SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|12 Months Ended|
Dec. 31, 2022
|Accounting Policies [Abstract]|
|SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES||
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly owned and controlled subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with US 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.
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 compensation and related taxes, consulting fees, and professional fees have now been reclassified within general and administrative expenses. In addition, previously reported change in fair value of warrant liability and interest income have now been reclassified as other non-operating income and realized and unrealized gains (losses) on digital assets held in investment fund has now been reclassified as operating income.
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing performance. Our chief operating decision–making group (“CODM”) is composed of the chief executive officer and chief financial officer. The Company currently operates in the Digital Currency Blockchain segment. The Company’s ASICs mining rigs are located in the United States, and the Company has employees only in the United States and views its operations as one operating segment as the CODM reviews financial information on a consolidated basis in making decisions regarding resource allocations and assessing performance.
Cash and Cash Equivalents
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 one financial institution that is insured by the Federal Deposit Insurance Corporation (“FDIC”). For the years ended December 31, 2022 and 2021, the Company’s bank balances exceeded the FDIC limit of $250 thousand in amount of $111,505 thousand and $267,635 thousand, respectively. To reduce its risk associated with the failure of such financial institution, the Company evaluates at least annually the rating of the financial institution in which it holds deposits. As of December 31, 2022 and 2021, the Company had cash equivalents of $92,044 thousand and $266,635 thousand, respectively.
Restricted cash represents 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 Balance Sheets to the corresponding amounts reported on the Consolidated Statements of Cash Flows.
SCHEDULE OF RESTRICTED CASH
Digital assets and Digital assets, restricted
Digital assets are included in current and other assets in the Consolidated Balance Sheets. Digital assets are accounted for as indefinite-lived intangible assets, and are initially measured at cost, in accordance with ASC 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 tables presents the activities of the digital assets and digital assets, restricted for the years ended December 31, 2022 and 2021:
SCHEDULE OF ACTIVITIES OF DIGITAL ASSETS
At December 31, 2022, the Company held approximately 12,232 bitcoin with a carrying value of $190,717 thousand. The 7,816 bitcoin were classified on the Consolidated Balance Sheets as digital assets with a carry value of approximately $121,842 thousand and digital assets, restricted of 4,416 bitcoin with a carrying value of approximately $68,875 thousand. At December 31, 2022, the fair market value of the Company’s bitcoin holdings was approximately $202,409 thousand, including digital assets and digital assets, restricted. Digital assets, restricted is comprised of bitcoins held as collateral for the term loan. At December 31, 2021, the Company held approximately 2,721 bitcoin with a carrying value of $95,225 thousand and a fair value of $126,000 thousand.
Digital assets held in Fund
On January 25, 2021, the Company entered into a limited partnership agreement with NYDIG Digital Assets Fund III, LP (“Fund”) wherein the Fund purchased 4,813 bitcoin in 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 Balance Sheets 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. The digital assets held by the Fund were traded on a number of active markets globally, including the over-the-counter market and digital asset exchanges. A fair value measurement under ASC 820 - “Fair Value Measurement” (“ASC 820”) for an asset assumes that the asset is exchanged in an orderly transaction between market participants either in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset (ASC 820-10-35-5). The fair value of the assets within the Fund were determined using the price of bitcoin provided by the OTC market, the Fund’s principal market for bitcoin as of 11:59:59 p.m. in New York for financial reporting purposes. For purposes of continuous (daily) fair value measurement, such assets within the Fund were measured using the daily price of bitcoin provided by the OTC market at 4:00 p.m. in New York. Any changes in the fair value of the assets were recorded in the Consolidated Statements of Other Comprehensive Income (Loss) 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 has been accounted for at cost less impairment in line with its digital assets measurement policy as described under “Digital assets and Digital assets, restricted”. The activity in the Fund for the twelve months ended December 31, 2022 and twelve months ended December 31, 2021 was as follows:
SCHEDULE OF DIGITAL CURRENCIES HELD IN FUND
The Company contracts with other service providers for hosting of its mining rigs and operational support in data centers where the company’s mining rigs are deployed. These arrangements also call for advance payments to be made to vendors in conjunction with the contractual obligations associated with these services. We classify these payments as Deposits on the balance sheet.
As of December 31, 2022 and December 31, 2021, such deposits totaled approximately $43,253 thousand and $34,458 thousand, respectively.
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. Derivative assets or liabilities are classified in the Consolidated Balance Sheets as current or non-current based on whether settlement of the instrument could be required within 12 months of the Consolidated Balance Sheets date.
Property and Equipment
The Company’s property and equipment is composed of bitcoin mining rigs which are largely homogeneous and have approximately the same useful lives. Accordingly, the Company applies the group method of depreciation on a straight-line basis for its bitcoin mining rigs. The Company will assess and adjust the estimated useful lives of its mining rigs when there are indicators that the productivity of the mining assets are higher or lower than the assigned estimated useful lives.
Advances to Vendors
The Company contracts with bitcoin mining equipment manufacturers in procuring mining rigs necessary for the operation of its bitcoin mining business. A typical agreement calls for a certain percentage of the total order to be paid in advance at specific intervals, usually within several days of execution of a specific contract and periodically thereafter with final payments due prior to each shipment date. We account for these payments as Advances to vendors on the balance sheet.
Due to the decrease in the cost of bitcoin mining rigs that was driven by the drop in bitcoin prices during the fourth quarter ended December 31, 2022, the Company evaluated the need for an impairment write-down of its contracts with bitcoin mining equipment manufacturers. The Company compared the prices of the miner rigs under contract to the fair value of mining rigs as of December 31, 2022, and determined that an impairment loss should be recognized. Accordingly, the Company recognized an impairment charge of $208,622 thousand on its mining rigs and reduced its Advances to vendors for purchase of mining rigs by $124,311 on the Consolidated Balance Sheets for the year ended December 31, 2022.
As of December 31, 2022 and December 31, 2021, advances to vendors was $488,299 thousand and $466,255 thousand, respectively. See also discussion regarding property and equipment impairment in NOTE 4 - PROPERTY AND EQUIPMENT.
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 Balance Sheets. 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 December 21, 2021 and December 31, 2021, the Company entered into two separate SAFE agreements classified on the Consolidated Balance Sheets as non-current assets. SAFE agreements are accounted for as 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 issue pursuant to ASC 321.
On February 3, 2022, the Company invested approximately $10,000 thousand in 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 9 – 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 increased its investment in the preferred stock of Auradine, Inc. by $30,000 thousand, bringing its total carrying amount of investment in Auradine, Inc. preferred stock to $35,500 thousand. The preferred stock is accounted for 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. During 2022, there were no noted impairments or other adjustments (See NOTE 15 – RELATED PARTY TRANSACTIONS).
As of 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.
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. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. These assumptions are the expected stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of the Company’s common stock over the expected term of the option. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term.
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.
In the year ended December 31, 2022 , we impaired the mining patent intangible asset and recorded an impairment charge of $919 thousand. We also impaired certain mining rigs and recorded an impairment charge of $208,622 thousand (see NOTE 4 – PROPERTY AND EQUIPMENT).
Revenues From Contracts with Customers
The Company recognizes revenue in accordance with ASC Topic 606 – “Revenue from Contracts with Customers” (“ASC 606”). The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
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:
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 is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
The transaction price is allocated to each performance obligation on a relative standalone selling price basis.
The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
Application of the five-step model to the Company’s mining operations
The Company’s ongoing major or central operation is to provide computing power to collectives of third-party bitcoin miners (such collectives, “mining pools”) as a participant (“Participant”) and bitcoin transaction verification services to the bitcoin network through a Company-operated mining pool as the operator and a participant in a private pool (“Operator”) (such activity as Participant and Operator, collectively, “mining”). The Company currently mines in a self-operated pool, which was previously open to third-party pool participants from September 2021 until May 2022.
The following table presents revenue of the Company disaggregated for those arrangements in which the Company is the Operator and Participant:
SCHEDULE OF DISAGGREGATION OF REVENUE
As Operator, the Company provides transaction verification services. Transaction verification services are an output of the Company’s ordinary activities; therefore, the Company views the transaction requestor as a customer and accounts for the transaction fees its earns as revenue from a contract with a customer under ASC 606. The bitcoin network is not an entity such that it may not meet the definition of a customer; however, the Company has concluded it is appropriate to apply ASC 606 by analogy to block rewards earned from the network. A contract exists under ASC 606 at the point the Company successfully validates a transaction to the distributed ledger. At this point, the performance obligation to validate the requested transaction has been satisfied and a contract is deemed to exist as follows:
The transaction requester, the bitcoin network and the Company have approved the contract and have evidenced they are committed to the transaction at the point of successfully validating and adding the transaction to the distributed ledger. The parties’ rights, the consideration to be transferred, and the payment terms are clear. The transaction has commercial substance and collection of the block reward and transaction fees to which the Company is entitled is probable because they are transferred to the Company as part of closing a successful block.
By successfully mining a block, the Company satisfies its lone performance obligation of providing transaction verification services and, thus, recognizes revenue at that point in time. The amount to which the Company is entitled for successfully validating a block of transactions is fixed at the point in time the contract is deemed to exist and the performance obligation is satisfied. Thus, there is no variable consideration.
The Company also, from time to time, engages unrelated third-party mining enterprises (“pool participants”) to contribute computing power, and in exchange, remits transaction fees and block rewards to pool participants on a pro rata basis according to each respective pool participant’s contributed computing power ( hash rate). The MaraPool wallet (owned by the Company as Operator) is recorded on the distributed ledger as the proof of work winner and assignee of all validations and, therefore, the transaction verifier of record. The pool participants enter into contracts with the Company as Operator; they do not directly enter into contracts with the network or the requester and are not known verifiers of the transactions assigned to the pool. As Operator, the Company delegates mining work to the pool participants utilizing software that algorithmically assigns work to each individual miner. By virtue of its selection and operation of the software, the Company as Operator controls delegation of work to the pool participants. This indicates that the Company directs the mining pool participants to contribute their hash rate to solve in areas that the Company designates. Therefore, the Company determined that it controls the service of providing transaction verification services to the network and requester. Accordingly, the Company records all of the transaction fees and block rewards earned from transactions assigned to MaraPool as revenue, and the portion of the transaction fees and block rewards remitted to MaraPool participants as cost of revenues. The Company operated a mining pool, Marapool, that engaged third-party pool participants from September 2021 until May 2022.
ASC 606-10-32-21 requires entities to measure the estimated fair value of noncash consideration at contract inception, which is the same time the block reward and transaction fee is earned and the performance obligation to the requester and the network is fulfilled by successfully validating the applicable block of transactions. For reasons of operational practicality, the Company applies an accounting convention to use the daily quoted closing U.S. dollar spot rate of bitcoin each day to determine the fair value of bitcoin earned as transaction fees and block rewards in the Company’s wallet during that day. This accounting convention does not result in materially different revenue recognition from using the fair value of the bitcoin earned at contract inception (i.e., the moment a block is solved) and has been consistently applied in all periods presented.
Expenses associated with providing the bitcoin transaction verification services to the Customers, such as rent, electricity cost, and transaction fees and block rewards are recorded as cost of revenues. Depreciation on digital asset mining equipment is recorded as a component of cost of revenues.
When the Company is a Participant in a third-party operated mining pool, the Company provides computing power (hash rate) that is an output of the Company’s ordinary activities in exchange for consideration. The Company considers the third-party mining pool operators its customer under Topic 606. These contracts are period-to-period contracts because they are terminable at any time by either party without compensation. A new contract is determined to exist each period that neither the Company, nor the pool operator, terminates the arrangement.
The provision of computing power is the only performance obligation under our arrangements with third-party mining pool operators. The transaction consideration the Company receives is non-cash (i.e., bitcoin) and entirely variable as it is unknown at each contract inception whether the Company will earn any consideration during the period, and if it does become entitled to consideration, how much consideration it will be entitled to.
In accordance with FASB ASC 606-10-32-11 and 32-12, the Company constrains the variable consideration to which it is entitled and does not recognize revenue for such amounts until it receives confirmation of the amount , usually via the settlement of the fractional share of block reward and transaction fee in the Company’s digital wallet (i.e., at that point, the variability is resolved and there is no longer the reasonable possibility of significant reversal of revenue). Before settlement occurs, estimation of the variable consideration to which the Company is entitled, which depends on inputs unknowable to the Company, carries the risk of a significant revenue reversal from mis-estimation. Settlement of consideration typically occurs within 24 hours of when a block is won unless such block is won over a weekend or holiday, in which case settlement can take up to 72 hours.
The Company uses its accounting convention to recognize revenue using the daily quoted closing U.S. dollar spot rate of bitcoin on the day the transaction fees and block rewards are settled in the Company’s wallet. However, this accounting convention does not result in materially different revenue recognition from using the fair value of the bitcoin earned at contract inception and has been consistently applied in all periods presented.
Expenses associated with providing computing power services to third-party operated mining pools, such as rent and electricity cost are recorded as cost of revenues. Depreciation on digital asset mining equipment is also recorded as a component of cost of revenues.
The Company accounts for income taxes under the asset and liability method, in which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is required to the extent any deferred tax assets may not be realizable.
ASC 740 - “Income Taxes” (“ASC 740”), also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
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 Financial Statements and assures that there are proper controls in place to ascertain that the Company’s Consolidated Financial Statements properly reflect the change.
In December 2022, the Securities Exchange Commission (“SEC”) provided additional guidance on accounting for loaned digital assets. The Company has therefore adopted the following accounting policy with retrospective application for arrangements where the Company loans digital assets to a borrower for a specific period of time in exchange for a fee akin to an interest rate.
Upon adoption, the Company first evaluates whether to derecognize loaned crypto assets based on an evaluation of all relevant control and asset derecognition considerations. Such considerations include whether the borrower has the right to use the digital assets at its sole discretion (e.g.,to sell, pledge digital assets to a third party) and whether the lender has transferred present rights to economic benefits associated with the digital asset for a different right to receive digital assets in the future.
When derecognition of the underlying loaned digital assets is appropriate, the Company will derecognize the loaned digital asset it no longer controls, and recognize a right to receive back in the future the loaned digital asset (“digital asset loan receivable”).
The digital asset loan receivable is recorded at the then-current (i.e., time of transfer) fair value of the loaned crypto assets with any difference between the fair value of the loaned crypto assets and their pre-transfer carrying amount recognized as a gain in the Consolidated Statements of Other Comprehensive Income (Loss). Throughout the loan period, the digital asset loan receivable will continue to be measured at the fair value of the underlying loaned digital asset with changes recorded in operating income (loss).
At loan commencement and throughout the loan period, the Company considers and accounts for credit risk of the borrower (i.e., risk the borrower will not return the loaned crypto assets), using the principles in Topic 326 to measure any credit impairment. The digital asset loan receivable is presented net of any allowance for credit losses on the Company’s Consolidated Balance Sheets. When the digital assets on loan are returned to the Company, such loaned digital assets are re-recorded on the Company’s Consolidated Balance Sheets at the carrying value of the digital asset loan receivable immediately prior to derecognition with no gain or loss realized at the end of the loan.
No definition available.
The entire disclosure for all significant accounting policies of the reporting entity.
Reference 1: http://www.xbrl.org/2003/role/disclosureRef