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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 3 Months Ended
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Mar. 31, 2023
Accounting Policies [Abstract] |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated condensed financial statements are unaudited and have been prepared in accordance with the rules and regulations of the SEC. They include all adjustments that we consider necessary for a fair statement of the results for the interim periods presented. Such adjustments consisted only of normal recurring items unless otherwise disclosed. The consolidated condensed balance sheet was derived from audited financial statements but does not include all footnote disclosures from the annual financial statements. Basis of Presentation and Principles of Consolidation These financial statements should be read in conjunction with the financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 16, 2023. The accompanying unaudited consolidated condensed financial statements include the accounts of the Company and its wholly owned and controlled subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. The consolidated condensed financial statements have been prepared by the Company pursuant to the rules and regulations of the SEC. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. These consolidated condensed financial statements reflect all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position, the results of operations and cash flows of the Company for the periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for any future fiscal periods in 2023 or for the full year ended December 31, 2023. Use of Estimates and Assumptions The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made by management include, but are not limited to, estimates of the useful lives of fixed assets, assumptions used to calculate fair value of options granted, realization of long-lived assets, deferred income taxes, unrealized tax positions and realization of digital assets. Reclassifications Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications have no effect on the reported financial position, results of operations, or cash flows. Previously reported depreciation and amortization expense has now been reclassified to “Cost of revenues - depreciation and amortization.” Previously reported compensation and related taxes, consulting fees, and professional fees have now been reclassified within “General and administrative expenses.” In addition, previously reported interest income has now been reclassified to “Other non-operating income.” Cash and Cash Equivalents and Restricted Cash The Company considers all highly liquid debt instruments and other short-term investments with maturity of three months or less, when purchased, to be cash equivalents. The Company maintains cash and cash equivalent balances at financial institutions that are insured by the FDIC. As of March 31, 2023 and December 31, 2022, the Company’s bank balances with its primary cash management institutions exceeded the FDIC limit ($250 thousand). In March 2023, the Company began to participate, to the extent practicable, in deposit programs which “sweep” its deposits across multiple FDIC insured accounts, each with deposits of no more than $250 thousand. Restricted cash principally represented those cash balances that support commercial letters of credit and are restricted from withdrawal. The following table provides a reconciliation of the total cash, cash equivalents and restricted cash reported on the consolidated condensed balance sheet to the corresponding amounts reported on the consolidated condensed statements of cash flows. SCHEDULE CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|  | March 31, |  |  | December 31, |
(in thousands) |  | 2023 |  |  | 2022 |
Cash and cash equivalents |  | $ | 124,882 |  |  | $ | 103,705 |
Restricted cash |  |  | — |  |  |  | 8,800 |
Cash, cash equivalents and restricted cash |  | $ | 124,882 |  |  | $ | 112,505 |
Digital assets and Digital assets, restricted Digital assets are included in current and other assets in the consolidated condensed balance sheet. Digital assets are accounted for as indefinite-lived intangible assets, and are initially measured in accordance with FASB Accounting Standards Codification (“ASC”) Topic 350 – Intangibles-Goodwill and Other (“ASC 350”). Digital assets, restricted represent collateral for long-term loans and as such are classified as a non-current asset. These digital assets are not amortized, but are 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 intangible asset is impaired. Whenever the exchange-traded price of digital assets declines below its carrying value, the Company has determined that an impairment exists and records impairment equal to the amount by which the carrying value exceeds the fair value. The following table presents the activities of the digital assets and digital assets, restricted for the three months ended March 31, 2023: SCHEDULE OF ACTIVITIES OF DIGITAL CURRENCIES
|  | (in thousands) |
Digital assets and digital assets, restricted at December 31, 2022 |  | $ | 190,717 |
Revenues from digital asset production |  |  | 50,941 |
Impairment of digital assets |  |  | (6,151 | )
Proceeds from sale of digital assets |  |  | (62,646 | )
Gain on sale of digital assets |  |  | 17,615 |
Payment of advisory fee |  |  | (1,389 | )
Digital assets and digital assets, restricted at March 31, 2023 |  | $ | 189,087 |
As of March 31, 2023, the Company held approximately 11,466 bitcoin, classified on the consolidated condensed balance sheet as “Digital assets”, with a carrying value of $189,087 thousand. At March 31, 2023, the fair market value of the Company’s bitcoin holdings was approximately $326,487 thousand based on Level 1 inputs. Impairment of digital assets for the three months ended March 31, 2023 includes an out of period adjustment of $1,221 thousand (refer to NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - OUT OF PERIOD ADJUSTMENTS, for further discussion). As of December 31, 2022, the Company held approximately 12,232 bitcoin, relating to digital assets and digital assets, restricted, with a carrying value of $190,717 thousand and a fair value of $202,409 thousand based on Level 1 inputs. Digital assets held in fund On January 25, 2021, the Company entered into a limited partnership agreement with NYDIG Digital Assets Fund III, LP (the “Fund”) pursuant to which the Fund purchased 4,813 bitcoin for an aggregate purchase price of $150,000 thousand. The Company owned 100% of the limited partnership interests and consolidated the Fund under a voting interest model. The consolidated assets in the investment fund are included in current assets in the consolidated condensed balance sheet under the caption “Digital assets held in fund.” The Fund qualified and operated as an investment company for accounting purposes pursuant to the accounting and reporting guidance under ASC 946 – Financial Services – Investment Companies (“ASC 946”), which requires fair value measurement of the Fund’s investments in digital assets. The Company retains the Fund’s investment company specific accounting principles under ASC 946 upon consolidation. We recorded any changes in the fair value of the assets in the consolidated condensed statements of operations under the caption “Realized and unrealized gains (losses) on digital assets held within Investment Fund.” On June 10, 2022, the Company redeemed 100% of its limited partnership interest in the Fund in exchange for approximately 4,769 bitcoin with a fair market value of approximately $137,844 thousand. This bitcoin was transferred from the Fund’s custodial wallet to the Company’s digital wallet. Upon redemption, the Company no longer had a majority voting interest in the Fund and therefore deconsolidated the Fund in accordance with ASC 810 – Consolidation (“ASC 810”). The Company did not record any gain or loss upon deconsolidation as the digital assets in the Fund were measured at fair value. Subsequent to the transfer, the bitcoin transferred to the Company’s digital wallet was accounted for at cost less impairment in line with its digital assets measurement policy as described under “Digital Assets and Digital assets, restricted.” Embedded Derivatives The Company evaluates its financing and service arrangements to determine whether certain arrangements contain features that qualify as embedded derivatives requiring bifurcation in accordance with ASC 815 - Derivatives and Hedging (“ASC 815”). Embedded derivatives that are required to be bifurcated from the host instrument or arrangements are accounted for and valued as separate financial instruments. For derivatives that are assets or liabilities, the derivative instrument is initially recorded at its fair value and is then remeasured at each reporting date with changes in the fair value reported in the statements of operations. The Company classifies derivative assets or liabilities in the consolidated condensed balance sheet as current or non-current based on whether settlement of the instrument could be required within 12 months of the consolidated condensed balance sheet date. Deposits The Company contracts with service providers for hosting of its equipment and operational support in data centers where the Company’s equipment is deployed. These arrangements also call for advance payments to be made to vendors in conjunction with the contractual obligations associated with these services. The Company classifies these payments as “Deposits” on the consolidated condensed balance sheet. Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation and impairment, as applicable. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The Company’s property and equipment is primarily composed of bitcoin miners which are largely homogeneous and have approximately the same useful lives. Accordingly, the Company utilizes the group method of depreciation for its bitcoin miners. The Company will update the estimated useful lives of its bitcoin mining server group periodically as information on the operations of the mining equipment indicates changes are required. The Company will assess and adjust the estimated useful lives of its mining equipment when there are indicators that the productivity of the mining assets is higher or lower than the assigned estimated useful lives. Investments Investments, which may be made from time to time for strategic reasons (and not to engage in the business of investments), are included in non-current assets in the consolidated condensed balance sheet. Investments without a readily determinable fair value are recorded at cost minus impairment, plus or minus changes from observable price changes in orderly transactions for identical or similar investments of the same issuer, in accordance with the measurement alternative described in ASC 321 - Investments – Equity Securities (“ASC 321”). As part of the Company’s policy to maximize return on strategic investment opportunities, while preserving capital and limiting downside risk, the Company may at times enter into equity investments or Simple Agreements for Future Equity (“SAFE”) agreements. The nature and timing of the Company’s investments will depend on available capital at any particular time and the investment opportunities identified and available to the Company. On February 3, 2022, the Company purchased approximately $10,000 thousand of convertible preferred stock of Compute North Holdings, Inc. The acquisition of convertible preferred stock was accounted for as investments in equity securities without readily determinable fair value at cost minus impairment, as adjusted for observable price changes in orderly transactions for identical or similar investment of the same issuer, pursuant to ASC 321. This investment was subject to an impairment of $10,000 thousand following Compute North’s Chapter 11 Bankruptcy filing in September 2022 (See NOTE 8 – COMPUTE NORTH BANKRUPTCY). On May 3, 2022, the Company converted $2,000 thousand from a SAFE investment into preferred stock while purchasing an additional $3,500 thousand of preferred stock in Auradine, Inc. along with entering into a commitment to acquire $30,000 thousand of additional shares of preferred stock. This forward contract was accounted for under ASC 321 as an equity security. On September 27, 2022, the Company purchased an additional $30,000 thousand of preferred stock, bringing its total carrying amount of investment in Auradine, Inc. preferred stock to $35,500 thousand, with no noted impairments or other adjustments. The Company accounts for the preferred stock as investments in equity securities without a readily determinable fair value at cost minus impairment, as adjusted for observable price changes in orderly transactions for identical or similar investments from the same issuer, pursuant to ASC 321 (See NOTE 13 – RELATED PARTY TRANSACTIONS). As of the three months ended March 31, 2023 and year ended December 31, 2022, the Company has one remaining SAFE investment with a carrying value of $1,000 thousand, with no noted impairments or other adjustments. Equity Method Investments The Company accounts for investments in which it owns between 20% and 50% of the common stock or has the ability to exercise significant influence, but not control, over the investee using the equity method of accounting in accordance with ASC 323 - Equity Method Investments and Joint Ventures (“ASC 323”). Under the equity method, an investor initially records an investment in the stock of an investee at cost and adjusts the carrying amount of the investment to recognize the investor’s share of the earnings or losses of the investee after the date of acquisition. On January 27, 2023, the Company and FS Innovation, LLC (“FSI”) entered into a Shareholders’ Agreement regarding the formation of an Abu Dhabi Global Markets company (the “ADGM Entity”). For the three months ended March 31, 2023, the ADGM Entity did not have any earnings or losses. As of March 31, 2023, the carrying value of the Company’s 20% ownership in the ADGM Entity was $43,194 thousand. The equity method investment is included in non-current assets in the consolidated condensed balance sheet under “Investments.” Stock-based Compensation The Company expenses stock-based compensation to employees and non-employees over the requisite service period based on the grant-date fair value of the awards and forfeiture rates. Impairment of Long-lived Assets Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset. 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. Revenues From Contracts with Customers The Company recognizes revenue under ASC 606 – Revenue from Contracts with Customers (“ASC 606”). The core principle of the revenue standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Income Taxes Effective Tax Rate Our effective tax rate (“ETR”) from continuing operations was (1.06)% for the three months ended March 31, 2023, and 24.91% for the three months ended March 31, 2022, respectively. The difference between the US statutory tax rate of 21% was primarily due to the change in valuation allowance as a result of current year activity. The following item caused the quarterly ETR to be significantly different from our historic annual ETR:
| ● | During the year ended December 31, 2022, the Company concluded, based upon all available evidence, it was more likely than not that it would not have sufficient future taxable income to realize the Company’s federal and state deferred tax assets. As a result, the Company established a valuation allowance against deferred tax assets that were not supported by reversing deferred tax liabilities. No events occurred in the three months ended March 31, 2023 impacting this determination.
Income Tax in Interim Periods The Company records its tax expense or benefit on an interim basis using an estimated annual effective tax rate. This rate is applied to the current period ordinary income or loss to determine the income tax provision or benefit allocated to the interim period. The income tax effects of unusual or infrequent items are excluded from the estimated annual effective tax rate and are recognized in the impacted interim period. Adjustments to the estimated annual effective income tax rate are recognized in the period when such estimates are revised. Uncertainties The Company files federal and state income tax returns. The 2019-2021 tax years generally remain subject to examination by the IRS and various state taxing authorities, although the Company is not currently under examination in any jurisdiction. The Company does not currently expect any of its remaining unrecognized tax benefits to be recognized in the next twelve months. Out-of-Period Adjustment During the three months ended March 31, 2023, the Company recorded an out-of-period adjustment as a result of applying the quoted price in an active market to the digital assets in accordance with ASC 820. The adjustment resulted in increased impairment of digital assets reflected in the current period consolidated condensed statement of operations of $1,221 thousand. The Company evaluated the quantitative and qualitative aspects of this out of period adjustment and determined that the adjustment did not have a material impact to any previously reported quarterly or annual financial statements. Refer to NOTE 6 - FAIR VALUE MEASUREMENT for further discussion. Recent Accounting Pronouncements The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequences of the change to its consolidated condensed financial statements and assures that there are proper controls in place to ascertain that the Company’s consolidated condensed financial statements properly reflect the change. There have been no material changes to our recent accounting pronouncements that were disclosed in our Annual Report on Form 10-K, which was filed with the SEC on March 16, 2023.

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