TeraWulf (WULF) - 2023 Q2 - Quarterly Report

Forward-Looking Statements This section outlines forward-looking statements in the report, emphasizing inherent risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements regarding strategy, future operations, financial position, revenue, costs, and market growth, primarily in the 'Risk Factors' and 'Management's Discussion and Analysis' sections[7] - Key uncertainties that could materially affect actual results include prolonged reductions in cryptocurrency prices (especially Bitcoin), competition, the need for additional capital (which could dilute shareholder interests), ability to implement business objectives, adverse geopolitical/economic conditions (e.g., high inflation), security threats, counterparty risk, workforce factors, and changes in regulations[9] - The company does not undertake to update or review publicly any forward-looking statements, except as required by law, and notes that these statements do not reflect the potential impact of future acquisitions, mergers, dispositions, joint ventures, or investments[8][11] PART I — FINANCIAL INFORMATION This part presents the unaudited consolidated financial statements and management's discussion and analysis of financial condition and results of operations ITEM 1. Financial Statements This section presents TeraWulf Inc.'s unaudited consolidated financial statements, including Balance Sheets, Statements of Operations, Stockholders' Equity, and Cash Flows, with detailed accounting notes Consolidated Balance Sheets This section presents the company's consolidated balance sheets, detailing assets, liabilities, and stockholders' equity at specific reporting dates Consolidated Balance Sheets (In thousands) | ASSETS (In thousands) | June 30, 2023 | December 31, 2022 | | :---------------------- | :------------ | :------------------ | | Cash and cash equivalents | $8,241 | $1,279 | | Restricted cash | — | $7,044 | | Digital currency, net | $708 | $183 | | Total current assets | $14,359 | $14,144 | | Property, plant and equipment, net | $161,776 | $191,521 | | TOTAL ASSETS | $299,822 | $317,687 | | LIABILITIES (In thousands) | June 30, 2023 | December 31, 2022 | | :---------------------- | :------------ | :------------------ | | Total current liabilities | $81,684 | $126,019 | | Long-term debt | $82,396 | $72,967 | | TOTAL LIABILITIES | $165,004 | $199,933 | | STOCKHOLDERS' EQUITY (In thousands) | June 30, 2023 | December 31, 2022 | | :---------------------- | :------------ | :------------------ | | Total stockholders' equity | $134,818 | $117,754 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $299,822 | $317,687 | Consolidated Statements of Operations This section presents the company's consolidated statements of operations, outlining revenue, expenses, and net loss for the reported periods Consolidated Statements of Operations (In thousands) | (In thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $15,456 | $1,385 | $26,989 | $1,602 | | Gross profit | $10,343 | $794 | $16,874 | $979 | | Operating loss | $(5,845) | $(7,816) | $(15,066) | $(16,983) | | Net loss | $(17,540) | $(13,669) | $(43,797) | $(31,852) | | Net loss attributable to common stockholders | $(17,805) | $(13,908) | $(44,321) | $(32,136) | | Basic and diluted loss per common share | $(0.08) | $(0.14) | $(0.24) | $(0.31) | Consolidated Statements of Stockholders' Equity This section details changes in stockholders' equity, including preferred stock, common stock, additional paid-in capital, and accumulated deficit Consolidated Statements of Stockholders' Equity (In thousands) | (In thousands) | Preferred Stock Amount | Common Stock Amount | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Equity | | :------------- | :--------------------- | :------------------ | :------------------------- | :------------------ | :------------------------- | | Balances as of December 31, 2022 | $9,273 | $145 | $294,810 | $(186,474) | $117,754 | | Net loss | — | — | — | $(43,797) | $(43,797) | | Balances as of June 30, 2023 | $9,273 | $216 | $355,600 | $(230,271) | $134,818 | - Common Stock outstanding increased from 145,492,971 shares at December 31, 2022, to 216,055,887 shares at June 30, 2023[14] - Additional paid-in capital increased by $60.79 million from December 31, 2022, to June 30, 2023, driven by common stock offerings, warrant exercises, and stock-based compensation[14] Consolidated Statements of Cash Flows This section presents the company's consolidated statements of cash flows, categorizing cash activities into operating, investing, and financing Consolidated Statements of Cash Flows (In thousands) | (In thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(9,010) | $(23,535) |\n| Net cash used in investing activities | $(28,433) | $(81,918) |\n| Net cash provided by financing activities | $37,361 | $59,920 |\n| Net change in cash and cash equivalents and restricted cash | $(82) | $(45,533) |\n| Cash and cash equivalents and restricted cash at end of period | $8,241 | $922 | - Cash used in operating activities significantly decreased from $23.5 million in H1 2022 to $9.0 million in H1 2023, partly due to proceeds from bitcoin sales ($28.5 million in H1 2023)[15][210] - Cash used in investing activities decreased from $81.9 million in H1 2022 to $28.4 million in H1 2023, reflecting reduced investments in joint ventures and plant/equipment purchases[15][211] - Cash provided by financing activities decreased from $59.9 million in H1 2022 to $37.4 million in H1 2023, with proceeds from common stock issuances being a primary source[15][212] Notes to Consolidated Financial Statements The notes provide detailed explanations of the company's financial reporting, including its business operations, significant accounting policies, and specific transactions NOTE 1 – ORGANIZATION This note describes TeraWulf Inc.'s business as a sustainable bitcoin miner, its public listing, and steps taken to address liquidity and achieve positive cash flows - TeraWulf's core business is sustainable bitcoin mining, operating facilities in New York (Lake Mariner) and Pennsylvania (Nautilus Cryptomine, a joint venture)[16][17] - The company became publicly traded in December 2021 via a merger with IKONICS Corporation, whose traditional business was sold and classified as discontinued operations[18] - Despite a net loss of $44.3 million and negative cash flows from continuing operations of $9.3 million for H1 2023, the company achieved 5.5 EH/s operating capacity by June 2023 and expects positive cash flows from operations[19] - Key steps to achieve positive cash flows include amending long-term debt to remove fixed principal amortization, receiving $36.1 million net proceeds from equity/equity-linked securities, funding all known capital commitments at Nautilus, receiving all contracted miners for existing facilities, and substantially completing construction at both facilities[21][23] NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES This note details the significant accounting policies used in preparing the consolidated financial statements, covering areas from basis of presentation to revenue recognition and cryptocurrencies Basis of Presentation and Principles of Consolidation This section outlines the basis for preparing unaudited interim consolidated financial statements in accordance with U.S. GAAP - Unaudited interim consolidated financial statements are prepared in accordance with U.S. GAAP, reflecting all necessary normal recurring adjustments[25] - Certain prior period cash flow amounts for H1 2022 were restated to correct miscalculations of noncash activity on plant and equipment purchases, which understated net cash used in investing and overstated net cash used in operating activities[26] Use of Estimates in the Financial Statements This section highlights the necessity of management estimates for various financial statement items, including fair values and impairment assessments - Financial statements require management estimates for items such as fair values in business combinations, useful lives of assets, impairment assessments, fair value of equity securities/warrants, stock-based compensation, right-of-use assets, and various accruals[28] Supplemental Cash Flow Information This section provides supplemental disclosure of non-cash activities impacting the company's financial position Supplemental Disclosure of Non-Cash Activities (In thousands) | Supplemental disclosure of non-cash activities (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------------------------------------------------- | :----------------------------- | :----------------------------- | | Contribution of plant and equipment to joint venture | $35,792 | — | | Common stock warrants issued for discount on long-term debt | $16,036 | — | | Common stock reacquired in exchange for warrants | $12,479 | — | | Convertible promissory notes converted to common stock | $4,666 | — | Cash and Cash Equivalents This section details the company's cash and cash equivalents, including balances exceeding FDIC insurance limits and fund transfers - Cash and cash equivalents were $8.2 million at June 30, 2023, down from $8.3 million (including restricted cash) at December 31, 2022[30][34] - The company's bank balances exceeded FDIC insurance limits by approximately $1.8 million as of June 30, 2023[30] - Following the closure of Signature Bank in March 2023, the company's funds were transferred out by April 5, 2023, after the FDIC guaranteed all depositors would be made whole[31][32] Restricted Cash This section clarifies the company's restricted cash position, noting its absence as of June 30, 2023 - The company had no restricted cash as of June 30, 2023, compared to $7.044 million at December 31, 2022, which was held in escrow from an asset sale[33][34] Segment Reporting This section identifies the company's sole operating segment as Digital Currency Mining, with former segments classified as discontinued operations - TeraWulf's current operations are solely within the Digital Currency Mining segment, with all mining activities located in the United States[35] - The former Imaging Technology segment (RM 101) was classified as held for sale and discontinued operations[35] Property, Plant and Equipment This section outlines the accounting policies for property, plant, and equipment, including depreciation methods and interest capitalization - Property, plant and equipment are recorded at cost, net of accumulated depreciation, using the straight-line method over estimated useful lives (5 years for computer equipment, 4 years for mining equipment)[36] - Interest related to asset construction is capitalized when material, construction has begun, and interest is incurred, ceasing when the asset is substantially complete or interest costs are no longer incurred[37] Leases This section describes the company's lease accounting policies, distinguishing between operating and finance leases and their balance sheet treatment - Leases are classified as operating or finance leases, with operating leases included in ROU assets and lease liabilities on the balance sheet[38][39] - The company does not recognize ROU assets or lease liabilities for short-term leases (12 months or less)[40] - As of June 30, 2023, the company is not a counterparty to any finance leases[43] Debt Modification This section explains the accounting treatment for debt instrument amendments, evaluating them for extinguishment or modification based on specific criteria - Amendments to debt instruments are evaluated for extinguishment or modification accounting based on changes in fair value of embedded conversion options or net present value of future cash flows (10% threshold)[44] Convertible Instruments This section details the accounting for convertible debt and equity instruments, assessing for liability classification or embedded derivatives - Convertible debt and equity instruments are accounted for under ASC 480 and ASC 815, assessing for liability classification or embedded derivatives requiring separate fair value accounting[45][47] Warrants This section describes the classification of warrants as either liabilities or equity, noting all granted warrants are currently equity-classified - Warrants are classified as liabilities or equity based on ASC 480 and ASC 815; all warrants granted to date are classified as equity[48] Nonmonetary Transactions This section outlines the accounting for nonmonetary transactions, typically at fair value unless commercial substance is lacking or fair value is undeterminable - Nonmonetary transactions are accounted for at fair value unless commercial substance is lacking or fair value is not determinable, in which case the recorded amount of the relinquished asset is used[49] Stock Issuance Costs This section explains that stock issuance costs reduce proceeds and are capitalized if the related issuance is probable - Stock issuance costs are recorded as a reduction to issuance proceeds and are capitalized in other assets if the closing of the related issuance is probable[50] Held for Sale and Discontinued Operations Classification This section defines criteria for classifying a business as held for sale and subsequently as discontinued operations, including impairment measurement - A business is classified as held for sale when management commits to a plan to sell, it's available for immediate sale, an active program is initiated, sale within one year is probable, and it's marketed at a reasonable price[51] - Newly acquired businesses meeting these criteria are reported as discontinued operations, with net assets measured for impairment[52] Revenue Recognition This section details the company's revenue recognition policies for mining pool services and data center hosting, adhering to FASB ASC 606 - Revenue is recognized under FASB ASC 606, following a five-step process to depict the transfer of promised goods or services to customers[53] - For mining pool services, the company provides computing power to Foundry USA Pool under an FPPS model, earning pay-per-share base amounts and transaction fees in Bitcoin, recognized daily[59][60] - Data center hosting revenue is recognized over time as customers simultaneously receive and consume benefits, with consideration primarily in cash but also cryptocurrency[62] - Miner hosting revenue was $1.7 million and $4.0 million for the three and six months ended June 30, 2023, respectively, a significant increase from $388,000 in the prior year periods[62] Cryptocurrencies This section outlines the accounting for cryptocurrencies as indefinite-lived intangible assets, subject to continuous impairment assessment - Cryptocurrencies, primarily Bitcoin, are classified as current assets due to liquidity and intent to liquidate for operations[63] - Cryptocurrencies are accounted for as indefinite-lived intangible assets, assessed for impairment continuously based on the intraday low quoted price in the principal market; impairment losses are not reversible[64] - Sales of cryptocurrencies and awards are included in operating cash flows, using the FIFO method for gains/losses[65] Cost of Revenue This section defines the components of cost of revenue for both mining pool services and data center hosting - Cost of revenue for mining pool services primarily consists of direct electricity costs (excluding depreciation)[66] - Cost of revenue for data center hosting includes direct electricity, labor, and internet provision[66] Stock-based Compensation This section describes the measurement and recognition of stock-based compensation expense over the service period - Stock-based compensation is measured at grant date fair value (stock price for time-based RSUs, Monte Carlo for market-based RSUs) and recognized straight-line over the service period[67] Power Curtailment Credits This section explains that payments from demand response programs are recorded as a reduction in cost of revenue - Payments from demand response programs are recorded as a reduction in cost of revenue, totaling $589,000 and $719,000 for the three and six months ended June 30, 2023, respectively (vs. $0 in prior year)[68] Other Income This section identifies interest income and short-swing profit disgorgement as primary components of other income - Other income primarily consists of interest income on bank deposits and a $39,000 disgorgement of short-swing profits for the three and six months ended June 30, 2023[69] Loss per Share This section details the computation of loss per share using the two-class method and identifies dilutive instruments - Loss per share is computed using the two-class method for participating securities, with basic loss per share dividing net loss attributable to common stockholders by weighted average common shares outstanding[70][71] - As of June 30, 2023, dilutive instruments include convertible preferred stock (approx. 1.1 million common shares upon conversion), 50.7 million common stock warrants (weighted average strike $0.56), and 9.4 million RSUs[72][73] Concentrations This section highlights key business concentrations, including reliance on suppliers, a major customer, and Bitcoin market value sensitivity - The company relies on two suppliers for bitcoin miners and one mining pool operator[74] - Revenue from one data center hosting customer represented 11.2% and 13.8% of consolidated revenue for the three and six months ended June 30, 2023, respectively[74] - The company's financial condition is sensitive to significant declines in Bitcoin market value, as it currently only mines Bitcoin[74] NOTE 3 – BUSINESS COMBINATION, ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS This note details the December 2021 business combination with IKONICS Corporation, the Contingent Value Rights (CVRs) issued, and the accounting for discontinued operations - TeraWulf became publicly traded on Nasdaq in December 2021 through a merger with IKONICS Corporation[75] - Former IKONICS shareholders received Contingent Value Rights (CVRs), entitling them to 95% of net proceeds from the sale of IKONICS' pre-merger business, with payments calculated quarterly[75] - All RM 101 (formerly IKONICS) assets held for sale were sold by December 31, 2022. By June 30, 2023, $9.6 million in proceeds had been distributed to CVR holders, with an estimated remaining CVR liability of $1.3 million[78] Loss from Discontinued Operations, Net of Tax (In thousands) | Loss from discontinued operations, net of tax (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net sales | $— | $4,595 | $— | $8,825 | | Gross profit | $— | $1,498 | $— | $2,505 | | Loss from discontinued operations, net of tax | $(3) | $(630) | $(38) | $(4,942) | NOTE 4 – FAIR VALUE MEASUREMENTS This note outlines the company's fair value measurement practices, including the valuation of contingent consideration liability and common stock warrants - Fair value measurements are based on a three-level hierarchy, prioritizing observable inputs[82] Financial Instruments Measured at Fair Value (In thousands) | Financial Instruments Measured at Fair Value (in thousands) | June 30, 2023 (Carrying Value) | December 31, 2022 (Carrying Value) | | :-------------------------------------------------------- | :----------------------------- | :--------------------------------- | | Contingent consideration liability - Contingent Value Rights | $1,302 | $10,900 | - The contingent consideration liability for CVRs is measured at fair value on a non-recurring basis using Level 2 observable inputs[83][85] - Common Stock warrants are valued using a Black-Scholes option pricing model with Level 3 inputs, including a discount for lack of marketability (DLOM) of 20-30% due to contractual restrictions[87] NOTE 5 – BITCOIN This note summarizes the company's Bitcoin activity, including receipts from mining and investee distributions, impairment losses, and dispositions Bitcoin Activity (In thousands) | Bitcoin Activity (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------ | :----------------------------- | :----------------------------- | | Beginning balance | $183 | $— | | Bitcoin received from mining pool and hosting services | $24,206 | $1,214 | | Bitcoin received as distribution from investee | $4,943 | $— | | Impairment | $(1,309) | $(563) | | Disposition | $(27,315) | $— | | Ending balance | $708 | $651 | - Bitcoin received from mining and hosting services increased substantially from $1.214 million in H1 2022 to $24.206 million in H1 2023[88] - The company received $4.943 million in Bitcoin as a distribution from an investee in H1 2023, with no such distributions in H1 2022[88] NOTE 6 — PROPERTY, PLANT AND EQUIPMENT This note details the composition of property, plant, and equipment, net, highlighting changes in miners, construction in process, and depreciation expense Property, Plant and Equipment, Net (In thousands) | Property, Plant and Equipment, net (in thousands) | June 30, 2023 | December 31, 2022 | | :------------------------------------------------ | :------------ | :------------------ | | Miners | $99,671 | $71,114 | | Construction in process | $1,949 | $32,360 | | Leasehold improvements | $62,450 | $29,880 | | Deposits on miners | $872 | $57,626 | | Total | $180,304 | $198,188 | | Less: accumulated depreciation | $(18,528) | $(6,667) | | Net | $161,776 | $191,521 | - Miners increased by $28.5 million, while construction in process decreased by $30.4 million and deposits on miners decreased by $56.7 million from December 31, 2022, to June 30, 2023[89] - Capitalized interest costs were $2.2 million for the six months ended June 30, 2023, down from $2.4 million in the prior year period[89] - Depreciation expense significantly increased to $11.9 million for the six months ended June 30, 2023, from $204,000 in the prior year, reflecting increased mining capacity in service[90] NOTE 7 — LEASES This note details the company's operating lease arrangements, primarily the Ground Lease for its New York facility, including amendments and expenses - The Ground Lease for the Lake Mariner Facility, with a related party, was amended in July 2022, extending the initial term to eight years and resulting in an $11.2 million increase to both right-of-use asset and operating lease liability[91] - Operating lease expense for the six months ended June 30, 2023, was $669,000 (including $108,000 contingent expense), compared to $99,000 (including $25,000 contingent expense) in the prior year[91] Maturity Analysis of Undiscounted Operating Lease Liabilities (In thousands) | Maturity Analysis of Undiscounted Operating Lease Liabilities (in thousands) | Amount | | :------------------------------------------------------------------- | :----- | | Year ending December 31, 2023 | $82 | | Year ending December 31, 2024 | $163 | | Year ending December 31, 2025 | $163 | | Year ending December 31, 2026 | $163 | | Year ending December 31, 2027 | $163 | | Thereafter | $1,045 |\n| Total Undiscounted Cash Flows | $1,779 |\n| Total operating lease liability (recognized) | $969 | NOTE 8 – INCOME TAXES This note explains the company's income tax accounting, including the 0.0% effective tax rate due to a full valuation allowance against deferred tax assets - The company's effective tax rate was 0.0% for the three and six months ended June 30, 2023 and 2022, differing from the statutory rate of 21% due to a full valuation allowance[93] - A valuation allowance is recorded against deferred tax assets because management believes it is more likely than not that the benefits of remaining deductible temporary differences will not be realized, based on historical U.S. losses and future projections[94] - No unrecognized tax benefits, accrued interest, or penalties related to unrecognized tax benefits were recorded as of June 30, 2023, or December 31, 2022[95] NOTE 9 – DEBT This note details the company's long-term debt, primarily a $146.0 million Term Loan facility, including amendments, warrant issuances, and principal maturities Long-Term Debt (In thousands) | Long-Term Debt (in thousands) | June 30, 2023 | December 31, 2022 | | :---------------------------- | :------------ | :------------------ | | Term loan | $146,000 | $146,000 | | Debt issuance costs and debt discount | $(27,177) | $(21,095) | | Total long-term debt, net of current portion | $82,396 | $72,967 | - The company's primary long-term debt is a $146.0 million Term Loan facility under the LGSA, maturing December 1, 2024, with an interest rate of 11.5%[96] - The Fifth Amendment (March 2023) eliminated mandatory amortization of term loans through April 7, 2024, and involved issuing 27.76 million Penny Warrants (strike $0.01) and 13.88 million Dollar Warrants (strike $1.00) to lenders[105][107] - Debt modification accounting was applied to the Fifth Amendment, with $16.0 million allocated value of warrants amortized as interest expense over the remaining term at an effective rate of 18.8%[108] Principal Maturities of Outstanding Long-Term Debt (In thousands) | Principal Maturities of Outstanding Long-Term Debt (in thousands) | Amount | | :---------------------------------------------------------------- | :----- | | Year ending December 31, 2023 | $15 | | Year ending December 31, 2024 | $146,034 |\n| Year ending December 31, 2025 | $36 | | Year ending December 31, 2026 | $20 | | Total principal maturities | $146,105 | NOTE 10 – STANDBY EQUITY PURCHASE AGREEMENT AND CONVERTIBLE PROMISSORY NOTE This note describes the terminated Standby Equity Purchase Agreement, the Yorkville Convertible Promissory Note, and other convertible notes converted to common stock - The Standby Equity Purchase Agreement (SEPA) with Yorkville, allowing the company to sell up to $50 million in common stock, was terminated on December 20, 2022, with no advances made[112] - The Yorkville Convertible Promissory Note, issued for $14.7 million in June 2022, was subject to debt extinguishment accounting in October 2022 due to significant term changes, resulting in a $2.1 million loss[113] - Convertible Promissory Notes issued in November 2022 (approx. $3.4 million) and January 2023 ($1.25 million) were converted into 8,628,024 and 3,134,932 shares of Common Stock, respectively, in March 2023[114][116][117] NOTE 11 – JOINT VENTURE This note details the Nautilus Cryptomine LLC joint venture, including TeraWulf's equity interest, Bitcoin distributions, and nonmonetary transactions involving miner transfers - TeraWulf holds a 25% equity interest in Nautilus Cryptomine LLC, a joint venture with Talen Energy Corporation, for a bitcoin mining facility in Pennsylvania[118][119][121] - The company received $4.9 million in Bitcoin distributions from Nautilus during the six months ended June 30, 2023[118] - Transfers of approximately 4,900 MinerVA miners from Nautilus to the Lake Mariner Facility in Q1 2023 resulted in an estimated fair value of $6.9 million and a loss of $13.6 million (for the six months ended June 30, 2023) due to decreasing miner prices[131][133] - The company contributed miners with a fair value of $36.7 million to Nautilus during the six months ended June 30, 2023[134] NOTE 12 – COMMITMENTS AND CONTINGENCIES This note outlines the company's commitments and contingencies, including legal proceedings, Bitmain miner purchase agreements, and a 10-year power agreement with NYPA - The company is not a party to any material legal proceedings[135] - Most Bitmain miner purchase agreements from 2021-2022 (Second, Third, September 2022, November 2022, December 2022) were concluded by June 30, 2023, with no further deliveries or payments due[136][137][138][139][141] - A new July 2023 Bitmain Agreement commits the company to purchase 15,138 S19j XP miners (with an option for 3,362 more) for Q4 2023 delivery, with an estimated effective purchase price of $53.4 million after applying coupons[174][215] - The company has a 10-year agreement with NYPA for up to 90 MW of electric power, subject to site investment and employment targets[142] NOTE 13 – CONVERTIBLE PREFERRED STOCK This note describes the Series A Convertible Preferred Stock, including its issuance, cumulative dividends, liquidation preference, and conversion features - In March 2022, TeraWulf sold 9,566 shares of Series A Convertible Preferred Stock for an aggregate purchase price of $9.6 million[143] - Holders accumulate 10.0% annual cumulative dividends, which are accreted to the liquidation preference. The aggregate liquidation preference was approximately $10.9 million as of June 30, 2023[144][148] - The Convertible Preferred Stock ranks senior to common stock upon liquidation and can be converted into approximately 1.1 million shares of Common Stock at the current conversion price[144][148] - No dividends were paid on preferred stock during the six months ended June 30, 2023, or 2022[148] NOTE 14 – COMMON STOCK This note details significant common stock activities, including the increase in authorized shares, various private placements, public offerings, and ATM sales - Shareholders approved an increase in authorized common stock from 200 million to 400 million shares on February 23, 2023[149][150] - In H1 2023, the company completed a February 2023 underwritten public offering of 40,764,706 shares, generating $26.6 million in net proceeds[161] - Through the ATM Sales Agreements, the company sold 3,048,196 shares of Common Stock for net proceeds of $5.2 million during H1 2023, with $184.6 million remaining capacity[154][155] - Other significant equity transactions in late 2022 and early 2023 included the October Private Placement ($9.4 million), December Private Placement ($6.74 million), January Private Placement ($1.75 million), and the exercise of January 2023 Warrants and New Exchange Warrants[156][157][158][159][160] NOTE 15 – STOCK-BASED COMPENSATION This note details the company's stock-based compensation expense, RSU grants, and unrecognized compensation costs for employees and non-employees - Stock-based compensation expense for the six months ended June 30, 2023, was $2.6 million, compared to $482,000 in the prior year period[165] Unvested Restricted Stock Units (Employees & Board of Directors) | Unvested Restricted Stock Units (Employees & Board of Directors) | Number of Shares | Weighted Average Grant-Date Fair Value | | :--------------------------------------------------------------- | :--------------- | :------------------------------------- | | Unvested as of December 31, 2022 | 1,931,187 | $2.87 | | Granted | 6,852,358 | $0.43 | | Vested | (2,197,854) | $1.08 | | Unvested as of June 30, 2023 | 6,585,691 | $0.93 | - As of June 30, 2023, unrecognized compensation cost for unvested employee and Board of Directors RSUs was $5.2 million, expected to be recognized over a weighted average period of 0.8 years[168] - Unrecognized compensation cost for unvested non-employee RSUs (excluding Board members) was $2.0 million, expected to be recognized over a weighted average period of 1.1 years[169] NOTE 16 – RELATED PARTY TRANSACTIONS This note details transactions with Beowulf Electricity & Data Inc., a related party, for construction and operational services, including fees and share-based liabilities - The company has a Services Agreement with Beowulf E&D, a related party, for construction and operational services at its bitcoin mining facilities[170] - Effective January 1, 2023, the annual base fee payable to Beowulf E&D was reduced to $8.46 million[172] - Payments to Beowulf E&D under the Services Agreement totaled $11.0 million for the six months ended June 30, 2023[172] - Share-based liabilities due to related parties for performance milestones were $15.0 million as of June 30, 2023, with $417,000 in related expense recognized for the six months ended June 30, 2023[173] NOTE 17 – SUBSEQUENT EVENTS This note discloses subsequent events, including a new Bitmain miner purchase agreement and additional common stock sales through the ATM Sales Agreement - On July 14, 2023, the company entered into an agreement with Bitmain Delaware to purchase 15,138 S19j XP miners (with an option for 3,362 more) for Q4 2023 delivery, with an estimated effective purchase price of $53.4 million after coupons[174] - Between July 1 and August 14, 2023, the company sold 3,623,762 shares of Common Stock via its ATM Sales Agreement, generating $10.0 million in net proceeds[175] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of the company's financial condition and operational results, covering recent developments, business overview, and liquidity Recent Developments This section highlights TeraWulf's recent compliance with Nasdaq's minimum bid price requirement after a prior notification - TeraWulf received a Nasdaq notice in March 2023 for failing to meet the $1.00 minimum bid price requirement[177] - The company regained compliance with Nasdaq Listing Rule 5550(a)(2) by April 24, 2023, after its common stock traded at or above $1.00 for 10 consecutive business days[177] General This section provides an overview of TeraWulf's business as a vertically-integrated, environmentally clean bitcoin miner with facilities in New York and Pennsylvania - TeraWulf is a vertically-integrated owner and operator of environmentally clean bitcoin mining facilities in the U.S., currently utilizing over 91% zero-carbon energy with a mission to achieve 100%[178] - The Lake Mariner Facility in New York operates 110 MW of bitcoin mining capacity and is expanding with a third building for an incremental 43 MW[179] - The Nautilus Cryptomine Facility, a joint venture, operates 50 MW of proprietary bitcoin mining capacity powered by 100% 'behind the meter' zero-carbon nuclear energy at a fixed rate of 2.0 cents/kWh for five years[180] - TeraWulf has an option to increase its energy requirement at Nautilus by an incremental 50 MW by May 13, 2024[181] The Business Combination This section details TeraWulf's December 2021 business combination with IKONICS Corporation, which led to its public listing and the issuance of Contingent Value Rights - TeraWulf completed its business combination with IKONICS Corporation on December 13, 2021, becoming a publicly traded company on Nasdaq[184] - IKONICS shareholders received TeraWulf common stock, $5.00 in cash, and Contingent Value Rights (CVRs) entitling them to 95% of net proceeds from the sale of IKONICS' pre-merger business[184][185] - All IKONICS net assets held for sale were sold by December 31, 2022, and the CVR liability was $1.3 million as of June 30, 2023[185] Results of Operations This section analyzes the company's financial performance, including revenue, costs, expenses, and a reconciliation of non-GAAP adjusted EBITDA Revenue and Cost of Revenue This section analyzes the significant increase in revenue and cost of revenue, driven by expanded mining and hosting capacity Revenue and Cost of Revenue (In thousands) | (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $15,456 | $1,385 | $26,989 | $1,602 | | Cost of revenue (exclusive of depreciation) | $5,113 | $591 | $10,115 | $623 | - Revenue increased by $25.4 million for the six months ended June 30, 2023, compared to the prior year, primarily due to increased mining and hosting capacity[189] - Cost of revenue (exclusive of depreciation) increased by $9.5 million for the six months ended June 30, 2023, driven by increased mining and hosting capacity[190] - Power curtailment credits, recorded as a reduction in cost of revenue, totaled $719,000 for the six months ended June 30, 2023, compared to $0 in the prior year[190] Costs and Expenses This section details changes in operating expenses, depreciation, digital currency impairment, and interest expense, reflecting expanded operations Operating Expenses (In thousands) | Operating Expenses (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating expenses | $468 | $948 | $776 | $1,428 | | Operating expenses - related party | $639 | $147 | $1,236 | $209 | | Total Operating Expenses | $1,107 | $1,095 | $2,012 | $1,637 | - Selling, general and administrative expenses (including related party) increased by $2.3 million to $17.9 million for the six months ended June 30, 2023, primarily due to higher stock-based compensation ($2.1 million increase) and employee compensation ($1.9 million increase), partially offset by decreased legal and insurance fees[194] - Depreciation expense surged to $11.9 million for the six months ended June 30, 2023, from $204,000 in the prior year, reflecting increased mining capacity in service[195] - Digital currency impairment was $1.3 million for H1 2023, while realized gain on sale of digital currency was $1.2 million, both increasing due to higher Bitcoin volume[196] - Interest expense increased by $5.8 million to $15.3 million for the six months ended June 30, 2023, driven by higher average principal outstanding and increased amortization of debt issuance costs/discount[197] - Equity in net loss of investee, net of tax, was $13.5 million for H1 2023, including a $13.6 million impairment loss on distributed miners from Nautilus[201] - Loss from discontinued operations, net of tax, was minimal ($38,000) for H1 2023, as RM 101's assets were sold prior to the period[202] Non-GAAP Measure This section presents Adjusted EBITDA as a non-GAAP measure, providing insights into core business operating results by excluding specific items - The company presents Adjusted EBITDA as a non-GAAP measure to provide meaningful comparisons of core business operating results, excluding items like interest, taxes, depreciation, amortization, preferred stock dividends, stock-based compensation, equity in net loss of investee, non-routine regulatory costs, other income, and discontinued operations[203][204] Non-GAAP Adjusted EBITDA (In thousands) | Non-GAAP Adjusted EBITDA (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss attributable to common stockholders | $(17,805) | $(13,908) | $(44,321) | $(32,136) | | Non-GAAP adjusted EBITDA | $7,615 | $(7,053) | $5,266 | $(15,260) | - Adjusted EBITDA significantly improved to $5.266 million for the six months ended June 30, 2023, from a negative $15.260 million in the prior year period[207] Liquidity and Capital Resources This section discusses the company's cash position, working capital, and accumulated deficit, outlining steps taken to ensure liquidity and achieve positive cash flows - As of June 30, 2023, the company had $8.2 million in cash and cash equivalents, a working capital deficiency of $67.3 million, and an accumulated deficit of $230.3 million[208] - The company expects to achieve positive cash flows from operations after reaching 5.5 EH/s operating capacity in June 2023[208][217] Cash Flows (In thousands) | Cash Flows (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------ | :----------------------------- | :----------------------------- | | Operating activities | $(9,010) | $(23,535) | | Investing activities | $(28,433) | $(81,918) | | Financing activities | $37,361 | $59,920 | - Key actions to achieve positive cash flows include amending long-term debt, raising $36.1 million in net proceeds from equity/equity-linked securities, completing capital commitments at Nautilus, receiving all contracted miners, and substantially completing construction at both facilities[218] - The company has an active At Market Issuance Sales Agreement (ATM Offering) for up to $200.0 million in common stock, providing additional liquidity if needed[218] Critical Accounting Policies and Estimates This section highlights critical accounting policies and estimates requiring significant management judgment, including VIEs, revenue recognition, cryptocurrencies, debt, and income taxes Variable Interest Entities This section explains the company's judgment in determining Variable Interest Entities (VIEs) and primary beneficiary status, specifically for the Nautilus JV - The company determines if an entity is a VIE and if it is the primary beneficiary, requiring significant judgment regarding power to direct activities and obligation to absorb losses or right to receive benefits[222][223] - Nautilus Cryptomine LLC is determined to be a VIE, but TeraWulf is not the primary beneficiary and accounts for it under the equity method, as it does not have the power to direct the most significant economic activities[224] Mining Pool This section details revenue recognition for mining pool services, where the company earns variable non-cash consideration in cryptocurrency - The company provides computing power to the Foundry USA Pool under an FPPS model, earning variable non-cash consideration (cryptocurrency) daily, with revenue recognized when a significant reversal is improbable[225][226] Data Center Hosting This section describes the recognition of hosting revenue over time as customers consume services, with consideration in cash or cryptocurrency - Hosting revenue is recognized over time as customers consume services, with consideration primarily in cash but also cryptocurrency, valued at the quoted price at contract inception[228] Cryptocurrencies This section reiterates the accounting for cryptocurrencies as indefinite-lived intangible assets, subject to continuous impairment assessment - Cryptocurrencies are classified as indefinite-lived intangible assets, assessed for impairment continuously based on the intraday low quoted price; impairment losses are not reversible[229][230] Issuance of Debt with Common Stock or Warrants; Debt Modification This section addresses the complex accounting for debt issuances with equity components and debt modifications, requiring significant judgment in fair value allocation - Accounting for debt issuances with equity components and debt modifications is complex, requiring significant judgment in fair value allocation and determining if extinguishment or modification accounting applies[232][233][234][235][236] - A 10% change in the estimated fair value of the Term Loan component could result in a $1.9 million change in allocation between debt and equity[232] - A 10% change in the estimated fair value of warrants issued with debt could result in a $0.2 million to $1.6 million change in the recorded value of the borrowing[233][235][236] Convertible Instruments This section outlines the assessment of convertible debt and equity instruments for liability classification or embedded derivatives - Convertible debt and equity instruments are assessed under ASC 480 and ASC 815 to determine if they require liability classification or contain embedded derivatives to be fair valued separately[237] Income Taxes This section details income tax accounting using the asset and liability approach, with a critical estimate being the valuation allowance against deferred tax assets - Income taxes are accounted for using the asset and liability approach, with a critical estimate being the determination of a valuation allowance against deferred tax assets based on the likelihood of realization[238] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, TeraWulf Inc. is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, TeraWulf Inc. is exempt from providing quantitative and qualitative disclosures about market risk[241] ITEM 4. Controls and Procedures Management, with CEO and CFO participation, concluded the company's disclosure controls and procedures were effective as of June 30, 2023 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, ensuring timely and accurate reporting to the SEC[242][244] - No material changes in internal control over financial reporting occurred during the three months ended June 30, 2023[243] PART II — OTHER INFORMATION This part provides additional information not covered in the financial statements, including legal proceedings, risk factors, and exhibits ITEM 1. Legal Proceedings TeraWulf Inc. was not subject to any material pending legal or administrative proceedings, lawsuits, or claims during the reporting period - TeraWulf was not subject to any material pending legal and administrative proceedings, lawsuits, or claims during the period covered by this Quarterly Report[245] ITEM 1A. Risk Factors This section highlights new and updated risk factors, including maintaining cash balances exceeding insured limits, vulnerability to severe weather, and internet disruptions - The company maintains cash balances at financial institutions that, at times, exceed federally insured limits, posing a risk of loss if institutions fail[247] - The business is vulnerable to severe weather conditions, natural disasters, power outages, and other industrial incidents, particularly in Maryland, New York, and Pennsylvania, which could disrupt operations[248] - Internet disruptions could adversely affect Bitcoin prices and the company's ability to mine Bitcoin, as its operations are dependent on internet connectivity[249] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds. This item reports that there were no unregistered sales of equity securities or use of proceeds to disclose for the period - No unregistered sales of equity securities or use of proceeds are reported for the period[251] ITEM 3. Defaults Upon Senior Securities. This item reports that there were no defaults upon senior securities to disclose for the period - No defaults upon senior securities are reported for the period[252] ITEM 4. Mine Safety Disclosures. This item reports that there were no mine safety disclosures to report for the period - No mine safety disclosures are reported for the period[253] ITEM 5. Other Information. This item reports that there was no other information to disclose for the period - No other information is reported for the period[254] ITEM 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including corporate documents, officer certifications, and iXBRL financial statements - Exhibits include amendments to the Certificate of Incorporation and Bylaws, certifications required by the Sarbanes-Oxley Act (Sections 302 and 906) from the Principal Executive and Financial Officers[256] - Financial statements for the quarter ended June 30, 2023, are provided in Inline Extensible Business Reporting Language (iXBRL) format[256] SIGNATURES This section contains the required signatures for the Form 10-Q, confirming its submission by the company's executive officers - The report is signed by Paul B. Prager (Chief Executive Officer and Chairman), Patrick A. Fleury (Chief Financial Officer), and Kenneth J. Deane (Chief Accounting Officer and Treasurer) on August 14, 2023[261]