Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The
following discussion about our market risk exposures involves forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements.
Market
Price Risk of Bitcoin. The Company holds a significant amount of bitcoin and as such, we are exposed to the impact of market
price changes in bitcoin on our bitcoin holdings. This exposure would generally manifest itself in the following areas:
●
We
account for our bitcoin holdings as indefinite lived intangible assets and we record impairment charges whenever the carrying value
of our bitcoin holdings on the balance sheet exceeds their fair market value. Subsequent recovery of bitcoin prices would not impact
the carrying value of bitcoin on the balance sheet, as recovery of previously recorded impairment charges are not allowed under US
GAAP.
●
Declines
in the fair market value of bitcoin also impact the value of collateral for our loan facilities. If the fair market value of bitcoin
held as collateral declines such that the loan-to-value ratio is above 75%, the Company is required to add collateral to bring the
ratio back to 65%. If the value of the collateral increases such that the loan-to-value ratios falls below 65%, the Company can require
a return of collateral to bring the ratio back to 65%.
●
Declines
in the fair market value of bitcoin also impact the Adjusted Net Worth covenant in our loan agreements, as this covenant allows for
Net Worth to be calculated based in the fair market value (and not the carrying value) of our digital assets.
●
Declines
in the fair market value of bitcoin also impact the cash value that would be realized if we were to sell our bitcoin for cash, therefore
having a negative impact on our liquidity.
At
December 31, 2022, the Company held approximately 12,232 bitcoin and the fair value of a single bitcoin was approximately $16,545, meaning
that the fair value of our bitcoin holdings on that date was approximately $202,409 thousand .
Approximately 4,417 of these bitcoin, or $73,100 thousand, were being utilized as collateral
for borrowings. The remaining 7,815 bitcoin, or $129,300 thousand, were unrestricted bitcoin
holdings.
Interest
rate risk. Prior to the termination of its credit facilities on March 8, 2023, the Company was exposed to interest rate risk
as both our Term Loan and RLOC facilities called for interest at a variable rate tied to the Wall Street Journal Prime Rate (“WSJ
Prime”), which was 7.75% as of March 8, 2023. Our Term Loan facility called for interest rates at the WSJ Prime rate plus a margin
of 1.75% or 9.50% as of March 8, 2023. Our RLOC facility called for interest rates at the WSJ Prime rate plus a margin that varies based
on the collateral posted as follows:
●
1.25%
margin (9.00% currently) if the RLOC LTV Ratio is less than 40%
●
2.00%
margin (9.75% currently) if the RLOC LTV Ratio is greater than 40% but less than 55%
●
2.75%
margin (10.50% currently) if the RLOC LTV Ratio is greater than 55%
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