CLEANSPARK, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations ($ presented in 000's, except for bitcoin price) The following discussion and analysis of our financial condition and results of operations should be read together with the interim condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 ("Form 10-K"). This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in other parts of this Quarterly Report on Form 10-Q, as well as those identified in the “Risk Factors” section of our Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. See “Forward-Looking Statements.” Company Overview We are a bitcoin mining company. We have no intention to mine, purchase or hold any other cryptocurrency at this time or in the foreseeable future, and we did not hold any other cryptocurrency as of June 30, 2024. We independently own and operate nine data centers in Georgia and three data centers in Mississippi for a total developed power capacity of approximately 520 megawatts (“MW”) as of June 30, 2024. We have completed an additional 50 MW of data center infrastructure in Sandersville, GA, which is pending the commissioning of a utility transformer before it goes into service, and we are currently finalizing the development of an additional 15 MW expansion at our Dalton, GA location. An independent data center operation in Massena, NY hosts 50 MW for us. We have also entered into a hosting agreement on June 26, 2024 with GRIID Infrastructure, Inc. to host up to 12 MW of our bitcoin miners. We design our infrastructure to responsibly secure and support bitcoin, the world’s most recognized digital commodity. We strive to leave the planet better than we found it by investing in communities that source low-carbon energy, like wind, solar, nuclear, and hydro. We cultivate trust and transparency among our employees, the communities we operate in, and the people around the world who depend on bitcoin. Bitcoin Mining Bitcoin was introduced in 2008 with the goal of serving as a digital means of exchanging and storing value. Bitcoin is a form of digital currency that depends upon a consensus-based network and a public ledger called a “blockchain”, which contains a record of every bitcoin transaction ever processed. The bitcoin network is the first decentralized peer-to-peer payment network, powered by users participating in the consensus protocol, with no central authority or middlemen, that has wide network participation. The authenticity of each bitcoin transaction is protected through digital signatures that correspond with addresses of users that send and receive bitcoin. Users have full control over remitting bitcoin from their own sending addresses. All transactions on the bitcoin blockchain are transparent, allowing those running the appropriate software to confirm the validity of each transaction. To be recorded on the blockchain, each bitcoin transaction is validated through a proof-of-work consensus method, which entails solving complex mathematical problems to validate transactions and post them on the blockchain. This process is called mining. Miners are rewarded with bitcoins, both in the form of newly created bitcoins and fees in bitcoin, for successfully solving the mathematical problems and providing computing power to the network. Factors such as access to specialized mining servers, energy, electricity cost, environmental factors (such as cooling capacity) and location play important roles in mining. As of June 30, 2024, our operating mining units were capable of producing over 20.4 exahash per second (“EH/s”) of computing power. In bitcoin mining, “hashrate” is a measure of the computing and processing power and speed by which a mining computer mines and processes transactions on the bitcoin network. We expect to continue increasing our computing power through 2024 and beyond as we expand our infrastructure at our owned sites in Georgia and Mississippi, seek strategic acquisition targets, and through strategic co-location agreements. As of July 31, 2024, we operated a high of 21.2 EH/s of computing power. A company’s computing power measured in hashrate is a significant factor in its bitcoin mining revenue. We owned approximately 180,000 miners as of June 30, 2024, of which approximately 152,505 were in service as of June 30, 2024 and the remainder pertain to new machines ready to install in the Dalton, GA expansion, newly acquired LN Energy locations, and GRIID hosting facilities or are pending repair. Our miners in service range in age from 6 1-42 months and have an average age of approximately 14 months. We do not have scheduled downtime for our miners, however, we periodically perform unscheduled maintenance and curtailments on our miners, but such downtime has not historically been significant. When performing unscheduled maintenance, we will typically replace the miner with a substitute miner to limit overall downtime. The miners owned as of June 30, 2024 had a range of energy efficiency (watts per terahash – “w/th”) of 17.5 to 29.5 w/th with an average energy efficiency of 21.2 w/th. We obtain bitcoin as a result of our mining operations, and we sell bitcoin from time to time to support our operations and strategic growth. Although we may engage in regular trading of bitcoin in the future, we have not previously engaged in trading of bitcoin (other than as necessary to convert our bitcoin into U.S. dollars) or hedging activities related to our holding of bitcoin; however, our decisions to hold or sell bitcoin at any given time may be impacted by the bitcoin market, which has been historically characterized by significant volatility. Currently, we do not use a formula or specific methodology to determine whether or when we will sell bitcoin that we hold, or the number of bitcoins we will sell. Rather, decisions to hold or sell bitcoins are currently determined by management by analyzing forecasts and monitoring the market in real time. The value of bitcoin has historically been subject to wide swings. The following table provides a range of intraday low and intraday high bitcoin prices between October 1, 2022 through June 30, 2024. Range of intraday bitcoin prices Quarterly Reporting Periods Ended Minimum Price Maximum Price December 31, 2022 $ 15,460 $ 21,479 March 31, 2023 $ 16,490 $ 29,190 June 30, 2023 $ 24,750 $ 31,444 September 30, 2023 $ 24,900 $ 31,862 December 31, 2023 $ 26,521 $ 45,000 March 31, 2024 $ 38,501 $ 73,836 June 30, 2024 $ 56,500 $ 72,777 As of June 30, 2024, we held 6,590 bitcoins. As of June 30, 2024, the Company held 99.8% of its bitcoin in cold storage and 0.2% in hot wallets. The fair value of our bitcoins as of June 30, 2024 was $413,033 on our Condensed Consolidated Balance Sheets. Effective October 1, 2023, we adopted ASC 350-60, which requires bitcoin to be measured at fair value. See Note 2 - Summary of Significant Accounting Policies for more details on the impact of implementation to the condensed consolidated financial statements. As a result, the carrying value of each bitcoin we held at October 1, 2023 and each subsequent reporting period reflects the price of one bitcoin quoted on the active exchange, Coinbase, at the end of the reporting period. Therefore, decreases in the market price of bitcoin could have a material impact on our earnings and on the carrying value of our bitcoin. As of September 30, 2023, we held $0.05 in USD Coin (“USDC”), which is a digital currency that is fully backed by U.S. dollar assets, with the value of one USDC coin pegged 1:1 to the value of one U.S. dollar. As of June 30, 2024, the Company did not hold any digital currency other than bitcoin. Through our wholly owned subsidiaries CSRE Properties, LLC, CSRE Property Management Company LLC, CSRE Properties Norcross, LLC, CSRE Properties Washington, LLC, CSRE Properties Sandersville, LLC, CSRE Properties Dalton, LLC, Dalton15, LLC, CleanSpark MS, LLC, CSRE Properties Mississippi, LLC, CSRE Properties Vicksburg, LLC, and CleanSpark HQ, LLC, we maintain real property holdings. Discontinued Operations As of June 30, 2022, we deemed our energy operations to be discontinued operations due to our strategic decision to strictly focus on bitcoin mining operations and divest of our energy assets. 7 Results of continuing operations for the three and nine months ended June 30, 2024 and 2023 ($ presented in 000's, except for bitcoin price and information set forth under the heading “Bitcoin Mining Operations”) Bitcoin Mining Operations Overview We operate a fleet of servers commonly known as miners or ASICs (Application-Specific Integrated Circuits), which are computer chips customized for a specific use. In the case of bitcoin mining, ASICs calculate the SHA-256 algorithm as efficiently and quickly as possible in order to compete with other miners to solve blocks. Each calculation is a hash, and each machine’s computational power is measured in terahash processed per second (“th/s”). One terahash is equal to 1 trillion hashes. The more terahash we produce and contribute into the mining pool, the higher our percentage of the blockchain reward. There are a variety of factors that influence our ability to mine bitcoin profitability. Our ability to mine profitability is dependent on successfully navigating these fluctuating variables, which include bitcoin’s value in USD (the volatility of which is described above), mining difficulty, block rewards and halving, global hashrate, power prices, fleet energy efficiency, data center energy efficiency, and other factors. The energy efficiency of a mining fleet helps drive profitability, because the most significant direct expense for bitcoin mining is power. We measure efficiency by the watts of energy required to produce each terahash of processing power. We believe we operate a highly efficient fleet of miners. The table below describes our fleet as of June 30, 2024 and 2023 and our miner efficiency and computing power as compared to the global computing power. As of Combined facilities June 30, 2024 June 30, 2023 Global hashrate (in terms of EH/s) (1) 558.0 397.8 Miner efficiency (w/th) (2) 22.3 29.9 CleanSpark hashrate (in terms of EH/s) 20.4 6.7 CleanSpark percentage of total global hashrate 3.66 % 1.68 % (1) Total global hashrate obtained from YCHARTS (https://ycharts.com/indicators/bitcoin_network_hash_rate). (2) Watts of energy required to produce each terahash of processing power. Based on miner fleet operating at period end. As of June 30, 2024, our operating hashrate was approximately 3.66% of the total global hashrate, and we received approximately the same percentage of the global blockchain rewards, which as of that date equaled approximately 14-16 bitcoin per day, excluding the bitcoin earned from network transaction fees. Ultimately, in order to mine profitably, we work to ensure that these mining rewards cover our direct operating costs. 8 The table below describes the average cost of mining each bitcoin for the three and nine months ended June 30, 2024 and 2023 and the total energy usage and cost per each kilowatt hour ("KWH") utilized within our owned facilities. 9 For the Three Months Ended For the Nine Months Ended Cost of Revenues - Analysis of costs to mine one bitcoin (per bitcoin amounts are actual) June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Cost of Mining - Owned Facilities Cost of energy per bitcoin mined $ 26,857 $ 11,366 $ 17,569 $ 11,679 Other direct costs of mining - non energy utilities per bitcoin mined 88 101 36 64 Cost to mine one bitcoin - Direct Energy Cost - Owned facilities $ 26,945 $ 11,467 $ 17,605 $ 11,743 Miner depreciation per bitcoin mined (excluding accelerated depreciation) 16,753 10,320 13,067 9,620 Financing costs per bitcoin mined 208 419 214 460 Direct cost to mine including non-cash depreciation and financing costs - Owned facilities $ 43,906 $ 22,206 $ 30,886 $ 21,823 Accelerated depreciation per bitcoin mined 5,060 - 1,473 - Direct cost to mine including non-cash depreciation, financing costs and accelerated depreciation - Owned facilities $ 48,966 $ 22,206 $ 32,359 $ 21,823 Average revenue of each bitcoin mined (1) $ 66,048 $ 27,982 $ 51,479 $ 23,016 Direct cost to mine one bitcoin as % of average bitcoin mining revenue - Including direct energy cost only 40.8 % 41.0 % 34.2 % 51.0 % Direct cost to mine one bitcoin as % of average bitcoin mining revenue - Including miner depreciation expense / excluding accelerated depreciation 66.5 % 79.4 % 60.0 % 94.8 % Direct cost to mine one bitcoin as % of average bitcoin mining revenue - Including miner depreciation expense / including miner accelerated depreciation 74.1 % 79.4 % 62.9 % 94.8 % Statistics Owned Facilities Total bitcoin mined at owned facilities 1,435 1,222 4,931 3,647 Bitcoin mining revenue - Owned facilities - ($ in thousands) $ 94,737 $ 34,192 $ 255,921 $ 84,625 Total miners in service in owned facilities - as of the periods ended 138,493 51,052 138,493 51,052 Total KWHs utilized 808,479,474 337,875,000 1,937,737,124 894,261,000 Total energy expense - ($ in thousands) $ 38,545 $ 13,886 $ 86,644 $ 42,598 Cost per KWH $ 0.048 $ 0.041 $ 0.045 $ 0.048 Energy expense as percentage of bitcoin mining revenue, net 40.7 % 40.6 % 33.9 % 50.3 % Other direct costs of mining - non energy utilities - ($ in thousands) $ 126 $ 124 $ 170 $ 233 Depreciation Expense - Miners Only - ($ in thousands) $ 24,043 $ 12,608 $ 64,436 $ 35,088 Accelerated Depreciation Expense - Miners Only - ($ in thousands) $ 7,261 $ — $ 7,261 $ — Direct miner financing costs - ($ in thousands) $ 299 $ 512 $ 1,055 $ 1,677 (1) Average revenue of each bitcoin mined is calculated by dividing the sum of bitcoin mining revenue for our owned facilities by the total number of bitcoin mined by our owned facilities during the respective periods. We have determined that Coinbase is the principal market 10 for valuing bitcoin transactions and use the closing price of bitcoin at 23:59:59 UTC as the source of recording revenue. See the table "Range of intraday bitcoin prices" for information on the range of intraday bitcoin prices for quarterly periods since October 1, 2022. Power prices are the most significant cost driver for our wholly owned locations, and energy costs represented 40.7% and 40.6% as expressed as a percentage of bitcoin mining revenues during the three months ended June 30, 2024 and 2023, respectively, and were 33.9% and 50.3% for the nine months ended June 30, 2024 and 2023, respectively. Energy prices can be highly volatile and global events (including the war in Ukraine and the resulting natural gas shortage) caused power prices to increase nationwide in 2022. All of our wholly owned and operated sites in the State of Georgia, Mississippi and our hosted miners in New York State are currently subject to variable prices and market rate fluctuations with respect to wholesale power costs. Such prices are governed by power purchase agreements which vary by location, and said prices can change hour to hour. While this renders energy prices less predictable, it also gives us greater ability and flexibility to actively manage the energy we consume with a goal of increasing profitability and energy efficiency. Energy prices are also highly sensitive to weather events, such as winter storms and polar vortices, which increase the demand for power regionally. When such events occur, we may curtail our operations to avoid using power at increased rates. The average power prices we paid in our owned facilities for the three months ended June 30, 2024 and 2023 were $0.048 and $0.041 per KWH, respectively, and were $0.045 and $0.048 per KWH for the nine months ended June 30, 2024 and 2023, respectively. The management team makes real-time determinations on the need and timing during which we should curtail our operations. We curtail when power prices exceed the value we would receive for the corresponding fixed bitcoin reward. This means if bitcoin’s value decreases or energy prices increase, our curtailment will increase; likewise, when bitcoin’s value increases and energy prices decrease, our curtailment will decrease. The management team manages this decision on an hour-by-hour basis across all our sites, both wholly owned and hosted. The Company did not have significant curtailment greater than 20% during the three months or nine months ended June 30, 2024. The Company records depreciation expense (a non-cash expense) on its miners on a straight-line basis over the miners' expected useful life. Such non-cash depreciation amounts are recorded within the Condensed Consolidated Statements of Operations and Comprehensive Loss as "Depreciation and Amortization". Although the Company recognizes depreciation with respect to its mining assets, it does not consider depreciation in determining whether it is economical to operate its mining equipment since depreciation expense is not an avoidable operating cost, such as energy costs. The table above presents the non-cash miner depreciation expense on a "per bitcoin" basis, calculated by dividing miner depreciation expense in our owned facilities by the number of bitcoin mined in the owned facilities. On a "cost per bitcoin" ratio, miner depreciation expense was $16,753 and $10,320 for the three months ended June 30, 2024 and 2023, respectively, and was $13,067 and $9,620 for the nine months ended June 30, 2024 and 2023, respectively. The Company recorded accelerated depreciation on certain of its miners based on the reduction of the estimated useful life from 5 years to 3 years, which equaled $5,060 and $1,473 on a cost per bitcoin ratio for the three and nine months ended June 30, 2024, respectively. The number of bitcoin received by the Company was reduced by 50% effective April 19, 2024 when the bitcoin algorithm halved the rewards from 6.25 per block to 3.125 per block. We have financing costs for a limited number of miners in our miner fleet and such costs are recorded within Interest Expense in our Condensed Consolidated Statements of Operations and Comprehensive Loss. The table above presents financing costs per bitcoin calculated by dividing direct interest expense on our miner financing agreement by the number of bitcoin mined in our owned facilities. On a cost per bitcoin ratio, financing costs were $208 and $419 for the three months ended June 30, 2024 and 2023, respectively, and were $214 and $460 for the nine months ended June 30, 2024 and 2023. The table below describes the average cost of mining each bitcoin for the three and nine months ended June 30, 2024 and 2023 and the total energy usage and cost per each KWH utilized within our hosted facilities. 11 For the Three Months Ended For the Nine Months Ended Cost of Revenues - Analysis of costs to mine one bitcoin (per bitcoin amounts are actual) June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Cost of Mining - Hosted Facilities Direct hosting fees expense per one bitcoin $ 46,138 $ 16,490 $ 30,971 $ 14,507 Miner depreciation per bitcoin mined 28,328 15,786 23,091 13,826 Direct cost to mine including non-cash depreciation - Hosted facilities $ 74,466 $ 32,276 $ 54,062 $ 28,333 Average revenue of each bitcoin mined (1) $ 66,048 $ 27,982 $ 51,479 $ 23,016 Direct cost to mine one bitcoin as % of average bitcoin mining revenue - Direct Hosting fees only 69.9 % 58.9 % 60.2 % 63.0 % Direct cost to mine one bitcoin as % of average bitcoin mining revenue - Including miner depreciation expense / Excluding accelerated depreciation 112.7 % 115.3 % 105.0 % 123.1 % Statistics Hosted Facilities Total bitcoin mined at hosted facilities 141 402 696 1,378 Bitcoin mining revenue - Hosted facilities - ($ in thousands) $ 9,371 $ 11,235 $ 33,772 $ 31,036 Total miners in service in hosted facilities - as of the periods ended 14,012 16,668 14,012 16,668 Total KWHs utilized 103,089,261 111,430,000 315,113,352 329,236,000 Total hosting fee expense - ($ in thousands) $ 6,509 $ 6,625 $ 21,560 $ 19,987 Hosting fee per KWH $ 0.063 $ 0.059 $ 0.068 $ 0.061 Hosting fee expense as percentage of bitcoin mining revenue, net 69.5 % 59.0 % 63.8 % 64.4 % Depreciation Expense - Miners Only - ($ in thousands) $ 3,997 $ 6,342 $ 16,075 $ 19,048 (1) Average revenue of each bitcoin mined is calculated by dividing the sum of bitcoin mining revenue for hosted facilities by the total number of bitcoin mined within the hosted facilities during the respective periods. We have determined that Coinbase is the principal market for valuing bitcoin transactions and use the closing prices as of 23:59:59 UTC as the source of recording revenue. See the table “Range of intraday bitcoin prices” for information on the range of intraday bitcoin prices for quarterly periods since October 1, 2022. For our co-locations, hosting fees (which comprise direct operating costs of the third-party operator with energy as the largest cost) and profit sharing were a combined 69.5% and 59.0% as a percentage of bitcoin mining revenues during the three months ended June 30, 2024 and 2023, respectively, and were 63.8% and 64.4% for the nine months ended June 30, 2024 and 2023, respectively. At our hosting facilities, the hosting fee as compared to KWHs utilized in the hosted facilities was $0.063 and $0.059 per KWH for the three months ended June 30, 2024 and 2023, respectively, and was $0.068 and $0.061 per KWH for the nine months ended June 30, 2024 and 2023, respectively. The Company did not have significant curtailment greater than 20% during the three months or nine months ended June 30, 2024. On a "cost per bitcoin" ratio, miner depreciation expense was $28,328 and $15,786 for the three months ended June 30, 2024 and 2023, respectively, and was $23,091 and $13,826 for the nine months ended June 30, 2024 and 2023, respectively. The increase for both FY 2024 periods presented was mainly due to the decrease of bitcoin production as a result of the bitcoin halving on April 19, 2024 when the bitcoin algorithm halved rewards from 6.25 per block to 3.125 per block. The Company did not have any S19 XP or S21 miners at the hosted facilities during the periods presented and accordingly, there was no accelerated depreciation in the hosted facilities. 12 Results of continuing operations for the three months ended June 30, 2024 and 2023 ($ presented in 000's, except for average bitcoin price) Bitcoin mining revenue We earned $104,108 in bitcoin mining revenue during the three months ended June 30, 2024, which was an increase of $58,681, or 129%, as compared with $45,427 for the three months ended June 30, 2023. Bitcoin mining revenues are recorded net of bitcoin mining fees charged by our sole mining pool operator that equaled approximately 0.15% of gross bitcoin mining revenues for the three months ended June 30, 2024, and are determined by two main drivers: quantity of bitcoin mined and the price of bitcoin on the date the bitcoin is mined. During the three months ended June 30, 2024, we mined 1,580 bitcoin with an average bitcoin price of $65,904 as compared to 1,623 bitcoin with an average bitcoin price of $27,982 during the three months ended June 30, 2023. The increase in bitcoin mining revenue for the three months ended June 30, 2024 was attributable to the increase in the average bitcoin price offset by the decrease in the bitcoin mined during the period and as compared to the three months ended June 30, 2023. The increase in the quantity of bitcoin mined was primarily driven by the increased number of our miners in operation, which increased to approximately 152,500 compared to 68,000, an increase of 124% between June 30, 2023 and June 30, 2024. The increase in our miners in operation increases our hashrate, which is our total computational power, and which when understood in the context of global hashrate, determines how much bitcoin we are able to mine. Other services revenues Other services revenues pertain to our former data center operations for which we earned $96 for the three months ended June 30, 2023. In fiscal year 2023 we ceased data center operations. Cost of revenues (exclusive of depreciation and amortization expense) Our cost of revenues were $45,180 for the three months ended June 30, 2024, an increase of $24,499, or 118%, as compared with $20,681 for the three months ended June 30, 2023. These costs were primarily related to energy costs to operate the miners within our owned facilities, which were $38,545 for the three months ended June 30, 2024, an increase of $24,659, or 178%, as compared to $13,886 for the three months ended June 30, 2023. The increase in energy costs was due to the increases in the volume of miners operating in our owned locations. We continually evaluate energy and bitcoin prices and periodically will curtail our mining operations when it is advantageous to do so. We also incurred hosting fees of $5,598 and profit sharing fees of $911 for the three months ended June 30, 2024, an increase of $307, or 6%, and decrease of $423, or 32%, as compared to $5,291 and $1,334, respectively, for the three months ended June 30, 2023. The hosting fees and profit sharing fees were primarily the result of our co-location agreement with Coinmint. The hosting fees increased period over period due to increased rates charged per KWH even though KWHs utilized decreased slightly. Professional fees Professional fees, which consisted primarily of legal, accounting and consulting fees, were $4,368 for the three months ended June 30, 2024, an increase of $2,143, or 96%, from $2,225 for the three months ended June 30, 2023. Legal expenses were $2,493 for the three months ended June 30, 2024, as compared to $1,210 for the three months ended June 30, 2023. This increase was primarily attributable to legal and other professional fees in connection with merger and acquisition transactions of $1,544 during the three months ended June 30, 2024, as compared to $16 of legal transactions during the three months ended June 30, 2023. Other professional fees, namely accounting and consulting, were $1,875 for the three months ended June 30, 2024, as compared to $1,015 for the three months ended June 30, 2023, representing an increase of $860. The increase in accounting fees was primarily related to tax services and consulting. Payroll expenses 13 Payroll expenses were $17,150 for the three months ended June 30, 2024, an increase of $6,745, or 65%, from $10,405 for the three months ended June 30, 2023. Our payroll expenses include all compensation related expenses for our employees and mainly include salaries, wages, payroll-related taxes and benefits and non-cash stock-based compensation. Payroll expenses, excluding non-cash stock-based compensation, were $14,204 for the three months ended June 30, 2024, representing an increase of 219% from $4,458 for the three months ended June 30, 2023, mainly attributed to an increase in employee headcount along with employee bonuses. We grant stock-based awards to certain employees as a significant portion of our payroll-related costs. Stock-based compensation, which is a non-cash expense, was $2,946 for the three months ended June 30, 2024, a decrease of $3,001, or 50%, from $5,947 for the three months ended June 30, 2023. The decrease in stock based compensation was mainly attributed to the vesting of a certain performance based restricted stock awards vesting in the three months ended June 30, 2023. General and administrative expenses General and administrative expenses increased to $8,235 for the three months ended June 30, 2024 from $5,064 for the three months ended June 30, 2023, representing an increase of $3,171. This increase was primarily attributable to increases in corporate overhead, including, but not limited to, property taxes and insurance premiums (primarily due to the substantial increase in owned assets). (Loss) gain on fair value of bitcoin, net Loss on fair value of bitcoin, net for the three months ended June 30, 2024 was $48,338. As discussed in Notes 2 - Summary of Significant Accounting Policies and Note 5 - Bitcoin above, the Company adopted the amendments per ASC 350-60 in the current period; accordingly, we measured crypto assets within the scope of ASC Topic 350-60 - Intangibles - Goodwill and Other - Crypto Assets at fair value in accordance with ASC Topic 820 - Fair Value Measurement and included the gains and losses from remeasurement in net income (loss). The loss pertains to the change in bitcoin's fair value from $71,291 per bitcoin on March 31, 2024 to $62,675 per bitcoin on June 30, 2024. Prior to the adoption of ASC 350-60 - Crypto Assets, bitcoin was classified as indefinite-lived intangible assets and was measured at cost less impairment. Additionally, in the previous guidance, subsequent increases in bitcoin prices are not allowed to be recorded (unrealized gains) unless the bitcoin is sold, at which point the gain is recognized. Accordingly, gains (losses) recognized on fair value of bitcoin in fiscal year 2024 are not comparable to fiscal year 2023. Other impairment expense (related to bitcoin) Impairment expense in the amount of $740 was recognized for the three months ended June 30, 2023. There was no impairment expense related to bitcoin for the three months ended June 30, 2024 due to the adoption of ASC 350-60 (as described in Note 2 - Summary of Significant Accounting Policies and Note 5 - Bitcoin) which resulted in measuring bitcoin at fair value and recognizing gains or losses from remeasurement of the assets rather than at cost less impairment. The prior year impairment expense consisted of bitcoin impairments due to the general decrease in bitcoin prices during the year. Decreases in bitcoin prices for periods subsequent to the mining date were recorded as impairment expense. Under ASC Topic 350 - Goodwill and Other (prior guidance) , subsequent increases in bitcoin prices are not allowed to be recorded (unrealized gains) unless the bitcoin is sold, at which point the gain is recognized. Realized gain on sale of bitcoin Realized gain on sale of bitcoin was $143 for the three months ended June 30, 2023. As described under the heading “ (Loss) gain on fair value of bitcoin, net” gains (losses) recognized on bitcoin transactions in fiscal year 2024 are not comparable to fiscal year 2023. Depreciation and amortization Depreciation and amortization expense increased to $40,727 for the three months ended June 30, 2024, from $21,850 for the three months ended June 30, 2023, an increase of $18,877, or 86%. Depreciation expense increased by 14 $18,929, or 89%, during the three months ended June 30, 2024, to $40,199 from $21,270, mainly due to accelerated depreciation expense on miners beginning in the quarter ended June 2024. In April 2024, we concluded that we will cease use of our S19J, S19 J Pro and S19 J Pro+ miners, which have an efficiency of 22 joules per terahash ("j/TH") or greater, through December 31, 2024. In April 2024, we modified our option contract for the purchase of 100,000 Antminer S21 miners to include the Antminer S21 Pro ("S21 Pros") miners and executed the full purchase with delivery to occur through the remainder of calendar 2024. Upon receipt of the newer more efficient S21 Pros, we will replace the lower efficiency S19J, S19J Pro and S19J Pro+ miners. We also evaluated the useful lives of all miners and have concluded based on the continued enhancements in miner efficiency that effective May 1, 2024, all miners would be adjusted to a useful life of 3 years, a reduction from 5 years. Accelerated depreciation from the changes in estimates above was approximately $7,261 for the three months ended June 30, 2024. Amortization expense for the three months ended June 30, 2024 was $528, a decrease of $52, or 9%, from $580 for the three months ended June 30, 2023. Other Income (Expenses) Other income, net was $3,341 for the three months ended June 30, 2024, compared with other income, net of $1,468 for the three months ended June 30, 2023, which is a change of $1,873. Other income (expenses) for the three months ended June 30, 2024 consisted primarily of interest income of $2,638 as compared to $52 in the same prior year period. This was partially offset by unrealized loss on derivative security of $1,188 as compared to loss for the same prior year period of $105. Interest expense in the three months ended June 30, 2024 decreased by $204 to $485 from $689 for the three months ended June 30, 2023 due to lower average debt balances during three months ended June 30, 2024 as compared to the three months ended June 30, 2023. Net (loss) income from Continuing Operations Net loss from continuing operations for the three months ended June 30, 2024 was $236,242 as compared to net loss from continuing operations of $14,117 for the three months ended June 30, 2023, for the reasons discussed above. Net loss Net loss for the three months ended June 30, 2024 was $236,242, a fluctuation of $222,023 compared to net loss of $14,219 for the three months ended June 30, 2023, for the reasons stated above. Results of continuing operations for the nine months ended June 30, 2024 and 2023 ($ presented in 000's, except for average bitcoin price) Bitcoin mining revenue We earned $289,693 in bitcoin mining revenue during the nine months ended June 30, 2024, which was an increase of $174,032, or 150%, as compared with $115,661 for the nine months ended June 30, 2023. Bitcoin mining revenues are recorded net of bitcoin mining fees charged by our sole mining pool operator that equaled approximately 0.16% of gross bitcoin mining revenues for the nine months ended June 30, 2024 and are determined by two main drivers: quantity of bitcoin mined and the price of bitcoin on the date the bitcoin is mined. During the nine months ended June 30, 2024, we mined 5,628 bitcoin with an average bitcoin price of $51,472 as compared to 5,025 bitcoin with an average bitcoin price of $23,016 during the nine months ended June 30, 2023. The increase in bitcoin mining revenue for the nine months ended June 30, 2024 was primarily due to the increase in the average bitcoin price and partially due to the increase in bitcoin mined during the period as compared to the nine months ended June 30, 2023. The increase in the quantity of bitcoin mined was primarily driven by the increased number of our miners in operation, which increased to approximately 152,500 compared to approximately 68,000, an increase of 84,500, between 15 June 30, 2023 and June 30, 2024. The increase in miners in operation increases our hashrate (hash calculations), which when understood in the context of global hashrate, determines how much bitcoin we are able to mine. Other services revenues Other services revenues pertain to our former data center operations for which we earned $227 for the nine months ended June 30, 2023. In fiscal year 2023 we ceased data center operations. Cost of revenues (exclusive of depreciation and amortization expense) Our cost of revenues were $108,374 for the nine months ended June 30, 2024, an increase of $45,195, or 72%, as compared with $63,179 for the nine months ended June 30, 2023. These costs were primarily related to energy costs to operate the miners within our owned facilities, which were $86,644 for the nine months ended June 30, 2024, an increase of $44,046 or 103% as compared to $42,598 for the nine months ended June 30, 2023. The increase in energy costs was due to the increases in the volume of miners operating in our owned locations partially offset by the reduction in the average cost per KWHs, which approximated $0.045/KWH for the nine months ended June 30, 2024 as compared to an average cost of $0.048/KWH for the nine months ended June 30, 2023. We continually evaluate energy and bitcoin prices and periodically will curtail our mining operations when it is advantageous to do so. We also incurred hosting fees of $17,737 and profit sharing fees of $3,823 for the nine months ended June 30, 2024, an increase of $1,027 or 6%,and $546 or 17%,respectively, as compared to $16,710 and $3,277, respectively, for the nine months ended June 30, 2023. The hosting fees and profit sharing fees were primarily the result of our co-location agreement with Coinmint. The hosting fees increased primarily due to increases in utility rates partially offset by a slight reduction in KWHs utilized. Professional fees Professional fees, which consisted primarily of legal, accounting and consulting fees, were $8,149 for the nine months ended June 30, 2024, a decrease of $657, or 7%, from $8,806 for the nine months ended June 30, 2023. Legal expenses were $3,438 for the nine months ended June 30, 2024, as compared to $6,505 for the nine months ended June 30, 2023. This decrease was primarily attributable to no legal settlements during the nine months ended June 30, 2024, as compared to $3,800 of legal settlements during the nine months ended June 30, 2023. Other professional fees, namely accounting and consulting fees, were $4,710 for the nine months ended June 30, 2024, as compared to $2,301 for the nine months ended June 30, 2023, representing an increase of $2,409. Payroll expenses Payroll expenses were $49,291 for the nine months ended June 30, 2024, an increase of $19,334, or 65%, from $29,957 for the nine months ended June 30, 2023. Our payroll expenses include all compensation related expenses for our employees and mainly include salaries, wages, payroll-related taxes and benefits and non-cash stock-based compensation. Payroll expenses, excluding non-cash stock-based compensation, were $26,595 for the nine months ended June 30, 2024, representing an increase of 115% from $12,389 for the nine months ended June 30, 2023, mainly attributable to an increase in employee headcount along with employee bonuses. We grant stock-based awards to certain employees as a significant portion of our payroll-related costs. Stock-based compensation, which is a non-cash expense, was $22,696 for the nine months ended June 30, 2024, an increase of $5,128, or 29%, from $17,568 for the nine months ended June 30, 2023. The increase in stock based compensation was mainly attributable to the vesting of a market-based restricted stock awards during the nine months ended June 30, 2024. General and administrative expenses General and administrative expenses increased to $20,058 for the nine months ended June 30, 2024 from $13,117 for the nine months ended June 30, 2023, representing an increase of $6,941. This increase was primarily attributable to 16 increases in corporate overhead, including, but not limited to, property taxes and insurance premiums (primarily due to the substantial increase in owned assets). Gain (Loss) on fair value of bitcoin, net Gain on fair value of bitcoin, net for the nine months ended June 30, 2024 was $107,406. As discussed in Note 2 - Summary of Significant Accounting Policies and Note 5 - Bitcoin above, the Company adopted the amendments per ASC 350-60 in the current period; accordingly, we measured crypto assets within the scope of ASC Topic 350-60 - Intangibles - Goodwill and Other - Crypto Assets at fair value in accordance with ASC Topic 820 - Fair Value Measurement and included the gains and losses from remeasurement in net income. The gain pertains to the change in bitcoin's fair value from the adoption date of $26,961 per bitcoin on October 1, 2023, to $62,675 per bitcoin as of June 30, 2024. Prior to the adoption of ASC 350-60 - Crypto Assets, bitcoin was classified as indefinite-lived intangible assets and was measured at cost less impairment. Additionally, in the previous guidance, subsequent increases in bitcoin prices are not allowed to be recorded (unrealized gains) unless the bitcoin is sold, at which point the gain is recognized. Accordingly, gains (losses) recognized on fair value of bitcoin in fiscal year 2024 are not comparable to fiscal year 2023. Other impairment expense (related to bitcoin) Impairment expense related to bitcoin in the amount of $1,017 was recognized for the nine months ended June 30, 2023. There was no impairment expense related to bitcoin for the nine months ended June 30, 2024 due to the adoption of ASC 350-60 (as described in Note 2 - Summary of Significant Accounting Policies and Note 5 - Bitcoin) which resulted in measuring bitcoin at fair value and recognizing gains or losses from remeasurement of the assets rather than at cost less impairment. The prior year impairment expense consisted of bitcoin impairments due to the general decrease in bitcoin prices during such year. Decreases in bitcoin prices for periods subsequent to the mining date were recorded as impairment expense. Under ASC Topic 350 - Goodwill and Other (prior guidance) , subsequent increases in bitcoin prices are not allowed to be recorded (unrealized gains) unless the bitcoin is sold, at which point the gain is recognized. Realized gain on sale of bitcoin Realized gain on sale of bitcoin was $762 for the nine months ended June 30, 2023. As described under the heading " Gain (Loss) on fair value of bitcoin, net", the gains (losses) recognized on bitcoin transactions in fiscal year 2024 are not comparable to fiscal year 2023. Depreciation and amortization Depreciation and amortization expense increased to $102,761 for the nine months ended June 30, 2024, from $62,525 for the nine months ended June 30, 2023, an increase of $40,236 or 64%. Depreciation expense increased by $40,272, or 66%, during the nine months ended June 30, 2024, from $60,926 to $101,198, mainly due to accelerated depreciation expense on miners beginning in the quarter ended June 30, 2024. In April 2024, we concluded that we will cease use of our S19J, S19 J Pro and S19 J Pro+ miners, which have an efficiency of 22 j/TH or greater, through December 31, 2024. In April 2024, we modified our option contract for the purchase of 100,000 Antminer S21 miners to include the S21 Pros and executed the full purchase with delivery to occur through the remainder of calendar 2024. Upon receipt of the newer more efficient S21 Pros, we will replace the lower efficiency S19J, S19J Pro and S19J Pro+ miners. We also evaluated the useful lives of all miners and have concluded based on the continued enhancements in miner efficiency that effective May 1, 2024, all miners would be adjusted to a useful life of 3 years, a reduction from 5 years. Accelerated depreciation from the changes in estimates above was approximately $7,261 for the nine months ended June 30, 2024. Amortization expense for the nine months ended June 30, 2024 was $1,563, an increase of $36, or 2%, from $1,599 for the nine months ended June 30, 2023. 17 Other Income (Expenses) Other income, net was $3,347 for the nine months ended June 30, 2024, compared with other expense, net of $817 for the nine months ended June 30, 2023, which is a change of $4,164. Other income, net for the nine months ended June 30, 2024 consisted primarily of interest income, which increased to $5,909 from $174 for the nine months ended June 30, 2023, an increase of $5,735 due to an increase in short-term overnight investments. Unrealized loss on derivative security was $1,005 as compared to a loss for the same prior year period of $1,110. This change between the periods was the result of a change in fair value of the underlying instrument. Interest expense in the nine months ended June 30, 2024 decreased by $820 to $1,557 from $2,377 for the nine months ended June 30, 2023 due to lower average debt balances during the nine months ended June 30, 2024 as compared to the nine months ended June 30, 2023. Net (loss) income from Continuing Operations Net income from continuing operations for the nine months ended June 30, 2024 was $83,598 as compared to net loss from continuing operations of $62,771 for the nine months ended June 30, 2023, for the reasons discussed above. Net (loss) income Net income for the nine months ended June 30, 2024 was $83,598, a fluctuation of $145,308 compared to net loss of $61,710 for the nine months ended June 30, 2023, for the reasons stated above. Non-GAAP Measure We present adjusted EBITDA, which is not a measurement of financial performance under generally accepted accounting principles in the United States ("GAAP"). Our non-GAAP "Adjusted EBITDA" excludes (i) impacts of interest, taxes, and depreciation; (ii) our share-based compensation expense, unrealized gains/losses on securities, and, changes in the fair value of contingent consideration with respect to previously completed acquisitions, all of which are non-cash items that we believe are not reflective of our general business performance, and for which the accounting requires management judgment, and the resulting expenses could vary significantly in comparison to other companies; (iii) non-cash impairment losses related to long-lived assets (including goodwill); (iv) legal fees related to litigation and various transactions, which fees management does not believe are reflective of our ongoing operating activities; (v) severance costs related to certain senior management employees, (vi) gains and losses on disposal of assets, the majority of which are related to obsolete or unrepairable machines that are no longer deployed; and (vii) gains and losses related to discontinued operations that would not be applicable to our future business activities. Management believes that providing this non-GAAP financial measure that excludes these items allows for meaningful comparisons between the Company's core business operating results and those of other companies, and provides the Company and its management with an important tool for financial and operational decision making and for evaluating its own core business operating results over different periods of time. In addition to management's internal use of non-GAAP Adjusted EBITDA, management believes that Adjusted EBITDA is also useful to investors and analysts in comparing our performance across reporting periods on a consistent basis. Management believes the foregoing to be the case even though some of the excluded items involve cash outlays and some of them recur on a regular basis (although management does not believe any of such items are normal operating expenses necessary to generate our bitcoin related revenues). For example, we expect that share-based compensation expense, which is excluded from Adjusted EBITDA, will continue to be a significant recurring expense over the coming years and is an important part of the compensation provided to certain employees, officers, and directors. Additionally, management does not consider any of the excluded items to be expenses necessary to generate our bitcoin related revenue. The Company's adjusted EBITDA measure may not be directly comparable to similar measures provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently. The Company's Adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to operating income (loss) or any other measure of performance derived in accordance with GAAP. Although management utilizes internally and presents Adjusted EBITDA, we only utilize and present that measure supplementally and do not consider it to be a substitute for, or superior to, the information provided by GAAP financial results. 18 Accordingly, Adjusted EBITDA is not meant to be considered in isolation of, and should be read in conjunction with, the information contained in our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The following is a reconciliation of our non-GAAP Adjusted EBITDA to its most directly comparable GAAP measure (i.e., net income (loss)) for the periods indicated: For the Three Months Ended June 30, For the Nine Months Ended June 30, ($ in thousands) 2024 2023 2024 2023 Reconciliation of non-GAAP Adjusted EBITDA Net loss $ (236,242 ) $ (14,219 ) $ (83,598 ) $ (61,710 ) Loss (income) on discontinued operations — 102 — (1,061 ) Impairment expense - other — — 396 — Impairment expense - fixed assets 189,235 — 189,235 — Depreciation and amortization 40,727 21,850 102,761 62,525 Share-based compensation expense 2,946 5,947 22,696 17,568 Change in fair value of contingent consideration — (2,000 ) — (2,485 ) Unrealized loss (gain) of derivative security (1,188 ) (105 ) 1,005 1,110 Interest income (2,638 ) (52 ) (5,909 ) (174 ) Interest expense 485 689 1,557 2,377 Loss on disposal of assets (47 ) — 2,281 3 Income tax expense (9,495 ) — 3,499 — Fees related to financing & business development transactions 2,862 85 3,038 675 Litigation & settlement related expenses 686 1,036 1,288 5,255 Non-GAAP adjusted EBITDA* $ (12,669 ) $ 13,333 $ 238,249 $ 24,083 * We have not excluded our net (loss) gain on fair value of bitcoin ($48,338 and $107,406 in the three and nine months ended June 30, 2024, respectively), which we now record in our Condensed Consolidated Statements of Operations and Comprehensive Loss as provided in ASC 350-60, as discussed elsewhere in this Quarterly Report on Form 10-Q. Liquidity and Capital Resources ($ presented in 000's) Our primary requirements for liquidity and capital are working capital, capital expenditures, public company costs and general corporate needs. We expect these needs to continue as we further develop and grow our business. Our principal sources of liquidity have been and are expected to be our cash and cash equivalents and bitcoin inventory. As of June 30, 2024, we had total current assets of $598,835, consisting of cash and cash equivalents, inventory, prepaid expenses and other current assets, bitcoin, investment in debt security and related derivative asset, current assets held for sale, and total assets in the amount of $1,475,575. Our total current liabilities and total liabilities as of June 30, 2024 were $66,985 and $73,376, respectively. We had working capital of $531,849 as of June 30, 2024. We sell the bitcoin we mine to fund operations and to fund capital expenditures. In addition, we have access to equity financing through our At-the-Market offering facility (see Note 13 - Stockholders' Equity and Note 18 - Subsequent Events to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q). We believe our cash and cash equivalents on hand, together with cash we expect to generate from future operations, will be sufficient to meet our working capital and capital expenditure requirements for a period of at least twelve months from the date of this Quarterly Report on Form 10-Q. We are likely to require additional capital to respond to technological advancements, competitive dynamics or technologies, customer demands, business opportunities, challenges, acquisitions or unforeseen circumstances and in either the short-term or long-term may determine to engage in equity or debt financings. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited. In particular, the ongoing impacts of inflation and rising interest rates, and the conflict between Russia and Ukraine, have resulted in, and may continue to result in, significant disruption and volatility in 19 the global financial markets, reducing our ability to access capital. If we are unable to raise additional funds when or on the terms desired, our business, financial condition and results of operations could be adversely affected. Material Cash Requirements We are a party to many contractual obligations involving commitments to make payments to third parties. These obligations impact our short-term and long-term liquidity and capital resource needs. Certain contractual obligations are reflected on the Condensed Consolidated Balance Sheets as of June 30, 2024, while others are considered future commitments. Our contractual obligations primarily consist of cancelable purchase commitments with various parties to purchase goods or services, primarily miners and equipment, entered into in the normal course of business and operating leases. For information regarding our other contractual obligations, refer to Note 16 - Commitments and Contingencies in this Quarterly Report on Form 10-Q for the period ended June 30, 2024, and Note 17 - Commitments and Contingencies included in our Annual Report on Form 10-K as filed with the SEC on December 1, 2023. We regularly evaluate opportunities to expand our business, including through potential acquisitions of businesses or assets. We will evaluate a variety of sources of capital in connection with financing any future possible acquisitions, including the incurrence of debt, sales of stock or bitcoin, or using cash on hand. We may also use the Company’s stock as transaction consideration, as we have done in the past. Operating Activities Operating activities from continuing operations for the nine months ended June 30, 2024 used $150,539 in cash primarily due to net loss of $83,598, adjusted by adding non-cash adjustments to reconcile net income to net cash of depreciation and amortization of $102,761, stock based compensation of $22,696 and subtracting non-cash bitcoin mining revenues of $289,693 and gain on fair value of bitcoin, net of $107,406. Changes in operating assets and liabilities generated a net total of $6,835 of cash. Operating activities from continuing operations for the nine months ended June 30, 2023 provided $16,562 in cash primarily due to net loss of $61,710, adjusted by adding non-cash adjustments to reconcile net income to net cash of depreciation and amortization of $62,525, stock based compensation of $17,568 and subtracting non-cash bitcoin mining revenues of $115,661. We also sold bitcoin that we held for a short period of time for net cash proceeds of $111,889. Changes in operating assets and liabilities generated a net total of $3,208 of cash. Investing Activities Investing activities from continuing operations used $503,698 during the nine months ended June 30, 2024, as compared with using $241,479 for the nine months ended June 30, 2023. Our payments on miners (including miner deposits) of $428,700 and purchase of fixed assets of $53,289 were the main components of our investing cash outflow for the nine months ended June 30, 2024. This was offset in part by cash proceeds received from the sale of bitcoin of $42,803. Our payments on miner deposits of $165,508, the acquisition of the Sandersville operations of Mawson Infrastructure Group in October 2022 of $22,518, and the purchase of fixed assets of $42,634 were the main components of our investing cash outflow for the nine months ended June 30, 2023. Financing Activities Cash flows generated from financing activities of continuing operations during the nine months ended June 30, 2024 amounted to $754,624 compared to $222,707 for the nine months ended June 30, 2023. Our cash flows from financing activities for the nine months ended June 30, 2024 consisted primarily of proceeds from the underwritten offering of $780,043 partially offset by payments on taxes on shares withheld for net settlement of restricted stock units of $17,246, payments on loans in the amount of $5,296 and payments of preferred dividends of $3,421. Our cash flows from financing activities for the nine months ended June 30, 2023 mainly consisted of proceeds from underwritten offerings of $233,383 partially offset by payments on loans in the amount of $12,493. 20 Critical Accounting Estimates Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses. We evaluate our estimates and assumptions on an ongoing basis and base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for the judgments we make about the carrying value of assets and liabilities that are not readily apparent from other sources. Because these estimates can vary depending on the situation, actual results may differ from these estimates. Making estimates and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on our results of operations, financial position and statement of cash flows. There have been no material changes to our critical accounting policies and estimates as compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023. For a description of our critical accounting policies and estimates, see Part I, Item 1, Note 2, "Summary of Significant Accounting Policies" in our notes to the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q. Recent Accounting Pronouncements Please refer to Note 2 - Summary of Significant Accounting Policies in our unaudited condensed consolidated financial statements contained elsewhere in this Quarterly Report on Form 10-Q for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Quarterly Report on Form 10-Q.