CYPHERPUNK HOLDINGS INC. MANAGEMENT DISCUSSION AND ANALYSIS
For the three month period ended December 31, 2022 and 2021
As at March 1, 2023
This Management Discussion and Analysis ("MD&A") has been approved in accordance with a resolution of the Board of Directors of Cypherpunk Holdings Inc. ("Cypherpunk" or, the "Company") dated March 1, 2023. It should
be read in conjunction with the interim condensed consolidated financial statements of the Company as at and for the three month period ended December 31, 2022 and 2021.
ABOUT CYPHERPUNK HOLDINGS INC.
Cypherpunk is a publicly traded company that is listed on the Canadian Securities Exchange (CSE) under the ticker HODL.
The Company is an actively managed crypto investment company. The core tenets of its investment thesis are privacy, self-sovereignty, and digital property rights (the "Thesis"). Cypherpunk executes its Thesis through two
lines of effort:
- Utilization of treasury for yield generation.
- Diversification and risk management
As at December 31, 2022, the Company had total assets of $22.6 million and net book value of $22.4 million. During the year ended September 30, 2022, the Company sold its cryptocurrency holdings, resulting in the cash and cash equivalents of $18.5 million at year end. The Company may purchase cryptocurrencies in the future depending upon market conditions.
SIGNIFICANT EVENTS IN THE THREE MONTH PERIOD ENDED DECEMBER 31, 2022
Overview
- Total assets decreased $1.2 million to $22.6 million (5%)
- Net book value decreased $1.2 million to $22.4 million (5%)
- FTX bankruptcy has minor impact on operations
Treasury Management and Diversified Yield Generation
Treasury Management - Treasury management remained dormant the as the Company assessed whether it should restart this initiative.
Cryptocurrencies - The Company is not active in cryptocurrencies at this time, generating small amounts of bitcoin income from its crypto mining assets which it immediately sells for cash upon distribution.
On November 11, 2022, FTX Trading Ltd. ("FTX") filed for Chapter 11 bankruptcy protection. Two of the Company's investments advised the Company that they had exposure to FTX; Lucy Labs' Rising Tide portfolio has "significant exposure" and Isla Capital had "19%" exposure. The impact on Isla and Lucy Labs is discussed below.
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Cypherpunk Holdings Inc.
Private Equity and Venture Capital
Highlights
- $2.8 million decrease in investments since September 30, 2022.
- $707,649 write down of Lucy Labs investment to zero after FTX bankruptcy filing.
- Redemption of Isla Labs investment for $1,591,591, reducing the investment portfolio by $2,062,707 million and resulting in a loss of $471,116.
- Gain on sale of intangible assets of $536,633
The Company's investments in equity instruments are classified as FVTPL and are carried at fair value. The detail is as follows:
December 31, | September 30, | |||
Quantity | 2022 | Quantity | 2022 | |
Chia Network Inc. (a) | 19,860 | 369,490 | 19,860 | 369,490 |
GOAT Gaming Pte Ltd. (b) | - | - | 176,470 | - |
ISLA Digital Strategies SP (c) | - | - | - | 2,062,707 |
Lucy Labs Flagship Offshore Fund SPC (d) | - | - | - | 707,649 |
NGRAVE.IO (e) | 138,966 | 148,419 | 138,966 | 148,419 |
Streetside Development, LLC (f) | 1,429 | 126,516 | 1,429 | 126,516 |
zkSNACKS Limited - Shares (g) | 4,500 | 445,028 | 4,500 | 445,028 |
$ | 1,089,452 | $ | 3,859,808 |
- During the year ended September 30, 2021, pursuant to the Company's Simple Agreement for Future Equity ("SAFE") investment in Chia Network Inc. ("Chia"), the Company received 19,806 shares of Series B Stock priced at US$15.15 per share, and the Company also exercised its participation rights and acquired 600 common shares of Chia at a price of US$21.21. Based on an independent valuation of Chia dated September 30, 2022, that estimated its fair market value per share to be $18.11 (US$13.21), the Company wrote its investment Chia down by $188,231 to a value of $369,490.
- During the year ended September 30, 2022 the Company acquired a 176,470 subscription shares of GOAT Gaming Pte Ltd. ("GOAT") for consideration of US$200,000 priced at US$1.13333 per subscription share ($252,695). Company management determined that the fair value of GOAT was $nil at September 30, 2022 and recognized a realized loss of $252,695 in the consolidated statements of comprehensive income.
- During the year ended September 30, 2022, the Company invested US$1,500,000 ($1,923,658) in three tranches acquiring 14,762.1833 Class B common shares of the AB Digital Strategies Fund (the "Isla Shares") managed by UK FCA-regulated Isla Capital. During the three months ended December 31, 2022 the Company redeemed its Isla shares for proceeds of $1.591,591 realizing a loss of $471,116 in the Interim Statements
- During the year ended September 30, 2022, the Company invested $636,075 (US$500,000) in Lucy Labs Flagship Offshore Fund Crypto Rising tide portfolio. On November 11, 2022, FTX Trading Ltd. ("FTX") filed for Chapter 11 bankruptcy protection. FTX was a counterparty of Lucy Labs. Based on correspondence with Lucy Labs, the Company wrote down its investments with Lucy Labs to zero during the three months ended December 31, 2022.
- During the year ended September 30, 2022, the Company's convertible loan to NGRAVE was converted into common shares of NGRAVE pursuant to its convertible loan agreement which resulted in the Company receiving 138,966 NGRAVE common shares at a deemed price of EUR 0.7936.
- During the year ended September 30, 2022, Company received 0.26 Bitcoin with a value of $16,336 (2021 - $nil)as a dividend from Streetside Development, LLC which has been recorded in the consolidated statements of comprehensive income.
- During the year ended September 30, 2020, the Company acquired 4,500 shares in zkSNACKS Limited for $337,500 U.S. Dollars resulting in a 4.5% stake in the company. During the year ended September 30, 2022, the Company received 3.06 Bitcoin (2021 - 2.7 Bitcoin) with a value of $171,511 (2021 - $121,574) as a dividend from zkSNACKS Limited which has been recorded in the consolidated statements of comprehensive income.
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Cypherpunk Holdings Inc.
Other Assets
Other assets declined $685,575 to $83,919 at December 31, 2022 (September 30, 2022 - $769,494), mainly due to the sale of the Company's IPv4 assets, on which it realized a gain of $536,633.
Cryptocurrency mining assets
Cryptocurrency mining assets of $83,919 (September 30, 2022 - $94,205) represent the acquisition cost of 25
Bitmain S19J Pro miners (the "Equipment") purchased by the Company during the year ended September 30, 2022 for cash consideration of $376,819, net of accumulated amortization and other adjustments. The Equipment is leased to MineOn LLC, which hosts and operates the machines in Iowa, USA for Cypherpunk pursuant to a managed mining and profit sharing agreement. During the year ended September 30, 2022 the Company determined that the value of the Equipment had declined and an impairment charge of $215,802 was recorded at year end. The Equipment is amortized on a straight line basis from the date of acquisition over its estimated economic useful life of 5 years. During the three months ended December 31, 2022 the Company recognized amortization expense of $7,909 (2021 - $nil) for total accumulated amortization of $74,261.
Intangible assets
Intangible assets of $nil (September 30, 2022 - $675,289) reflect the disposition of the Company's 24,576 IPv4 addresses (the "Intangible Assets"). The Intangible Assets were purchased by the Company during the year ended
September 30, 2021 for cash consideration of $938,582. The intangible assets were being amortized on a straight line basis from the date of purchase over the estimated economic useful life of 5 years. During the year ended September 30, 2022 the Company recognized amortization expense of $188,737 (2021 - $74,556) for total accumulated amortization of $263,293 (2021 - $74,556). During the three month period ended December 31, 2022 the Company sold it Intangible Assets for gross proceeds of $1,172,863 and recognized a gain of $536,633 in its interim condensed consolidated financial statements for the three months ended December 31, 2022 and 2021 (the "Interim Statements").
Subsequent Events
On January 24, 2023 the Company announced that it was commencing a normal course issuer bid (the "NCIB"),
under which it may purchase up to 8,003,535 common shares of the Company over a period of one year (the "NCIB Period"), representing approximately 5% of the Company's issued and outstanding common shares.
On February 15, 2023, the Company announced that it had acquired 9.09 million ordinary shares of Animoca Brands Corporation Limited for approximately AUD $10 million (CAD $9.42 million) through secondary market trades.
On February 28, 2023, the Company had purchased 2,960,000 of its common shares for cancellation pursuant to the NCIB.
OVERALL PERFORMANCE
Overview
- Cash position of $20.8 million (September 30, 2022 - $18.5 million)
- Cryptocurrency holdings of $nil (September 30, 2022 - $3,035 million)
- Total assets of $22.6M (September 30, 2022 - $23.8 million)
- Net book value of $22.4 million (September 30, 2021 - $27.8 million)
- Decreases due primarily to operating losses and unrealized loss on Lucy Labs. Due to dispositions of assets cash increased $2.3 million
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Cypherpunk Holdings Inc.
SELECTED ANNUAL INFORMATION
Selected audited annual information for the three most recently completed years, all reported under IFRS, are as follows:
Year ended September 30, | 2022 | 2021 | 2020 | |||
Total assets | $ | 23,892,055 | $ | 31,230,861 | $ | 6,855,628 |
Shareholders' equity | 23,583,763 | 27,841,541 | 6,669,514 | |||
Income | 3,131,499 | 406,819 | 556,808 | |||
Net income | 358,456 | (1,174,497) | (159,417) | |||
EPS | $ | 0.00 | $ | (0.01) | $ | (0.00) |
Comprehensive income | (5,612,877) | 7,419,378 | 377,009 |
Results of Operations
Comparison of the years ended September 30, 2022 and 2021
The total comprehensive loss for the year ended September 30, 2022 (the "Period") decreased $13,032,255 to a loss of $5,612,877compared to total comprehensive income of $7,419,378 for the year ended September 30,
2021. The main reasons for the variance are as follows:
- During FY22 a realized gain on investments of $3,758,852 (2021 - investment loss of $3,910) mainly due to the sale of Animoca investment
- Operating expenses for the Period were $2,338,302 (2021 - $2,767,316), the decrease mainly due to:
- Foreign exchange gain for the Period of $715,354 (2021 - loss of 344,691) due to the appreciation of the US dollar, the currency most of the Company's assets are held in, versus the Canadian dollar
- Employment termination costs for the Period of $nil for the period (2021 - $477,500)
- Stock-basedcompensation for the Period of $1,345,099 (2021 - $644,195)
- For the Period other comprehensive loss was $5,971,333 (2021 - income of $8,593,875) mainly due to a decline in cryptocurrency prices during the Period compared to an appreciation of cryptocurrency prices during the prior year.
SELECTED QUARTERLY INFORMATION
The below selected quarterly information summarizes the financial information for the last eight quarters.
Dec-22 | Sep-22 | Jun-22 | Mar-22 | Dec-21 | Sep-21 | Jun-21 | Mar-21 | |||||||||
$ | $ | $ | $ | $ | $ | $ | $ | |||||||||
Income (loss) before taxes | (1,348,958) | (427,633) | (592,442) | (1,873,965) | 3,687,237 | 476,284 | (1,460,542) | (348,227) | ||||||||
Tax Recovery | - | (434,741) | - | - | - | 1,186,000 | - | - | ||||||||
Income (loss) for period | (1,348,958) | (862,347) | (592,442) | (1,873,965) | 3,687,237 | 1,662,284 | (1,460,542) | (348,227) | ||||||||
Net income (loss) per share (basic and diluted) | $ | (0.00) | $ | (0.01) | $ | (0.00) | $ | (0.02) | $ | 0.02 | $ | 0.01 | $ | (0.01) | $ | - |
Total comprehensive income (loss) | 6,928,210 | 2,664,292 | (11,613,376) | (2,084,665) | 5,420,873 | 4,167,306 | (12,395,810) | 10,053,898 | ||||||||
Total assets | 22,645,041 | 23,892,055 | 23,377,205 | 34,250,965 | 37,230,469 | 31,230,861 | 23,487,650 | 35,223,067 | ||||||||
Net book value | 22,376,611 | 23,583,763 | 21,186,912 | 32,168,113 | 33,828,505 | 27,841,541 | 23,115,447 | 34,985,129 | ||||||||
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Cypherpunk Holdings Inc.
Results of Operations
Comparison of the three months ended December 31, 2022 and 2021
The total comprehensive income for the three months ended December 31, 2022 ("Q1-23") decreased $5,036,195 to loss of $1,348,958 compared to total comprehensive income of $3,687,237 for the three months ended December 31, 2021 ("Q4-21"). The main reasons for the variance are as follows:
-
In Q1-23, there was an unrealized loss on investments of $707,649 due to Lucy Labs compared to an
unrealized gain in Q1-22 of $4,715,936, a difference of $5,423,585, which was mainly due to the appreciation of the Company's investment in Animoca. - In Q1-23 the Company's unrealized loss on investments was partially by a gain on the disposition of assets of $536,633 (2021 - $nil).
- In Q1-23 the Company had a realized loss on investments of $471,116 due to its redemption of its Isla investment (2021 - $113,120).
- In Q1-23 stock based compensation declined to $141,506 (2021 - $556,091), which was partially offset by increases in professional fees of $155,299 (2021 - $41,208) and foreign exchange of $190,931 (2021 - $28,120).
FINANCIAL AND CAPITAL MANAGEMENT
Outstanding Share Data | |
At December 31, 2022 | |
Common shares outstanding: | 160,070,718 |
Options to purchase common shares: | 14,006,500 |
Warrants: | 26,698,442 |
At March 31, 2023 | |
Common shares outstanding: | 157,110,718 |
Options to purchase common shares: | 14,006,500 |
Warrants: | 16,764,707 |
Cash Flow
For the three months ended December 31, 2022, the net cash inflow is $ 2,268,096 (2021 - $140,744) due to $2,767,489 (2021 - $353,184) of net cash received from investing activities offset by $499,393 (2021 - $200,017) of cash used in operating activities and $nil (2021 - $12,423) used in financing activities.
FINANCIAL RISK FACTORS
Capital Management
The Company manages and adjusts its capital structure, based on the funds available to the Company, in order to support the investment in cryptocurrencies and blockchain companies. The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company's management to sustain future development of the business. The Company considers capital to be its capital stock, warrant, and stock option components of shareholders' equity.
To effectively manage the Company's capital requirements, the management has in place a planning, budgeting, and forecasting process to help determine the funds required to ensure the Company has the appropriate
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Disclaimer
Cypherpunk Holdings Inc. published this content on 15 March 2023 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 15 March 2023 19:21:08 UTC.
