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. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, the Company is required to perform a quantitative impairment test. 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.
Purchases of cryptocurrencies, if any, made by the Company will be included within investing activities in the consolidated statements of cash flows, while cryptocurrencies awarded to the Company through its mining activities will be included within operating activities in the consolidated statements of cash flows. The sales of cryptocurrencies will be included within investing activities in the consolidated statements of cash flows and any realized gains or losses from such sales will be included in other income (expense) in the consolidated statements of operations. The Company will account for its gains or losses in accordance with the first in first out (“FIFO”) method of accounting. The following table presents digital currency activity (in thousands):
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| | | Three Months Ended | | | Period February 8, 2021 (date of inception) to |
| | | March 31, | | | March 31, |
| | 2022 | | 2021 | ||
Beginning balance | | $ | — | | $ | — |
Revenue recognized from bitcoin mined | |
| | |
| — |
Impairment of bitcoin | |
| ( | |
| — |
Ending balance | | $ | | | $ | — |
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 attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. 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 had
Concentrations
The Company or its joint venture have contracted with two suppliers for the provision of bitcoin miners. One supplier, Minerva Semiconductor Corp., for the joint venture is well behind on its miner delivery schedule due to COVID-19 lockdowns, power shortages and other operational issues at its factory. Although the supplier has committed to fulfilling its performance obligations with increased future production levels at multiple production facilities, shipments of miners have continued to be delayed.
The Company has currently contracted with one mining pool operator and one cryptocurrency custodian. The Company does not believe that these counterparties represent a significant performance risk.
The Company operates bitcoin mining facilities. While the Company may choose to mine other cryptocurrencies in the future, it has no plans to do so currently. If the market value of bitcoin declines significantly, the consolidated financial condition and results of operations of the Company may be adversely affected.
NOTE 3 – BUSINESS COMBINATION
On June 25, 2021, TeraCub entered into the Merger Agreement with IKONICS, a public company registered on the National Association of Securities Dealers Automated Quotations (“Nasdaq”), pursuant to which, among other things, TeraCub would effectively acquire IKONICS and become a publicly traded company on the Nasdaq, which was the primary purpose of the business combination. The closing date of the acquisition was December 13, 2021.
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Under the terms of the Merger Agreement, each share of IKONICS common stock issued and outstanding immediately prior to the transaction close, as defined (the “Closing”), was automatically converted into and exchanged for (i)
Consideration Transferred
The following table summarizes the fair value of the aggregate consideration paid for IKONICS (in thousands):
Cash consideration |
| $ | |
Equity instruments: | |
| |
Contingent consideration: Contingent Value Rights | |
| |
| | $ | |
As of March 31, 2022, the amount recognized for the CVR contingent consideration was remeasured to a fair value of $
The Company’s consolidated financial statements include the operating results of IKONICS beginning on December 13, 2021, the date of the acquisition. The operating loss of $
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NOTE 4 – ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
Upon acquisition, the IKONICS 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 IKONICS 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. The structure of the business combination, through the CVR Agreement, contemplated the sale of the IKONICS legacy business whereby the Company would become solely a bitcoin mining focused entity. The Merger Agreement requires IKONICS, after the Closing, to use its reasonable best efforts to consummate a sale of its legacy business as soon as reasonably practicable. The CVR Agreement provides that
The assets and liabilities of IKONICS are presented separately in current assets held for sale and current liabilities held for sale, respectively, in the consolidated balance sheets and includes the following (in thousands):
| March 31, 2022 |
| December 31, 2021 | ||
Trade receivables | $ | |
| $ | |
Inventories |
| | |
| |
Prepaid expenses and other current assets |
| | |
| |
Property, plant and equipment |
| | |
| |
Intangible assets |
| | |
| |
Current assets held for sale | $ | | | $ | |
| | | | | |
Accounts payable | $ | | | $ | |
Accrued compensation |
| | |
| |
Other accrued liabilities |
| | |
| |
Current liabilities held for sale | $ | | | $ | |
During the three months ended March 31, 2022, the Company determined that change in circumstance indicated that the then carrying amount of the IKONICS’ long-lived assets may not be recoverable and has recognized an impairment loss in loss on discontinued operations, net of tax of $
| | Three Months Ended | |
| | March 31, | |
| 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 (expense) benefit |
| | |
Loss from discontinued operations, net of tax | $ | ( | |
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Total cash flows used in operating activities from discontinued operations was $
Subsequent to March 31, 2022, the Company became aware of certain potential environmental remediation that may be required on a property of IKONICS. As of the date these consolidated financial statements were available to be issued, because the extent of any potential remediation procedures is not known, the Company cannot reasonably estimate a range of potential remediation costs, if any.
NOTE 5 – 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, 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 | | Impairment | ||||||
Contingent consideration liability - Contingent Value Rights (1) | | $ | | | $ | — | | $ | | | $ | — | | $ | | | $ | — |
Long-lived assets held for sale - intangible assets (1) | | | | | | — | | | | | | — | | | — | | | |
| | $ | | | $ | — | | $ | | | $ | — | | $ | | | $ | |
| (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 of the underlying assets. |
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, 2021 (in thousands):
| | | | | | | | Significant | | Significant | | | | ||
| | | | | Quoted Prices | | Other | | Other | | | | |||
| | | | | in Active | | Observable | | Unobservable | | | | |||
| | | | | Markets | | Inputs | | Inputs | | | | |||
|
| Carrying Value |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Impairment | |||||
Contingent consideration liability - Contingent Value Rights (1) | | $ | | | $ | — | | $ | — | | $ | | | $ | — |
Goodwill | | | — | | | — | | | — | | | — | | | |
Long-lived assets held for sale - intangible assets (2) | | | | | | — | | | — | | | | | | |
| | $ | | | $ | — | | $ | — | | $ | | | $ | |
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| (1) | At December 31, 2021, the significant unobservable inputs used to estimate fair value include (1) a business enterprise value of $ |
| (2) | At December 31, 2021, the significant unobservable inputs used to estimate fair value include an attrition rate of |
The Company has determined the long-term debt fair value at March 31, 2022 is approximately $
NOTE 6 — PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consisted of the following (in thousands):
|
| March 31, 2022 |
| December 31, 2021 | ||
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 will be depreciated over the asset’s useful life. Capitalized interest costs were $
Depreciation expense was $
NOTE 7 — LEASES
Effective in May 2021, the Company entered into a 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 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 lease has an initial term of
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The following is a maturity analysis of the annual undiscounted cash flows of the estimated operating lease liabilities as of March 31, 2022 (in thousands):
Year ending December 31: |
| |
|
2022 | | $ | |
2023 | |
| |
2024 | |
| |
2025 | |
| |
2026 | |
| |
Thereafter | |
| |
| | $ | |
A reconciliation of the undiscounted cash flows to the operating lease liabilities recognized in the consolidated balance sheet as of March 31, 2022 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 is two months and concludes in May 2022. There are no variable charges under this arrangement. For the three months ended March 31, 2022, lease expense related to this arrangement of $
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. At March 31, 2022 and December 31, 2021, 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 at March 31, 2022 and December 31, 2021 for the amount of deferred tax assets that will not be realized.
The Company has
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NOTE 9 – DEBT
Promissory Notes
Between October 4, 2021 and November 19, 2021, the Company obtained loans (each, a “Loan”) from its
Long-Term Debt
Long-term debt consists of the following (in thousands):
| | March 31, 2022 |
| December 31, 2021 | ||
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, TeraCub entered into a Loan, Guaranty and Security Agreement with Wilmington Trust, National Association as administrative agent (the “LGSA”). The LGSA consists of a $
The LGSA requires the Company to maintain or meet certain affirmative, negative, financial 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 10), 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
21
In connection with the LGSA, the Company issued to the holders of the Term Loans
Principal maturities of outstanding long-term debt as of March 31, 2022 are as follows (in thousands):
Year ending December 31: |
| |
|
2022 | | $ | — |
2023 | |
| |
2024 | |
| |
Total principal maturities | | $ | |
NOTE 10 – JOINT VENTURE
On May 13, 2021, the Company and 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 March 19, 2021, TeraCub executed an agreement for the purchase of bitcoin miners from Minerva Semiconductor Corp. (“Minerva”) for a total of
22
On June 15, 2021, Nautilus entered into
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, 2022 follows (in thousands):
Payment of TeraWulf | | $ | ( |
Investments in joint venture related to direct payments made on behalf of joint venture | | | ( |
Direct investments in joint venture | | | ( |
Investments in joint venture, including direct payments made on behalf of joint venture | | $ | ( |
| | | |
Payment of Talen | | $ | ( |
Reimbursable payments for deposits on plant and equipment made on behalf of a joint venture partner | | $ | ( |
| | | |
Talen reimbursement of | | $ | |
Reimbursement of payments for deposits on plant and equipment made on behalf of 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 March 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 | | to Date | | Entity | | (1) | | in Entity (2) | ||||||
Nautilus |
| | % | $ | | | $ | | | $ | | | $ | | | $ | | | $ | |
| (1) | The Members may seek alternate financing for the Pennsylvania bitcoin mining facility, which could reduce the amount of investments each Member would be required to provide. The Members may mutually agree on changes to the Pennsylvania bitcoin mining facility, which could increase or decrease the amount of contributions each Member is required to provide. |
| (2) | The maximum exposure at March 31, 2022 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. |
The condensed results of operations for the three months ended March 31, 2022 and the condensed financial position as of March 31, 2022 and December 31, 2021, of Nautilus are summarized below (in thousands):
|
| Three Months Ended |
| |
| | March 31, 2022 | | |
Condensed statement of operations information: |
| |
|
|
Revenue | | $ | — | |
Operating expense | |
| | |
Net loss | | $ | ( | |
23
|
| March 31, 2022 |
| December 31, 2021 | ||
Condensed balance sheet information: |
| |
|
| |
|
Current assets | | $ | | | $ | |
Noncurrent assets | |
| | |
| |
Total assets | | $ | | | $ | |
| | | | | | |
Current liabilities | | $ | | | $ | |
Equity | |
| | |
| |
Total liabilities and equity | | $ | | | $ | |
In March 2022, the Company entered into an exchange agreement with Nautilus and the Nautilus co-venturer whereby the Company purchased 2,500 of Nautilus’ Bitmain S19j Pro miners (the “Nautilus Miners”) to be received under the Bitmain Purchase Agreements in exchange for an option to either (1) deliver miners that are not less favorable in all material respects to those of the Nautilus Miners (the “Exchange Miners”) by July 1, 2022 or (2) incur a pro forma adjustment to Nautilus’ distributions such that the Nautilus co-venturer is made whole as though the miners had not been transferred to the Company. If the Exchange Miners are not delivered by September 30, 2022, the Nautilus co-venturer is entitled to elect to distribute in-kind a number of miners then in possession of Nautilus comparable to the then-undelivered Exchange Miners.
NOTE 11 – 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
24
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 12 – 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
25
NOTE 13 – COMMON STOCK
TeraWulf’s Certificate of Incorporation provides for authorized shares of
In February 2022, the Company entered into the At Market Issuance Sales Agreement (the “ATM Sales Agreement”) with B. Riley Securities, Inc. and D.A. Davidson & Co. (collectively, the “Agents”), pursuant to which the Company may offer and sell, from time to time, through or to the Agents, acting as agent or principal, shares of the Company’s Common Stock, par value $
In March 2022, the Company concluded a private placement of
NOTE 14 – 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 restricted stock units. No grants have been made under the Plan as of the date the consolidated financial statements were available to be issued.
26
NOTE 15 – 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 build out and operate certain bitcoin mining facilities 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
The Services Agreement 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 16 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events through May 16, 2022, which is also the date these consolidated financial statements were available to be issued, and has determined that the following subsequent events require disclosure.
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
27
In April 2022, the Company entered into a replacement sales agreement (the “April ATM Sales Agreement”) with Cantor Fitzgerald & Co., B. Riley Securities, Inc. and D.A. Davidson & Co. (together the “April ATM Agents”), pursuant to which the Company may offer and sell, from time to time, through or to the April ATM Agents, shares of the Company’s Common Stock, par value $
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, 2021. 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.”
General
TeraWulf is a digital asset technology company with a core business of sustainable bitcoin mining. The Company is actively developing and constructing, consistent with its sustainable energy mandate, two bitcoin mining facility sites, 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 90% zero-carbon energy, with a target of achieving 100%.
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.
Nautilus Cryptomine Facility — The Nautilus Cryptomine Facility is a joint venture between TeraWulf and Talen. 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 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 plans to begin installation of ASICs at the Nautilus Cryptomine Facility in the third quarter of 2022.
TeraWulf expects to generate revenues primarily by sustainably mining bitcoin at its bitcoin mining facility sites. Incremental revenues may be generated through the hedging and sale of mined bitcoin and the commercial optimization of TeraWulf’s power supply. The Company will also leverage 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 at a discounted purchase price.
The Business Combination
TeraWulf completed its business combination with IKONICS on the Closing Date pursuant to which, among other things, TeraCub would effectively acquire IKONICS and become a publicly traded company on the Nasdaq, which was the primary purpose of the business combination. For financial accounting purposes, the business combination was treated as a reverse merger whereby the accounting acquirer was TeraCub due to TeraCub’s historic shareholders having the majority voting control in the Company, the
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board of directors members being associated with TeraCub and the senior management of TeraCub becoming the senior management of TeraWulf. Pursuant to business combination accounting, the Company applied the acquisition method, which requires the assets acquired and liabilities assumed be recorded at fair value, with limited exceptions. The Company’s consolidated financial statements include the operating results of IKONICS beginning on the Closing Date.
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 CVR 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. The fair value of the aggregate consideration paid for IKONICS was $66.3 million, which includes (i) cash consideration of $13.7 million ($10.3 million net of cash acquired), (ii) equity consideration of $40.6 million and contingent consideration (related to the CVRs) of $12.0 million.
Upon the consummation of the business combination, IKONICS 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
The Company’s results of operations could be adversely affected by general conditions in the economy and in the global financial markets, including conditions that are outside of the Company's control, such as the outbreak and global spread of the novel coronavirus disease (“COVID-19”). The COVID-19 pandemic that was declared on March 11, 2020 has caused significant economic dislocation in the United States and globally as governments across the world, including the United States, introduced measures aimed at preventing the spread of COVID-19. The spread of COVID-19 and the imposition of related public health measures have resulted in, and are expected to continue to result in, increased volatility and uncertainty in the cryptocurrency space. Any severe or prolonged economic downturn, as a result of the COVID-19 pandemic or otherwise, could result in a variety of risks to the business and management cannot anticipate all the ways in which the current economic climate and financial market conditions could adversely impact its business.
The Company may experience disruptions to its business operations resulting from supply interruptions (including miner delivery interruptions), quarantines, self-isolations, or other movement and restrictions on the ability of its employees or its counterparties to perform their jobs and provide services. The Company may also experience 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 complications among its employees, suppliers and contractors. If the Company is unable to effectively set up and service its miners, its ability to mine bitcoin will be adversely affected. The future impact of the COVID-19 pandemic is still highly uncertain and there is no assurance that the COVID-19 pandemic or any other pandemic, or other unfavorable global economic, business or political conditions, will not materially and adversely affect the Company's business, prospects, financial condition, and operating results.
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Change in Fiscal Year
Upon the closing of its business combination with IKONICS, the Company assumed the fiscal year end of December 31. Previously, the Company’s fiscal year ended on March 31.
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, public company readiness and general corporate activities. The Company’s plan of operation for the next twelve months is to continue to develop its initial 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, 2022 and the period February 8, 2021 (date of inception) to March 31, 2021 relate to its wholly-owned operations of its sole business segment, digital currency mining, due to the Company presenting the newly acquired IKONICS business as held for sale and discontinued operations as of and for the three months ended March 31, 2022.
Revenues
Revenue increased to $217,000 during the three months ended March 31, 2022 as compared to $0 during the period February 8, 2021 (date of inception) to March 31, 2021 due to the commencement of mining activities at the Lake Mariner Facility in March 2022.
Costs and Expenses
Operating expenses (including related party expenses) during the three months ended March 31, 2022 and the period February 8, 2021 (date of inception) to March 31, 2021 totaled $542,000 (including $62,000 related party expenses) and $853,000 (all related party expenses), respectively. The decrease of $311,000 is a result of the period February 8, 2021 (date of inception) to March 31, 2021 including certain development expenses, including services and third-party costs for transmission consulting, engineering consulting, transmission impact study, electricity procurement and site development.
Selling, general and administrative expenses during the three months ended March 31, 2022 and the period February 8, 2021 (date of inception) to March 31, 2021 totaled $8.8 million (including $2.8 million related party expenses) and $0.8 million (including $0.6 million related party expenses), respectively. The increase of $8.0 million is primarily a result of the scope of Company operations whereby the Company was a public company significantly engaged in an infrastructure buildout and commencement of mining activities during the three months ended March 31, 2022 as opposed to a newly formed private company with limited operations for the period February 8, 2021 (date of inception) to March 31, 2021. Selling, general and administrative expenses are comprised primarily of professional fees, legal fees, employee compensation and benefits, insurance and general corporate expenses. Professional fees include fixed and passthrough expenses under the administrative and infrastructure services agreement amounting to $2.8 million for the three months ended March 31, 2022.
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Interest expense for the three months ended March 31, 2022 and the period February 8, 2021 (date of inception) to March 31, 2021 totaled $5.3 million and $0, respectively. Interest expense relates primarily to the Company’s term loan financing in the principal amount of $123.5 million, which was closed on December 1, 2021 (the “Term Loan”). The Term Loan bears an interest rate of 11.5%, which interest payments are due quarterly in arrears. Of the $5.3 million of interest expense reported in the statement of operations for the three months ended March 31, 2022, approximately $2.5 million of the interest expense relates to amortization of debt issuance costs and debt discount related to debt issuance costs, an upfront fee, and the fair value of equity issued to the Term Loan investors in conjunction with the Term Loan. During the three months ended March 31, 2022, the Company capitalized $760,000 and $482,000 of interest costs to property, plant and equipment, net and equity in net assts of investee, respectively, in the consolidated balance sheet as of March 31, 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, 2022 and the period February 8, 2021 (date of inception) to March 31, 2021 totaled $788,000 and $0, respectively. The $788,000 for the three months ended March 31, 2022 reflects TeraWulf’s 50% share of losses of Nautilus, which had not commenced principal operations during the three months ended March 31, 2022.
Loss from discontinued operations, net of tax
Loss from discontinued operations, net of tax for the three months ended March 31, 2022 and the period February 8, 2021 (date of inception) to March 31, 2021 totaled $2.9 million and $0, respectively. In conjunction with the IKONICS’ business classification as held for sale upon acquisition, the Company has reported the IKONICS business as discontinued operations in the consolidated financial statements. The total loss from discontinued operations reported is comprised primarily of an impairment loss on discontinued operations of $3.9 million to write down the related carrying amounts of IKONICS 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 IKONICS acquisition.
Liquidity and Capital Resources
As of March 31, 2022, the Company had cash and cash equivalents of $3.6 million, working capital deficiency, including current assets and current liabilities held for sale, of $27.0 million, total stockholders’ equity of $121.0 million and an accumulated deficit of $114.0 million. The Company incurred a net loss of $18.2 million for the three months ended March 31, 2022, including a net impairment charge (net of the CVR remeasurement gain) of $2.5 million included in loss from discontinued operations, net of tax related to the acquired IKONICS business. The Company has commenced mining activities, however not yet to scale, and therefore has not generated material revenues from its mining business. The Company has relied on proceeds from its issuances of debt and equity to fund its principal operations. The principal uses of cash are for deposits on miners, the buildout of mining facilities, general
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corporate activities and investments in Nautilus joint venture related to the miner deposits, mining facility buildout and general corporate activities. Cash flow information is as follows (in thousands):
| | | | | | | |
| | | Three Months Ended | | | Period February 8, 2021 (date of inception) to | |
| | | March 31, | | | March 31, | |
| | 2022 | | 2021 |
| ||
Cash provided by (used in): | |
| | |
| | |
Operating activities: | |
| | |
| | |
Continuing operations | | $ | (21,459) | | $ | — | |
Discontinued operations | |
| (50) | |
| — | |
Total operating activities | |
| (21,509) | |
| — | |
Investing activities | |
| (40,560) | |
| (23,700) | |
Financing activities | |
| 19,200 | |
| 30,000 | |
Net change in cash and cash equivalents and restricted cash | | $ | (42,869) | | $ | 6,300 | |
Cash used in operating activities for continuing operations was $21.5 million and $0 for the three months ended March 31, 2022 and the period February 8, 2021 (date of inception) to March 31, 2021, respectively. For the three months ended March 31, 2022, cash used in operations results from a net loss of $18.2 million less non-cash expenses, net of $6.2 million and adjusted for changes in certain asset and liability balances. The non-cash expenses were primarily comprised of (i) $2.9 million of loss from discontinued operations, net of tax related to IKONICS business, which is classified as held for sale at March 31, 2022, (ii) $0.8 million related to the Company’s equity in net loss, net of tax of Nautilus and (iii) $2.5 million related to amortization of debt issuance cost and accretion of debt discount. The changes in certain assets and liabilities were primarily comprised of a net decrease in current liabilities (which includes accounts payable, accrued construction liabilities, other accrued liabilities and other amounts due to related parties) of $4.5 million and a net increase in current assets (which includes digital currency, prepaid expenses, amounts due from related parties and other current assets) of $4.1 million.
Cash used in investing activities for continuing operations was $40.6 million and $23.7 for the three months ended March 31, 2022 and the period February 8, 2021 (date of inception) to March 31, 2021, respectively. Deposits on miners comprised $12.1 million and $23.7 million (subsequently contributed to Nautilus) for the three months ended March 31, 2022 and the period February 8, 2021 (date of inception) to March 31, 2021, respectively. For the three months ended March 31, 2022, the Company additionally invested (i) $9.4 million in the buildout of mining facilities and (ii) $19.1 million (investments in joint venture of $30.5 million net of reimbursement from joint venture partner of $11.4 million) in Nautilus related primarily to the joint venture’s miner deposits and mining facility buildout. The Company has significant future obligations related to miner deposits and also has commitments under the Talen Joint Venture Agreement. See “—Contractual Obligations and Other Commitments.”
Cash provided by financing activities for continuing operations was $19.2 million and $30.0 for the three months ended March 31, 2022 and the period February 8, 2021 (date of inception) to March 31, 2021, respectively. Proceeds from the issuance of Common Stock, net of issuance costs, were $6.8 million and $30.0 million for the three months ended March 31, 2022 and the period February 8, 2021 (date of inception) to March 31, 2021, respectively. In addition, 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 and received proceeds, net of principal payments, of notes payable for insurance premium financing of $3.1 million.
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Contractual Obligations and Other Commitments
The Company has purchase obligations under miner purchase agreements and commitments under the Talen Joint Venture Agreement as of March 31, 2022, as follows (in thousands):
| | | | | | | | | | |
| Remaining | |
|
| | | |
| Contractual |
| | | | Contractual | ||
Counterparty | | Agreement Description |
| Agreement Date |
| Amount |
| Paid |
| Amount | |||
Bitmain Technologies Limited | | Miner Purchase Agreement (1) | | December 7, 2021 | | $ | 32,550 | | $ | 13,352 | | $ | 19,198 |
Bitmain Technologies Limited |
| Miner Purchase Agreement (1) | | December 15, 2021 | | $ | 169,050 | | $ | 69,335 | | $ | 99,715 |
Nautilus Cryptomine LLC |
| Joint Venture Agreement (2) | | May 13, 2021 | | $ | 156,000 | | $ | 125,372 | | $ | 30,628 |
(1) | Pursuant to the December Bitmain Agreements, the Company has the option to purchase or decline to purchase any batch of miners comprising a monthly shipment upon Bitmain’s notification of the actual price under the agreements one month prior to shipment, so long as it has been determined that the Company is in compliance with the terms of the agreements. In the event the Company declines to purchase any monthly scheduled batch, the remaining balance prepaid for such batch is to be refunded to the Company pursuant to the terms of the agreements. As of March 31, 2022, the potential refund amount would be up to $82.7 million based on payments then made and the portion of the remaining contractual amounts the Company would not be obligated to pay in the event the Company declines to purchase any monthly scheduled batch is up to $60.5 million, in each case so long as it has been determined that the Company is in compliance with the terms of the agreements. |
(2) | The contractual commitment amount represents the contractually required capital contributions of the Company which are required for the initial phase of the Nautilus Cryptomine Facility buildout. The joint venture members may seek alternate financing for the Nautilus Cryptomine Facility, which could reduce the amount of investments each member would be required to provide. The members may mutually agree on changes to the Nautilus Cryptomine Facility, which could increase or decrease the amount of contributions each joint venture member is required to provide. |
On December 7, 2021, the Company entered into the Second Bitmain Agreement. The Second Bitmain Purchase Agreement includes liquidated damage provisions that may be applied if payments are not made within sixty days of a payment due date, if not otherwise mutually extended. No liquidated damages have been applied as of the date the consolidated financial statements for the quarter ended March 31, 2022 were available to be issued. The Company is responsible for all logistics costs related to transportation for the delivery of miners. Pursuant to the Second Bitmain Purchase Agreement, the Company paid an initial deposit of approximately $11.4 million in 2021 and $2.0 million during the three months ended March 31, 2022. The balance of payments due under the Second Bitmain Purchase Agreement, an amount of $19.2 million, are scheduled to be paid in unequal monthly installments through November 2022.
On December 15, 2021, the Company entered into the Third Bitmain Agreement. The Third Bitmain Purchase Agreement includes liquidated damage provisions that may be applied if payments are not made within sixty days of a payment due date, if not otherwise mutually extended. No liquidated damages have been applied as of the date the consolidated financial statements for the quarter ended March 31, 2022 were available to be issued. The Company is responsible for all logistics costs related to transportation for the delivery of miners. Pursuant to the Third Bitmain Purchase Agreement, the Company paid an initial deposit of approximately $59.2 million in 2021 and $10.1 million during the three months ended March 31, 2022. The balance of payments due under the Third Bitmain Purchase Agreement, an amount of $99.7 million, are scheduled to be paid in unequal monthly installments through November 2022.
Pursuant to the terms of the Talen Joint Venture Agreement, TeraWulf would contribute $156.0 million both in cash and in-kind and Talen would contribute $156.0 million both in cash and in-kind to Nautilus by March 2022, unless otherwise determined in accordance with the Talen Joint Venture Agreement. The aforementioned contributions were based on an initial development budget formed on assumptions and inputs available at the time the joint venture was formed and are subject to change. These contributions are now expected to be contributed by the fourth quarter of 2022, as agreed to by the members.
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Financial Condition; Need for Additional Capital
There is limited historical financial information about the Company upon which to base an evaluation of its performance. The Company has commenced mining activities, however not yet to scale, and therefore has not generated material revenues from its mining business. The Company has relied on proceeds from its issuances of debt and equity to fund its principal operations. In accordance with its plan to develop its bitcoin mining facilities, during the three months ended March 31, 2022, the Company paid approximately $12.1 million as deposits on miners, and has significant future obligations related to these miner purchase agreements. Also, during the three months ended March 31, 2022, the Company invested $19.1 million, net in its joint venture and has additional commitments under its joint venture agreement. The Company will need additional capital in order to meet these obligations in accordance with the existing contractual terms and to fund the planned development of its bitcoin mining facilities. Until TeraWulf is able to generate positive cash flows from operations, TeraWulf expects to fund its business operations and infrastructure buildout through the issuance of debt or equity securities or through the provision miner hosting services. During the three months ended March 31, 2022 and as discussed below, the Company entered into an 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”). However, there can be no assurance that the ATM Offering or any other financing will be successfully consummated on acceptable terms and volume, if at all, which may impact the timing or scale of TeraWulf’s planned development. In the event TeraWulf is unable to raise additional capital, TeraWulf may seek alternative arrangements or potential partnerships in order to fund its planned development. In the opinion of management, while it expects to be successful in its fundraising efforts, these factors, which include elements of capital acquisition outside the control of the Company, raise substantial doubt about TeraWulf’s ability to continue as a going concern through at least the next twelve months. The financial statements do not include any adjustments that might result from TeraWulf’s possible inability to continue as a going concern.
ATM Offering. On February 11, 2022, in order to facilitate additional capital acquisition, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. and D.A. Davidson & Co. (each, individually, an “Agent” and, collectively, the “Agents”), pursuant to which the Company may offer and sell, from time to time, through or to the agents, acting as agent or principal, shares of the Company’s Common Stock, par value $0.001 per share, having an aggregate offering price of up to $200.0 million (the “Shares”). The Company is not obligated to sell any Shares under the Sales Agreement. As of May 13, 2022, the Company sold 741,103 shares of Common Stock for net proceeds of approximately $6.1 million under the ATM Offering. In April 2022, the Company entered into a replacement sales agreement (the “April ATM Sales Agreement”) with Cantor Fitzgerald & Co., B. Riley Securities, Inc. and D.A. Davidson & Co. (together the “April ATM Agents”), pursuant to which the Company may offer and sell, from time to time, through or to the April ATM Agents, shares of the Company’s Common Stock, par value $0.001 per share, having an aggregate offering price of up to $200.0 million. The April ATM Sales Agreement replaced the Sales Agreement. The Company is not obligated to sell any shares under the April ATM Sales Agreement. Subject to the terms and conditions of the April ATM Sales Agreement, the Agents will use commercially reasonable efforts, consistent with its normal trading and sales practices, to sell Shares from time to time based upon the Company’s instructions, including any price, time or size limits or other customary parameters or conditions specified by the Company. The Company will pay the Agents a commission equal to 3.0% of the gross sales price from each sale of Shares and provide the Agents with customary indemnification and contribution rights. The April ATM Sales Agreement may be terminated by the Agents or the Company at any time upon five (5) days’ notice to the other party. The issuance and sale of the April Shares by the Company under the April ATM Sales Agreement are made pursuant to the prospectus and prospectus supplement forming a part of the 2022 Registration Statement, including a final prospectus supplement dated April 26, 2022. The 2022 Registration Statement provides that the Company may offer and sell from time to time shares of its Common Stock, shares of its preferred stock, debt securities, depositary shares, warrants, rights, purchase contracts or units, or any combination thereof, in one or more offerings in amounts, at prices and on terms that it determines at the time of the offering, with an aggregate initial offering price of up to $500.0 million (or its equivalent in foreign currencies, currency units or composite currencies).
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.
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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) 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.
The Company evaluated its investment in Nautilus under the VIE guidance, which requires management to exercise significant judgment. 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. The power to direct the activities of Nautilus that most significantly impact Nautilus’ economic performance are 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, are 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 fund additional equity investments.
Issuance of Debt with Common Stock
On December 1, 2021, TeraCub entered into a Loan, Guaranty and Security Agreement with Wilmington Trust, National Association as administrative agent (the “LGSA”). The LGSA 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.
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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.
Business Combinations
The Company includes the results of operations of the businesses that it acquires as of the acquisition date. The Company allocates the purchase price of the acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair values of identifiable assets and liabilities is recorded as goodwill. Contingent consideration is included within the purchase price and is recognized at its fair value on the acquisition date. A liability resulting from contingent consideration is remeasured to fair value as of each reporting date until the contingency is resolved, and subsequent changes in fair value are recognized in earnings. Contingent consideration is recorded in current liabilities in the Company’s consolidated balance sheets. During the three months ended March 31, 2022, the Company recorded a $1.4 million remeasurement gain on the CVR contingent consideration, which is recorded in loss from discontinued operations, net in the consolidated statement of operations.
While the Company uses its best estimates and assumptions to accurately apply preliminary values to assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, these estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of the assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in the consolidated statements of operations. Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for intangible assets, contractual obligations assumed, pre-acquisition contingencies, and contingent consideration, where applicable. Although the Company believes the assumptions and estimates it has made have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets acquired include; future expected cash flows, estimated market royalty rates, customer attrition rates, cost of developed technology and discount rates. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates, or actual results. As a measure of sensitivity, at March 31, 2022 a change in estimated net fair value of acquired assets and assumed liabilities of IKONICS of 10% would result in a change of $1.4 million to the impairment on held-for-sale classification included in loss from discontinued operations, net in the consolidated statement of operations for the three months ended March 31, 2022. During the three months ended March 31, 2022, the Company recorded a $3.9 million impairment loss on the long-lived assets of IKONICS held for sale, which is recorded in loss from discontinued operations, net in the consolidated statement of operations.
Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
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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. As a measure of sensitivity, the classification of the IKONICS business as held-for-sale resulted in a $48.9 million impairment charge included in loss from discontinued operations, net in the consolidated statement of operations in 2021. If held-for-sale classification accounting had not been applied, the acquired goodwill would have been evaluated for impairment with an alternate potential impairment charge applied.
Newly acquired businesses that meet the held-for-sale classification criteria upon acquisition are reported as discontinued operations.
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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, 2022 that have materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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, you should carefully consider the risk factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. 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.
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
On March 15, 2022, Lucky Liefern LLC, an entity owned and controlled by Paul B. Prager, bought 271,447 shares of our Common Stock at a price of $7.81 per share for an aggregate offering price of approximately $2.12 million. The shares were issued in reliance on an exemption from registration under the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof.
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ITEM 3. | Defaults Upon Senior Securities. |
None.
ITEM 4. | Mine Safety Disclosures. |
None.
ITEM 5. Other Information.
On May 16, 2022, the Company appointed Patrick A. Fleury, age 44, as Chief Financial Officer of the Company, effective immediately (the “Effective Date”), replacing Kenneth J. Deane, who is currently serving as Chief Financial Officer of the Company. Mr. Deane will remain with the Company and continue to serve as the Company’s Chief Accounting Officer and Treasurer, as of the Effective Date. The biographical information and business experience of Mr. Deane are included in the Company’s proxy statement for the annual meeting of stockholders to be held on June 22, 2022, filed with the SEC on May 2, 2022, and are incorporated herein by reference.
Previously, Mr. Fleury was a Managing Director and Senior Research Analyst at NovaWulf Digital Management, LP (“NovaWulf”) from January 2022 to present. Prior to NovaWulf, Mr. Fleury was a founding member of the credit team at Platinum Equity Advisors (“Platinum”), responsible for public and private credit investments in high yield, distressed and special situations. Prior to joining Platinum in June 2019, Mr. Fleury was at Nokota Management LP (“Nokota”) from September 2016 to May 2019, where he was responsible for public and private distressed, high yield and equity investments. Prior to joining Nokota, Mr. Fleury was a Managing Director at Blackstone’s global credit platform, GSO Capital Partners, where he led credit investments in operationally and financially challenged situations. Before joining Blackstone/GSO, Mr. Fleury held roles of increasing responsibility at Satellite Asset Management and Jefferies & Company, Inc. Mr. Fleury began his career in the Global Energy & Power Investment Banking Group at Banc of America Securities, LLC. Mr. Fleury received a BA, magna cum laude, in Economics and Government & Legal Studies from Bowdoin College.
In connection with his appointment as Chief Financial Officer, the Company entered into an employment agreement with Mr. Fleury on May 16, 2022 (the “Fleury Employment Agreement”), which will become effective on the Effective Date, and provides for a term of three years. Pursuant to the Fleury Employment Agreement, Mr. Fleury will receive an annual base salary of $350,000, will be eligible to receive a performance-based annual bonus with a target opportunity equal to 50% of his annual base salary, and will be eligible to participate in the benefit plans of the Company that are made generally available to similarly situated employees of the Company. The Fleury Employment Agreement contains customary non-competition, non-solicitation and confidentiality covenants.
As an inducement to his commencement of employment as Chief Financial Officer of the Company, the Board, upon the recommendation of the compensation committee of the Board (the “Compensation Committee”), executed with Mr. Fleury that certain Inducement Grant Restricted Stock Unit Award Agreement, as of the Effective Date (the “Fleury RSU Agreement”), which provided for the grant to Mr. Fleury of an equity award of 1,000,000 restricted stock units (“RSUs”). Twenty-five percent (25%) of the RSUs will vest upon each of the first two anniversaries of the date of grant and the remaining fifty percent (50%) of the RSUs will vest upon the third anniversary of the date of the grant, subject to Mr. Fleury’s continued employment or service with the Company through each such date (the “Inducement Award”). The Inducement Award was granted as an “employment inducement grant” within the meaning of Rule 5635(c)(4) of the Nasdaq Listing Rules and was therefore not awarded under the Company’s stockholder approved equity plan.
Pursuant to the terms of the Fleury Employment Agreement, if Mr. Fleury’s employment is terminated by the Company without “cause” or by Mr. Fleury for “good reason” (each as defined in the Fleury Employment Agreement), other than as a result of his death or disability, Mr. Fleury will be entitled to receive the following severance benefits: (i) a lump-sum cash payment payable on the 60th calendar day following the termination date in an aggregate amount equal to the annual base salary that would have been paid to Mr. Fleury during the 12-month period (the “severance period”) following the termination date; (ii) continued coverage during the severance period (or until such Mr. Fleury becomes eligible for comparable coverage under the medical health plans of a successor employer, if earlier) for Mr. Fleury and any eligible dependents under all of the Company’s health and welfare plans in which Mr. Fleury and any eligible dependents participated immediately prior to the termination date, subject to any active-employee cost-sharing or similar provisions in effect for Mr. Fleury thereunder as of immediately prior to the termination date; (iii) a prorated portion of the annual bonus payable with respect to the fiscal year in which such termination occurs determined on a daily basis, based on target level of achievement of the applicable performance goals for such year, payable on the 60th calendar day following the termination date; (iv) any previously earned annual bonus payable to Mr. Fleury for any fiscal year completed on or before the termination date that has not been paid to Mr. Fleury as of the termination date, payable on the 60th calendar day following the termination date; and (v) all outstanding equity awards
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then-held by Mr. Fleury will be treated in accordance with the terms of the applicable equity plan and award agreements; provided, however, that, with respect to awards that vest (x) solely based on continued service with TeraWulf, excluding the Inducement Award, such award will vest in any tranche scheduled to vest in accordance with the applicable award agreement during the severance period and (y) based on the achievement of performance criteria, based on the actual achievement of such performance criteria that occurs during the severance period.
If Mr. Fleury’s employment is terminated by the Company due to Mr. Fleury’s death or disability, subject to Mr. Fleury’s (or his estate’s) execution of an effective general release of claims and continued compliance with non-competition, non-solicitation and other restrictive covenants applicable to Mr. Fleury pursuant to such Mr. Fleury’s restrictive covenant agreement entered into contemporaneously with the Fleury Employment Agreement (the “Fleury Restrictive Covenant Agreement”), the Company will pay or provide Mr. Fleury (or his estate) with the following severance benefits: (i) a prorated portion of the annual bonus payable with respect to the fiscal year in which such termination occurs determined on a daily basis, based on target level of achievement of the applicable performance goals for such year, payable on the 60th calendar day following the termination date; and (ii) any previously earned annual bonus payable to Mr. Fleury for any fiscal year completed on or before the termination date that has not been paid to Mr. Fleury as of the termination date, payable on the 60th calendar day following the termination date.
Contemporaneously with the entry into his employment agreement, Mr. Fleury also entered into a restrictive covenant agreement by which he is bound by certain restrictive covenants during employment and for a specified period thereafter, including non-competition (6 months post-employment; provided that such period increases to 12 months post-employment if Mr. Fleury’s employment is terminated by TeraWulf for cause), non-solicitation (18 months post-employment), non-disparagement (indefinite) and confidentiality (indefinite).
In connection with his appointment as Chief Accounting Officer, Mr. Deane entered into a letter agreement (the “Deane Employment Agreement Amendment”) which amended his employment letter agreement, dated November 4, 2021, with the Company (the “Deane Employment Agreement”) and which is filed as Exhibit 10.2 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The Deane Employment Agreement Amendment amended Mr. Deane’s position, authority, duties and responsibilities such that Mr. Deane will be employed in the position of Chief Accounting Officer and Treasurer of the Company, following his voluntary resignation from his position as Chief Financial Officer as of the Effective Date.
In connection with his appointment as Chief Accounting Officer, the Compensation Committee granted Mr. Deane an equity award of 300,000 restricted stock units, one-third (1/3rd) of which will vest upon each of the first three anniversaries of the date of grant, generally subject to Mr. Deane’s continued employment or service with the Company through each such date (the “Award”). If Mr. Deane’s employment is terminated by the Company without cause, he resigns for good reason or his employment is terminated by the Company due to his death or disability, then any unvested restricted stock units outstanding under the Award will vest in full as of the date of such termination. The Award is granted pursuant to the Company’s 2021 Omnibus Incentive Plan and an award agreement issued thereunder (the “Deane RSU Agreement”).
There are no family relationships between Mr. Fleury or Mr. Deane and any of the officers or directors of the Company, and there are no related party transactions with Mr. Fleury or Mr. Deane that are reportable under Item 404(a) of Regulation S-K.
The foregoing descriptions of the Fleury Employment Agreement, the Fleury Restrictive Covenant Agreement, the Fleury RSU Agreement, the Deane Employment Agreement Amendment and the Deane RSU Agreement do not purport to be complete, and are qualified in their entirety by reference to the full text of the Fleury Employment Agreement, the Fleury Restrictive Covenant Agreement, the Fleury RSU Agreement, the Deane Employment Agreement Amendment and the Deane RSU Agreement, respectively, which are filed as exhibits 10.25, 10.26, 10.27, 10.28 and 10.29 hereto, respectively, and each of which is incorporated herein by reference.
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PART IV
ITEM 6. | Exhibits, Financial Statement Schedules |
Exhibit Number |
| Description |
|---|---|---|
| | |
| | |
(3.1) | | |
| | |
(3.2) | | |
| | |
(3.3) | | |
| | |
(10.1) | | |
| | |
10.2* | | |
| | |
10.3* | | |
| | |
10.4* | | |
| | |
10.5* | | |
| | |
10.6* | | |
| | |
31.1 | | |
| | |
31.2 | | |
| | |
32.1 | | |
| | |
101 | | Financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted in Inline Extensible Business Reporting Language (iXBRL); (i) Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021, (ii) Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and the period February 8, 2021 (date of inception) to March 31, 2021, (iii) Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2022 and the period February 8, 2021 (date of inception) to March 31, 2021, (iv) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and the period February 8, 2021 (date of inception) to March 31, 2021, 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 periodic filings as specifically noted. |
* | Executive compensation plans and arrangements. |
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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 16, 2022 | By: | /s/ Paul B. Prager |
(Date) | | Paul B. Prager (Principal Executive Officer) |
| | |
| By: | /s/ Kenneth J. Deane |
| | Kenneth J. Deane (Principal Financial Officer) |
| ||
| | |
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