Cipher Digital Inc.: Form 10-Q for the period ended Jun 30, 2024

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report, as well as our audited consolidated financial statements and related notes disclosed in our 2023 Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the “Risk Factors” sections of our 2023 Form 10-K and this Quarterly Report and in other parts of this Quarterly Report.

Unless the context otherwise requires, references in this Quarterly Report to the “Company,” “Cipher,” “Cipher Mining,” “we,” “us” or “our” refers to Cipher Mining Inc. and its consolidated subsidiaries, unless otherwise indicated.

Overview

We are an emerging technology company that develops and operates industrial scale bitcoin mining data centers. Bitcoin mining is our principal revenue generating business activity.

We currently operate four bitcoin mining data centers in Texas, including one wholly-owned and three partially-owned data centers acquired through investments in joint ventures. Our largest data center is the Odessa data center (the “Odessa Facility”), which is our wholly-owned 207 MW facility located in Odessa, Texas. We also jointly operate the Alborz data center (the “Alborz Facility”) located near Happy, Texas, Bear data center (the “Bear Facility”) and our Chief data center (the “Chief Facility”) are both located near Andrews, Texas which are partially-owned through joint ventures with WindHQ LLC (“WindHQ”). We are also developing an additional wholly-owned data center in Winkler County, TX (“Black Pearl” or the “Black Pearl Facility”) for up to 300 MW, and we expect to energize 300 MW in 2025.

Our current intention is to continue to expand our bitcoin mining business by developing additional data centers, expanding capacity at our current data centers, developing our treasury management platform and entering into other arrangements, such as joint ventures, data center hosting agreements, or software licensing arrangements.

Our key mission is to expand and strengthen the Bitcoin network’s critical infrastructure. As of July 31, 2024, we operated an aggregate hashrate capacity of approximately 10.6 EH/s, utilizing approximately 310 MW of electricity, of which we owned an aggregate hashrate capacity of approximately 8.7 EH/s, utilizing approximately 257 MW of electricity.

Recent Developments

Miner Purchases and Miner Purchase Amendments

On June 5, 2024, we entered into a Sales and Purchase Contract (the “Canaan Agreement”) with Canaan Creative Global Pte. Ltd. (“Canaan”) to purchase 1.25 EH/s of miners to be delivered in the fourth quarter of 2024. We paid a deposit of $6.6 million in connection with the Canaan Agreement, with $9.8 million left to be paid. Additionally, the Canaan Agreement included an option to purchase 160 MW of miners which we can exercise on or before June 30, 2025. We paid a deposit of $5.3 million associated with the option.

Also on June 5, 2024, we entered into a Supplemental Agreement to the Future Sales and Purchase Agreement (the “Supplemental Agreement”) with Bitmain Technologies Delaware Limited (“Bitmain”), which supplements that certain Future Sales and Purchase Agreement, dated December 16, 2023 (the “Original Agreement”). The Supplemental Agreement (1) upgraded the purchase of 37,396 Antminer T21 miners to 30,364 Antminer S21 Pro miners (the “Bitmain Miners”) and (2) accelerated the delivery of the Bitmain Miners from April 2025 to September 2024 and October 2024. The purchase price for the Bitmain Miners under the Supplemental Agreement is $134.3 million.

On July 10, 2024, we entered into an Amendment Agreement to the Future Sales and Purchase Agreement (the “Amendment Agreement”) with Bitmain, which upgraded the miners we have the option to purchase (the “Option Miners”), and extended the call option period we have to exercise our purchase of the Option Miners, which may be exercised in whole or in part, in one or more transactions, from December 31, 2024 to June 30, 2025. The purchase price for the Option Miners under the Amendment Agreement is $186.7 million. We paid an additional $6.2 million as a deposit in connection with this amendment.

Factors Affecting Our Results of Operations

There have been no material changes to the “Factors Affecting Our Results of Operations” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our 2023 Form 10-K. Our financial position and results of operations depend to a significant extent on those factors.

Summary of Bitcoin Mining Results

The following table presents information about our Bitcoin mining activities, including bitcoin production and sales of bitcoin (dollar amounts in thousands):

Components of our Results of Operations

For a description of the components of our results of operations, refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our 2023 Form 10-K.

Results of Operations

Comparative Results for the Three Months Ended June 30, 2024 and 2023

Revenue

Bitcoin mining operations at our Odessa Facility mined 558 bitcoin, generating revenue of $36.8 million for the three months ended June 30, 2024, at an average price per bitcoin of approximately $65.9 thousand, compared to 1,112 bitcoin, generating revenue of

$31.2 million for the three months ended June 30, 2023, at an average price per bitcoin of approximately $28.1 thousand. The increase in revenue in the current period was primarily driven by the increase in bitcoin price, partially offset by impact of the halving in April 2024.

Cost of revenue

Cost of revenue for the three months ended June 30, 2024 was $14.3 million, compared to $15.9 million for the three months ended June 30, 2023 and consisted primarily of power costs at the Odessa Facility as delivered under our power purchase agreement with Luminant ET Services Company LLC (the “Luminant Power Agreement”), as well as maintenance expenses for mining equipment. The decrease was primarily driven by decreased power costs at the Odessa Facility in the current year period.

Compensation and benefits

Compensation and benefits increased to $16.3 million for the three months ended June 30, 2024 compared to $12.7 million for the three months ended June 30, 2023. The increase is primarily driven by an increase in headcount and share-based compensation expense.

General and administrative

General and administrative expenses were $8.4 million for the three months ended June 30, 2024 compared to $8.7 million for the three months ended June 30, 2023. The decrease was primarily driven by a decrease on our D&O insurance in the current year.

Depreciation and amortization

Depreciation and amortization for the three months ended June 30, 2024 was $20.3 million, compared to $14.4 million for the three months ended June 30, 2023. Depreciation and amortization primarily relates to miners, mining equipment and leasehold improvements at the Odessa Facility. Also included in depreciation is the amortization of our finance lease right-of-use asset for our Interconnection Electrical Facilities (as defined below) that provides power to the Odessa Facility, amortization on our intangible assets, and accretion of our estimated asset retirement obligation related to the Odessa Facility and depreciation of the associated capitalized costs. The increase in depreciation in the current period primarily relates to increased assets placed into service in late 2023 to finish the build-out at the Odessa Facility, in addition to changing the estimated useful life of our miners from five years to three years effective June 1, 2024, increasing Depreciation and amortization by $3 million per month.

Change in fair value of derivative asset

The change in the fair value of our derivative asset related to the Luminant Power Agreement resulted in a gain of $22.0 million during the three months ended June 30, 2024 compared to $3.2 million for the three months ended June 30, 2023. The gains in both periods were primarily due to the change in the power market forward curve over the respective periods as power prices in the futures market continue to increase, outpacing the reduction of benefit from future periods.

Power sales

In accordance with the Luminant Power Agreement, we sold excess electricity that is available under the Luminant Power Agreement, but not needed in our mining operations at the Odessa Facility, back to the ERCOT market through Luminant for which we received proceeds of $1.1 million for the three months ended June 30, 2024 compared to $5.7 million for the three months ended June 30, 2023. Power sales vary each period due to changes in the opportunity cost of selling power instead of mining bitcoin.

Equity in losses of equity investees

Equity in losses of equity investees totaled approximately $0.6 million for the three months ended June 30, 2024, compared to $1.4 million for the three months ended June 30, 2023. Equity in losses of equity investees consists of our 49% share in the earnings or losses generated by our three partially-owned mining sites, and the accretion of the basis differences in our investments in the equity investees that resulted from contributions of miners during the year ended December 31, 2022. We are accreting these basis differences over the life of the miners. We recognized approximately $1.7 million for both the three months ended June 30, 2024 and June 2023, for the accretion of basis differences.

Losses (gains) on fair value of bitcoin

Losses on fair value of bitcoin was $16.3 million during the three months ended June 30, 2024, compared to gains of $0.9 million for the three months ended June 30, 2023. This activity primarily contains of the mark to market of our bitcoin held in inventory, and is highly correlated with bitcoin price. The loss in the current period was driven by an increase in bitcoin held in our inventory, and declining prices over the current quarter. The Company had a bitcoin inventory of 2,203 held at $62.7 thousand per bitcoin at June 30, 2024, compared to 1,730 bitcoin held at $71.3 thousand per bitcoin at March 31, 2024. In the prior year period, we held 404 bitcoin held at roughly $30.5 thousand per bitcoin at June 30, 2023, compared to 415 bitcoin held at $28.5 thousand per bitcoin at March 31, 2023.

Other income (expense)

Other income totaled $1.4 million for the three months ended June 30, 2024, primarily consisting of interest income earned on Cash and cash equivalent balances held in interest bearing accounts, gains and losses on derivative trading related to managing our bitcoin treasury, and interest expense on our finance lease related to our Interconnection Electrical Facilities. Other expense for the three months ended June 30, 2023 totaled $0.5 million and consisted primarily interest expense on our finance lease related to our Interconnection Electrical Facilities.

Income tax expense

Income tax expense totaled $0.5 million, or (3.6%) of income before taxes, and $0.6 million or (4.9%) of a loss before taxes for the three months ended June 30, 2024 and 2023, respectively, and was determined using the estimated effective tax rate for the year, adjusted for the impact of any discrete items which are accounted for in the period in which they occur.

Comparative Results for the Six Months Ended June 30, 2024 and 2023

Revenue

Bitcoin mining operations at our Odessa Facility mined 1,477 bitcoin, generating revenue of $84.9 million for the six months ended June 30, 2024, at an average price per bitcoin of approximately $57.5 thousand, compared to 2,055 bitcoin, generating revenue of $53.1 million for the six months ended June 30, 2023, at an average price per bitcoin of approximately $25.8 thousand. The increase in revenue in the current period was primarily driven by the increase in bitcoin price, partially offset by impact of the halving in April 2024.

Cost of revenue

Cost of revenue for the six months ended June 30, 2024 was $29.1 million, compared to $24.0 million for the six months ended June 30, 2023 and consisted primarily of power costs at the Odessa Facility as delivered under the Luminant Power Agreement, as well as maintenance expenses for mining equipment. The increase was primarily driven by increased maintenance expenses as a result of the Odessa Facility being fully operational. In the current period, Cost of revenue included $1.1 million of non-recurring costs to purchase parts intended to increase the efficiency of our miners.

Compensation and benefits

Compensation and benefits increased to $29.3 million for the six months ended June 30, 2024 compared to $24.6 million for the six months ended June 30, 2023. The increase is primarily driven by an increase in headcount, and share-based compensation.

General and administrative

General and administrative expenses were consistent at $14.4 million for the six months ended June 30, 2024 compared to $14.2 million for the six months ended June 30, 2023.

Depreciation and amortization

Depreciation and amortization for the six months ended June 30, 2024 was $37.5 million, compared to $26.1 million for the six months ended June 30, 2023. Depreciation and amortization primarily relates to miners, mining equipment and leasehold improvements at the Odessa Facility. Also included in depreciation is the amortization of our finance lease right-of-use asset for our Interconnection Electrical Facilities (as defined below) that provides power to the Odessa Facility, amortization on our intangible assets, and accretion of our estimated asset retirement obligation related to the Odessa Facility and depreciation of the associated capitalized costs. The increase in depreciation in the current period primarily relates to increased assets placed into service in late 2023 to finish the build-out at the Odessa Facility, in addition to changing the estimated useful life of our miners from five years to three years effective June 1, 2024, increasing Depreciation and amortization by $3 million per month.

Change in fair value of derivative asset

The change in the fair value of our derivative asset related to the Luminant Power Agreement resulted in a gain of $29.3 million during the six months ended June 30, 2024 compared to $8.6 million for the six months ended June 30, 2023. The gains in both periods were primarily due to the change in the power market forward curve over the respective periods as power prices in the futures market continue to increase, outpacing the reduction of benefit from future periods.

Power sales

In accordance with the Luminant Power Agreement, we sold excess electricity that is available under the Luminant Power Agreement, but not needed in our mining operations at the Odessa Facility, back to the ERCOT market through Luminant for which we received proceeds of $2.3 million for the six months ended June 30, 2024 compared to $5.7 million for the six months ended June 30, 2023. Power sales vary each period due to changes in the opportunity cost of selling power instead of mining bitcoin.

Equity in (gains) losses of equity investees

Equity in gains of equity investees totaled approximately $0.2 million for the six months ended June 30, 2024, compared to Equity in losses of equity investees of $2.2 million for the six months ended June 30, 2023. Equity in losses of equity investees consists of our 49% share in the earnings (losses) generated by our three partially-owned mining sites, and the accretion of the basis differences in our investments in the equity investees that resulted from contributions of miners during the year ended December 31, 2022. We are accreting these basis differences over the five-year useful life of the miners. We recognized approximately $3.3 million for the six months ended June 30, 2024 and 2023, respectively, for the accretion of basis differences.

Gains on fair value of bitcoin

Gains on fair value of bitcoin was $24.2 million during the six months ended June 30, 2024, compared to $5.1 million for the six months ended June 30, 2023. The increase in the current period was primarily driven by an increase in bitcoin held at rising prices by the Company in the current period. We had a bitcoin inventory of 2,203 held at $62.7 thousand per bitcoin at June 30, 2024, compared to 780 bitcoin held at $42.2 thousand per bitcoin at December 31, 2023. In the prior year, we had 404 bitcoin held at roughly $30.5 thousand per bitcoin at June 30, 2023, compared to 394 bitcoin held at $16.5 thousand per bitcoin at December 31, 2022.

Other gains

We recognized proceeds of approximately $2.3 million during the six months ended June 30, 2023 related to the sale of transferable coupons received from Bitmain Technologies Limited, with no comparable activity for the six months ended June 30, 2024.

Other income (expense)

Other income totaled $0.1 million for the six months ended June 30, 2024, compared to Other expense of $0.9 million in the prior period, and in both periods primarily consisted of interest income earned on Cash and cash equivalent balances held in interest bearing accounts, gains and losses on derivative trading related to managing our bitcoin treasury, and interest expense recognized related to our finance lease for the Interconnection Electrical Facilities. The increase in Other income primarily relates to cash management to generate interest income from cash held in money market accounts.

Income tax expense

Income tax expense totaled $6.1 million, or 19.8% of income before taxes, and $0.7 million, or (4.0%) of a loss before taxes for the six months ended June 30, 2024 and 2023, respectively, and was determined using the estimated effective tax rate for the year, adjusted for the impact of any discrete items which are accounted for in the period in which they occur.

Liquidity and Capital Resources

We used cash flows from operations of $52.0 million for the six months ended June 30, 2024. As of June 30, 2024, we had cash and cash equivalents of $122.6 million, total stockholders’ equity of $690.8 million and an accumulated deficit of $112.2 million. For our fiscal years prior to 2023, we relied in large part on proceeds from the consummation of our business combination with Good Works Acquisition Corp. (“GWAC”) to fund our operations. During fiscal year 2023, we funded operations through a combination of at-the-market stock issuances and bitcoin sales. During the six months ended June 30, 2024, we have not needed to sell our bitcoin inventory to support operating expenses.

On September 21, 2022, we filed the Registration Statement with the SEC. In connection with the filing of the Registration Statement, we also entered into an at-the market offering agreement (the “Prior Sales Agreement”) with H.C. Wainwright & Co., LLC (the “Prior

Agent”), under which we may, from time to time, sell shares of our Common Stock having an aggregate offering price of up to $250.0 million in “at-the-market” offerings through the Agent, which is included in the $500.0 million of securities that may be offered pursuant to the Registration Statement. Effective August 1, 2023, the Company terminated the Prior Sales Agreement.

On August 3, 2023, we entered into a Controlled Equity OfferingSM Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co., Canaccord Genuity LLC, Needham & Company, LLC and Compass Point Research & Trading, LLC (each, an “Original Agent” and, together, the “Original Agents”), pursuant to which we may offer and sell pursuant to a prospectus supplement, from time to time through or to the Original Agents, shares of our Common Stock, for aggregate gross proceeds of up to $250.0 million. The offering and sale of up to $250.0 million of the Shares has been registered under the Registration Statement, the base prospectus contained within the Registration Statement, and a prospectus supplement that was filed with the SEC on August 4, 2023 (the “Prospectus Supplement”).

On March 6, 2024, we entered into an amendment (the “Amendment”) to the Sales Agreement (as amended, the “Amended Sales Agreement”) by and among the Original Agents, Stifel, Nicolaus & Company, Incorporated (“Stifel”) and Virtu Americas LLC (“Virtu”) (each of the Original Agents, Stifel and Virtu, an “Agent” and, together, the “Agents”). The Amendment modifies the Sales Agreement to include Stifel and Virtu as additional agents under the Amended Sales Agreement. On March 6, 2024, we also filed an amendment to the Prospectus Supplement (i) increasing the dollar amount of shares available to be sold pursuant to the Amended Sales Agreement, to $296,560,661, which consists of $96,560,661 remaining as originally authorized under the Prospectus Supplement and an additional $200,000,000, and (ii) including Stifel, Nicolaus & Company, Incorporated and Virtu Americas LLC as additional Agents. For the quarter ended June 30, 2024, we received net proceeds on sales of 20.6 million shares of common stock under the the Amended Sales Agreement of approximately $95.9 million (net of commissions and expenses) at an average net selling price of $4.65.

On August 14, 2023, we entered into a master loan agreement with Coinbase Credit, Inc., as lender, and Coinbase, Inc., as lending service provider. Pursuant to the master loan agreement, we established a secured line of credit up to $10.0 million (the “Credit Facility”). We will not incur commitment fees for unused portions of the Credit Facility. The borrowing rate on amounts drawn against the Credit Facility is determined on the basis of the Federal Funds Target Rate - Upper Bound, plus 2.5%, calculated daily based on a 365-day year and payable monthly for the duration of the loan. Borrowings under the Credit Facility are available on demand, open term, and collateralized by bitcoin transferred to the lending service provider’s platform. As of June 30, 2024 we have not drawn upon the Credit Facility.

Management believes that our existing financial resources, combined with projected cash and bitcoin inflows from our data centers and our intent and ability to sell bitcoin received or earned, will be sufficient to enable us to meet our operating and capital requirements for at least 12 months from the date these unaudited condensed consolidated financial statements are issued.

Cash Flows

The following table summarizes our sources and uses of cash (in thousands):

Operating Activities

Net cash used in operating activities increased by $24.2 million to $52.0 million for the six months ended June 30, 2024 from $27.8 million for the six months ended June 30, 2023. We earned net income of $24.6 million for the six months ended June 30, 2024, compared to a net loss of $17.8 million for the six months ended June 30, 2023, representing an increase of $42.4 million. Cash flows from operating activities was impacted by a $57.0 million increase in non-cash items, primarily driven by a $32.4 million increase in bitcoin received as payment from our mining pool operator, $20.8 million gain on our derivative asset, and a $19.1 million increase in gains on the fair value of bitcoin. Additionally, changes in assets and liabilities resulted in a decrease in cash used of $9.5 million between the six months ended June 30, 2024 and 2023.

Investing Activities

Cash flows from investing activities decreased by $80.4 million to $62.3 million of net cash used in investing activities for the six months ended June 30, 2024 compared to $18.0 million of net cash provided by investing activities for the six months ended June 30,

2023, primarily related to a $42.1 million decrease in proceeds from bitcoin sales as we increased our bitcoin inventory, $32.8 million of deposits primarily related to new miner purchases, and a $17.3 million increase in contributions to equity investees related to expansions at the Bear and Chief facilities, partially offset by a $12.8 million decrease in purchases of property and equipment which in the prior period related to building out the Odessa facility.

Financing Activities

Cash flows from financing activities increased by $151.2 million to $150.8 million net cash provided by financing activities for the six months ended June 30, 2024 from $0.4 million net cash used in financing activities for the six months ended June 30, 2023, primarily driven by $160.5 million increase in proceeds from the issuance of common stock during the six months ended June 30, 2024.

Limited Business History; Need for Additional Capital

There is limited historical financial information about us upon which to base an evaluation of our performance. Our business is subject to risks inherent in the establishment of a new business enterprise, including limited capital resources, possible delays in exploration and/or development, and possible cost overruns due to price and cost increases in services. We may require additional capital to pursue certain business opportunities or respond to technological advancements, competitive dynamics or technologies, customer demands, challenges, acquisitions or unforeseen circumstances. Additionally, we have incurred and expect to continue to incur significant costs related to becoming a public company. Accordingly, we may engage in equity or debt financings or enter into credit facilities for the above-mentioned or other reasons; however, we may not be able to timely secure additional debt or equity financings on favorable terms, if at all. If we raise additional funds through equity financing, our existing stockholders could experience significant dilution. Furthermore, any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. If we are unable to obtain adequate financing on terms that are satisfactory to us, when we require it, our ability to continue to grow or support the business and to respond to business challenges could be significantly limited, which may adversely affect our business plan. For risks associated with this, see “Risks Factors—Risks Related to Our Business, Industry and Operations—We may need to raise additional capital, which may not be available on terms acceptable to us, or at all” in our 2023 Form 10-K.

Contractual Obligations and Other Commitments

On December 17, 2021, we entered into a lease agreement for executive office space, with an effective term that commenced on February 1, 2022 and monthly rent payments of approximately $0.1 million. The initial lease term was for a period of five years and four months. During the second quarter of 2024, we entered into an amendment to the lease agreement commencing on May 15, 2024, to increase the leased office space and extend the term through May 2029. Monthly rent payments associated with the amended lease are approximately $0.2 million.

We also entered into a series of agreements with affiliates of Luminant ET Services Company LLC ( “Luminant”), including the Lease Agreement dated June 29, 2021, with amendment and restatement on July 9, 2021 (as amended and restated, the “Luminant Lease Agreement”). The Luminant Lease Agreement leases a plot of land to us where our data center, ancillary infrastructure and electrical system (the “Interconnection Electrical Facilities” or “substation”) have been set up for our Odessa Facility. We entered into the Luminant Lease Agreement and the Luminant Purchase and Sale Agreement to build the infrastructure necessary to support our planned operations. Management determined that the Luminant Lease Agreement and the Luminant Purchase and Sale Agreement should be combined for accounting purposes under ASC 842 (collectively, the “Combined Luminant Lease Agreement”) and that amounts exchanged under the combined contract should be allocated to the various components of the overall transaction based on relative fair values.

Our management determined that the Combined Luminant Lease Agreement contains two lease components; and the components should be accounted for together as a single lease component, because the effect of accounting for the land lease separately would be insignificant.

The Combined Luminant Lease Agreement commenced on November 22, 2022 and has an initial term of five years, with renewal provisions that are aligned with the Luminant Power Agreement. Financing for use of the land and substation is provided by Luminant affiliates. Despite lease commencement in November 2022, we had not been required by Luminant to make any lease payments for the substation prior to July 2023, therefore we accrued amounts due under the Combined Luminant Lease Agreement in accrued expenses and other current liabilities on its unaudited condensed consolidated balance sheet.

On August 23, 2023, we entered into a second amendment of the Luminant Lease Agreement, the terms of which included an amended payment schedule, reflecting monthly installments of principal and interest totaling $19.7 million on an undiscounted basis, due over the remaining four-year period starting in July 2023. This amendment did not have a material impact on our unaudited condensed consolidated financial statements.

At the end of the lease term for the Interconnection Electrical Facilities, the substation will be sold back to Luminant’s affiliate, Vistra Operations Company, LLC at a price to be determined based upon bids obtained in the secondary market.

Non-GAAP Financial Measures

We are providing supplemental financial measures for Adjusted Earnings that excludes the impact of depreciation and amortization, the non-cash change in fair value of derivative asset, the non-cash change in fair value of the warrant liability, nonrecurring gains and losses, deferred income taxes, and share-based compensation expense. This supplemental financial measure is not a measurement of financial performance under accounting principles generally accepted in the United Stated (“GAAP”) and, as a result, this supplemental financial measure may not be comparable to similarly titled measures of other companies. Management uses this non-GAAP financial measure internally to help understand, manage, and evaluate our business performance and to help make operating decisions. We believe the use of this non-GAAP financial measure can also facilitate comparison of our operating results to those of our competitors.

Non-GAAP financial measures are subject to material limitations as they are not in accordance with, or a substitute for, measurements prepared in accordance with GAAP. For example, we expect that share-based compensation expense, which is excluded from the non-GAAP financial measure, will continue to be a significant recurring expense over the coming years and is an important part of the compensation provided to certain employees, officers and directors. Similarly, we expect that depreciation and amortization will continue to be a recurring expense over the term of the useful life of the related assets. Our non-GAAP financial measure is not meant to be considered in isolation and should be read only in conjunction with our condensed consolidated financial statements included elsewhere in this Quarterly Report, which have been prepared in accordance with GAAP. We rely primarily on such condensed consolidated financial statements to understand, manage and evaluate our business performance and use the non-GAAP financial measures only supplementally.

The following is a reconciliation of our Adjusted Earnings to the most directly comparable GAAP measure for the periods indicated (in thousands):

Critical Accounting Policies and Use of Estimates

The preparation of financial statements in conformity with 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 expenses during the reporting period. A description of our significant accounting policies in included in our 2023 Form 10-K. You should read the accompanying unaudited condensed consolidated financial statements in conjunction with our audited consolidated financial statements and accompanying notes in our 2023 Form 10-K. There have been no material changes in the information disclosed in the notes to our audited consolidated financial statements included in our 2023 Form 10-K, except the change in estimated useful life of our miners from five years to three years, as described in Note 5. Property and Equipment of Item 1. Financial Statements in this Form 10-Q.

Recent accounting pronouncements

Information regarding recent accounting pronouncements applicable to us, adopted and not yet adopted as of the date of this report, is included in Note 2 to our unaudited condensed consolidated financial statements located in “Part I - Financial Information, Item 1. Financial Statements” in this Quarterly Report.

Emerging Growth Company

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period to enable us to comply with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our unaudited condensed consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

On the last business day of the second quarter in 2024, the aggregate market value of our shares of common stock held by non-affiliate stockholders exceeded $700 million. As a result, as of December 31, 2024, we will be considered a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, and will cease to be an emerging growth company. Due to loss of emerging growth company status, we will no longer be exempt from the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, and our independent registered public accounting firm will evaluate and report on the effectiveness of internal control over financial reporting.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation of the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”), as defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of June 30, 2024, the end of the period covered by this Quarterly Report. The Disclosure Controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, with the goal being that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, our disclosure controls and procedures were not effective at the reasonable assurance level as of June 30, 2024.

Remediation of Material Weakness

As noted in the 2023 Form 10-K, during management’s assessment of internal controls over financial reporting, a material weakness was identified related to certain Information Technology General Controls over user access, segregation of duties and change management controls.

As management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, we understand the importance of developing a resolution plan aligned with management and overseen by the Audit Committee of our Board of Directors. Since the material weakness was identified, management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. Our plan includes the following:

• Enhance our remediation efforts by continuing to devote resources in 2024 in key financial reporting and information technology areas, including hiring additional employees.
• Continue to utilize an external third-party internal audit and SOX 404 implementation firm to work to improve the Company’s controls related to our material weaknesses, specifically relating to user access and change management surrounding the Company’s IT systems and applications.
• Continue to implement new processes and controls and engage external resources when required in connection with remediating this material weakness, such that these controls are designed, implemented, and operating effectively.
• Continue to formalize our policies and processes including those over outside service providers with a specific focus on enhancing design and documentation related to (i) developing and communicating additional policies and procedures to govern the areas of IT change management and user access processes and related control activities and (ii) develop robust processes to validate data received from third-parties and relied upon to generate financial statements that are complete and accurate.

We recognize that the material weaknesses in our internal control over financial reporting will not be considered remediated until the remediated controls operate for a sufficient period of time and can be tested and concluded by management to be designed and operating effectively. Because our remediation efforts involve our outsourced service providers, we cannot provide any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts.

We continue to evaluate and work to improve our internal control over financial reporting related to the identified material weaknesses and management may determine to take additional measures to address control deficiencies or determine to modify the remediation plan described above. In addition, we report the progress and status of the above remediation efforts to the Audit Committee on a periodic basis.

Changes in Internal Control over Financial Reporting

Other than the remediation efforts described above, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to the risk factors as previously disclosed in Part I, Item 1A, “Risk Factors” of our 2023 Form 10-K, which is incorporated herein by reference. There have been no material changes to the risk factors previously disclosed in our 2023 Form 10-K, except for the risk factor noted below.

We will no longer qualify as an “emerging growth company” or a "smaller reporting company" as of December 31, 2024 and, as a result, we will no longer be able to avail ourselves of certain reduced reporting requirements applicable to emerging growth companies or smaller reporting companies, subject to applicable transition relief.

We are currently an “emerging growth company,” as defined in the JOBS Act, and we have taken advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including the auditor attestation requirements of Section 404, compliance with requirements that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditors’ report providing additional information about the audit and the financial statements, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, as an emerging growth company, we have elected to use the extended transition period for complying with new or revised accounting standards until those standards would otherwise apply to private companies. As a result, our consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies.

Because the market value of our common stock held by non-affiliates exceeded $700 million as of June 30, 2024, we will be deemed a large accelerated filer under the Exchange Act and will lose our status as an “emerging growth company” as of December 31, 2024. As a result, subject to certain grace periods, we will be required to:

• engage an independent registered public accounting firm to provide an attestation report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002;
• submit certain executive compensation matters to stockholder advisory votes; and
• disclose a compensation discussion and analysis, including disclosure regarding certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation.

We will no longer able to take advantage of cost savings associated with the JOBS Act. Furthermore, if the additional requirements applicable to non-emerging growth companies divert the attention of our management and personnel from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations. The increased costs will decrease our net income or increase our net loss and may require us to reduce costs in other areas of our business. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. Furthermore, if we are unable to satisfy our obligations as a non-emerging growth company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

As a result of our loss of “emerging growth company” status, it is possible that investors will find our common stock less attractive in light of the fact that we have relied on certain of these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our share price may be more volatile. In addition, any failure to comply with these additional requirements in a timely manner, or at all, could have an adverse effect on our business and results of operations and could cause a decline in the price of our common stock.