Hut 8 Corp.: Form 10-Q for the period ended Sep 30, 2024

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and the related notes and the other financial information included elsewhere in this Quarterly Report and with our audited consolidated financial statements included in our Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual business, financial condition, and results of operations could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report and in our Annual Report, particularly under “Item 1A. Risk Factors.” See also “Cautionary Statement Regarding Forward-Looking Statements.” Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

Business Overview

Hut 8 is an energy infrastructure operator and Bitcoin miner with self-mining, hosting, managed services, and traditional data center operations across North America. We acquire, design, build, manage, and operate data centers that power compute-intensive workloads such as Bitcoin mining, high performance computing, and AI.

We see incredible opportunities at the intersection of energy and infrastructure. As demand for energy increases over the coming years, we believe that building a scaled portfolio of energy infrastructure assets will create a sustainable competitive advantage for our business. Our vertically integrated model, including our ability to rapidly build new capacity and redeploy existing assets to new use cases, positions us to capture future demand as advancements in technology and the increasing demand for compute capacity necessitate significant growth in underlying energy infrastructure. We also leverage our operating scale, purpose-built technology, and sophisticated approach to energy management to drive efficiency across our business lines.

As of September 30, 2024, our total energy capacity under management was 1,322 MW across twenty sites: 967 MW across ten Bitcoin mining sites in North America, 310 MW across four natural gas power generation facilities in Canada, 3 MW across five cloud and colocation data centers in Canada, and 42 MW at a non-operational site in Canada. During the quarter ended September 30, 2024, we also brought online 1,000 NVIDIA H100 GPUs for our GPU-as-a-Service business.

Merger of USBTC and Hut 8

On February 6, 2023, USBTC, Legacy Hut, and Hut 8 entered into a business combination agreement pursuant to which, among other things, Legacy Hut and its direct wholly-owned subsidiary amalgamated to continue as Hut Amalco and both Hut Amalco and USBTC became wholly-owned subsidiaries of Hut 8 Corp.

On November 30, 2023, the Business Combination was completed, and Hut 8 Corp. began trading on the Nasdaq on December 4, 2023.

Given that the Business Combination closed after the end of the quarterly period ended September 30, 2023, the information included in this Quarterly Report principally describes Hut 8’s business and operations following the closing of the Business Combination, but includes the historical financial statements of USBTC, the accounting acquirer, and related management’s discussion and analysis, which describes the business, financial condition, results of operations, liquidity and capital resources of USBTC prior to the Business Combination.

Business Segments

We have four reportable business segments: Digital Asset Mining, Managed Services, High Performance Computing – Colocation and Cloud, and Other.

Digital Asset Mining

Currently, one of our largest revenue streams is derived from Digital Asset Mining (also referred to as self-mining), which consists entirely of mining Bitcoin (43% of total revenue for the nine months ended September 30, 2024 and 26% of total revenue for the three months ended September 30, 2024).

Our self-mining business spanned four sites during the three months ended September 30, 2024:

• three sites with facilities we own and operate: (1) Niagara Falls, New York (“Alpha”), (2) Medicine Hat, Alberta (“Medicine Hat”), and (3) Orla, Texas (“Salt Creek”); and
• one site with a facility in McCamey, Texas (King Mountain) that we own 50% of through a joint venture (the “King Mountain JV”).

Until April 30, 2024, we also had self-mining operations at two sites located in Kearney, Nebraska (“Kearney”) and Granbury, Texas (“Granbury”).

We receive digital asset mining rewards via third party mining pool operators, Foundry Digital LLC and Luxor Technology Corporation. Mining pools allow us to combine our computing power with other miners, increasing the chances of solving a block and getting paid by the network. The pools distribute our pro-rata share of Bitcoin rewards based on the computing power we contribute. On April 19, 2024, the Bitcoin reward for solving a block was halved from 6.25 Bitcoin to 3.125 Bitcoin.

As the adoption of Bitcoin continues to grow and the market valuation of Bitcoin rises, we anticipate a surge in demand for Bitcoin, prompting the entry of new miners into the market. This influx of participants results in the increase of the Bitcoin network’s hash rate. Consequently, existing miners must scale their own hash rate to maintain a competitive edge in solving blocks and acquiring rewards. While we anticipate this trend to persist, we aim to grow our hash rate as we continue to scale our portfolio of underlying energy infrastructure.

As of September 30, 2024, including our net share of the King Mountain JV, we owned approximately 49,400 miners totaling approximately 4.7 EH/s with an average fleet efficiency of 32.0 J/TH. In addition to miners, this business segment also includes the mining infrastructure related to our owned and leased sites used for self-mining.

Managed Services

Our Managed Services business provides institutional partners with an end-to-end partnership model for energy infrastructure development, including:

• Project inception: Site design, procurement, and construction management;
• Project operationalization: Software automation, process design, personnel hiring, and team training;
• Revenue management: Utilities contracts, hosting operations, and customer management;
• Project optimization: Energy portfolio optimization and strategic initiatives; and/or
• Compliance and reporting: Finance, accounting, and safety.

Under this model, partners can enter into infrastructure projects with confidence: renewable energy companies can utilize our modular data centers as a flexible load, investors can deploy capital into energy infrastructure without the need for specialized expertise in site design, construction, and operations and site owners can monetize their assets with minimal operational requirements on their end. Meanwhile, the scalable and capital-light nature of this business allows us to generate cash flow without significant upfront capital investment while driving attractive project-level economics for our partners. Cash flows are generated through a fee structure that is typically fixed based on power capacity under management, with reimbursement of passthrough costs. In addition to the fixed fee, further cash flows may be driven from incentive bonuses and certain energy management services.

As of September 30, 2024, we managed 582 MW of energy capacity under this program across six sites in the United States, which included 280 MW owned by the King Mountain JV and 302 MW owned by Ionic.

High Performance Computing – Colocation and Cloud

Our HPC business spans five locations in Canada (Mississauga, Ontario; Vaughan, Ontario; Kelowna, British Columbia; and two locations in Vancouver, British Columbia) with a total energy capacity of 3 MW and more than 36,000 square feet of geo-diverse data center space powered by predominantly emission-free energy sources. Our infrastructure is designed to support a variety of compute, storage, and network workloads across traditional enterprise, B2B, machine learning, visual effects, and AI. This segment serves computing needs unrelated to Digital Asset Mining. The data centers are geo-diverse and carrier neutral with network diversity and redundancy from multiple telecommunications providers.

The fee structure for our HPC business is based on two models:

• Allocation: Under the allocation model, customers pay a fixed recurring monthly fee based on a set amount of resources assigned.
• Consumption: The consumption model for both the colocation and cloud businesses is generally a function of additional consumption of compute, storage, network, or power usage above and beyond the contractual commitment.

We believe high-density colocation services available in some of our locations position us well to support the increasing demand for power densities driven by AI and graphics processing unit (“GPU”) requirements, along with traditional central processing unit (“CPU”) performance increases. In addition to colocation services, our cloud services are a core product offering: we support public and private cloud, managed backup, business continuity and disaster as a recovery service, and high performance high-capacity storage solutions.

Other

Hosting

We also enter into hosting contracts to operate mining equipment on behalf of third parties within our facilities. Hosting services include the provision of mining equipment and energized space and the monitoring, troubleshooting, repair, and maintenance of customer mining equipment. Hosting services revenue is generated through fees that may be fixed or based on a profit-sharing arrangement, typically with reimbursement for passthrough costs.

As of September 30, 2024, we hosted approximately 8,500 miners (about 0.8 EH/s) at our wholly owned Alpha site, which has a total capacity of 50 MW.

Equipment sales and repairs

We may enter into equipment sale contracts when we believe there is an opportunity to generate profit from selling machines and other mining equipment. For example, as market prices of miners fluctuate, there may be opportunities where we believe the market value of miners exceeds the prices that we can procure them for. We may also repair miners for third parties in exchange for a fee, as we have a fully equipped, MicroBT-certified repair center space at our Medicine Hat site.

Power

We provide capacity and energy to the grid through the natural gas power plants in Ontario, Canada through the majority-owned Far North entities. The power generation facilities that are connected to the IESO, which operates Ontario’s power grid, primarily generate revenue from capacity sales. Revenue generated from electricity sales is variable and depends on several factors including but not limited to the supply and demand for electricity, generation capacity in the market, and the prevailing price of natural gas. Power revenue is strictly derived from the 80% interest we have in the Far North JV.

GPU-as-a-Service

On September 26, 2024, we launched our GPU-as-a-Service offering as our inaugural GPU cluster came fully online. The cluster, hosted at a tier-three data center in Chicago, Illinois, comprises multiple HPE Cray supercomputers powered by 1,000 NVIDIA H100 GPUs. We have entered into a contract with an AI cloud services provider pursuant to which the provider pays us a fixed infrastructure fee and a share of its revenues from the sale of its services at the cluster.

Joint Ventures

King Mountain JV

The King Mountain JV is a 50/50 joint venture with one of the world’s largest renewable energy producers. The King Mountain JV has 280 MW of self-mining and hosting operations colocated behind-the-meter at a wind farm in McCamey, Texas.

As of September 30, 2024, the King Mountain JV owned approximately 18,000 miners for self-mining (about 1.8 EH/s) and hosted approximately 68,200 miners (about 7.7 EH/s) for MARA Holdings at its wholly owned King Mountain site, which has a total capacity of 280 MW.

We account for the King Mountain JV using the equity method of accounting, resulting in reporting the King Mountain JV as an unconsolidated joint venture. As part of the acquisition of our 50% interest in the King Mountain JV, we also assumed the TZRC Secured Promissory Note. Our 50% portion of any distributions made from the King Mountain JV are swept to pay down the TZRC Secured Promissory Note. See Note 9. Investments in unconsolidated joint venture and Note 10. Loans and notes payable to the Unaudited Condensed Consolidated Statements found elsewhere in this Quarterly Report for additional information on the King Mountain JV and TZRC Secured Promissory Note.

Below is the condensed consolidated income statement for the King Mountain JV for the three and nine month periods ended September 30, 2024 and 2023.

Condensed Consolidated Income Statement

Our board of directors and management team also evaluate Adjusted EBITDA for the King Mountain JV, which is a non-GAAP financial measure. We define Adjusted EBITDA as net (loss) income before depreciation and amortization and interest income. We use Adjusted EBITDA to assess the King Mountain JV’s financial performance because it allows us to compare the operating performance on a consistent basis across periods by removing the effects of the King Mountain JV’s capital structure.

Net (loss) income is the GAAP measure most directly comparable to Adjusted EBITDA. This non-GAAP financial measure should not be considered as an alternative to the most directly comparable GAAP financial measure. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in such presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. There can be no assurance that we will not modify the presentation of Adjusted EBITDA in the future, and any such modification may be material. Adjusted EBITDA has important limitations as an analytical tool and you should not consider Adjusted EBITDA in isolation or as a substitute for analysis of our results as reported under GAAP. Because Adjusted EBITDA may be defined differently by other companies in our industry, our definition of this non-GAAP financial measure may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.

Far North JV

The Far North JV is an approximately 80/20 joint venture in partnership with Macquarie. We acquired an approximately 80% membership interest in the Far North JV in February 2024 through a stalking horse bid for the acquisition of certain assets of Validus Power Corp. and certain of its subsidiaries. The Far North JV holds certain mining and electrical equipment formerly owned by a subsidiary of Hut 8, in addition to four natural gas power plants totaling 310 MW in Ontario, Canada, including:

• one 110 MW facility in Kingston;
• one 120 MW facility in Iroquois Falls;
• one 40 MW facility in Kapuskasing; and
• one 40 MW facility and Bitcoin mine in North Bay.

We account for the Far North JV using the acquisition method of accounting, resulting in consolidation of the Far North entities with a non-controlling interest. As of September 30, 2024, the consolidated balance sheet included the following balances from Far North:

Recent Developments

Miner Fleet Upgrade

On November 6, 2024, we entered into an agreement to purchase 31,145 BITMAIN Antminer S21+ ASIC miners at $15.00 per terahash with initial deliveries expected in Q1 2025.

Call Option Trade

During October 2024, we sold covered call options on Bitcoin for proceeds of $2.9 million to generate cash flow on a portion of our digital assets. We have pledged Bitcoin as collateral with one of our digital asset custodians in a quantity equal to the notional amount for the covered call options sold. The covered call options are only exercisable upon the date of expiry, are automatically exercised if the underlying reference price is greater than the strike price of the call option, and are settled with delivery of the underlying Bitcoin. The reference price is the BRR at 4:00pm London time for a given date.

Anchorage Loan Conversion

On September 27, 2024, we entered into a Debt Repayment Agreement with Anchorage to exchange the $37.9 million outstanding balance of the Anchorage Loan (exclusive of $1.5 million of deferred financing costs) as of the agreement date for 2,313,435 shares of our common stock (the “Conversion”). Upon completion of the Conversion, the outstanding loan and all of our other related obligations, including those of our subsidiaries, under the Anchorage Loan were satisfied, and we recorded a gain on debt extinguishment of $6.0 million. See Note 10. Loans and notes payable in our Unaudited Condensed Consolidated Statements included elsewhere in this Quarterly Report for additional information.

Launch of GPU-as-a-Service Business

On September 26, 2024, we launched our GPU-as-a-Service offering as our inaugural GPU cluster came fully online under our wholly owned subsidiary Highrise AI, Inc., which has its own management team. The cluster, hosted at a tier-three data center in Chicago, Illinois, comprises multiple HPE Cray supercomputers powered by 1,000 NVIDIA H100 GPUs. We have entered into a contract with an AI cloud services provider pursuant to which the provider pays us a fixed infrastructure fee and a share of its revenues from the sale of its services at the cluster.

Bitmain Partnership and Hosting Services Agreement

On September 19, 2024, we expanded our partnership with Bitmain by launching a next-generation ASIC miner. These miners will be hosted at the 205 MW Texas Panhandle site (“Vega”) through a hosting agreement with Bitmain that includes a capacity of approximately 15 EH/s. Deployment of these miners is planned for the second quarter of 2025.

The agreement includes a fixed hosting fee and provides us with an option to purchase all or a portion of the hosted machines at a set price within six months of their energization. As of the three months ended September 30, 2024, we made a $32.0 million deposit toward this purchase option.

Key Factors Affecting Our Performance

Price of Bitcoin

We primarily mine Bitcoin, which has historically experienced significant price volatility. We record revenue upon receipt of Bitcoin at its spot price at the beginning of the day (midnight UTC time), and we have also elected to adopt ASU 2023-08, effective July 1, 2023, under which Bitcoin is revalued every reporting period at fair value with changes in fair value recognized in net income, so any fluctuations in the price of Bitcoin may impact our results of operations.

During the three months ended September 30, 2024 and 2023, the price of Bitcoin ranged from approximately $49,100 to $70,000 and $24,900 to $31,900, respectively. During the nine months ended September 30, 2024 and 2023, the price of Bitcoin ranged from approximately $38,500 to $73,800 and $16,500 to $31,900, respectively.

Bitcoin network difficulty and hash rate

Bitcoin network difficulty, which varies directly with Bitcoin network hash rate, directly affects the results of our operations. We define Bitcoin network difficulty, multiplied by two to the thirty-second power (difficulty * 2˄32), as the measure of how many SHA-256d hashes, on average, are required to record a new block on the Bitcoin blockchain. The Bitcoin protocol is designed such that one block is generated, on average, every 10 minutes, no matter how much hash rate is on the network. To keep the time interval between blocks fixed at 10 minutes, the Bitcoin network adjusts its “network difficulty” every 2,016 blocks (or roughly every two weeks) such that the average number of SHA-256d hashes needed to find a new block is normalized at 10 minutes based on the time interval between blocks for the last 2,016 blocks.

For example, as Bitcoin network hash rate increases, the time interval between new blocks decreases. The Bitcoin network will then adjust its difficulty upward to require more hashes, on average, to record a new block. Network difficulty is an integer.

Average network difficulty and average network hash rate were 87.0T and 622.6 EH/s, respectively, for the three months ended September 30, 2024, compared to 53.3T and 381.3 EH/s, respectively, for the three months ended September 30, 2023. Average network difficulty and average network hashrate were 83.1T and 594.6 EH/s, respectively, for the nine months ended September 30, 2024, compared to 47.7T and 341.2 EH/s, respectively, for the nine months ended September 30, 2023.

Block reward and halving

During the three and nine months ended September 30, 2023, the Bitcoin reward for solving a block was 6.25 Bitcoin. Since April 19, 2024, the Bitcoin reward for solving a block has decreased to 3.125 Bitcoin. The Bitcoin network is programmed such that the Bitcoin block reward is halved every 210,000 blocks mined, or approximately every four years (the “Halving”). This reduction in reward spreads out the release of Bitcoin over a long period of time as an ever smaller number of coins are mined with each Halving. The maximum supply of Bitcoin is 21,000,000 Bitcoin, which is projected to be fully mined around the year 2140.

Bitcoin Halving events impact the amount of Bitcoin we mine which, in turn, may have a potential impact on our results of operations. The next Halving is expected to occur in March 2028.

Cost of electricity

Electricity prices are a significant factor affecting our results of operations. We manage our cost of electricity through participation in various demand response programs, power purchase agreements, and curtailment of miners when electricity prices make it unprofitable to mine Bitcoin.

Key Performance Indicators

In addition to our financial results and non-GAAP financial measures, we use certain key performance indicators to evaluate our business, identify trends, and make strategic decisions.

The following table presents our key performance indicators for the three and nine months ended September 30, 2024 and 2023.

(1) Cost to mine a Bitcoin (excluding hosted facilities) is equivalent to the all-in electricity cost, net of credits from participation in ancillary demand response programs, to mine a Bitcoin at owned or leased sites and includes our net share of the King Mountain JV.

(2) Cost to mine a Bitcoin is calculated as the sum of total all-in electricity expense, net of credits from participation in ancillary demand response programs, and hosting expense divided by Bitcoin mined during the respective periods and includes our net share of the King Mountain JV.

(3) Weighted average revenue per Bitcoin mined is calculated as the sum of total self-mining revenue divided by Bitcoin mined during the respective periods and includes our net share of the King Mountain JV; it excludes our discontinued operations at Drumheller, Alberta.

(4) Bitcoin mined includes our net share of the King Mountain JV and excludes our discontinued operations at Drumheller, Alberta. Bitcoin mined excluding our net share of the King Mountain JV was 190 and 553 for the three months ended September 30, 2024 and 2023, respectively, and 993 and 1,447 for the nine months ended September 30, 2024 and 2023, respectively.

(5) Energy capacity under management (mining) includes 180 MW of self-mining sites comprised of Alpha, Medicine Hat, and Salt Creek, 205 MW of hosting capacity at Vega, and 280 MW of capacity under management at our King Mountain JV. The remaining 302 MW is from our Managed Services agreement with Ionic.

(6) Total energy capacity under management includes the 967 MW of energy capacity under management (mining) above, 310 MW of capacity from our four natural gas power generation facilities, 3 MW of capacity from our five cloud and colocation data centers, and 42 MW of capacity at a non-operational site in Canada.

Cost to mine a Bitcoin

Our profitability in self-mining is heavily dependent upon our cost to mine a Bitcoin, calculated as the sum of total all-in electricity expense, net of credits from participation in ancillary demand response programs, and hosting costs divided by Bitcoin mined during the respective periods and includes our net share of the King Mountain JV. Our management reviews the cost to mine a Bitcoin excluding hosted facilities and inclusive of hosted facilities.

Our cost to mine a Bitcoin (excluding hosted facilities) for the three months ended September 30, 2024 was $31,482 compared to $15,020 for the three months ended September 30, 2023. The increase was primarily due to the Halving event in April 2024 which decreased the Bitcoin reward from 6.25 Bitcoin per block to 3.125 Bitcoin per block, in addition to an increase in average network difficulty during the period (87.0T for the three months ended September 30, 2024 compared to 53.3T for the three months ended September 30, 2023). This was partially offset by a decrease in our energy cost per MWh (see below for further discussion on energy cost per MWh).

Our cost to mine a Bitcoin (excluding hosted facilities) for the nine months ended September 30, 2024 was $25,249 compared to $11,367 for the nine months ended September 30, 2023. The increase was also primarily due to the Halving event in April 2024 and an increase in average network difficulty during the period (83.1T for the nine months ended September 30, 2024 compared to 47.7T for the nine months ended September 30, 2023), partially offset by a decrease in our energy cost per MWh (see below for further discussion on energy cost per MWh).

Inclusive of hosted facilities, our cost to mine a Bitcoin for the three months ended September 30, 2024 was $31,482 compared to $17,274 for the three months ended September 30, 2023. As of April 30, 2024, we were no longer self-mining at hosted facilities, and we did not incur hosting costs during the three months ended September 30, 2024, so our cost to mine a Bitcoin for the three months ended September 30, 2024 consisted solely of energy costs.

Inclusive of hosted facilities, our cost to mine a Bitcoin for the nine months ended September 30, 2024 was $26,277 compared to $15,039 for the nine months ended September 30, 2023. The increase was driven by the Halving event in April 2024, an increase in average network difficulty during the period (83.1T for the nine months ended September 30, 2024 compared to 47.7T for the nine months ended September 30, 2023) and an increase in our hosting cost per MWh due to a higher variable hosting rate that is tied to hashprice. This was partially offset by a decrease in our energy cost per MWh (see below for further discussion on energy cost per MWh) and a decrease in energy consumption at hosted facilities after exiting the Kearney and Granbury sites.

Energy and hosting cost per MWh

In addition to the cost to mine a Bitcoin, our management reviews the energy cost per MWh at facilities we own and hosting cost per MWh at hosted facilities. Energy cost per MWh is calculated by dividing our total energy expense by the total MWh utilized at owned facilities during the respective periods and includes our net share of the King Mountain JV. Hosting cost per MWh is calculated by dividing our total hosting expense by the total MWh utilized at hosted facilities during the respective periods.

Energy cost per MWh for the three months ended September 30, 2024 was $28.83 compared to $42.73 for the three months ended September 30, 2023. The decrease was primarily driven by lower energy costs at our newly built Salt Creek site in addition to credits received for participating in ancillary demand response programs and efficient economic curtailment of miners using our proprietary software. The current quarter reflects three months of combined company self-mining activity at our Alpha, Medicine Hat, Salt Creek, and King Mountain sites while the prior quarter reflects three months of USBTC’s self-mining activity at our Alpha and King Mountain sites.

Energy cost per MWh for the nine months ended September 30, 2024 was $32.89 compared to $38.08 for the nine months ended September 30, 2023, and the decrease was also primarily driven by lower energy costs at our newly built Salt Creek site in addition to credits received for participating in ancillary demand response programs. The current period reflects nine months of combined company self-mining activity at our Alpha, Medicine Hat, Salt Creek, and King Mountain sites while the prior period reflects nine months of USBTC’s self-mining activity at our Alpha and King Mountain sites.

Hosting cost per MWh for the three months ended September 30, 2024 was nil compared to $60.33 for the three months ended September 30, 2023. The decrease was due to us no longer self-mining at the Kearney and Granbury sites as of April 30, 2024, and we did not incur any hosting costs during the current quarter.

Hosting cost per MWh for the nine months ended September 30, 2024 was $68.72 compared to $60.91 for the nine months ended September 30, 2023. The increase was due to a higher variable hosting rate (tied to hashprice) at the Kearney and Granbury sites during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023.

Bitcoin mined

Bitcoin mined represents the number of Bitcoin we mined during the respective periods and includes our net share of the King Mountain JV. Our management looks at this metric as it directly impacts our Digital Asset Mining segment and King Mountain JV for the respective periods.

Bitcoin mined for the three months ended September 30, 2024 and 2023 was 234 and 675, respectively. The decrease in Bitcoin mined was primarily due to the Halving and an increase in network difficulty (87.0T for the three months ended September 30, 2024 compared to 53.3T for the three months ended September 30, 2023).

Bitcoin mined for the nine months ended September 30, 2024 and 2023 was 1,229 and 1,938, respectively. The decrease in Bitcoin mined was primarily due to the Halving and, an increase in network difficulty (83.1T for the nine months ended September 30, 2024 compared to 47.7T for the nine months ended September 30, 2023).

Energy capacity under management

Energy capacity under management (mining) includes the energy capacity of our self-mining and hosting infrastructure, as well as the energy capacity of the sites that we manage for our clients under the Managed Services line of business. Total energy capacity under management includes energy capacity under management (mining) plus energy capacity from our natural gas power generation facilities, traditional data centers, and our non-operational site in Canada.

Energy capacity under management (mining) as of September 30, 2024 was 967 MW compared to 730 MW as of September 30, 2023. The increase was due to: (i) the addition of Medicine Hat, a 67 MW self-mining facility that we own as a result of the Business Combination, (ii) the addition of five digital asset mining facilities owned by Ionic, totaling 302 MW, through a Management Services Agreement with Ionic, (iii) the addition of Salt Creek, a 63 MW facility that we own, and (iv) the addition of Vega, a 205 MW facility that we own. These increases were partially offset by the transition of our previously managed Kearney and Granbury sites totaling 400 MW.

Total energy capacity under management increased to 1,322 MW as of September 30, 2024 from 730 MW as of September 30, 2023. The increase was due to: (i) the addition of 310 MW of natural gas power generation facilities as a result of the Far North transaction, (ii) 3 MW of traditional data centers as a result of the Business Combination, and (iii) the addition of Drumheller, a 42 MW self-mining facility that we own as a result of the Business Combination. These increases were partially offset by the transition of our previously managed Kearney and Granbury sites totaling 400 MW.

Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we rely on Adjusted EBITDA to evaluate our business, measure our performance, and make strategic decisions. Adjusted EBITDA is a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss) before interest expense, income tax provision, depreciation and amortization, further adjusted by the removal of gains on the extinguishment of debt (if applicable), gain (loss) on derivatives, depreciation and amortization embedded in the equity in earnings (losses) from an unconsolidated joint venture, foreign exchange gain, gain on the sale of property and equipment (if applicable), non-recurring transactions, net income attributable to noncontrolling interest, and stock-based compensation expense in the period presented. You are encouraged to evaluate each of these adjustments and the reasons our Board and management team consider them appropriate for supplemental analysis.

Our Board and management team use Adjusted EBITDA to assess our financial performance because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense and income), asset base (such as depreciation and amortization), and other items (such as non-recurring transactions mentioned above) that impact the comparability of financial results from period to period.

Net income (loss) is the GAAP measure most directly comparable to Adjusted EBITDA. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in such presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. There can be no assurance that we will not modify the presentation of Adjusted EBITDA in the future, and any such modification may be material. Adjusted EBITDA has important limitations as an analytical tool and you should not consider Adjusted EBITDA in isolation or as a substitute for analysis of our results as reported under GAAP. Because Adjusted EBITDA may be defined differently by other companies in our industry, our definition of this non-GAAP financial measure may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.

For a reconciliation to our most directly comparable financial measure, calculated and presented in accordance with GAAP, please see “—Results of Operations” below.

Results of Operations

Three Months Ended September 30, 2024 and 2023

Adjusted EBITDA reconciliation:

(1) Net of the accretion of fair value differences of depreciable and amortizable assets included in equity in earnings of unconsolidated joint venture in the Consolidated Statements of Operations and Comprehensive Income (Loss) in accordance with ASC 323. See Note 9. Investments in unconsolidated joint venture of our Unaudited Condensed Consolidated Financial Statements for further detail.

(2) Non-recurring transactions for the three months ended September 30, 2024 primarily represent a $13.5 million contract termination fee received from MARA Holdings and a release of relocation fees that were over-accrued in the prior period. Non-recurring transactions for the three months ended September 30, 2023 were nil.

Revenue

Total revenue for the three months ended September 30, 2024 and 2023 was $43.7 million and $21.7 million, respectively, and consisted of Digital Asset Mining, Managed Services, HPC, and Other.

Digital Asset Mining

Digital Asset Mining revenue was $11.6 million and $15.6 million for the three months ended September 30, 2024 and 2023, respectively. The decrease was primarily driven by a decrease in Bitcoin mined due to: (i) the Halving, and (ii) an increase in network difficulty. Bitcoin mined (excluding our net share of the King Mountain JV) for the three months ended September 30, 2024 and 2023 was 190 and 553, respectively. This was partially offset by an increase in average revenue per Bitcoin mined (excluding our net share of the King Mountain JV), which was about $61,100 for the three months ended September 30, 2024 compared to about $28,100 for the three months ended September 30, 2023.

Managed Services

Managed Services revenue was $20.8 million for the three months ended September 30, 2024, consisting of $4.1 million in management fees, $1.9 million in cost reimbursements, $1.3 million in the form of customer equity, and $13.5 million in termination fees. Managed Services revenue was $4.8 million for the three months ended September 30, 2023, consisting of $3.4 million in management fees and $1.4 million in cost reimbursements. The increase was primarily driven by management fees related to the Ionic Management Services Agreement signed at the end of January 2024, and the $13.5 million termination fee received from MARA Holdings related to the termination of the PMAs for the Kearney and Granbury sites that occurred on April 30, 2024.

High Performance Computing – Colocation and Cloud

HPC revenue was $3.4 million and nil for the three months ended September 30, 2024 and 2023, respectively. The revenue for the three months ended September 30, 2024 represents three months of combined company activity in connection with the Business Combination and consists of recurring revenue from small and medium enterprises predominantly domiciled in Canada.

Other

Other revenue was $7.9 million and $1.4 million for the three months ended September 30, 2024 and 2023, respectively. Other revenue for the three months ended September 30, 2024 consisted of $1.8 million in hosting cost reimbursements, $0.6 million in hosting services revenue, $5.4 million in power revenues from our natural gas power plants that were acquired as part of the Far North JV, and $0.1 million in equipment repair revenue.

Cost of revenue

Digital Asset Mining

Cost of revenue for Digital Asset Mining for the three months ended September 30, 2024 and 2023 was $7.3 million and $10.9 million, respectively. This decrease was driven by a decrease in costs after completing the relocation of our fleet from hosted to owned sites, including to our new site, Salt Creek, which has a favorable energy profile, the implementation of our proprietary curtailment system, resulting in more efficient management of our energy costs, and credits from participation in ancillary demand response programs. The three months ended September 30, 2024 includes three months of costs at the Medicine Hat site, which was acquired as a result of the Business Combination.

Managed Services

Cost of revenue for Managed Services for the three months ended September 30, 2024 and 2023 was $2.8 million and $1.4 million, respectively. The $1.4 million increase was primarily driven by a $0.8 million increase in reimbursable payroll costs and a $0.6 million increase in other reimbursable site operating costs driven by the addition of the five Ionic sites.

High Performance Computing – Colocation and Cloud

Cost of revenue for HPC for the three months ended September 30, 2024 and 2023 was $2.6 million and nil, respectively. The cost of revenue reflects three months of activity in connection with the newly acquired HPC business from the Business Combination.

Other

Cost of revenue for Other for the three months ended September 30, 2024 was $4.9 million and consisted primarily of $2.6 million in cost of hosting services revenue, which included $2.2 million in electricity costs, and $2.3 million in cost of power revenues from our natural gas power plants that were acquired as part of the Far North JV. Cost of revenue for Other for the three months ended September 30, 2023 was $1.2 million and consisted entirely in cost of hosting services revenue.

Depreciation and amortization

Depreciation and amortization expense was $10.5 million and $4.5 million for the three months ended September 30, 2024 and 2023, respectively. The increase was primarily driven by depreciation and amortization of property and equipment acquired through the Business Combination and Far North transaction.

General and administrative expenses

G&A expenses were $16.2 million and $4.2 million for the three months ended September 30, 2024 and 2023, respectively. The $12.0 million increase in G&A expenses was driven by: (i) a $4.7 million increase in stock-based compensation, (ii) a $4.6 million increase in salary and benefit costs due to added headcount as part of the Business Combination and to support our growth, (iii) a $0.7 million increase in insurance expenses, (iv) a $0.7 million increase in professional fees, (v) a $0.7 million increase in other G&A expenses, and (vi) a $0.6 million increase in sales tax expenses.

Losses on digital assets

Losses on digital assets were $1.6 million and $0.2 million for the three months ended September 30, 2024 and 2023, respectively. The increase was primarily driven the impact of foreign currency translation adjustments, partially offset by the increase in the market value from the last reporting period to the current reporting period of our Bitcoin in accordance with ASU 2023-08, which requires us to recognize our digital assets at fair value with changes recognized in net income during the reporting period. The price of Bitcoin on June 30, 2024 was $62,668 compared to the price of Bitcoin on September 30, 2024 of $63,301. This increase in Bitcoin price was offset by the impact of foreign currency translation adjustments during the quarter, resulting in a loss of $1.6 million.

Other income (expense)

Other income (expense) totaled $2.9 million and ($3.6) million for the three months ended September 30, 2024 and 2023, respectively. The increase of $6.6 million was primarily due to a $6.0 million gain on debt extinguishment related to our Anchorage Loan, a $2.7 million gain on derivatives related to the covered call options, and a $0.7 million in foreign exchange gain. This was partially offset by a $0.6 million decrease in equity in earnings of unconsolidated joint venture and a $2.2 million increase in interest expense resulting from higher debt balances for the three months ended September 30, 2024 compared to September 30, 2023.

Income tax

Our income tax provision was $0.5 million for the three months ended September 30, 2024 compared to $0.1 million for the three months ended September 30, 2023. The increase in income tax provision was primarily due to lower taxable income for the three months ended September 30, 2024 compared to the prior year period.

Adjusted EBITDA

Adjusted EBITDA was $5.6 million and $11.5 million for the three months ended September 30, 2024, and 2023, respectively. This decline was primarily driven by a $8.5 million increase in general and administrative expenses (net of stock-based compensation expense and a release of over-accrued relocation fees), a $1.4 million increase in losses on digital assets, and a $0.6 million decrease in equity earnings from unconsolidated joint ventures. These impacts were partially offset by a $4.5 million increase in gross margin (excluding the one-time $13.5 million termination fee).

For a reconciliation to our most directly comparable financial measure calculated and presented in accordance with GAAP, please see “—Results of Operations—Adjusted EBITDA reconciliation” above.

Nine Months Ended September 30, 2024 and 2023

Adjusted EBITDA reconciliation:

(1) Net of the accretion of fair value differences of depreciable and amortizable assets included in equity in earnings of unconsolidated joint venture in the Consolidated Statements of Operations and Comprehensive Income (Loss) in accordance with ASC 323. See Note 9. Investments in unconsolidated joint venture of our Unaudited Condensed Consolidated Financial Statements for further detail.

(2) Non-recurring transactions for the nine months ended September 30, 2024 represent approximately $3.8 million of restructuring costs and $1.7 million related to the Far North transaction costs, offset by a $13.5 million contract termination fee received from MARA Holdings, and a $2.2 million tax refund.

Revenue

Total revenue for the nine months ended September 30, 2024 and 2023 was $130.7 million and $57.9 million, respectively, and consisted of Digital Asset Mining, Managed Services, HPC, and Other.

Digital Asset Mining

Digital Asset Mining revenue was $55.9 million and $39.1 million for the nine months ended September 30, 2024 and 2023, respectively. This increase was primarily driven by an increase in the average price of Bitcoin in the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. The average revenue per Bitcoin mined (excluding our net share of the King Mountain JV) was about $56,300 during the nine months ended September 30, 2024 compared to about $27,000 during the nine months ended September 30, 2024. The increase in average revenue per Bitcoin mined (excluding our net share of the King Mountain JV) was partially offset by a decrease in Bitcoin mined driven by: (i) the Halving, (ii) an increase in average network difficulty, (iii) the relocation of miners from the Kearney and Granbury sites to Alpha and Salt Creek, and (iv) planned downtime at the Salt Creek site to fortify the upstream electrical infrastructure supporting the facility. Bitcoin mined (excluding our net share of the King Mountain JV) for the nine months ended September 30, 2024 and 2023 was 993 (excluding the Bitcoin mined at Drumheller) and 1,447, respectively. Average network difficulty for the nine months ended September 30, 2024 and 2023 was 83.1T and 47.7T, respectively.

Managed Services

Managed Services revenue was $39.1 million for the nine months ended September 30, 2024, consisting of $20.6 million in management fees, $5.0 million in cost reimbursements, and $13.5 million in contract termination fees. Managed Services revenue was $15.0 million for the nine months ended September 30, 2023, consisting of $9.4 million in management fees and $5.6 million in cost reimbursements. The increase was primarily driven by the $13.5 million in contract termination fees received from MARA Holdings, and management fees related to the Ionic Management Services Agreement signed at the end of January 2024.

High Performance Computing – Colocation and Cloud

HPC revenue was $10.1 million and nil for the nine months ended September 30, 2024 and 2023, respectively. The revenue for the nine months ended September 30, 2024 represents nine months of combined company activity in connection with the Business Combination and consists of recurring revenue from small and medium enterprises predominantly domiciled in Canada.

Other

Other revenue was $25.6 million and $3.8 million for the nine months ended September 30, 2024 and 2023, respectively. Other revenue for the nine months ended September 30, 2024 consisted of $7.3 million in equipment sales, $6.6 million in hosting cost reimbursements, $3.9 million in hosting services revenue, $7.6 million in power revenues, and $0.2 million in equipment repair revenue. Other revenue for the nine months ended September 30, 2023 consisted primarily of hosting services revenue.

Cost of revenue

Digital Asset Mining

Cost of revenue for Digital Asset Mining for the nine months ended September 30, 2024 and 2023 was $31.3 million and $27.4 million, respectively. The increase was driven primarily by an increase in electricity costs from additional miners online and higher network difficulty. The nine months ended September 30, 2024 includes nine months of costs at the Medicine Hat site, which was acquired as a result of the Business Combination.

Managed Services

Cost of revenue for Managed Services for the nine months ended September 30, 2024 and 2023 was $8.7 million and $5.3 million, respectively. The $3.4 million increase was primarily due to increased reimbursable site operating costs driven by the addition of the five Ionic sites, partially offset by the termination of the PMAs for the Kearney and Granbury sites that occurred on April 30, 2024.

High Performance Computing – Colocation and Cloud

Cost of revenue for HPC for the nine months ended September 30, 2024 and 2023 was $7.7 million and nil, respectively. The cost of revenue reflects nine months of activity in connection with the newly acquired HPC business from the Business Combination.

Other

Cost of revenue for Other for the nine months ended September 30, 2024 was $18.6 million and consisted primarily of $9.4 million in cost of hosting services revenue, of which $8.4 million is electricity costs, $3.9 million in cost of equipment sold, and $5.3 million in cost of power revenues. Cost of revenue for Other for the nine months ended September 30, 2023 was $1.3 million and consisted primarily in cost of hosting service revenue.

Depreciation and amortization

Depreciation and amortization expense was $33.5 million and $11.5 million for the nine months ended September 30, 2024 and 2023, respectively. The increase was primarily driven by property and equipment acquired through the Business Combination and the Far North transaction. Additionally, during the three months ended March 31, 2024, management performed an operational efficiency review of its mining equipment ahead of the anticipated Halving. The outcome was a change in the expected useful life of our MicroBT M31S and M31S+ and Canaan Avalon servers. The mining equipment was originally estimated to have a useful life of four years from the date the mining equipment was put into service. After the operational efficiency review, the mining equipment was estimated to have a useful life of five months as of January 1, 2024. The result is a change in estimate and applied prospectively, which increased depreciation expense by $5.6 million for the nine months ended September 30, 2024.

General and administrative expenses

G&A expenses were $54.1 million and $15.8 million for the nine months ended September 30, 2024 and 2023, respectively. The $38.3 million increase in G&A expenses was driven by: (i) a $14.8 million increase in stock-based compensation, (ii) a $9.7 million increase in salary and benefit costs due to added headcount as part of the Business Combination and to support our growth, (iii) a $4.0 million increase in other G&A expenses related to additional cost centers as part of the Business Combination to support our growth, (iv) a $3.8 million increase in restructuring costs, (v) a $2.8 million increase in insurance expenses, and (vi) a $1.7 million increase in expenses related to the Far North transaction. The remaining $1.5 million increase is related to the Company’s growth since the Business Combination.

Gains on digital assets

Gains on digital assets were $201.2 million and $0.2 million for the nine months ended September 30, 2024 and 2023, respectively. The increase, which primarily consists of increases in the market value of our Bitcoin, was due to our decision to adopt ASU 2023-08, effective July 1, 2023, which requires us to recognize our digital assets at fair value with changes recognized in net income during the reporting period. The price of Bitcoin on December 31, 2023 was $42,288 compared to the price of Bitcoin on September 30, 2024 of $63,301, such that the increase in Bitcoin price during the nine months ended September 30, 2024 resulted in the significant gain of $201.2 million.

Legal settlement

Legal settlement was nil and $1.5 million for the nine months ended September 30, 2024 and 2023, respectively. USBTC became a plaintiff in a malpractice lawsuit in September 2021. In April 2023, USBTC settled the lawsuit for a gross amount of $3.1 million. In May 2023, USBTC received approximately $1.5 million, net of legal fees.

Other income

Other income totaled $13.1 million and $13.4 million for the nine months ended September 30, 2024 and 2023, respectively. The decrease of $0.6 million was primarily due to gain on debt extinguishment of $6.0 million compared to $23.7 million during the nine months ended September 30, 2024 and 2023, related to our conversion of the Anchorage Loan in September 2024, and restructuring of the NYDIG debt in February 2023, respectively. The decrease in other income was partially offset by a gain on call options of $19.9 million and nil for the nine months ending September 30, 2024 and 2023, respectively, interest expense of $20.2 million and $19.0 during the nine months ended September 30, 2024 and 2023, respectively, equity in earnings of unconsolidated joint venture of $8.4 million and nil during the nine months ended September 30, 2024 and 2023, respectively, and foreign exchange loss of $1.0 million and nil during the nine months ended September 30, 2024 and 2023, respectively.

Income tax

Our income tax provision was $3.0 million for the nine months ended September 30, 2024 compared to $0.7 million for the nine months ended September 30, 2023. The increase in income tax provision was primarily due to higher deferred tax expenses recognized in the nine months ended September 30, 2024 compared to the prior year period.

Loss from discontinued operations

Loss from discontinued operations was $9.4 million and nil for the nine months ended September 30, 2024 and 2023, respectively. On March 6, 2024, we announced the closure of our Drumheller site in Alberta, Canada in connection with restructuring and optimization initiatives designed to strengthen financial performance. Of the $9.4 million loss related to the closure of our Drumheller site, the impairment of the long term assets contributed $6.1 million and the remaining $3.3 million loss was from other operational activities.

Adjusted EBITDA

Adjusted EBITDA was $242.7 million and $34.7 million for the nine months ended September 30, 2024 and 2023, respectively. The increase was primarily driven by the $201.2 million fair value gain on digital assets, higher gross margin per Bitcoin mined, and additional profitable revenue from Managed Services, HPC, and Other. For a reconciliation to our most directly comparable financial measure calculated and presented in accordance with GAAP, please see “—Results of Operations—Adjusted EBITDA reconciliation” above.

Liquidity and Capital Resources

Our earnings and ability to meet any debt obligations will depend on the cash flows resulting from our operations. Our cash needs historically were primarily for growth through acquisitions and working capital to support equipment financing and the purchase of additional miners. Cash needs for operations have historically been financed with cash generated from operations, sales of our mined Bitcoin or financings. Our strategy is primarily to sell new Bitcoin mined and we intend to use existing Bitcoin held in reserve to build balance sheet value and finance growth initiatives. Bitcoin held in reserve may be deployed through direct sales, option strategies, or other approaches. See Note 10. Loans and notes payable to the Unaudited Condensed Consolidated Financial Statements found elsewhere in this Quarterly Report for additional information on our existing financing arrangements.

Our ability to meet our anticipated cash requirements will depend on factors including our ability to expand our business or enter into new lines of business and provide new offerings, services, and features and make enhancements to our business, our ability to compete with existing and new competitors in existing and new markets and offerings, our ability to acquire new businesses or pursue strategic transactions and global and domestic economic conditions and their impact on demand for our markets and offering.

We believe that cash flows generated from operating activities and our Bitcoin held in reserve will meet our anticipated cash requirements in the short-term. On a long-term basis, we would rely on access to the capital markets for any long-term funding not provided by operating cash flows, cash on hand, and our Bitcoin held in reserve.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

Operating Activities

Net cash used in operating activities was $46.9 million and $0.3 million for the nine months ended September 30, 2024 and 2023, respectively. Net cash used in operating activities for the nine months ended September 30, 2024 resulted from net income and related adjustments of $27.9 million in addition to unfavorable changes in working capital of $19.0 million. Net cash provided by operating activities for the nine months ended September 30, 2023 resulted from net income and related adjustments of $5.5 million offset by favorable changes in working capital of $5.2 million.

Investing Activities

Net cash (used in) provided by investing activities was ($60.7) million and $37.6 million for the nine months ended September 30, 2024 and 2023, respectively. Cash increases for the nine months ended September 30, 2024 were primarily due to $65.6 million in proceeds from the sale of Bitcoin, $4.9 million in proceeds from the sale of property and equipment, and $1.8 million in cash acquired from the Far North acquisition. This was partially offset by $48.5 million in deposits on property and equipment, $78.1 million in purchases of property and equipment primarily related to the AI cluster under our GPU-as-a-Service business and, from the Salt Creek buildout, and a $6.4 million investment in Ionic. Cash increases for the nine months ended September 30, 2023 were primarily due to $39.6 million in proceeds from the sale of Bitcoin, partially offset by $1.0 million in deposits on miners and $1.1 million in purchases of property and equipment.

Financing Activities

Net cash provided by (used in) financing activities was $149.6 million and ($31.2) million for the nine months ended September 30, 2024 and 2023, respectively. Cash provided by financing activities for the nine months ended September 30, 2024 was driven by $150.0 million in proceeds from the Coatue convertible note, $20.8 million in proceeds from covered call options premium, and $14.8 million in proceeds from the Coinbase loan, and $0.5 million in proceeds from the issuance of common stock – stock option exercises. This was partially offset by $34.0 million in repayments of loans and notes payable, $0.9 million in debt issuance costs paid, and $1.6 million in principal payments on finance leases. Cash used for the nine months ended September 30, 2023 was due to $30.0 million in repayment of notes payable and $1.2 million in debt issuance costs paid.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities, each as of the date of the consolidated financial statements, and revenues and expenses during the periods presented. On an ongoing basis, our management evaluates these estimates and assumptions, and the effects of any such revisions are reflected in the consolidated financial statements in the period in which they are determined to be necessary. Actual outcomes could differ materially from those estimates in a manner that could have a material effect on our consolidated financial statements.

Set forth below are the policies and estimates that we have identified as critical to our business operations and understanding our results of operations, based on the high degree of judgment utilized or complexity in their application.

• Use of estimates
• Digital assets
• Revenue from contracts with customers
• Impairment of long-lived assets
• Investment in equity investees
• Finite-lived intangible assets
• Stock based compensation expense

See Note 2. Basis of presentation, summary of significant accounting policies and recent accounting pronouncements to our Unaudited Condensed Consolidated Financial Statements found elsewhere in this Quarterly Report for more detail on these accounting policies and estimates.

Recent Accounting Pronouncements

See Note 2. Basis of presentation, summary of significant accounting policies and recent accounting pronouncements to our Unaudited Condensed Consolidated Financial Statements found elsewhere in this Quarterly Report for a discussion of recent accounting pronouncements.

Market Price Risk of Bitcoin

We hold a significant amount of Bitcoin; therefore, we are exposed to the impact of market price changes in Bitcoin on our Bitcoin holdings.

As of September 30, 2024, we held 9,106 Bitcoin and the fair value of a single Bitcoin was approximately $63,300. Therefore, the fair value of our Bitcoin holdings as of September 30, 2024 was approximately $576.5 million. Declines in the fair market value of Bitcoin will impact the cash value that would be realized if we were to sell our Bitcoin for cash, therefore having a negative impact on our liquidity.

Interest Rate Risk

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Our exposure to interest rate risk relates to our ability to earn interest income on cash balances denominated in foreign currency at variable rates. Changes in short term interest rates will not have a significant effect on the fair value of our cash account.

In addition, we have two loans that maintain a variable interest rate. The first is the TZRC Secured Promissory Note, which includes a floating interest rate subject to a maximum rate of 15.25%. The second is the Coinbase credit facility, which bears interest at a rate of 6.0% plus the greater of (i) the federal funds rate on the date of the applicable borrowing and (ii) 3.25%. As a result, changes in the market interest rate could have an effect on our operations over certain periods. As of September 30, 2024, the interest rate on the TZRC Secured Promissory Note was 15.25%, the maximum interest rate. As of September 30, 2024, the interest rate on the Coinbase credit facility was 11.00%. Based on the outstanding balance of the Coinbase credit facility as of Sepetmber 30, 2024, for every 100 basis point increase in the US Federal Funds Target Rate - Upper Bound, we would incur approximately $0.7 million of additional annual interest expense. We currently do not hedge interest rate exposure. We may in the future hedge our interest rate exposure and may use swaps, caps, collars, structured collars or other common derivative financial instruments to reduce interest rate risk. It is difficult to predict the effect that future hedging activities would have on our operating results.

For more information regarding the TZRC Secured Promissory Note and Coinbase credit facility, see Note 10. Loans and notes payable to the Unaudited Condensed Consolidated Financial Statements found elsewhere in this Quarterly Report.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of Hut 8’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act and regulations promulgated thereunder) as of September 30, 2024. Based on this evaluation, our management concluded that our disclosure controls and procedures were effective as of September 30, 2024. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls, and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow for timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the three months ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

As of the date of this Quarterly Report, there have been no material changes from the risk factors set forth in Part I, Item IA of our Annual Report. We are subject to various risks and uncertainties that could materially adversely affect our business, financial condition, operating results and the trading price of our common stock. You should carefully read and consider the risks and uncertainties included in the Annual Report, together with all of the other information in the Annual Report and this Quarterly Report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, and other documents that we file with the U.S. Securities and Exchange Commission (the “SEC”). The risks and uncertainties described in these reports may not be the only ones we face. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. The factors discussed in these reports, among others, could cause our actual results to differ materially from historical results and those expressed in forward-looking statements made by us or on our behalf in filings with the SEC, press releases, communications with investors, and oral statements.