Rebuttal to Ionic Digital’s FAQ
By Mike Cagney, Figure Markets Co-Founder and CEO
November 7, 2024
Below is a response to Ionic Digital Inc.’s (“Ionic” or the “Company”) recent FAQ published on November 1, which aimed to address shareholder inquiries.
We acknowledge Ionic Digital’s attempt to clarify with shareholders through recent communication after a period of limited updates. However, we are concerned that certain details provided in their FAQ do not accurately reflect the current state of Ionic Digital’s governance, mining costs, and shareholder liquidity.
Figure Markets, Tony Vejseli, and GXD Labs remain committed to enhancing transparency around Ionic Digital’s financial and operational metrics to safeguard shareholder interests. To that end, we’ve collectively proposed a special meeting for shareholders to discuss a potential change in the board of directors, suggesting the removal of board members Tom DiFiore, Scott Duffy, and Emmanuel Aidoo.
Please review our collective rebuttal to Ionic’s FAQ and consider supporting the proposed special meeting by completing the form to participate in the vote on potential board adjustments.
Corporate Governance
Who is on Ionic’s board of directors and how were those directors chosen?
Ionic Response
More information on our current board of directors is available at https://www.ionicdigital.com/team
The Plan provided that Ionic Digital would have initially an 8-person board of directors: 2 individuals chosen by Hut 8 as a result of its contractual relationship with Ionic Digital, and 6 individuals chosen by Celsius’s Official Committee of Unsecured Creditors (the “Celsius UCC”). The designees chosen by the Celsius UCC were Scott Duffy, Thomas DiFiore, Elizabeth LaPuma, Max Holmes, Fred Arnold, and Emmanuel Aidoo.The identities of each proposed director candidate was disclosed in a supplement to the Plan that was distributed to the hundred of thousands of Celsius creditors entitled to vote on the Plan, which was approved by Celsius creditors and the Bankruptcy Court.
The Plan provided that, following Ionic Digital’s formation, the Board may fill vacancies. Per the Celsius Plan of Reorganization, any vacancy occurring in the board for any cause shall, unless (as) the board determines by resolution that any such vacancies shall be filled by the stockholders or (b) as otherwise required by law, be filled only by the affirmative vote of a majority of the directors.
Each director shall hold office until the annual meeting at which such director’s term expires and until such director’s successor is duly elected and qualified, or until such director’s resignation, disqualification or removal.
The Reality
Not a single board member is qualified to make critical decisions on behalf of the company and its shareholders. The previous 10 months have only proved this further. Emmanuel Aidoo, Scott Duffy and Tom DiFiore have no relevant board experience.
How is the board structured?
Ionic Response
Our board is structured and governed in a manner consistent with best practices and following the structure of the majority of publicly-traded entities. The board currently comprises six members with two open seats to be filled in the near future, and has the following three standing committees in addition to an Emergence Committee:
- Audit Committee
- Compensation Committee
- Nominating and Corporate Governance Committee
The purpose of the emergence committee is to ensure the Company is executing its business strategy in accordance with Celsius’ Plan of Reorganization
The composition of each of the board committees, including the chairperson, can be found at https://www.ionicdigital.com/committee-composition. The charters for the standing committees can also be found at https://www.ionicdigital.com/corporate-governance
The Reality
What is the purpose of the Emergence Committee?
The fabrication of an “Emergence Committee” is completely unjust, unethical, and not in accordance with standard public company governance. Why does the Company need to pay 6 board members a total of $1,095,000 in addition to their other $1,575,000 aggregate compensation to ensure that it is executing a plan architected by Tom DiFiore, Scott Duffy, Emmanuel Aidoo and White & Case over ten months ago? We contend that this committee is yet another vehicle to allow the Board to line their own pockets, at the expense of shareholders
For reference, there are only 12 companies out of the 500 companies in the S&P 500 index, with board compensation higher than Ionic’s. These companies are massive companies with enterprise values significantly greater than Ionic, and board members who are significantly more tenured and qualified.
What is the board’s primary responsibility?
Ionic Response
The primary function of the board is oversight. The board exercises its business judgment to act as an advisor and counselor to senior management and define and enforce standards of accountability, all with a view to enabling senior management to execute their responsibilities fully and in the best interests of the Company and its shareholders. Consistent with that function, the following are the primary responsibilities of the board:
Overseeing and reviewing the Company’s strategic direction and objectives, taking into account (among other considerations) the Company’s risk profile and exposures and its relationships with key stakeholders;
Overseeing the conduct of the Company’s business in the best interests of the Company and its shareholders;
Selecting, evaluating and compensating the chief executive officer (the “CEO”) and other key executives, and planning for CEO and key executive succession;
Monitoring the Company’s accounting and financial reporting practices and reviewing the Company’s financial and other controls; and
Overseeing the Company’s compliance with applicable laws and regulations and the processes that are in place to safeguard the Company’s assets and manage material enterprise risks.
The Reality
We strongly believe that it is precisely the failure of Board oversight that has led the Company to its current predicament. The above illustrates the Group’s point precisely:
- There appears to be no clear strategy, and no ability to inspire confidence from shareholders
- The Board appears to be acting in its own self-interest vs the best interests of the Company
- There is currently no permanent CEO; the last CEO was not qualified to work for Hut8 in a more junior role, yet the Board accepted him as the Company’s initial CEO and paid him handsomely.
- There are currently no audited financial statements; the Board failed to disclose that the auditor resigned until 6 months after they knew this was going to be the case, and until being pressed by shareholders.
- The Board failed to disclose the major turnover of independent directors and management team members, until pressed by shareholders
- The current Board imposed trading restrictions denying stockholders liquidity for over ten months for no apparent good reason
Is Ionic Digital Considering Proposals from Figure Markets and GXD Labs?
Ionic Response
As stated in the Company’s press release, Ionic Digital and its board are fiduciaries for shareholders and are prepared to fully consider any and all actionable proposals from its shareholders. Ionic and its board, with the assistance of its counsel and advisors, will fully assess the proposals from Figure Markets and GXD Labs in due course.
Although the Company will fully consider Figure Markets and GXD Labs’ concepts, the proposals put forth lack critical detail about how they would ultimately achieve it, and significant aspects of the proposals are inconsistent with the Celsius creditor-back and Court-approved plan of reorganization.
The Reality
Our detailed proposal is consistent with the reorganization plan approved by the Court. In fact, the Board did not object to the absence of any detail or the existence of any alleged conflict in our meeting, but appeared only to take issue with our proposed corporate governance changes. We see these changes as a necessary prerequisite for any improvements to the business to be achieved – that is, without meaningful changes to the Board, the Company will likely continue on its current trajectory - no liquidity, little transparency, no strategy and an overpriced mining partner that simultaneously competes with the Company.
Why did Ionic not become public within 60 days of filing its Form 10 with the SEC?
Ionic Response
The assets Ionic Digital acquired came from a legal entity named Celsius Mining, LLC. This entity was not publicly-traded and was a subsidiary of Celsius Network Limited.
In order to become a public company, Ionic Digital is required to have audited financial statements for the predecessor entity, Celsius Mining, which were included as part of Ionic Digital’s submission of a Form 10 filed with the SEC. All financial statements included in the Form10 have to be “current” as defined in SEC rules and regulations at the time of filing and at the time of effectiveness.
This meant that an auditor had to be engaged to audit the stand-alone financial statements of Celsius Mining for the financial statements to be included in the Form 10.
RSM US LLP (“RSM”) was engaged and completed its audit of Celsius Mining in May 2024, but then resigned as the auditor of Ionic Digital. On October 17, 2024, Ionic Digital engaged BDO USA as its new auditor and BDO will be required to complete a review of Ionic Digital’s 2024 interim financial statements, including the most recent quarter, before we can make another filing with the SEC that includes all these financial statements.
Without an auditor to review its current interim financial statements, the Company was unable to continue its filings with the SEC. Management worked to replace RSM with another auditing firm through an RFP process, that ultimately led to the hiring of BDO USA as the Company’s new auditing firm.
Because of the need to have Celsius Mining’s financial statements be audited for fiscal year 2023, it was not possible for Ionic Digital to become a public company within 60 days of filing its initial Form 10 filing with the SEC.
The Reality
Ionic’s stock was issued under Rule 1145 upon emergence from Chapter 11. The Company continues to insist inaccurately that the only path to liquidity for stockholders is listing on a national securities exchange. Ionic stock should be tradeable today - at least in private, OTC transactions - but the Board has prevented this without providing any compelling reason. The Company could be trading on an ATS, such as Figure’s, in advance of the effectiveness of its Form 10. Figure has committed to sourcing capital to provide liquidity for day one sellers, bringing in market makers for subsequent liquidity and sourcing growth capital for the business. However, it is clear that change at the Board level is necessary before the Company will meaningfully consider this path.
Is Ionic’s board compensation structure in-line with industry standards?
Ionic Response
Yes, Ionic’s board is compensated in accordance with industry standards for the work required to execute the Plan and become listed on a national securities exchange.
The Reality
Compensation packages for members of the Board are 38% higher than the 2023 average for S&P 500-listed companies1, whose median capitalization is $1.7 billion, far above the Company’s. With a base Board salary2 of $240,000 per Board member and additional compensation for committee service including a lucrative $180,000 for membership on the so-called Emergence Committee, which apparently remains in place ten months after emergence. Members of the Board are receiving nearly half a million dollars per person in annual compensation, almost all in cash. What independent compensation consultant advised Ionic that these compensation packages were in accordance with industry standards? What studies support this claim?
Becoming a public company
When will Ionic become a public company?
Ionic Response
The exact date at which Ionic Digital will become a publicly-traded company is not known at this time but is currently expected to be in Q1 or Q2 of 2025. We understand that the process has taken longer than was initially thought when Ionic Digital was established. The resignation of the Company’s initial auditor RSM caused delays in the registration process and is a primary reason this process has taken longer than was anticipated.
The absence of an auditor until a replacement was selected and engaged prevented the Company from having financial statements that had been audited or reviewed. These financial statements are required to be reviewed or audited in order to be included in any filings with the SEC. Thus, the absence of an auditor stopped the Company from being able to provide current financial statements and to make new filings as part of the registration process, effectively delaying the time required to make Ionic Digital a publicly-traded company.
The Reality
The absence of an auditor and delay on listing on a national securities exchange is not an excuse to deny stockholders liquidity. Alternatives, such as listing on an ATS, are available to the Company today that it refuses to pursue, and even in the absence of such a listing, private, secondary transactions could provide stockholders with liquidity if the Board had not refused to permit stockholders to engage in such transactions without providing any compelling explanation.
When does Ionic plan to file an S-1 with the SEC?
Ionic Response
Ionic currently plans to file an S-1 with the SEC which we are working diligently towards finalizing as soon as possible pending completion of our financial audit, which we are striving to complete at the beginning of 2025.
The Reality
An S1 requires at least two years of audited financials. This would push the public listing date out to 2026, if that is even achievable. It’s confusing why the Company feels an S1 will solve their Form 10 problems, as the Company still must complete all the prerequisites for registration and listing required by the SEC.
Why does having an auditor impact Ionic’s ability to become a publicly traded company?
Ionic Response
In order to become a publicly traded company, we must register the Company’s shares with the SEC.
The registration process requires us to submit financial statements and other information in a Registration Statement with the SEC. Any financial statements included in these filings must be audited or reviewed by an independent public accounting firm (auditor) and the financial statements must be current. Without an auditor, the Company could not submit audited or reviewed current financial statements, thus stopping the registration process.
Now that the Company has engaged a new auditor, we will complete and have reviewed current financial statements for the Company. We will then recommence the filing process by providing an updated submission to the SEC. Ionic Digital will then be back on the road to becoming a publicly traded company.
The Reality
By issuing the Company’s shares under 1145, the shares are exempt from registration with the SEC - no S1 is required. Ionic could have its shares trading today on an ATS - like Figure’s. Registration with the SEC and listing on a national securities exchange, while an important step for the Company in the future, has been an ongoing red herring the Company has used to thwart the pursuit of immediately available paths to provide stockholders with liquidity in advance of the completion of those steps.
Information about Ionic’s business operations
What is the MSA with Hut8?
Ionic Response
The Management Services Agreement (“MSA”) is an agreement between Ionic Digital and U.S. Data Management Group LLC (“Hut 8”) entered into on the effective date of the Plan that provides for Hut 8 to manage and oversee certain aspects of the day-to-day Bitcoin mining business operations of Ionic Digital, under our direction and supervision. The MSA was entered into via the bankruptcy court/bid process and Hut 8 was the Plan sponsor. Once the Plan became effective, the MSA took effect.
Under the MSA, Hut 8 will complete and deliver certain capital projects upon Ionic Digital’s approval of the required funding, including building and energizing up to 100MW of Bitcoin mining facilities within 12 months at a capped construction cost of $395K/MW. The capped construction costs will also apply to up to 300MW of additional developments for medium 8 +voltage to plug ready infrastructure within a 24-month period.
The MSA had an initial term of 4 years and may be extended for an additional year at the discretion of Ionic Digital’s board of directors, or automatically extends for an additional year should Ionic Digital’s EH/s be greater than 23 EH/s prior to the third anniversary of the agreement. Hut 8 receives an annual management fee for providing these services.
The Reality
The Board has negligently appointed a direct competitor to manage its operations and proprietary information. This is similar to Coca Cola hiring Pepsi to oversee its production and strategy.
There was an opportunity to terminate the Hut 8 MSA, however the Board's self-interests appear to have gotten in the way. Certain board members admit that the Hut8 relationship had soured, and the contract was toxic prior to the June termination date. They noted that Asher Genoot threatened to sue the company on numerous board calls, and allegedly threatened to buy the company out of bankruptcy. We believe the amendment and extension of the Hut 8 agreement to the detriment of stockholders is a clear breach of the Board’s fiduciary duties.
Why was the MSA modified in June 2024?
Ionic Response
In June 2024, the Company and Hut 8 mutually agreed to amend and restate the MSA. This resulted in several improvements to the terms of the MSA for the benefit of the Company and its shareholders.
The amendments to the MSA included a greater than 25% reduction in management fees, the removal of the liquidity deadline, and related termination provisions as Ionic Digital continues to pursue a public listing, and a new right to terminate the MSA for convenience at any time for a termination fee which generally will be $22.5M.
A summary of the key terms of the amended and restated MSA is available at https://x.com/ionicdigital/status/1828392378274881679?s=46&t=igB1FAoPf7ZsZMvL4DmJdQ
The Reality
The Company has disclosed a brief and generously described summary of the restated MSA, but materially omits key details. Stockholders should be entitled to receive the full MSA document. The specific details contained in the MSA are material. Stockholders should have all of the information to make an informed decision.
It was made clear that the only board members supportive of the current relationship with Hut8 are Emmanuel Aidoo and Mac Gardner (who was appointed by Hut8).
If the Hut8 contract ensures that the company cannot produce positive EBITDA or cash flow, why is the company paying Hut8 $1.25 million dollars per month and why did the company increase Hut8’s termination fee by $2.5 million (12.5%)?
How does Ionic intend to successfully compete in the BTC market?
Ionic Response
Ionic Digital is a leading cryptocurrency mining company that intends to leverage cutting edge technology to mine Bitcoin efficiently, profitably and sustainably.
Additionally, we intend to:
Be an emerging innovator in energy monetization with data centers across the U.S.
Combine our experience in data center management, blockchain technology and digital infrastructure to be at the forefront of mining innovation and technology
Monetize excess power generation and improve the economic return from our energy projects, including ways to integrate HPC, AI and next generation computing capabilities.
The Reality
None of the current board members has a positive track record, nor any relevant experience in institutional Bitcoin mining or power infrastructure. The current board is not capable of pursuing innovative, value-creating activity such as standing up a distributed mining pool operator, innovating with hash rate derivatives and anchoring a carbon credit marketplace.
These types of differentiated activities will be critical for the Company to raise capital. Capital should be raised not only to take out day one sellers, but in order to upgrade and sustain the mining fleet. The current Board seems uninterested in pursuing any of these critical projects, leaving the Company floundering and its stockholders holding the bag.
How is Ionic performing so far?
Ionic Response
Ionic Digital quickly began the deployment of its miner inventory and had 96,000 miners deployed by September 30, 2024. The remaining miners will be in production by the fourth quarter of 2024 when the site in Ward County, Texas (formerly known as our Cedarvale facility) is complete.
By the end of 2024 we anticipate having a total of 395MW of power deployed.
Ionic Digital accomplished this deployment while preserving the majority of the capital it had when it was funded and began operating on February 1, 2024. We have used our cash resources to fund operations and our capital projects and have generated over 1500 BTC from these operations during the same period. At the end of September 2024, our combined cash/BTC balances were approximately the same as our initial net cash on hand.
Ionic Digital expects to convert some of the BTC to cash during the fourth quarter of 2024 to maintain an adequate liquidity level to fund ongoing operations, and to use for strategic investments in future sites.
The Reality
This statement fails to capture the entire picture and leaves many unanswered questions.
Why are current “combined cash (and) BTC balances from inception” being compared to “initial net cash on hand”? This is not apples to apples. The board should disclose:
- Initial cash balance vs current cash balance
- Initial BTC balance and price at inception vs current
- BTC balance and price
- Cash used to pay Hut8
- Cash used to pay attorneys fees (White & Case, and Clearly Gottlieb)
- Cash used to pay board members
- Cash used to pay management
- Cash used to pay people who are no longer engaged by the company
- Cash used to build Cedarvale
- Future unpaid development expenses
- Any deposits paid for future machine deliveries
What is Ionic’s cost to mine a BTC?
Ionic Response
The cost varies by mining location and whether the site is Company-owned or is hosted by another company. The average cost to self-mine a BTC in the second quarter of 2024 was $24,000 per BTC (excluding depreciation).
The Reality
The above answer is disingenuous and lacks critical detail. For starters, why is this the only Q&A line that is using a number from the second quarter 2024, while all other Answers are using third quarter 2024.
Second, it should be noted this number only represents the power cost of mining over that time period, and shows how it was calculated.
Most importantly, Ionic’s actual cost to mine is likely above $65,000 per BTC today, which is the highest in the industry due to its extremely high fixed costs:
- Ionic is paying way-above-market board compensation of ~$450,000 per board member, including a fabricated “Emergence Committee Member” bonus to each board member, for work that is par for the course for any post emergence board. This “Emergence Committee” bonus is completely off-market, unjust and unethical.
- Ionic is paying $15 million per year plus pass through expense to Hut8
- Ionic is paying its own management team
- Ionic has to pay D&O insurance and other standard public company expenses
- Ionic has additional fixed operating expenses and SG&A
For reference, the lowest cost miners in the industry have ~3 cent power which, combined with state-of-the-art mining rigs, have average cost per bitcoin in the low $35k / BTC. The Group estimates that taking into account Board compensation, the Hut8 contract, D&O insurance, fixed opex, and SG&A, Ionic's actual cost of mining creates a negative EBITDA and negative cash flow situation. Given Ionic’s fleet is near obsolete and the company will need significant capital, in our view, Ionic’s current business model is unsustainable.
Why does Ionic want to list its shares on a regulated national securities exchange?
Ionic Response
Ionic’s intention to list on Nasdaq, a national stock exchange, was described in detail in the Plan and its related disclosure statement, which was disseminated to Celsius’s hundreds of thousands of creditors who were entitled to vote on the Plan.
The rationale for listing on a national securities exchange like Nasdaq remains the same today, which is that it offers significant benefits for the Company and shareholders, including enhanced visibility, credibility, and access to a broader pool of investors. The stringent listing standards of a national securities exchange can enable Ionic to leverage a well-established trading infrastructure and reach institutional investors who prefer or require investing on a national securities exchange. These factors collectively align with Ionic’s strategic goals and commitment to maximizing long-term shareholder value.
Ionic Digital is committed to facilitating liquidity for its shareholders. Ionic Digital will continue to assess options that are designed to provide stockholders with liquidity, which may include other national exchanges and/or alternative trading systems.
The Reality
The Group contends that the idea that Nasdaq is the sole source of stockholder liquidity is wrong. One has only to look at the example of other listed BTC miners, many of which have limited daily volume, to see that this is not an attractive solution.
Ionic has had the opportunity to list on an Alternative Trading System (“ATS”) since it emerged from bankruptcy. However, the Company has taken what we believe is a misguided view that the only path to liquidity for its stockholders is listing on a national securities exchange. This has resulted in stockholders experiencing a significant delay to their liquidity - the opportunity cost of which has been a 50% rise in BTC since emergence. Ionic Digital Inc. (“Ionic” or the “Company”) has had the opportunity to list on an Alternative Trading System (“ATS”) since it emerged from bankruptcy. However, the Company has taken what we believe is a misguided view that the only path to liquidity for its stockholders is listing on a national securities exchange. This has resulted in stockholders experiencing a significant delay to their liquidity - the opportunity cost of which has been a 50% rise in BTC since emergence.
For the Company to list on a national securities exchange, they need two market makers. But what market maker is going to sign up to provide liquidity in front of what will likely be a very high amount of selling from shareholders who were forced into this investment? We see no evidence that the Company has a plan to raise sufficient capital to offset that selling pressure or that it can raise this capital with its current Board and the operating performance of the business.
For the Company to list on a national securities exchange, they need two market makers. But what market maker is going to sign up to provide liquidity in front of what will likely be a very high amount of selling from shareholders who were forced into this investment? We see no evidence that the Company has a plan to raise sufficient capital to offset that selling pressure or that it can raise this capital with its current Board and the operating performance of the business.
In addition, it is likely that Ionic is going to face an avalanche of sell orders when it is first publicly listed. Not only does the Company apparently not have a plan to line up capital to absorb those sales, but it is unlikely to be able to secure market makers (which are required for listing) as we do not believe any market maker will want to stand in front of that amount of selling pressure.
When does Ionic expect BDO to complete its audit?
Ionic Response
Ionic anticipates that BDO will complete its 2024 audit by the end of the first quarter of 2025.
The Reality
The audit was originally promised for early 2024 and continues to be pushed out. Given the lack of transparency around costs and key operational metrics, we have no confidence that the Company will keep this expected audit deadline either.