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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
FORM 10-Q/A
(Amendment No. 1)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-41163
___________________________________________________
TERAWULF INC.
(Exact name of registrant as specified in its charter)
___________________________________________________
| | | | | |
DE | 87-1909475 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
9 Federal Street | 21601 |
Easton, MD | |
(Address of principal executive offices) | (Zip Code) |
| | |
(410) 770-9500 |
(Registrant’s telephone number, including area code) |
|
Not Applicable |
(Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to 12(b) of the Exchange Act:
| | | | | | | | | | | | | | |
Title of each class: | | Trading Symbol(s) | | Name of each exchange on which registered: |
Common Stock, $0.001 par value per share | | WULF | | The Nasdaq Stock Market LLC |
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. Yes x No o
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). Yes x No o
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 o | Accelerated filer o | Non-accelerated filer x | Smaller reporting company x | Emerging growth company o |
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
There were 238,203,308 shares of Common Stock outstanding as of November 22, 2023.
EXPLANATORY NOTE
EXPLANATORY NOTE
Restatement of Previously Issued Financial Statements
TeraWulf Inc. (“TeraWulf” or the "Company") is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2023 (the "Form 10-Q/A"), which was originally filed with the U.S. Securities and Exchange Commission (the "SEC") on November 13, 2023, for the purpose of correcting an identified error in its historical unaudited interim consolidated financial statements. On November 22, 2023, the Company filed a Current Report on Form 8-K with the SEC disclosing the determination by the audit committee of the Company’s board of directors, after considering the recommendations of management and discussions with RSM US LLP, the Company’s independent registered public accounting firm, that, as a result of the error described below, the Company would restate previously issued unaudited consolidated financial statements and related disclosures as of and for the interim period ended September 30, 2023. The misstatement relates solely to incorrectly classifying “payments of contingent value rights liability related to proceeds from sale of net asset held for sale” as an investing activity instead of as a financing activity in the respective unaudited interim consolidated statements of cash flows. See Note 3 to the Consolidated Financial Statements for a discussion of the payments made in accordance with the Contingent Value Rights Agreement related to the Company's merger with RM 101 Inc. (formerly known as IKONICS Corporation) on December 13, 2021. The Company determined that its unaudited interim consolidated financial statements in the quarterly reports for the periods ended March 31, 2023, June 30, 2023 and September 30, 2023 (the “Relevant Periods”) were materially misstated and should be restated. The restatements are set forth in detail in Note 17 to the Consolidated Financial Statements.
Internal Control & Disclosure Control Considerations
Management assessed the effectiveness of internal control over financial reporting and identified a material weakness, resulting in the conclusion by the Company's Chief Executive Officer and Chief Financial Officer that the Company's internal control over financial reporting and the Company's disclosure controls and procedures were not effective as of September 30, 2023. The material weakness relates solely to the inadequate design and operation of management’s review controls over classification in the consolidated statements of cash flows of payments made related to business combinations. Management is taking steps to remediate the material weakness in the Company's internal control over financial reporting, as described in Part I, Item 4, “Controls and Procedures.”
Non-Reliance on Previously Filed Reports
TeraWulf believes that presenting all of this information regarding the Relevant Periods in this Form 10-Q/A allows investors to review all pertinent data in a single presentation. Therefore, the Company does not plan to amend its previously filed Quarterly Reports on Form 10-Q for June 30, 2023 and March 31, 2023. The misstatement relates solely to incorrectly classifying "payments of contingent value rights liability related to proceeds from sale of net assets held for sale" as an investing activity instead of as a financing activity in the respective unaudited interim consolidated statements of cash flows (the "Misclassification"). Accordingly, investors should no longer rely upon the Company’s previously released financial statements for the Relevant Periods and any earnings releases or other communications relating to these Relevant Periods with respect to the Misclassification. The financial information that has been previously filed or otherwise reported for the Relevant Periods with respect to the Misclassification is superseded by the information in Note 17 to the Consolidated Financial Statements in this Form 10-Q/A. TeraWulf will also correct previously reported financial information for this Misclassification in its future filings, as applicable.
Items Amended in this Form 10-Q/A
The following sections in the Original Report are revised in this Form 10-Q/A to reflect the restatement:
• Part I, Item 1: Financial Statements
• Part I, Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
• Part I, Item 4: Controls and Procedures
• Part II, Item 1A: Risk Factors
In addition, this Form 10-Q/A includes an updated signature page and new certifications of the Company’s Chief Executive Officer and Chief Financial Officer, dated as of the date of this filing (Exhibits 31.1, 31.2, 32.1 and 32.1).
Because these amendments are treated as corrections of errors to the Company's prior period financial results, the amendments are considered to be a "restatement” under U.S. generally accepted accounting principles (“US GAAP”). Accordingly, the revised financial information included in this Form 10-Q/A has been identified as “As Restated.”
TERAWULF INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Forward-Looking Statements
This Quarterly Report contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management, and expected market growth are forward-looking statements. These forward- looking statements are contained principally in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis.” Without limiting the generality of the preceding sentence, any time we use the words “expects,” "intends,” “will,” “anticipates,” “believes,” “confident,” “continue,” “propose,” “seeks,” “could,” “may,” “should,” “estimates,” “forecasts,” “might,” “goals,” “objectives,” “targets,” “planned,” “projects,” and, in each case, their negative or other various or comparable terminology and similar expressions, we intend to clearly express that the information deals with possible future events and is forward-looking in nature. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. For TeraWulf, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include, without limitation:
•conditions in the cryptocurrency mining industry, including any prolonged substantial reduction in cryptocurrency prices, and specifically, the value of bitcoin, which could cause a decline in the demand for TeraWulf’s services;
•competition among the various providers of data mining services;
•the need to raise additional capital to meet our business requirements in the future, which may be costly or difficult to obtain or may not be obtained (in whole or in part) and, if obtained, could significantly dilute the ownership interests of TeraWulf’s shareholders;
•the ability to implement certain business objectives and the ability to timely and cost-effectively execute integrated projects;
•adverse geopolitical or economic conditions, including a high inflationary environment;
•security threats or unauthorized or impermissible access to our data centers, our operations or our digital wallet;
•counterparty risk with respect to our digital asset custodian and our mining pool provider;
•employment workforce factors, including the loss of key employees;
•changes in governmental safety, health, environmental and other regulations, which could require significant expenditures;
•liability related to the use of TeraWulf’s services;
•currency exchange rate fluctuations; and
•other risks, uncertainties and factors included or incorporated by reference in this Quarterly Report, including those set forth under “Risk Factors” and those included under the heading “Risk Factors” in our annual report on Form 10-K, filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 31, 2023 (the “Original 10-K”), as amended by our annual report on Form 10-K/A, filed with the SEC on May 5, 2023, for the fiscal year ended December 31, 2022 (the “10-K/A” and together with the Original 10-K, the “Annual Report on Form 10-K”).
These forward-looking statements reflect our views with respect to future events as of the date of this Quarterly Report and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report and, except as required by law, we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Quarterly Report. We anticipate that subsequent events and developments will cause our views to change. You should read this Quarterly Report completely and with 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.
PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements
TERAWULF INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2023 AND DECEMBER 31, 2022
(In thousands, except number of shares and par value)
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| (unaudited) | | |
ASSETS | | | |
CURRENT ASSETS: | | | |
Cash and cash equivalents | $ | 6,595 | | | $ | 1,279 | |
Restricted cash | — | | | 7,044 | |
Digital currency, net | 614 | | | 183 | |
Prepaid expenses | 2,360 | | | 5,095 | |
Other receivables | 2,723 | | | — | |
Other current assets | 688 | | | 543 | |
Total current assets | 12,980 | | | 14,144 | |
Equity in net assets of investee | 105,557 | | | 98,741 | |
Property, plant and equipment, net | 181,294 | | | 191,521 | |
Right-of-use asset | 11,194 | | | 11,944 | |
Other assets | 768 | | | 1,337 | |
TOTAL ASSETS | $ | 311,793 | | | $ | 317,687 | |
| | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
CURRENT LIABILITIES: | | | |
Accounts payable | $ | 19,422 | | | $ | 21,862 | |
Accrued construction liabilities | 724 | | | 2,903 | |
Other accrued liabilities | 6,743 | | | 14,963 | |
Share based liabilities due to related party | 2,085 | | | 14,583 | |
Other amounts due to related parties | 1,433 | | | 3,295 | |
Contingent value rights | 1,366 | | | 10,900 | |
Current portion of operating lease liability | 46 | | | 42 | |
Insurance premium financing payable | 199 | | | 2,117 | |
Convertible promissory notes | — | | | 3,416 | |
Current portion of long-term debt | 76,461 | | | 51,938 | |
Total current liabilities | 108,479 | | | 126,019 | |
Operating lease liability, net of current portion | 912 | | | 947 | |
Long-term debt | 48,468 | | | 72,967 | |
TOTAL LIABILITIES | 157,859 | | | 199,933 | |
| | | |
Commitments and Contingencies (See Note 12) | | | |
| | | |
STOCKHOLDERS' EQUITY: | | | |
Preferred stock, $0.001 par value, 100,000,000 and 25,000,000 authorized at September 30, 2023 and December 31, 2022, respectively; 9,566 issued and outstanding at September 30, 2023 and December 31, 2022; aggregate liquidation preference of $11,145 and $10,349 at September 30, 2023 and December 31, 2022, respectively | 9,273 | | | 9,273 | |
Common stock, $0.001 par value, 400,000,000 and 200,000,000 authorized at September 30, 2023 and December 31, 2022, respectively; 232,222,332 and 145,492,971 issued and outstanding at September 30, 2023 and December 31, 2022, respectively | 232 | | | 145 | |
Additional paid-in capital | 393,799 | | | 294,810 | |
Accumulated deficit | (249,370) | | | (186,474) | |
Total stockholders' equity | 153,934 | | | 117,754 | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 311,793 | | | $ | 317,687 | |
See Notes to Consolidated Financial Statements.
TERAWULF INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(In thousands, except number of shares and loss per common share; unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | |
Revenue | $ | 18,955 | | | $ | 3,864 | | | $ | 45,944 | | | $ | 5,466 | |
Cost of revenue (exclusive of depreciation shown below) | 8,268 | | | 5,181 | | | 18,383 | | | 5,804 | |
Gross profit (loss) | 10,687 | | | (1,317) | | | 27,561 | | | (338) | |
| | | | | | | |
Cost of operations: | | | | | | | |
Operating expenses | 442 | | | 261 | | | 1,218 | | | 1,689 | |
Operating expenses – related party | 779 | | | 603 | | | 2,015 | | | 812 | |
Selling, general and administrative expenses | 5,767 | | | 5,934 | | | 18,137 | | | 16,253 | |
Selling, general and administrative expenses – related party | 4,519 | | | 2,948 | | | 10,093 | | | 8,187 | |
Depreciation | 8,224 | | | 1,515 | | | 20,085 | | | 1,719 | |
Realized gain on sale of digital currency | (697) | | | (127) | | | (1,883) | | | (127) | |
Impairment of digital currency | 922 | | | 119 | | | 2,231 | | | 682 | |
Loss on disposals of property, plant, and equipment | 420 | | | — | | | 420 | | | — | |
Loss on nonmonetary miner exchange | — | | | 804 | | | — | | | 804 | |
Total cost of operations | 20,376 | | | 12,057 | | | 52,316 | | | 30,019 | |
| | | | | | | |
Operating loss | (9,689) | | | (13,374) | | | (24,755) | | | (30,357) | |
Interest expense | (10,251) | | | (7,230) | | | (25,535) | | | (16,691) | |
Other income | 59 | | | — | | | 113 | | | — | |
Loss before income tax and equity in net loss of investee | (19,881) | | | (20,604) | | | (50,177) | | | (47,048) | |
Income tax (expense) benefit | — | | | 256 | | | — | | | 256 | |
Equity in net income (loss) of investee, net of tax | 850 | | | (12,739) | | | (12,613) | | | (14,611) | |
Loss from continuing operations | (19,031) | | | (33,087) | | | (62,790) | | | (61,403) | |
Loss from discontinued operations, net of tax | (68) | | | (901) | | | (106) | | | (4,437) | |
Net loss | (19,099) | | | (33,988) | | | (62,896) | | | (65,840) | |
Preferred stock dividends | (272) | | | (247) | | | (796) | | | (531) | |
Net loss attributable to common stockholders | $ | (19,371) | | | $ | (34,235) | | | $ | (63,692) | | | $ | (66,371) | |
| | | | | | | |
Loss per common share: | | | | | | | |
Continuing operations | $ | (0.09) | | | $ | (0.31) | | | $ | (0.32) | | | $ | (0.59) | |
Discontinued operations | - | | | (0.01) | | | - | | | (0.04) | |
Basic and diluted | $ | (0.09) | | | $ | (0.32) | | | $ | (0.32) | | | $ | (0.63) | |
| | | | | | | |
Weighted average common shares outstanding: | | | | | | | |
Basic and diluted | 221,718,367 | | 108,839,269 | | 199,259,314 | | 104,391,923 |
See Notes to Consolidated Financial Statements.
TERAWULF INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(In thousands, except number of shares; unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total |
| Number | | Amount | | Number | | Amount | | | |
Balances as of June 30, 2023 | 9,566 | | $ | 9,273 | | 216,055,887 | | $ | 216 | | $ | 355,600 | | $ | (230,271) | | | $ | 134,818 |
Warrant exercise | - | | - | | 1,610,184 | | 1 | | 13 | | - | | 14 |
Common stock offering, net of issuance costs | - | | - | | 10,850,699 | | 11 | | 21,775 | | - | | 21,786 |
Common stock issued for share based liabilities due to related party | - | | - | | 2,460,513 | | 2 | | 14,998 | | - | | 15,000 |
Stock-based compensation expense and issuance of stock | - | | - | | 1,245,049 | | 2 | | 1,413 | | - | | 1,415 |
Net loss | - | | - | | - | | - | | - | | (19,099) | | | (19,099) |
Balances as of September 30, 2023 | 9,566 | | $ | 9,273 | | 232,222,332 | | $ | 232 | | $ | 393,799 | | $ | (249,370) | | $ | 153,934 |
| | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total |
| Number | | Amount | | Number | | Amount | | | |
| | | | | | | | | | | | | |
Balances as of December 31, 2022 | 9,566 | | $ | 9,273 | | | 145,492,971 | | $ | 145 | | | $ | 294,810 | | | $ | (186,474) | | | $ | 117,754 | |
Common stock reacquired in exchange for warrants | — | | — | | | (12,000,000) | | (12) | | | (12,479) | | | — | | | (12,491) | |
Warrant issuance in conjunction with debt modification | — | | — | | | — | | — | | | 16,036 | | | — | | | 16,036 | |
Warrant offerings | — | | — | | | — | | — | | | 14,991 | | | — | | | 14,991 | |
Warrant exercise | — | | — | | | 27,258,005 | | 27 | | | 3,500 | | | — | | | 3,527 | |
Common stock offering, net of issuance costs | — | | — | | | 54,663,601 | | 55 | | | 54,079 | | | — | | | 54,134 | |
Convertible promissory notes converted to common stock | — | | — | | | 11,762,956 | | 12 | | | 4,693 | | | — | | | 4,705 | |
Common stock issued for share based liabilities due to related party | — | | — | | | 2,460,513 | | 2 | | | 14,998 | | | — | | | 15,000 | |
Stock-based compensation expense and issuance of stock | — | | — | | | 3,084,780 | | 3 | | | 4,023 | | | — | | | 4,026 | |
Tax withholdings related to net share settlements of stock-based compensation awards | — | | — | | | (500,494) | | — | | | (852) | | | — | | | (852) | |
Net loss | — | | — | | | — | | — | | | — | | | (62,896) | | | (62,896) | |
Balances as of September 30, 2023 | 9,566 | | $ | 9,273 | | | 232,222,332 | | $ | 232 | | | $ | 393,799 | | | $ | (249,370) | | | $ | 153,934 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total |
| Number | | Amount | | Number | | Amount | | | |
Balances as of June 30, 2022 | 9,566 | | $ | 9,804 | | 104,969,199 | | $ | 105 | | $ | 253,174 | | $ | (127,819) | | | $ | 135,264 |
Warrant issuance in conjunction with debt offering | — | | — | | | — | | — | | | 5,764 | | | — | | | 5,764 | |
Common stock offering, net of issuance costs | — | | — | | 10,477,202 | | 10 | | 14,472 | | — | | 14,482 |
Stock-based compensation expense | — | | — | | | — | | — | | | 568 | | | — | | | 568 | |
Preferred stock dividends | — | | — | | — | | — | | — | | (247) | | | (247) |
Net loss | — | | — | | | — | | — | | | — | | | (33,988) | | | (33,988) | |
Balances as of September 30, 2022 | 9,566 | | $ | 9,804 | | 115,446,401 | | $ | 115 | | $ | 273,978 | | $ | (162,054) | | $ | 121,843 |
| | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total |
| Number | | Amount | | Number | | Amount | | | |
| | | | | | | | | | | | | |
Balances as of December 31, 2021 | — | | $ | — | | | 99,976,253 | | $ | 100 | | | $ | 218,762 | | | $ | (95,683) | | | $ | 123,179 | |
Issuance of Series A Convertible Preferred Stock, net of issuance costs | 9,566 | | 9,273 | | | — | | — | | | — | | | | | 9,273 | |
Warrant issuance in conjunction with debt offering | — | | — | | | — | | — | | | 5,764 | | | — | | | 5,764 | |
Common stock offering, net of issuance costs | — | | — | | | 15,470,148 | | 15 | | | 48,402 | | | — | | | 48,417 | |
Stock-based compensation expense | — | | — | | | — | | — | | | 1,050 | | | — | | | 1,050 | |
Preferred stock dividends | — | | 531 | | | — | | — | | | — | | | (531) | | | — | |
Net loss | — | | — | | | — | | — | | | — | | | (65,840) | | | (65,840) | |
Balances as of September 30, 2022 | 9,566 | | $ | 9,804 | | 115,446,401 | | $ | 115 | | $ | 273,978 | | $ | (162,054) | | $ | 121,843 |
See Notes to Consolidated Financial Statements.
TERAWULF INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (AS RESTATED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(In thousands; unaudited)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
| (As Restated) | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net loss | $ | (62,896) | | | $ | (65,840) | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Amortization of debt issuance costs, commitment fees and accretion of debt discount | 14,316 | | | 7,468 | |
Related party expense to be settled with respect to common stock | 2,502 | | | — | |
Common stock issued for interest expense | 26 | | | 82 | |
Stock-based compensation expense | 4,023 | | | 1,050 | |
Depreciation | 20,085 | | | 1,719 | |
Amortization of right-of-use asset | 750 | | | 53 | |
Increase in digital currency from mining and hosting services | (41,936) | | | (3,561) | |
Impairment of digital currency | 2,231 | | | 682 | |
Realized gain on sale of digital currency | (1,883) | | | (127) | |
Proceeds from sale of digital currency | 52,570 | | | 2,946 | |
Loss on disposals of property, plant, and equipment | 420 | | | — | |
Loss on nonmonetary miner exchange | — | | | 804 | |
Deferred income tax benefit | — | | | (256) | |
Equity in net loss of investee, net of tax | 12,613 | | | 14,611 | |
Loss from discontinued operations, net of tax | 106 | | | 4,437 | |
Changes in operating assets and liabilities: | — | | | — | |
Decrease (increase) in prepaid expenses | 2,735 | | | (1,218) | |
Decrease in amounts due from related parties | — | | | 815 | |
Increase in other receivables | (2,723) | | | — | |
Increase in other current assets | (97) | | | (1,129) | |
Decrease (increase) in other assets | 69 | | | (879) | |
(Decrease) increase in accounts payable | (3,936) | | | 5,663 | |
(Decrease) increase in other accrued liabilities | (3,463) | | | 2,537 | |
(Decrease) increase in other amounts due to related parties | (2,396) | | | 1,652 | |
(Decrease) increase in operating lease liability | (31) | | | 185 | |
Net cash used in operating activities from continuing operations | (6,915) | | | (28,306) | |
Net cash provided by (used in) operating activities from discontinued operations | 283 | | | (1,303) | |
Net cash used in operating activities | (6,632) | | | (29,609) | |
| | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Investments in joint venture, including direct payments made on behalf of joint venture | (2,845) | | | (37,997) | |
Reimbursable payments for deposits on plant and equipment made on behalf of a joint venture or joint venture partner | — | | | (11,741) | |
Reimbursement of payments for deposits on plant and equipment made on behalf of a joint venture or joint venture partner | — | | | 11,716 | |
Purchase of and deposits on plant and equipment | (41,392) | | | (53,947) | |
Proceeds from sale of net assets held for sale | — | | | 13,500 | |
Net cash used in investing activities | (44,237) | | | (78,469) | |
| | | |
| | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Proceeds from issuance of long-term debt, net of issuance costs paid of $0 and $38 | — | | | 14,962 | |
Proceeds from insurance premium and property, plant and equipment financing | 790 | | | 4,854 | |
Principal payments on insurance premium and property, plant and equipment financing | (2,613) | | | (4,724) | |
Proceeds from issuance of common stock, net of issuance costs paid of $1,051 and $142 | 57,664 | | | 36,828 | |
Proceeds from warrant issuances | 2,500 | | | — | |
Payments of tax withholding related to net share settlements of stock-based compensation awards | (852) | | | — | |
Proceeds from issuance of preferred stock | — | | | 9,566 | |
Proceeds from issuance of convertible promissory note | 1,250 | | | 14,700 | |
Principal payments on convertible promissory note | — | | | (2,832) | |
Payment of contingent value rights liability related to proceeds from sale of net assets held for sale | (9,598) | | | — | |
Net cash provided by financing activities | 49,141 | | | 73,354 | |
| | | |
Net change in cash and cash equivalents and restricted cash | (1,728) | | | (34,724) | |
Cash and cash equivalents and restricted cash at beginning of period | 8,323 | | | 46,455 | |
Cash and cash equivalents and restricted cash at end of period | $ | 6,595 | | | $ | 11,731 | |
| | | |
Cash paid during the period for: | | | |
Interest | $ | 15,542 | | $ | 9,220 |
Income taxes | $ | — | | $ | — |
See Notes to Consolidated Financial Statements.
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 – ORGANIZATION
Organization
TeraWulf Inc. (“TeraWulf” or the “Company”) is a digital asset technology company with a core business of digital infrastructure and energy development to enable sustainable bitcoin mining. TeraWulf’s principal business consists of developing and operating bitcoin mining facilities in the United States that are fueled by clean, low cost and reliable power sources. The Company generates revenue in the form of bitcoin by providing hash computation services to a mining pool operator to mine bitcoin and validate transactions on the global bitcoin network using application-specific integrated circuit computers (“ASIC” or “miners”) owned by the Company. The earned bitcoin are routinely sold for U.S. dollars. The Company also earns revenue by providing miner hosting services to third parties. While the Company may choose to mine other digital currencies or pursue other data center services in the future, it has no plans to do so currently.
TeraWulf currently owns and operates, either independently or through a joint venture, two bitcoin mining facilities: the Lake Mariner Facility located in upstate New York; and the Nautilus Cryptomine Facility located in central Pennsylvania. The Company’s wholly-owned Lake Mariner Facility began mining bitcoin in March 2022 and, as of September 30, 2023, the Company has energized two buildings and additional infrastructure comprising 110 MW of capacity. The Nautilus Cryptomine Facility, which has been developed and constructed through a joint venture (see Note 11), commenced mining operations in February 2023 and, in April 2023, achieved full energization of the Company’s allotted infrastructure capacity of 50 MW.
On December 13, 2021, TeraWulf Inc. completed a strategic business combination (the “Merger”) with IKONICS Corporation ("IKONICS") , a Minnesota corporation, pursuant to which, among other things, the Company effectively acquired IKONICS and became a publicly traded company on the National Association of Securities Dealers Automated Quotations (“Nasdaq”), which was the primary purpose of the business combination. IKONICS’ traditional business was the development and manufacturing of high-quality photochemical imaging systems for sale primarily to a wide range of printers and decorators of surfaces. Customers’ applications were primarily screen printing and abrasive etching. TeraWulf initially classified the IKONICS business as held for sale and discontinued operations in its consolidated financial statements. During the year ended December 31, 2022, the Company completed sales of substantially all of IKONICS’ historical net assets (see Note 3). Subsequent to the asset sales, IKONICS’ name was changed to RM 101 Inc. (“RM 101”).
Risks and Uncertainties
Liquidity and Financial Condition
The Company incurred a net loss attributable to common stockholders of $63.7 million and negative cash flows from continuing operations of $6.9 million for the nine months ended September 30, 2023. As of September 30, 2023, the Company had balances of cash and cash equivalents and restricted cash of $6.6 million, a working capital deficiency of $95.5 million, total stockholders’ equity of $153.9 million and an accumulated deficit of $249.4 million. The Company has 5.5 EH/s of operating capacity across the Lake Mariner Facility and the Nautilus Cryptomine Facility as of September 2023, which the Company expects to result in positive cash flows from operations subsequently. To date, the Company has relied primarily on proceeds from its issuances of debt and equity and sale of bitcoin mined to fund its principal operations.
In accordance with development of its bitcoin mining facilities, during the nine months ended September 30, 2023, the Company invested approximately $41.4 million for purchases of and deposits on plant and equipment. Also, during the nine months ended September 30, 2023, the Company invested $2.8 million in its joint venture (see Note 11). TeraWulf expects to fund its business operations and incremental infrastructure buildout primarily through positive cash flows from operations, including sales of mined bitcoin or through miner hosting services, cash on the balance sheet and the issuance of equity securities.
During the nine months ended September 30, 2023, the Company accomplished several notable steps to achieve expected positive cash flows from operations, namely: (1) the Company amended its long-term debt agreement (see Note 9) to, among other changes, remove the fixed principal amortization through April 7, 2024 and, potentially, through maturity, (2) the Company received net proceeds of $57.7 million through the issuance of shares of our common stock, par value $0.001 per share (the “Common Stock”), Common Stock warrants and convertible promissory notes (see Notes 13 and 14), which along with cash flows from operations, is expected to be sufficient to fund the Company’s operating expenses in the months prior to achieving a free cash flow positive enterprise (3) commenced mining activities at the Nautilus Cryptomine Facility and the Company deems that it has funded all known and expected capital commitments at that facility, (4) the
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Company received substantially all contracted miners from the miner suppliers and has no remaining outstanding financial commitments under the miner purchase agreements (see Notes 11 and 12) for the existing operations at the Lake Mariner Facility and the Nautilus Cryptomine Facility, (5) the Company has received the quantity of miners sufficient to fully utilize mining capacity in service at the Lake Mariner Facility for buildings one and two and the Nautilus Cryptomine Facility and (6) the construction activities at the Lake Mariner Facility for buildings one and two and the Nautilus Cryptomine Facility are substantially complete as of September 30, 2023, although the Company intends to expand its infrastructure at the Lake Mariner Facility. Additionally, if a business need requires its use, the Company has an active at-the-market sales agreement for sale of shares of Common Stock having an aggregate offering price of up to $200.0 million (the “ATM Sales Agreement”), which had a remaining capacity of $162.2 million as of September 30, 2023. The issuance of Common Stock under this agreement would be made pursuant to the Company’s effective registration statement on Form S-3 (Registration statement No. 333-262226). The Company has determined that it is probable that these actions and conditions will allow the Company to generate positive cash flows from operations and be able to realize its assets and discharge its liabilities and commitments in the normal course of business and, therefore, there is not substantial doubt about the Company’s ability to continue as a going concern through at least the next twelve months. The consolidated financial statements do not include any adjustments that might result from TeraWulf’s possible inability to continue as a going concern.
COVID-19
As of May 2023, the World Health Organization no longer considers COVID-19 a global health emergency, however the Company may from time to time experience disruptions to its business operations resulting from continued COVID-19-related supply interruptions, including miner delivery interruptions. The Company may also experience COVID-19-related delays in construction and obtaining necessary equipment in a timely fashion. To date, the Company has experienced minimal delays due to COVID-19 among its suppliers and contractors.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. In the opinion of the Company, the accompanying unaudited interim consolidated financial statements reflect all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair statement of such interim results. All significant intercompany accounts and transactions have been eliminated. Certain prior period amounts have been reclassified to conform with current period presentation.
Certain amounts in the unaudited interim consolidated statement of cash flows for the nine months ended September 30, 2022 were restated as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The misstatements related solely to incorrectly calculating the impact of noncash activity on purchase and deposits on plant and equipment, resulting in an understatement of net cash used in investing activities and a corresponding overstatement of net cash used in operating activities as originally included in the respective interim unaudited consolidated statements of cash flows.
The results for the unaudited interim consolidated statements of operations are not necessarily indicative of results to be expected for the year ending December 31, 2023 or for any future interim period. The unaudited interim consolidated financial statements do not include all the information and notes required by U.S. GAAP for complete financial statements. The accompanying unaudited interim financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Prior Interim Period Restatement
The Company identified an error in its historical unaudited interim consolidated statements of cash flows for each of the first three quarters of 2023. In accordance with Staff Accounting Bulletin No. 99, “Materiality,” the Company determined that these unaudited interim consolidated financial statements were materially misstated and should be restated. The misstatement relates solely to incorrectly classifying payments of contingent value rights liability as an investing activity instead of as a financing activity in the respective unaudited interim consolidated statements of cash flows. These payments were made in accordance with the Contingent Value Rights Agreement related to the Company's merger with RM 101 Inc.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(see Note 3). The unaudited interim consolidated balance sheets, unaudited interim consolidated statements of operations and unaudited interim consolidated statements of stockholders' equity for each of the first three quarters of 2023 were not impacted and do not require restatement. The restated unaudited interim consolidated statements of cash flows information is included in Note 17.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for (but are not limited to) such items as the fair values of assets acquired and liabilities assumed in business combinations, the fair value of contingent consideration issued in a business combination, the establishment of useful lives for property, plant and equipment and intangible assets, the impairment of goodwill and held for sale assets, the fair value of equity securities or warrants to purchase common stock issued individually or as a component of a debt or equity offering, the fair value of changes to the conversion terms of embedded conversion features, the fair value and requisite service periods of stock-based compensation, the fair value of assets received in nonmonetary transactions, the establishment of right-of-use assets and lease liabilities that arise from leasing arrangements, the timing of commencement of capitalization for plant and equipment, impairment of indefinite-lived intangible assets, impairment of long-lived assets, recoverability of deferred tax assets and the recording of various accruals. These estimates are made after considering past and current events and assumptions about future events. Actual results could differ from those estimates.
Supplemental Cash Flow Information
The following table shows supplemental cash flow information (in thousands):
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
Supplemental disclosure of non-cash activities: | | | |
Right-of-use asset obtained in exchange for lease obligations | $ | — | | $ | 11,223 |
Contribution of plant and equipment or deposits on plant and equipment to joint venture | $ | 35,792 | | $ | — |
Common stock issuance costs in accounts payable | $ | — | | $ | 150 |
Preferred stock issuance costs in other accrued liabilities or accounts payable | $ | — | | $ | 293 |
Purchases of and deposits on plant and equipment in accounts payable, accrued construction liabilities, other accrued liabilities and long-term debt | $ | 6,081 | | $ | 10,100 |
Purchases of and deposits on plant and equipment with digital currency | $ | 269 | | $ | — |
Investment in joint venture in other accrued liabilities, other amounts due to related parties and long-term debt | $ | 452 | | $ | 2,043 |
Convertible promissory notes converted to common stock | $ | 4,666 | | $ | — |
Increase to preferred stock liquidation preference from accumulating dividends | $ | — | | $ | 531 |
Convertible promissory note deferred issuance costs in accounts payable | $ | — | | $ | 104 |
Common stock issued for share based liabilities due to related party | $ | 15,000 | | $ | — |
Common stock issued pursuant to operating lease amendment | $ | — | | $ | 11,489 |
Common stock issued for payment on convertible promissory note | $ | — | | $ | 168 |
Common stock warrants issued for long-term debt commitment fee | $ | — | | $ | 2,306 |
Common stock warrants issued for discount on long-term debt | $ | 16,036 | | $ | 3,458 |
Decrease to investment in joint venture and increase in plant and equipment for distribution or transfer of nonmonetary assets | $ | 6,867 | | $ | 51,978 |
Decrease to investment in joint venture due to bitcoin received as distribution from investee | $ | 11,682 | | $ | — |
Common stock reacquired in exchange for warrants | $ | 12,479 | | $ | — |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Cash and Cash Equivalents
Highly liquid instruments with an original maturity of three months or less are classified as cash equivalents. As of September 30, 2023 and December 31, 2022, the Company had cash and cash equivalents of $6.6 million and $8.3 million, including restricted cash, respectively.
The Company currently maintains cash and cash equivalent balances primarily at two financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Company’s accounts at these institutions are insured, up to $250,000, by the FDIC. As of September 30, 2023, the Company’s bank balances exceeded the FDIC insurance limit in an amount of approximately $0. To reduce its risk associated with the failure of such financial institutions, the Company evaluates at least annually the rating of the financial institutions in which it holds deposits.
On March 12, 2023, Signature Bank (“SBNY”) was closed by its state chartering authority, the New York State Department of Financial Services. On the same date the FDIC was appointed as receiver and transferred all customer deposits and substantially all of the assets of SBNY to Signature Bridge Bank, N.A., a full-service bank that is operated by the FDIC. All funds were transferred out of Signature Bridge Bank, N.A. by April 5, 2023.
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 Company had no restricted cash as of September 30, 2023. The restricted cash included in the consolidated balance sheet as of December 31, 2022 is restricted primarily due to being held in escrow in accordance with an asset purchase agreement governing the sale of certain RM 101 assets (see Note 3).
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets that total to the amounts shown in the consolidated statements of cash flows (in thousands):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Cash and cash equivalents | $ | 6,595 | | $ | 1,279 |
Restricted cash | — | | 7,044 |
Cash and cash equivalents and restricted cash | $ | 6,595 | | $ | 8,323 |
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision–making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision–making group (“CODM”) is composed of the chief executive officer, chief operating officer and chief strategy officer. Currently, the Company operates solely in the Digital Currency Mining segment. The Company’s mining operations are located in the United States, and the Company has employees only in the United States and views its mining operations as one operating segment as the CODM reviews financial information on a consolidated basis in making decisions regarding resource allocations and assessing performance. Prior to the sale of substantially all of RM 101’s assets, through its ownership of RM 101, the Company operated in the Imaging Technology segment. TeraWulf classified the RM 101 segment as held for sale and discontinued operations in these consolidated financial statements (see Note 3).
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 5 years for computer equipment and 4 years for miners). Leasehold improvements and electrical equipment are depreciated over the shorter of their estimated useful lives or the lease term. Property, plant and equipment, net includes deposits, amounting to approximately $16.3 million and $57.6 million as of September 30, 2023 and December 31, 2022, respectively, on purchases of such assets, including miners, which would be included in property, plant and equipment upon receipt.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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.
Impairment of Long-lived Assets
The Company reviews its long-lived assets, including property, plant and equipment, for impairment when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. Any impairment loss recorded is measured as the amount by which the carrying value of the assets exceeds the fair value of the assets. During the three and nine months ended September 30, 2023 and 2022, the Company determined that no impairment of long-lived assets exists.
Leases
The Company determines if an arrangement is a lease at inception and, if so, classifies the lease as an operating or finance lease. Operating leases are included in right-of-use (“ROU”) asset, current portion of operating lease liability, and operating lease liability, net of current portion in the consolidated balance sheets. Finance leases would be included in property, plant and equipment, current portion of finance lease liabilities, and finance lease liabilities, net of current portion in the consolidated balance sheets. The Company does not recognize a ROU asset or lease liability for short-term leases having initial terms of 12 months or less and instead recognizes rent expense on a straight-line basis over the lease term. In an arrangement that is determined to be a lease, the Company includes both the lease and nonlease components as a single component and accounts for it as a lease when the Company would otherwise recognize the cost associated with both the lease and nonlease components in a similar fashion.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at commencement date, and subsequently remeasured upon changes to the underlying lease arrangement, based on the present value of lease payments over the lease term. If the lease does not provide an implicit rate or if the implicit rate is not determinable, the Company generally uses an estimate of its incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at the commencement date. The ROU asset also includes any lease prepayments made and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
Costs associated with operating lease ROU assets are recognized on a straight-line basis within operating expenses or selling, general and administrative, as appropriate, over the term of the lease. Variable lease costs are recognized as incurred and primarily consist of common area maintenance charges not included in the measurement of right-of-use assets and operating lease liabilities. Finance ROU lease assets are amortized within operating expenses or selling, general and administrative expenses, as appropriate, on a straight-line basis over the shorter of the estimated useful lives of the assets or, in the instance where title does not transfer at the end of the lease term, the lease term. The interest component of a finance lease is included in interest expense and recognized using the effective interest method over the lease term.
As of September 30, 2023 and December 31, 2022, the Company was not a counterparty to any finance leases.
Debt Modification
The Company evaluates amendments to its debt instruments in accordance with applicable U.S. GAAP. This evaluation includes comparing (1) if applicable, the change in fair value of an embedded conversion option to that of the carrying amount of the debt immediately prior to amendment and (2) the net present value of future cash flows of the amended debt to that of the original debt to determine, in each case, if a change greater than 10% occurred. In instances where the net present value of future cash flows or the fair value of an embedded conversion option, if any, changed more than 10%, the Company applies extinguishment accounting. In instances where the net present value of future cash flows and the fair value of an embedded conversion option, if any, changed less than 10%, the Company accounts for the amendment to the debt as a debt modification. For debt that has been amended more than once in a twelve-month period, the debt terms that existed just prior to the earliest amendment occurring in the prior twelve months are applied to the 10% test, provided modification accounting was previously applied. Gains and losses on debt amendments that are considered extinguishments are recognized in current earnings. Debt amendments that are considered debt modifications are accounted for prospectively through yield adjustments, based on the revised terms. Legal fees and other costs incurred with third parties that are directly related to debt modifications are expensed as incurred and generally are included in interest expense in the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
consolidated statements of operations. Amounts paid by the Company to the lenders, including upfront fees and the fair value of warrants issued, are included in future cash flows for accounting treatment determination and, if debt modification is applicable, are also included in the determination of yield adjustment.
Convertible Instruments
The Company accounts for its issuance of convertible debt and convertible equity instruments in accordance with applicable U.S. GAAP. In connection with that accounting, the Company assesses the various terms and features of the agreement in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 480 “Distinguishing Liabilities from Equity” (“ASC 480”) and ASC 815 “Derivatives and Hedging Activities” (“ASC 815”). ASC 480 requires liability accounting for certain financial instruments, including shares that embody an unconditional obligation to transfer a variable number of shares, provided that the monetary value of the obligation is based solely or predominantly on one of the following three characteristics: (1) a fixed monetary amount known at inception, (2) variations in something other than the fair value of the issuer’s equity shares or (3) variations in the fair value of the issuer’s equity shares, but the monetary value to the counterparty moves in the opposite direction as the value of the issuer’s shares. In accordance with ASC 815, the Company assesses the various terms and features of the agreement to determine whether or not they contain embedded derivative instruments that are required under ASC 815 to be accounted for separately from the host contract and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value recorded in the current period's operating results.
Warrants
The Company applies ASC 480 and ASC 815 to assist in the determination of whether warrants issued for the purchase of Common Stock should be classified as liabilities or equity. Warrants that are determined to require liability classification are measured at fair value upon issuance and are subsequently remeasured to their then fair value at each subsequent reporting period with changes in fair value recorded in current earnings. Warrants that are determined to require equity classification are measured at fair value upon issuance and are not subsequently remeasured unless they are required to be reclassified. All warrants granted by the Company to date are classified as equity.
Nonmonetary Transactions
The Company accounts for goods and services exchanged in nonmonetary transactions at fair value unless the underlying exchange transaction lacks commercial substance or the fair value of the assets received or relinquished is not reasonably determinable, in which case the nonmonetary exchange would be measured based on the recorded amount of the nonmonetary asset relinquished.
Stock Issuance Costs
Stock issuance costs are recorded as a reduction to issuance proceeds. Stock issuance costs incurred prior to the closing of the related issuances, including under shelf registration statements, are recorded in other assets in the consolidated balance sheets if the closing of the related issuance is deemed probable.
Held for Sale and Discontinued Operations Classification
The Company classifies a business as held for sale in the period in which management commits to a plan to sell the business, the business is available for immediate sale in its present condition, an active program to complete the plan to sell the business is initiated, the sale of the business within one year is probable and the business is being marketed at a reasonable price in relation to its fair value.
Newly acquired businesses that meet the held-for-sale classification criteria upon acquisition are reported as discontinued operations. Upon a business’ classification as held for sale, net assets are measured for impairment. An impairment loss is recorded for long-lived assets held for sale when the carrying amount of the asset exceeds its fair value less cost to sell. Other assets and liabilities are generally measured for impairment by comparing their carrying values to their respective fair values. A long-lived asset is not depreciated or amortized while it is classified as held for sale.
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Revenue Recognition
The Company recognizes revenue under the FASB ASC 606 “Revenue from Contracts with Customers” (“ASC 606”). The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
•Step 1: Identify the contract with the customer
•Step 2: Identify the performance obligations in the contract
•Step 3: Determine the transaction price
•Step 4: Allocate the transaction price to the performance obligations in the contract
•Step 5: Recognize revenue when the Company satisfies a performance obligation
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
•Variable consideration
•Constraining estimates of variable consideration
•The existence of a significant financing component in the contract
•Noncash consideration
•Consideration payable to a customer
Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
Mining Pool
The Company has entered into an arrangement with a cryptocurrency mining pool (the Foundry USA Pool) to perform hash computation (i.e. hashrate) for the mining pool in exchange for consideration. Providing hash computation services to a mining pool is an output of the Company’s ordinary activities. The provision of such hash computation services is the sole performance obligation. The mining pool arrangement is terminable at any time without substantial penalty by Foundry USA Pool and may be terminated without substantial penalty by the Company upon providing one Contract Day’s, as defined, prior written notice. The Company’s enforceable right to compensation only begins when and continues
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
while the Company provides hash computation services to its customer, the mining pool operator. Accordingly, the contract term with Foundry USA Pool is deemed to be less than 24 hours and to continuously renew throughout the day. Additionally, the Company concluded that the mining pool operator’s (i.e., the customer’s) renewal right is not a material right because the renewal rights do not include any discounts; that is, the terms, conditions, and compensation amounts are at the then-current market rates.
There is no significant financing component in these transactions.
The mining pool applies the Full Pay Per Share (“FPPS”) payout model. Under the FPPS model, in exchange for providing hash computation services to the pool, the Company is entitled to pay-per-share base amount and transaction fee reward compensation, calculated on a daily basis, at an amount that approximates the total bitcoin that could have been mined and transaction fees that could have been awarded using the Company’s hash computation services, based upon the then current blockchain difficulty. Under this model, the Company is entitled to compensation, payable in bitcoin, regardless of whether the pool operator successfully records a block to the bitcoin blockchain.
The transaction consideration the Company receives, if any, is noncash consideration and is all variable. Because digital currency is considered noncash consideration, fair value of the digital currency award received would generally be determined using the quoted price of the related digital currency in the Company’s principal market at the time of contract inception. The Company has adopted an accounting policy to aggregate individual contracts with individual terms less than 24-hours within each intraday period and apply a consistent valuation point, the start of day Coordinated Universal Time (00:00:00 UTC), to value the related noncash consideration. Revenue is recognized when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur, which is the same day that control of the contracted service transfers to the mining pool, which is the same day as the contract inception. After every 24-hour contract term, the mining pool transfers the digital currency consideration to our designated digital currency wallet.
Consideration payable to the customer in the form of a pool operator fee, which is incurred only to the extent that the Company has generated FPPS consideration, is deducted from the bitcoin the Company receives and is recorded as contra-revenue, as it does not represent a payment for a distinct good or service.
Data Center Hosting
The Company’s current hosting contracts are service contracts with a single performance obligation. The service the Company provides primarily includes hosting the customers’ miners in a physically secure data center with electrical power, internet connectivity, ambient air cooling and available maintenance resources. Hosting revenue is recognized over time as the customer simultaneously receives and consumes the benefits of the Company’s performance. The Company recognizes hosting revenue to the extent that a significant reversal of such revenue will not occur. Data center hosting customers are invoiced and payments are due on a monthly basis. While the majority of consideration is paid in cash, certain consideration is payable in digital currency. Because digital currency is considered noncash consideration, fair value of the digital currency award received is determined using the quoted price of the related digital currency in the Company’s principal market at the time of contract inception. The Company has one data center hosting contract with a customer, which expires in December 2023, for which the quoted price of bitcoin in the Company’s principal market at the time of contract inception was approximately $38,000. The Company recorded miner hosting revenue of $1.8 million and $5.8 million during the three and nine months ended September 30, 2023, respectively, and $1.4 million and $1.8 million during the three and nine months ended September 30, 2022, respectively.
Digital currency, net
Digital currency, net is comprised of bitcoin earned as noncash consideration in exchange for providing hash computation services to a mining pool as well as in exchange for data center hosting services which are accounted for in connection with the Company’s revenue recognition policy disclosed above. From time to time, the Company also receives bitcoin as distributions-in-kind from its joint venture. Digital currency is included in current assets in the consolidated balance sheets due to the Company’s ability to sell it in a highly liquid marketplace and because the Company reasonably expects to liquidate its digital currency to support operations within the next twelve months. The Company sells its digital currency on a first-in-first-out basis.
Digital currency is accounted for as intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently if events or changes in circumstances indicate it is more likely than not that the asset is impaired. Impairment exists when the carrying amount exceeds its fair
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
value. 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, it is required to perform a quantitative impairment test.
The Company has elected to bypass the optional qualitative impairment assessment and to track its bitcoin activity daily for impairment assessment purposes. The Company determines the fair value of its bitcoin on a nonrecurring basis in accordance with ASC 820 based on quoted prices on the active trading platform that the Company normally transacts and has determined is its principal market for bitcoin (Level 1 inputs), based on all information that is reasonably available. The Company performs an analysis each day to identify whether events or changes in circumstances, principally decreases in the quoted price of bitcoin on the active trading platform, indicate that it is more likely than not that its bitcoin are impaired. For impairment testing purposes, the lowest intraday trading price of bitcoin is identified at the single bitcoin level (one bitcoin). The excess, if any, of the carrying amount of bitcoin and the lowest daily trading price of bitcoin represents a recognized impairment loss. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of previously recorded impairment losses is prohibited. The Company recognized impairment of digital currency of $0.9 million and $2.2 million during the three and nine months ended September 30, 2023, respectively, and $0.1 million and $0.7 million during the three and nine months ended September 30, 2022, respectively.
Digital currency awarded to the Company through its mining activities are included as an adjustment to reconcile net loss to cash used in operating activities on the consolidated statements of cash flows. Proceeds from sales of digital currency are included within cash flows from operating activities on the consolidated statements of cash flows and any realized gains or losses from such sales are included in costs and operating expenses on the consolidated statements of operations. The receipt of digital currency as distributions-in-kind from equity investees are included within supplemental disclosures of noncash investing activities.
Cost of Revenue
Cost of revenue for mining pool revenue is comprised primarily of direct costs of electricity but excludes depreciation which is separately presented. Cost of revenue for data center hosting is comprised primarily of direct costs of electricity, labor and internet provision.
Stock-based Compensation
The Company periodically issues restricted stock units (“RSUs”) to employees and non-employees in non-capital raising transactions for services. In accordance with the authoritative guidance for share-based payments FASB ASC 718 “Compensation – Stock Compensation,” the Company measures stock-based compensation cost at the grant date, based on the estimated fair value of the award. For RSUs with time-based vesting, the fair value is determined by the Company’s stock price on the date of grant. For RSUs with vesting based on market conditions, the effect of the market condition is considered in the determination of fair value on the grant date using a Monte Carlo simulation model. The Company has not issued stock options.
Expense for RSUs is recognized on a straight-line basis over the employee’s or non-employee’s service period, including the derived service period for RSUs with market conditions. Stock-based compensation for RSUs with market conditions is recorded over the derived service period unless the market condition is satisfied in advance of the derived service period, in which case a cumulative catch-up is recognized as of the date of achievement. Stock-based compensation for RSUs with market conditions is recorded regardless of whether the market conditions are met unless the service conditions are not met. The Company accounts for forfeitures as they occur. The Company recognizes excess tax benefits or deficiencies on vesting or settlement of awards as discrete items within income tax benefit or provision within net income (loss) and the related cash flows are classified within operating activities.
Power Curtailment Credits
Proceeds related to participation in demand response programs are recorded as a reduction in cost of revenue in the consolidated statements of operations in the period corresponding to the underlying associated demand response program period. The Company recorded demand response program amounts of approximately $1.7 million and $2.5 million during the three and nine months ended September 30, 2023, respectively, and $0.1 million during each of the three and nine months ended September 30, 2022.
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Other Income
Other income consists primarily of interest income on bank deposits. The Company recorded other income of $0 and $39,000 during the three and nine months ended September 30, 2023, respectively, related to a disgorgement of short-swing profits arising from trades by a non-management insider under Section 16(b) of the Securities and Exchange Act of 1934.
Loss per Share
The Company computes earnings (loss) per share using the two-class method required for participating securities. The two-class method requires income available to common stockholders for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed.
Basic loss per share of common stock is computed by dividing the Company’s net loss attributed to common stockholders (adjusted for preferred stock dividends declared or accumulated) by the weighted average number of shares of common stock outstanding during the period. Convertible preferred stock, which are participating securities because they share in a pro rata basis any dividends declared on common stock but because they do not have the obligation to share in the loss of the Company, are excluded from the calculation of basic net loss per share. Diluted loss per share reflects the effect on weighted average shares outstanding of the number of additional shares outstanding if potentially dilutive instruments, if any, were converted into common stock using the treasury stock method or as-converted method as appropriate. The computation of diluted loss per share does not include dilutive instruments in the weighted average shares outstanding, as they would be anti-dilutive. The Company’s dilutive instruments or participating securities as of September 30, 2023 include convertible preferred stock, common stock warrants and RSUs issued for services. The Company’s dilutive instruments or participating securities as of December 31, 2022 include convertible preferred stock, convertible promissory notes, common stock warrants and RSUs issued for services. If the entire liquidation preference of the Convertible Preferred Stock (as defined in Note 13) was converted at its conversion price as of September 30, 2023, the Company would issue approximately 1.1 million shares of Common Stock. As of September 30, 2023, Common Stock warrants outstanding were 49,120,642 with a weighted average strike price of $0.58 and total RSUs outstanding were 6,422,632.
Concentrations
The Company and its joint venture have contracted with two suppliers for the provision of bitcoin miners and one mining pool operator. The Company does not believe that these counterparties represent a significant performance risk. Revenue from one data center hosting customer represents 9.5% and 12.7% of consolidated revenue for the three and nine months ended September 30, 2023, respectively, and represents 36.2% and 32.9% of consolidated revenue for the three and nine months ended September 30, 2022, respectively. The Company only operates bitcoin mining facilities. While the Company may choose to mine other digital currencies or pursue other data center services 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, ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
On December 13, 2021, the Company completed the Merger with RM 101 (formerly known as IKONICS Corporation) pursuant to which, among other things, the Company effectively acquired RM 101 and became a publicly traded company on the Nasdaq. The consideration in the Merger included, among other things, contractual contingent value rights (“CVR”) per a Contingent Value Rights Agreement (the “CVR Agreement”). Pursuant to the CVR Agreement, each shareholder of RM 101 as of immediately prior to the Merger, received one non-transferable CVR for each outstanding share of common stock of RM 101 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 RM 101. Payments under the CVR Agreement are calculated quarterly, are paid on the sixtieth day after the respective quarterly calculation period and are subject to a reserve of up to 10% of the Gross Proceeds (as defined in the CVR Agreement) from such transaction or more under certain conditions. The Company made a CVR payment in the amount of $3.9 million in February 2023 related to the quarterly calculation for the fourth quarter of 2022. The Company made a CVR payment in the amount of $5.7 million in May 2023 related to the quarterly calculation for the first quarter of 2023. The CVRs do not confer to the holders thereof any voting or equity or ownership interest in TeraWulf. The CVRs 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.
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Holders of CVRs (the “CVR Holders”) will not be eligible to receive payment for dispositions, if any, of any part of the pre-merger business of RM 101 after the eighteen-month anniversary of the closing of the Merger.
In August 2022, RM 101 sold a certain property, including a warehouse, to a third party for $6.7 million gross with net sale proceeds of $6.2 million. The Definitive Agreement governing the sale included certain indemnifications which were subject to an $850,000 limitation and which expired in August 2023.
In August 2022, RM 101 sold (i) certain property, including a warehouse and a building which houses manufacturing, operations and administration, (ii) substantially all of its working capital and (iii) its historical business to a third party for $7.7 million gross, including net working capital, with net sale proceeds of $7.0 million. The Asset Purchase Agreement (the “APA”) governing the sale was structured as an asset sale. The APA included certain indemnifications which were subject to a $650,000 limitation and a related escrow of that amount upon consummation of the transaction. Substantially all the remaining purchase price was placed into escrow upon consummation of the transaction pending the completion of certain remaining environmental testing and remediation resulting therefrom, if any. At December 31, 2022, proceeds from this sale were included in restricted cash in the consolidated balance sheet. In February 2023, all escrowed funds were released to the Company.
In accordance with the CVR Agreement, as of September 30, 2023, the Company has made aggregate distributions of $9.6 million of proceeds to the CVR Holders. As of September 30, 2023, all RM 101 assets previously held for sale had been sold and the estimated remaining CVR liability of $1.4 million is included in contingent value rights in the consolidated balance sheet. The final CVR payment will be made on or about November 28, 2023.
Upon acquisition, the RM 101 business met the assets held-for-sale and discontinued operations criteria and is reflected as discontinued operations held for sale in these consolidated financial statements. The Company determined that the RM 101 business qualified as assets held for sale as management committed to a plan to sell the business, the business was in readily sellable form and it was deemed probable that the business would be sold in a twelve-month period. All net assets held for sale had been sold as of December 31, 2022. The loss from discontinued operations, net of tax presented in the consolidated statements of operations includes the following results of RM 101 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Net sales | $ | — | | | $ | 2,203 | | | $ | — | | | $ | 11,028 | |
Cost of goods sold | — | | | 1,945 | | | — | | | 8,265 | |
Gross profit | — | | | 258 | | | — | | | 2,763 | |
Selling, general and administrative expenses | 4 | | | 760 | | | 65 | | | 3,375 | |
Research and development expenses | — | | | 148 | | | — | | | 437 | |
Impairment on remeasurement or classification as held for sale | — | | | — | | | — | | | 4,541 | |
Loss on sale of net assets held for sale | — | | | 239 | | | — | | | 239 | |
Loss from discontinued operations before other income | (4) | | | (889) | | | (65) | | | (5,829) | |
Interest expense | — | | | (12) | | | — | | | (12) | |
Other income | — | | | — | | | 23 | | | 6 | |
Loss from discontinued operations before income tax | (4) | | | (901) | | | (42) | | | (5,835) | |
Income tax expense | | | — | | | — | | | (8) | |
Loss from discontinued operations, net of tax | $ | (4) | | | $ | (901) | | | $ | (42) | | | $ | (5,843) | |
Loss from discontinued operations, net of tax in the consolidated statement of operations also includes a loss on CVR remeasurement of $64,000 for each of the three and nine months ended September 30, 2023 and includes a gain on CVR remeasurement of $0 and $1.4 million for the three and nine months ended September 30, 2022, respectively. Total cash flows provided by (used in) operating activities from discontinued operations was $0.3 million and $(1.3) million in the consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022, respectively.
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 4 – FAIR VALUE MEASUREMENTS
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-level fair value hierarchy prioritizing the inputs to valuation techniques is used to measure fair value. The levels are as follows: (Level 1) observable inputs such as quoted prices in active markets for identical assets or liabilities; (Level 2) observable inputs for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable either directly or indirectly from market data; and (Level 3) unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
The following table illustrates the financial instruments measured at fair value on a non-recurring basis segregated by hierarchy fair value levels as of September 30, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Carrying Value | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Other Unobservable Inputs (Level 3) | | Remeasurement Gain (Loss) |
Contingent consideration liability - Contingent Value Rights | $ | 1,366 | | | $ | — | | | $ | 1,366 | | | $ | — | | | $ | (64) | |
| $ | 1,366 | | | $ | — | | | $ | 1,366 | | | $ | — | | | $ | (64) | |
The following table illustrates the financial instruments measured at fair value on a non-recurring basis segregated by hierarchy fair value levels as of December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Carrying Value | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Other Unobservable Inputs (Level 3) | | Remeasurement Gain (Loss) |
Contingent consideration liability - Contingent Value Rights (1) | $ | 10,900 | | $ | — | | $ | 10,900 | | $ | — | | $ | 1,100 |
| $ | 10,900 | | $ | — | | $ | 10,900 | | $ | — | | $ | 1,100 |
(1)During the three months ended March 31, 2022, the Company changed the valuation approach from the use of other unobservable inputs to other observable inputs based on information obtained through the active marketing and sale of the underlying assets.
The Company has determined the long-term debt fair value as of September 30, 2023 is approximately $135.1 million (see Note 9). The carrying values of cash and cash equivalents, restricted cash, prepaid expenses, amounts due from related parties, other current assets, accounts payable, accrued construction liabilities, other accrued liabilities and other amounts due to related parties are considered to be representative of their respective fair values principally due to their short-term maturities. There were no additional material non-recurring fair value measurements as of September 30, 2023 and December 31, 2022, except for (i) the calculation of fair value of Common Stock warrants issued in connection with amendments to the Company’s long-term debt agreement (see Note 9), in connection with the issuance of Common Stock (see Note 15), in connection with a Common Stock exchange agreement (see Note 14) and on a standalone basis (see Note 14), (ii) the change in fair value of embedded derivatives in certain of the Company’s convertible promissory notes (see Note 14) and (iii) the calculation of fair value of nonmonetary assets distributed from the Company’s joint venture (see Note 11).
The Company utilized a Black-Scholes option pricing model and the application of a discount for lack of marketability (“DLOM”) to value its Common Stock warrants issued in connection with the New Term Facility and to value its Common Stock warrants issued in connection with the Fifth Amendment (each as defined in Note 9). The DLOM is applied primarily due to contractual restrictions on the exercise of the respective warrants. The estimated fair value of the warrants
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
is determined using Level 3 inputs. Inherent in the model and fair value estimate are assumptions related to expected share-price volatility, expected life, risk-free interest rate, dividend yield and DLOM. The Company estimates volatility based on public company peer group volatility over the contractual term of the warrants. The risk-free interest rate is based on the U.S. Treasury rate on the grant date for a maturity similar to the expected life of the warrants, which is assumed to be equivalent to their contractual term. The dividend rate is based on the historical rate, which the Company anticipates will remain at zero. The Company applied a DLOM of 20% to value its Common Stock warrants issued in connection with the New Term Facility and applied a DLOM of 30% to value its Common Stock warrants issued in connection with the Fifth Amendment.
NOTE 5 – BITCOIN
The following table presents the Company’s bitcoin activity (in thousands):
| | | | | | | | | | | |
| Nine Months Ended September 30, 2023 | | Year Ended December 31, 2022 |
Beginning balance | $ | 183 | | $ | — |
Bitcoin received from mining pool and hosting services | 41,936 | | 10,810 |
Bitcoin received as distribution from investee | 11,682 | | — |
Impairment | (2,231) | | | (1,457) | |
Disposition | (50,687) | | | (9,170) |
Bitcoin exchanged for goods or services | (269) | | — |
Ending balance | $ | 614 | | $ | 183 |
NOTE 6 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consisted of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Miners | $ | 100,337 | | | $ | 71,114 | |
Construction in process | 12,731 | | | 32,360 | |
Leasehold improvements | 62,880 | | | 29,880 | |
Equipment | 15,613 | | | 7,208 | |
Vehicles | 104 | | | — | |
Deposits on miners | 16,347 | | | 57,626 | |
| 208,012 | | | 198,188 | |
Less: accumulated depreciation | (26,718) | | | (6,667) | |
| $ | 181,294 | | | $ | 191,521 | |
The Company capitalizes a portion of the interest on funds borrowed to finance its capital expenditures. Capitalized interest is recorded as part of an asset’s cost and is depreciated over the same period as the related asset. Capitalized interest costs were $0 and $2.2 million for the three and nine months ended September 30, 2023, respectively, and $1.9 million and $4.3 million for the three and nine months ended September 30, 2022, respectively.
Depreciation expense was $8.2 million and $20.1 million for the three and nine months ended September 30, 2023, respectively, and $1.5 million and $1.7 million for the three and nine months ended September 30, 2022, respectively.
NOTE 7 – LEASES
Effective in May 2021, the Company entered into a ground lease (the “Ground Lease”) related to the Lake Mariner Facility in New York with a counterparty which is a related party due to control by a member of Company management. The
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Ground Lease includes fixed payments and contingent payments, including an annual escalation factor as well as the Company’s proportionate share of the landlord’s cost to own, operate and maintain the premises. The Ground Lease originally had an initial term of five years and a renewal term of five years at the option of the Company, subject to the Company not then being in default, as defined.
In July 2022, the Ground Lease was amended to increase the initial term of the lease to eight years and to amend certain other non-financial sections to adjust environmental obligations, site access rights and leasehold mortgage rights. In September 2022, the Company issued 8,510,638 shares with a fair value of $11.5 million as compensation to the landlord for entering into the lease amendment. The Ground Lease, which is classified as an operating lease, was remeasured as of the date of the amendment, resulting in an increase of $11.2 million to both right-of-use asset and operating lease liability in the consolidated balance sheets. The Ground Lease remained classified as an operating lease based on the remeasurement analysis that utilized a discount rate of 12.6%, which was an estimate of the Company’s incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at the remeasurement date. Upon expiration of the lease, the buildings and improvements on the premises will revert to the landlord in good order.
For the three and nine months ended September 30, 2023, the Company recorded operating lease expense of $0.3 million and $1.0 million, respectively, including contingent expense of $37,000 and $0.1 million, respectively, in operating expenses – related party in the consolidated statements of operations and made cash lease payments of $0.2 million and $0.8 million, respectively. For the three and nine months ended September 30, 2022, the Company recorded operating lease expense of $0.4 million and $0.5 million, respectively, including contingent expense of $0.1 million and $0.2 million, respectively, in operating expenses – related party in the consolidated statements of operations and made cash lease payments $0.1 million and of $0.2 million, respectively. The remaining lease term based on the terms of the amended Ground Lease as of September 30, 2023 is 10.6 years.
The following is a maturity analysis of the annual undiscounted cash flows of the estimated operating lease liabilities as of September 30, 2023 (in thousands):
| | | | | |
Year ending December 31: | |
2023 | $ | 41 | |
2024 | 163 | |
2025 | 163 | |
2026 | 163 | |
2027 | 163 | |
Thereafter | 1,045 | |
| $ | 1,738 | |
A reconciliation of the undiscounted cash flows to the operating lease liabilities recognized in the consolidated balance sheet as of September 30, 2023 follows (in thousands):
| | | | | |
Undiscounted cash flows of the operating lease | $ | 1,738 | |
Unamortized discount | 780 | |
Total operating lease liability | 958 | |
Current portion of operating lease liability | 46 | |
Operating lease liability, net of current portion | $ | 912 | |
During the nine months ended September 30, 2022, the Company entered into a short-term lease arrangement for digital currency miners. The term of the operating lease was two months and concluded in May 2022. There were no variable charges under this arrangement. For the three and nine months ended September 30, 2022, lease expense related to this arrangement of $0 and $1.3 million, respectively, was recorded in operating expenses in the consolidated statements of operations. The Company periodically enters into short term lease arrangements for operating equipment and recorded $0.1 million and $0.2 million under these short-term lease arrangements in operating expenses in the consolidated
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
statements of operations for the three and nine months ended September 30, 2023, respectively, and $0.3 million for each of the three and nine months ended September 30, 2022.
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 0.0% for each of the three and nine months ended September 30, 2023 and 0.54% for each of the three and nine months ended September 30, 2022. The Company’s effective rate differs from its statutory rate of 21% primarily due to the recording of a valuation allowance against its deferred tax assets. During the three and nine months ended September 30, 2022, the Company sold the net assets held for sale of IKONICS, resulting in a reversal of existing net deferred tax liabilities and a related tax benefit of $0.3 million recorded in income tax benefit in the consolidated statements of operations during each of the three and nine months ended September 30, 2022.
ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of available evidence, it is more likely than not that some or a portion or all the deferred tax assets will not be realized. As of September 30, 2023 and 2022, the Company estimated a portion of its deferred tax assets will be utilized to offset the Company’s deferred tax liabilities. Based upon the level of historical U.S. losses and future projections over the period in which the remaining deferred tax assets are deductible, at this time, management believes it is more likely than not that the Company will not realize the benefits of the remaining deductible temporary differences, and as a result the Company has recorded a valuation allowance as of September 30, 2023 and December 31, 2022 for the amount of deferred tax assets that will not be realized.
The Company has no unrecognized tax benefits as of September 30, 2023 and December 31, 2022. The Company’s policy is to recognize interest accrued and penalties related to unrecognized tax benefits in tax expense. No accrued interest or penalties were recorded during the three and nine months ended September 30, 2023 and 2022.
NOTE 9 – DEBT
Long-Term Debt
Long-term debt consists of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Term loan | $ | 146,000 | | | $ | 146,000 | |
Debt issuance costs and debt discount | (21,168) | | | (21,095) | |
Property, plant and equipment finance agreement | 97 | | | — | |
| 124,929 | | | 124,905 | |
Less long-term debt due within one year | 76,461 | | | 51,938 | |
Total long-term debt, net of portion due within one year | $ | 48,468 | | | $ | 72,967 | |
On December 1, 2021, the Company entered into a Loan, Guaranty and Security Agreement (the “LGSA”) with Wilmington Trust, National Association as administrative agent, which consisted of an original term loan facility of $123.5 million (the “Original Term Loan”). In July 2022, the Company entered into an amendment to the LGSA (the “First Amendment”) and borrowed $15.0 million at its closing (the “First Amendment Term Loan”). In October 2022, the Company entered into a third amendment to the LGSA (the “Third Amendment”) and borrowed $7.5 million at its closing (the “Third Amendment Term Loan” and, collectively with the Original Term Loan and First Amendment Term Loan, the “Term Loans”). The Term Loans bear an interest rate of 11.5% and have a maturity date of December 1, 2024. Upon the occurrence and during the continuance of an event of default, as defined, the applicable interest rate will be 13.5%. The interest rate may be increased, if applicable, to the cash interest rate on any junior capital raised plus 8.5%, if higher. As of September 30, 2023, no interest rate adjustments had been made under this provision. Subsequent to an amendment to the LGSA in March 2023 (the “Fifth Amendment,” as described below) and as of September 30, 2023, the Company is required to pay amounts subject to an excess cash flow sweep, as defined, on a quarterly basis which will automatically extend to the maturity of the Term Loans in the event the Company repays at least $40.0 million of the principal balance of the Term Loans by April 1, 2024. If the Company does not repay at least $40.0 million of the principal balance of the Term
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Loans by April 1, 2024, the Company shall repay 25.0% of the outstanding principal balance in quarterly installments beginning on April 8, 2024 through the maturity date. Interest payments were due quarterly in arrears prior to the Fifth Amendment and are due monthly in arrears subsequent to the Fifth Amendment. The Company has the option to prepay all or any portion of the Term Loans in increments of at least $5.0 million subject to certain prepayment fees for the Original Term Loan equal to (1) if paid prior to December 1, 2023, an amount of 3% of the prepaid principal and (2) if paid subsequent to December 1, 2023 but prior to the maturity date of the Term Loans, an amount of 2% of the prepaid principal. Certain events, as described in the LGSA, require mandatory prepayment. The Term Loans are guaranteed by TeraWulf Inc. and TeraCub and its subsidiaries, as defined, and is collateralized by substantially all of the properties, rights and assets of TeraWulf Inc. and its subsidiaries (except RM 101), as defined.
The LGSA, as amended, requires the Company to maintain or meet certain affirmative, negative and reporting covenants. The affirmative covenants include, among other things, a requirement for the Company to maintain insurance coverage, maintain mining equipment and comply in all material respects with the Company’s Nautilus joint venture agreement (see Note 11), each as defined. The negative covenants restrict or limit the Company’s ability to, among other things, incur debt, create liens, divest or acquire assets, make restricted payments and permit the Company’s interest in the Nautilus joint venture to be reduced below 25%, each as defined. The LGSA also contains usual and customary events of default. If an event of default occurs and is continuing, the then outstanding obligations under the LGSA may become immediately due and payable.
As of September 30, 2023 and December 31, 2022, certain of the investors in the Term Loans were related parties due to cumulative voting control by members of the Company’s management and a member of the Company’s board of directors. As of September 30, 2023 and December 31, 2022, NovaWulf Digital Master Fund, L.P. and NovaWulf Digital Private Fund, LLC, held outstanding principal balances in the amount of $2.0 million and $15.7 million, respectively. In October 2023, all outstanding principal amounts held by NovaWulf Digital Master Fund, L.P. and NovaWulf Digital Private Fund, LLC were distributed to respective entities controlled by certain limited partners of NovaWulf Digital Master Fund, L.P. and all the members of NovaWulf Digital Private Fund, LLC., of which certain are members of Company management and a member of the Company's board of directors.
In connection with the Original Term Loan, the Company issued to the holders of the Original Term Loan 839,398 shares of Common Stock (the “Term Loan Equity”), which is a quantity of Common Stock which represented 1.5% of the outstanding shares of the publicly registered shares of TeraWulf subsequent to the closing of the Original Term Loan. In connection with the issuance of the Original Term Loan, the Company incurred aggregate issuance costs of approximately $4.0 million, in addition to a $1.2 million upfront fee. The aggregate issuance costs and the upfront fee were allocated to the Term Loan Equity and the Original Term Loan based on the relative fair value method in the amounts of $1.1 million and $4.1 million, respectively. For the Original Term Loan, this $4.1 million was included in debt discount along with the fair value of the Term Loan Equity, an amount of $25.7 million. The total of these items, an amount of $29.8 million, represented debt issuance costs and debt discount and was deducted from the Original Term Loan proceeds and was being accreted into the long-term debt balance over the term of the debt at an effective interest rate of 12.9%, which was in addition to the stated interest rate.
In July 2022, the First Amendment to the LGSA provided for an additional $50.0 million term loan facility (the “New Term Facility”). Pursuant to the New Term Facility, funds could have been drawn in three tranches. The First Amendment Term Loan represented the first tranche and was drawn at closing in July 2022, and the subsequent tranches of up to $35 million (the “Delayed Draw Term Loan Commitment”) may have been drawn at Company’s option prior to December 31, 2022, subject to certain conditions, including the raising of matching junior capital, as defined. The New Term Facility required the Company to extend the initial term of the Ground Lease from five years to eight years. In connection with the New Term Facility, the Company paid an upfront fee of $0.1 million and issued warrants to the lenders under the New Term Facility to purchase 5,787,732 shares of Common Stock at $0.01 per share, an aggregate number of shares of the Company’s Common Stock equal to 5.0% (comprised of 2.0% related to the Delayed Draw Term Loan Commitment and 3.0% related to the First Amendment Term Loan) of the then fully diluted equity of the Company. In connection with the issuance of the New Term Facility, the Company also incurred aggregate issuance costs of approximately $1.5 million, in addition to the aforementioned upfront fee. If the Company drew subsequent tranches, it was required to issue warrants to the lenders to purchase shares of the Company’s Common Stock equal to dilution of 3.75% upon the issuance of a second tranche in the amount of $15.0 million and 4.25% upon issuance of a third tranche in the amount of $20.0 million, in each case as a percentage of the then fully diluted equity of the Company, respectively.
The Company determined that debt modification accounting applied in connection with the New Term Facility. Third party and upfront fees were allocated pro rata between the First Amendment Term Loan and the Delayed Draw Term Loan
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Commitment. Third-party fees of $0.4 million related to the First Amendment Term loan were expensed to interest expense in the consolidated statement of operations. Fees paid to lenders and the allocated value of the Common Stock warrants, an aggregate $3.5 million, related to the First Amendment Term Loan were included with the unamortized discount on the Original Term Loan and were being amortized as an adjustment of interest expense over the remaining term of the Term Loans at an effective rate of 13.1%, which was in addition to the stated interest rate.
Fees paid and the fair value of the Common Stock warrants related to the Delayed Draw Term Loan Commitment, an aggregate $3.4 million, were capitalized to other assets (the “Commitment Fee Asset”) and were amortized on a straight-line basis over the commitment period, which expired December 31, 2022. If a tranche of the Delayed Draw Term Loan Commitment was drawn, the then related carrying value of the Commitment Fee Asset was derecognized and a discount on debt was recorded and amortized over the term of the commitment drawn.
In October 2022, the Third Amendment to the LGSA divided the initial funding of up to $15.0 million of the Delayed Draw Term Loan Commitment under the First Amendment to the LGSA into two tranches of up to $7.5 million each. The Third Amendment Term Loan represented the first tranche and was borrowed upon the closing in October 2022. In connection with the Third Amendment, the Company entered into an amendment and restatement of the warrant agreement related to the New Term Facility. The amended and restated warrant agreement provides that holders thereto are entitled to additional warrants to purchase an aggregate number of shares of Common Stock equal to an incremental 3.75%, to be divided into two separate increments of 1.875% each, of the fully diluted equity of the Company, determined on the date of the funding of the two separate sub-tranches of $7.5 million each pursuant to the Third Amendment. In connection with the Third Amendment Term Loan, the Company issued warrants to purchase 2,667,678 shares of Common Stock at $0.01 per share. The fair value of the Common Stock warrants and the related proportional carrying value of the Commitment Fee Asset, an aggregate $2.9 million, related to Third Amendment were included with the unamortized discount on the Original Term Loan and First Amendment Term Loan and were being amortized as an adjustment of interest expense over the remaining term of the Term Loans at an effective rate of 25.1%, which was in addition to the stated interest rate.
In March 2023, the Fifth Amendment to the LGSA eliminated mandatory amortization of the Term Loans through April 7, 2024, as long as the Company received aggregate net proceeds of at least $33.5 million from the issuance of equity or equity-linked securities by March 15, 2023 (such condition, the “Amortization Relief Condition”). The Company satisfied the Amortization Relief Condition on March 9, 2023. As a condition of the Fifth Amendment becoming effective, the Company entered into a warrant agreement (the “Warrant Agreement”) to issue the following warrants to the lenders: (i) 27,759,265 warrants to purchase an aggregate number of shares of the Company’s Common Stock equal to 10.0% of the fully diluted equity of the Company as of the Fifth Amendment effective date with an exercise price of $0.01 per share of the Company’s Common Stock (the “Penny Warrants”) and (ii) 13,879,630 warrants to purchase an aggregate number of shares of the Company’s Common Stock equal to 5.0% of the fully diluted equity of the Company as of the Fifth Amendment effective date with an exercise price of $1.00 per share of the Company’s Common Stock (the “Dollar Warrants”). The quantity of the Penny Warrants and the Dollar Warrants include the final impact of anti-dilution protection for additional capital raising transactions by the Company of up to $5.0 million subsequent to the $33.5 million aggregate net proceeds associated with the Amortization Relief Condition. The Penny Warrants are exercisable during the period beginning on April 1, 2024 and ending on December 31, 2025, and the Dollar Warrants are exercisable during the period beginning on April 1, 2024 and ending on December 31, 2026. In March 2023, in connection with the issuance of the warrants pursuant to the Warrant Agreement, the Company entered into a registration rights agreement pursuant to which the Company has agreed to provide customary shelf and piggyback registration rights to the LGSA lenders with respect to the common stock issuable upon exercise of the warrants described above.
The Company determined that debt modification accounting applied in connection with the Fifth Amendment. Because the First Amendment and the Fifth Amendment occurred within a twelve-month period, the debt terms that existed just prior to the First Amendment were applied in determining the appropriateness of the debt modification accounting model. The allocated value of the Penny Warrants and Dollar Warrants, an aggregate $16.0 million, related to the Fifth Amendment were included with the unamortized discount on the LGSA, as amended, and are being amortized as an adjustment of interest expense over the remaining term of the modified LGSA at an effective rate of 19.7%, which is in addition to the stated interest rate.
During the three and nine months ended September 30, 2023, the Company amortized total debt issuance costs and debt discount of $6.0 million and $16.0 million, respectively, of which $6.0 million and $14.3 million, respectively, were recorded as interest expense in the consolidated statements of operations, $0 and $1.2 million, respectively, were capitalized interest in property, plant and equipment, net in the consolidated balance sheets as of September 30, 2023 and
TERAWULF INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
December 31, 2022, respectively, and $0 and $0.5 million, respectively, were capitalized interest in equity in net assets of investee in the consolidated balance sheets as of September 30, 2023 and December 31, 2022, respectively.
Principal maturities of outstanding long-term debt as of September 30, 2023 are as follows (in thousands):
| | | | | |
Year ending December 31: | |
2023 | $ | 6,599 | |
2024 | 139,443 | |
2025 | 36 | |
2026 | 19 | |
Total principal maturities | $ | 146,097 | |
NOTE 10 – STANDBY EQUITY PURCHASE AGREEMENT AND CONVERTIBLE PROMISSORY NOTE
Standby Equity Purchase Agreement
In June 2022, the Company entered into a Standby Equity Purchase Agreement (“SEPA”) with YA II PN, Ltd. (“Yorkville”). Pursuant to the SEPA, the Company had the right, but not the obligation, to sell to Yorkville, subject to certain limitations and conditions, up to $50.0 million of its shares of Common Stock, at the Company’s request any time during the commitment period commencing on June 2, 2022 and terminating on the earliest of (i) the first day of the month following the 36-month anniversary of the SEPA and (ii) the date on which Yorkville shall have made payment of any advances requested pursuant to the SEPA for shares of the Common Stock equal to the commitment amount of $50.0 million. In addition to the Company’s right to request advances, subject to certain conditions precedent, the Company had the option to, but was not obligated to, effect a pre-advance loan with a principal amount of $15.0 million through the issuance and sale to Yorkville of a convertible promissory note (the “Promissory Note”). The Company elected to issue and sell the Promissory Note to Yorkville on June 2, 2022. Subject to the terms of the SEPA, the Company had the right to terminate the SEPA at any time, at no cost or penalty, upon five trading days’ prior written notice so long as there are no outstanding advances, no outstanding balance on the Promissory Note and no other amounts owed to Yorkville. No termination of the SEPA affects the indemnification provisions contained within the SEPA, which provisions survive a termination. The SEPA was terminated in December 2022. No advances occurred while the SEPA was outstanding.
Yorkville Convertible Promissory Note
In June 2022, the Company issued the Promissory Note to Yorkville, which was issued with a 2.0% original issue discount, for proceeds of $14.7 million. The maturity date of the $15.0 million Promissory Note was originally November 25, 2022 and the Company was required to pay the outstanding principal balance in five monthly $3.0 million payments commencing July 27, 2022. Upon reasonable advance notice, the Company had the right to defer 50% of a monthly payment amount due on two such monthly payments to later dates to be mutually agreed by the Company and Yorkville. In July 2022, $1.5 million of the $3.0 million July monthly payment amount was deferred until the October 2022 monthly payment due date. In August 2022, $1.5 million of the $3.0 million August monthly payment amount was deferred until the November 2022 monthly payment due date. The Promissory Note, which bore an interest rate of 4.0% and had an initial conversion price of $3.75 per share of Common Stock, may have been repaid with the proceeds of a sale of Common Stock to Yorkville or repaid in cash and, if repaid in cash, together with a cash payment premium originally of 6.0%, provided that if the Company’s Common Stock market price, as defined, was less than $2.25 per share, the cash payment premium would have been 4.0%. In October and November 2022, the Company amended and restated the Promissory Note to, among other things, change the then-existing repayment schedule, change the cash payment premium to 12.0% and change the conversion price. The Company determined that extinguishment of debt accounting applied to the October 2022 amendment and restatement because the change in the fair value of the embedded conversion feature was greater than 10% of the carrying value of the Promissory Note immediately prior to the modification. The Company recorded a loss on debt extinguishment of $2.1 million in the consolidated statement of operations for the year ended December 31, 2022. This extinguishment loss was primarily related to the change in the fair value of the embedded conversion feature of $1.6 million and the excess of the fair value of the A&R Promissory Note of $9.4 million over the carrying value of the Promissory Note immediately prior to the modification. The Company determined that debt modification accounting applied to the November 2022 amendment and restatement. The $20,000 change in the fair value of the embedded conversion feature was accounted for as a debt discount and amortized as an adjustment of interest expense over the remaining term of the Second A&R Promissory Note at an effective rate of 3.1%. No portion of the Second A&R
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Promissory Note was converted into shares of Common Stock and the Second A&R Promissory Note was paid in full in December 2022.
Convertible Promissory Notes
In November 2022, the Company issued convertible promissory notes (the “Convertible Notes”) in an aggregate principal amount of approximately $3.4 million to certain accredited investors, including to members of Company management in the amount of $1.7 million. The Convertible Notes were issued in privately negotiated transactions as part of a private placement exempt from registration under the Securities Act of 1933, as amended. The Convertible Notes, which contained usual and customary antidilution provisions, had a maturity date of April 1, 2025 and accrued annual interest at a rate of 4%, which would have increased to 15% upon the occurrence of an event of default, as defined. The Convertible Notes were originally automatically convertible into shares of equity securities of the Company upon the closing of a Qualified Financing, as defined in the Convertible Notes as the issuance and sale of equity securities with an aggregate gross sales price of not less than $5.0 million, with certain sales of equity securities excluded, at a conversion price equal to the price per share paid by the investors purchasing such equity securities in such Qualified Financing. The Convertible Notes originally embodied an unconditional obligation to settle a fixed monetary amount with, upon a Qualified Financing, with a variable number of shares and was initially considered potentially share settled debt. In December 2022, the Company entered into a private placement (see Note 14) which met the definition of a Qualified Financing and contemporaneously amended the Convertible Notes to (a) change the conversion date to March 1, 2023 and (b) allow for the conversion price to be reduced if an additional Qualified Financing were to occur prior to the conversion date at a price lower than the then existing Convertible Note conversion price. The Company determined that debt modification accounting applied in connection with the December 12, 2022 amendment to the Convertible Notes. There was no change to the effective interest rate as the result of this amendment. As a result of the private placement, the conversion price was $0.40 per share of Common Stock. The Convertible Notes are included in convertible promissory notes in the consolidated balance sheet as of December 31, 2022. In January 2023, the Convertible Notes were amended to change the conversion date to the third business day following the Shareholder Approval Date (as defined in Note 14). In March 2023, the Convertible Notes and accrued but unpaid interest were converted into 8,628,024 shares of Common Stock.
In January 2023, the Company entered into a convertible promissory note (the “January Convertible Note”) to an accredited investor in a privately negotiated transaction as part of a private placement exempt from registration under Section 4(a)(2) and/or Regulation D under the Securities Act in an aggregate principal amount of $1.3 million. The January Convertible Note had a maturity date of April 1, 2025 and accrued annual interest at a rate of 4.0%. The January Convertible Note was automatically convertible into Common Stock on the third business day following the Shareholder Approval Date (the “Conversion Date”) at a conversion price equal to the lowest price per share paid by investors purchasing equity securities in any sale of equity securities by the Company between November 25, 2022 and the Conversion Date with an aggregate gross sales price of not less than $5 million, subject to certain exclusions set forth in the January Convertible Note. The conversion price was $0.40 per share of Common Stock upon issuance. In March 2023, the January Convertible Note and accrued but unpaid interest were converted into 3,134,932 shares of Common Stock.
NOTE 11 – JOINT VENTURE
In May 2021, the Company and a subsidiary of Talen Energy Corporation (“Talen”) (each a “Member” and collectively the “Members”) entered into a joint venture, Nautilus Cryptomine LLC (“Nautilus”), to develop, construct and operate up to 300 MW of zero-carbon bitcoin mining in Pennsylvania (the “Joint Venture”). In connection with the Joint Venture, Nautilus simultaneously entered into (i) a ground lease (the “Nautilus Ground Lease”), which includes an electricity supply component, with a related party of Talen, (ii) a Facility Operations Agreement (the “FOA”) with a related party of the Company and (3) a Corporate Services Agreement (the “CSA”) with a related party of Talen. Each Member originally held a 50% interest in the Joint Venture. The Company capitalized a portion of the interest on funds borrowed to finance its investments in Nautilus prior to Nautilus commencing its principal operations. Capitalized interest costs were $0 and $0.9 million for the three and nine months ended September 30, 2023, respectively, and $0 and $1.6 million for the three and nine months ended September 30, 2022, respectively. During the nine months ended September 30, 2023, the Company received bitcoin distributions from Nautilus with a fair value of $11.7 million. The Company received no bitcoin distributions in 2022.
In August 2022, the Members entered into an amended and restated Joint Venture agreement (the “A&R Agreement”) whereby, among other changes, the unit ownership will be determined by infrastructure contributions while distributions of mined bitcoin will be determined by each Member’s respective hashrate contributions. Members are allowed to make contributions of miners up to the effective electrical capacity of their owned infrastructure percentage. Each party retains
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
access to 50% of the electricity supply outlined in the Nautilus Ground Lease. Additionally, the Company’s scheduled capital contributions were amended such that the Company would retain a 33% ownership interest in the Joint Venture if such capital contributions were funded. With the change in ownership percentage, governance rights were amended to provide for greater Talen board participation, among other changes. As allowed under the A&R Agreement, the Company structured its capital contributions to achieve a targeted a 25% ownership interest in Nautilus.
In March 2023, the Company entered into a second amended and restated limited liability company agreement for Nautilus (the “Second A&R Nautilus Agreement”). Under the Second A&R Nautilus Agreement, the Company holds a 25% equity interest in Nautilus and Talen holds a 75% equity interest in Nautilus, each subject to adjustment based on relative capital contributions. Distributions are made periodically in accordance with each Member’s respective hashrate contributions after deducting primarily each Member’s share of power and operational costs. Pursuant to the terms of the Second A&R Nautilus Agreement, the Nautilus Cryptomine Facility initially requires 200 MW of electric capacity. Prior to May 13, 2024, the Company may elect to expand the energy requirement of the Nautilus Cryptomine Facility by up to 50 MW, funded solely by the Company. If the Company makes such an election, the Talen Member may, within twelve months thereof, elect to expand the energy requirement of the Nautilus Cryptomine Facility by up to an additional 50 MW, funded solely by the Talen Member, for a total capacity of up to 300 MW. Upon such election, Nautilus will call additional capital for expansion and enter into an additional energy supply agreement with Talen Member or its affiliate for the additional capacity, subject to any regulatory approvals and third-party consents.
In March 2021, TeraCub executed an agreement for the purchase of bitcoin miners from MinerVA Semiconductor Corp. (“MinerVA”) for a total of 30,000 MV7 miners, with originally scheduled monthly deliveries of miners each between November 2021 and January 2022, for an aggregate price of $118.5 million (the “MinerVA Purchase Agreement”). Concurrently with the execution of the Joint Venture agreement, TeraWulf assigned the MinerVA Purchase Agreement to Nautilus. Prior to December 31, 2022, total payments of $40.5 million were made under the MinerVA Purchase Agreement. Production delays at MinerVA’s factory impacted the initial pricing and delivery schedule. Accordingly, Nautilus and MinerVA have deemed all payments made to date to apply to the initial approximate 9,000 miners shipped or to be shipped. As of the date at which these financial statements were available to be issued, Nautilus had not amended the MinerVA Purchase Agreement.
In June 2021, Nautilus entered into two Non-fixed Price Sales and Purchase Agreements for the purchase of bitcoin miners from Bitmain Technologies Limited (“Bitmain”) for a total of 30,000 S19j Pro miners, with originally scheduled monthly deliveries of 5,000 miners each between January 2022 and March 2022 under one agreement (the “Q1 2022 Bitmain Agreement’) and 5,000 miners each between April 2022 and September 2022 under a second agreement (the “Q2 2022 Bitmain Agreement” and, together, the “Bitmain Purchase Agreements”). During the nine months ended September 30, 2022, the Company paid Bitmain $22.8 million and was reimbursed by Talen for 50% of that amount. As of December 31, 2022, the Q1 2022 Bitmain Agreement was concluded with all parties performing under the contract. In September 2022, the Q2 2022 Bitmain Agreement was cancelled whereby each Member received a $31.2 million credit with Bitmain to use at the respective Member’s discretion (the “Bitmain Credit”). See Note 12. The Company recorded a distribution from the Joint Venture whereby equity in net assets of investee was reduced and property, plant and equipment, net was correspondingly increased by the $31.2 million distributed credit in the consolidated balance sheet as of December 31, 2022.
In December 2022, the Company entered into a Payment Netting Agreement with Nautilus, Talen and the related party FOA and CSA agreement counterparties whereby certain amounts were owed by Nautilus to each of the FOA and CSA counterparties, including for the termination of the FOA agreement. These amounts were offset to arrive at a net result whereby the Company owed the related party FOA counterparty (see Note 16) approximately $2.2 million. This amount is recorded in equity in net assets of investee in the consolidated balance sheet as of December 31, 2022.
The Company’s direct payments to MinerVA and Bitmain, among others, on behalf of Nautilus for the nine months ended September 30, 2022, are included in investments in joint venture related to direct payments made on behalf of joint venture
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
in the consolidated statement of cash flows. A reconciliation of amounts included within this footnote to captions in the consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022 follows (in thousands):
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
Payment of TeraWulf 50% share of Bitmain deposits | $ | — | | | $ | (11,402) | |
Investments in joint venture related to direct payments made on behalf of joint venture | — | | | (11,402) | |
Direct investments in joint venture and payments made on plant and equipment contributed to joint venture | (2,845) | | | (26,395) | |
Investments in joint venture, including direct payments made on behalf of joint venture | $ | (2,845) | | | $ | (37,797) | |
| | | |
Payment of Talen 50% share of Bitmain deposits | $ | — | | | $ | (11,402) | |
Other reimbursable payments | — | | | (339) | |
Reimbursable payments for deposits on plant and equipment made on behalf of joint venture or a joint venture partner | $ | — | | | $ | (11,741) | |
| | | |
Talen reimbursement of 50% share of Bitmain deposits | $ | — | | | $ | 11,402 | |
Other reimbursable payments | — | | | 314 | |
Reimbursement of payments for deposits on plant and equipment made on behalf of joint venture or a joint venture partner | $ | — | | | $ | 11,716 | |
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 September 30, 2023 (in thousands, except for percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | % | | Initial Investment | | Additional Investment, Net | | Net loss Inception to Date | | Company’s Variable Interest in Entity | | Commitment to Future Additional Contributions (1) | | Company’s Maximum Exposure to Loss in Entity (2) |
Entity | | Ownership | | | | | | |
Nautilus | | 25.0 | % | | $ | 18,000 | | | $ | 117,420 | | | $ | 29,863 | | | $ | 105,557 | | | $ | — | | | $ | 105,557 | |
(1)The Members may mutually agree on changes to the Nautilus facility, which could increase the amount of contributions the Company is required to provide. The Members may seek alternate financing for the Nautilus facility, which could reduce the amount of investments each Member may be required to provide.
(2)The maximum exposure at September 30, 2023 is determined by adding the Company’s variable interest in the entity and any explicit or implicit arrangements that could require the Company to provide additional financial support. The amount represents the contractually required capital contributions of the Company which were required for the initial phase of the Nautilus facility buildout.
Due to the change in Member ownership percentage and governance rights under the A&R Agreement, Talen determined it controlled the Joint Venture from an accounting perspective and thereby was required to fair value the identifiable assets and liabilities of the Joint Venture for its internal accounting purposes. Under the CSA, Talen is responsible for maintaining the books and records of the Joint Venture and elected to push down the fair value adjustments to Nautilus’ books and records. During the nine months ended September 30, 2023, Talen elected to push down an additional fair value adjustment to Nautilus’ books and records. The Company accounts for the Joint Venture as an equity method investment and the change in ownership percentage does not impact the Company’s method of accounting or basis. Therefore, there is a basis difference between the books and records of Nautilus and the Company’s accounting basis in the Joint Venture. The
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
condensed results of operations for the three and nine months ended September 30, 2023 and 2022 and the condensed financial position as of September 30, 2023 and December 31, 2022 of Nautilus are summarized below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, (1) | | Nine Months Ended September 30, (1) |
| 2023 | | 2022 | | 2023 | | 2022 |
Condensed statement of operations information: | | | | | | | |
Revenue | $ | 29,106 | | | $ | — | | | $ | 70,929 | | | $ | — | |
Operating expense | 27,619 | | | 2,909 | | | 67,646 | | | 6,654 | |
Net income (loss) | $ | 1,487 | | | $ | (2,909) | | | $ | 3,283 | | | $ | (6,654) | |
| | | | | | | | | | | |
| September 30, 2023 (1) | | December 31, 2022 (1) |
Condensed balance sheet information: | | | |
Current assets | $ | 14,876 | | | $ | 28,986 | |
Noncurrent assets | 182,977 | | | 154,552 | |
Total assets | $ | 197,853 | | | $ | 183,538 | |
| | | |
Current liabilities | $ | 13,981 | | | $ | 12,864 | |
Noncurrent liabilities | 27,641 | | | — | |
Equity | 156,231 | | | 170,674 | |
Total liabilities and equity | $ | 197,853 | | | $ | 183,538 | |
(1)The condensed statement of operations information for the three and nine months ended September 30, 2023 and 2022 and the condensed balance sheet information as of September 30, 2023 and December 31, 2022 reflect the impact of the Talen-estimated fair value measurements of Nautilus which, resulting from the application of ASC 805 “Business Combinations,” have been pushed down to the books and records of Nautilus by Talen, as discussed above. The Company’s basis in the assets and liabilities of Nautilus continue to be recorded at historical value on the accompanying consolidated balance sheets.
In March 2022, the Company entered into an exchange agreement with Nautilus and the Nautilus co-venturer whereby the Company purchased 2,469 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 were not delivered by September 30, 2022, the Nautilus co-venturer would