TERAWULF INC. (WULF) FY 2021 MD&A

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with a review of the other Items included in this Annual Report and with the accompanying consolidated financial statements and notes thereto included elsewhere in this report. All figures presented below represent results from continuing operations, unless otherwise specified. Certain statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations may be deemed to forward-looking statements. See “Forward-Looking Statements.”

General

TeraWulf is a digital asset technology company with a core business of sustainable bitcoin mining. TeraWulf will develop, own and operate its bitcoin mining facility sites in the United States and expects to consume over 90% zero-carbon energy, with a target of 100% by 2028.

TeraWulf is actively developing, consistent with its sustainable energy mandate, two bitcoin mining facility sites in the States of New York and Pennsylvania, the Lake Mariner Facility and the Nautilus Cryptomine Facility, respectively, and has secured competitive equipment supply agreements for each.

Lake Mariner Facility — Located at a site adjacent to the decommissioned coal-fired Somerset Generating Station in Barker, New York, the Lake Mariner Facility has secured an initial 90 MW of energy to support its bitcoin mining capacity through an agreement with the NYPA with the potential to expand into an additional 410 MW of energy supply. TeraWulf began mining bitcoin at the Lake Mariner Facility in March 2022.

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Nautilus Cryptomine Facility — The Nautilus Cryptomine Facility is a joint venture between TeraWulf and Talen. The Nautilus Cryptomine Facility, located in Salem Township, Luzerne County, Pennsylvania, is located adjacent to the 2.5 GW nuclear-powered Susquehanna Station, 2.3 GW of which are owned and operated by Talen.. The Nautilus Cryptomine Facility has secured as its power supply zero-carbon nuclear energy received directly from a substation connected to the Susquehanna Station’s electrical generators over a five-year term with two successive three-year renewal options. The Nautilus Cryptomine Facility is located “behind the meter” and not connected to the electrical distribution grid, therefore avoiding transmission and distribution charges typically paid by other large power consumers. At the time of this Annual Report, the Nautilus Cryptomine Facility has access to up to 300 MW of bitcoin mining capacity from the Susquehanna Station and is expected to be the first bitcoin mining facility site that is powered by 100% “behind the meter” zero-carbon nuclear energy. TeraWulf plans to begin installation of ASICs at the Nautilus Cryptomine Facility by mid-year 2022. TeraWulf expects to generate revenues primarily by sustainably mining bitcoin at its bitcoin mining facility sites. Incremental revenues may be generated through the hedging and sale of mined bitcoin and the commercial optimization of TeraWulf’s power supply.

The Business Combination

TeraWulf completed its business combination with IKONICS on the Closing Date pursuant to which, among other things, TeraCub would effectively acquire IKONICS and become a publicly traded company on the Nasdaq, which was the primary purpose of the business combination. For financial accounting purposes, the business combination was treated as a reverse merger whereby the accounting acquirer was TeraCub due to TeraCub’s historic shareholders having the majority voting control in the Company, the board of directors members being associated with TeraCub and the senior management of TeraCub becoming the senior management of TeraWulf. Pursuant to business combination accounting, the Company applied the acquisition method, which requires the assets acquired and liabilities assumed be recorded at fair value, with limited exceptions. The Company’s consolidated financial statements include the operating results of IKONICS beginning on the Closing Date.

Under the terms of the Merger Agreement, each share of IKONICS common stock issued and outstanding immediately prior to the Closing Date was automatically converted into and exchanged for (i) one validly issued, fully paid and nonassessable share of common stock of TeraWulf, (ii) one CVR and (iii) the right to receive $5.00 in cash, without interest. TeraCub common stock issued and outstanding immediately prior to the Closing Date was automatically converted into the right to receive a number of validly issued, fully paid and nonassessable shares of TeraWulf such that the TeraCub common stockholders prior to conversion would effectively control 98% of the total outstanding shares of TeraWulf immediately subsequent to the Closing Date.

Pursuant to the CVR Agreement, each shareholder of IKONICS as of immediately prior to the Closing Date, received one CVR for each outstanding share of common stock of IKONICS then held.  The holders of the CVRs are entitled to receive 95% of the Net Proceeds (as defined in the CVR Agreement), if any, from the sale, transfer, disposition, spin-off, or license of all or any part of the pre-merger business of IKONICS completed within 18 months following the date of the merger, subject to a reserve of up to 10% of the Gross Proceeds (as defined in the CVR Agreement) from such transaction. The CVRs do not confer to their holders any voting or equity or ownership interest in IKONICS or TeraWulf and are not transferable, except in limited circumstances, and are not listed on any quotation system or traded on any securities exchange. The CVR Agreement will terminate after all payment obligations to the holders thereof have been satisfied. Holders of CVRs will not be eligible to receive payment for dispositions, if any, of any part of the pre-merger business of IKONICS after the eighteen-month anniversary of the Closing Date.  The fair value of the aggregate consideration paid for IKONICS was $66.3 million, which includes (i) cash consideration of $13.7 million ($10.3 million net of cash acquired), (ii) equity consideration of $40.6 million and contingent consideration (related to the CVRs) of $12.0 million.

Upon the consummation of the business combination, IKONICS common stock ceased trading on the Nasdaq and TeraWulf common stock began trading on the Nasdaq on December 14, 2021 under the ticker symbol “WULF.”

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COVID-19

The Company’s results of operations could be adversely affected by general conditions in the economy and in the global financial markets, including conditions that are outside of the Company's control, such as the outbreak and global spread of the novel coronavirus disease (“COVID-19”). The COVID-19 pandemic that was declared on March 11, 2020 has caused significant economic dislocation in the United States and globally as governments across the world, including the United States, introduced measures aimed at preventing the spread of COVID-19. The spread of COVID-19 and the imposition of related public health measures have resulted in, and are expected to continue to result in, increased volatility and uncertainty in the cryptocurrency space. Any severe or prolonged economic downturn, as a result of the COVID-19 pandemic or otherwise, could result in a variety of risks to the business and management cannot anticipate all the ways in which the current economic climate and financial market conditions could adversely impact its business.

The Company may experience disruptions to its business operations resulting from supply interruptions (including miner delivery interruptions), quarantines, self-isolations, or other movement and restrictions on the ability of its employees or its counterparties to perform their jobs and provide services. The Company may also experience delays in construction and obtaining necessary equipment in a timely fashion. To date, the Company has experienced certain, but minimal, delays due to COVID-19 complications among its employees, suppliers and contractors. If the Company is unable to effectively set up and service its miners, its ability to mine bitcoin will be adversely affected. The future impact of the COVID-19 pandemic is still highly uncertain and there is no assurance that the COVID-19 pandemic or any other pandemic, or other unfavorable global economic, business or political conditions, will not materially and adversely affect the Company's business, prospects, financial condition, and operating results.

Change in Fiscal Year

Upon the closing of its business combination with IKONICS, the Company assumed the fiscal year end of December 31. Accordingly, its consolidated financial statements are as of December 31, 2021 and for the nine-month period ended December 31, 2021. Previously, the Company’s fiscal year ended on March 31.

Results of Operations

Since the Company’s inception on February 8, 2021, the Company’s primary activities have been focused on capital acquisition, merger negotiation and consummation, joint venture negotiation and participation, miner procurement, electricity procurement, construction commencement and management, public company readiness and general corporate purposes. The Company’s plan of operation for the next twelve months is to continue to develop its initial bitcoin mining facilities, both wholly owned and owned through Nautilus.

Continuing Operations

All items included in loss from continuing operations in the consolidated statements of operations for the nine months ended December 31, 2021 and the period February 8, 2021 (date of inception) to March 31, 2021 relate to its wholly-owned operations of its sole business segment, digital currency mining, due to the Company classifying the newly acquired IKONICS business as held for sale and discontinued operations as of and for the nine months ended December 31, 2021.

Selling, general and administrative expenses during the nine months ended December 31, 2021 and the period February 8, 2021 (date of inception) to March 31, 2021 totaled $41.5 million (including $18.0 million related party expenses) and $0.8 million (including $0.6 million related party expenses), respectively. The increase of $40.7 million is a result of the difference in the nine-month period ended December 31, 2021 as compared to the less than two-month period ended March 31, 2021, among other factors, including merger-related costs and scaling of the Company’s operations during nine months ended December 31, 2021. In connection with the business combination with IKONICS, the Company incurred $27.7 million of incremental expense during the nine months ended December 31, 2021, consisting of $15.2 million of financial and legal advisor fees and other merger-related costs and the $12.5 million performance incentive expense under the Beowulf E&D administrative and infrastructure services agreement to be settled with respect to shares of the Company’s common stock. The balance of selling, general and administrative expenses is comprised primarily of professional fees, employee compensation and benefits, insurance and general corporate expenses. Professional fees include fixed and passthrough expenses under the administrative and infrastructure services agreement amounting to $5.4 million for the nine months ended December 31, 2021.

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Interest expense for the nine months ended December 31, 2021 and the period February 8, 2021 (date of inception) to March 31, 2021 totaled $2.3 million and $0, respectively. Interest expense incurred relates primarily to the Company’s term loan financing in the principal amount of $123.5 million, which was closed on December 1, 2021 (the “Term Loan”). The Term Loans bear an interest rate of 11.5%, which interest payments are due quarterly in arrears. Of the $2.3 million of interest expense reported in the statement of operations for the nine months ended December, 2021, approximately $1.0 million of the interest expense relates to amortization of debt issuance costs and debt discount related to debt issuance costs, an upfront fee, and the fair value of equity issued to the Term Loan investors in conjunction with the Term Loan.

Equity in net loss of investee, net of tax

Equity in net loss of investee, net of tax for the nine months ended December 31, 2021 and the period February 8, 2021 (date of inception) to March 31, 2021 totaled $1.5 million and $0, respectively. The $1.5 million for the nine months ended December 31, 2021 reflects TeraWulf’s 50% share of losses of Nautilus, which had not commenced principal operations as of December 31, 2021.

Loss from discontinued operations, net of tax

Loss from discontinued operations, net of tax for the nine months ended December 31, 2021 and the period February 8, 2021 (date of inception) to March 31, 2021 totaled $49.1 million and $0, respectively. In conjunction with the IKONICS’ business classification as held for sale upon acquisition, the Company has reported the IKONICS business as discontinued operations in the consolidated financial statements. The total loss from discontinued operations reported is comprised primarily of a loss on discontinued operations of $48.9 million to write down the related carrying amounts of IKONICS to their fair values less estimated cost to sell.

Liquidity and Capital Resources

As of December 31, 2021, the Company had cash and cash equivalents of $43.4 million, working capital, including current assets and current liabilities held for sale, of $22.2 million, total stockholders’ equity of $123.2 million and an accumulated deficit of $95.7 million. The Company incurred a net loss of $94.0 million for the nine months ended December 31, 2021, including an impairment charge of $48.9 million included in loss from discontinued operations, net of tax related to the acquired IKONICS business. As a new business enterprise that has not commenced its principal revenue generating operations, the Company’s primary sources of liquidity have been the issuance of debt and equity securities. The principal uses of cash are for deposits on miners, the buildout of mining facilities, general corporate purposes and investments in Nautilus joint venture related to the miner deposits, mining facility buildout and general corporate purposes. Cash flow information is as follows (in thousands):

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Cash used in operating activities for continuing operations was $21.1 million and $0 for the nine months ended December 31, 2021 and the period February 8, 2021 (date of inception) to March 31, 2021, respectively. The cash used in operations results from a net loss of $94.0 million less non-cash expenses, net of $63.5 million and adjusted for changes in certain asset and liability balances. The non-cash expenses were primarily comprised of (i) $49.1 million of loss from discontinued operations, net of tax related to IKONICS business, which is classified as held for sale at December 31, 2021, (ii) $12.5 million related to a performance incentive expense under the administrative and infrastructure services agreement to be settled with respect to shares of the Company’s common stock, (iii) $1.5 million related to the Company’s equity in net loss, net of tax of Nautilus and (iv) $1.0 million related to amortization of debt issuance cost and accretion of debt discount offset by $0.6 million related to deferred income tax benefit. The changes in certain assets and liabilities were primarily comprised of a net increase in current liabilities (which includes accounts payable, accrued construction liabilities, other accrued liabilities and other amounts due to related parties) of $11.6 million offset by an increase in current assets (which includes prepaid expenses, amounts due from related parties and other current assets) of $2.2 million.

Cash used in investing activities for continuing operations was $177.7 million and $23.7 for the nine months ended December 31, 2021 and the period February 8, 2021 (date of inception) to March 31, 2021, respectively. Deposits on miners comprised $70.6 million and $23.7 million (subsequently contributed to Nautilus) for the nine months ended December 31, 2021 and the period February 8, 2021 (date of inception) to March 31, 2021, respectively. For the nine months ended December 31, 2021, the Company additionally invested (i) $14.8 million in the buildout of mining facilities, (ii) $82.1 million (investments in joint venture of $93.9 million net of reimbursement from joint venture partner of $11.8 million) in Nautilus related primarily to the joint venture’s miner deposits and mining facility buildout and (iii) $10.3 million, net of cash acquired in the business acquisition of IKONICS. The Company has significant future obligations related to miner deposits and also has commitments under the Talen Joint Venture Agreement . See “—Contractual Obligations and Other Commitments.”

Cash provided by financing activities for continuing operations was $242.0 million and $30.0 for the nine months ended December 31, 2021 and the period February 8, 2021 (date of inception) to March 31, 2021, respectively. Proceeds from the issuance of common stock provided, net of issuance costs, $74.4 million and $30.0 million for the nine months ended December 31, 2021 and the period February 8, 2021 (date of inception) to March 31, 2021, respectively. For the nine months ended December 31, 2021, the Company issued shares of Series A Preferred stock for proceeds, net of issuance costs, of $49.3 million and Term Loan debt proceeds, net of issuance costs, of $118.3 million. The Series A Preferred stock converted into shares of common stock immediately prior to the Closing Date. The Term Loan debt offering included providing shares of common stock with an aggregate fair value, net of allocated issuance costs, of $24.6 million to the Term Loan investors.

Contractual Obligations and Other Commitments

The Company has purchase obligations under miner purchase agreements and commitments under the Talen Joint Venture Agreement as of December 31, 2021, as follows (in thousands):

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On December 7, 2021, the Company entered into the December 7 Bitmain Agreement. The First Bitmain Purchase Agreement includes liquidated damage provisions that may be applied if payments are not made within sixty days of a payment due date, if not otherwise mutually extended. The Company is responsible for all logistics costs related to transportation for the delivery of miners. Pursuant to the First Bitmain Purchase Agreement, the Company paid an initial deposit of approximately $11.4 million during the nine months ended December 31, 2021. The balance of payments due under the First Bitmain Purchase Agreement, an amount of $21.2 million, are scheduled to be paid in unequal monthly installments through November 2022.

On December 15, 2021, the Company entered into the December 15 Bitmain Agreement. The Second Bitmain Purchase Agreement includes liquidated damage provisions that may be applied if payments are not made within sixty days of a payment due date, if not otherwise mutually extended. The Company is responsible for all logistics costs related to transportation for the delivery of miners. Pursuant to the Second Bitmain Purchase Agreement, the Company paid an initial deposit of approximately $59.2 million during the nine months ended December 31, 2021. The balance of payments due under the Second Bitmain Purchase Agreement, an amount of $109.9 million, are scheduled to be paid in unequal monthly installments through November 2022.

Pursuant to the terms of the Talen Joint Venture Agreement, TeraWulf would contribute $156.0 million both in cash and in-kind and Talen would contribute $156.0 million both in cash and in-kind to Nautilus by March 2022, unless otherwise determined in accordance with the Talen Joint Venture Agreement. The aforementioned contributions were based on an initial development budget formed on assumptions and inputs available at the time the joint venture was formed, and are subject to change. These contributions are now expected to be contributed by the third quarter of 2022, as agreed to by the members.

Financial Condition; Need for Additional Capital

There is limited historical financial information about the Company upon which to base an evaluation of its performance. The Company has commenced mining activities, however not yet to scale, and therefore has not generated material revenues from its mining business. The Company has relied on proceeds from its issuances of debt and equity to fund its principal operations. In accordance with its plan to develop its bitcoin mining facilities, during the nine months ended December 31, 2021, the Company paid approximately $70.6 million as deposits on miners, and has significant future obligations related to these miner purchase agreements. Also during the nine months ended December 31, 2021, the Company invested $82.1 million, net in its joint venture and has additional commitments under its joint venture agreement. The Company will need additional capital in order to meet these obligations in accordance with the existing contractual terms and to fund the planned development of its bitcoin mining facilities. Until TeraWulf is able to generate positive cash flows from operations, TeraWulf expects to fund its business operations and infrastructure buildout through the issuance of debt or equity securities. Subsequent to December 31, 2021 and as discussed below, the Company entered into an At Market Issuance Sales Agreement for sale of shares of Common Stock having an aggregate offering price of up to $200.0 million (the “ATM Offering”).  However, there can be no assurance that the ATM Offering or any other financing will be successfully consummated on acceptable terms and volume, if at all, which may impact the timing or scale of TeraWulf’s planned development. In the event TeraWulf is unable to raise additional capital, TeraWulf may seek alternative arrangements or potential partnerships in order to fund its planned development. In the opinion of management, while it expects to be successful in its fundraising efforts, these factors, which include elements of capital acquisition outside the control of the Company, raise substantial doubt about TeraWulf’s ability to continue as a going concern through at least the next twelve months. The financial statements do not include any adjustments that might result from TeraWulf’s possible inability to continue as a going concern.

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ATM Offering. On February 11, 2022, in order to facilitate additional capital acquisition, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. and D.A. Davidson & Co. (each, individually, an “Agent” and, collectively, the “Agents”), pursuant to which the Company may offer and sell, from time to time, through or to the agents, acting as agent or principal, shares of the Company’s common stock, par value $0.001 per share, having an aggregate offering price of up to $200.0 million (the “Shares”). The Company is not obligated to sell any Shares under the Sales Agreement. As of March 28, 2021, the Company sold 521,390 shares of common stock for net proceeds of approximately $4.3 million under the ATM offering. Subject to the terms and conditions of the Sales Agreement, the Agents will use commercially reasonable efforts, consistent with its normal trading and sales practices, to sell Shares from time to time based upon the Company’s instructions, including any price, time or size limits or other customary parameters or conditions specified by the Company. The Company will pay the Agents a commission equal to 3.0% of the gross sales price from each sale of Shares and provide the Agents with customary indemnification and contribution rights. The Sales Agreement may be terminated by the Agents or the Company at any time upon five (5) days’ notice to the other party. The issuance and sale of any Shares by the Company under the Sales Agreement are made pursuant to the Company’s effective registration statement on Form S-3 (Registration Statement No. 333-262226) (as amended, the “Registration Statement”), filed with the SEC on January 31, 2022, and declared effective by the SEC on February 4, 2022. The Registration Statement provides that the Company may offer and sell from time to time shares of its common stock, shares of its preferred stock, debt securities, depositary shares, warrants, rights, purchase contracts or units, or any combination thereof, in one or more offerings in amounts, at prices and on terms that it determines at the time of the offering, with an aggregate initial offering price of up to $500.0 million (or its equivalent in foreign currencies, currency units or composite currencies). The ATM Offering is described in the Company’s prospectus supplement dated February 11, 2022, as filed with the SEC on February 11, 2022, which is a supplement to the prospectus dated February 4, 2022.

Critical Accounting Policies and Estimates

The above discussion and analysis of the Company’s financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the Company’s consolidated financial statements requires the application of accounting policies and the use of estimates. The accounting policies most important to the preparation of the consolidated financial statements and estimates that require management’s most difficult, subjective or complex judgments are described below.

Variable Interest Entities

Variable interest entities (“VIE”) are legal entities in which equity investors do not have (i) sufficient equity at risk for the legal entity to finance its activities without additional subordinated financial support or (ii) as a group, the power, through voting or similar rights, to direct the activities of the legal entity that most significantly impact the entity’s economic performance, or (iii) obligation to absorb the expected losses of the legal entity or the right to receive expected residual returns of the legal entity. The Company would consolidate any VIE in which it has a controlling financial interest through being deemed to be the primary beneficiary of the VIE. The primary beneficiary of a VIE has both of the following characteristics: (1) the power to direct the activities of the VIE that most significantly impact its economic performance; and (2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could be significant to the VIE. If both characteristics are met, the Company considers itself to be the primary beneficiary and therefore will consolidate that VIE into its consolidated financial statements.

The Company determines whether it is the primary beneficiary of a VIE upon initial involvement with a VIE and reassesses whether it is the primary beneficiary of a VIE on an ongoing basis. The determination of whether an entity is a VIE and whether the Company is the primary beneficiary of a VIE is based upon facts and circumstances for the VIE and requires significant judgments such as whether the entity is a VIE, whether the Company’s interest in a VIE is a variable interest, the determination of the activities that most significantly impact the economic performance of the entity, whether the Company controls those activities, and whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE.

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The Company evaluated its investment in Nautilus under the VIE guidance, which requires management to exercise significant judgment. Due to the initial nature of the joint venture and the continued commitment for additional financing, the Company determined Nautilus is a VIE. While the Company has the ability to exercise significant influence over Nautilus, the Company has determined that it does not have the power to direct the activities that most significantly impact the economic performance of Nautilus. The power to direct the activities of Nautilus that most significantly impact Nautilus’ economic performance are shared equally by both parties within the joint venture due to the requirement for both equity holders to approve many of the key operating decisions and when not equally shared, are predominantly under the control of the co-venturer, including through the co-venturer’s majority representation on the board of managers. As such, the Company has determined that it is not the primary beneficiary of Nautilus and, therefore, has accounted for this entity under the equity method of accounting. Risks associated with the Company’s involvement with Nautilus include a commitment to fund additional equity investments.

Issuance of Debt with Common Stock

On December 1, 2021, TeraCub entered into a Loan, Guaranty and Security Agreement with Wilmington Trust, National Association as administrative agent (the “LGSA”). The LGSA consists of a $123.5 million term loan facility. In connection with the LGSA, the Company issued to the holders of the Term Loan 839,398 shares of common stock, which is a quantity of common stock representing 1.5% of the outstanding shares of the publicly registered shares of TeraWulf subsequent to the Closing. The allocation of proceeds between the debt instrument and any other components included in the debt issuance, including common stock, is generally based on the relative fair value allocation method. In applying the relative fair value allocation method, the determination of the fair value of the common stock issued and the fair value of the Term Loan independent of the common stock issued requires significant judgment. As a measure of sensitivity, a 10% change in the estimated fair value of the Term Loan component would result in a $1.9 million change in the fair value allocated to each of the Term Loan and equity components.

Income Taxes

The Company accounts for income taxes pursuant to the provision of Accounting Standards Codification (“ASC”) 740-10, “Accounting for Income Taxes” which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred tax asset will not be realized. The Company follows the provision of the ASC 740-10 related to Accounting for Uncertain Income Tax Positions. When tax returns are filed, it is more likely than not that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely that not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with the tax positions taken that exceeds the amount measured as described above should be reflected as a liability for uncertain tax benefits in the Company’s balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The most critical estimate for income taxes is the determination of whether to record a valuation allowance for any net deferred tax asset, including net loss carryforwards, whereby management must estimate whether it is more likely than not that the deferred tax asset would be realized.

Business Combinations

The Company includes the results of operations of the businesses that it acquires as of the acquisition date. The Company allocates the purchase price of the acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair values of identifiable assets and liabilities is recorded as goodwill. Contingent consideration is included within the purchase price and is recognized at its fair value on the acquisition date. A liability resulting from contingent consideration is remeasured to fair value as of each reporting date until the contingency is resolved, and subsequent changes in fair value are recognized in earnings. Contingent consideration is recorded in current liabilities in the Company’s consolidated balance sheets.

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While the Company uses its best estimates and assumptions to accurately apply preliminary values to assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, these estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of the assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in the consolidated statements of operations. Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for intangible assets, contractual obligations assumed, pre-acquisition contingencies, and contingent consideration, where applicable. Although the Company believes the assumptions and estimates it has made have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets acquired include; future expected cash flows, estimated market royalty rates, customer attrition rates, cost of developed technology and discount rates. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates, or actual results. As a measure of sensitivity, at December 31, 2021 a change in estimated net fair value of acquired assets and assumed liabilities of IKONICS of 10% would result in a change of $1.8 million to the impairment on held-for-sale classification included in loss from discontinued operations, net in the consolidated statement of operations for the nine months ended December 31, 2021.

Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.

Held for Sale and Discontinued Operations Classification

The Company classifies a business as held for sale in the period in which management commits to a plan to sell the business, the business is available for immediate sale in its present condition, an active program to complete the plan to sell the business is initiated, the sale of the business within one year is probable and the business is being marketed at a reasonable price in relation to its fair value. As a measure of sensitivity, the classification of the IKONICS business as held-for-sale resulted in a $48.9 million impairment charge included in loss from discontinued operations, net in the consolidated statement of operations for the nine months ended December 31, 2021. If held-for-sale classification accounting had not been applied, the acquired goodwill would have been evaluated for impairment with an alternate potential impairment charge applied.

Newly acquired businesses that meet the held-for-sale classification criteria upon acquisition are reported as discontinued operations.