# TERAWULF INC. (WULF) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from TERAWULF INC.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1083301/000108330124000072/wulf-20231231.htm
Accession: 0001083301-24-000072
Filing date: 2024-03-20
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/WULF/
All MD&A years: /company/WULF/mda/
Previous year: /company/WULF/mda/fy2022/ (FY 2022)
Next year: /company/WULF/mda/fy2024/ (FY 2024)

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 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. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the Consolidated Financial Statements. Unless the context otherwise requires, references in this Annual Report to the “Company,” “TeraWulf,” “we,” “us” or “our” refers to TeraWulf Inc. and its consolidated subsidiaries. Certain statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations may be deemed forward-looking statements. See “Forward-Looking Statements.”

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Overview

We are a leading digital asset technology firm that specializes in digital infrastructure and sustainable energy development. Our primary focus is supporting environmentally conscious bitcoin mining operations by developing and operating state-of-the-art facilities within the United States. Our bitcoin mining facilities are powered by clean, affordable, and reliable energy sources, underscoring our commitment to sustainable practices within the cryptocurrency mining industry.

Revenue Structure

Our primary source of revenue stems from the mining of bitcoin conducted at our sustainable mining facility sites. Additionally, we occasionally generate revenue through the provision of miner hosting services to third-party entities. We exclusively engage in bitcoin mining for our own purposes and do not facilitate bitcoin transactions for external parties.

Our industrial-scale bitcoin mining operations are strategically designed to optimize efficiency. This involves continuously expanding our hash rate, which represents the computational power dedicated to supporting the bitcoin blockchain. By doing so, we enhance our chances of successfully solving cryptographic hashes, thereby generating new blocks on the bitcoin blockchain—a process commonly known as “solving a block.” Typically, a miner’s likelihood of solving a block and earning the block reward is directly linked to the proportion of the bitcoin blockchain's total network hash rate that its hash rate represents.

Block rewards, which are fixed, undergo periodic reductions through halving events. The most recent halving occurred in May 2020, reducing the block reward from 12.5 to 6.25 bitcoin. Another halving, which is expected in April 2024, will further reduce the block reward to 3.125 bitcoin.

In addition to block rewards, bitcoin miners also earn transaction fees for confirming transactions. By validating unconfirmed transactions and incorporating them into new blocks within the blockchain, miners collect these fees. While miners are not obliged to confirm specific transactions, economic incentives drive them to validate legitimate transactions to earn fees. Historically, miners have accepted relatively low transaction fees, but these fees can vary, making future fee predictions challenging.

Presently, we liquidate the bitcoin mined as part of our routine treasury management processes to acquire U.S. dollars for operational, capital, or other corporate expenses. Our bitcoin holdings are securely stored in a cold storage wallet managed by our custodian, NYDIG Trust Company LLC, a duly chartered New York limited liability trust company (“NYDIG”).

For our bitcoin mining operations, we utilize a third-party mining pool operated by Foundry Digital LLC (“Foundry”). At the close of each day, the bitcoin we have earned is transferred by Foundry to our custodial wallet address at NYDIG. We abstain from engaging in the direct sale of our bitcoin on any exchange. Instead, we rely on NYDIG to handle the sale of our mined bitcoin in accordance with our execution agreement with NYDIG, as detailed further in the “Risk Factors” section herein. Our bitcoin sales occur on a daily, weekly, and monthly basis.

Bitcoin and Blockchain

Bitcoin, introduced in 2008, fundamentally transformed the landscape of digital currency by providing a decentralized mechanism for exchanging and preserving value. It operates on a consensus-based network, utilizing a public ledger termed as the “blockchain” to meticulously record every bitcoin transaction. TeraWulf’s fully integrated bitcoin mining facilities capitalize on zero-carbon energy sources, primarily sourced from baseload nuclear and hydroelectric power.

Bitcoin mining involves validating transactions through a proof-of-work consensus method, where miners solve complex mathematical problems to add transactions to the blockchain. TeraWulf invests in computation networks (mining rigs) equipped with application-specific integrated circuit (“ASIC”) chips and secures power to validate transactions and maintain the bitcoin ledger. Factors such as computing capacity, electricity costs, and location play pivotal roles in mining operations.

Our Facilities

TeraWulf currently conducts its bitcoin mining operations at two established data centers: the Lake Mariner facility in upstate New York (the “Lake Mariner Facility”) and the jointly owned Nautilus facility located in central

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Pennsylvania (the “Nautilus Cryptomine Facility”). As of December 31, 2023, 95% of TeraWulf’s mining operations were fueled by zero-carbon energy, reflecting our dedication to sustainability. The Company’s ongoing objective is to achieve complete reliance on zero-carbon energy sources.

As of December 31, 2023, these two industrial scale projects had a combined operating capacity of 5.5 EH/s with approximately 48,900 miners deployed, comprised of 33,100 operational miners at the Lake Mariner Facility (including 4,800 hosted miners) and 15,800 self-miners at the Nautilus Cryptomine Facility. As of the date of this Annual Report, the Company has a total operational capacity of 210 megawatts (“MW”) and is currently constructing an additional 35 MW at its Lake Mariner Facility, which is expected to be operational in mid-2024.

Lake Mariner Facility

Located at a site adjacent to the now decommissioned coal-fired power plant in Barker, New York, the Lake Mariner Facility began sustainably mining bitcoin in March 2022. As of December 31, 2023, the Lake Mariner Facility was operating approximately 115 megawatt (“MW”) of bitcoin mining capacity and as of the date of this Annual Report, the Company has expanded its Lake Mariner Facility infrastructure to 160 MW of bitcoin mining capacity at the site. The Company has an agreement in place with the Power Authority of the State of New York (“NYPA”) for 90 MW of high load factor power to support its bitcoin mining operations (the “PPA”). The PPA was executed on February 12, 2022 and has a term of ten years from the date of commencement of NYPA’s power delivery. The Lake Mariner Facility is situated on an expansive site on the shores of Lake Ontario and has the ability to scale up to 500 MW of capacity.

As of December 31, 2023, we owned approximately 30,100 miners, exclusive of the 4,800 hosted miners, of which approximately 28,300 are operational at the Lake Mariner Facility with the remainder undergoing maintenance or on standby to replace miners under repair. These miners were comprised as follows:

[[GREPCENT_TABLE]]
[["Vendor and Model","","Number of miners"],["Bitmain S19 Pro","","6,700"],["Bitmain S19 XP","","6,300"],["Bitmain S19j Pro","","11,800"],["MinerVA M7","","4,100"],["Whatsminer M30S+","","1,200"],["","","30,100"]]
[[/GREPCENT_TABLE]]

As of December 31, 2023, our fleet of miners ranged in age from 0.4 to 1.6 years and have an average age of approximately 0.8 years. We do not have scheduled downtime for our miners; however, while we periodically perform unscheduled maintenance on our miners, such downtime has not been significant historically. When performing unscheduled maintenance, depending on the length of estimated repair time, we may replace a miner with a substitute miner to limit overall downtime. Our fleet of miners at the Lake Mariner Facility had a range of energy efficiency from 22.0 to 39.0 joules per terahash (“j/th”) and has an average energy efficiency of 28.8 j/th.

Nautilus Cryptomine Facility

Located in Berwick, Pennsylvania, Nautilus Cryptomine LLC (“Nautilus”) is a joint venture between TeraWulf and a subsidiary of Talen Energy Corporation (“Talen”). Nautilus currently owns a 200 MW bitcoin mining facility located adjacent to the 2.5 gigawatt nuclear-powered Susquehanna Station. The Nautilus Cryptomine Facility represents the first bitcoin mining facility site that is powered by 100% “behind the meter” zero-carbon nuclear energy, which is contracted at a fixed rate of 2.0 cents per kilowatt-hour for a term of five years with two successive three-year renewal options. Under the Nautilus joint venture agreement, the Company holds a 25% equity interest in Nautilus and Talen holds a 75% equity interest, each subject to adjustment based on relative capital contributions. TeraWulf began mining bitcoin at the Nautilus Cryptomine Facility in the first quarter of 2023 and, as of December 31, 2023, had 50 MW of operational bitcoin mining capacity at the Nautilus Cryptomine Facility. On February 28, 2024, the Company exercised its option to increase its energy requirement at the Nautilus Cryptomine Facility by an incremental 50 MW (for a total of 100 MW attributable to TeraWulf).

As of December 31, 2023, approximately 48,000 miners have been deployed at the Nautilus Cryptomine Facility of which 46,000 are operational with the remainder undergoing maintenance or on standby to replace miners under repair.

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Approximately 15,800 of the deployed miners are attributed to TeraWulf's contributions to Nautilus in order to utilize TeraWulf's allotted 50 MW of bitcoin mining capacity. These miners are comprised as follows:

[[GREPCENT_TABLE]]
[["Vendor and Model","","Number of miners"],["Bitmain S19 Pro","","6,300"],["Bitmain S19 XP","","7,100"],["Bitmain S19j Pro","","2,400"],["","","15,800"]]
[[/GREPCENT_TABLE]]

As of December 31, 2023, these miners ranged in age from 0.7 to 0.8 years and have an average age of approximately 0.8 years. Nautilus does not have scheduled downtime for miners; however, while Nautilus periodically performs unscheduled maintenance on miners, such downtime has not been significant historically. When performing unscheduled maintenance, depending on the length of estimated repair time, Nautilus may replace a miner with a substitute miner to limit overall downtime. These miners have a range of energy efficiency from 22.0 to 30.0 j/th and an average energy efficiency of 25.5 j/th. While the Company holds a 25% equity interest in Nautilus, the distributions of mined bitcoin are determined by each of TeraWulf’s and Talen’s respective hashrate contributions. Accordingly, the Company has contributed approximately 1.9 EH/s of a total 5.2 EH/s of miners which results in an approximate 35.7% of the hashrate share attributed to the Company.

Combined Facilities

As described above, there are a variety of factors that influence our ability to mine bitcoin profitably, including bitcoin’s value in USD, mining difficulty global hashrate, power prices, fleet energy efficiency, data center energy efficiency and other factors. The energy efficiency of a mining fleet drives profitability, because the most significant direct expense for bitcoin mining is power. We believe we operate a highly efficient fleet of miners. The Company uses the following metrics as indicators of operational progress and effectiveness and believes they are useful to investors for the same purposes and to provide comparisons to peer companies.

The table below presents our miner efficiency and computing power as compared to the global computing power as of December 31, 2023.

[[GREPCENT_TABLE]]
[["Combined facilities(1)","","As of December 31, 2023"],["Global hashrate (EH/s)(2)","","558.4"],["Miner efficiency (w/th)(3)","","27.6"],["TeraWulf combined average operating hashrate (EH/s)(4)","","5.0"],["TeraWulf % of Global hashrate","","0.9","%"]]
[[/GREPCENT_TABLE]]

(1) Results reflect hashrate of mining operations at the Lake Mariner Facility and TeraWulf’s net share of hashrate produced at the Nautilus Cryptomine Facility.

(2) Total global hashrate obtained from YCHARTS (https://ycharts.com/indicators/bitcoin_network_hash_rate)

(3) Joules of energy required to produce each terahash of processing power

(4) While nameplate inventory for TeraWulf’s two facilities is 5.5 EH/s, inclusive of gross total hosted miners, actual monthly hashrate performance depends on a variety of factors, including (but not limited to) performance tuning to increase efficiency and maximize margin, scheduled outages (scopes to improve reliability or performance), unscheduled outages, curtailment due to participation in various cash generating demand response programs, derate of ASICS due to adverse weather and ASIC maintenance and repair.

As of December 31, 2023, our operating hashrate was approximately 0.9% of the total global hashrate, and we received approximately the same percentage of the global blockchain rewards, which as of that date, equaled approximately 10 to 11 bitcoin per day. Ultimately, in order to mine profitably, we work to ensure that these mining rewards cover our direct operating costs.

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The table below presents the average cost of mining each bitcoin, including bitcoin mined at the Lake Mariner Facility and the Company’s net share of bitcoin mined at the Nautilus Cryptomine Facility, for the year ended December 31, 2023 and the total energy cost per kWh utilized within the facilities.

[[GREPCENT_TABLE]]
[["Cost of mining - Analysis of costs to mine one bitcoin","","Year Ended December 31, 2023"],["Cost of mining - Lake Mariner Facility and net share of the Nautilus Cryptomine Facility"],["Cost of energy per bitcoin mined","","$","8,676"],["Other direct costs of mining - non energy utilities per bitcoin mined","","$","29"],["Cost to mine one bitcoin","","$","8,705"],["Value of each bitcoin mined(1)","","$","29,645"],["Cost to mine one bitcoin as % of value of bitcoin mined","","29.4","%"],["Statistics"],["Lake Mariner Facility and net share of the Nautilus Cryptomine Facility"],["Total bitcoin mined(2)","","3,343"],["Total value of bitcoin mined(1) ($ in thousands)","","$","99,105"],["Total kWhs utilized","","910,743,637"],["Total energy expense, net of expected demand response proceeds(3) ($ in thousands)","","$","29,006"],["Cost per kWh","","$","0.032"],["Energy expense, net as % of value of bitcoin mined","","29.3","%"],["Other direct costs of mining ($ in thousands)","","$","97"]]
[[/GREPCENT_TABLE]]

1 Computed as the weighted-average opening price of bitcoin on each respective day the mined bitcoin is earned. Excludes bitcoin earned from profit sharing associated with a hosting agreement that expired in February 2024 at the Lake Mariner Facility.

2 Excludes bitcoin earned from profit sharing associated with a hosting agreement that expired in February 2024 at the Lake Mariner Facility of 51 bitcoin for the year ended December 31, 2023, and includes TeraWulf’s net share of bitcoin mined at the Nautilus Cryptomine Facility, based on the hashrate share attributed to the Company.

3 Excludes energy expenses associated with a hosting agreement that expired in February 2024 at the Lake Mariner Facility and includes TeraWulf’s net share of energy expense at the Nautilus Cryptomine Facility, based on aggregate nameplate power consumption of deployed miners attributed to TeraWulf’s contribution to Nautilus.

Power prices are the most significant cost driver for our bitcoin mining operations, and energy expense represented 29.3% as expressed as a percentage of value of bitcoin mined during the year ended December 31, 2023.

Energy prices can be highly volatile and global events (including the war in Ukraine and the resulting natural gas shortage) have caused power prices to increase nationwide over the past year. Our wholly-owned Lake Mariner Facility in New York is subject to variable prices and market rate fluctuations with respect to wholesale power costs. Such prices are governed by market power prices 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 an eye towards 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 or we may be curtailed under demand response programs in which we participate. The average aggregate power prices incurred at the Lake Mariner Facility and the Nautilus Cryptomine Facility during the year ended December 31, 2023 was $0.032 per kilowatt hour.

The management team makes real-time determinations on the need and timing during which we should curtail. If not otherwise curtailed under demand response programs, 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.

During the year ended December 31, 2023, the Company curtailed operations at the Lake Mariner Facility due to weather events, energy price spikes, and demand response program participation. The Company records expected payments to be received for demand response programs as a reduction in cost of revenue, which amounted to $3.5 million for the year ended December 31, 2023.

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The Company has purchased all miners with cash and has not used limited recourse equipment financing to complete its miner purchases. The Company has raised capital through both the issuance of equity and corporate level debt. These funds have been utilized to support operations, invest in our joint ventures, purchase miners and other fixed assets. Costs related to such issuances are not included in this analysis. Additionally, miner acquisition costs, or capital expenditures, are not factored into the above cost of mining analysis as capital expenditures do not impact the marginal cost of production of one bitcoin. Miner acquisition costs, or capital expenditures, are recorded at cost in property, plant and equipment in the consolidated balance sheets. Depreciation of property, plant and equipment is computed using the straight-line method over the estimated useful lives of the equipment: generally 4 years for miners and 5 years for computer equipment. While we currently depreciate our miners over a 4-year period, given our historical low cost of power ($0.032 per kilowatt-hour for the year ended December 31, 2023), it is possible the average actual useful life of our miners may exceed the depreciation period in certain circumstances. Nevertheless, if depreciation of our miner fleet were factored into the above cost of mining analysis, it would add $11,187 per bitcoin mined in the year ended December 31, 2023.

The estimation of asset useful lives requires management judgement, including consideration of historical operating data, which is limited in the industrial-scale bitcoin mining space given the advent of next-generation mining rigs primarily used by the Company’s bitcoin mining operations. Depreciation periods can be adjusted periodically if an event, regulatory action, or change in retirement patterns indicates an update is necessary. Additionally, management considers expected future energy market prices and conditions, operating costs, maintenance practices and capital investment requirements in determining the estimated useful lives of our equipment and reassesses the reasonableness of estimated useful lives whenever events or changes in circumstances warrant. When a determination has been made that an asset will be retired or extended before or after the end of its current estimated useful life, depreciation provisions will be accelerated or extended to reflect the shortened or lengthened estimated useful life, which could have a material unfavorable or favorable impact on future results of operations.

The Business Combination

TeraWulf completed its business combination with IKONICS Corporation (“IKONICS) on December 13, 2021 (the “Closing Date”) pursuant to which, among other things, TeraCub Inc. (“TeraCub,” formerly known as TeraWulf Inc.) would effectively acquire IKONICS and become a publicly traded company on the Nasdaq, which was the primary purpose of the business combination. 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 contingent value right (“CVR”) pursuant to a Contingent Value Rights Agreement between TeraWulf and IKONICS (the “CVR Agreement”), 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 and such other amount to be retained to satisfy Retained Liabilities, as defined. 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. As of December 31, 2022, the CVR liability included in the Company’s consolidated balance sheet was $10.9 million. During the year ended December 31, 2022, the Company completed sales of all IKONICS’ net assets held for sale for net proceeds of $13.2 million, of which $7.0 million remained in escrow under provisions of an asset purchase agreement as of December 31, 2022. Subsequent to the asset sales, IKONICS’ name was changed to RM 101 Inc. (“RM 101”) and the entity has no remaining operations or employees.

In February 2023, all escrowed funds were released to the Company and during the year ended December 31, 2023, the Company made various CVR payments, including (i) a CVR payment of $3.9 million in February 2023 related to the quarterly calculation for the fourth quarter of 2022, (ii) a CVR payment of $5.7 million in May 2023 related to the quarterly calculation for the first quarter of 2023, and (iii) the final CVR payment of $1.4 million in November 2023. In accordance with the CVR Agreement, as of December 31, 2023, all IKONICS’ net assets previously held for sale had been

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sold and the Company has made all of the aggregate distributions of $11.0 million of proceeds to the CVR Holders such that the CVR Agreement was deemed terminated as of December 31, 2023.

Upon the consummation of the business combination, RM 101 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.”

Results of Operations

The Company generates revenue in the form of bitcoin by providing hash computation services to a mining pool operator to mine bitcoin and validate transactions on the global Bitcoin Network using application-specific integrated circuit computers owned by the Company. The earned bitcoin are routinely sold for U.S. dollars. The Company also earns revenue by providing miner hosting services to third parties. In 2023, the Company established WULF Compute as its internal innovation center, with a specific focus on the research, development, and deployment of its expansive and scalable digital infrastructure. Subsequent to a successful pilot phase involving a compact graphics processing unit (“GPU”) system designed to bolster generative AI and large language model applications, the Company made an initial commitment by allocating a 2 MW power block at the Lake Mariner Facility located in upstate New York (the “Lake Mariner Facility”). This allocation is intended to support a broader high-performance computing (“HPC”) initiative, strategically aimed at diversifying the Company’s revenue streams. While the Company may choose to mine other digital currencies or pursue other data center services in the future, it has no plans to do so currently. The Company's plan of operation for the next twelve months is to continue to increase the mining capacity at its operating mining facilities and to complete the construction of the fourth building at its Lake Mariner Facility.

Revenue and Cost of Revenue

The following table presents revenue and cost of revenue (exclusive of depreciation) (in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["Revenue","$","69,229","","","$","15,033"],["Cost of revenue (exclusive of depreciation)","$","27,315","","","$","11,083"]]
[[/GREPCENT_TABLE]]

Revenue for the years ended December 31, 2023 and 2022 was $69.2 million and $15.0 million, respectively, an increase of $54.2 million. The increase was due primarily to the increase in mining and hosting capacity due to infrastructure constructed and placed in service in the latter half of the year ended December 31, 2022 and during the year ended December 31, 2023. The Company began mining bitcoin at the Lake Mariner Facility in March 2022 and as of December 31, 2023, the Company had energized two buildings and additional infrastructure comprising 115 MW of capacity. During the years ended December 31, 2023 and 2022, revenue from mining was $61.7 million and $10.5 million, respectively, and revenue from hosting was $7.5 million and $4.6 million, respectively.

Cost of revenue (exclusive of depreciation) for the years ended December 31, 2023 and 2022 was $27.3 million and $11.1 million, respectively, an increase of approximately $16.2 million. The increase was primarily due to the increase in mining and hosting capacity due to infrastructure constructed and placed in service between December 31, 2022 and December 31, 2023 at the Lake Mariner Facility. Cost of revenues is comprised primarily of power expense and, to a lesser degree, the cost of services provided under our miner hosting agreements. The Company records proceeds related to participation in demand response programs as a reduction in cost of revenue in the period corresponding to the underlying demand response program period; the amount of aggregate proceeds received or expected to be received were $3.5 million and $0.1 million for the years ended December 31, 2023 and 2022, respectively. The Company is actively expanding its enrollment in such available programs in New York.

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Costs and Expenses

The following table presents operating expenses (in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["Operating expenses","$","2,116","","","$","2,038"],["Operating expenses - related party","2,773","","","1,248"],["","$","4,889","","","$","3,286"]]
[[/GREPCENT_TABLE]]

Operating expenses (including related party expenses) for the years ended December 31, 2023 and 2022 were approximately $4.9 million and $3.3 million, respectively, a net increase of $1.6 million. During the year ended December 31, 2023, operating expenses increased slightly due to increases in repair costs and property insurance offset by lower equipment lease expense as compared to the prior year, while operating expenses – related party, which is paid to a related party which provides services to its Lake Mariner Facility, increased due to increased staffing at the Lake Mariner Facility related to infrastructure constructed and placed in service between December 31, 2022 and 2023 and additionally, to a lesser degree, by an increase in ground lease expense.

The following table presents selling, general and administrative expenses (in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["Selling, general and administrative expenses","$","23,693","","","$","22,770"],["Selling, general and administrative expenses - related party","13,325","","","13,280"],["","$","37,018","","","$","36,050"]]
[[/GREPCENT_TABLE]]

Selling, general and administrative expenses (including related party expenses) for the years ended December 31, 2023 and 2022 were $37.0 million and $36.1 million, respectively, a net increase of $1.0 million. Selling, general and administrative expenses are comprised primarily of professional fees, legal fees, employee compensation and benefits, stock-based compensation to employees and consultants, insurance and general corporate expenses. The increases during the year ended December 31, 2023 as compared to the prior year were primarily due to increased expenses of (i) stock-based compensation of $4.3 million, (ii) employee compensation and benefits of $3.3 million, and (iii) related party expense to be settled with respect to common stock of $0.8 million. These increases were partially offset by decreases in legal fees of $3.7 million, insurance expense of $1.9 million, and professional fees of $1.7 million. As previously disclosed, the Company has undertaken cost reduction initiatives targeted at reducing its overall selling, general and administrative expenses that are expected to benefit its operating profitability going forward.

Depreciation for the years ended December 31, 2023 and 2022 was $28.4 million and $6.7 million, respectively. The increase was primarily due to the increase in mining capacity due to infrastructure constructed and placed in service between December 31, 2022 and December 31, 2023 at the Lake Mariner Facility.

Impairment of digital currency for the years ended December 31, 2023 and 2022 was $3.0 million and $1.5 million, respectively. Impairment of digital currency represents the decline in bitcoin prices during the Company’s holding period of its bitcoin. Bitcoin impairment is not reversed during its holding period but instead a gain, if any, is recognized upon its liquidation. Realized gain on sale of digital currency, representing such gains on bitcoin liquidation, for the years ended December 31, 2023 and 2022 was $3.2 million and $0.6 million, respectively. In each case, the increase was due to increased bitcoin both earned and sold due to the increase in mining capacity between December 31, 2022 and December 31, 2023.

During the year ended December 31, 2023, the Company recorded a loss on disposal of property, plant and equipment of $1.2 million related to disposals of miners and write-off of deposits on miners. No loss on disposal of property, plant, and equipment was recorded during the year ended December 31, 2022.

During the year ended December 31, 2022, the Company recorded a loss on nonmonetary miner exchange of $0.8 million related to an exchange agreement with Nautilus. No loss on nonmonetary miner exchange was recorded during the year ended December 31, 2023.

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Interest expense for the years ended December 31, 2023 and 2022 was $34.8 million and $24.7 million, respectively, an increase of $10.1 million. Interest expense relates primarily to the Company’s term loan financing in the principal amount of $139.4 million as of December 31, 2023 and $146.0 million as of December 31, 2022. The increase in interest expense during the year ended December 31, 2023 as compared to the prior year is primarily due to an increase of approximately $10.2 million of amortization of debt discount related to the term loan financing and an increase in related to the stated interest rate, which remained unchanged, on the term loan financing. The Company’s term loan financing has a maturity date of December 1, 2024.

During the year ended December 31, 2022, the Company recorded a loss on extinguishment of debt of $2.1 million related to an October 2022 amendment to a convertible promissory note (the “Promissory Note”) which was considered an extinguishment of debt under GAAP due the change in fair value of the embedded conversion feature of $1.6 million and the excess of the fair value of the amended Promissory Note of $9.4 million over the carrying value of the Promissory Note immediately prior to the modification.

Income tax benefit for the years ended December 31, 2023 and 2022 was $0 and $0.3 million, respectively. The decrease was do to, during the year ended December 31, 2022, the Company sold the net assets held for sale of IKONICS, resulting in reversal of existing net deferred tax liabilities and a related tax benefit of $0.3 million recorded in income tax benefit in the consolidated statement of operations. Based upon the level of historical U.S. losses and future projections over the period in which the net deferred tax assets are deductible, at this time, management believes it is more likely than not that the Company will not realize the benefits of the remaining deductible temporary differences, and as a result the Company has recorded a full valuation allowance against its gross deferred tax assets as of December 31, 2023 and 2022.

Equity in net loss of investee, net of tax

Equity in net loss of investee, net of tax for the years ended December 31, 2023 and 2022 was $9.3 million and $15.7 million, respectively. The amounts include an impairment loss of $13.6 million and $11.5 million for the years ended December 31, 2023 and 2022, respectively, related to the distribution of miners from Nautilus to the Company whereby the miners were marked to fair value from book value on the date distributed. The impairment loss was the result of decreasing prices for miners between initial purchase and distribution. In each case, the remaining amounts represent TeraWulf’s proportional share of income or losses of Nautilus, which commenced principal operations in February 2023.

Loss from discontinued operations, net of tax

All items included in loss from continuing operations in the consolidated statements of operations for the years ended December 31, 2023 and 2022 relate to its wholly-owned operations of its sole business segment, digital currency mining, due to the Company presenting the RM 101 business as discontinued operations for the years ended December 31, 2023 and 2022.

Loss from discontinued operations, net of tax for the years ended December 31, 2023 and 2022 was $0.1 million and $4.9 million, respectively. The decrease was due to, for the year ended December 31, 2022, the loss from discontinued operations reporting being comprised primarily of an impairment loss on discontinued operations of $4.5 million to write down the related carrying amounts of IKONICS’ net assets to their fair values less estimated cost to sell, offset by a remeasurement gain of $1.1 million on the CVRs, which represents the contingent consideration purchase price component of the RM 101 acquisition. For the year ended December 31, 2023, all assets of IKONICS had been sold prior to the start of the period and RM 101 had no operations or employees.

Non-GAAP Measure

To provide investors with additional information in connection with our results as determined in accordance with generally accepted accounting principals in the United States (“GAAP”), we disclose Adjusted EBITDA as a non-GAAP measure. This measure is not a financial measure calculated in accordance with GAAP, and it should not be considered as a substitute for net income, operating income, or any other measure calculated in accordance with GAAP, and may not be comparable to similarly titled measures reported by other companies.

We define Adjusted EBITDA as income (loss) from continuing operations adjusted for (i) impacts of interest, taxes, depreciation and amortization; (ii) preferred stock dividends, stock-based compensation expense and related party expense to be settled with respect to common stock, all of which are non-cash items that the Company believes are not reflective of its general business performance, and for which the accounting requires management judgment, and the resulting expenses could vary significantly in comparison to other companies; (iii) equity in net loss of investee, net of tax, related to Nautilus; (iv) costs related to non-routine regulatory activities, which costs management does not believe are

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reflective of the Company’s ongoing operating activities; (v) other income which is related to interest income or income for which management believes is not reflective of the Company’s ongoing operating activities; and (vi) gains and losses related to discontinued operations that are not be applicable to the Company’s future business activities. The Company’s Adjusted EBITDA also includes the impact of distributions from investee received in bitcoin related to a return on the Nautilus investment, which management believes, in conjunction with excluding the impact of equity in net loss of investee, net of tax, is reflective of assets available for the Company’s use in its ongoing operations as a result of its investment in Nautilus.

Management believes that providing this non-GAAP financial measure allows for meaningful comparisons between the Company's core business operating results and those of other companies, and provides the Company 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 the Company’s 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 the Company’s bitcoin related revenues). For example, the Company expects 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, directors and consultants. Additionally, management does not consider any of the excluded items to be expenses necessary to generate the Company’s bitcoin related revenue.

The Company’s Adjusted EBITDA measure may not be directly comparable to similar measures provided by other companies in the Company’s industry, as other companies in the Company’s 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 (loss) income or any other measure of performance derived in accordance with GAAP. Although management utilizes internally and presents Adjusted EBITDA, the Company only utilizes that measure supplementally and does not consider it to be a substitute for, or superior to, the information provided by GAAP financial results. Accordingly, Adjusted EBITDA is not meant to be considered in isolation of, and should be read in conjunction with, the information contained in the Company’s consolidated financial statements, which have been prepared in accordance with GAAP.

The following table is a reconciliation of the Company’s Adjusted EBITDA to its most directly comparable GAAP measure (i.e., net loss attributable to common stockholders) for the periods indicated (in thousands):

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[[/GREPCENT_TABLE]]

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Liquidity and Capital Resources

As of December 31, 2023, the Company had balances of cash and cash equivalents of $54.4 million, a working capital deficiency of $92.1 million, total stockholders’ equity of $222.5 million and an accumulated deficit of $259.9 million. The Company incurred a net loss attributable to common stockholders of $74.5 million for the year ended December 31, 2023. The Company began mining bitcoin in March 2022 and had 5.5 EH/s of operating capacity across the Lake Mariner Facility and the Nautilus Cryptomine Facility as of December 31, 2023, which increased to 7.9 EH/s upon energization of the third building at the Lake Mariner Facility during the first quarter of 2024. To date, the Company has relied primarily on proceeds from its issuances of debt and equity and sale of bitcoin, both self-mined and distributed from the joint venture which owns the Nautilus Cryptomine Facility (see Note 11), to fund its principal operations. TeraWulf expects to fund its business operations and incremental infrastructure buildout primarily through positive cash flows from operations, including sales of bitcoin, both self-mined and distributed from the joint venture which owns the Nautilus Cryptomine Facility (see Note 11), cash on the balance sheet and the issuance of equity securities.

The principal uses of cash are for the operation and buildout of mining facilities, debt service, and general corporate activities and, to a lesser extent, investments in the Nautilus joint venture related to mining facility buildout and general corporate activities. Cash flow information is as follows (in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["Cash provided by (used in):"],["Operating activities:"],["Continuing operations","$","4,160","","","$","(32,262)"],["Discontinued operations","103","","","(1,804)"],["Total operating activities","4,263","","","(34,066)"],["Investing activities","(78,013)","","","(94,047)"],["Financing activities","119,866","","","89,981"],["Net change in cash and cash equivalents and restricted cash","$","46,116","","","$","(38,132)"]]
[[/GREPCENT_TABLE]]

Cash provided by (used in) operating activities for continuing operations was $4.2 million and $(32.3) million for the years ended December 31, 2023 and 2022, respectively. For the year ended December 31, 2023, cash provided by operations resulted from a net loss of $73.4 million less (a) $4.3 million noncash expenses, net of $63.9 million increase in digital currency from mining, (b) proceeds from sale of bitcoin of $83.9 million, and (c) changes in certain asset and liability balances. The noncash expenses were primarily comprised of (i) $19.5 million related to amortization of debt issuance cost, commitment fees and accretion of debt discount, (ii) $2.9 million of related party expense to be settled with respect to common stock, (iii) $5.9 million related to stock-based compensation, (iv) $28.4 million of depreciation, (v) $1.0 million of amortization of right-of-use asset, (vi) $0.1 million related to realized gain on sale of digital currency net of impairment of digital currency, and (vii) $9.3 million related to the Company’s equity in net loss of investee, net of tax. The changes in certain assets and liabilities were primarily comprised of a net decrease in current liabilities (which includes accounts payable, other accrued liabilities and other amounts due to related parties) of $10.3 million. For the year ended December 31, 2022, cash used in operations results from a net loss of $90.8 million less (a) $35.6 million noncash expenses, net of $10.8 million increase in digital currency from mining, (b) proceeds from sale of bitcoin of $9.7 million, and (c) changes in certain asset and liability balances. The noncash expenses were primarily comprised of (i) $11.7 million related to amortization of debt issuance cost and accretion of debt discount, (ii) $2.1 million of related party expense to be settled with respect to common stock, (iii) $1.6 million related to stock-based compensation, (iv) $6.7 million of depreciation, (v) $0.3 million of amortization of right-of-use asset, (vi) $0.9 million related to impairment of digital currency net of realized gain on sale of digital currency, (vii) $15.7 million related to the Company’s equity in net loss, net of tax of Nautilus, (viii) $4.9 million of loss from discontinued operations, net of tax related to RM 101’s business, the assets of which were substantially sold as of December 31, 2022, (ix) $0.8 million loss on nonmonetary miner exchange, and (x) $2.1 million of loss on extinguishment of debt. The changes in certain assets and liabilities were primarily comprised of a net increase in liabilities (which primarily includes accounts payable, other accrued liabilities, other amounts due to related parties) of $17.0 million, a net increase in current assets (which primarily includes prepaid expenses, amounts due from related parties and other current assets) of $2.8 million, an increase in other assets of $1.0 million.

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Cash used in investing activities was $78.0 million and 94.0 million for the years ended December 31, 2023 and 2022, respectively. During the years ended December 31, 2023 and 2022, the Company (i) invested $75.2 million and $61.1 million, respectively, in the buildout of mining facilities and (ii) invested $2.8 million and $46.2 million, respectively, in Nautilus related primarily to the joint venture’s miner deposits and mining facility buildout (including reimbursable payments made on behalf of the joint venture of joint venture partner offset by reimbursement from joint venture or joint venture partner of less than $0.1 million net cash used). Additionally, during the year ended December 31, 2022 the Company received net proceeds from the sale of IKONICS’ net assets held for sale of $13.3 million. See “Contractual Obligations and Other Commitments” for additional discussion on miner and Nautilus commitments.

Cash provided by financing activities was $119.9 million and $90.0 million for the years ended December 31, 2023 and 2022, respectively. During the years ended December 31, 2023 and 2022, the Company received proceeds from issuance of (i) Common Stock, net of issuance costs, of $135.9 million and $47.3 million, respectively, (ii) warrants of $2.5 million and 5.7 million, respectively, and (iii) convertible promissory notes of $1.3 million and $14.7 million. During the year ended December 31, 2022, the Company also received (i) $22.5 million of proceeds from issuance of long-term debt, net of issuance costs, (ii) $3.4 million proceeds from issuance of promissory notes to stockholders, (iii) $9.6 million of proceeds from issuance of preferred stock and (iv) $2.1 million related to proceeds from insurance premium and property, plant and equipment financing (net of principal payments made). During the years ended December 31, 2023 and 2022, the Company reported cash outflows from operations of (i) $6.6 million and $0, respectively, related to principal payments on long-term debt (ii) $2.0 million and $0, respectively, related to payments of tax withholding related to net share settlements of stock-based compensation awards, (ii) $0 and $15.3 million, respectively, related to principal payments on convertible promissory notes, and (iii) $11.0 million and $0, respectively, related to payment of CVR liability related to proceeds from sale of IKONICS’ net assets held for sale.

Contractual Obligations and Other Commitments

As of December 31, 2023, the Company had one outstanding miner purchase agreement, with Bitmain Technologies Delaware Limited (“Bitmain Delaware”) (the “July 2023 Bitmain Agreement”). The July 2023 Bitmain Agreement provides that the Company will receive 15,100 S19j XP miners from Bitmain Delaware, with an option to receive an additional 3,400 miners, pursuant to certain payment timing conditions, for delivery in the fourth quarter of 2023 for a total purchase price of $75.4 million. The Company is entitled to apply coupons equivalent to 30% of the total purchase price, resulting in an estimated effective purchase price of $53.4 million for 18,500 miners. In September 2023, the Company entered into a binding letter of intent with Bitmain Development PTE. Ltd. (“Bitmain PTE”), for the purchase of at least 1,200 PH of Antminer S21 miners, pursuant to which the Company paid a security deposit of $1.2 million. During the year ended December 31, 2023, the Company elected not to purchase the applicable quantity of Antminer S21 miners, as allowed under the letter of intent, and the $1.2 million security deposit was credited to the Company's account with Bitmain PTE and applied to the July 2023 Bitmain Agreement. As of December 31, 2023, the Company had made payments of $36.2 million, including purchase of coupons, representing 67% of the effective purchase price. Subsequent to December 31, 2023, the Company made the remaining $17.7 million payments to Bitmain Delaware and received all miners contracted under the July 2023 Bitmain Agreement.

The Company is counterparty to the amended and restated Joint Venture agreement dated August 27, 2022 (“A&R Nautilus Agreement”). Under this A&R Nautilus Agreement, the Company has invested $125.2 million on a net basis and has right-sized its equity ownership interest to 25.0% of the joint venture. The Company does not expect any additional material capital contributions to be required for existing infrastructure and operations.

Financial Condition

As of December 31, 2023, the Company had balances of cash and cash equivalents of $54.4 million, a working capital deficiency of $92.1 million, total stockholders’ equity of $222.5 million and an accumulated deficit of $259.9 million. As of December 31, 2023, the working capital deficiency included the then outstanding $139.4 million principal balance of the Company’s Term Loans (See Note 9) which matures on December 1, 2024. To date, the Company has relied primarily on proceeds from its issuances of debt and equity and sale of bitcoin, both self-mined and distributed from the joint venture which owns the Nautilus Cryptomine Facility (see Note 11), to fund its principal operations.

During the year ended December 31, 2023, the Company accomplished several notable steps to achieve positive cash flows from operations and in the aggregate, namely: (1) the Company amended its long-term debt agreement (see Note 9) to, among other changes, remove the fixed principal amortization through April 7, 2024 and, subsequent to December 31, 2023, through maturity on December 1, 2024 (see Note 18), (2) the Company received net proceeds of $135.9 million through the issuance of shares of our common stock, par value $0.001 per share (the “Common Stock”), $2.5 million from warrant issuances in conjunction with equity offerings (see Note 15), and $1.3 million from issuance of a

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convertible promissory note (see Note 10), (3) the Company commenced mining activities at the Nautilus Cryptomine Facility, deems that it has funded all known and expected capital commitments at that facility, and received bitcoin distributions of $21.9 million from the joint venture which owns the Nautilus Cryptomine Facility, (4) for the existing operations at the Lake Mariner Facility in buildings one and two and at the Nautilus Cryptomine Facility, the Company received substantially all contracted miners from the miner suppliers and has no remaining outstanding financial commitments under the miner purchase agreements (see Notes 11 and 12), and (5) the construction activities at the Lake Mariner Facility for buildings one, two and three and at the Nautilus Cryptomine Facility are substantially complete as of December 31, 2023, although the Company intends to continue to expand its infrastructure. Additionally, if a business need requires its use, the Company has an active at-the-market sales agreement for sale of shares of Common Stock having an aggregate offering price of up to $200.0 million (the “ATM Sales Agreement”), which had a remaining capacity of $81.2 million and $29.8 million as of December 31, 2023 and March 19, 2024, respectively. The issuance of Common Stock under this agreement would be made pursuant to the Company’s effective registration statement on Form S-3 (Registration statement No. 333-262226).

As of December 31, 2023, the Company is required to pay amounts under its long-term debt agreement subject to an excess cash flow sweep, as defined, on a quarterly basis which automatically extends to the maturity of the Term Loans of December 1, 2024, in the event the Company repays at least $40.0 million of the principal balance of the Term Loans by April 1, 2024 (see Note 9). In February 2024, the Company achieved aggregate repayment of $40.0 million of the principal balance of the Term Loans, thereby automatically extending the excess cash flow sweep to December 1, 2024 (see Note 18). As of March 19, 2024, the outstanding principal balance of the Term Loans was $106.0 million. The Company has determined, based on its expected range of forecasted bitcoin prices, network hashrate, and power prices, that it is probable that it will generate positive cash flows from operations and be able to realize its assets and discharge its liabilities and commitments in the normal course of business, including the Term Loans through maturity without the use of proceeds from equity offerings. Therefore, the Company determined there is not substantial doubt about the Company’s ability to continue as a going concern through at least the next twelve months. The Consolidated Financial Statements do not include any adjustments that might result from TeraWulf’s possible inability to continue as a going concern.

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.

See Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a summary of the Company’s significant accounting policies.

Revenue Recognition

The Company recognizes revenue under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.

Mining Pool

The Company has entered into an arrangement with a cryptocurrency mining pool (the Foundry USA Pool) to perform hash computations (i.e. hashrate) for the mining pool in exchange for consideration. Providing hash computation services to a mining pool is an output of the Company’s ordinary activities. The provision of such hash computation services is the sole performance obligation. The mining pool arrangement is terminable at any time without substantial penalty by Foundry USA Pool and may be terminated without substantial penalty by the Company upon providing one Contract Day’s, as defined, prior written notice. The Company’s enforceable right to compensation only begins when and continues while the Company provides hash computation services to its customer, the mining pool operator. Accordingly, the contract term with Foundry USA Pool is deemed to be less than 24 hours and to continuously renew throughout the day. Additionally, the Company concluded that the mining pool operator’s (i.e., the customer’s) renewal right is not a material right because the renewal rights do not include any discounts; that is, the terms, conditions, and compensation amounts are at the then-current market rates.

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There is no significant financing component in these transactions.

The mining pool applies the Full Pay Per Share (“FPPS”) payout model. Under the FPPS model, in exchange for providing hash computation services to the pool, the Company is entitled to pay-per-share base amount and transaction fee reward compensation, calculated on a daily basis, at an amount that approximates the total bitcoin that could have been mined and transaction fees that could have been awarded using the Company’s hash computation services, based upon the then current blockchain difficulty. Under this model, the Company is entitled to compensation, payable in bitcoin, regardless of whether the pool operator successfully records a block to the bitcoin blockchain.

The transaction consideration the Company receives, if any, is noncash consideration and is all variable. Because digital currency is considered noncash consideration, fair value of the digital currency award received would generally be determined using the quoted price of the related digital currency in the Company’s principal market at the time of contract inception. The Company has adopted an accounting policy to aggregate individual contracts with individual terms less than 24 hours within each intraday period and apply a consistent valuation point, the start of day Coordinated Universal Time (00:00:00 UTC), to value the related noncash consideration. Revenue is recognized when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur, which is the same day that control of the contracted service transfers to the mining pool and is the same day as the contract inception. After every 24-hour contract term, the mining pool transfers the digital currency consideration to the Company’s designated digital currency wallets.

Consideration payable to the customer in the form of a pool operator fee, which is incurred only to the extent that the Company has generated FPPS consideration, is deducted from the bitcoin the Company receives and is recorded as contra-revenue, as it does not represent a payment for a distinct good or service.

Data Center Hosting

The Company’s current hosting contracts are service contracts with a single performance obligation. The service the Company provides primarily includes hosting the customers’ miners in a physically secure data center with electrical power, internet connectivity, ambient air cooling and available maintenance resources. Hosting revenue is recognized over time as the customer simultaneously receives and consumes the benefits of the Company’s performance. The Company recognizes hosting revenue to the extent that a significant reversal of such revenue will not occur. Data center hosting customers are invoiced and payments are due on a monthly basis. While the majority of consideration is paid in cash, certain consideration is payable in digital currency. Because digital currency is considered noncash consideration, fair value of the digital currency award received is determined using the quoted price of the related digital currency in the Company’s principal market at the time of contract inception. The Company has one data center hosting contract with a customer, which expired in January 2024, for which the quoted price of bitcoin in the Company’s principal market at the time of contract inception was approximately $38,000. The Company recorded miner hosting revenue of $7.5 million and $4.6 million during the years ended December 31, 2023 and 2022, respectively.

Digital currency, net

Digital currency, net is comprised of bitcoin earned as noncash consideration in exchange for providing hash computation services to a mining pool as well as in exchange for data center hosting services which are accounted for in connection with the Company’s revenue recognition policy disclosed above. From time to time, the Company also receives bitcoin as distributions-in-kind from its joint venture. Digital currency is included in current assets in the consolidated balance sheets due to the Company’s ability to sell it in a highly liquid marketplace and because the Company reasonably expects to liquidate its digital currency to support operations within the next twelve months. The Company sells its digital currency on a first-in-first-out basis.

Digital currency is accounted for as intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently if events or changes in circumstances indicate it is more likely than not that the asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test.

The Company has elected to bypass the optional qualitative impairment assessment and to track its bitcoin activity daily for impairment assessment purposes. The Company determines the fair value of its bitcoin on a nonrecurring basis in accordance with ASC 820, Fair Value Measurement, based on quoted prices on the active trading platform that the Company normally transacts and has determined is its principal market for bitcoin (Level 1 inputs), based on all

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information that is reasonably available. The Company performs an analysis each day to identify whether events or changes in circumstances, principally decreases in the quoted price of bitcoin on the active trading platform, indicate that it is more likely than not that its bitcoin are impaired. For impairment testing purposes, the lowest intraday trading price of bitcoin is identified at the single bitcoin level (one bitcoin). The excess, if any, of the carrying amount of bitcoin and the lowest daily trading price of bitcoin represents a recognized impairment loss. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of previously recorded impairment losses is prohibited. The Company recognized impairment of digital currency of $3.0 million and $1.5 million during the years ended December 31, 2023 and 2022, respectively.

Digital currency awarded to the Company through its mining activities are included as an adjustment to reconcile net loss to cash used in operating activities on the consolidated statements of cash flows. Proceeds from sales of digital currency are included within cash flows from operating activities on the consolidated statements of cash flows and any realized gains or losses from such sales are included in costs and operating expenses on the consolidated statements of operations. The receipt of digital currency as distributions-in-kind from equity investees are included within supplemental disclosure of noncash investing activities.

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) the 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.

In 2021, the Company entered into a joint venture, Nautilus Cryptomine LLC (“Nautilus”), with an unrelated co-venturer to develop, construct and operate up to 300 MW of zero-carbon bitcoin mining in Pennsylvania (the “Joint Venture”). 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. Initially, the power to direct the activities of Nautilus that most significantly impact Nautilus’ economic performance were 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, were 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 potentially fund additional equity investments. See Note 11 for additional information, including a decrease in the Company’s ownership interest in Nautilus during the year ended December 31, 2022.

Impairment of Long-lived Assets

The Company reviews its long-lived assets, including property, plant and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or asset group, may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset. Any impairment loss recorded is measured as the amount by which the carrying value of the assets exceeds the fair value of the assets. During the years ended December 31, 2023 and 2022, the Company recorded no impairment charges for long-lived assets.

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Issuance of Debt with Common Stock or Warrants; Debt Modification

On December 1, 2021, the Company entered into the LGSA, which consists of an original term loan facility of $123.5 million (the “Original Term Loan”). In connection with the Original Term Loan, the Company issued to the holders of the Original 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 of the Original Term Loan. 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 Original 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 Original Term Loan component would result in a $1.9 million change in the fair value allocated to each of the Original Term Loan and equity components.

In July 2022, the Company entered into the First Amendment to the LGSA, which included an additional borrowing of $15.0 million and the issuance of warrants to purchase 5,787,732 shares of Common Stock at $0.01 per share. The accounting for debt modifications is complex and requires significant judgment. Potential accounting outcomes include troubled debt restructuring accounting, extinguishment accounting or modification accounting, each with different implications for the consolidated financial statements. The Company has determined that modification accounting is applicable. Additionally, debt modification accounting requires the determination of the fair value of the warrants issued, which requires significant judgment. As a measure of sensitivity, a 10% change in the estimated fair value of the warrants would result in a $0.3 million change in the recorded value of the borrowing under the First Amendment.

In October 2022, the Company entered into the Third Amendment to the LGSA, which included an additional borrowing of $7.5 million and the issuance of warrants to purchase 2,667,678 shares of Common Stock at $0.01 per share. The accounting for debt modifications is complex and requires significant judgment. Potential accounting outcomes include troubled debt restructuring accounting, extinguishment accounting or modification accounting, each with different implications for the consolidated financial statements. The Company has determined that modification accounting is applicable. Additionally, debt modification accounting requires the determination of the fair value of the warrants issued, which requires significant judgment. As a measure of sensitivity, a 10% change in the estimated fair value of the warrants would result in a $0.2 million change in the recorded value of the borrowing under the Third Amendment.

In March 2023, the Company entered into the Fifth Amendment to the LGSA, which included the issuance of warrants to purchase 27,759,265 shares of Common Stock at $0.01 per share and 13,879,630 shares of Common Stock at $1.00 per share. The accounting for debt modifications is complex and requires significant judgment. Potential accounting outcomes include troubled debt restructuring accounting, extinguishment accounting or modification accounting, each with different implications for the consolidated financial statements. The Company has determined that modification accounting is applicable. Additionally, debt modification accounting requires the determination of the fair value of the warrants issued, which requires significant judgment. As a measure of sensitivity, a 10% change in the estimated fair value of the warrants would result in a $1.6 million change in the recorded value of the borrowing under the Fifth Amendment.

Convertible Instruments

The Company accounts for its issuance of convertible debt and convertible equity instruments in accordance with applicable U.S. GAAP. In connection with that accounting, the Company assesses the various terms and features of the agreement in accordance with ASC 480, Distinguishing Liabilities from Equity (“ASC 480”), and ASC 815, Derivatives and Hedging Activities (“ASC 815”). ASC 480 requires liability accounting for certain financial instruments, including shares that embody an unconditional obligation to transfer a variable number of shares, provided that the monetary value of the obligation is based solely or predominantly on one of the following three characteristics: (1) a fixed monetary amount known at inception, (2) variations in something other than the fair value of the issuer’s equity shares or (3) variations in the fair value of the issuer’s equity shares, but the monetary value to the counterparty moves in the opposite direction as the value of the issuer’s shares. In accordance with ASC 815, the Company assesses the various terms and features of the agreement to determine whether or not they contain embedded derivative instruments that are required under ASC 815 to be accounted for separately from the host contract and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value recorded in the current period’s operating results. The Company did not have any liabilities required to be revalued in accordance with ASC 480 or ASC 815 as of December 31, 2023.

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Income Taxes

The Company accounts for income taxes pursuant to the provision of ASC 740, Accounting for Income Taxes (“ASC 740”), 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 ASC 740 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, 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 than 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 accompanying 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.