You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Annual Report. This discussion contains forwardlooking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forwardlooking statements as a result of various factors, including those set forth in Part 1, Item 1A, "Risk Factors" and other factors set forth in other parts of this Annual Report.
Unless the context otherwise requires, references in this Annual Report to the
“Company,” “Cipher,” “
We are an emerging technology company that develops and operates industrial
scale bitcoin mining data centers. Bitcoin mining is our principal revenue
generating business activity.
consolidated subsidiaries, including CMTI, currently operates four bitcoin
mining data centers in
Our current intention is to continue to expand our bitcoin mining business by developing additional data centers, expanding capacity at our current data centers and entering into other arrangements, such as joint ventures or data center hosting agreements. Our key mission is to expand and strengthen the Bitcoin network's critical infrastructure. As of
February 28, 2023, we operated approximately 58,500 miners, with an aggregate hashrate capacity of approximately 6.1 EH/s, deploying approximately 203 MW of electricity, of which we owned approximately 48,500 miners, with an aggregate hashrate capacity of approximately 5.2 EH/s, deploying approximately 172 MW of electricity. We operate four bitcoin mining data centers in Texas, including one wholly-owned and three partially-owned data centers acquired through investments in joint ventures. Our largest data center is the Odessa Facility which is our wholly-owned 207 MW facility located in Odessa, Texas. We also operate our Alborz, Bear and Chief facilities in different sites across Texaspursuant to a joint venture with WindHQ where we have a 49% membership interest in each facility. By the end of the first quarter 2023, we anticipate operating approximately 66,500 miners, capable of generating approximately 6.7 EH/s across our sites.
Factors Affecting Our Results of Operations
We believe that our performance and future success depend on a number of factors that present significant opportunities for us. These factors also pose risks and challenges, including those discussed in Part I, Item 1A. "Risk Factors" of this Annual Report. Market Value of Bitcoin. Our revenues comprise a combination of: (i) block rewards in bitcoin, which are fixed rewards programmed into the bitcoin software that are awarded to a miner or a group of miners for solving the cryptographic problem required to create a new block on a given blockchain and (ii) transaction fees in bitcoin, which are flexible fees earned for verifying transactions in support of the blockchain. For further details, see "Business-Revenue Structure." Our revenues are directly impacted by changes in the market value of bitcoin. For example, the average bitcoin price for 2020 and 2021 was
$11,057and $47,385, respectively. Bitcoin price generally declined throughout 2022. As at December 31, 2022, the price of bitcoin was $16,526. Furthermore, block rewards are fixed and the Bitcoin network is designed to periodically reduce them through halving. Currently the block rewards are fixed at 6.25 bitcoin per block, and it is estimated that it will halve again to 3.125 bitcoin in April 2024. The halving events happen without any regard to ongoing demand, meaning that if the ongoing demand remains the same after a halving event, whatever demand was being met by new supply will be restricted, which may necessitate an adjustment of the price of bitcoin, though there is no definitive evidence of a causal link between bitcoin's programmatic decrease in supply and broadening demand. Once the halving occurs, we expect that it could have a negative impact on our revenues as the reward for each bitcoin mines will be reduced. Bitcoin miners also collect transaction fees for each transaction they confirm. Miners validate unconfirmed transactions by adding the previously unconfirmed transactions to new blocks in the blockchain. Miners are not forced to confirm any specific transaction, but they are economically incentivized to confirm valid transactions as a means of collecting fees. Miners have historically accepted relatively low transaction confirmation fees, because miners have a very low marginal cost of validating unconfirmed transactions; however, unlike the fixed block rewards, transaction fees may vary, depending on the consensus set within the network. 62 -------------------------------------------------------------------------------- As the use of the Bitcoin network expands and the total number of bitcoin available to mine and, thus, the block rewards, declines over time, we expect the mining incentive structure to transition to a higher reliance on transaction confirmation fees, and the transaction fees to become a larger proportion of the revenues to miners. We have expenses denominated primarily in United Statesdollars. As such, we are likely to need to sell a portion of the bitcoin we mine to generate dollars to meet expenses. This means the market value of bitcoin will always be a significant factor affecting our results of operations.
Capacity and Efficiency of Mining Machines.
Because the number of bitcoin mined is directly related to the size and efficiency of a bitcoin mining company's fleet of miners, we believe miners need to deploy increasingly sophisticated miners in ever greater quantities to remain competitive. To remain competitive, we will need to increase our hashing power to maintain market share as the overall hashrate and difficulty of the Bitcoin network increases. We believe that our commitment to cost and mining efficiency remains our competitive advantage. The majority of our capital expenditures have been directed towards the latest models of mining machines and technology featuring industry-leading capacity, speed and efficiency. We believe that we operate one of the most efficient mining rig fleets in the global market. In some periods, the industry has experienced, and we expect may experience again in the future, a scarcity of advanced mining rigs. We believe that to maintain our competitive advantage over the long term, we must develop and maintain strong relationships across the mining rig supply chain, and strategically invest in state-of-the art miners at attractive prices, while effectively managing our fleet as it ages along the obsolescence curve. All of our miners are housed in air-cooled containers and we do not currently have any immersion miners. This means we cannot increase the clock rate to speed up performance of, or "over-clock," our miners, and it is possible that our miners will experience greater wear-and-tear due to environmental factors, including temperature changes and dust, than might other miners housed in immersion cooling containers. See "Risk Factors-Risks Related to Our Business, Industry and Operations-Bitcoin miners and other necessary hardware are subject to malfunction, technological obsolescence and physical degradation." Additionally, our strategy involves curtailing our mining operations, meaning we turn the miners on and off, for a variety of contractual, economic, weather related, business or other reasons. We do not know how that cycling on and off process will affect the efficiency of our miners over time or whether they will age faster than machines that are not turned on and off as frequently. See "Risk Factors-Risks Related to Our Business, Industry and Operations-Bitcoin miners and other necessary hardware are subject to malfunction, technological obsolescence and physical degradation."
Cost and Source of Power.
Mining bitcoin is a highly power-intensive process, with large amounts of electrical power required to operate the mining rigs. We believe that cost efficiency, and particularly, maintaining cost of power efficiency in bitcoin mining over the long term, will be necessary for success. We currently have a portfolio of competitively priced electrical power. However, there is no guarantee that we will be able to negotiate additional power agreements on similar terms, or at all. See "Risk Factors-Risks Related to Our Business, Industry and Operations-We may be affected by price fluctuations in the wholesale and retail power markets" and "-Risks Related to Bitcoin Mining-We may not adequately respond to price fluctuations and rapidly changing technology, which may negatively affect our business." Our four data centers are all located in west
Texasand the Texas Panhandle, which are areas that we believe have site development potential with access to competitively priced electrical power, whether through grid connection, through solar and wind generation facilities, or otherwise. Where we can, we anticipate that we will, either directly, or through our power providers, participate in demand response programs offered by ERCOT. We believe these strategic investments will generate long-term returns in the form of controlled access to low cost, responsible sources of power and differentiate us from our competitors. However, after the initial terms of our current power purchase arrangements end, we may not be able to secure similarly competitively priced access to the electrical power needed for out data centers to mine bitcoin profitably. 63 --------------------------------------------------------------------------------
Our business environment is constantly evolving, and bitcoin miners can range from individual enthusiasts to professional mining operations with dedicated mining facilities. We compete with other companies that focus all or a portion of their activities on mining activities at scale. In the past few years there have been many new entrants and existing competitors in the space and a general increase in the competition for industrial scale bitcoin mining companies. The number of bitcoin we are able to mine depends on the size of our share of the total network hashrate. It is very difficult to predict changes in network hashrate. To the extent that we are unable to maintain our market share, or in other words, to the extent that the relative portion our network hashrate represents as compared to the total network hashrate decreases, we may mine fewer bitcoin than anticipated and the results of our operations may suffer. See "Risk Factors - Risks Related to Our Business, Industry and Operations - We operate in a highly competitive industry and we compete against companies that operate in less regulated environments as well as companies with greater financial and other resources, and our business, operating results, and financial condition may be adversely affected if we are unable to respond to our competitors effectively."
COVID-19 and Supply Chain Constraints.
The COVID-19 pandemic has resulted in significant national and global economic disruption, has had an effect on our business operations and may, in the future, continue to affect our business. For example, in early
January 2022, we had to temporarily shut down the construction at the Alborz Facility in response to employees being impacted by COVID-19. We may also experience disruptions to our business operations resulting from delays in construction and obtaining necessary equipment in a timely fashion. Global supply logistics have caused delays across all channels of distribution, and we have also experienced delays in certain of our miner delivery schedules. Additionally, the global supply chain for data center construction equipment, such as transformers and substations, is presently further constrained due to unprecedented demand. Based on our current assessments, however, we do not expect any material impact on long-term development, operations, or liquidity due to the COVID-19 pandemic. While most countries have either fully lifted or significantly limited their COVID-19 pandemic restrictions, the COVID-19 or any new epidemics or pandemics could create significant macroeconomic pressures, which may directly or indirectly impact our business, results of operations, cash flows, and financial condition. The full extent to which the COVID-19 pandemic and related macroeconomic pressures will directly or indirectly impact our business, results of operations, cash flows, and financial condition will depend on future developments that are uncertain and cannot be accurately predicted. For further discussion, see "Risk Factors - Risks Related to Our Business, Industry and Operations - We are exposed to risks related to disruptions or other failures in the supply chain for bitcoin mining hardware and related data center hardware, and difficulties in obtaining new hardware" and "- Any unfavorable global economic, business or political conditions, epidemics, pandemics or disease outbreaks or other public health conditions, such as the global COVID-19 pandemic, and the disruption caused by various countermeasures to reduce their spread, could adversely affect our business, prospects, financial condition, and operating results."
Components of Our Results of Operations
Our revenue consists of bitcoin earned through mining activities at our
OdessaFacility. We currently participate in one mining pool, specifically Foundry. The provision of computing power in accordance with the mining pool operator's terms of service is the only performance obligation in our contract with the mining pool operator. We are entitled to a fractional share of the fixed cryptocurrency award from the mining pool operator (referred to as a "block reward") and potentially transaction fees generated from blockchain users and distributed to individual miners by the mining pool operator. Our fractional share of the block reward is based on the proportion of computing power we contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm, over the contract term. The block reward is pre-determined and hard coded into the protocol governing the relevant blockchain. Our proportionate share of transaction fees is based on our contributed share of hashrate as a percentage of total network hashrate during the contract term. The transaction fees are the aggregate fees paid by 64 --------------------------------------------------------------------------------
parties whose transactions are included in the block. Bitcoin earned is measured
at fair value at contract inception and is recognized in revenue over the
contract term as hashrate is provided.
Cost of revenue
Cost of revenue consists primarily of direct production costs of bitcoin mining operations, consisting mainly of electricity expenses, as well as other facilities costs associated with our wholly-owned Odessa Facility, but excludes depreciation which is separately stated.
General and administrative expenses
General and administrative expenses represent salary and other employee costs including stock-based compensation, insurance expense, rent expense for non-mining locations, professional fees, including accounting and audit, consulting, legal, public relations and/or investor relations expenses, taxes and licenses, travel, and other expenses. We expect our administrative fees to remain high as we incur the ongoing costs of operating as a public company, including increased director and officer insurance costs, potential increases in the number of employees at the Company, and increased travel and conference participation expenses.
Our depreciation expense consists mainly of depreciation for our miners and mining equipment, as well as depreciation associated with leasehold improvements and other capitalized assets associated with our Odessa Facility. It also includes an immaterial amount of depreciation for other property and equipment not directly associated with our mining activities. We capitalize the cost of our mining machines and record depreciation expense on a straight-line basis over the estimated useful life of the machines, which is generally 5 years. Leasehold improvements include capitalized asset retirement costs, which are amortized over the estimated useful life of the related asset. All other leasehold improvements are depreciated over the lesser of the estimated useful life of the asset or the remaining life of the related lease.
Change in fair value of derivative asset and power sales
The change in fair value of derivative asset primarily represents the initial fair value recorded for the derivative asset related to the
Luminant PowerAgreement on July 1, 2022, and includes the subsequent changes in fair value recorded during the reporting period. Additionally, change in fair value of derivative asset also includes income from our sales of electricity prior to bitcoin mining operations beginning at the Odessa Facility. Sales of electricity subsequent to the start of mining operations at the Odessa Facility are recorded in income from power sales.
Equity in losses of equity investees
Equity in losses of equity investees includes our share of the losses recorded by
Alborz LLC, Bear LLCand Chief LLC. Additionally, it includes the losses that we recognized upon our contributions of miners to these equity investees, due to the miners have a lower fair value at the time of the contributions than our costs paid to obtain them, which resulted in basis differences between the cost of the investments on our consolidated balance sheet and the amount of our underlying equity in the net assets of the investee attributed to the miners. We are accreting these basis differences and recognizing the accretion as a reduction to our share of the losses recognized by Alborz LLC, Bear LLCand Chief LLC within the equity in losses of equity investees on the consolidated statement of operations over the depreciation period for the miners.
Impairment of bitcoin and realized gain on sale of bitcoin
During 2022, we mined bitcoin and received bitcoin as distributions-in-kind from our equity investees,
Alborz LLC, Bear LLCand Chief LLC. All of our bitcoin is recorded as a current asset on our consolidated balance sheet as we expect to begin regularly exchanging our bitcoin held for fiat currency to fund our operating expenses. Cryptocurrencies are accounted for as intangible assets with indefinite useful lives, and as such is assessed for impairment on a daily basis. Impairment exists and is recognized when the carrying amount of bitcoin exceeds its fair value, which is determined based on the lowest daily trading price of bitcoin based on quoted prices on the 65 -------------------------------------------------------------------------------- active trading platform that management has determined is our principal market for bitcoin. We did recognize a small gain related to immaterial sales of bitcoin during 2022. The fair value of bitcoin has been highly volatile since we began to obtain bitcoin through our operating activities, which has impacted our operating results and we expect volatility in the fair value of bitcoin to continue for the foreseeable future.
Provision for income taxes
Our provision for income taxes consists of
U.S.deferred federal taxes. A valuation allowance is recorded against substantially all of our net deferred tax assets, which are composed primarily of federal and state net operating loss carryforwards, stock-based compensation, non-goodwill intangibles, investments in joint ventures and lease liabilities; in addition, we have deferred tax liabilities resulting from our derivative and right-to-use assets. Our ability to offset our deferred tax liabilities with our deferred tax assets is limited due to restrictions on the ability to offset taxable income by more than eighty percent with federal net operating losses. As a result, we have recorded a deferred tax liability for the expected amount of future taxable income that isn't covered by net operating losses. We evaluate our ability to recognize our deferred tax assets annually by considering all positive and negative evidence available as proscribed by the Financial Accounting Standards Board("FASB") under its general principles of Accounting Standards Codification ("ASC") 740, Income Taxes. Results of Operations Comparison of the Year Ended December 31, 2022and the Eleven Months Ended December 31, 2021Year Ended Eleven Months Ended December 31, 2022 December 31, 2021 Revenue - bitcoin mining $ 3,037 $ -
Costs and operating expenses (income)
Cost of revenue 748 - General and administrative 70,836 72,147 Depreciation 4,378 5 Change in fair value of derivative asset (73,479 ) - Income from power sales (458 ) - Equity in losses of equity investees 36,972 - Realized gain on sale of bitcoin (6 ) - Impairment of bitcoin 1,467 - Total costs and operating expenses 40,458 72,152 Operating loss (37,421 ) (72,152 ) Other income (expense) Interest income 215 4 Interest expense (137 ) (27 ) Change in fair value of warrant liability 130 22 Total other income (expense) 208 (1 ) Loss before taxes (37,213 ) (72,153 ) Provision for income taxes (1,840 ) - Net loss $ (39,053 ) $ (72,153 ) Revenue Revenue for the year ended
December 31, 2022was $3.0 millionand was generated entirely from bitcoin mining operations at our Odessa Facility, which began mining for bitcoin on November 22, 2022. For the period from November 22, 2022through December 31, 2022, we mined 180 bitcoin at an average price per coin of approximately $17,000. We generated no revenue during the eleven months ended December 31, 2021. 66 --------------------------------------------------------------------------------
Cost of revenue
Cost of revenue for the year ended
December 31, 2022was $0.7 millionand consisted primarily of power costs at the Odessa Facility under the Luminant Power Agreement. We incurred no similar costs during the eleven months ended December 31, 2021. General and administrative General and administrative expenses decreased by $1.3 millionto $70.8 millionduring the year ended December 31, 2022from $72.1 millionfor the eleven months ended December 31, 2021. The decrease was primarily driven by the reduction in share-based compensation costs of $22.3 millionin 2022, which was partially offset by increases of $6.2 millionfor business insurance, $2.4 millionfor payroll and payroll-related benefits for employees due to increasing headcount, $2.0 millionfor taxes, $1.9 millionfor accounting and audit services, $1.8 millionfor legal expenses, $1.5 millionfor rent expense primarily related to our headquarters, $1.5 millionfor office supplies and software, $1.3 millionfor consulting expenses, $0.7 millionfor specific costs of operating as a public company, $0.7 millioneach for travel expenses, $0.6 millionfor board fees and $0.4 millionfor placement expenses associated with increased hiring. Certain costs such as accounting, legal and public company costs were higher during the year ended December 31, 2022due to operating as a public company for the full fiscal year, as well as due to preparation and filing of the Registration Statement in September 2022. See additional information in "-Liquidity and Capital Resources" below.
Depreciation for the year ended
December 31, 2022was $4.4 million, an increase of $4.4 millionover depreciation expense for the eleven months ended December 31, 2021, which was immaterial. The increase was due to miners, mining equipment and leasehold improvements at the Odessa Facility being placed into service in November 2022and the recognition of depreciation for those assets, as well as amortization of the right-of-use asset for the Interconnection Electrical Facilities that provides power to the Odessa Facility and accretion of the asset retirement obligation at the Odessadata center and depreciation of the associated capitalized costs.
Change in fair value of derivative asset
Change in fair value of derivative asset was
$73.5 millionfor the year ended December 31, 2022and was driven by the fair value of the Luminant PowerAgreement. The $73.5 millionincluded $83.6 millionof income recognized for the initial derivative asset fair value on July 1, 2022, partially offset by $11.8 millionof expense recorded related to a decrease in the fair value of the Luminant Power Agreement as of December 31, 2022. The change in fair value of derivative asset in 2022 also included $1.7 millionfor our sales of electricity facilitated by Luminant, which were conducted prior to our ability to accept delivery of power at the Odessa Facility. Subsequent to the Odessa Facility becoming operational, sales of electricity under our Luminant Power Agreement are recorded in power sales on the consolidated statement of operations. We had no effective derivative asset during the eleven months ended December 31, 2021.
After the start of mining operations at the Odessa Facility on
November 22, 2022, we sold excess electricity that was available under the Luminant PowerAgreement, but not needed in our mining operations at the Odessa Facility, back to the ERCOTmarket through Luminant for proceeds of $0.5 millionbefore the end of the 2022.
Equity in losses of equity investees
Equity in losses of equity investees totaled
$37.0 millionfor the year ended December 31, 2022and primarily consisted of losses totaling $33.4 millionrecognized by us in relation to miners contributed between June 2022and October 2022to Alborz LLC, Bear LLCand Chief LLC that had fair values at the time of the contributions that were less than the costs we paid to obtain the miners. These losses created basis differences in our investments in the equity investees, which we are accreting over the five-year useful life of the miners. Equity in losses of equity investees was also impacted by the net losses of our equity investees, for which we recorded expenses of $5.667 --------------------------------------------------------------------------------
million for our share in their losses for the year ended
which was partially offset by
differences mentioned above.
Impairment of bitcoin
We recognized a total of
from our mining activities and received as distributions from our equity
investees during the year ended
Other income (expense)
Other income totaled
$0.2 millionfor the year ended December 31, 2022, consisting of interest income of $0.2 millionfrom our money market accounts and $0.1 millionfrom the change in the fair value of our warrant liability; which was partially offset by $0.1 millionof interest expense recognized related to the Purchase and Sale Agreement with Luminant's affiliate, Vistra Operations Company, LLC, for the Interconnection Electrical Facilities, which we recorded as a finance lease on our consolidated balance sheet as of the lease commencement date on November 22, 2022. Other expense for the eleven months ended December 31, 2021was immaterial.
Provision for income taxes
For the year ended
December 31, 2022, we recorded a provision for income taxes of $1.8 millionprimarily due to our derivative asset related to the Luminant Power Agreement. In the eleven months ended December 31, 2021, we did not record any provision or benefit for income taxes.
Liquidity and Capital Resources
We incurred a net loss of
$39.1 millionand negative cash flows from operations of $20.9 millionfor the year ended December 31, 2022. As of December 31, 2022, we had cash and cash equivalents of $11.9 million, total stockholders' equity of $342.9 millionand an accumulated deficit of $111.2 million. To date, we have relied in large part on proceeds from the consummation of our business combination with GWAC (the "Business Combination") to fund our operations. During the year ended December 31, 2022, we paid approximately $188.1 millionas deposits on equipment, primarily for miners, and had $73.0 millionof deposits on equipment still on our consolidated balance sheet as of December 31, 2022. We currently do not have any outstanding amounts due associated with purchase commitments for miners; however, management expects to incur ongoing capital expenditures in the first half of 2023 related to the Odessa Facility that will require resources beyond our existing financial resources as of December 31, 2022. Management intends to continue with the infrastructure buildout at the Odessa Facility to get the site to full capacity in support of our current business plans. Our management believes that our existing financial resources, combined with projected cash and bitcoin inflows from its data centers and our intent and ability to sell bitcoin received or earned, will be sufficient to enable us to meet our operating and capital requirements for at least 12 months from the date these consolidated financial statements are issued. On September 21, 2022, we filed with the Securities and Exchange Commissiona shelf registration statement on Form S-3, which was declared effective on October 6, 2022(the "Registration Statement"). The Registration Statement covers: (i) the offer and sale by us, from time to time in one or more offering, securities having an aggregate public offering price of up to $500.0 million, (ii) the offer and sale from time to time by the selling securityholders identified therein of up to 23,265,565 shares of our Common Stock and the offer and sale from time to time by the selling securityholders of up to 85,500 of our warrants and (iii) the offer and sale of (A) up to 8,499,978 shares of Common Stock that are issuable by us upon the exercise of 8,499,978 public warrants that were previously registered and (B) up to 114,000 shares of Common Stock that are issuable by us upon the exercise of 114,000 private placement warrants. In connection with the filing of the Registration Statement, we also entered into an at-the-market offering agreement (the "Sales Agreement") with H.C. Wainwright & Co., LLC(the "Agent"), under which we may, from time to time, sell shares of our Common Stock having an aggregate offering price of up to $250.0 millionin "at-the-market" offerings through the Agent, which is included in the $500.0 millionof securities that may be offered pursuant to the Registration Statement. Sales of the shares of Common Stock, if any, will be made at prevailing market prices at the time of sale, or as otherwise agreed with the Agent. Pursuant to the Sales Agreement, we will pay the Agent a commission of up to 3.0% of the gross proceeds from the sale of any shares of Common Stock 68 -------------------------------------------------------------------------------- under the Sales Agreement. We are not obligated to make any sales of shares of our Common Stock under the Sales Agreement. We have not sold any shares of our Common Stock under the Sales Agreement as of the issuance of these consolidated financial statements. Cash Flows The following summarizes our sources and uses of cash for the periods indicated (in thousands): Year Ended Eleven Months Ended December 31, 2022 December 31, 2021 Net cash used in operating activities $ (20,915 ) $
Net cash used in investing activities (173,909 )
Net cash (used in) provided by financing (3,090 ) activities
Net (decrease) increase in cash and cash $ (197,914 ) equivalents $ 209,841 Operating Activities Net cash used in operating activities declined by
$10.8 millionto $20.9 millionfor the year ended December 31, 2022from $31.7 millionin the eleven months ended December 31, 2021. This was primarily driven by a reduction in our net loss by $33.1 millionto $39.1 millionin 2022 from $72.2 millionin 2021, which was impacted by a total decrease in non-cash items totaling $53.2 million, which primarily included the $73.5 millionchange in fair value of derivative asset following the effective date of the Luminant Power Agreement on July 1, 2022and the $22.3 millionreduction in share-based compensation expense; partially offset by increases in non-cash equity in losses of equity investees of $37.0 million, which was comprised mainly of the $33.4 millionof losses recognized upon our contributions of equipment during the current year, and depreciation expense of $4.4 million. Additionally, changes in assets and liabilities resulted in decreases in cash used of $30.9 millionbetween the year ended December 31, 2022and the eleven months ended December 31, 2021. This improvement consisted primarily of an improvement in cash from the following: prepaid expenses and other current assets of $19.8 million; security deposits of $3.0 million; accounts payable of $2.2 million(including related party accounts payable); as well as proceeds from the reduction of scheduled power under the Luminant Power Agreement of $5.1 millionand from power sales of $1.7 million. These increases in cash were offset by a decrease related to the related party accounts receivable of $1.1 million.
Net cash used in investing activities increased by
$53.8 millionto $173.9 millionduring the year ended December 31, 2022from $120.1 millionduring the eleven months ended December 31, 2021. This was due to increases of $73.2 millionfor deposits paid for miners and mining equipment and $34.8 millionfor purchases of property and equipment primarily related to construction at the Odessa Facility, which were partially offset by cash distributions totaling $54.0 millionfrom Alborz LLC, Bear LLCand Chief LLC.
Net cash from financing activities decreased by
$364.7 millionto net cash used of $3.1 millionfor the year ended December 31, 2022from net cash provided of $361.6 millionfor the eleven months ended December 31, 2021. The decrease was due to the cash proceeds received from the Business Combination, net of issuance costs, of approximately $384.9 millionduring the eleven months ended December 31, 2021, offset by a $20.2 millionreduction in cash used to repurchase shares to cover the tax obligations of employees resulting from the vesting of RSUs.
Limited Business History; Need for
There is limited historical financial information about the Company upon which to base an evaluation of our performance. Our business is subject to risks inherent in the establishment of a new business enterprise, including limited capital resources, possible delays in exploration and/or development, and possible cost overruns due to price and cost increases in services. We have no current intention of entering into a merger or acquisition within the next 12 months. We may require additional capital to pursue certain business opportunities or respond to technological 69 -------------------------------------------------------------------------------- advancements, competitive dynamics or technologies, customer demands, challenges, acquisitions or unforeseen circumstances. Additionally, we have incurred and expect to continue to incur significant costs related to becoming a public company. Accordingly, we may in engage in equity or debt financings or enter into credit facilities for the above-mentioned or other reasons; however, we may not be able to timely secure additional debt or equity financings on favorable terms, if at all. If we raise additional funds through equity financing, our existing stockholders could experience significant dilution. Furthermore, any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. If we are unable to obtain adequate financing on terms that are satisfactory to us, when we require it, our ability to continue to grow or support the business and to respond to business challenges could be significantly limited, which may adversely affect our business plan. For risks associated with this, see "Risks Factors-Risks Related to Our Business, Industry and Operations-We may need to raise additional capital, which may not be available on terms acceptable to us, or at all."
Contractual Obligations and Other Commitments
December 17, 2021, we entered into a lease agreement for executive office space, with an effective term commencing on February 1, 2022and monthly rent payments of approximately $0.1 millioncommencing on June 1, 2022. The initial lease term is for a period of five years and four months. We also entered into a series of agreements with affiliates of Luminant, including the Lease Agreement dated June 29, 2021, with amendment and restatement on July 9, 2021(as amended and restated, the "Luminant Lease Agreement"). The Luminant Lease Agreement leases a plot of land to us where our data center, ancillary infrastructure and electrical system (the "Interconnection Electrical Facilities" or "substation") have been set up for our Odessa Facility. We entered into the Luminant Lease Agreement and the Luminant Purchase and Sale Agreement to build the infrastructure necessary to support our planned operations. Management determined that the Luminant Lease Agreement and the Luminant Purchase and Sale Agreement should be combined for accounting purposes under ASC 842 (collectively, the "Combined Luminant Lease Agreement") and that amounts exchanged under the combined contract should be allocated to the various components of the overall transaction based on relative fair values. Our management determined that the Combined Luminant Lease Agreement contains two lease components; and the components should be accounted for together as a single lease component, because the effect of accounting for the land lease separately would be insignificant. Financing for use of the land and substation is provided by Luminant affiliates, with monthly installments of principal and interest due over a five-year period starting upon transfer of legal title of the substation to us (estimated total undiscounted principal payments of $15.0 million). The Combined Luminant Lease Agreement commenced on November 22, 2022and has an initial term of five years, with renewal provisions that are aligned with the Luminant Power Agreement. At the end of the lease term for the Interconnection Electrical Facilities, the substation will be sold back to Luminant's affiliate, Vistra Operations Company, LLCat a price to be determined based upon bids obtained in the secondary market. 70 --------------------------------------------------------------------------------
Mining and Mining Equipment
commitments for miners and other mining equipment (in thousands):
Expected Original Maximum Shipping for Agreement Purchase Open Purchase Open Purchase Vendor Dates Commitment (1) Commitment Deposits Paid Commitments Bitmain August 20, $ 171,135 $ 1,720 $ 1,720 February 2023 Technologies 2021 and through April Limited (2) August 30, 2023 2021 SuperAcme May 6, 2022 222,401 50,660 50,660 January 2023 Technology and November through April (Hong Kong) 4, 2022 2023 (2) Bitfury USA Various 20,638 20,638 and other vendors (primarily for BBACs) Total
$ 73,018 $ 73,018
(1) Maximum purchase commitment did not consider discounts that we could qualify
for with the respective vendors, which reduced the total cost of the miners.
(2) Pursuant to our agreements with Bitmain and SuperAcme, we are responsible for all logistics costs related to transportation, packaging for transportation and insurance related to the delivery of the miners.
We have purchased miners from Bitmain and SuperAcme.
Under our agreement of
August 2021with Bitmain, we purchased a total of 27,000 S19j Pro miners, at an average price of $49.66per terahash. As of the date of this filing, we have received all 27,000 of those miners at our data centers in Texasand we have no further payment obligations under that agreement. In November and December 2022, we agreed to purchase an additional 5,000 and 2,200 S19j Pro miners, respectively, from Bitmain for delivery in February and March 2023, respectively. For these miners, we paid an average price of $2.35per terahash, covering the majority of the purchase price by using accumulated Bitmain coupons from previous orders. We have no further payments due in respect of those orders. As of the date of this filing, approximately 4,600 of those miners have been delivered to us in Texas, and we expect the remainder to be delivered before the end of April 2023. Under our framework agreement of September 2021with SuperAcme, which was amended and restated by the Amended and Restated Framework Agreement, we agreed to purchase 60,000 MicroBT M30S, M30S+ and M30S++ miners. In November 2022we entered into the Supplementary Agreement with SuperAcme, which amended and supplemented the Amended and Restated Framework Agreement by changing the previously agreed fixed and floating price terms for miners that had yet to be delivered. As of the date of the Supplementary Agreement, SuperAcme had delivered 17,833 miners to us in Texas, with an aggregate cost of approximately $51.1 million, and the Company had paid a total of $101.8 millionto SuperAcme. We applied the remaining balance of $50.7 millionto purchase miners at the new fixed and floating price terms set forth in the Supplementary Agreement, and SuperAcme delivered 17,286 additional miners to us in Texas. Of the miners we have purchased, SuperAcme has delivered 34,927 miners, and we expect the remainder to be delivered by the end of April 2023. In total, we have purchased 35,119 MicroBT miners from SuperAcme, at an average price of $28.64per terahash. On October 11, 2021, we entered into an agreement with Bitfury Top HoldCo, made under, and as a part of, the Master Services and Supply Agreement, to purchase a total of between 28,000 to 56,000 mining rigs, to be delivered in seven batches on a monthly basis between June 2022and December 2022. Generally, under this agreement, we agreed to pay a maximum price of $6,250per machine, with an advance payment of $10.0 milliondue on or before the third business day following the execution of the agreement, and advance payments for each 71 -------------------------------------------------------------------------------- monthly batch due thereafter in accordance with the terms of the agreement. The $10.0 millionadvance payment was paid by us prior to December 31, 2021. The agreement was a non-binding commitment unless and until confirmed by a mutually executed order confirmation. We did not enter into any such order confirmations and, as mentioned above in Item 1A. Risk Factors, we executed the Waiver Agreement with Bitfury Top HoldCo in April 2022, which provided for the cancellation of 2,890,173 shares of Common Stock held by Bitfury Top HoldCo as consideration for the $10.0 milliondeposit. We also entered into two agreements with Bitfury USA, a subsidiary of Bitfury Top HoldCo, made under, and as a part of, the Master Services and Supply Agreement, to purchase a total of 240 units of BBACs. As of December 31, 2022, a total of 150 containers have been received, and the rest are expected to be delivered by April 2023.
Non-GAAP Financial Measures
We are providing supplemental financial measures for (i) non-GAAP loss from operations that excludes the impact of depreciation and amortization, stock compensation expense and the non-cash change in fair value of derivative asset and (ii) non-GAAP net loss and non-GAAP diluted loss per share that excludes the impact of depreciation and amortization, the non-cash change in fair value of derivative asset, the non-cash change in fair value of the warrant liability and stock compensation expense. These supplemental financial measures are not measurements of financial performance under accounting principles generally accepted in the United Stated ("GAAP") and, as a result, these supplemental financial measures may not be comparable to similarly titled measures of other companies. Management uses these non-GAAP financial measures internally to help understand, manage, and evaluate our business performance and to help make operating decisions. We believe that these non-GAAP financial measures are also useful to investors in comparing our performance across reporting periods on a consistent basis. Non-GAAP loss from operations excludes non-cash operational expenses that we believe are not reflective of our general business performance such as (i) depreciation and amortization, (ii) the non-cash change in fair value of our derivative asset and (iii) stock compensation expense, which could vary significantly in comparison to other companies. Non-GAAP net loss and non-GAAP diluted loss per share exclude the impact of (i) depreciation and amortization, (ii) non-cash change in fair value of our derivative asset, (iii) non-cash change in fair value of our warrant liability and (iv) stock compensation expense. We believe the use of these non-GAAP financial measures can also facilitate comparison of our operating results to those of our competitors. Non-GAAP financial measures are subject to material limitations as they are not in accordance with, or a substitute for, measurements prepared in accordance with GAAP. For example, we expect that share-based compensation expense, which is excluded from the non-GAAP financial measures, will continue to be a significant recurring expense over the coming years and is an important part of the compensation provided to certain employees, officers and directors. Similarly, we expect that depreciation and amortization will continue to be a recurring expense over the term of the useful life of the related assets. Our non-GAAP financial measures are not meant to be considered in isolation and should be read only in conjunction with our consolidated financial statements included elsewhere in this Annual Report, which have been prepared in accordance with GAAP. We rely primarily on such consolidated financial statements to understand, manage and evaluate our business performance and use the non-GAAP financial measures only supplementally. 72 -------------------------------------------------------------------------------- The following is a reconciliation of our non-GAAP loss from operations, which excludes the impact of (i) depreciation and amortization, (ii) non-cash change in fair value of our derivative asset and (iii) stock compensation expense, to its most directly comparable GAAP measure for the periods indicated (in thousands): Year Ended Eleven Months Ended December 31, 2022 December 31, 2021 Reconciliation of non-GAAP loss from operations: Operating loss $ (37,421 ) $
Depreciation and amortization 5,150 5 Change in fair value of derivative asset (71,758 ) - Stock compensation expense 41,504
Non-GAAP loss from operations $ (62,525 ) $
The following are reconciliations of our non-GAAP net loss and non-GAAP basic and diluted net loss per share, in each case excluding the impact of (i) depreciation and amortization (ii) non-cash change in fair value of our derivative asset, (iii) non-cash change in fair value of our warrant liability and (iv) stock compensation expense, to the most directly comparable GAAP measures for the periods indicated (in thousands): Year Ended
Eleven Months Ended
December 31, 2022
Reconciliation of non-GAAP net loss:
Net loss $ (39,053 ) $
Non-cash adjustments to net loss:
Depreciation and amortization 5,150 5 Change in fair value of derivative asset (71,758 ) - Change in fair value of warrant liability 130 22 Stock compensation expense 41,504
Total non-cash adjustments to net loss (24,974 )
Non-GAAP net loss $ (64,027 ) $
Reconciliation of non-GAAP basic and diluted net loss per share: Basic and diluted net loss per share $ (0.16 ) $
Depreciation and amortization (per share) 0.02 - Change in fair value of derivative asset (0.29 ) -
Change in fair value of warrant liability - -
Stock compensation expense (per share) 0.17 0.29 Non-GAAP basic and diluted net loss per $ (0.26 ) $ (0.04 ) share
Critical Accounting Policies, Significant Judgments and Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting period. As of and for the year ended
December 31, 2022, the most significant estimates inherent in the preparation of our consolidated financial statements include, but are not limited to, those related to equity instruments issued in share-based compensation arrangements, valuations of the derivative asset, determination of our asset retirement obligation and the valuation allowance associated with our deferred tax assets. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from those estimates. 73 -------------------------------------------------------------------------------- While our significant accounting policies are described in the notes to our consolidated financial statements included elsewhere in this Annual Report, we believe that the following critical accounting policies are most important to understanding and evaluating our reported and future financial results.
Fair value of financial instruments
Our financial assets and liabilities are accounted for in accordance with ASC 820, Fair Value Measurement, which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs when measuring fair value and classifies those inputs into three levels:
Level 1 – Observable inputs, such as quoted prices in active markets for
identical assets and liabilities.
Level 2 - Inputs other than Level 1 inputs that are either directly or indirectly observable, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the instrument's anticipated life.
Level 3 – Unobservable inputs in which there is little or no market data, which
require the reporting entity to develop its own assumptions.
To the extent the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair values requires more judgement. Accordingly, the degree of judgement exercised by management in determining fair value is greatest for instruments categorized as Level 3. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The carrying values reported in our consolidated balance sheets for cash (excluding cash equivalents which are recorded at fair value on a recurring basis), accounts payable and accrued expenses and other current liabilities are reasonable estimates of their fair values due to the short-term nature of these items. Bitcoin Bitcoin are included in current assets on our consolidated balance sheets. Bitcoin received through our wholly-owned mining activities are accounted for in connection with our revenue recognition policy. Bitcoin awarded to us as distributions-in-kind from equity investees are accounted for in accordance with ASC 845, Nonmonetary Transactions, and recorded at fair value upon receipt. Bitcoin held 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 annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, we have 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 management concludes otherwise, we are required to perform a quantitative impairment test. Management has elected to bypass the optional qualitative impairment assessment and to track bitcoin activity daily for impairment assessment purposes. Management determines the fair value of bitcoin on a nonrecurring basis in accordance with ASC 820, based on quoted prices on the active trading platform that management has determined is our principal market for bitcoin (Level 1 inputs). Management 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 daily trading price of bitcoin is identified at the single of bitcoin level. 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 impairment losses is not permitted. 74 -------------------------------------------------------------------------------- Bitcoin awarded to us through our 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 bitcoin 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 (income) on the consolidated statements of operations. The receipt of bitcoin as distributions-in-kind from equity investees are included within investing activities on the consolidated statements of cash flows. Bitcoin are sold on a first-in-first-out basis.
Management determined that, as of
July 1, 2022, the Luminant Power Agreement meets the definition of a derivative under ASC 815, Derivatives and Hedging. Because we have the ability to sell our electricity rather than take physical delivery, physical delivery is not probable through the entirety of the contract and therefore, management does not believe the normal purchases and normal sales scope exception applies to the Luminant Power Agreement. Accordingly, the Luminant Power Agreement (the non-hedging derivative contract) is recorded at an estimated fair value each reporting period with the change in the fair value recorded in change in fair value of derivative asset in the consolidated statements of operations. The estimated fair value of our derivative asset was derived from Level 2 and Level 3 inputs (i.e., unobservable inputs) due to a lack of quoted prices for similar type assets and as such, is classified in Level 3 of the fair value hierarchy. Specifically, the discounted cash flow estimation models contain quoted spot and forward prices for electricity, as well as estimated usage rates consistent with the terms of the Luminant Power Agreement, the initial term of which is five years. The valuations performed by the third-party valuation firm engaged by management utilized pre-tax discount rates of 6.83% and 7.19% as of December 31, 2022and the derivative effective date of July 1, 2022, respectively, and include observable market inputs, but also include unobservable inputs based on qualitative judgment related to company-specific risk factors. Unrealized gains associated with the derivative asset within the Level 3 category include changes in fair value that were attributable to amendments to the Luminant Power Agreement, changes to the quoted forward electricity rates, as well as unobservable inputs (e.g., changes in estimated usage rates and discount rate assumptions).
Asset retirement obligation
Asset retirement obligations relate to the legal obligations associated with the retirement of long-lived assets that result from the construction, development and/or normal operation of a long-lived asset. We currently have one asset retirement obligation ("ARO") related to the construction of the data center and installation of the related electrical infrastructure at the Odessa Facility. ASC 410, Asset Retirement and Environmental Obligations, requires an entity to record the fair value of a liability for an ARO in the period in which it is incurred if a reasonable estimate of fair value can be made. Due to the long lead time involved until decommissioning activities occur, we use a present value technique to estimate the liability. A liability for the fair value of the ARO based on the expected present value of estimated future decommissioning costs with a corresponding increase to the carrying value of the related long-lived asset (leasehold improvements) was recorded upon commencement of the lease in
November 2022. The estimated capitalized asset retirement costs are depreciated using the straight-line method over the estimated remaining useful life of the related long-lived asset, with such depreciation included in depreciation expense in the consolidated statements of operations. The ARO is accreted based on the original discount rate and is recognized as an increase in the carrying amount of the liability and as a charge to accretion expense, which is included in depreciation expense in the consolidated statements of operations. Annually, or more frequently if an event occurs that would dictate a change in assumptions or estimates underlying the obligation, management reassesses the ARO to determine whether any revisions to the obligation are necessary. Revisions to the estimated ARO for items such as (i) new liabilities incurred, (ii) liabilities settled during the period and (iii) revisions to estimated future cash flow requirements (if any), will result in adjustments to the related capitalized asset and corresponding liability. In order to determine the fair value of the ARO, management made certain estimates and assumptions including, among other things, projected cash flows, the borrowing interest rate and an assessment of market conditions that could significantly impact the estimated fair value. These estimates and assumptions are subjective. 75 --------------------------------------------------------------------------------
Investment in equity investees
We account for investments using the equity method of accounting if the investments provide us with the ability to exercise significant influence, but not control, over our investees. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of an investee of between 20 percent and 50 percent, or an ownership interest greater than three to five percent in certain partnerships, unincorporated joint ventures and limited liability companies, although other factors are considered in determining whether the equity method of accounting is appropriate. Under this method, an investment in the common stock of an investee (including a joint venture) shall be initially measured and recorded at cost; however, an investor shall initially measure at fair value an investment in the common stock of an investee (including a joint venture) recognized upon the derecognition of a distinct nonfinancial asset at the time that control over the distinct nonfinancial asset is transferred to the equity investee, such as that which occurs upon our transfer of miners and mining equipment to a joint venture. Our investments are subsequently adjusted to recognize our share of net income or losses as they occur. We also adjust our investments upon receipt of bitcoin from an equity investee, which is accounted for as a distribution-in-kind. Our share of investees' earnings or losses is recorded, net of taxes, within equity in losses of equity investees on the consolidated statements of operations. Additionally, our interest in the net assets of our equity method investees is reflected on the consolidated balance sheets. If, upon our contribution of nonfinancial assets to a joint venture, there is any difference between the cost of the investment and the amount of the underlying equity in the net assets of the investee, the difference is required to be accounted for as if the investee were a consolidated subsidiary. If the difference is assigned to depreciable or amortizable assets or liabilities, then the difference should be amortized or accreted in connection with the equity earnings based on our proportionate share of the investee's net income or loss. If we are unable to relate the difference to specific accounts of the investee, the difference should be considered goodwill.
We consider whether the fair value of our equity method investments have
declined below their carrying values whenever adverse events or changes in
circumstances indicate that recorded values may not be recoverable. If we
considered any such decline to be other than temporary (based on various
factors, including historical financial results, success of the mining
operations and the overall health of the investee’s industry), then we would
record a write-down to the estimated fair value.
Impairment of long-lived assets
Management reviews long-lived assets, including leases and investments, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset, asset group, or investment may not be recoverable.
Recoverability of assets to be held and used are measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset. Because the impairment test for long-lived assets held in use is based on estimated undiscounted cash flows, there may be instances where an asset or asset group is not considered impaired, even when its fair value may be less than its carrying value, because the asset or asset group is recoverable based on the cash flows to be generated over the estimated life of the asset or asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
We account for leases in accordance with ASC 842, Leases. Accordingly, management determines whether an arrangement contains a lease at the inception of the arrangement. If a lease is determined to exist, the term of such lease is assessed based on the date on which the underlying asset is made available for our use by the lessor. Management's assessment of the lease term reflects the non-cancelable term of the lease, inclusive of any rent-free periods and/or periods covered by early-termination options which we are reasonably certain of not exercising, as well as periods covered by renewal options which we are reasonably certain of exercising. We also determine lease classification as either operating or finance at lease commencement, which governs the pattern of expense recognition and the presentation reflected in the consolidated statements of operations over the lease term. 76 -------------------------------------------------------------------------------- For leases with a term exceeding 12 months, a lease liability is recorded on our consolidated balance sheet at lease commencement reflecting the present value of our fixed minimum payment obligations over the lease term. A corresponding right-of-use ("ROU") asset equal to the initial lease liability is also recorded, adjusted for any accrued or prepaid rents and/or unamortized initial direct costs incurred in connection with execution of the lease and reduced by any lease incentives received. For purposes of measuring the present value of our fixed payment obligations for a given lease, we use our incremental borrowing rate, determined based on information available at lease commencement, if rates implicit in our leasing arrangements are not readily determinable. Our incremental borrowing rate reflects the rate we would pay to borrow on a secured basis and incorporates the term and economic environment of the associated lease. ROU assets will be reviewed for impairment, consistent with other long-lived assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while the expense for finance leases is recognized as depreciation expense and interest expense using the interest method of recognition. For leases with a term of 12 months or less, any fixed payments are recognized on a straight-line basis over the lease term and are not recognized on the Company's consolidated balance sheet as an accounting policy election. Leases qualifying for the short-term lease exception are insignificant. Variable lease costs are expensed as incurred and are not included in the measurement of ROU assets and lease liabilities. ASC 842 provides practical expedients for an entity's ongoing accounting. The Company elected the practical expedient not to separate lease and non-lease components for all leases, which means all consideration that is fixed, or in-substance fixed, relating to the non-lease components will be captured as part of the Company's lease components for balance sheet purposes.
We recognize revenue under ASC 606, Revenue from Contracts with Customers. The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
Step 1: Identify the contract with the customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations in the
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 77
Constraining estimates of variable consideration
The existence of a significant financing component in the contract
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 standalone selling price is the price at which we would sell a promised service separately to a customer. The relative selling price for each performance obligation is estimated using observable objective evidence if it is available. If observable objective evidence is not available, we use our best estimate of the selling price for the promised service. In instances where we do not sell a service separately, establishing standalone selling price requires significant judgment. We estimate the standalone selling price by considering available information, prioritizing observable inputs such as historical sales, internally approved pricing guidelines and objectives, and the underlying cost of delivering the performance obligation. 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. Management judgment is required when determining the following: when variable consideration is no longer probable of significant reversal (and hence can be included in revenue); whether certain revenue should be presented gross or net of certain related costs; when a promised service transfers to the customer; and the applicable method of measuring progress for services transferred to the customer over time. We entered into a bitcoin mining pool by executing a contract, which may be amended from time to time, with a mining pool operator to provide computing power to the mining pool. Specifically, in
November 2022, we entered into a mining pool contract with Foundry. Providing computing power to a mining pool operator for the purpose of cryptocurrency transaction verification is an output of our ordinary activities. The contract is terminable at any time by either party with no substantive termination penalty. Our enforceable right to compensation begins when, and lasts for as long as, we provide computing power to the mining pool operator; our performance obligation extends over the contract term given our continuous provision of hashrate. This period of time corresponds with the period of service for which the mining pool operator determines compensation due to us. Given cancellation terms of the contract, and our customary business practice, the contract effectively provides us with the option to renew for successive contract terms of 24 hours. The options to renew are not material rights because they are offered at the standalone selling price of computing power. We elected the optional exemption to not disclose the transaction price allocated to remaining performance obligations that are part of a contract that has an original expected duration of one year or less. The provision of computing power in accordance with the mining pool operator's terms of service is the only performance obligation in our contract with the mining pool operator, our customer. In exchange for providing computing power pursuant to Foundry's terms of service, we are entitled to noncash consideration in the form of bitcoin, measured under the Full Pay Per Share ("FPPS") approach. Under the FPPS approach, we are entitled to a fractional share of the fixed bitcoin award from the mining pool operator (referred to as a "block reward") and potentially transaction fees generated from (paid by) blockchain users and distributed (paid out) to individual miners by the mining pool operator. Our fractional share of the block reward is based on the proportion of computing power we contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm, over the contract term. We are entitled to our relative share of consideration even if a block is not successfully placed. In other words, we receive consideration once after the end of each 24-hour contract period, regardless of whether the pool successfully places a block. Our proportionate share of transaction fees is based on our contributed share of hashrate as a percentage of total network hashrate during the contract term.
The mining pool operator calculates block rewards under the FPPS approach
described above and may charge a pool fee for maintenance of the pool that
reduces the amount of block rewards to which we are entitled. Foundry did not
claim a fee for any block rewards earned by us in 2022. After every 24-hour
contract term, we receive a payout and the pool transfers the bitcoin
consideration to our designated bitcoin wallet.
78 -------------------------------------------------------------------------------- Noncash consideration is measured at fair value at contract inception. Fair value of the bitcoin consideration is determined using the quoted price on our principal market for bitcoin at the beginning of the contract period at the single bitcoin level (one bitcoin). This amount is recognized in revenue over the contract term as hashrate is provided. Changes in the fair value of the noncash consideration due to form of the consideration (changes in the market price of bitcoin) are not included in the transaction price and hence are not included in revenue. Changes in fair value of the noncash consideration post-contract inception that are due to reasons other than form of consideration (other than changes in the market value of bitcoin) are measured based on the guidance on variable consideration, including the constraint on estimates of variable consideration. Because the consideration to which we expect to be entitled for providing computing power is entirely variable, as well as being noncash consideration, we assess the estimated amount of the variable noncash consideration at contract inception and subsequently, to determine when and to what extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur once the uncertainty associated with the variable consideration is subsequently resolved (the "constraint"). Only when significant revenue reversal is concluded probable of not occurring can estimated variable consideration be included in revenue. Based on evaluation of likelihood and magnitude of a reversal in applying the constraint, the estimated variable noncash consideration is constrained from inclusion in revenue until the end of the contract term, when the underlying uncertainties have been resolved and number of bitcoin to which we are entitled becomes known.
There is no significant financing component in these transactions.
Our ability to satisfy the performance obligation under our contract with a mining pool operator to provide computing power may be contracted to various third parties and there is a risk that if these parties are unable to perform or curtail their operations, our revenue and operating results may be affected. Please see "
Business- Business Agreements-Powerand Hosting Arrangements" for additional information about our power arrangements.
We account for all share-based payments to employees, consultants and directors, which may include grants of stock options, stock appreciation rights, restricted stock awards, and restricted stock units ("RSUs") to be recognized in the consolidated financial statements, based on their respective grant date fair values. As of
December 31, 2022, we have awarded only RSUs with service-based vesting conditions ("Service- Based RSUs") and performance-based RSUs with market-based vesting conditions ("Performance-Based RSUs"). Compensation expense for all awards is amortized based upon a graded vesting method over the estimated requisite service period. All share-based compensation expenses are recorded in general and administrative expense in the consolidated statements of operations. Forfeitures are recorded as they occur. The fair value of Service-Based RSUs is the closing market price of our common stock on the date of the grant. We employ a Monte Carlo simulation technique to calculate the fair value of the Performance-Based RSUs on the date granted based on the average of the future simulated outcomes. The Performance-Based RSUs contain different market-based vesting conditions that are based upon the achievement of certain market capitalization milestones. Under the Monte Carlo simulation model, a number of variables and assumptions are used including, but not limited to, the underlying price of our common stock, the expected stock price volatility over the term of the award, a correlation coefficient, and the risk-free rate. The Performance-Based RSUs awarded do not have an explicit requisite service period, therefore compensation expense is recorded over a derived service period based upon the estimated median time it will take to achieve the market capitalization milestone using a Monte Carlo simulation. Weighted average assumptions used in the November 17, 2021Monte Carlo valuation model for Performance-Based RSUs awarded on that date were: expected volatility of 96.1% and a risk-free rate of 1.60% based upon a remaining term of 10 years. These assumptions were used to estimate share-based compensation expense related to our Performance-Based RSUs, which was recognized in our consolidated financial statements year ended December 31, 2022and for the eleven months ended December 31, 2021, and which will continue to impact our consolidated financial results over the remaining weighted average derived service period of the Performance-Based RSUs, which, as of December 31, 2022is expected to occur over the next 1.4 years. 79 --------------------------------------------------------------------------------
Emerging Growth Company
We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period to enable us to comply with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our unaudited condensed consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
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