The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with a review of the other
Items included in this Annual Report and with the accompanying consolidated
financial statements and notes thereto included elsewhere in this report. All
figures presented below represent results from continuing operations, unless
otherwise specified. Certain statements contained in this Management's
Discussion and Analysis of Financial Condition and Results of Operations may be
deemed forward-looking statements. See "Forward-Looking Statements."
General
TeraWulf is a vertically-integrated owner and operator of environmentally clean
bitcoin mining facilities in the United States. Founded and led by an
experienced group of energy & power entrepreneurs, the Company is actively
operating and constructing, consistent with its sustainable energy mandate, two
bitcoin mining facilities, the Lake Mariner Facility and the Nautilus Cryptomine
Facility, in the States of New York and Pennsylvania, respectively. TeraWulf
will own and operate its bitcoin mining facility sites and expects to consume
over 91% zero-carbon energy, with a target of achieving 100%. In connection with
the planned buildout, TeraWulf entered into a power purchase agreement at the
Nautilus Cryptomine Facility and will receive power at approximately 2.0
cents/kWh. Moreover, the Lake Mariner Facility is located a mere 40 miles from
the Robert Moses Niagara Power Plant, an approximate 2,600MW hydroelectric
generating facility, the largest generating facility in New York State, and one
of the largest in the country, with 24/7 access to low-cost carbon-free
electricity. With the Nautilus Cryptomine Facility power purchase agreement, and
the strategic location of the Lake Mariner Facility addition, TeraWulf expects
to achieve an average long-term cost of electricity of approximately 3.5
cents/kWh, competitively positioning the Company to be a leading, low-cost and
zero-carbon bitcoin mining operator in the United States.
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Lake Mariner Facility
Located at a site adjacent to the decommissioned coal-fired Somerset Generating
Station in Barker, New York, the Lake Mariner Facility has secured an initial 90
MW of energy to support its bitcoin mining capacity through an agreement with
NYPA with the potential to expand into an additional 410 MW of energy supply.
TeraWulf began mining bitcoin at the Lake Mariner Facility in March 2022 with 10
MW of mining capacity located on the turbine deck of the former coal-fired power
plant and energized its first dedicated mining building ("Building 1"), housing
approximately 50 MW of mining capacity, during the third quarter of 2022. During
the third quarter of 2022, and in conjunction with Nautilus JV amendment
discussed below, the Company expanded its self-mining capacity in Building 1 by
transferring miners previously purchased for use at the Nautilus facility in
order to accelerate revenue growth. Construction is largely complete at the
Company's second dedicated mining building ("Building 2"), which is also
scheduled to house approximately 50MW of mining capacity and is targeted for
completion in the second quarter of 2023.
Nautilus Cryptomine Facility
The Nautilus Cryptomine Facility is a joint venture between TeraWulf and Talen.
The Nautilus Cryptomine Facility, located in Salem Township, Luzerne County,
Pennsylvania, is adjacent to the 2.5 GW nuclear-powered Susquehanna Station, 2.3
GW of which are owned and operated by Talen. The Nautilus Cryptomine Facility
has secured as its power supply zero-carbon nuclear energy received directly
from a substation connected to the Susquehanna Station's electrical generators
over a five-year term with two successive three-year renewal options. The
Nautilus Cryptomine Facility is located "behind the meter" and not connected to
the electrical distribution grid, therefore avoiding transmission and
distribution charges typically paid by other large power consumers. At the time
of this Annual Report, the Nautilus Cryptomine Facility has access to up to 300
MW of bitcoin mining capacity from the Susquehanna Station and is expected to be
the first bitcoin mining facility site that is powered by 100% "behind the
meter" zero-carbon nuclear energy. TeraWulf began installation of miners at the
Nautilus Cryptomine Facility in the fourth quarter of 2022, and began mining
bitcoin in the first quarter of 2023. In August 2022, the Company and Talen
amended their joint venture agreement thereby reducing TeraWulf's stake in the
facility to 25% and right-sizing TeraWulf's miners and infrastructure to enable
maximum utilization of 50 MW of power at approximately 2.0 cents/kWh for five
years.
TeraWulf expects to generate revenues primarily by sustainably mining bitcoin at
its bitcoin mining facility sites. Incremental revenues may be generated through
the hedging and sale of mined bitcoin and the commercial optimization of
TeraWulf's power supply. The Company will also leverage its available digital
infrastructure to provide miner hosting services to third parties whereby the
Company targets holding an option to purchase the hosted miners in the future.
We believe TeraWulf is an important and low-cost player in the bitcoin network
due to our vertical integration, ramp of large-scale operations, market-leading
zero-carbon power supply arrangements and a seasoned, dedicated senior
management team.
Recent Developments
February 2023 Equity Offering
On February 6, 2023, TeraWulf completed an underwritten public offering of
36,764,706 shares of common stock (the "Equity Offering") at a public offering
price of $0.68 per share, with JonesTrading Institutional Services LLC
("JonesTrading") acting as sole book-running manager (the "Underwriter") for the
Equity Offering. The Company granted the Underwriter a 30-day over-allotment
option to purchase up to an additional 5,514,705 shares of its common stock. On
February 8, 2023, the Underwriter exercised its over-allotment option and
purchased an additional 3,000,000 shares of common stock from the Company at the
public offering price of $0.68 per share (the "February 8, 2023 Overallotment
Exercise"). On February 28, 2023, the Underwriter further exercised its
over-allotment option and purchased an additional 1,000,000 shares of Common
Stock from the Company at the public offering price of $0.68 per share (the
"February 28, 2023 Overallotment Exercise" and together with the February 8,
2023 Overallotment Exercise, the "Overallotment Exercise"). The Overallotment
Exercise resulted in additional net proceeds to the Company of approximately
$2.56 million, or approximately $26.56 million in aggregate net proceeds from
the Offering, after deducting underwriting discounts and commissions and
estimated offering expenses.
Special Meeting of Shareholders
On February 13, 2023, the Company filed a definitive proxy statement to hold a
special meeting (the "Special Meeting") of its shareholders to amend the
Company's charter to (i) increase the maximum number of authorized shares of
common stock, with the par value of $0.001 per share, from 200,000,000 to
400,000,000 and the maximum number of authorized shares of preferred stock,
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with the par value of $0.001 per share, from 25,000,000 to 100,000,000
(collectively, the "Share Increase Amendment") and (ii) remove the restriction
on stockholder action by written consent (the "Written Consent Amendment" and,
together with the Share Increase Amendment, the "Charter Amendments"). The
Company's shareholders of record as of the close of business on January 27, 2023
were entitled to vote their shares at the Special Meeting. On February 23, 2023,
the Charter Amendments were approved by the Company's shareholders at the
Special Meeting.
Voting and Support Agreement
As an inducement for the Exchanging Shareholder (as defined below) to enter into
the Exchange Agreement (as defined below), the Company entered into a Voting and
Support Agreement, dated January 30, 2023, with certain of the Company's
shareholders (the "Voting and Support Agreement"). Pursuant to the Voting and
Support Agreement, such shareholders voted in support of the Charter Amendments
at the Special Meeting.
The Voting and Support Agreement contains customary representations, warranties,
covenants and termination rights.
Exchange Agreement
For the purpose of increasing the number of shares available for issuance under
the charter prior to the receipt of shareholder approval of the Charter
Amendments, on January 30, 2023, the Company entered into an exchange agreement
(the "Exchange Agreement") with an entity controlled by Paul Prager (the
"Exchanging Shareholder"). Pursuant to the Exchange Agreement, the Exchanging
Shareholder exchanged a total of 12,000,000 shares of common stock for
12,000,000 new warrants issued by the Company (the "New Exchange Warrants") in a
private exchange exempt from registration under Section 4(a)(2) and/or
Regulation D under the Securities Act. The New Exchange Warrants became
immediately exercisable at a strike price of $0.00001 per share on February 24,
2023 and will expire on December 31, 2023. The terms and conditions of the New
Exchange Warrants are governed by a certain Warrant Agreement between the
Company and the Exchanging Shareholder. The Exchanging Shareholder is entitled
to customary registration rights with respect to the shares of common stock
issuable upon exercise of the New Exchange Warrants.
The Exchange Agreement contains customary representations, warranties, covenants
and termination rights.
Entry into Binding Term Sheet for Fifth Amendment to LGSA & Entry into Fifth
Amendment to LGSA
On January 27, 2023, the Company entered into a binding term sheet with its
lenders (the "Term Sheet") pursuant to which the parties agreed to make certain
amendments to the LGSA via a fifth amendment (the "Fifth Amendment"). The Term
Sheet provided for the elimination of mandatory amortization of the term loan
through April 8, 2024, subject to certain conditions, including the completion
of one or more equity capital raises with aggregate net proceeds of at least
$33.5 million by March 15, 2023 (such aggregate capital raise, the "Qualified
Equity Capital Raise"). The Company satisfied the Qualified Equity Capital Raise
condition on March 9, 2023. The Term Sheet also provided for an excess cash flow
sweep in place of scheduled principal payments, which will automatically extend
to the maturity of the term loan on December 1, 2024 in the event the Company
repays at least $40 million of the term loan by April 1, 2024. The modifications
to the term loan's amortization schedule are also contingent on the Company
complying with certain corporate governance provisions, and that no default or
event of default has occurred or is occurring under the term loan.
On March 1, 2023 (the "Fifth Amendment Effective Date"), the conditions
precedent to the effectiveness of the Fifth Amendment were satisfied and the
Company entered into the Fifth Amendment. Also, on March 1, 2023, in connection
with the execution of the Fifth Amendment, the Company entered into a Warrant
Agreement (the "Fifth Amendment Warrant Agreement") to issue the following
warrants to the lenders: (i) 26,666,669 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 "Lender Penny
Warrants") and (ii) 13,333,333 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 "Lender Dollar Warrants").
Both the Lender Penny Warrants and the Lender Dollar Warrants are subject to
anti-dilution protection for any additional capital raising transaction by the
Company of up to $5.0 million following the completion of the Qualified Equity
Capital Raise. The Lender Penny Warrants are exercisable during the period
beginning on April 1, 2024 and ending at 5:00 p.m., New York City time, on
December 31, 2025, and the Lender Dollar Warrants are exercisable during the
period beginning on April 1, 2024 and ending at 5:00 p.m., New York City time,
on December 31, 2026. Also, on March 1, 2023, the Company entered into a
registration rights agreement in respect of the Lender Penny Warrants and the
Lender Dollar Warrants which provides the lenders with customary shelf and
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piggyback registration rights. The Lender Penny Warrants and the Lender Dollar
Warrants were issued in a private placement transaction exempt from registration
under Section 4(a)(2) and/or Regulation D under the Securities Act.
Additional 2023 Private Placements Warrants
On January 30, 2023, the Company entered into (a) subscription agreements (the
"Warrant Subscription Agreements") with certain accredited investors (the
"Warrant Investors") pursuant to which such Warrant Investors purchased from the
Company warrants, each exercisable to purchase one share of the Company's common
stock, at an exercise price of $0.00001 per share of Common Stock (the
"Warrants"), in private placement transactions exempt from registration under
Section 4(a)(2) and/or Regulation D of the Securities Act for an aggregate
purchase price of $2.5 million, based on a price per share of common stock of
$1.05 for a total of 2,380,952 shares of Common Stock and (b) warrant agreements
(the "Warrant Agreements") with such Warrant Investors. The Warrant Agreements
govern the terms and conditions of the Warrants, which became exercisable
beginning on February 24, 2023 and expire on December 31, 2023.
Pursuant to the Warrant Subscription Agreements, the Company agreed to provide
customary registration rights to the Warrant Investors with respect to the
common stock issuable upon conversion of the Warrants. The Warrant Subscription
Agreements contain customary representations, warranties, covenants and
termination rights.
February Private Placement
On February 1, 2023, the Company entered into additional subscription agreements
(the "February Subscription Agreements") with certain accredited investors,
investors (the "February Common Stock Investors") purchased from the Company
shares of the Company's common stock, at a purchase price of $0.68 per share of
common stock, in private placement transactions exempt from registration under
Section 4(a)(2) and/or Regulation D under the Securities Act for an aggregate
purchase price of $0.94 million (the "February Private Placement"). The
February Private Placement closed on February 2, 2023.
Pursuant to the February Subscription Agreements, the Company agreed to provide
customary registration rights to the Common Stock Investors. The
February Subscription Agreements contain customary representations, warranties,
covenants and termination rights.
Convertible Promissory Notes
Amendment to Existing Convertible Promissory Notes
On January 30, 2023, the Company entered into amendments to its previously
disclosed convertible promissory notes (the "Existing Convertible Promissory
Notes"), originally issued to certain accredited investors on November 25, 2022
and further amended on December 12, 2022, in privately negotiated transactions
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 approximately $3.4 million. The Existing Convertible
Promissory Notes converted into shares of common stock on February 28, 2023 at a
price of $0.40.
Entry into New Convertible Promissory Note
On January 30, 2023, the Company entered into a new convertible promissory note
(the "New Convertible Promissory 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 $1.25 million. The New Convertible Promissory
Note has a maturity date of April 1, 2025 and accrues annual interest at a rate
of 4%. The New Convertible Promissory Note converted into shares of common stock
on February 28, 2023 at a price of $0.40.
Registered Direct Offering, December Private Placement and January Private
Placement
On December 12, 2022, the Company entered into (a) subscription agreements (the
"December Subscription Agreements") with certain accredited investors (the
"December Investors") pursuant to which the Company issued (i) to the
December Investors, 16,850,000 shares of common stock (the "Registered Common
Stock") as part of a registered direct offering (the "Registered Direct
Offering"), at a purchase price of $.40 per share of Registered Common Stock,
for an aggregate purchase price of $6.74 million before deducting any fees and
other expenses and (ii) to certain of the December Investors, the
December Private Placement Warrants exercisable at an exercise price equal to
$0.40 per share of common stock for December Private Placement Warrant Shares in
a private
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placement transaction exempt from registration under Section 4(a)(2) and/or
Regulation D under the Securities Act and (b) a warrant agreement (the
"December Private Placement Warrant Agreement) with such December Investors. The
December Private Placement Warrant Agreement governs the terms and conditions of
the December Private Placement Warrants. The December Private Placement Warrants
became exercisable on January 16, 2023 and expired on January 31, 2023.
In connection with the signing of the December Private Placement Warrant
Agreement, the Company and certain of the December Investors entered into a
Registration Rights Agreement, dated as of December 12, 2022, pursuant to which
the Company agreed to provide customary registration rights to such
December Investors with respect to the December Private Placement Warrant
Shares.
On January 30, 2023, the Company entered into additional subscription agreements
with the December Investors pursuant to which such December Investors purchased
from the Company shares of the Company's common stock, at a purchase price of
$0.40 per share of common stock (the "January Common Shares"), in private
placement transactions exempt from registration under Section 4(a)(2) and/or
Regulation D under the Securities Act for an aggregate purchase price of $1.75
million (the "January Private Placement"). The January Private Placement
effectively replaced 50% of the unexercised December Private Placement Warrants
at the same purchase price of $0.40 per share of common stock. The
January Private Placement closed on March 9, 2023.
October 2022 Private Placement
On October 6, 2022, the Company entered into (a) subscription agreements (the
"October Subscription Agreements") with certain accredited investors (the
"October Investors") pursuant to which such October Investors purchased from the
Company units (the "October Units") consisting of: (i) 7,481,747 shares of
common stock (the "October Shares") and (2) warrants (the "October Private
Placement Warrants") exercisable for 7,481,747 shares of common stock (such
shares, the "October Private Placement Warrant Shares") in a private placement
transaction exempt from registration under Section 4(a)(2) and/or Regulation D
under the Securities Act and (b) a warrant agreement (the "October Private
Placement Warrant Agreement) with the October Investors. The October Private
Placement Warrant Agreement governs the terms and conditions of the October
Private Placement Warrants. Upon closing of the private placement transaction on
October 6, 2022, the October Units separated into the October Shares and the
October Private Placement Warrants. On January 30, 2023, certain of the October
Investors agreed to amend the terms of their warrants such that their warrants
would become exercisable only after February 23, 2023, the date of approval of
the Charter Amendments described elsewhere in this 2022 Form 10-K.
In connection with the signing of the October Subscription Agreements, the
Company and the October Investors entered into a Registration Rights Agreement,
dated as of October 6, 2022, pursuant to which the Company agreed to provide
customary registration rights to the October Investors.
Other Developments
Amendment and Restatement of Lender Warrant Agreement
On October 7, 2022, the Company entered into an amendment and restatement of
that certain warrant agreement, dated July 1, 2022, by and among the Company and
the holders party thereto (such amended agreement, the "Amended and Restated
Warrant Agreement") pursuant to which the Company issued to its lenders under
the LGSA warrants exercisable for 2,667,678 shares of common stock in a private
placement transaction exempt from registration under Section 4(a)(2) and/or
Regulation D. The Amended and Restated Warrant Agreement provided for the
immediate exercisability of the lender warrants.
Loss of Controlled Company Status
After giving effect to the issuance of the Registered Common Stock in the
December 2022 Registered Direct Offering, Paul Prager, founder and Chief
Executive Officer of the Company, no longer controlled a majority of the
Company's outstanding shares, and certain proxies granted in favor of Stammtisch
Investments LLC, an entity owned and controlled by Mr. Prager, terminated in
accordance with their terms. As a result, the Company is no longer considered a
"controlled company" under applicable Nasdaq rules. The Company is currently in
compliance with the applicable Nasdaq corporate governance requirements during
the permitted phase-in periods, and expects to be fully in compliance by the
requisite deadlines.
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Amendment No. 1 to Administrative and Infrastructure Services Agreement
On March 29, 2023, TeraWulf and Beowulf E&D entered into Amendment No. 1 to the
administrative and infrastructure services agreement, pursuant to which TeraWulf
agreed to pay Beowulf E&D, effective as of January 1, 2023, a reduced annual
base fee equal to $8.46 million payable in monthly installments, until all
obligations under the Company's LGSA are either indefeasibly repaid in full or
refinanced.
Amendment to Talen Joint Venture
On March 23, 2023, TeraWulf (Thales) entered into a second amended and restated
limited liability company agreement (the "Second A&R Talen Joint Venture
Agreement") with Cumulus Coin. Under the Second A&R Talen Joint Venture
Agreement, TeraWulf (Thales) will hold a 25% equity interest in Nautilus and
Cumulus Coin will hold a 75% equity interest in Nautilus, each subject to
adjustment based on relative capital contributions. Bitcoin distributions will
be made every two weeks in accordance with each member's respective hash rate
contributions after deducting each member's share of power and operational costs
and cash reserves, as established by the board of managers, to fund, among other
things, one month of estimated power costs and two months of budgeted
expenditures.
Under the Second A&R Talen Joint Venture Agreement, each member will be entitled
to make contributions to Nautilus of certain miners up to a maximum determined
in accordance with each member's ownership percentage, by delivering or causing
to be delivered and installed or deemed installed on behalf of Nautilus at the
Nautilus Cryptomine facility or at Nautilus' storage facility, such miners.
Pursuant to the Second A&R Talen Joint Venture Agreement, certain MinerVa miners
that TeraWulf (Thales) contributed to Nautilus will be removed and provided to
TeraWulf (Thales), which TeraWulf (Thales) has the right to replace in its
discretion. Likewise, Cumulus Coin may elect to remove certain MinerVa miners
that Cumulus Coin contributed to Nautilus, which Cumulus Coin has the right to
replace in its discretion.
Nautilus will be governed by a board of managers comprised of one manager
appointed by TeraWulf (Thales) and four managers appointed by Cumulus Coin.
Under the Second A&R Talen Joint Venture Agreement, the board of managers
generally acts upon a majority vote at a duly called meeting at which the
manager appointed by TeraWulf (Thales) is present, except that, for certain
specified matters ("Special Consent Matters"), the board of managers acts upon a
unanimous vote, subject to deadlock procedures. Any member owning less than 20%
of Nautilus has no right to vote on Special Consent Matters. Generally, neither
TeraWulf (Thales) nor Cumulus Coin may directly transfer any of its interests in
Nautilus to any third parties without the majority consent of the board of
managers, except that TeraWulf (Thales) is entitled to transfer its interests in
Nautilus if certain conditions are met.
Pursuant to the terms of the Second A&R Talen Joint Venture Agreement, the
Nautilus Cryptomine facility will initially require 200 MW of electric capacity,
and the Cumulus Coin may elect to expand the energy requirement by up to 100 MW,
funded solely by the Cumulus Coin, prior to May 13, 2024, for a total capacity
of 300 MW. Upon such election, Nautilus will call additional capital for
expansion and enter into an additional energy supply agreement with Cumulus Coin
or its affiliate for the additional capacity, subject to any regulatory
approvals and third-party consents.
On August 26, 2022, Nautilus and Beowulf E&D entered into an amended and
restated facility operations agreement with an early termination right for
Nautilus, pursuant to which Beowulf E&D provides, or arranges for the provision
to Nautilus of, certain infrastructure, construction, operations and maintenance
and administrative services necessary to build out and operate the Nautilus
Cryptomine facility and support Nautilus's ongoing business at the Nautilus
Cryptomine facility. Nautilus terminated the amended and restated facility
operations agreement effective December 26, 2022. On December 26, 2022, Nautilus
and Talen Energy Supply LLC entered into a replacement facility operations
agreement pursuant to which Talen Energy Supply LLC provides, or arranges for
the provision to Nautilus of, certain infrastructure, construction, operations
and maintenance and administrative services necessary to build out and operate
the Nautilus Cryptomine facility and support Nautilus's ongoing business at the
Nautilus Cryptomine Facility. Also on December 26, 2022, Beowulf E&D and
Nautilus entered into a transition services agreement to facilitate the prompt
transition of the services provided by Beowulf E&D to Nautilus under the amended
and restated facility operations agreement to Talen Energy Supply LLC. Pursuant
to the transition services agreement, Beowulf E&D shall provide such transition
services to Nautilus until June 30, 2023 in exchange for payment by Nautilus of
$339,200 and reimbursement of out of pocket expenses.
The Business Combination
TeraWulf completed its business combination with IKONICS on December 13, 2021
(the "Closing Date") pursuant to which, among other things, TeraCub Inc.
("TeraCub," formerly known as TeraWulf Inc.) would effectively acquire IKONICS
and become a publicly traded company on the Nasdaq, which was the primary
purpose of the business combination. For financial accounting
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purposes, the business combination was treated as a reverse merger whereby the
accounting acquirer was TeraCub due to TeraCub's historic shareholders having
the majority voting control in the Company, the board of directors members being
associated with TeraCub and the senior management of TeraCub becoming the senior
management of TeraWulf. Pursuant to business combination accounting, the Company
applied the acquisition method, which requires the assets acquired and
liabilities assumed be recorded at fair value, with limited exceptions. The
Company's consolidated financial statements include the operating results of
IKONICS beginning on the Closing Date.
Under the terms of the Merger Agreement, each share of IKONICS common stock
issued and outstanding immediately prior to the Closing Date was automatically
converted into and exchanged for (i) one validly issued, fully paid and
nonassessable share of Common Stock of TeraWulf, (ii) one CVR pursuant to the
CVR Agreement, and (iii) the right to receive $5.00 in cash, without interest.
TeraCub common stock issued and outstanding immediately prior to the Closing
Date was automatically converted into the right to receive a number of validly
issued, fully paid and nonassessable shares of TeraWulf such that the TeraCub
common stockholders prior to conversion would effectively control 98% of the
total outstanding shares of TeraWulf immediately subsequent to the Closing Date.
Pursuant to the CVR Agreement, each shareholder of IKONICS as of immediately
prior to the Closing Date, received one CVR for each outstanding share of common
stock of IKONICS then held. The holders of the CVRs are entitled to receive 95%
of the Net Proceeds (as defined in the CVR Agreement), if any, from the sale,
transfer, disposition, spin-off, or license of all or any part of the pre-merger
business of IKONICS completed within 18 months following the date of the merger,
subject to a reserve of up to 10% of the Gross Proceeds (as defined in the CVR
Agreement) from such transaction and such other amount to be retained to satisfy
Retained Liabilities, as defined. The CVRs do not confer to their holders any
voting or equity or ownership interest in IKONICS or TeraWulf and are not
transferable, except in limited circumstances, and are not listed on any
quotation system or traded on any securities exchange. The CVR Agreement will
terminate after all payment obligations to the holders thereof have been
satisfied. Holders of CVRs will not be eligible to receive payment for
dispositions, if any, of any part of the pre-merger business of IKONICS after
the eighteen-month anniversary of the Closing Date. The fair value of the
aggregate consideration paid for IKONICS was $66.3 million, which includes (i)
cash consideration of $13.7 million ($10.3 million net of cash acquired), (ii)
equity consideration of $40.6 million and (iii) contingent consideration
(related to the CVRs) of $12.0 million. As of December 31, 2022, the CVR
liability included in the Company's consolidated balance sheet is $10.9 million.
During the year ended December 31, 2022, the Company completed sales of all
IKONICS net assets held for sale for net proceeds of $13.3 million, of which
$7.0 million remained in escrow under provisions of an asset purchase agreement
as of December 3, 2022. In February 2023, all escrowed funds were released to
the Company. Subsequent to the asset sales, IKONICS' name was changed to RM 101
Inc. ("RM 101") and the entity has no remaining operations or employees.
Upon the consummation of the business combination, RM 101 common stock ceased
trading on the Nasdaq and TeraWulf Common Stock began trading on the Nasdaq on
December 14, 2021 under the ticker symbol "WULF."
COVID-19
The Company's results of operations could be adversely affected by general
conditions in the economy and in the global financial markets, including
conditions that are outside of the Company's control, such as the outbreak and
global spread of the novel coronavirus disease ("COVID-19"). The COVID-19
pandemic that was declared on March 11, 2020 has caused significant economic
dislocation in the United States and globally as governments across the world,
including the United States, introduced measures aimed at preventing the spread
of COVID-19. The spread of COVID-19 and the imposition of related public health
measures resulted in increased volatility and uncertainty in the cryptocurrency
space.
The Company may experience disruptions to its business operations resulting from
COVID-19-related supply interruptions (including miner delivery interruptions),
quarantines, self-isolations, or other movement and restrictions on the ability
of its employees or its counterparties to perform their jobs and provide
services. The Company may also experience COVID-19-related delays in
construction and obtaining necessary equipment in a timely fashion. To date, the
Company has experienced certain, but minimal, delays due to COVID-19 among its
employees, suppliers and contractors.
Change in Fiscal Year
Upon the closing of its business combination with IKONICS on December 13, 2021,
the Company assumed the fiscal year end of December 31. Previously, the
Company's fiscal year ended on March 31. The historical financial statements for
the period
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from February 8, 2021 (date of inception) and for the nine-month period ended
December 31, 2021 have been recast to conform with the Company's adopted fiscal
year.
Restatement of Previously Issued Financial Statements
As part of the Company's financial statement close process and preparation of
its Annual Report on Form 10-K (the "2022 Form 10-K"), the Company identified
errors in its historical interim unaudited consolidated financial statements.
The misstatements relate 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
Company determined that its interim unaudited consolidated financial statements
for the quarterly periods ended March 31, 2022, June 30, 2022 and September 30,
2022 (the "Relevant Periods") were materially misstated and needed to
be restated. The restatements are set forth in detail in Note 18 to the
Consolidated Financial Statements.
Results of Operations
Since the Company's inception on February 8, 2021, the Company's primary
activities have been focused on capital acquisition, merger negotiation and
consummation, joint venture negotiation and participation, miner procurement,
electricity procurement, construction commencement and management, commencement
of mining operations, ongoing mining operations, public company readiness and
general corporate activities. The Company's plan of operation for the next
twelve months is to continue to increase the mining capacity at its operating
mining facilities and complete the construction of its other bitcoin mining
facilities, both wholly owned and owned through the Nautilus Joint Venture.
Continuing Operations
All items included in loss from continuing operations in the consolidated
statements of operations for the year ended December 31, 2022 and the period
February 8, 2021 (date of inception) to December 31, 2021 relate to its
wholly-owned operations of its sole business segment, digital currency mining,
due to the Company presenting the RM 101 business as discontinued operations for
the year ended December 31, 2022 the period February 8, 2021 (date of inception)
to December 31,2021.
Revenue and Cost of Revenue
Revenue increased to $15.0 million during the year ended December 31, 2022,
respectively, as compared to $0 during the period February 8, 2021 (date of
inception) to December 31, 2021 due primarily to the commencement of mining
activities at the Lake Mariner Facility in March 2022, the accelerated ramp of
mining operations during the year ended December 31, 2022 and the commencement
of miner hosting arrangements at the Lake Mariner Facility in May 2022. During
the year ended December 31, 2022, revenue from mining was $10.5 million and
revenue from hosting was $4.5 million.
Cost of revenue increased to $11.1 million during the year ended December 31,
2022, respectively, as compared to $0 during the period February 8, 2021 (date
of inception) to December 31, 2021 due primarily to the commencement of mining
activities at the Lake Mariner Facility in March 2022, the accelerated ramp of
mining operations during the year ended December 31, 2022 and the commencement
of miner hosting arrangements at the Lake Mariner Facility in May 2022. Cost of
revenues is comprised primarily of power expense and, to a lesser degree, the
cost of services provided under our miner hosting agreements. While the cost of
power has moderated subsequent to December 31, 2022, certain periods in calendar
year 2022 experienced elevated power prices in the New York power market, the
primary power market for the Lake Mariner Facility. The Company records payments
received for demand response programs as a reduction in cost of revenue; the
amount of aggregate payments received were not significant during the year ended
December 31, 2022. The Company is expanding its enrollment in such available
programs.
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Costs and Expenses
The following table presents operating expenses (in thousands):
Period
February 8,
2021 (date of
Year Ended inception) to
December 31, December 31,
2022 2021
Operating expenses $ 2,038 $ 104
Operating expenses - related party 1,248 960
$ 3,286 $ 1,064
Operating expenses (including related party expenses) were $3.3 million and $1.1
million for the year ended December 31, 2022 and the period February 8, 2021
(date of inception) to December 31, 2021, respectively, which represents an
increase of $2.2 million. Operating expenses are comprised primarily of lease
expense, operations labor and various site maintenance costs. The increase is
attributable primarily to the commencement of mining activities at the Lake
Mariner Facility in March 2022 and the commencement of miner hosting
arrangements at the Lake Mariner Facility in May 2022. This increase is tempered
by the period February 8, 2021 (date of inception) to December 31, 2021
including certain development expenses, including services and third-party costs
for transmission consulting, engineering consulting, transmission impact study,
electricity procurement and site development.
The following table presents selling, general and administrative expenses (in
thousands):
Period
February 8,
2021 (date of
Year Ended inception) to
December 31, December 31,
2022 2021
Selling, general and administrative expenses $ 22,770 $ 23,759
Selling, general and administrative expenses - related party 13,280 18,576
$ 36,050 $ 42,335Selling, general and administrative expenses (including related party expenses)
were $36.1 million and $42.3 million for the year ended December 31, 2022 and
the period February 8, 2021 (date of inception) to December 31, 2021,
respectively, which represents a decrease of $6.3 million. The decrease is
primarily a result of the period February 8, 2021 (date of inception) to
December 31, 2021 including $27.7 million of incremental expense related to the
RM 101 business combination, consisting of $15.2 million of financial and legal
advisor fees and other merger-related costs and a one-time $12.5 million
performance expense to be settled in shares of Common Stock included in selling,
general and administrative expenses - related party. The decrease is somewhat
offset by the year ended December 31, 2022 having increased costs, including
insurance, professional fees and payroll, as it was a public company with a
growing business throughout the year. Selling, general and administrative
expenses are comprised primarily of professional fees, legal fees, employee
compensation and benefits, insurance and general corporate expenses.
Professional fees for the year ended December 31, 2022 include fixed and
passthrough expenses under the administrative and infrastructure services
agreement amounting to $13.3 million, inclusive of $2.1 million of expense to be
settled in shares of Common Stock. Professional fees for the period February 8,
2021 (date of inception) to December 31, 2021 include fixed and passthrough
expenses under the administrative and infrastructure services agreement
amounting to $18.6 million, inclusive of the aforementioned $12.5 million of
share-based expense. The Company has undertaken cost reduction initiatives
targeted at reducing its overall operating expense that is expected to benefit
its operating profitability going forward.
Depreciation for the year ended December 31, 2022 was $6.7 million and for the
period February 8, 2021 (date of inception) to December 31, 2021 was $0. The
increase is due primarily to the Lake Mariner Facility commencing operations in
March 2022 and ramping operations through the balance of the year ended December
31, 2022.
Impairment of digital currency for the year ended December 31, 2022 was $1.5
million and for the period February 8, 2021 (date of inception) to December 31,
2021 was $0. Impairment of digital currency represents the decline in bitcoin
prices during the Company's holding period of its bitcoin. Bitcoin impairment is
not reversed during its holding period but instead a gain, if any, is
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recognized upon its liquidation. Realized gain on sale of digital currency,
representing such gains on bitcoin liquidation, for the year ended December 31,
2022 was $0.6 million and for the period February 8, 2021 (date of inception) to
December 31, 2021 was $0.
Interest expense for the year ended December 31, 2022 was $24.7 million and for
the period February 8, 2021 (date of inception) to December 31, 2021 was $2.3
million, an increase of $22.4 million. Interest expense relates primarily to the
Company's term loan financing in the principal amount of $146.0 million, which
was closed on December 1, 2021 with a principal balance of $123.5 million and
was amended in July and October 2022 to include an additional aggregate $22.5
million drawn under a delayed draw term loan facility (together, the "Term
Loan"). The Term Loan bears an interest rate of 11.5%, which interest payments
are due quarterly in arrears. For the year ended December 31, 2022 and for the
period February 8, 2021 (date of inception) to December 31, 2021, interest
expense also includes $9.3 million and $1.0 million, respectively, of
amortization of debt issuance costs and debt discount related to debt issuance
costs, an upfront fee, and the fair value of equity and common stock warrants
issued to the Term Loan investors in conjunction with the Term Loan. During the
year ended December 31, 2022 and for the period February 8, 2021 (date of
inception) to December 31, 2021, the Company capitalized $5.3 million and $0.1
million, respectively, of interest costs to property, plant and equipment, net
and $4.6 million and $0.1 million, respectively, of interest to equity in net
assts of investee in the consolidated balance sheet as of December 31, 2022 and
2021. For the year ended December 31, 2022, the Company incurred $3.1 million in
interest expense related to amortization of a commitment fee for the delayed
draw term loan facility comprised primarily of the fair value of common stock
warrants issued to the Term Loan lenders. The delayed draw term loan facility
expired on December 31, 2022. Additionally, on June 2, 2022, the Company entered
into a convertible promissory note (the "Promissory Note") with a principal
balance of $15.0 million. The Promissory Note bore an interest rate of 4.0%.
Interest payments were due monthly in conjunction with scheduled principal
payments. The Promissory Note could have been repaid with the issuance of Common
Stock or with cash and, if repaid in cash, together with a cash payment premium
of between 4% and 12%. Of the $24.7 million of interest expense reported in the
statement of operations for the year ended December 31, 2022, approximately $1.5
million of the interest relates to the Promissory Note, including $0.4 million
of expense related to amortization of debt issuance costs and debt discount
related to an upfront fee. The Promissory Note was repaid as of December 31,
2022.
Loss on extinguishment of debt was $2.1 million $0 for the year ended December
31, 2022 and the period February 8, 2021 (date of inception) to December 31,
2021, respectively. The loss on extinguishment of debt for the year ended
December 31, 2022 relates to an October 2022 amendment to the Promissory Note
which is considered an extinguishment of debt under U.S. GAAP due the change in
fair value of the embedded conversion feature. 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 amended
Promissory Note of $9.4 million over the carrying value of the Promissory Note
immediately prior to the modification.
Income tax benefit was $0.3 million $0.6 million for the year ended December 31,
2022 and the period February 8, 2021 (date of inception) to December 31, 2021,
respectively. Based upon the level of historical U.S. losses and future
projections over the period in which the net deferred tax assets are deductible,
at this time, management 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 of $29.5 million
for the total, net deferred tax assets as of December 31, 2022.
Equity in net loss of investee, net of tax
Equity in net loss of investee, net of tax was $15.7 million for the year ended
December 31, 2022 and was $1.5 million for the period February 8, 2021 (date of
inception) to December 31, 2021. For the year ended December 31, 2022, the
amount includes an impairment loss of $11.4 million on the distribution of
miners from Nautilus to the Company whereby the miners were marked to fair value
from book value on the date distributed. The impairment loss was the result of
decreasing prices for miners between initial purchase and distribution. In each
case, the remaining amounts represent TeraWulf's proportional share of losses of
Nautilus, which had not commenced principal operations as of December 31, 2022.
Loss from discontinued operations, net of tax
Loss from discontinued operations, net of tax was $4.9 million for the year
ended December 31, 2022 and was $49.1 million, for the period February 8, 2021
(date of inception) to December 31, 2021. In conjunction with the RM 101
business classification as held for sale upon acquisition on December 13, 2021,
the Company has reported the RM 101 business as discontinued operations in the
consolidated financial statements. For the year ended December 31, 2022, the
total loss from discontinued operations reported is comprised primarily of an
impairment loss on discontinued operations of $4.5 million to write down the
related carrying amounts of IKONICS to their fair values less estimated cost to
sell, offset by a remeasurement gain of $1.1 million on the CVRs, which
represents the contingent consideration purchase price component of the RM 101
acquisition. For the period February 8, 2021 (date of inception)
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to December 31, 2021, the loss from discontinued operations, net of tax is
comprised primarily of a loss on discontinued operations of $48.9 million to
write down the related carrying amount so RM 101 to their fair values less
estimated costs to sell. All RM 101 net assets held for sale have been sold as
of December 31, 2022.
Liquidity and Capital Resources
As of December 31, 2022, the Company had balances of cash and cash equivalents
and restricted cash of $8.3 million, a working capital deficiency of $111.9
million, total stockholders' equity of $117.8 million and an accumulated deficit
of $186.5 million. The Company incurred a net loss attributable to common
stockholders of $91.6 million for the year ended December 31, 2022, including a
net impairment charge (net of a contingent consideration remeasurement gain) of
$4.9 million included in loss from discontinued operations, net of tax related
to the acquired RM 101 business. The Company has commenced mining activities at
the Lake Mariner Facility, however not yet to the scale required to support its
principal operations. The Company has relied primarily on proceeds from its
issuances of debt and equity and sale of bitcoin mined to fund its principal
operations. The principal uses of cash are for deposits on miners, the buildout
of mining facilities, debt service, general corporate activities and investments
in Nautilus joint venture related to the miner deposits, mining facility
buildout and general corporate activities. Cash flow information is as follows
(in thousands):
Period
February 8,
2021 (date of
Year Ended inception) to
December 31, December 31,
2022 2021
Cash provided by (used in):
Operating activities:
Continuing operations $ (32,262) $ (21,141)
Discontinued operations (1,804) (2,958)
Total operating activities (34,066) (24,099)
Investing activities (94,047) (201,413)
Financing activities 89,981 271,967
Net change in cash and cash equivalents and
restricted cash $ (38,132) $ 46,455Cash used in operating activities for continuing operations was $32.3 million
and $21.1 million for the year ended December 31, 2022 and the period February
8, 2021 (date of inception) to December 3, 2021, respectively. For the year
ended December 31, 2022, cash used in operations results from a net loss of
$90.8 million less non-cash expenses, net of $35.3 million, adjusted for changes
in certain asset and liability balances and increased by proceeds from sale of
bitcoin of $9.7 million. The non-cash expenses were primarily comprised of (i)
$4.9 million of loss from discontinued operations, net of tax related to RM
101's business, the assets of which were substantially sold as of December 31,
2022, (ii) $15.7 million related to the Company's equity in net loss, net of tax
of Nautilus, (iii) $11.7 million related to amortization of debt issuance cost
and accretion of debt discount, (iv) impairment of digital currency and realized
gain on sale of digital currency of $0.9 million on a net basis, (v) stock-based
compensation of $1.6 million, (vi) depreciation of $6.7 million, (vii)
amortization of right-of-use asset of $0.3 million, (viii) a loss on nonmonetary
miner exchange of $0.8 million, (ix) loss on extinguishment of debt of $2.1
million and (x) related party expense to be settled with respect to common stock
of $2.1 million. The changes in certain assets and liabilities were primarily
comprised of a net increase in current liabilities (which primarily includes
accounts payable, other accrued liabilities, other amounts due to related
parties) of $16.8 million, a net increase in current assets (which primarily
includes prepaid expenses, amounts due from related parties and other current
assets) of $2.8 million, an increase in other assets of $1.0 million and an
increase in other liabilities of $0.2 million.
Cash used in investing activities for continuing operations was $94.0 million
and $201.4 for the year ended December 31, 2022 and the period February 8, 2021
(date of inception) to December 31, 2021, respectively. For the year ended
December 31, 2022, the Company (i) invested $61.1 million in the buildout of
mining facilities, (ii) invested $46.20 million (including reimbursable payments
made on behalf of the joint venture of joint venture partner offset by
reimbursement from joint venture or joint venture partner of less than $0.1
million net cash used) in Nautilus related primarily to the joint venture's
miner deposits and mining facility buildout and (iii) received net proceeds from
the sale of IKONICS' net assets held for sale of $13.5 million.. See
"Contractual Obligations and Other Commitments" for additional discussion on
miner and Nautilus commitments.
Cash provided by financing activities for continuing operations was $90.0
million and $272.0 for the year ended December 31, 2022 and the period February
8, 2021 (date of inception) to December 31, 2021, respectively. For the year
ended December 31,
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2022, the Company received proceeds from the issuance of Common Stock, net of
issuance costs, of $47.3, proceeds from the issuance of warrants of $5.7
million, proceeds from the issuance of convertible preferred stock of $9.6
million and net proceeds from the issuance and repayment of convertible
promissory notes of $2.8 million. In addition, for the year ended December 31,
2022, the Company received proceeds related to an amendment to its long-term
debt of $22.5 million and received proceeds, net of principal payments, of notes
payable for insurance premium financing of $2.1 million, net of repayments.
Contractual Obligations and Other Commitments
The Company is counterparty to five miner purchase agreements with Bitmain
Technologies Limited. The Company has satisfied all contractual financial
commitments under these contracts as of December 31, 2022.
The Company is counterparty to an amended and restated Talen joint venture
agreement dated August 27, 2022. Under this joint venture agreement, the Company
has invested $116.0 million on a net basis and has right-sized its equity
ownership interest to 25% of the joint venture. The Company does not expect any
additional material capital contributions to be required.
Financial Condition
There is limited historical financial information about the Company upon which
to base an evaluation of its performance. The Company has commenced mining
activities, however not yet to the scale required to support its principal
operations. The Company has relied primarily on proceeds from its issuances of
debt and equity and sale of bitcoin mined to fund its principal operations.
Until TeraWulf is able to generate positive cash flows from operations, TeraWulf
expects to fund its business operations and infrastructure buildout through the
issuance of debt or equity securities, the sale of mined bitcoin or through the
provision miner hosting services.
Prior to December 31, 2022, the Company's fundraising activities resulted in net
cash provided by financing activities of $90.0 million and $272.0 million for
the year ended December 31, 2022 and the period February 8, 2021 (date of
inception) to December 31, 2021, respectively. Financing activities during the
year ended December 31 2022 include the following:
ATM Offering. On February 11, 2022, in order to facilitate additional capital
acquisition, the Company entered into an At Market Issuance Sales Agreement (the
"Sales Agreement") with B. Riley Securities, Inc. and D.A. Davidson & Co. (each,
individually, an "Agent" and, collectively, the "Agents"), pursuant to which the
Company may offer and sell, from time to time, through or to the agents, acting
as agent or principal, shares of the Company's Common Stock, par value $0.001
per share, having an aggregate offering price of up to $200.0 million (the
"Shares"). The Company is not obligated to sell any Shares under the Sales
Agreement. In April 2022, the Company entered into a replacement sales agreement
(the "April ATM Sales Agreement") with Cantor Fitzgerald & Co., B. Riley
Securities, Inc. and D.A. Davidson & Co. (together the "April ATM Agents"),
pursuant to which the Company may offer and sell, from time to time, through or
to the April ATM Agents, shares of the Company's Common Stock, par value $0.001
per share, having an aggregate offering price of up to $200.0 million. The April
ATM Sales Agreement replaced the Sales Agreement. The Company is not obligated
to sell any shares under the April ATM Sales Agreement. Subject to the terms and
conditions of the April ATM Sales Agreement, the Agents will use commercially
reasonable efforts, consistent with its normal trading and sales practices, to
sell Shares from time to time based upon the Company's instructions, including
any price, time or size limits or other customary parameters or conditions
specified by the Company. The Company will pay the Agents a commission equal to
3.0% of the gross sales price from each sale of Shares and provide the Agents
with customary indemnification and contribution rights. The April ATM Sales
Agreement may be terminated by the Agents or the Company at any time upon five
(5) days' notice to the other party. The issuance and sale of the April Shares
by the Company under the April ATM Sales Agreement are made pursuant to the
prospectus and prospectus supplement forming a part of the Company's shelf
registration statement on Form S-3 (Registration Statement No. 333-262226),
which was declared effective on February 4, 2022 ("the 2022 Registration
Statement"), including a final prospectus supplement dated April 26, 2022. The
2022 Registration Statement provides that the Company may offer and sell from
time to time shares of its Common Stock, shares of its preferred stock, debt
securities, depositary shares, warrants, rights, purchase contracts or units, or
any combination thereof, in one or more offerings in amounts, at prices and on
terms that it determines at the time of the offering, with an aggregate initial
offering price of up to $500.0 million (or its equivalent in foreign currencies,
currency units or composite currencies). As of March 30, 2023, the Company sold
2,910,909 shares of Common Stock for net proceeds of approximately $9.7 million
under the ATM Offering.
Common Stock and Common Stock Warrants. At various times through the year ended
December 31, 2022, the Company concluded private placements and offerings
pursuant to underwriting agreements, to offer Common Stock or units consisting
of Common Stock and Common Stock warrants to investors, including members of
Company management. Certain Common Stock warrants were also exercised. In the
aggregate for these transactions, the Company issues 33,938,500 shares of Common
Stock for net proceeds of $53.0 million.
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Convertible Preferred Stock. In March 2022, TeraWulf entered into Series A
Convertible Preferred Stock Subscription Agreements (the "Subscription
Agreements") with certain accredited and institutional investors (collectively,
the "Holders"). Pursuant to the Subscription Agreements, the Company sold 9,566
shares (of 10,000 shares authorized) of Series A Convertible Preferred Stock,
par value $0.001 per share (the "Convertible Preferred Stock") to the Purchasers
for an aggregate purchase price of $9.6 million. The Subscription Agreements
contain customary representations, warranties, covenants and agreements of the
Company. The offer and sale of the Convertible Preferred Stock were made
pursuant to the prospectus and prospectus supplement forming a part of the 2022
Registration Statement. Holders of the Convertible Preferred Stock will
accumulate cumulative dividends at an annual rate of 10.0% on the stated amount
per share plus the amount of any accrued and unpaid dividends on such share,
accumulating on a daily basis and payable quarterly on March 31st, June 30th,
September 30th and December 31st, respectively, in each year and commencing June
30, 2022. Commencing June 30, 2022, unpaid dividends will be accreted to, and
increase, the liquidation preference of the Convertible Preferred Stock. The
initial liquidation preference is $1,000 per share. The Conversion Price is
determined by dividing $1,000 by the Conversion Rate, as defined, which is
initially 100 shares of Common Stock per $1,000 liquidation preference of
Convertible Preferred Stock. Cumulative dividends of $0.8 million were
accumulated and accreted to liquidation preference as of December 31, 2022. As
of December 31, 2022, the aggregate liquidation preference of the Convertible
Preferred Stock was approximately $10.3 million.
Long-term Debt Amendments. In July 2022, the Company entered into an amendment
to is Loan, Guaranty and Security Agreement (the "LGSA"). This amendment
provides for an additional $50.0 million term loan facility (the "New Term
Facility"). The New Term Facility has a maturity date of December 1, 2024,
consistent with the existing term loans under the LGSA. The interest rate with
respect to the New Term Facility is consistent with the existing term loans
under the LGSA, but is subject to increase upon the occurrence of certain
conditions. Pursuant to the New Term Facility, funds can be drawn in three
tranches. The $15.0 million first tranche was drawn at closing in July 2022, and
the subsequent tranches of up to $35 million may be drawn at Company's option,
subject to certain conditions, including the raising of matching junior capital,
as defined. The amortization with respect to the first tranche of the New Term
Facility is consistent with existing term loans under the LGSA. The loans under
the subsequent tranches of the New Term Facility are repayable in quarterly
installments on (i) April 5, 2024 and July 8, 2024, equal to 12.50% of the
original principal amount advanced under such tranches under the LGSA and
(ii) October 7, 2024, equal to 37.5% of the original principal amount advanced
under such tranches of the LGSA. 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 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% of the fully diluted equity of the Company. If the Company draws
subsequent tranches, it is required to issue warrants to the lenders to purchase
shares of the Company's Common Stock equal to dilution of 3.75% and 4.25% of the
then fully diluted equity of the Company, respectively. A certain portion of the
Warrants issued under the Warrant Agreement were subject to cancellation, upon
the occurrence of certain conditions.; however, the time period for potential
warrant cancellation has expired and no warrants were cancelled. In October
2022, the Company entered into a third amendment (the "Third Amendment") to the
LGSA. The Third Amendment divides the initial funding of up to $15,000,000 of
the delayed draw term loan commitment under the LGSA into two tranches of up to
$7,500,000 each. The first tranche of $7,500,000 was borrowed upon the
effectiveness of the Third Amendment on October 7, 2022. In connection with the
Third Amendment described above, 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 party 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
$7,500,000 each pursuant to the Third Amendment. On October 7, 2022. the Company
issued warrants to purchase 2,667,678 shares of Common Stock at $0.01 per share.
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 contain usual and customary antidilution provisions,
have a maturity date of April 1, 2025 and accrue annual interest at a rate of
4%, which increases to 15% upon the occurrence of an event of default, as
defined. The Convertible Notes are 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. On December 12, 2022, the Company entered into a private
placement 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. As of
December 31, 2022, the conversion price was $0.40 per share of Common Stock.
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SEPA. On June 2, 2022, in order to facilitate additional capital acquisition,
the Company entered into the Standby Equity Purchase Agreement ("SEPA") with YA
II PN, Ltd. ("Yorkville"). Pursuant to the SEPA, the Company shall have the
right, but not the obligation, to sell to Yorkville 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. As of December 31, 2022, the
Company sold 91,405 shares of Common Stock for net proceeds of $250,000. The
Company fully repaid the Promissory Note, substantially in cash, and the SEPA
has been cancelled as of December 31, 2022.
The Company has invested $61.1 million and $109.1 million in the buildout of
mining facilities for the year ended December 31, 2022 and the period February
8, 2021 (date of inception) to December 31, 2021, respectively, and $46.2
million and $82.1 million in the Nautilus joint venture for the year ended
December 31, 2022 and the period February 8, 2021 (date of inception) to
December 31, 2021, respectively. The Lake Mariner facility commenced operations
in March 2022 and the Nautilus Cryptomine Facility commenced operations in
February 2023. These facilities are expected to reach an aggregate 160 MW of net
bitcoin mining capacity with a capacity to support 50,000 miners and over 5.5
EH/s of computational power by early in the second quarter of 2023.
Subsequent to December 31, 2022, the Company accomplished several notable steps
toward achieving near term positive cash flows from operations, namely: (1) the
Company amended its long-term debt agreement to, among other changes, remove the
fixed principal amortization through April 7, 2024 and, potentially, beyond, (2)
through the issuance of Common Stock, Common Stock warrants and convertible
promissory notes, the Company received net proceeds of $34.3 million, which
along with cash flow from operations, is expected to be sufficient to satisfy
the Company's final capital expenditure requirements, other obligations and
operating expenses in the months prior to achieving a free cash flow positive
enterprise (3) mining activities have commenced at the Nautilus Facility and the
Company deems that it has funded all known and expected capital commitments, (4)
the Company received materially all contracted miners from the miner suppliers
and has no remaining outstanding financial commitments under the miner purchase
agreements, (5) the received miners are sufficient to fully utilize mining
capacity both in service and under construction at the Lake Mariner Facility and
the Nautilus Cryptomine Facility and (6) the remaining construction activities
at the Lake Mariner Facility and the Nautilus Cryptomine Facility are currently
ongoing and expected to be complete in the second quarter of 2023. The Company
has determined that it is probable that these actions 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 no longer 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.
However, the ability to raise funds , if required, through the sale of equity,
debt financings, or the sale of bitcoin to expand and maintain our operations is
subject to many risks and uncertainties and, even if we were successful, future
equity issuances or convertible debt or preferred stock offerings could result
in dilution to our existing stockholders and any future debt or debt securities
may contain covenants that limit our operations or ability to enter into certain
transactions. Our ability to realize revenue through bitcoin mining and
successfully convert bitcoin into cash or fund overhead with bitcoin is subject
to a number of risks, including regulatory, financial and business risks, many
of which are beyond our control. Additionally, bitcoin has experienced
significant historical volatility in its market price and, as such, future
prices cannot be predicted. See the discussion of risks affecting the Company's
business under Part I, Item 1A. "Risk Factors" of this Annual Report.
Critical Accounting Policies and Estimates
The above discussion and analysis of the Company's financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of the Company's
consolidated financial statements requires the application of accounting
policies and the use of estimates. The accounting policies most important to the
preparation of the consolidated financial statements and estimates that require
management's most difficult, subjective or complex judgments are described
below.
See Note 2 of the Notes to Consolidated Financial Statements included in Item 8
of this Annual Report on Form 10-K for a summary of the Company's significant
accounting policies.
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Variable Interest Entities
Variable interest entities ("VIE") are legal entities in which equity investors
do not have (i) sufficient equity at risk for the legal entity to finance its
activities without additional subordinated financial support, or (ii) as a
group, the power, through voting or similar rights, to direct the activities of
the legal entity that most significantly impact the entity's economic
performance, or (iii) the obligation to absorb the expected losses of the legal
entity or the right to receive expected residual returns of the legal entity.
The Company would consolidate any VIE in which it has a controlling financial
interest through being deemed to be the primary beneficiary of the VIE. The
primary beneficiary of a VIE has both of the following characteristics: (1) the
power to direct the activities of the VIE that most significantly impact its
economic performance; and (2) the obligation to absorb losses of the VIE that
could potentially be significant to the VIE or the right to receive benefits
from the VIE that could be significant to the VIE. If both characteristics are
met, the Company considers itself to be the primary beneficiary and therefore
will consolidate that VIE into its consolidated financial statements.
The Company determines whether it is the primary beneficiary of a VIE upon
initial involvement with a VIE and reassesses whether it is the primary
beneficiary of a VIE on an ongoing basis. The determination of whether an entity
is a VIE and whether the Company is the primary beneficiary of a VIE is based
upon facts and circumstances for the VIE and requires significant judgments such
as whether the entity is a VIE, whether the Company's interest in a VIE is a
variable interest, the determination of the activities that most significantly
impact the economic performance of the entity, whether the Company controls
those activities, and whether the Company has the obligation to absorb losses of
the VIE or the right to receive benefits from the VIE that could be significant
to the VIE.
In 2021, the Company entered into a joint venture, Nautilus Cryptomine LLC
("Nautilus"), with an unrelated co-venturer to develop, construct and operate a
bitcoin mining facility in Pennsylvania. Due to the initial nature of the joint
venture and the continued commitment for additional financing, the Company
determined Nautilus is a VIE. While the Company has the ability to exercise
significant influence over Nautilus, the Company has determined that it does not
have the power to direct the activities that most significantly impact the
economic performance of Nautilus. Initially, the power to direct the activities
of Nautilus that most significantly impact Nautilus' economic performance were
shared equally by both parties within the joint venture due to the requirement
for both equity holders to approve many of the key operating decisions and when
not equally shared, were predominantly under the control of the co-venturer,
including through the co-venturer's majority representation on the board of
managers. As such, the Company has determined that it is not the primary
beneficiary of Nautilus and, therefore, has accounted for this entity under the
equity method of accounting. Risks associated with the Company's involvement
with Nautilus include a commitment to potentially fund additional equity
investments. During the year ended December 31, 0222, the Company reduced its
ownership interest in Nautilus to 25.2%.
Mining Pool
The Company has entered into an arrangement with a cryptocurrency mining pool
(the Foundry USA Pool) to provide computing power to the mining pool in exchange
for consideration. The arrangement is terminable at any time without substantial
penalty by either party and the contract term is deemed to be 24 hours. The
Company's enforceable right to compensation only begins when and continues while
the Company provides computing power to its customer, the mining pool operator.
The mining pool applies the Full Pay Per Share ("FPPS") model. Under the FPPS
model, in exchange for providing computing power to the pool, the Company is
entitled to pay-per-share base amount and transaction fee reward compensation,
calculated on a daily basis, at an amount that approximates the total bitcoin
that could have been mined and transaction fees that could have been awarded
using the Company's computing power, based upon the then current blockchain
difficulty. Under this model, the Company is entitled to compensation regardless
of whether the pool operator successfully records a block to the bitcoin
blockchain.
Providing computing power to a mining pool for cryptocurrency transaction
verification services is an output of the Company's ordinary activities. The
provision of such computing power is the sole performance obligation. The
transaction consideration the Company receives, if any, is non-cash
consideration and is all variable. Because cryptocurrency is considered non-cash
consideration, fair value of the cryptocurrency award received is determined
using the quoted price of the related cryptocurrency in the Company's principal
market at the time of contract inception, which is deemed daily. Revenue is
recognized when it is probable that a significant reversal in the amount of
cumulative revenue recognized will not occur. After every 24-hour contract term,
the mining pool transfers the cryptocurrency consideration to our designated
cryptocurrency wallet.
There is no significant financing component in these transactions. There may be,
however, consideration payable to the customer in the form of a pool operator
fee; this fee, if any, is deducted from the proceeds the Company receives and is
recorded as contra-revenue, as it does not represent a payment for a distinct
good or service.
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Data Center Hosting
The Company's current hosting contracts are service contracts with a single
performance obligation. The service the Company provides primarily includes
hosting the customers' miners in a physically secure data center with electrical
power, internet connectivity, ambient air cooling and available maintenance
resources. Hosting revenue is recognized over time as the customer
simultaneously receives and consumes the benefits of the Company's performance.
The Company recognizes hosting revenue to the extent that a significant reversal
of such revenue will not occur. Data center hosting customers are invoiced and
payments are due on a monthly basis. While the majority of consideration is paid
in cash, certain consideration is payable in cryptocurrency. Because
cryptocurrency is considered non-cash consideration, fair value of the
cryptocurrency award received is determined using the quoted price of the
related cryptocurrency in the Company's principal market at the time of contract
inception. The Company has one data center hosting contract with a customer,
which expires in December 2023, for which the quoted price of bitcoin in the
Company's principal market at the time of contract inception was approximately
$38,000. The Company recorded miner hosting revenue of $4.6 million and $0
during the year ended December 31, 2022 and the period February 8, 2021 (date of
inception) to December 31, 2021, respectively.
Cryptocurrencies
Cryptocurrencies, including bitcoin, are included in current assets in the
consolidated balance sheets due to the Company's ability to sell it in a highly
liquid marketplace and its intent to liquidate its cryptocurrencies to support
operations when needed. Cryptocurrencies earned by the Company through the
provision of computing power to a mining pool and hosting activities are
accounted for in connection with the Company's revenue recognition policy
disclosed above.
Cryptocurrencies are accounted for as intangible assets with indefinite useful
lives. An intangible asset with an indefinite useful life is not amortized but
assessed for impairment on a continuous basis through the entirety of its
holding period. Impairment exists when the carrying amount exceeds its fair
value, which is measured using the quoted price of the cryptocurrency at the
time its fair value is being measured, which is based on the intraday low quoted
price of the cryptocurrency reported in the Company's principal market. To the
extent an impairment loss is recognized, the loss establishes the new cost basis
of the asset. Subsequent reversal of impairment losses is not permitted.
Sales of cryptocurrencies by the Company and cryptocurrencies awarded to the
Company, including as compensation for data center hosting services, are
included within cash flows from operating activities on the consolidated
statements of cash flows. The Company will account for its gains or losses in
accordance with the first in first out ("FIFO") method of accounting.
Issuance of Debt with Common Stock or Warrants; Debt Modification
On December 1, 2021, TeraCub entered into a the LGSA, which consists of a $123.5
million term loan facility. In connection with the LGSA, the Company issued to
the holders of the Term Loan 839,398 shares of Common Stock, which is a quantity
of Common Stock representing 1.5% of the outstanding shares of the publicly
registered shares of TeraWulf subsequent to the Closing. The allocation of
proceeds between the debt instrument and any other components included in the
debt issuance, including Common Stock, is generally based on the relative fair
value allocation method. In applying the relative fair value allocation method,
the determination of the fair value of the Common Stock issued and the fair
value of the Term Loan independent of the Common Stock issued requires
significant judgment. As a measure of sensitivity, a 10% change in the estimated
fair value of the Term Loan component would result in a $1.9 million change in
the fair value allocated to each of the Term Loan and equity components.
In July 2022, the Company entered into the First Amendment to the LGSA, which
included an additional borrowing of $15.0 million and the issuance of warrants
to purchase 3,472,640 shares of Common Stock at $0.01 per share. The accounting
for debt modifications is complex and requires significant judgment. Potential
accounting outcomes include troubled debt restructuring accounting,
extinguishment accounting or modification accounting, each with different
implications for the consolidated financial statements. The Company has
determined that modification accounting is applicable. Additionally, debt
modification accounting requires the determination of the fair value of the
warrants issued, which requires significant judgment. As a measure of
sensitivity, a 10% change in the estimated fair value of the warrants would
result in a $0.3 million change in the recorded value of the borrowing under the
First Amendment.
In October 2022, the Company entered into the Third Amendment to the LGSA, which
included an additional borrowing of $7.5 million and the issuance of warrants to
purchase 2,667,678 shares of Common Stock at $0.01 per share. The accounting for
debt modifications is complex and requires significant judgment. Potential
accounting outcomes include troubled debt restructuring
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accounting, extinguishment accounting or modification accounting, each with
different implications for the consolidated financial statements. The Company
has determined that modification accounting is applicable. Additionally, debt
modification accounting requires the determination of the fair value of the
warrants issued, which requires significant judgment. As a measure of
sensitivity, a 10% change in the estimated fair value of the warrants would
result in a $0.2 million change in the recorded value of the borrowing under the
Third Amendment.
Convertible Instruments
The Company accounts for its issuance of convertible debt and convertible equity
instruments in accordance with applicable U.S. GAAP. In connection with that
accounting, the Company assesses the various terms and features of the agreement
in accordance with Financial Accounting Standards Board ("FASB") Accounting
Standards Codification ("ASC") No. 480 "Distinguishing Liabilities from Equity"
("ASC 480") and ASC 815 "Derivatives and Hedging Activities" ("ASC 815"). ASC
480 requires liability accounting for certain financial instruments, including
shares that embody an unconditional obligation to transfer a variable number of
shares, provided that the monetary value of the obligation is based solely or
predominantly on one of the following three characteristics: (1) a fixed
monetary amount known at inception, (2) variations in something other than the
fair value of the issuer's equity shares or (3) variations in the fair value of
the issuer's equity shares, but the monetary value to the counterparty moves in
the opposite direction as the value of the issuer's shares. In accordance with
ASC 815, the Company assesses the various terms and features of the agreement to
determine whether or not they contain embedded derivative instruments that are
required under ASC 815 to be accounted for separately from the host contract and
recorded on the balance sheet at fair value. The fair value of derivative
liabilities, if any, is required to be revalued at each reporting date, with
corresponding changes in fair value recorded in current period operating
results.
Income Taxes
The Company accounts for income taxes pursuant to the provision of Accounting
Standards Codification ("ASC") 740-10, "Accounting for Income Taxes" which
requires, among other things, an asset and liability approach to calculating
deferred income taxes. The asset and liability approach requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences
of temporary differences between the carrying amounts and the tax bases of
assets and liabilities. A valuation allowance is provided to offset any net
deferred tax assets for which management believes it is more likely than not
that the net deferred tax asset will not be realized. The Company follows the
provision of the ASC 740-10 related to Accounting for Uncertain Income Tax
Positions. When tax returns are filed, it is more likely than not that some
positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position taken
or the amount of the position that would be ultimately sustained. In accordance
with the guidance of ASC 740-10, the benefit of a tax position is recognized in
the financial statements in the period during which, based on all available
evidence, management believes it is more likely that not that the position will
be sustained upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated with other
positions. The tax benefits recognized in the consolidated financial statements
from such positions are then measured based on the largest benefit that has a
greater than 50% likelihood of being realized upon settlement with the
applicable taxing authority. The portion of the benefits associated with the tax
positions taken that exceeds the amount measured as described above should be
reflected as a liability for uncertain tax benefits in the Company's balance
sheets along with any associated interest and penalties that would be payable to
the taxing authorities upon examination. The most critical estimate for income
taxes is the determination of whether to record a valuation allowance for any
net deferred tax asset, including net loss carryforwards, whereby management
must estimate whether it is more likely than not that the deferred tax asset
would be realized.
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