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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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For the quarterly period ended September 30, 2023

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For the transition period from _____________ to _____________

Commission file number 001-41864

Hut 8 Corp.

(Exact name of registrant as specified in its charter)

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(305) 224-6427

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes ☐     No ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes ☒   No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes ☐   No ☒

As of December 18, 2023, the registrant had 88,962,964 shares of its common stock outstanding.

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Introductory Note

Effective November 30, 2023 (the “Closing Date”), Hut 8 Corp., a Delaware corporation (“New Hut” or the “Combined Company”) completed the previously announced merger of equals transaction contemplated by the Business Combination Agreement, dated as of February 6, 2023 (the “Business Combination Agreement”), by and among Hut 8 Mining Corp. (“Hut 8”), U.S. Data Mining Group, Inc. doing business as “US BITCOIN” (“USBTC”) and New Hut. Pursuant to the Business Combination Agreement, (i) Hut 8 and its direct wholly-owned subsidiary, Hut 8 Holdings Inc. (“Hut 8 Holdings”), a corporation existing under the laws of British Columbia, was, as part of a court-sanctioned plan of arrangement (the “Arrangement”) under the Business Corporations Act (British Columbia), amalgamated to continue as one British Columbia corporation (“Hut Amalco”), with the capital of Hut Amalco being the same as the capital of Hut 8 (the “Amalgamation”), (ii) following the Amalgamation, and pursuant to the Arrangement, each common share of Hut Amalco (other than any shares held by dissenting shareholders) was exchanged for 0.2000 of a share of New Hut common stock, par value $0.01 per share (the “Common Stock”), which effectively resulted in a consolidation of the common shares of Hut 8 on a five to one (5 to 1) basis and (iii) following the completion of the Arrangement, a newly-formed direct wholly-owned Nevada subsidiary of New Hut (“Merger Sub”) merged with and into USBTC, with each share of Series A preferred stock of USBTC, $0.00001 par value per share, Series B preferred stock of USBTC, $0.00001 par value per share, Series B-1 preferred stock of USBTC, $0.00001 par value per share and common stock of USBTC, $0.00001 par value per share, exchanged for 0.6716 of a share of Common Stock in a merger executed in accordance with the relevant provisions of the Nevada Revised Statutes, as amended (the “Merger,” and together with the Arrangement, the “Business Combination”). As a result of the Business Combination, both Hut 8 and USBTC became wholly-owned subsidiaries of New Hut.

New Hut’s Common Stock is now listed on the Nasdaq Capital Market (“Nasdaq”) under the symbol “HUT.”

As the Business Combination closed subsequent to the quarterly period ended September 30, 2023, this Quarterly Report on Form 10-Q (the “Quarterly Report”) principally describes our business and operations prior to the Closing Date of the Business Combination, including the financial statements of USBTC, the accounting acquirer, and related Management’s Discussion and Analysis (“MD&A”), which describe the business, financial condition, results of operations, liquidity and capital resources of USBTC prior to the Business Combination. Given USBTC historically had a fiscal year ended June 30, 2023, the financials and MD&A included in this Quarterly Report describes USBTC’s three months ended September 30, 2023.

As used in this Quarterly Report, unless otherwise noted or the context otherwise requires:

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Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, as well as assumptions, that, if proven incorrect or do not materialize, could cause the results of New Hut to differ materially from those expressed or implied by these forward-looking statements. Forward-looking statements generally are identified by the words “intend,” “plan,” “may,” “should,” “will,” “project,” “estimate,” “anticipate,” “believe,” “expect,” “continue,” “potential,” “opportunity” and similar expressions. All statements other than statements of historical fact forward-looking statements. For example, forward-looking statements include projections of earnings, revenues, synergies, accretion or other financial items; any statements of the plans, strategies and objectives of management for future operations, including the execution of integration and restructuring plans in connection with the completed Business Combination and the anticipated timing of filings; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; statements of belief and any statement of assumptions underlying any of the foregoing.

Forward-looking statements in this Quarterly Report may include, for example, statements about:

The following factors or events, among others, could cause actual results to differ materially from those described in the forward-looking statements:

For additional information concerning factors that could cause actual conditions, events or results to materially differ from those described in the forward-looking statements, please refer to the section titled “Risk Factors” under Part II. Item 1A of this Quarterly Report.

The risks and uncertainties described and referred to above are not exclusive and further information concerning New Hut and its business, including factors that potentially could materially affect New Hut’s business, financial condition or operating results, may emerge from time to time. You are urged to consider these factors carefully in evaluating these forward-looking statements, and not to place undue reliance on any forward-looking statements. The forward-looking statements in this Quarterly Report speak only as of the date of this Quarterly Report. Except as required by law, New Hut does not assume any obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

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PART I

Item 1. Financial Statements

Hut 8 Corp. (f/k/a U.S. Data Mining Group, Inc.)

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US Data Mining Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

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See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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US Data Mining Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations - Unaudited

(in thousands, except share and per share data)

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See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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US Data Mining Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity - Unaudited

(in thousands, except share data)

Three Months Ended September 30, 2023

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Three Months Ended September 30, 2022

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See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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US Data Mining Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows - Unaudited

(in thousands)

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See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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U.S. Data Mining Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Organization

Nature of operations and corporate information:

U.S. Data Mining Group, Inc. (d/b/a “US BITCOIN”) and Subsidiaries (collectively, the “Company” or “USBTC”) operates cryptocurrency mining operations, which utilize specialized computers (also known as “miners”) using application-specific integrated circuit (“ASIC”) chips to solve complex cryptographic algorithms in order to support the Bitcoin blockchain (in a process known as “solving a block”), in exchange for cryptocurrency rewards.

As of September 30, 2023, the Company operated a total of approximately 182,000 miners (inclusive of approximately 30,200 owned miners) across four locations, with access to approximately 730 megawatts (“MW”) of electricity, via the Company’s cryptocurrency mining, hosting, equipment sales and managed infrastructure operations. The Company owns and operates a bitcoin mining facility in Niagara Falls, New York with current access to approximately 50 MW of electricity. The Company also owns a 50% interest in a joint venture with a leading North American energy company (the “JV”). The JV owns a bitcoin mining site in Upton County, Texas (the “Echo Site”). The Company is also the site operator for three bitcoin mining sites. The first site is located in Kearney, Nebraska and has access to approximately 100 MW of electricity. The second site is located in Granbury, Texas and has access to approximately 300 MW of electricity. The third site is the Echo Site owned by the JV discussed above, which has access to approximately 280 MW of electricity.

In March 2022, the Company launched new business lines for Mining Equipment Sales and for providing Hosting Services to its mining customers. In November 2022, the Company launched its Managed Infrastructure Operations business line in which it provides day-to-day management, support and administrative functions of operating bitcoin mining datacenters owned or leased by third-party or related party customers, in exchange for management fees and reimbursement of certain operating costs.

As mentioned above, one of the Company’s subsidiaries acquired a 50% membership interest in a JV named TZRC LLC (“TZRC” or the “King Mountain JV”). The Company’s subsidiary assumed a property management agreement (“PMA”) with TZRC and a senior secured promissory note (the “TZRC Secured Promissory Note” or the “King Mountain JV Senior Note”) related to the JV. See Notes 9 and 10 for further discussion of the investment and assumed PMA and TZRC Secured Promissory Note, respectively.

The Company’s wholly owned subsidiaries include U.S. Data Technologies Group Ltd., which was incorporated in the state of Delaware on December 4, 2020, U.S. Data Lone Star, Inc. (f/k/a U.S. Data PP, Inc.), U.S. Data Falls, Inc. (f/k/a U.S. Data Machines 1, Inc.) and U.S. Data Machines 2, Inc., which were incorporated in the state of Nevada on December 4, 2020, Pecos Data Technologies, LLC, which was organized in the state of Nevada on January 18, 2022, USMIO Charlie LLC, USMIO Delta LLC, and USMIO Echo LLC, which were organized in the state of Delaware on November 1, 2022, US Data King Mountain LLC, which was organized in the state of Nevada on November 15, 2022, and US Data Guardian LLC, which was organized in the state of Nevada on January 23, 2023.

Business Combination Agreement

On February 6, 2023, the Company and Hut 8 Mining Corp. (“Hut 8”) entered into a Business Combination Agreement (“BCA”) under which the companies will combine in an all-stock merger of equals (the “Transaction”). The combined company will be named “Hut 8 Corp.” (“New Hut” or the “Combined Company”) and will be a U.S.-domiciled entity. Pursuant to the BCA, stockholders of USBTC will receive, for each share of USBTC capital stock, 0.6716 of a share of New Hut common stock. Following completion of the Transaction, existing Hut 8 shareholders and USBTC stockholders each collectively own, on a fully-diluted in the money basis, approximately 50% each of the stock of the Combined Company. Following completion of the Transaction, Hut 8 and USBTC each became wholly-owned subsidiaries of New Hut. See Note 16 for further detail.

Stock Split

On September 1, 2022, the Company’s Board of Directors authorized a stock split of its common stock, par value $0.00001 per share and its preferred stock, par value $0.00001, at a ratio of 250-for-1 (the “2022 Stock Split”). As a result of the 2022 Stock Split, (i) every 1 share of the issued and outstanding common stock and preferred stock were automatically converted into 250 newly issued and outstanding shares of common stock and preferred stock, respectively, without any change in the par value per share, and (ii) the number of authorized shares of common stock and preferred stock outstanding was proportionally increased. Shares of common stock underlying outstanding stock options and other equity instruments convertible into common stock were proportionately increased and the respective exercise prices, if applicable, were proportionately decreased in accordance with the terms of the agreements governing such securities.

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Notes to Unaudited Condensed Consolidated Financial Statements

Fractional shares, if any, resulting from the 2022 Stock Split were rounded up to the nearest whole share, and all shares of common stock and preferred stock (including fractions thereof) issuable upon the 2022 Stock Split to a given stockholder were aggregated for the purpose of determining whether the Stock Split would result in the issuance of a fractional share. Conversion terms on the Company’s preferred stock were not changed. Preferred stock continues to convert on a one to one basis for common stock.

All of the Company’s historical share and per share information related to issued and outstanding common stock, issued and outstanding preferred stock and outstanding options exercisable for common stock in these unaudited condensed consolidated financial statements have been adjusted, on a retroactive basis, to reflect the 2022 Stock Split. See Note 12.

Investment in Fahrenheit LLC and Celsius Bankruptcy Bid

On April 10, 2023, a USBTC subsidiary invested in Fahrenheit LLC (“Fahrenheit”), a joint venture formed for the purposes of bidding on the management rights of a new entity to be formed and vested with certain assets of Celsius Network LLC (“Celsius”) in connection with Celsius’ bankruptcy auction. On May 25, 2023, Fahrenheit won the auction and was awarded the right to manage and operate the assets of Celsius in exchange for a management fee of $20.0 million per year as part of a five-year agreement with Celsius, subject to the approval of the bankruptcy court. In addition, USBTC, acting separately through its USMIO business, won the right to enter into one or more operating and services agreements with the restructured company, in exchange for a fee of $15.0 million per year net of certain operating expenses, which is also subject to the approval of the bankruptcy court.

On May 26, 2023, the USBTC subsidiary contributed a portion of the initial $10.0 million cash deposit required in the Fahrenheit bid.

On November 29, 2023, Celsius informed Fahrenheit that it was unable to obtain certain regulatory approvals respecting the proposed transaction involving Celsius and Fahrenheit, and, as a result, Celsius would not move forward with the Fahrenheit-sponsored transaction.

On November 30, 2023, Celsius filed a motion disclosing that USBTC, acting separately through its USMIO business, won the right to enter into one or more operating and services agreements pursuant to a revised transaction structure in exchange for a fee of $20.4 million per year net of certain operating expenses as part of a four-year agreement with the restructured company. This revised transaction remains subject to the approval of the bankruptcy court.

The USBTC subsidiary’s portion of the initial $10.0 million cash deposit remains in escrow and is anticipated to be returned due to Celsius not moving forward with the Fahrenheit bid. USBTC’s USMIO contract bid remains subject to approval and, if approved, will become binding.

There can be no assurance that the Celsius bid will obtain the necessary approvals and USBTC may never realize any benefits from the USMIO contract bid.

Note 2. Liquidity and Financial Condition

The Company has experienced losses since inception. As of September 30, 2023, the Company had cash of $12.7 million, positive operating cash flows of $2.2 million, working capital of $11.2 million, total stockholders’ equity of $23.3 million and an accumulated deficit of ($110.9) million. To date, the Company has, in large part, relied on equity and debt financings to fund its operations. The Company believes its current cash on hand, proceeds from sales of cryptocurrency and ongoing operations will be sufficient to meet its operating and capital requirements for at least the next twelve months from the date these unaudited condensed consolidated financial statements are issued.

During the quarter ended September 30, 2023, the Company paid approximately $15.1 million against its notes payable.

During the fiscal year ended June 30, 2023, the Company received net debt proceeds of approximately $13.0 million.

For a detailed discussion about the Company’s liquidity and financial condition, see the Company’s June 30, 2023, consolidated financial statements.

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Notes to Unaudited Condensed Consolidated Financial Statements

Note 3. Basis of Presentation, Summary of Significant Accounting Policies and Recent Accounting Pronouncements

Basis of preparation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the SEC. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of such interim results. Amounts are in thousands except for share, per share and miner amounts.

The results in the unaudited condensed consolidated statements of operations are not necessarily indicative of results to be expected for the fiscal year ending June 30, 2024 or for any future interim period. The unaudited condensed consolidated financial statements do not include all the information and notes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the fiscal year ended June 30, 2023, and notes thereto.

Principles of consolidation

These unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries. Consolidated subsidiaries’ results are included from the date the subsidiary was formed or acquired. Intercompany balances and transactions have been eliminated in consolidation.

Unconsolidated investments in which the Company does not have a controlling interest but does have significant influence are accounted for as equity method investments, with earnings recorded in other expense. These investments are included in long-term assets and the Company’s proportionate share of income or loss is included in other expense.

Reclassification of prior year accounts

Certain accounts for the three months ended September 30, 2022 were reclassified to conform to the current year presentation. More specifically, in the unaudited condensed consolidated statements of operations, cost of revenues of $18.4 million was bifurcated into cost of revenues services for $15.3 million and cost of revenues mining equipment for $3.1 million.

Reclassification of consolidated financial statements

Restatement of September 30, 2022 Unaudited Interim Consolidated Financial Statements

The Unaudited Condensed Three Months Ended September 30, 2022 Consolidated Statement of Cash Flows has been restated for an error in previously reported information. Restatement of financial information presented was necessary to correct for the classification of proceeds from the sales of cryptocurrency from cash flows from operations to cash flows from investing activities. See below for presentation of restated unaudited condensed three months ended September 30, 2022 Consolidated Statement of Cash Flows.

There were no other changes to the Unaudited Condensed Three Months Ended September 30, 2022 Consolidated Financial Statements so there will be no presentation of other financial statements.

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Notes to Unaudited Condensed Consolidated Financial Statements

Unaudited Condensed Consolidated Statement of Cash Flows

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Notes to Unaudited Condensed Consolidated Financial Statements

Use of estimates

The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its most significant accounting estimates, including those related to impairment of cryptocurrency and property and equipment, income taxes and stock-based compensation.

In addition, management uses assumptions when utilizing the Black-Scholes and other option valuation models to calculate the fair value of granted stock-based awards. Management bases its estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that it believes to be reasonable under the granted stock-based awards. Management bases its estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, when these carrying values are not readily available from other sources. Making estimates requires management to exercise significant judgment.

It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the unaudited condensed consolidated financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, actual results may differ significantly from those estimates.

Significant Accounting Policies

For a detailed discussion about the Company’s significant accounting policies, see the Company’s June 30, 2023, consolidated financial statements.

Cryptocurrency, net

Cryptocurrency (bitcoin) is included in current assets in the accompanying consolidated balance sheets due to the Company’s ability to sell it in a highly liquid marketplace and the Company reasonably expects to liquidate its bitcoin to support operations or for treasury management within the next 12 months.

Cryptocurrency received by the Company through its mining activities are accounted for in connection with the Company’s revenue recognition policy disclosed below.

Cryptocurrency held is accounted for as intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life is not amortized but assessed for impairment when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired and at a minimum annually. The Company measures for impairment on a daily basis, determining the fair value of its cryptocurrency by using the lowest intra-day price as determined by the Company’s principal market. The Company recognizes impairment whenever, and to the extent, the carrying amount exceeds the lowest intra-day price. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.

The proceeds from sales of cryptocurrencies are included within investing activities in the accompanying consolidated statements of cash flows and any realized gains or losses from such sales are included in operating income (expense) in the consolidated statements of operations. The Company’s policy is to account for gains or losses on sale of cryptocurrency in accordance with the first-in first-out method of accounting.

Investment in equity investees

The Company accounts for its investment in equity investees in accordance with ASC Topic 323, “Investments – Equity Method and Joint Ventures” (“ASC 323”). The Company accounts for its investment in TZRC under ASC 323 because the Company has the ability to exercise significant influence, but not control, over the investee. See Note 9 for additional information on the equity method investment entity. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock of an investee of between 20 percent and 50 percent, or an ownership interest greater than three to five percent in certain partnerships, unincorporated joint ventures and limited liability companies, although other factors are considered in determining whether the equity method of accounting is appropriate.

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Notes to Unaudited Condensed Consolidated Financial Statements

Under this method, an investment in the unconsolidated investee is generally initially measured and recorded at cost.

The Company recorded its investment in TZRC based upon the fair value of the consideration transferred which was determined to be its cost. The Company’s investment is subsequently adjusted to recognize its share of net income or losses as they occur. The Company also adjusts its investment upon receipt of a distribution from an equity investee, which is accounted for as a distribution-in-kind that is measured as of time of receipt. The Company’s share of the investees’ earnings or losses is recorded, net of taxes, within equity in earnings (losses) of unconsolidated joint venture on the Company’s consolidated statements of operations. Additionally, the Company’s interest in the net assets of its equity method investee is reflected on its consolidated balance sheets. If, upon the Company’s acquisition of the investment, there is any difference between the cost of the investment and the amount of the underlying equity in the net assets of the investee, the difference is required to be accounted for as if the investee were a consolidated subsidiary. If the difference is assigned to depreciable or amortizable assets or liabilities, then the difference should be amortized or accreted in connection with the equity earnings based on the Company’s proportionate share of the investee’s net income or loss. If the Company is unable to relate the difference to specific accounts of the investee, the difference should be considered goodwill.

The Company considers whether the fair value of its equity method investment has declined below its carrying value whenever adverse events or changes in circumstances indicate that recorded value may not be recoverable. If the Company considered any such decline to be other than temporary (based on various factors, including historical financial results, success of the mining operations and the overall health of the investee’s industry), then the Company would record a write-down to the estimated fair value. No impairment of the Company’s investment in TZRC was recorded for the three months ended September 30, 2023.

Revenue Recognition

The Company recognizes revenue under ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”). The core principle of this 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. The following five steps are applied to achieve that core principle:

In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).

If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:

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Notes to Unaudited Condensed Consolidated Financial Statements

Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.

Cryptocurrency mining:

The majority of the Company’s revenue is derived from the service of performing hash computations (i.e., hashrate) for mining pools. The Company has entered into arrangements, as amended from time to time, with mining pool operators to perform hash computations for the mining pools. Providing hash computation services for mining pools is an output of the Company’s ordinary activities. The Company has the right to decide the point in time and duration for which it will provide hash computation services to the mining pools. As a result, the Company’s enforceable right to compensation only begins when, and continues as long as, the Company provides hash computation services to the mining pools. The contracts are terminable at any time by either party without substantive compensation to the other party for such termination. Upon termination, the mining pool operator (i.e., the customer) is required to pay the Company any amount due related to previously satisfied performance obligations. Therefore, the Company has determined that the duration of the contract is less than 24 hours and that the contract continuously renews throughout the day. The Company has determined that the mining pool operator’s (i.e., the customer) renewal right is not a material right as the terms, conditions, and compensation amounts are at then market rates. There is no significant financing component in these transactions.

In exchange for providing hash computation services, which represents the Company’s only performance obligation, the Company is entitled to noncash consideration in the form of cryptocurrency, calculated under payout models determined by the mining pool operators. The payout model used by the mining pools in which the Company participated is the Full Pay Per Share (“FPPS”) model, which contains three components, (1) a fractional share of the fixed cryptocurrency award from the mining pool operator (referred to as a “block reward”), (2) transaction fees generated from (paid by) blockchain users to execute transactions and distributed (paid out) to individual miners by the mining pool operator, and (3) mining pool operating fees retained by the mining pool operator for operating the mining pool. The Company’s total compensation is calculated using the following formula: the sum of the Company’s share of (a) block rewards and (b) transaction fees, less (c) mining pool operating fees.

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Notes to Unaudited Condensed Consolidated Financial Statements

For each contract, the Company measures noncash consideration at the bitcoin spot price at the beginning of the day on the date of contract inception, as determined by the Company’s principal market, which is Coinbase Prime. The Company recognizes this noncash consideration on the same day that control of the contracted service transfers to the mining pool operator, which is the same day as the contract inception.

Hosting services:

The Company began providing hosting services in the third quarter of fiscal year 2022. The Company’s current hosting contracts are service contracts with a single performance obligation. The service the Company provides includes the provision of mining equipment, energized space, and typically also include monitoring, active troubleshooting and various maintenance levels for the mining equipment.

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. All consideration to which the Company is entitled under its hosting services agreements is in the form of cash. Customer contracts can include advance payment terms in the form of monthly prepayments and/or upfront payments at contract inception. Advance payments are recorded as deferred revenue and recognized over time (generally, the month of hosting service to which they relate) as the customer simultaneously receives and consumes the benefits of the Company’s performance.

The Company’s hosting contracts contain service level agreement clauses, which guarantee a certain percentage of time the power will be available to its customer. In the rare case that the Company may incur penalties under these clauses, the Company recognizes the payment as variable consideration and a reduction of the transaction price and, therefore, of revenue, when not in exchange for a good or service from the customer.

Mining equipment sales

The Company entered into its first mining equipment sales contract in the first quarter of fiscal year 2023. Mining equipment sales contracts are for a fixed price and do not include a significant financing component. All consideration to which the Company is entitled is in the form of cash. The Company recognizes mining equipment revenue at a point in time based on management’s evaluation of when the control of the products has been passed to customers. The transfer of control to the customer occurs when products have been picked up by or shipped to the customer based on the terms of the contract. Each product is considered distinct from all other promised products in the contract because the Company does not provide a service of significant integration between each product promised, each product promised does not modify or customize any other product promised under the contract, and the promised products are not highly interrelated or interdependent. Some contracts may also include upfront deposits or require the customer to pay the full sale price up front. Any advance payments are recorded as deferred revenue and recognized as revenue upon transfer of control of the products to the customer.

Management fees and cost reimbursements

The Company began providing management services under PMAs in the second quarter of fiscal year 2023. Under PMAs, the Company provides project management services for the customer’s data centers. PMAs contain a single performance obligation comprised of a series of distinct monthly service periods. The contracts have an initial term of five or ten years and certain contracts include renewal options. In exchange for the provision of the services, the Company is entitled to variable consideration primarily in the form of a fixed monthly management fee based on capacity of the customer’s data centers, plus the reimbursement of certain operating costs, which vary each month. The Company acts as the principal when incurring costs which are reimbursed by our customers. For some PMAs, the Company may also be entitled to a share of additional hosting services business the Company helps generate for the customer. The variable fees are attributable to the monthly service periods in the contract. All consideration to which the Company is entitled is in the form of cash. The Company recognizes revenue to the extent that a significant reversal of such revenue will not occur. Revenue is recognized over time as the customer simultaneously receives and consumes the benefits of the Company’s performance.

Net loss per share

The Company calculates basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method required for companies with participating securities. The Company considered the convertible preferred stock to be a participating security as the holders are entitled to receive aggregated accrued and not paid dividends if/when declared by the Board of Directors at a dividend rate payable in preference and priority to the holders of common stock.

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Notes to Unaudited Condensed Consolidated Financial Statements

Additionally, the Company’s restricted stock grants are considered participating securities as the holders are entitled to receive dividends if/when declared by the Board of Directors commensurate with other common stockholders.

Under the two-class method, basic net loss per share attributable to common stockholders was calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period. The net loss attributable to common stockholders was not allocated to the convertible preferred stock or unvested restricted stock grants as the holders of these securities do not have a contractual obligation to share in losses, which is consistent with the if converted method of calculation. Diluted net loss per share attributable to common stockholders was computed by giving effect to all potentially dilutive common stock equivalents outstanding for the period. For purposes of this calculation, convertible preferred stock, stock options and restricted stock grants were considered common shares equivalents but had been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect was anti-dilutive. In periods in which the Company reports a net loss attributable to all classes of common stockholders, diluted net loss per share attributable to all classes of common stockholders is the same as basic net loss per share attributable to all classes of common stockholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.

Since the Company has only incurred losses, basic and diluted net loss per share is the same. Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share at September 30, 2023 and September 30, 2022 because their inclusion would be anti-dilutive are as follows:

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Segment reporting

Operating segments are defined as components of an enterprise about which separate financial information is available that is regularly reviewed by the chief operating decision maker (“CODM”), which may be an individual or decision-making group. The CODM reviews financial information for the purpose of making operating decisions, allocating resources and in evaluating financial performance of the business of the reportable operating segments, based on discrete financial information. The Company’s chief executive officer is currently designated as the CODM. Although the Company has three lines of business, two of those lines of businesses were recently launched by the Company. These new lines of business are in the same industry as the Company currently operates and do not require special consideration. As of September 30, 2023, the CODM does not receive or evaluate the business lines separately and therefore the Company currently operates as one segment.

Recent accounting pronouncements

Management does not believe that any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Company’s financial statements.

Note 4. Concentrations

The Company has only mined Bitcoin as of September 30, 2023 and 2022, respectively. Therefore, 100% of the Company’s mining revenue is related to one cryptocurrency. The Company has three mining pool operators as of September 30, 2023 and 2022, respectively.

Note 5. Cryptocurrency, net

The following table presents the cryptocurrency activity for the three month periods ended September 30, 2023 and June 30, 2023:

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Notes to Unaudited Condensed Consolidated Financial Statements

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For the three months ended September 30, 2023, the Company received approximately $15.5 million in proceeds from sales of bitcoin and recorded an approximately $0.5 million realized gain related to these sales. For the three months ended June 30, 2023, the Company received approximately $16.1 million in proceeds from sales of bitcoin and recorded an approximately $1.0 million realized gain related to these sales.

Note 6. Property and Equipment, net

Property and equipment consists of the following as of September 30, 2023 and June 30, 2023:

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Depreciation and amortization expense of property and equipment for the three-month periods ending September 30, 2023 and 2022 was approximately $4.3 million and $5.8 million, respectively. Depreciation is computed on the straight-line basis over their estimated useful life for the periods the assets are in service. Amortization of leasehold improvements is calculated on the straight-line basis over the remaining life of the respective lease term.

Note 7. Deposits on Miners

Deposits on miners represent the amount the Company has paid to its suppliers for the purchase of miners which have not yet been received. The following table presents the deposits on miners activity for the three month periods ended September 30, 2023 and June 30, 2023:

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Notes to Unaudited Condensed Consolidated Financial Statements

Note 8. Deferred Revenue

Deferred revenue represents customer cash advances associated with the Company’s hosting services, which have not yet been earned by the Company. The following table presents the deferred revenue activity for the three month periods ended of September 30, 2023 and June 30, 2023:

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Note 9. Investments in unconsolidated joint venture

On November 25, 2022, the Company entered into an Asset Purchase Agreement (“Agreement”) with Compute North Member, LLC to purchase their 50 percent membership interest in TZRC, an early stage operator of vertically integrated cryptocurrency mining and power facilities. The transaction closed on December 6, 2022. As of June 30, 2023, the Company determined that fair value of the net assets acquired differed from the carrying value of the estimated fair value of the underlying net assets acquired in an amount of approximately $22.4 million. This difference is attributable to depreciable and amortizable assets and liabilities and in accordance with ASC 323, will be accreted within the equity in earnings of unconsolidated joint venture in the Company’s consolidated statements of operations. For the three months ended September 30, 2023, the amount of the accretion was approximately $1.7 million.

The consideration paid consisted of cash of $10.0 million and the TZRC Secured Promissory Note with a fair value estimate as of transaction date of approximately $95.1 million. The Company also assumed a PMA (intangible asset) with a fair value estimate as of the transaction date of approximately $5.9 million. The $10.0 million in cash was sourced from funds the Company had previously received under the terms of a subscription agreement from a third party. The subscription agreement was subsequently superseded by and the funds released under a promissory note from the same third party.

TZRC is an operating joint venture where both members jointly control the essential areas of the entity’s business. The purpose of TZRC is to develop, construct, install, own, finance, rent and operate one or more modular data centers located on or near renewable power sources for purposes of cryptocurrency mining. The entity both self-mines and provides hosting services, both of which began in August 2022. Pursuant to the Agreement, the Company assumed the role of property manager under a PMA, to provide day-to-day management and oversight services of TZRC’s data center facilities. The service contract has a term of 10 years and automatically renews for successive one year terms unless either party provides written notice of non-renewal. As property manager, the Company is entitled to approximately $1.5 million per year, subject to downward adjustment based on capacity utilization of TZRC’s data centers. In addition, the PMA allows pass through costs on behalf of the Company, such as payroll and other incidental costs. Pass through costs for the three months ended September 30, 2023 were approximately $0.4 million.

The Company accounts for its 50% interest in TZRC using the equity method of accounting. For the three months ended September 30, 2023, the Company recorded its ownership percentage of income of TZRC in Other income (expense) for $2.1 million in the Company’s consolidated statements of operations. The carrying value of the Company’s investment in TZRC was approximately $84.3 million at September 30, 2023 and is included in the Company’s consolidated balance sheets.

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Notes to Unaudited Condensed Consolidated Financial Statements

A summarized consolidated income statement and balance sheet for TZRC as of September 30, 2023 follows:

Condensed Consolidated Income Statement

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Condensed Consolidated Balance Sheet

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Note 10. Notes Payable

The following is a summary of the Company’s secured promissory notes as of September 30, 2023 and June 30, 2023:

Notes Payable – September 30, 2023:

Notes Payable – June 30, 2023:

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