Item 1. Business
Company Background
A predecessor to the Company was incorporated in
the state of Nevada on August 16, 1995 as Interactive Lighting Showrooms, Inc. On June 30, 2004, the predecessor changed its name to Am/Tex
Oil and Gas, Inc. On January 24, 2008, the predecessor changed its name to Critical Point Resources, Inc. On February 2, 2012, the predecessor
changed its name to Renewable Energy Solution Systems, Inc. On May 18, 2012, the predecessor changed its name to RES Systems, Inc. On
May 23, 2013, the predecessor changed its name back to Renewable Energy Solution Systems, Inc.
On April 6, 2020, the predecessor redomiciled in
the State of Delaware by merging with a Delaware subsidiary named RESS Merger Corp., which was the successor in the merger. Thereafter,
effective July 15, 2020, the predecessor and the Company effected a holding company reorganization pursuant to Section 251(g) of the Delaware
General Corporation Law (the “DGCL”) under which RESS Merger Corp. merged with RESS of Delaware, Inc., a Delaware subsidiary
of RESS Merger Corp., and all shareholders of RESS Merger Corp. received one share of common stock of the Company, another Delaware subsidiary
of RESS Merger Corp., for each share that they previously held in RESS Merger Corp., and RESS of Delaware, Inc. (the successor in the
merger with RESS Merger Corp.) becoming a subsidiary of the Company.
Effective July 17, 2020, the Company divested RESS
of Delaware, Inc. to Sterling Acquisitions I, Inc. (“Sterling”), which is owned by the chief executive officer of the Company,
pursuant to an agreement under Sterling (i) purchased Ten Million (10,000,000) common shares of the Company for an aggregate price of
Ten Dollars ($10), and (ii) was issued Ten Million (10,000,000) Class A Warrants at an aggregate price of Ten Dollars ($10), and (iii).
Ten Million (10,000,000) Class B Warrants at an aggregate price of Ten Dollars ($10). In addition, the Company agreed to pay a fee of
$1,000 to Sterling to cover the expenses associated with the maintenance of RESS of Delaware, Inc. until such time as a certificate of
dissolution is filed with the state of Delaware.
By a written consent dated July 16, 2021, holders
of a majority of the Company’s issued and outstanding common stock approved a resolution to appoint Jonathan Bates, Raymond Mow,
Michael Maloney and Seth Bayles to the board of directors of the Company, and to appoint Jonathan Bates as Chairman, Seth Bayles as Corporate
Secretary, Raymond Mow as Chief Financial Officer, and Ryan Ramnath as Chief Operating Officer (collectively, the “New O&Ds”).
Erik S. Nelson remained a director and the chief executive officer. At the same time, the shareholders approved the issuance of 32,994,999
shares of common stock in the Company’s offering of common stock at $0.015 per share, and the grant of 4,750,000 shares for services,
which were valued at $0.015 per share. As a result of the foregoing stock issuances, the New O&Ds (or entities controlled by them)
collectively acquired 24,893,877 shares of common stock, which represented approximately 62% of the issued and outstanding shares at the
time.
The appointment of certain of the New O&Ds
to the Company’s board, and issuance to the New O&Ds of a controlling interest in the Company, were made in order to enable
the Company to enter the business of creating a hosting center for Bitcoin mining computers primarily utilizing immersion cooling
technology, as well mining the Bitcoin digital currency for its own account. Prior to the change of control to the New O&Ds, the Company
was a shell company.
Company Overview
Since July 2021, our business has been as a blockchain
technology company that is building out industrial scale digital asset mining, equipment sales and hosting operations. The Company’s
primary business is hosting third-party equipment used in mining of digital asset coins and tokens, specifically Bitcoin, as well as self-mining
for its own account. Our state-of-the-art facilities will be specifically designed and constructed for housing advanced mining equipment.
Our data centers will provide power, racks, proprietary thermodynamic management (heat dissipation and airflow management), redundant
connectivity, 24/7 security, as well as software which provide infrastructure management and custom firmware that boost performance and
energy efficiency.
We plan to operate our data centers using immersion
cooling technology. Immersion cooling is the process of submerging computer components (or full servers) in a thermally, but not electrically,
conductive liquid (dielectric coolant) allowing higher heat transfer performance than air and many other benefits. Immersion cooling can
be up to 95% more efficient than standard air cooling, producing an estimated PUE (power usage effectiveness) of 1.05. This cooler environment
has been shown to extend machine lives by 30% or longer.
We initially decided to locate our initial
facilities in Trinidad, because it has some of the cheapest electricity in the world due to its abundant supplies of oil and gas and
because some of our technical staff is located there. We have entered into an agreement with Telecommunications Services of Trinidad
& Tobago Limited (“TSTT”), the largest and oldest telecom company in Trinidad, to co-locate up to 125 800 kw
containers for hosting digital asset miners. TSTT has up to 93 potential locations for co-location of our containers. Under the
agreement, we have the option, but not obligation, to co-locate containers at our own pace. We pay a fixed amount per container,
plus the actual electricity costs incurred by our containers in the amount billed to TSTT by the local utility without any markup.
The agreement provides that our hosting containers will be billed for electricity usage at the local utility’s standard rates,
which is the greater of 3.5 cents per kwh or 75% of the declared reserve capacity, which is equal to the customer’s highest
expected monthly kilovolt-ampere demand at $7.40. The term of the agreement expires on October 14, 2031. We have the right to
terminate our agreement with TSTT at any time that the price for electricity consumption exceeds $0.05 per kwh.
Until our permanent hosting facilities are operational,
we are temporarily leasing space for a small number of ASIC computers with a co-host. We intend to move all of our currently owned and
customer owned miners to our new TSTT hosting facilities once they are operational.
In October 2022, we completed the installation
of initial hosting containers under our agreement with TSTT. However, prior to commencing operations, TSTT advised us that the utility
had refused to honor its existing agreement with TSTT with respect to electricity supplied to our pilot hosting site, and instead indicated
that the rate would be approximately $0.09 per kwh. TSTT has informed us that it does not believe that its contract with the local utility
entitles it to vary the rate it charges for the use of electricity and has protested the decision. At this time, we are unable to predict
how this dispute between TSTT and the utility will be resolved, what form any resolution may take or how long any resolution may take.
Accordingly, we are delaying the installation of additional containers in Trinidad until this dispute is resolved. Until the dispute between
TSTT and the utility is resolved, we intend to focus our efforts on purchasing or developing hosting locations in the United States and
Canada, either directly or in joint ventures with other industry participants.
In light of the recent developments in Trinidad,
we are focusing our efforts in the near term on developing hosting locations in the United States and Canada. We are exploring situations
where medium to long-term power agreements may be available at affordable prices, whether using traditional power sources such as coal
or natural gas, as well as environmentally friendly sources such as hydroelectric, wind and solar-backed projects, which might allow us
to generate collateral revenue from the sale of excess power to the local utility grid and from the generation of saleable carbon credits.
We recently entered into a joint arrangement whereby
we would contribute one immersion contain and six transformers, and sold four immersion containers to a joint venture with a third party
that has procured a location and a medium or long-term power purchase agreement in Pecos, Texas.
Our digital asset mining operation is focused on
the generation of digital assets by solving complex cryptographic algorithms to validate transactions on specific digital asset network
blockchains, which is commonly referred to as “mining.” Mining requires the use of specialized computers equipped with application-specific
integrated circuit (ASIC) chips (known as “miners”) to solve complex cryptographic algorithms in support of the Bitcoin blockchain
(in a process known as “solving a block”) in exchange for digital asset rewards (primarily bitcoin). Whether we are hosting
our client’s computers or mining for our own account with our own computers, the miners participate in “mining pools”
organized by “mining pool operators” in which we or our clients share mining power (known as “hash rate”) with
the hash rate generated by other miners participating in the pool to earn digital asset rewards. The mining pool operator provides a service
that coordinates the computing power of the independent mining enterprises participating in the mining pool. Fees are paid to the mining
pool operator to cover the costs of maintaining the pool. The pool uses software that coordinates the pool members’ mining power,
identifies new block rewards, records how much hash rate each participant contributes to the pool, and assigns digital asset rewards earned
by the pool among its participants in proportion to the hash rate each participant contributed to the pool in connection with solving
a block.
As the demand for digital assets increases and
digital assets become more widely accepted, there is an increasing demand for professional-grade, scalable infrastructure to support growth
of the blockchain ecosystem. We expect to continually evaluate the performance of our data centers, including our ability to access additional
megawatts of electric power and to expand our total self-mining and customer and related party hosting hash rates.
Revenue Sources
Our revenue will consist primarily of fees generated
from our hosting operations, sales of mining equipment to be hosted in our data centers and proceeds related to Bitcoin transaction processing
for our own account.
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Hosting revenue from customers and related parties. Hosting revenue from customers and related parties is based on consumption-based contracts with our customers and related parties. Most contracts are renewable, and our customers are generally billed on a fixed and recurring basis each month for the duration of their contract, which vary from one to three years in length. Our typical agreement provides for full reimbursement of the client’s share of electricity costs of the hosting facility, and a percentage of bitcoin generated by the client’s activities. The percentage is negotiable on a case-by-case basis but is expected to average 25% of revenues. In addition, we may earn minor services revenue from equipment repairs and handling shipping logistics. We do not indemnify our hosting clients against loss. The agreements are normally terminable in the event of a default by either party. The agreements are often subject to suspension in the event force majeure events or when the prevailing gross margins on digital asset mining are not positive. In addition, some of our agreements may allow a client to terminate the agreement in the event the price of electricity exceeds a certain benchmark, which is negotiated on a case-by-case basis based on the location of the hosting facility. Our hosting customers may supply their own equipment or may purchase the equipment from us. |
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Digital asset mining income. We will conduct proprietary digital asset mining operations using specialized computers equipped with application-specific integrated circuit (ASIC) chips (known as “miners”) to solve complex cryptographic algorithms in support of the Bitcoin blockchain (in a process known as “solving a block”) in exchange for digital asset rewards (primarily Bitcoin). The Company will participate in “mining pools” organized by “mining pool operators” in which we share our mining power (known as “hash rate”) with the hash rate generated by other miners participating in the pool to earn digital asset rewards. The mining pool operator provides a service that coordinates the computing power of the independent mining enterprises participating in the mining pool. Fees are paid to the mining pool operator to cover the costs of maintaining the pool. The pool uses software that coordinates the pool members’ mining power, identifies new block rewards, records how much hash rate each participant contributes to the pool, and assigns digital asset rewards earned by the pool among its participants in proportion to the hash rate each participant contributed to the pool in connection with solving a block. Revenues from digital asset mining are impacted by volatility in Bitcoin prices, as well as increases in the Bitcoin blockchain’s network hash rate resulting from the growth in the overall quantity and quality of miners working to solve blocks on the Bitcoin blockchain and the difficulty index associated with the secure hashing algorithm employed in solving the blocks. |
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Equipment sales to customers and related parties. Equipment sales to customers and related parties is derived from our ability to leverage our partnerships with leading equipment manufacturers to secure equipment in advance, which is then sold to our customers and related parties. Our equipment sales are typically in connection with a hosting contract, but have sold equipment to parties that are not hosting customers where the terms are attractive. |
We consider these all to be part of the same line
of business. We do not have any fixed goals regarding the percentage of our data centers that we use for hosting third party miners versus
the percentage that we use for self-mining. For mining or hosting equipment that we purchase, we also do not have any fixed goals regarding
whether we utilize the equipment for our own account, sell it to a customer or other third party or contribute it to a joint venture.
We let market conditions and overall profitability analysis guide the decisions. When we host, we look for opportunities to profitably
sell miners to the hosting client in a buy/host transaction. In some instances, we may resell data center and electrical equipment if
we are offered an attractive price and believe that we can replace it at a lower price and by the time we may need it for our internal
operations. These decisions are dynamic and based on the overall market for all of the above.
Our decision to utilize the data center space for
hosting versus self-mining will depend on the relative profitability of each segment at the time and whether we have the capital to invest
in new miners for mining for our own account at the time. In recent years, the prices of miners have fluctuated widely due to supply and
demand factors, and mining for our own account is less profitable when the price of miners is high due to the capital costs needed to
acquire the miners. In addition, the margins from mining have also fluctuated widely in recent years due to wide fluctuations in the price
of digital assets and the electricity prices need to mine digital assets.
We do not generally accept digital assets as payment
for goods and services. However, we have agreed to accept digital assets as payment in some situations, and expect to enter into more
such arrangements in the future. To the extent we agree to accept digital assets as payment, we intend to only accept Bitcoin. We expect
that most of our hosting contracts will provide that we receive a percentage of Bitcoin mined by our hosting customers as partial payment
for our hosting services. In addition, under our hosting agreements we have the right to apply Bitcoin mined by our hosting customers
toward payment of amounts invoiced in U.S. dollars if the invoiced amount is not paid by its due date; however, in such situations, the
credit that is applied to the U.S. dollar invoice is based on the actual cash proceeds received from the conversion of the Bitcoin into
U.S. dollars or a discount to the spot price of Bitcoin if it is not immediately converted in U.S. dollars. We have also agreed to sell
hosting containers to a third party for a note payable in Bitcoin.
We do not have a set policy in regard to how long
we hold digital assets that we receive as payment, other than to immediately sell digital assets as needed to pay operating expenses or
for capital expenditures. We do not plan to hold any digital assets that we receive as a long-term investment. We hold our digital assets
in a cold storage wallet account in our name, and not with a custodian or other intermediary. We have an account with Gemini Trust Company,
LLC, which is a qualified custodian regulated by the New York Department of Financial Services, to which we transfer any digital assets
that we decide to liquidate immediately prior to their liquidation. We do not store any digital assets at Gemini.
Blockchain and Cryptocurrencies Generally
Bitcoin was first introduced in 2008 and was first
introduced as a means of exchange in 2009. Bitcoin is a digital asset that is issued by and transmitted through an open-source protocol
collectively maintained by a peer-to-peer network of decentralized user nodes. This network hosts a public transaction ledger, known as
the Bitcoin blockchain, on which Bitcoin holdings and transactions in Bitcoin are recorded. Balances of Bitcoin are stored in individual
“wallet” functions, which associate network public addresses with a “private key” that controls the transfer of
Bitcoin. The Bitcoin blockchain can be updated without any single entity owning or operating the network. New Bitcoin is created and allocated
by the protocol that governs Bitcoin through a “mining” process that rewards users that verify transactions in the Bitcoin
blockchain. The Bitcoin protocol limits the total issuance of Bitcoin over time to 21 million.
Bitcoin can be used to pay for goods and services,
or it can be converted to fiat currencies, such as the U.S. dollar, at rates of exchange determined by market forces on Bitcoin trading
platforms, which operate 24-hours-a-day, 7-days-a-week and are not regulated in as comprehensive a manner as traditional securities exchanges.
As a result, trading on these markets is likely more subject to manipulation than on securities markets regulated by the SEC, and pricing
on these markets is likely affected by such manipulative activity. In addition to these platforms, over-the-counter markets and derivatives
markets for Bitcoin also exist; however, these markets are still maturing and many are unregulated.
We don’t have a fixed policy regarding fiat
currencies, other than to immediately sell enough to cover operating expenses, to sell enough to cover capital expenses when required,
and to ultimately sell all of it when needs arise. We do not plan to leverage our balance sheet in order to hold bitcoin.
Bitcoin exists entirely in electronic form, as
virtually irreversible public transaction ledger entries on the blockchain, and transactions in Bitcoin are recorded and authenticated
not by a central repository, but by a decentralized peer-to-peer network. This decentralization avoids certain threats common to centralized
computer networks, such as denial of service attacks, and reduces the dependency of the Bitcoin network on any single system. While the
Bitcoin network as a whole is decentralized, the private keys used to access Bitcoin balances are not widely distributed and are held
on hardware (which can be physically controlled by the holder or by a third party such as a custodian) or via software programs on third-party
servers and loss of such private keys results in an inability to access, and effective loss of, the corresponding Bitcoin. Consequently,
Bitcoin holdings are susceptible to all of the risks inherent in holding any electronic data, such as power failure, data corruption,
security breach, communication failure, and user error, among others. These risks, in turn, make Bitcoin subject to theft, destruction,
or loss of value from hackers, corruption, or technology-specific factors such as viruses that do not affect conventional fiat currency.
In addition, the Bitcoin network relies on open-source developers to maintain and improve the Bitcoin protocol. Accordingly, Bitcoin may
be subject to protocol design changes, governance disputes such as “forked” protocols, competing protocols, and other open
source-specific risks that do not affect conventional proprietary software.
Distributed blockchain technology is a decentralized
and encrypted ledger that is designed to offer a secure, efficient, verifiable, and permanent way of storing records and other information
without the need for intermediaries. Cryptocurrencies serve multiple purposes. They can serve as a medium of exchange, store of value
or unit of account. Examples of cryptocurrencies include: Bitcoin, Bitcoin cash, and litecoin. Blockchain technologies are being evaluated
for a multitude of industries due to the belief in their ability to have a significant impact in many areas of business, finance, information
management, and governance.
Cryptocurrencies are decentralized currencies that
enable near instantaneous transfers. Transactions occur via an open source, cryptographic protocol platform which uses peer-to-peer technology
to operate with no central authority. The online network hosts the public transaction ledger, known as the blockchain, and each cryptocurrency
is associated with a source code that comprises the basis for the cryptographic and algorithmic protocols governing the blockchain. In
a cryptocurrency network, every peer has its own copy of the blockchain, which contains records of every historical transaction - effectively
containing records of all account balances. Each account is identified solely by its unique public key (making it effectively anonymous)
and is secured with its associated private key (kept secret, like a password). The combination of private and public cryptographic keys
constitutes a secure digital identity in the form of a digital signature, providing strong control of ownership.
No single entity owns or operates the network.
The infrastructure is collectively maintained by a decentralized public user base. As the network is decentralized, it does not rely on
either governmental authorities or financial institutions to create, transmit or determine the value of the currency units. Rather, the
value is determined by market factors, supply and demand for the units, the prices being set in transfers by mutual agreement or barter
among transacting parties, as well as the number of merchants that may accept the cryptocurrency. Since transfers do not require involvement
of intermediaries or third parties, there are currently little to no transaction costs in direct peer-to-peer transactions. Units of cryptocurrency
can be converted to fiat currencies, such as the US dollar, at rates determined on various exchanges, such as Cumberland, Coinsquare (in
Canada), Coinbase, Bitsquare, Bitstamp, and others. Cryptocurrency prices are quoted on various exchanges and fluctuate with extreme volatility.
We believe cryptocurrencies offer many advantages
over traditional, fiat currencies, although many of these factors also present potential disadvantages and may introduce additional risks,
including:
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acting as a fraud deterrent, as cryptocurrencies are digital and cannot be counterfeited or reversed arbitrarily by a sender; |
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immediate settlement; |
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elimination of counterparty risk; |
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no trusted intermediary required; |
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lower fees; |
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identity theft prevention; |
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accessible by everyone; |
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transactions are verified and protected through a confirmation process, which prevents the problem of double spending; |
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decentralized – no central authority (government or financial institution); and |
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recognized universally and not bound by government imposed or market exchange rates. |
However, cryptocurrencies may not provide all of
the benefits they purport to offer at all or at any time.
As with many new and emerging technologies, there
are potentially significant risks. Businesses (including the Company) which are seeking to develop, promote, adopt, transact or rely upon
blockchain technologies and cryptocurrencies have a limited track record and operate within an untested new environment. These risks are
not only related to the businesses the Company pursues, but the sector and industry as a whole, as well as the entirety of the concept
behind blockchain and cryptocurrency as value. Factors such as access to computer processing capacity, interconnectivity, electricity
cost, environmental factors (such as cooling capacity) and location play an important role in “mining,” which is the term
for using the specialized computers in connection with the blockchain for the creation of new units of cryptocurrency.
Digital Asset Mining
Specialized computers, or “miners,”
power and secure blockchains by solving complex cryptographic algorithms to validate transactions on specific digital asset networks.
In order to add blocks to the blockchain, a miner must map an input data set consisting of the existing blockchain, plus a block of the
most recent digital asset transactions and an arbitrary number called a “nonce,” to an output data set of a predetermined
length using the SHA256 cryptographic hash algorithm. Solving these algorithms is also known as “solving or completing a block.”
Solving a block results in a reward of digital assets, such as Bitcoin, in a process known as “mining.” These rewards of digital
assets currently can be sold profitably when the sale price of the digital asset exceeds the cost of “mining,” which generally
consists of the cost of mining hardware, the cost of the electrical power to operate the machine, and other facility costs to house and
operate the equipment.
Mining processing power is generally referred to
as “hashing power.” A “hash” is the computation run by mining hardware in support of the blockchain. A miner’s
“hash rate” refers to the rate at which it is capable of solving such computations per second. Miners with higher rated hash
rate when operating at maximum efficiency have a higher chance of completing a block in the blockchain and receiving a digital asset reward.
Currently, the likelihood that an individual mining participant acting alone will solve a block and be awarded a digital asset is extremely
low. As a result, to maximize the opportunities to receive a reward, most large-scale miners have joined with other miners in “mining
pools” where the computing power of each pool participant is coordinated to complete the block on the blockchain and mining rewards
are distributed to participants in accordance with the rules of the mining pool. Fees payable to the operator of the pool vary but are
typically as much as 2% of the reward earned and are deducted from the amounts earned by each pool participant. Mining pools are subject
to various risks including connection issues, outages and other disruptions which can impact the quantity of digital assets earned by
participants.
Mathematically Controlled Supply
The method for creating new Bitcoins is mathematically
controlled in a manner so that the supply of Bitcoins grows at a limited rate pursuant to a pre-set schedule. The number of Bitcoins awarded
for solving a new block is automatically halved every 210,000 blocks. This means every block up to and including block 210,000 produced
a reward of 50 Bitcoin, while blocks beginning with 210,001 produced a reward of 25 Bitcoin. Since blocks are mined on average every 10
minutes, 144 blocks are mined per day on average. At 144 blocks per day, 210,000 blocks take four years to mine on average. The current
fixed reward for solving a new block is 6.25 Bitcoin per block and it is anticipated that the reward will decrease by half to become 3.125
Bitcoin per block in early 2024, according to estimates of the rate of block solution calculated by BitcoinClock.com. This deliberately
controlled rate of Bitcoin creation means that the number of Bitcoins in existence will never exceed 21 million and that Bitcoins cannot
be devalued through excessive production unless the Bitcoin Network’s source code (and the underlying protocol for Bitcoin issuance)
is altered. The Company monitors the Blockchain network and, as of July 16, 2022, based on the information we collected from our network
access, more than 19 million Bitcoins have been mined.
Performance Metrics
Hash Rate
Miners perform computational operations in
support of digital asset blockchains measured in “hash rate” or “hashes per second.” A “hash”
is the computation run by mining hardware in support of the blockchain; therefore, a miner’s “hash rate” refers
to the rate at which it is capable of solving such computations. The original equipment used for mining Bitcoin utilized the Central
Processing Unit (“CPU”) of a computer to mine various forms of digital assets. Due to performance limitations, CPU mining
was rapidly replaced by the Graphics Processing Unit (“GPU”), which offers significant performance advantages over CPUs. General
purpose chipsets like CPUs and GPUs have since been replaced as the standard in the mining industry by ASIC chips
such as those found in the S17 and S19 miners that we and our customers use to mine Bitcoin. These ASIC chips are
designed specifically to maximize the rate of hashing operations.
Network Hash Rate
In digital assets mining, hash rate is a measure
of the processing speed by a mining computer for a specific digital asset. A participant in a blockchain network’s mining function
has a hash rate total of its miners seeking to mine a specific digital asset and, system-wide, there is a total hash rate of all miners
seeking to mine each specific type of digital asset. A higher total hash rate relative to the system-wide total hash rate generally
results over time in a corresponding higher success rate in digital asset rewards as compared to mining participants with relatively
lower total hash rates.
However, as the relative market price for a digital
asset increases, more users are incentivized to mine that digital asset, which increases the network’s overall hash rate.
As a result, a mining participant must increase its total hash rate in order to maintain its relative possibility
of solving a block on the network blockchain. Achieving greater hash rate power by deploying increasingly sophisticated miners in ever
greater quantities has become one of the Bitcoin mining industry’s great sources of competition. Our goal is to deploy a powerful
fleet of hosted- and self-miners, while operating as energy-efficiently as possible.
We expect to use miners with a J/TH efficiency
of 30-40 based on the current generation of ASIC computers, although we own a small number of less efficient machines. We do not intend
to accept anything lower than 82 TH/s machines in the future. Our average efficiency for machines in immersion will be approximately 36
J/TH on the current deployment. The legacy machines have an approximate efficiency of 51.5 J/TH.
Key Factors Affecting Our Performance
Market Price of Digital Assets
Our business is heavily dependent on the spot price
of Bitcoin, as well as other digital assets. The prices of digital assets, specifically Bitcoin, have experienced substantial volatility,
which may reflect “bubble” type volatility, meaning that high or low prices may have little or no relationship to identifiable
market forces, may be subject to rapidly changing investor sentiment, and may be influenced by factors such as technology, regulatory
void or changes, fraudulent actors, manipulation, and media reporting. Bitcoin (as well as other digital assets) may have value based
on various factors, including their acceptance as a means of exchange by consumers and others, scarcity, and market demand.
Our financial performance and growth depend in
large part on our ability to mine for digital assets profitably and to attract customers for our hosting services. Increases in power
costs, inability to mine digital assets efficiently and to sell digital assets at favorable prices will reduce our operating margins,
impact our ability to attract customers for our services may harm our growth prospects and could have a material adverse effect on our
business, financial condition and results of operations. Over time, there has been a positive trend in the total market capitalization
of digital assets which suggests increased adoption. However, historical trends are not indicative of future adoption, and it is possible
that the adoption of digital assets and blockchain technology may slow, take longer to develop, or never be broadly adopted, which would
negatively impact our business and operating results.
Network Hash Rate
Our business is not only impacted by the volatility
in digital asset prices, but also by increases in cost of mining digital assets, as reflected by the blockchain’s network hash rate
resulting from the growth in the overall quantity and quality of miners working to solve blocks on the blockchain and the difficulty index
associated with the secure hashing algorithm employed in solving the blocks. As more and more hash rate is needed to maintain competitiveness
on a given coin’s blockchain, miners deploy more and more machines, which require electrical power to operate, both to directly
power hash rate production and also to dissipate the significant amount of heat generated by the machines’ operation. Therefore,
as more hash rate is generated, more electric power is consumed, which generally increases the cost of mining a given coin. In response,
miners have attempted to achieve greater hash rate by deploying increasingly sophisticated miners in ever greater quantities. This has
become the cryptocurrency mining industry’s great “arms race.”
Halving
Further affecting the industry, and particularly
for the Bitcoin blockchain, the digital asset reward for solving a block is subject to periodic incremental halving. Halving is a process
designed to control the overall supply and reduce the risk of inflation in digital assets using a proof of work consensus algorithm. At
a predetermined block, the mining reward is reduced by half, hence the term “halving.”
Electricity Costs
Electricity cost is the major operating cost for
the mining fleet, both to power miners and to dissipate the heat generated by the miners’ operations, as well as for the hosting
services provided to customers and related parties. As a result, our ability to locate and select sites for our hosting centers that are
able to supply low-cost electricity for our hosting centers is key to our success.
Equipment Costs
As the market value of digital assets has increased
in 2020 and 2021, the demand for the newest, most efficient miners also increased, leading to scarcity in the supply of and thereby a
resulting increase in the price of miners. Since the market value of digital assets have declined in 2020, the demand for all types of
mines has also decreased. As a result, the cost of new machines can be unpredictable. Additionally, the demand for hosting space in 2020
and 2021 increased the demand for the equipment necessary to build and operate hosting centers, which resulted in price increases and
long lead times to acquire such equipment from manufacturers. With the decline in digital asset prices in 2022, the market for hosting
equipment has shifted back in favor of buyers, although not as much as has been the case with mining equipment. Our ability to secure
the necessary equipment in a timely manner, while maintaining proper cost controls, will be key to our success.
Our Customers
In addition to factors underlying our mining business
growth and profitability, our success greatly depends on our ability to retain and develop opportunities with our existing customers and
to attract new customers. Our business environment is constantly evolving, and digital asset miners can range from individual enthusiasts
to professional mining operations with dedicated data centers. We compete with other companies that focus all or a portion of their activities
on mining activities at scale. We face significant competition in every aspect of our business, including, but not limited to, the acquisition
of new miners, the ability to raise capital, obtaining low-cost electricity, obtaining access to energy sites with reliable
sources of power, and evaluating new technology developments in the industry.
At present, the information concerning the activities
of these enterprises may not be readily available as the vast majority of the participants in this sector do not publish information publicly
or the information may be unreliable. Published sources of information include “Bitcoin.org” and “blockchain.info”;
however, the reliability of that information and its continued availability cannot be assured.
From the third fiscal quarter of calendar year
2020 through 2021, the market prices of digital assets increased substantially, which resulted in an increase in the scale and sophistication
of competition in the digital asset mining industry, with new entrants and existing competitors gaining access to substantial capital
resources to build larger and larger mining operations. This caused many new and existing competitors may be encouraged to build or expand
their Bitcoin mining operations. In 2022, as digital asset prices have fallen, the trend has somewhat reversed, but not entirely as a
result of projects and commitments made by industry participants before 2022. The market has also been impacted by the trend of some countries
(mainly China) that formerly were major hosting centers to outlaw or greatly restrict digital asset mining within their borders.
While we do not believe that we are subject to
anti-money laundering laws in the United States as this time, we verify that our customers are not listed on OFAC’s SDN list on
a voluntary basis.
Competition
Our business environment is constantly evolving,
and cryptocurrency miners can range from individual enthusiasts to professional mining operations with dedicated data centers. We compete
with other companies that focus all or a portion of their activities on mining activities at scale. We face significant competition in
every aspect of our business, including, but not limited to, the acquisition of new miners, the ability to raise capital, obtaining the
lowest cost of electricity, obtaining access to energy sites with reliable sources of power, and evaluating new technology developments
in the industry.
At present, the information concerning the activities
of these enterprises may not be readily available as the vast majority of the participants in this sector do not publish information publicly
or the information may be unreliable. Published sources of information include “Bitcoin.org” and “blockchain.info”;
however, the reliability of that information and its continued availability cannot be assured.
We believe, based on available data, that the trend
of increasing market prices for Bitcoin and other major cryptocurrencies that began in the third fiscal quarter of calendar year 2020
has resulted in an increase in the scale and sophistication of competition in the cryptocurrency mining industry, with new entrants and
existing competitors gaining access to substantial capital resources to build larger and larger mining operations. If this trend of increasing
market prices for Bitcoin and other cryptocurrencies continues, which we believe has occurred (though with significant volatility) into
calendar year 2021, we believe many new and existing competitors may be encouraged to build or scale Bitcoin mining operations.
Despite this trend, we believe, based on our access
to necessary equipment, we will be able to maintain a competitive hash rate capacity among both public and private Bitcoin miners. However,
to stay competitive in our evolving industry, both against new entrants into the market and existing competitors, we anticipate that we
will have to continue to expand our existing miner fleet by purchasing the latest generation of miners, as well as innovating to develop
and implement new technologies and mining solutions.
Regulation
Our financial prospects and continued growth depend
in part on our ability to continue to operate in a compliant manner with all rules and regulations. Blockchain and digital currencies
are increasingly becoming subject to governmental regulation, both in the U.S. and internationally. State and local regulations also may
apply to our activities and other activities in which we may participate in the future. Other governmental or semi-governmental regulatory
bodies have shown an interest in regulating or investigating companies engaged in the blockchain or cryptocurrency business. For instance,
the Cyber-Digital Task Force of the U.S. Department of Justice (the “DOJ”) published a report entitled “Cryptocurrency:
An Enforcement Framework” in October 2020. This report provides a comprehensive overview of the possible threats and enforcement
challenges the DOJ views as associated with the use and prevalence of cryptocurrency, as well as the regulatory and investigatory means
the DOJ has at its disposal to deal with these possible threats and challenges. Further, in early March 2021, the SEC chairperson nominee
expressed an intent to focus on investor protection issues raised by Bitcoin and other cryptocurrencies.
Presently, we do not believe any U.S. or State
regulatory body has taken any action or position adverse to our main cryptocurrency, Bitcoin, with respect to its production, sale, and
use as a medium of exchange; however, future changes to existing regulations or entirely new regulations may affect our business in ways
it is not presently possible for us to predict with any reasonable degree of reliability.
Further, following the appreciation of the market
price of Bitcoin in the second half of 2020, we have observed increasing media attention directed at the environmental concerns associated
with cryptocurrency mining, particularly its energy-intensive nature. While we do not believe any U.S.-based regulators have taken a position
adverse to Bitcoin mining, in March 2021, the governmental authorities for the Chinese province of Inner Mongolia, which represents roughly
8% of the world’s total mining power, implemented an outright ban on Bitcoin mining in the province due to the industry’s
intense electrical power demands and its negative environmental impacts (both in terms of the waste produced by mining the rare Earth
metals used to manufacture miners and the production of electrical power used in Bitcoin mining). Later, China extended the ban to the
entire nation of China, effective as of the end of July 2021. While we have yet to see whether these miners will be able to relocate to
another location outside of China and Mongolia to continue mining, this action serves as a stark reminder of the power of national and
state governments to affect our industry through regulator action.
As the regulatory and legal environment evolves,
we may become subject to new laws, such as further regulation by the SEC and other agencies, which may affect our mining and other activities.
For additional discussion regarding our belief about the potential risks existing and future regulation pose to our business, see the
Section entitled “Risk Factors” herein.
Our Facilities
We initially planned to locate our initial facilities
in Trinidad, because it has some of the cheapest electricity in the world due to its abundant supplies of oil and gas and because some
of our technical staff is located there. We have entered into an agreement with Telecommunications Services of Trinidad & Tobago Limited
(“TSTT”), the largest and oldest telecom company in Trinidad, to co-locate up to 125 800 kw containers for hosting digital
asset miners. TSTT has up to 93 potential locations for co-location of our containers. Under the agreement, we have the option, but not
obligation, to co-locate containers at our own pace. We pay a fixed amount per container, plus the actual electricity costs incurred by
our containers in the amount billed to TSTT by the local utility without any markup. The agreement provides that our hosting containers
will be billed for electricity usage at the local utility’s standard rates, which is the greater of 3.5 cents per kwh or 75% of
the declared reserve capacity, which is equal to the customer’s highest expected monthly kilovolt-ampere demand at $7.40. The term
of the agreement expires on October 14, 2031. However, we have the right to terminate our agreement with TSTT at any time that the price
for electricity consumption exceeds $0.05 per kwh. Also, both parties have the right to terminate the agreement on one month notice to
the other party in either the third or sixth year of the term.
As of December 2021, electricity prices in Trinidad and Tobago averaged
5.2 cents per kilowatt-hour, which is the average price among all households, which ranks it among the lowest rates available in the world.
In particular, Trinidad and Tobago ranked 34th out of 148 countries surveyed in terms of the affordability of its electricity
prices. In comparison, the average price in the United States was 16.2 cents per kwh, and in Canada was 10.7 cents per kwh. Most countries
with lower rates have either unstable political environments or inadequate and unstable electrical infrastructure that make then unsuitable
for data centers. See https://globalpetrolprices.com/electricity_prices/. The rate that we expect to pay is 3.5 cents per kwh, which is
less than the average in Trinidad and Tobago, because electricity to our facilities will be supplied through TSTT’s contract with
the local utility.
In October 2022, we completed the installation
of initial hosting containers under our agreement with TSTT. However, prior to commencing operations, TSTT advised us that the local utility
had refused to honor its existing agreement with TSTT with respect to electricity supplied to our hosting containers, and instead indicated
that the rate would be approximately $0.09 per kwh. TSTT has informed us that it does not believe that the local utility’s contract
entitles it to vary the rate it charges for the use of electricity and has protested the decision. At this time, we are unable to predict
how this dispute between TSTT and the local utility will be resolved, what form any resolution may take or how long any resolution may
take. Accordingly, we are delaying the installation of additional containers in Trinidad until this dispute is resolved.
We lease 1,800 square feet of warehouse space in
Trinidad that we use to house a 72-slot fan cooled container that we also lease. The warehouse lease is for eleven months beginning on
February 1, 2022 and provides for rental payments of $3,818 per month. The container lease is for twelve months beginning February 1,
2022, and provides for rental payments of $2,500 per month. We are using this space as a temporary facility for our initial hosting customer
until our permanent facilities become operational.
In light of the recent developments in Trinidad,
we are focusing our efforts in the near term on developing hosting locations in the United States and Canada. We are exploring situations
where medium to long-term power agreements may be available at affordable prices, whether using traditional power sources such as coal
or natural gas, as well as environmentally friendly sources such as hydroelectric, wind and solar-backed projects, which might allow us
to generate collateral revenue from the sale of excess power to the local utility grid and from the generation of saleable carbon credits.
The Company’s president allows the Company
to utilized the office space of an affiliated company for its executive offices without charge to the Company.
Hosting Equipment
Our focus is to build data center using immersion
hosting containers. In 2021 and 2022, we purchased a total of ten immersion hosting containers from Submer for an average of approximately
$269,000 each. We have deployed or sold the immersion containers as follows:
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We installed two of the immersion containers at our initial co-location facility in Trinidad, although operations are the facility are currently delayed pending the resolution of a dispute between TSTT and the local utility regarding the rate that will be charged for electricity supplied to the facility. |
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In August 2022, we sold two immersion containers to a third party in Trinidad for $960,000, of which $910,000 is payable over twenty five months with interest at 7.5% per annum, for monthly payments of $40,950 per month. |
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In October 2022, we sold four immersion containers to a joint venture with ROC Digital Mining I, LLC (“ROC Digital”) for $1,200,000, and made an equity contribution of one immersion container. Our equity contribution also included six GE Protec 1500 KVA transformers valued at $150,000 each. |
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Under our agreement with ROC Digital, we retained the right to install one container at the joint venture’s hosting site, which we are entitled to use for self-mining or hosting third party miners. |
Although we originally bought our immersion containers
with the intention of using them purely for hosting third party equipment, we elected to sell two of the containers because we were offered
an attractive price for them and because we did not a suitable location to install them in the short-term. While we do not have any agreements
to purchase additional immersion containers from Submer, we believe that additional immersion containers available for purchase from Submer
or other vendors as we need them for additional hosting facilities.
Mining Equipment
Digital asset mining is dependent on specialized
digital asset mining hardware utilizing application-specific integrated circuit (“ASIC”) chips to solve blocks on blockchains
using the 256-bit secure hashing algorithm. Almost all of these miners are produced outside of the United States, mostly in China and
Southeast Asia, by a few manufacturers, the largest of which is Bitmain Technologies, Ltd (“Bitmain”). Our principal supplier
for miners has been Bitmain. Our mining business is highly dependent upon digital asset mining equipment suppliers such as Bitmain providing
an adequate supply of new generation digital asset mining machines at economical prices to enable profitable mining by us and by third-party
customers intending to purchase our hosting and other solutions.
We do not have any agreements for the acquisition
of miners. To date, we have purchased miners opportunistically as they been available for sale in the “spot” market. Based
on historical market activity, as the market value of digital assets increases, the demand for the newest, most efficient miners will
also increase, leading to scarcity in the supply, and thereby a resulting increase in the price of miners. If we need to purchase miners
in larger quantities in order to fill data center capacity, we have to enter into formal agreements with Bitmain or other suppliers. These
agreements, like those of other miner manufacturers, generally require significant refundable deposits payable months in advance of delivery
and additional advance payments in monthly installments thereafter. These agreements also contain other terms and conditions favorable
to the manufacturer.
As of November 4, 2022, we own a total of 362 miners,
consisting of: 25 Whatsminers, 72 Antimer T-19s, 25 Canaan Avalons, and 240 Antminer S-19s (not including defective or retired miners).
We initially sold a number of the miners to our initial hosting client, but recently terminated the hosting relationship and required
the miners (along with other miners) in order to concentrate on self-mining. For our current inventory of miners, we paid an average of
$2,587 per machine, or $29.99 per terahash. The miners that we owned as of November 4, 2022 have an average mining efficiency of 38.34
j/TH.
Due to the significant drop in the price of miners
(70-80% since early 2021) relative to the cost of the datacenter and electrical equipment needed to host the miners has led us to focus
more on self-mining, since the capital investment needed to self-mine is significantly less than last year.
Patents and Trademarks
We intend to protect our intellectual property
rights through a combination of trademark, patent, copyright and trade secrets laws.
Employees and Independent Contractors
As of December 1, 2022, we had six employees and
independent contractors, which do not include our officers who are performing services without a contract or compensation until we raise
capital.
We have no collective bargaining agreements with
our employees, and believe all independent contractor and employment agreements relationships are satisfactory. We hire independent contractors
on an as-needed basis, and we may retain additional employees and consultants during the next twelve months, including additional executive
management personnel with substantial experience in development business.
Available Information
We make available free of
charge on our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments
to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and
Exchange Commission, or (the “SEC”). Our corporate website is bitminetech.io. The information in this website is not a part
of this report.
Item 1A. Risk Factors
Ownership of our securities involves a high
degree of risk. Holders of our securities should carefully consider the following risk factors and the other information contained
in this Form 10-K, including our historical financial statements and related notes included herein. The following discussion highlights
some of the risks that may affect future operating results. Additional risks and uncertainties not presently known to us, which we currently
deem immaterial or which are similar to those faced by other companies in our industry or businesses in general, may also impair our businesses
operations. If any of the following risks or uncertainties actually occur, our business, financial condition and operating results could
be adversely affected in a material way. This could cause the trading prices of our common stock to decline, perhaps significantly, and
you may lose part or all of your investment. Please see “Cautionary Notes Regarding Forward-Looking Statements.”
Risks Related to Company’s Business and Industry
We may not be able to obtain new hosting and transaction processing
hardware or purchase such hardware at competitive prices during times of high demand, which could have a material adverse effect on our
business, financial condition and results of operations.
Historically, an increase in interest and demand
for digital assets has led to a shortage of hosting and transaction processing hardware and increased prices. Higher Bitcoin prices increase
the demand for mining equipment and increases the cost. In addition, as more companies seek to enter the mining industry, the demand for
machines may outpace supply and create mining machine equipment shortages. We and our customers and potential customers have experienced,
and may in the future experience, difficulty in obtaining new equipment or replacement components for our and their existing equipment,
including graphics processing units and application-specific integrated circuit chipsets and computer servers, which has had, and in the
future may have, a material impact on the demand for our services and associated revenue. Currently, with the restriction on digital asset
mining in China and the recent drop in digital asset prices, there is increased availability, and decreased prices, of new and used mining
equipment. However, these trends may be temporary, particularly the drop in digital asset prices, and a return to higher prices could,
once again, lead to shortages of mining equipment and an increase in prices, which could have a material adverse effect on our business,
financial condition and results of operations.
Our business is capital intensive, and failure to obtain the
necessary capital when needed may force us to delay, limit or terminate our expansion efforts or other operations, which could have a
material adverse effect on our business, financial condition and results of operations.
The costs of constructing, developing, operating
and maintaining digital asset mining and hosting facilities, and owning and operating a large fleet of the latest generation mining equipment
are substantial.
Our proprietary mining operations can only be successful
and ultimately profitable if the costs, including hardware and electricity costs, associated with mining digital assets are lower than
the price of the digital assets that are mined by us. Mining equipment experiences ordinary wear and tear from operation and may also
face more significant malfunctions caused by factors which may be beyond our control. As miners become degrade due to ordinary wear and
tear from usage, or are lost or damaged due to factors outside of our control, these miners will need to be repaired or replaced along
with other equipment from time to time for us to stay competitive. In addition, continued developments in ASIC miners has resulted in
constantly improvements in miners, as measured by such factors as electricity efficiency and/or price per exahash mined. Developments
in mining technology may render our miners uncompetitive before they reach the end of their useful life. Many of the new miners we will
need to purchase are made by third-party manufacturers located primarily in China. This upgrading process requires substantial capital
investment, and we may face challenges in doing so on a timely and cost-effective basis based on availability of new miners and our access
to adequate capital resources. If we are unable to obtain adequate numbers of new and replacement miners at scale, we may be unable to
remain competitive in our highly competitive and evolving industry.
Moreover, in order to grow our hosting business,
we need additional hosting facilities to increase our capacity for more miners. The costs of constructing, developing, operating and maintaining
hosting facilities and growing our hosting operations may increase in the future, which may make it more difficult for us to expand our
business and to operate our hosting facilities profitably.
We will need to raise additional funds through
equity or debt financings in order to meet our capital needs. Additional debt or equity financing may not be available when needed or,
if available, may not be available on satisfactory terms. An inability to generate sufficient cash from operations or to obtain additional
debt or equity financing would adversely affect our results of operations. Additionally, if this happens, we may not be able to mine digital
assets as efficiently or in similar amounts as our competition and, as a result, our business and financial results could suffer.
If future prices of Bitcoin are not sufficiently high, our business,
results of operations and financial condition could be materially and adversely affected, which may have a negative impact on the trading
price of our securities.
Our financial condition and results of operations
are, and are expected to increasingly be, reliant on our ability to sell the Bitcoin we receive from mining at a price greater than our
costs to produce that Bitcoin, and our ability to sell Bitcoin that we receive as a fee for hosting services at price greater than our
cost to provide hosting services.
To the extent the cost to purchase new miners or
hosting equipment increases or our electricity costs increase, our cost to produce a single Bitcoin also increases, therefore requiring
a corresponding increase in the price of Bitcoin for us to maintain profitable operations from mining. If future prices of Bitcoin are
not sufficiently high, we may not realize the benefit of the capital expenditures we incur each time we acquire new miners and expand
our hosting environment to host those miners. If this occurs, our business, results of operations and financial condition could be materially
and adversely affected, which may have a negative impact on the trading price of our securities, which may have a materially adverse impact
on investors’ investment in our Company.
To the extent the cost of purchase and installation
of new hosting equipment increases, our cost to provide hosting services will also increase, therefore requiring a corresponding increase
in the price of Bitcoin for us to maintain profitable operations from hosting. If future prices of Bitcoin are not sufficiently high,
we may not realize the benefit of the capital expenditures we incur each time we expand our hosting operations. If this occurs, our business,
results of operations and financial condition could be materially and adversely affected, which may have a negative impact on the trading
price of our securities, which may have a materially adverse impact on investors’ investment in our Company.
Recently, the market prices of all digital currencies
have fallen substantially along with the drop in world stock exchanges. The price of Bitcoin is still sufficient to enable us and our
hosting clients to mine Bitcoin profitably; however, if the price drops much farther the marginal cost of mining Bitcoin will exceed the
value of the Bitcoin that is mined, with the result that both we and our hosting clients may be forced to cease mining Bitcoin until it
becomes profitable to do so again. The cessation of Bitcoin mining would have a materially adverse impact on our business.
Our success depends in large part on our ability to mine digital
assets profitably and to attract customers for our hosting capabilities. Increases in power costs or our inability to mine digital assets
efficiently and to sell digital assets at favorable prices will reduce our operating margins, impact our ability to attract customers
for our services and harm our growth prospects and could have a material adverse effect on our business, financial condition and results
of operations.
Our growth depends in large part on our ability
to successfully mine digital assets and to attract customers for our hosting capabilities. We may not be able to attract customers to
our hosting capabilities for a number of reasons, including if:
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there is a reduction in the demand for our services due to macroeconomic factors in the markets in which we operate; |
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we fail to provide competitive pricing terms or effectively market them to potential customers; |
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we provide hosting services that are deemed by existing and potential customers or suppliers to be inferior to those of our competitors, or that fail to meet customers’ or suppliers’ ongoing and evolving program qualification standards, based on a range of factors, including available power, preferred design features, security considerations and connectivity; |
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businesses decide to host internally as an alternative to the use of our services; |
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we fail to successfully communicate the benefits of our services to potential customers; |
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we are unable to strengthen awareness of our brand; |
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we are unable to provide services that our existing and potential customers’ desire; |
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our customers are unable to secure an adequate supply of new generation digital asset mining equipment to host with us; |
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we are unable to obtain deliveries of hosting equipment, including immersion containers and transformers, which have recently been in short supply; or |
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we are unable to find suitable locations for hosting facilities which have electricity at competitive rates. |
If we are unable to obtain hosting customers at favorable pricing
terms or at all, it could have a material adverse effect on our business, financial condition and results of operations.
A slowdown in the demand for blockchain technology
or blockchain hosting resources and other market and economic conditions could have a material adverse effect on our business, financial
condition and results of operations.
Adverse developments in the blockchain industry, and in the blockchain
hosting market could lead to a decrease in the demand for hosting resources, which could have a material adverse effect on our business,
financial condition and results of operations. We face risks including those related to:
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a decline in the adoption and use of Bitcoin and other similar digital assets within the technology industry or a decline in value of digital assets; |
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increased costs of complying with existing or new government regulations applicable to digital assets and other factors; |
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a downturn in the market for blockchain hosting space generally, which could be caused by an oversupply of or reduced demand for blockchain space; |
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any transition by our customers of blockchain hosting from third-party providers like us to customer-owned and operated facilities; |
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the rapid development of new technologies or the adoption of new industry standards that render our or our customers’ current products and services obsolete or unmarketable and, in the case of our customers, that contribute to a downturn in their businesses, increasing the likelihood of a default under their service agreements or their becoming insolvent; |
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a slowdown in the growth of the Internet generally as a medium for commerce and communication; |
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availability of an adequate supply of new generation digital asset mining equipment to enable us to mine digital assets at scale and for customers who want to host with us to be able to do so; |
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the degree of difficulty in mining digital assets and the trading price of such assets; and |
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an increase in political opposition to mining digital assets, for example due to concerns about its impact on climate change or its impact on the availability of affordable electricity to other consumers in the local market, the degree of difficulty in mining digital assets and the trading price of such assets. |
To the extent that any of these or other adverse
conditions exist, they are likely to have an adverse impact on our mining rewards and market demand and pricing for our services, which
could have a material adverse effect on our business, financial condition and results of operations.
Additionally, we and our customers are affected
by general business and economic conditions in the United States and globally. These conditions include short-term and long-term interest
rates, inflation, money supply, political issues, legislative and regulatory changes, including the imposition of new tariffs affecting
our or our customers’ products and services, fluctuations in both debt and equity capital markets and broad trends in industry and
finance, all of which are beyond our control. Macroeconomic conditions that affect the economy and the economic outlook of the United
States and the rest of the world could adversely affect our customers and vendors, which could have a material adverse effect on our business,
financial condition and results of operations.
Our business is heavily impacted by social, political, economic
and other events and circumstances in countries outside of the United States, most particularly China and other non-Western countries.
Our business is heavily impacted by social, political,
economic and other events and circumstances in countries outside of the United States, most particularly in China and other non-Western countries.
These events and circumstances are largely outside of our influence and control. We are heavily dependent on the Chinese manufacture of
equipment. Historically China was a location of significant digital asset mining at low electric power rates. Recently, China and other
foreign governments have taken action to prohibit or significantly restrict digital asset mining. For example, in May and June 2021, in
their efforts to curb digital asset trading and mining, regulators in several Chinese Provinces, including Qinghai, Inner Mongolia and
Sichuan, announced policies to curb or ban local digital asset mining operations. Later, the Chinese government extended the ban on digital
asset mining to all Chinese Provinces, effective July 31, 2021. The long-term impact of governmental restrictions on digital asset mining
is unknown and could be either beneficial or detrimental to our business and profitability. Currently, the restrictions in China have
increased the demand for cost-effective data hosting services outside of China. Whether or not the lack of mining activity in China will
negatively impact Chinese miner manufacturing and the development, price, availability of new and enhanced mining equipment is unknown.
Should China or other countries that currently restrict digital asset mining eliminate such restrictions or actually seek to enhance such
mining activity, the likely increase in mining activity could reduce our revenue and profitability.
Adoption of a different method of validating transactions in
bitcoin could materially impair the business of mining firms, and could even make them obsolete.
Transactions in bitcoin are currently validated
by a system called “proof of work,” where powerful computers run software that races to solve complex problems, verifying
transactions in the process. The system is widely known as “mining” because the computers earn payments in cryptocurrency
as rewards for the verification service. The system has been criticized by many because it requires substantial amounts of electricity
to validate transactions. Recently, another type of digital currency, Ethereum, implemented a different system of validation called “proof
of stake,” which is expected to require 99% less energy consumption. In the event bitcoin adopts a similar system, it could make
bitcoin mining substantially less profitable and could even render the business obsolete.
Where there is no assurance that bitcoin will not
adopt a “proof of stake” system. Even if bitcoin decided to adopt such a system, we do not believe that the adoption would
occur during in the near term, given the number of years it took Ethereum to create and implement its alternative system.
Continuing coronavirus outbreaks may have a material adverse
impact on our business, liquidity, financial condition and results of operations.
COVID-19 was first reported in December 2019
in the City of Wuhan, Hubei, China and was recognized as a pandemic by the World Health Organization on March 11, 2020. In response
to the pandemic, governmental authorities around the World, including the United States, Canada, China and elsewhere, introduced various
measures to limit the spread of the pandemic, including travel restrictions, border closures, business closures, quarantines, self- and
forced isolations, shelter-in-place orders and social distancing. COVID-19 reduced the number of new generation machines
available for purchase by prospective customers of our blockchain hosting services, delayed the delivery and implementation of new generation
mining machines and reduced demand for services. A resurgence of COVID-19, including the emergence of variant strains of COVID-19, could
have a material impact on our business, liquidity, financial condition and results of operations and any such impact will be determined
by the severity and duration of the continuing pandemic.
Changes in tariffs or import restrictions could have a material
adverse effect on our business, financial condition and results of operations.
Equipment necessary for digital asset mining is
almost entirely manufactured outside of the United States. There is currently significant uncertainty about the future relationship between
the United States and various other countries, including China, the European Union, Canada, and Mexico, with respect to trade policies,
treaties, tariffs and customs duties, and taxes. For example, since 2019, the U.S. government has implemented significant changes to U.S.
trade policy with respect to China. These tariffs have subjected certain digital asset mining equipment manufactured overseas to additional
import duties of up to 25%. The amount of the additional tariffs and the number of products subject to them has changed numerous times
based on action by the U.S. government. These tariffs have increased costs of digital asset mining equipment, and new or additional tariffs
or other restrictions on the import of equipment necessary for digital asset mining could have a material adverse effect on our business,
financial condition and results of operations.
A significant portion of our assets are pledged to an entity
controlled by our chairman and failure to repay obligations to such entity when due will have a material adverse effect on our business
and could result in foreclosure on our assets.
As of December 1, 2022, we owed $400,000 to an
investment fund controlled by our chairman under a line of credit that permits draws by the company of up to $1,000,000. At maturity on
December 1, 2023, the amount due under the line of credit along with accrued interest will be payable in full.
It is necessary for us to grow our business in
order to generate the free cash flow necessary to repay the principal and interest on our indebtedness. If we were to default on the amounts
owed or other terms and conditions of the convertible notes, the lender would have the right to exercise rights and remedies to collect,
which would include obtaining judgement lien on our assets and selling them to pay the judgment. A default would have a material adverse
effect on our business and our stockholders could lose their entire investment in us. We may need to raise capital in order to repay our
amounts due under the line of credit at maturity. There is no assurance that we will be able to raise such capital on terms that will
be favorable to common stockholders.
Delays in the construction of our hosting facilities or significant
cost overruns could present significant risks to our business and could have a material adverse effect on our business, financial condition
and results of operations.
The servers used for digital asset transaction
processing and colocation hosting require the use of facilities (“hosting facilities”) with a highly specialized infrastructure
and considerable, reliable power in order to compete effectively. Our growth strategy is to build mining capacity in locations that have
reliable sources of low-cost power, and to utilize that capacity to host third-party miners and to host our own proprietary mining equipment.
We have completed our initial hosting facility in Trinidad (which has not commenced operations due to a dispute over electricity costs
to the facility), and continue to search for new locations for hosting facilities, but inside and outside Trinidad. We may face challenges
in obtaining suitable land to build new hosting facilities, as we need to work closely with the local power suppliers and local governments
of the places where our proposed hosting facilitates are located. Delays in actions that require the assistance of such third parties,
in receiving required permits and approvals or in mediations with local communities, if any, may negatively impact our construction timelines
and budget or result in any new hosting facilities not being completed at all.
Additional expansion of existing hosting facilities
and construction of new hosting facilities is also being contemplated. Such expansion and construction require us to rely on the experience
of one or more designers, general contractors and subcontractors, and such designers or contractors may experience financial or other
problems during the design or construction process. We may also experience quality control issues as we implement any upgrades in our
hosting capacity through the installation and maintenance of chipsets and servers or new cooling technologies such as immersion and water
curtain cooling. Our business will be negatively impacted if we are unable to run our mining operations in a way that is technologically
advanced, economically and energy efficient and temperature controlled. If we are unsuccessful, we will damage our miners and the miners
of third parties and the profitability of our mining operations.
If we experience significant delays in the supply
of power required to support any hosting facility expansion or new construction, the progress of such projects could deviate from our
original plans, which could cause material and negative effects on our revenue growth, profitability and results of operations. Any material
delay in completing these projects, or any substantial cost increases or quality issues in connection with these projects, could materially
delay our ability to deliver our hosting capacity, cause us to incur penalties under hosting contracts, result in reduced order volume
and materially adversely affect our business, financial condition and results of operations.
We are subject to risks associated with our need for significant
electric power and the limited availability of power resources, which could have a material adverse effect on our business, financial
condition and results of operations.
Our mining and hosting services require a significant
amount of electric power. The costs of electric power account for a significant portion of our cost of revenue. We require a significant
electric power supply to conduct our mining activity and to provide many hosting services we offer, such as powering and cooling our and
our customers’ servers and network equipment and operating critical mining and hosting facility and equipment infrastructure.
The amount of power required by us and our customers
will increase commensurate with the demand for our services and the increase in miners we operate for ourselves and our hosting customers.
While energy costs are not vulnerable to seasonal factors in Trinidad, in some places that we are evaluating for future hosting facilities
energy costs and availability are vulnerable to seasonality, with increased costs primarily in the summer months (in the Northern hemisphere)
and risks of outages and power grid damage as a result of inclement weather, animal incursion, sabotage and other events out of our control.
Although we aim to build and operate energy efficient hosting facilities, there can be no assurance such facilities will be able to deliver
sufficient power to meet the growing needs of our business. The cost of power at some of our hosting facilities may be dependent on our
ability to perform under power contracts that we are a party to, which we may be unable to do successfully. Pursuant to these power contracts,
if we fail to curtail our power usage when called upon or fail to satisfy certain eligibility requirements for monthly bill credits, our
power costs would increase. Any system downtime resulting from insufficient power resources or power outages could have a material adverse
effect on our business, financial condition and results of operations. Our operations may not be equipped to run on back-up generators
in the event of a power outage. Increased power costs and limited availability and curtailment of power resources could reduce our revenue
and have a material and adverse effect on our cost of revenue and results of operations.
Any system downtime resulting from insufficient
power resources or power outages could have a material adverse effect on our business, financial condition and results of operations.
Because the mining portion of our business consumes a large amount of energy, it is not practical or economical for our operations to
run on back-up generators in the event of a power outage.
Governments and government regulators may potentially restrict
the ability of electricity suppliers to provide electricity to hosting and transaction processing operations such as ours, which could
have a material adverse effect on our business, financial condition and results of operations.
Governments or government regulators may potentially
restrict electricity suppliers from providing electricity to hosting facilities and hosting and transaction processing operators in times
of electricity shortage or may otherwise potentially restrict or prohibit the provision of electricity to transaction process operators
like us. Some governments, such as China, have moved to ban all digital asset mining due to the adverse impact such mining has on the
environment and/or to conserve the electricity for use by other businesses and consumers in the market. In the event government regulators
issue moratoriums or impose bans or restrictions involving hosting operations or transaction processing in jurisdictions in which we operate,
we will not be able to continue our operations in such jurisdictions. A moratorium, ban or restriction could have a material adverse effect
our business, financial condition and results of operations.
Power outage in our hosting facilities could have a material
adverse effect on our business, financial condition and results of operations.
Although we control, operate and have access to
our servers and all of the other components of our network, we are still vulnerable to disruptions and power outages resulting from weather,
animal incursions, accidents, equipment failures, curtailments, acts of war, sabotage and other events. We may not have backup power generators
for our blockchain operations in the event of a power outage. This could impact our ability to generate and maintain contractually specified
power levels to our contractual counterparties, which could have a material adverse effect on our business, financial condition and results
of operations.
If we do not accurately predict our hosting facility requirements,
it could have a material adverse effect on our business, financial condition and results of operations.
The costs of building out, leasing and maintaining
our hosting facilities constitute a significant portion of our capital and operating expenses. In order to manage growth and ensure adequate
capacity for our digital mining operations and new and existing hosting customers while minimizing unnecessary excess capacity costs,
we continuously evaluate our short- and long-term data center capacity requirements. If we overestimate our business’ capacity requirements
or the demand for our services and therefore secure excess data center capacity, our operating margins could be materially reduced. If
we underestimate our data center capacity requirements, we may not be able to service the expanding needs of our existing customers and
may be required to limit new customer acquisition, which could have a material adverse effect on our business, financial condition and
results of operations.
If there are significant changes to the method of validating
blockchain transactions, such changes could reduce demand for our blockchain hosting services.
New digital asset transaction protocols are continuously
being deployed, and existing and new protocols are in a state of constant change and development. While certain validation protocols currently
employ a “proof of work” consensus algorithm, whereby transaction processors are required to expend significant amounts of
electrical and computing power to solve complex mathematical problems in order to validate transactions and create new blocks in a blockchain,
there may be a shift towards adopting alternative validating protocols. These protocols may include a “proof of stake” algorithm
or an algorithm based on a protocol other than proof of work, which may decrease the reliance on computing power as an advantage to validating
blocks. Our transaction processing operations, and, to our knowledge, the operations of our potential hosting customers, are currently
designed to primarily support a proof of work consensus algorithm. Should the algorithm shift from a proof of work validation method to
a proof of stake method, mining would require less energy and may render any company that maintains advantages in the current climate
(for example, from lower priced electricity, processing, real estate or hosting) less competitive. As a result of our efforts to optimize
and improve the efficiency of our digital asset mining operations, we may be exposed to the risk in the future of losing the benefit of
our capital investments and the competitive advantage we hope to gain from this as a result, and may be negatively impacted if a switch
to proof of stake validation were to occur. Any such change to transaction validating protocols could have a material adverse effect on
our business, financial condition and results of operations.
If we fail to accurately estimate the factors upon which we base
our contract pricing, we may generate less profit than expected or incur losses on those contracts, which could have a material adverse
effect on our business, financial condition and results of operations.
Our ability to earn a profit on our hosting contracts
requires that we accurately estimate the costs involved and outcomes likely to be achieved and assess the probability of generating sufficient
hosting and colocation capacity within the contracted time period. These expenses include electricity, facilities costs, equipment costs,
supplies, and personnel. In addition, we may not be able to obtain all expected benefits, including tax abatements or government incentives
offered in opportunity zones.
Also, we generally do not charge a fixed sum for
hosting, but charge a percentage of the Bitcoin mined by the customer. To the extent the price of Bitcoin falls, our fee for hosting services
will fall proportionally, and may fall below the cost to provide the hosting services. The inability to accurately estimate the factors
upon which we base our contract pricing could have a material adverse effect on our business, financial condition and results of operations.
Supply chain and shipping disruptions have resulted in shipping
delays, a significant increase in shipping costs, and could increase product costs and result in lost sales, which may have a material
adverse effect on our business, operating results and financial condition.
Supply chain disruptions, resulting from factors
such as the COVID-19 pandemic, labor supply and shipping container shortages, have impacted, and may continue to impact, us and our third-party
manufacturers and suppliers. These disruptions have resulted in longer lead times and increased product costs and shipping expenses, including
with respect to the delivery of miners that we have purchased. While we have taken steps to minimize the impact of these increased costs
by working closely with our suppliers and customers, there can be no assurances that unforeseen events impacting the supply chain will
not have a material adverse effect on us in the future. Additionally, the impacts supply chain disruptions have on our third-party manufacturers
and suppliers are not within our control. It is not currently possible to predict how long it will take for these supply chain disruptions
to cease. Prolonged supply chain disruptions impacting us and our third-party manufacturers and suppliers could interrupt product manufacturing,
increased lead times, increased product costs and result in lost sales and bitcoin production, result in a delay in the delivery of miners
that we have purchased, and continue to increase shipping costs associated with the delivery of our purchased miners, which may have a
material adverse effect on our business, operating results and financial condition.
Banking relationships can be difficult to maintain for companies
in the crypto currency space.
A number of companies that engage in Bitcoin and/or
other cryptocurrency-related activities have been unable to find banks or financial institutions that are willing to provide them with
bank accounts and other services. Similarly, a number of companies and individuals or businesses associated with cryptocurrencies may
have had and may continue to have their existing bank accounts closed or services discontinued with financial institutions. To the extent
that such events may happen to us, they could have a material adverse effect on our business, prospects or operations and potentially
the value of any bitcoin or other cryptocurrencies we mine or otherwise acquire or hold for our own account.
Any failure in the critical systems of our hosting facilities
or services we provide could lead to disruptions in our and our customers’ businesses and could harm our reputation and result in
financial penalty and legal liabilities, which would reduce our revenue and have a material adverse effect on our business, financial
condition and results of operations.
The critical systems of the hosting facilities
we operate and the services we provide are subject to failure. Any failure in the critical systems of any hosting facility we operate
or services that we provide, including a breakdown in critical plant, equipment or services, routers, switches or other equipment, power
supplies or network connectivity, whether or not within our control, could result in service interruptions impacting our customers as
well as equipment damage, which could significantly disrupt the normal business operations of our customers, harm our reputation and reduce
our revenue. Any failure or downtime in one of the facilities that we operate impact mining rewards generated by us and reduce the profitability
of our customers. The total destruction or severe impairment of any of the facilities we operate could result in significant
downtime of our services and loss of customer data. Since our ability to attract and retain customers depends on our ability to provide
highly reliable service, even minor interruptions in our service could harm our reputation and negatively impact our revenue and profitability.
The services we provide are subject to failures resulting from numerous factors, including:
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human error or accidents; |
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theft, sabotage and vandalism; |
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failure by us or our suppliers to provide adequate service or maintain our equipment; |
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network connectivity downtime and fiber cuts; |
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service interruptions resulting from server relocation; |
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security breaches of our infrastructure; |
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improper building maintenance by us; |
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physical, electronic and cybersecurity breaches; |
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fire, earthquake, hurricane, tornado, flood and other natural disasters; |
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public health emergencies; and |
Moreover, service interruptions and equipment failures
may expose us to potential legal liability. As our services are critical to our customers’ business operations, any disruption in
our services could result in lost profits of or other indirect or consequential damages to our customers. Although our customer contracts
typically contain provisions limiting our liability for service outages causes by factors beyond our control, there can be no assurance
that a court would enforce any contractual limitations on our liability in the event that one of our customers brings a lawsuit against
us as the result of a service interruption that they may ascribe to us. The outcome of any such lawsuit would depend on the specific facts
of the case and any legal and policy considerations that we may not be able to mitigate. In such cases, we could be liable for substantial
damage awards, which would as a result have a material adverse effect on our business, financial condition and results of operations.
Our success is dependent on the ability of our management team
and our ability to attract, develop, motivate and retain other well-qualified employees, which may be more difficult, costly or time-consuming
than expected.
Our success depends largely on the development
and execution of our business strategy by our senior management team. We cannot assure you that our management will work well together,
work well with our other existing employees or successfully execute our business strategy in the near-term or at all, which could have
a material adverse effect on our business, financial condition and results of operations.
Our future success also depends on our continuing
ability to attract, develop, motivate and retain highly qualified and skilled directors and other employees. In particular, it is difficult
to locate experienced executives in our industry and offer them competitive salaries at this stage in our development. We may be unable
to retain our directors, senior executives and key personnel or attract and retain new directors, senior executives and key personnel
in the future, any of which could have a material adverse effect on our business, financial condition and results of operations. At this
time, we are not paying any salaries to certain members of our management team, and are not paying market salaries to the remainder. There
is no assurance that we will be able to retain any member of management while we are unable to competitive compensation and benefits to
management.
Competition for employees is intense, and we may not be able
to attract and retain the qualified and skilled employees needed to support our business, which in turn could have a material adverse
effect on our business, financial condition and results of operation.
We believe our success depends on the efforts and
talent of our employees, including hosting facility design, construction management, operations, data processing, engineering, IT, risk
management and sales and marketing personnel. Our future success depends on our continued ability to attract, develop, motivate and retain
qualified and skilled employees. Competition for highly skilled personnel is extremely intense. We may not be able to hire and retain
these personnel at compensation levels consistent with our existing compensation and salary structure. Some of the companies with which
we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment.
In addition, we invest significant time and expenses
in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees,
we could incur significant expenses in hiring and training their replacements, and the quality of our services and our ability to serve
our customers could diminish, resulting in a material adverse effect on our business, financial condition and results of operations. At
this time, we lack the resources to hire all of the skilled employees that we need to properly operate our business.
We may be vulnerable to security breaches, which could disrupt
our operations and have a material adverse effect on our business, financial condition and results of operations.
A party who is able to compromise the physical
security measures protecting our hosting facilities could cause interruptions or malfunctions in our operations and misappropriate our
property or the property of our customers. As we provide assurances to our customers that we provide the highest level of security, such
a compromise could be particularly harmful to our brand and reputation. We may be required to expend significant capital and resources
to protect against such threats or to alleviate problems caused by breaches in security. As techniques used to breach security change
frequently and are often not recognized until launched against a target, we may not be able to implement new security measures in a timely
manner or, if and when implemented, we may not be certain whether these measures could be circumvented. Any breaches that may occur could
expose us to increased risk of lawsuits, regulatory penalties, loss of existing or potential customers, harm to our reputation and increases
in our security costs, which could have a material adverse effect on our business, financial condition and results of operations.
In addition, any assertions of alleged security
breaches or systems failure made against us, whether true or not, could harm our reputation, cause us to incur substantial legal fees
and have a material adverse effect on our business, financial condition and results of operations. Whether or not any such assertion actually
develops into litigation, our management may be required to devote significant time and attention to dispute resolution (through litigation,
settlement or otherwise), which would detract from our management’s ability to focus on our business. Any such resolution could
involve the payment of damages or expenses by us, which may be significant. In addition, any such resolution could involve our agreement
with terms that restrict the operation of our business. Any such resolution, including the resources exhausted in connection therewith,
could have a material adverse effect on our business, financial condition and results of operations.
Furthermore, security breaches, computer malware
and computer hacking attacks have been a prevalent concern in the Bitcoin exchange market since the launch of the Bitcoin network. Any
security breach caused by hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional
malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer
viruses, could harm our business operations or result in loss of our assets.
We are subject to litigation risks.
We may be subject to litigation arising out of
our operations. Damages claimed under such litigation may be material, and the outcome of such litigation may materially impact our operations,
and the value of the common shares. While we will assess the merits of any lawsuits and defend such lawsuits accordingly, we may be required
to incur significant expense or devote significant financial resources to such defenses. In addition, the adverse publicity surrounding
such claims may have a material adverse effect on our operations.
We may be exposed to cybersecurity threats and hacks, which could
have a material adverse effect on our business, financial condition and results of operations.
The threats to network and data security are increasingly
diverse and sophisticated. Despite our efforts and processes to prevent breaches, our computer servers and computer systems may be vulnerable
to cybersecurity risks, including denial-of-service attacks, physical or electronic break-ins, employee theft or misuse
and similar disruptions from unauthorized tampering with our computer servers and computer systems. The preventive actions we take to
reduce the risk of cyber incidents and protect our information technology and networks may be insufficient to repel a major cyber-attack
in the future. To the extent that any disruption or security breach results in a loss or damage to our network, in unauthorized disclosure
of confidential information or in a loss of our digital assets, it could cause significant damage to our reputation, lead to claims against
us and ultimately have a material adverse effect on our business, financial condition and results of operations. Additionally, we may
be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.
Our future success depends on our ability to keep pace with rapid
technological changes that could make our current or future technologies less competitive or obsolete.
Rapid, significant and disruptive technological
changes continue to impact our industry. The infrastructure at our hosting facilities may become less marketable due to demand for new
processes and technologies, including, without limitation: (i) new processes to deliver power to, or eliminate heat from, computer
systems; (ii) customer demand for additional redundancy capacity; (iii) new technology that permits higher levels of critical
load and heat removal than our hosting facilities are currently designed to provide; (iv) an inability of the power supply to support
new, updated or upgraded technology; and (v) a shift to more power-efficient transaction validation protocols. In addition, the systems
that connect our hosting facilities to the Internet and other external networks may become insufficient, including with respect to latency,
reliability and diversity of connectivity. We may not be able to adapt to changing technologies, identify and implement new alternatives
successfully or meet customer demands for new processes or technologies in a timely and cost-effective manner, if at all, which would
have a material adverse effect on our business, financial condition and results of operations.
Even if we succeed in adapting to new processes
and technologies, there is no assurance that our use of such new processes or technology would have a positive impact on our financial
performance. For example, we could incur substantial additional costs if we needed to materially improve our hosting center infrastructure
through the implementation of new systems or new server technologies that require levels of critical load and heat removal that our facilities
are not currently designed to provide. In addition, if one of our new offerings were competitive to our prior offerings and represented
an adequate or superior alternative, customers could decide to abandon prior offerings that produce higher revenue or better margins for
the new offering. Therefore, the adaptation to new processes and technologies could result in lower revenue, lower margins and/or higher
costs, which could have a material adverse effect on our business, financial condition and results of operations.
In addition, our competitors or others might develop
technologies that are more effective than our current or future technologies, or that render our technologies less competitive or obsolete.
Further, many of our competitors may have superior financial and human resources deployed toward research and development efforts. We
may not be able to effectively keep pace with relevant technological changes. If competitors introduce superior technologies for hosting
operations or transaction processing, and we cannot make upgrades to our hardware or software to remain competitive, it could have a material
adverse effect on our business, financial condition and results of operations.
Our compliance and risk management methods might not be effective
and may result in outcomes that could adversely affect our reputation, operating results, and financial condition.
Our ability to comply with applicable complex and
evolving laws, regulations, and rules is largely dependent on the establishment and maintenance of our compliance, audit, and reporting
systems, as well as our ability to attract and retain qualified compliance and other risk management personnel. While we plan to devote
significant resources to develop policies and procedures to identify, monitor and manage our risks, we cannot assure you that our policies
and procedures will always be effective against all types of risks, including unidentified or unanticipated risks, or that we will always
be successful in monitoring or evaluating the risks to which we are or may be exposed in all market environments.
We may infringe on third-party intellectual property rights or
other proprietary rights, which could have a material adverse effect on our business, financial condition and results of operations.
Our commercial success depends on our ability to
operate without infringing third-party intellectual property rights or other proprietary rights. For example, there may be issued patents
of which we are not aware that our services or products infringe on. Also, there may be patents we believe we do not infringe on, but
that we may ultimately be found to by a court of law or government regulatory agency. Moreover, patent applications are in some cases
maintained in secrecy until patents are issued. Because patents can take many years to issue, there may be currently pending applications
of which we are unaware that may later result in issued patents that our services or products allegedly infringe on.
If a third party brings any claim against us based
on third-party intellectual property rights and/or other proprietary rights, we will be required to spend significant resources to defend
and challenge such claim, as well as to invalidate any such rights. Any such claim, if initiated against us, whether or not it is resolved
in our favor, could result in significant expense to us, and divert the efforts of our technical and management personnel, which could
have a material adverse effect on our business, financial condition and results of operations.
The further development and acceptance of cryptographic and algorithmic
protocols governing transaction validation and the issuance of, and transactions in, digital assets are subject to a variety of factors
that are difficult to evaluate. The slowing or stoppage of development or acceptance of blockchain networks and digital assets would have
an adverse material effect on the successful development of the mining operation and value of mined digital assets.
The use of digital assets to, among other things,
buy and sell goods and services, is part of a new and rapidly evolving industry that employs digital assets based upon a computer-generated
mathematical and/or cryptographic protocol. The future of this industry is subject to a high degree of uncertainty. The factors affecting
the further development of this industry include, but are not limited to:
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continued worldwide growth in the adoption and use of digital assets and blockchain technologies; |
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government and quasi-government regulation of digital assets and their use, or restrictions on or regulation of access to and operations of digital asset transaction processing; |
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changes in consumer demographics and public tastes and preferences; |
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the maintenance and development of the open-source software protocols or similar digital asset systems; |
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the availability and popularity of other forms or methods of buying and selling goods and services, or trading assets including new means of using fiat currencies; |
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general economic conditions and the regulatory environment relating to digital assets; and |
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negative consumer perception of digital assets, including digital assets specifically and digital assets generally. |
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a decline in the popularity or acceptance of digital assets could materially impact us or our potential hosting customers, which could have a material adverse effect on our business, financial condition and results of operations. |
We may not be able to adequately protect our intellectual property
rights and other proprietary rights, which could have a material adverse effect on business, financial condition and results of operations.
We may not be able to obtain broad protection in
the United States or internationally for all of our existing and future intellectual property and other proprietary rights, and we may
not be able to obtain effective protection for our intellectual property and other proprietary rights in every country in which we operate.
Protecting our intellectual property rights and other proprietary rights may require significant expenditure of our financial, managerial
and operational resources. Moreover, the steps that we may take to protect our intellectual property and other proprietary rights may
not be adequate to protect such rights or prevent third parties from infringing or misappropriating such rights. Any of our intellectual
property rights and other proprietary rights, whether registered, unregistered, issued or unissued, may be challenged by others or invalidated
through administrative proceedings and/or litigation.
We may be required to spend significant resources
to secure, maintain, monitor and protect our intellectual property rights and other proprietary rights. Despite our efforts, we may not
be able to prevent third parties from infringing upon, misappropriating or otherwise violating our intellectual property rights and other
proprietary rights. We may initiate claims, administrative proceedings and/or litigation against others for infringement, misappropriation
or violation of our intellectual property rights or other proprietary rights to enforce and/or maintain the validity of such rights. Any
such action, if initiated, whether or not it is resolved in our favor, could result in significant expense to us, and divert the efforts
of our technical and management personnel, which may have a material adverse effect on our business, financial condition and results of
operations.
Risks Related to Our Limited Operating History and Early Stage of
Growth
We operate in a rapidly developing industry
and have an evolving business model with no history of generating revenue from our services. In addition, our evolving business model
increases the complexity of our business, which makes it difficult to evaluate our future business prospects and could have a material
adverse effect on our business, financial condition and results of operations.
We may adjust our business model further from time
to time, including trying to offer additional types of products or services, such as a blockchain application designed by us, blockchain
services and other related businesses, or entering into strategic partnerships or acquisitions. The evolution of and modifications to
our business strategy will continue to increase the complexity of our business and placed significant strain on our management, personnel,
operations, systems, technical performance and financial resources. Future additions to or modifications of our business strategy are
likely to have similar effects. Further, any new services that we offer that are not favorably received by the market could damage our
reputation or our brand. There can be no assurance that we will ever generate sufficient revenues or achieve profitably in the future
or that we will have adequate working capital to meet our obligations as they become due.
We cannot be certain that our current business
strategy or any new or revised business strategies will be successful or that we will successfully address the risks we face. In the event
that we do not effectively evaluate future business prospects, successfully implement new strategies or adapt to our evolving industry,
it will have a material adverse effect on our business, financial condition and results of operations.
We may not be able to compete effectively
against our current and future competitors, which could have a material adverse effect on our business, financial condition and results
of operations.
The digital asset mining industry is highly innovative,
rapidly evolving and characterized by healthy competition, experimentation, frequent introductions of new products and services and uncertain
and evolving industry and regulatory requirements. We expect competition to further intensify in the future as existing and new competitors
introduce new products or enhance existing products. We compete against a number of companies operating both within the United States
and abroad, that have greater financial and other resources and that focus on digital asset mining, including businesses focused on developing
substantial Bitcoin mining operations. If we are unable to compete successfully, or if competing successfully requires us to take costly
actions in response to the actions of our competitors, our business, operating results and financial condition could be adversely affected.
We compete with a range of hosting providers and
blockchain providers for some or all of the services we offer. We face competition from numerous developers, owners and operators in the
blockchain industry, including technology companies, such as hyperscale cloud players, managed service providers and real estate investment
trusts (“REITs”), some of which own or lease properties similar to ours, or may do so in the future, in the same submarkets
in which our properties are located. Cloud offerings may also influence our customers to move workloads to cloud providers, which may
reduce the services they obtain from us. Our current and future competitors may vary from us in size, service offerings and geographic
presence.
Competition is primarily centered on reputation
and track record; design, size, quality, available power and geographic coverage of hosting space; quality of installation and customer
equipment repair services; relationships with equipment manufacturers and ability to obtain replacement parts; technical and software
expertise; and financial strength and price. Some of our current and future competitors may have greater brand recognition, longer operating
histories, stronger marketing, technical and financial resources and access to greater and less expensive power than we do.
In addition, many companies in the industry are
consolidating, which could further increase the market power of our competitors. As a result, some of our competitors may be able to:
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identify and acquire desirable properties that we are interested in from developers; |
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offer hosting services at prices below current market rates or below the prices we currently charge our customers; |
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bundle colocation services with other services or equipment they provide at reduced prices; |
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develop superior products or services, gain greater market acceptance and expand their service offerings more efficiently or rapidly; |
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adapt to new or emerging technologies and changes in customer requirements more quickly; |
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take advantage of acquisition and other opportunities more readily; and |
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adopt more aggressive pricing policies and devote greater resources to the promotion, marketing and sales of their services. |
We operate in a competitive market, and we face
pricing pressure with respect to our hosting services. Prices for our hosting services are affected by a variety of factors, including
supply and demand conditions and pricing pressures from our competitors. We may be required to lower our prices to remain competitive,
which may decrease our margins and could have a material adverse effect on our business, financial condition and results of operations.
In addition, we also face significant competition
from other users and/or companies that are processing transactions on one or more digital asset networks, as well as other potential financial
vehicles, including securities, derivatives or futures backed by, or linked to, digital assets through entities similar to us, such as
exchange-traded funds. Market and financial conditions, and other conditions beyond our control, may make it more attractive to invest
in other financial vehicles, or to invest in digital assets directly. Such events could have a material adverse effect on our business,
financial condition and results of operations and potentially the value of any digital assets we hold or expect to acquire for our own
account.
Our projections are subject to significant
risks, assumptions, estimates and uncertainties, including assumptions regarding the demand for our hosting services and the adoption
of Bitcoin and other digital assets. As a result, our projected revenues, market share, expenses and profitability may differ materially
from our expectations in any given quarter or fiscal year.
We operate in a rapidly changing and competitive
industry and our projections are subject to the risks and assumptions made by management with respect to our industry. Operating results
are difficult to forecast as they generally depend on our assessment of the timing of adoption and use of Bitcoin and other digital assets,
which is uncertain. Furthermore, as we invest in the development of our hosting and self-mining business, whether because of competition
or otherwise, we may not recover the substantial up-front costs of constructing, developing and maintaining our hosting facilities
and purchasing the latest generation of miners or recover the opportunity cost of diverting management and financial resources away from
other opportunities. Additionally, our business may be affected by reductions in miner demand for hosting facilities and services and
the price of Bitcoin and other digital assets as a result of a number of factors which may be difficult to predict. Similarly, our assumptions
and expectations with respect to margins and the pricing of our hosting services and market price of Bitcoin or other digital assets we
mine may not prove to be accurate. This may result in decreased revenue, and we may be unable to adopt measures in a timely manner to
compensate for any unexpected shortfall in revenue. This inability could cause our operating results in a given quarter or year to be
higher or lower than expected. If actual results differ from our estimates, analysts or investors may negatively react and our stock price
could be materially impacted.
We may experience difficulties in establishing
relationships with banks, leasing companies, insurance companies and other financial institutions that are willing to provide us with
customary financial products and services, which could have a material adverse effect on our business, financial condition and results
of operations.
As an early stage company with operations focused
in the digital asset transaction processing industry, we may in the future experience difficulties in establishing relationships with
banks, leasing companies, insurance companies and other financial institutions that are willing to provide us with customary leasing and
financial products and services, such as bank accounts, lines of credit, insurance and other related services, which are necessary for
our operations. To the extent a significant portion of our business consists of digital asset transaction mining, processing or hosting,
we may in the future continue to experience difficulty obtaining additional financial products and services on customary terms, which
could have a material adverse effect on our business, financial condition and results of operations.
If we fail to maintain an effective system
of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements
or comply with applicable regulations could be impaired.
As a public company, we will be subject to the
reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the applicable listing standards of
any exchange on which we list our common stock. We expect that the requirements of these rules and regulations will continue to increase
our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly and place significant
strain on our personnel, systems and resources.
The Sarbanes-Oxley Act requires, among other things,
that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop
and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in
the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules
and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal
executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain
and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we anticipate that
we will have to expend significant resources, including accounting-related costs and significant management oversight.
Our current controls and any new controls
that we develop may become inadequate because of changes in conditions in our business. In addition, changes in accounting
principles or interpretations could also challenge our internal controls and require that we establish new business processes,
systems and controls to accommodate such changes. For example, we will need to implement new revenue recognition modules into our
existing enterprise resource planning system to facilitate the preparation of our financial statements under Accounting Standards
Codification 606, Revenue from Contracts with Customers (“ASC 606”). We will also be required to adopt Accounting
Standards Update (“ASU”) 2016-02, Leases (Topic 842), which requires, among other things, lessees to
recognize most leases on-balance sheet via a right of use asset and lease liability, beginning January 1, 2022. We
have limited experience with implementing the systems and controls that will be necessary to operate as a public company, as well as
adopting changes in accounting principles or interpretations mandated by the relevant regulatory bodies. Additionally, if these new
systems, controls or standards and the associated process changes do not give rise to the benefits that we expect or do not operate
as intended, it could adversely affect our financial reporting systems and processes, our ability to produce timely and accurate
financial reports or the effectiveness of internal control over financial reporting. Moreover, our business may be harmed if we
experience problems with any new systems and controls that result in delays in their implementation or increased costs to correct
any post-implementation issues that may arise.
Further, while we do not believe that we have
any weaknesses in disclosure controls or internal controls over financial reporting at this time, we may discover material weaknesses
in our disclosure controls and internal control over financial reporting in the future as our business outgrows our current infrastructure.
Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm
our business or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior
periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results
of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness
of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be
filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors
to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of
our common stock. We are not currently required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act
and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for
that purpose. As a public company, we will be required to provide an annual management report on the effectiveness of our internal control
over financial reporting commencing with our second annual report on Form 10-K. Our independent registered public accounting firm
is not required to formally attest to the effectiveness of our internal control over financial reporting while we are an emerging growth
company.
Risks Related to Regulatory Framework
If we were deemed an “investment company”
under the Investment Company Act of 1940, as amended (the “1940 Act”), applicable restrictions could make it impractical for
us to continue our business as contemplated and could have a material adverse effect on our business.
An issuer will generally be deemed to be an “investment
company” for purposes of the 1940 Act if:
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it is an “orthodox” investment company because it is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or |
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it is an inadvertent investment company because, absent an applicable exemption, it owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. |
We believe that we are not and will not be primarily
engaged in the business of investing, reinvesting or trading in securities, and we do not hold ourselves out as being engaged in those
activities. We intend to hold ourselves out as a digital asset mining business. Accordingly, we do not believe that we are an “orthodox”
investment company as described in the first bullet point above.
While certain digital assets may be deemed to be
securities, we do not believe that certain other digital assets, in particular Bitcoin, are securities; therefore, we believe that less
than 40% of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis will comprise digital
assets that could be considered investment securities. Accordingly, we do not believe that we are an inadvertent investment company by
virtue of the 40% inadvertent investment company test as described in the second bullet point above. Although we do not believe any of
the digital assets we may own, acquire or mine are securities, there is still some regulatory uncertainty on the subject, see “Risk
Factors — There is no one unifying principle governing the regulatory status of digital assets nor whether digital assets are
securities in any particular context. Regulatory changes or actions in one or more countries may alter the nature of an investment in
us or restrict the use of digital assets in a manner that adversely affects our business, prospects or operations.” If certain digital
assets, including Bitcoin, were to be deemed securities, and consequently, investment securities by the SEC, we could be deemed an inadvertent
investment company.
If we were to be deemed an inadvertent investment
company, we may seek to rely on Rule 3a-2 under the 1940 Act, which allows an inadvertent investment company a grace period
of one year from the earlier of (a) the date on which the issuer owns securities and/or cash having a value exceeding 50% of the
issuer’s total assets on either a consolidated or unconsolidated basis or (b) the date on which the issuer owns or proposes
to acquire investment securities having a value exceeding 40% of the value of such issuer’s total assets (exclusive of U.S. government
securities and cash items) on an unconsolidated basis. We are putting in place policies that we expect will work to keep the investment
securities held by us at less than 40% of our total assets, which may include acquiring assets with our cash, liquidating our investment
securities or seeking no-action relief or exemptive relief from the SEC if we are unable to acquire sufficient assets or liquidate
sufficient investment securities in a timely manner. As Rule 3a-2 is available to an issuer no more than once every three years,
and assuming no other exclusion were available to us, we would have to keep within the 40% limit for at least three years after we cease
being an inadvertent investment company. This may limit our ability to make certain investments or enter into joint ventures that could
otherwise have a positive impact on our earnings. In any event, we do not intend to become an investment company engaged in the business
of investing and trading securities.
Finally, we believe we are not an investment
company under Section 3(b)(1) of the 1940 Act because we are primarily engaged in a non-investment company business.
The 1940 Act and the rules thereunder contain detailed
parameters for the organization and operations of investment companies. Among other things, the 1940 Act and the rules thereunder limit
or prohibit transactions with affiliates, impose limitations on the issuance of debt and equity securities, prohibit the issuance of stock
options, and impose certain governance requirements. We intend to continue to conduct our operations so that we will not be deemed to
be an investment company under the 1940 Act. However, if anything were to happen that would cause us to be deemed to be an investment
company under the 1940 Act, requirements imposed by the 1940 Act, including limitations on our capital structure, ability to transact
business with affiliates and ability to compensate key employees, could make it impractical for us to continue our business as currently
conducted, impair the agreements and arrangements between and among us and our senior management team and materially and adversely affect
our business, financial condition and results of operations.
Any change in the interpretive positions
of the SEC or its staff with respect to digital asset mining firms could have a material adverse effect on us.
We intend to conduct our operations so that we
are not required to register as an investment company under the 1940 Act. Specifically, we do not believe that digital assets, are securities.
The SEC Staff has not provided guidance with respect to the treatment of these assets under the 1940 Act. To the extent the SEC Staff
publishes new guidance with respect to these matters, we may be required to adjust our strategy or assets accordingly. There can be no
assurance that we will be able to maintain our exclusion from registration as an investment company under the 1940 Act. In addition, as
a consequence of our seeking to avoid the need to register under the 1940 Act on an ongoing basis, we may be limited in our ability to
engage in digital asset mining operations or otherwise make certain investments, and these limitations could result in our holding assets
we may wish to sell or selling assets we may wish to hold, which could materially and adversely affect our business, financial condition
and results of operations.
If regulatory changes or interpretations
of our activities require our registration as a money services business (“MSB”) under the regulations promulgated by the Financial
Crimes Enforcement Network (“FinCEN”) under the authority of the U.S. Bank Secrecy Act, or otherwise under state laws, we
may incur significant compliance costs, which could be substantial or cost-prohibitive. If we become subject to these regulations, our
costs in complying with them may have a material negative effect on our business and the results of our operations.
To the extent that our activities cause us to be
deemed an MSB under the regulations promulgated by FinCEN under the authority of the U.S. Bank Secrecy Act, we may be required to comply
with FinCEN regulations, including those that would mandate us to implement anti-money laundering programs, make certain reports to FinCEN
and maintain certain records.
To the extent that our activities would cause us
to be deemed a “money transmitter” (“MT”) or equivalent designation, under state law in any state in which we
may operate, we may be required to seek a license or otherwise register with a state regulator and comply with state regulations that
may include the implementation of anti-money laundering programs, maintenance of certain records and other operational requirements. For
example, in August 2015, the New York State Department of Financial Services enacted the first U.S. regulatory framework for licensing
participants in “virtual currency business activity.” The regulations, known as the “BitLicense,” are intended
to focus on consumer protection and regulate the conduct of businesses that are involved in “virtual currencies” in New York
or with New York customers and prohibit any person or entity involved in such activity to conduct activities without a license.
Such additional federal or state regulatory obligations
may cause us to incur extraordinary expenses. Furthermore, we may not be capable of complying with certain federal or state regulatory
obligations applicable to MSBs and MTs. If we are deemed to be subject to and determine not to comply with such additional regulatory
and registration requirements, we may act to dissolve and liquidate.
There is no one unifying principle governing
the regulatory status of digital assets nor whether digital assets are securities in any particular context. Regulatory changes or actions
in one or more countries may alter the nature of an investment in us or restrict the use of digital assets in a manner that adversely
affects our business, prospects or operations.
As digital assets have grown in both popularity
and market size, governments around the world have reacted differently, with certain governments deeming digital assets illegal, and others
allowing their use and trade without restriction. In some jurisdictions, such as in the U.S., digital assets are subject to extensive,
and in some cases overlapping, unclear and evolving regulatory requirements.
Bitcoin is the oldest and most well-known form
of digital asset. Bitcoin and other forms of digital assets have been the source of much regulatory consternation, resulting in differing
definitional outcomes without a single unifying statement. Bitcoin and other digital assets are viewed differently by different regulatory
and standards setting organizations globally as well as in the United States on the federal and state levels. For example, the Financial
Action Task Force considers a digital asset as currency or an asset, and the Internal Revenue Service (“IRS”) considers a
digital asset as property and not currency. Further, the IRS applies general tax principles that apply to property transactions to transactions
involving virtual currency.
If regulatory changes or interpretations require
the regulation of Bitcoin or other digital assets under the securities laws of the United States or elsewhere, including the Securities
Act, the Exchange Act and the 1940 Act or similar laws of other jurisdictions and interpretations by the SEC, the CFTC, the IRS, Department
of Treasury or other agencies or authorities, we may be required to register and comply with such regulations, including at a state or
local level. To the extent that we decide to continue operations, the required registrations and regulatory compliance steps may result
in extraordinary expense or burdens to us. We may also decide to cease certain operations and change our business model. Any disruption
of our operations in response to the changed regulatory circumstances may be at a time that is disadvantageous to us.
Current and future legislation and SEC-rulemaking and
other regulatory developments, including interpretations released by a regulatory authority, may impact the manner in which Bitcoin or
other digital assets are viewed or treated for classification and clearing purposes. In particular, Bitcoin and other digital assets may
not be excluded from the definition of “security” by SEC rulemaking or interpretation requiring registration of all transactions
unless another exemption is available, including transacting in Bitcoin or digital assets among owners and require registration of trading
platforms as “exchanges.”
Furthermore, the SEC may determine that certain
digital assets or interests may constitute securities under the “Howey” test as stated by the United States Supreme Court.
We do not believe our planned mining activities would require registration for us to conduct such activities and accumulate digital assets.
However, the SEC, CFTC, IRS, stock exchanges, or other governmental or quasi-governmental agency or organization may conclude that our
activities involve the offer or sale of “securities,” or ownership of “investment securities,” and we may be subject
to regulation or registration requirements under various federal laws and related rules. Such regulation or the inability to meet the
requirements to continue operations, would have a material adverse effect on our business and operations. We may also face similar issues
with various state securities regulators who may interpret our actions as subjecting us to regulation, or requiring registration, under
state securities laws, banking laws, or money transmitter and similar laws, which are also an unsettled area or regulation that exposes
us to risks. In light of such certainty, any determination that we make regarding the applicability of any law or regulation to our activities
would be a risk-based assessment, and would not be binding on any regulatory body or court, and would not preclude legal or regulatory
action against us.
Regulatory changes or actions may restrict
the use of digital assets or the operation of digital asset networks in a manner that may require us to cease certain or all operations,
which could have a material adverse effect on our business, financial condition and results of operations.
Recently, there has been a significant amount of
regulatory attention directed toward digital assets, digital asset networks and other industry participants by United States federal and
state governments, foreign governments and self-regulatory agencies. For example, as digital assets such as Bitcoin have grown in popularity
and in market size, the Federal Reserve Board, U.S. Congress and certain U.S. agencies (e.g., FinCEN, the SEC, the CFTC and the Federal
Bureau of Investigation) have begun to examine the operations of the Bitcoin network, Bitcoin users and Bitcoin exchange markets.
In addition, local state regulators such as the
Texas State Securities Board, the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth, the New Jersey
Bureau of Securities, the North Carolina Secretary of State’s Securities Division and the Vermont Department of Financial Regulation
have initiated actions against, and investigations of, individuals and companies involved in digital assets.
Also, in March 2018, the South Carolina Attorney
General Office’s Security Division issued a cease-and-desist order against Genesis Mining and Swiss Gold Global, Inc., stating that
both companies were to stop doing business in South Carolina and are permanently barred from offering securities in the state in the future
since they offered unregistered securities via cloud mining contracts under the South Carolina Uniformed Securities Act of 2005, S.C.
Code Ann. § 35-1-101, et seq. (the order against Genesis Mining was subsequently withdrawn).
Further, the North Carolina Secretary of State’s
Securities Division issued in March 2018 a Temporary Cease and Desist Order against Power Mining Pool (made permanent pursuant to a Final
Order on April 19, 2018), ordering it to cease and desist, among other things, offering “mining pool shares,” which were
deemed “securities” under N.C. Gen. Stat. 78A-2(11), in North Carolina until they are registered with the North
Carolina Secretary of State or are offered for sale pursuant to an exemption from registration under the North Carolina Securities Act,
N.C. Gen. Stat. Chapter 78A.
Additionally, we rely on third-party mining pool
service providers for mining revenue payouts from our mining operation, and certain of our potential hosting customers could be involved
in, or could issue, cloud mining contracts or mining pool shares, and any regulatory restrictions on their practices could significantly
reduce demand for our hosting services. Furthermore, it is possible that laws, regulations or directives that affect digital assets, digital
asset transaction processing or blockchain server hosting may change in a manner that may adversely affect our ability to conduct our
business and operations in the relevant jurisdiction.
In addition, various foreign jurisdictions either
have adopted or may adopt laws, regulations or directives that affect digital assets, digital asset networks and their users and hosting
service providers that fall within such jurisdictions’ regulatory scope. Such laws, regulations or directives may conflict with
those of the United States, may negatively impact the acceptance of digital assets by users, merchants and service providers outside of
the United States and may therefore impede the growth of digital asset use. A number of countries, including India, China, South Korea
and Russia, among others, currently have a more restrictive stance toward digital assets and, thereby, have reduced the rate of expansion
of digital asset use, as well as digital asset transaction processing, in each of those countries. For example, in January 2018, several
media publications reported that a Chinese multiagency government task force overseeing risk in Internet finance issued a notice ordering
local authorities to guide the shutdown of digital asset transaction processing in China. However, the People’s Bank of China immediately
refuted such reports, indicating that digital asset transaction processing is still permitted in China. As a result of such conflicting
positions taken within the Chinese government, a number of digital asset transaction processing operators have moved their operations
from China to other jurisdictions in order to build in more regulatory certainty in their operations.
Governments may in the future take regulatory actions
that prohibit or severely restrict the right to acquire, own, hold, sell, use or trade digital assets or to exchange digital assets for
fiat currency. Ownership of, holding or trading in digital assets may then be considered illegal and subject to sanction. Governments
may also take regulatory action that may increase the cost and/or subject digital asset mining companies to additional regulation.
By extension, similar actions by governments may
result in the restriction of the acquisition, ownership, holding, selling, use or trading in the capital stock of digital asset mining
companies, including our common stock. Such a restriction could result in us liquidating our digital asset inventory at unfavorable prices
and may adversely affect our shareholders. The effect of any regulatory change, either by federal, state, local or foreign governments
or any self-regulatory agencies, on us or our potential hosting customers is impossible to predict, but such change could be substantial
and may require us or our potential hosting customers to cease certain or all operations and could have a material adverse effect on our
business, financial condition and results of operations.
Current and future legislation and rulemaking
regarding digital assets may result in extraordinary, non-recurring expenses and could have a material adverse effect on our
business, financial condition and results of operations.
Current and future legislation and rulemaking by
the CFTC and SEC or other regulators, including interpretations released by a regulatory authority, may impact the manner in which digital
assets are treated. For example, digital assets derivatives are not excluded from the definition of “commodity future” by
the CFTC. Furthermore, according to the CFTC, digital assets fall within the definition of a commodity under the Commodities Exchange
Act (the “CEA”) and as a result, we may be required to register and comply with additional regulations under the CEA, including
additional periodic reporting and disclosure standards and requirements. We may also be required to register as a commodity pool operator
and to register as a commodity pool with the CFTC through the National Futures Association. If we are required to register with the CFTC
or another governmental or self-regulatory authority, the scope of our business and operations may be constrained by the rules of such
authority and we may be forced to incur additional expenses in the form of licensing fees, professional fees and other costs of compliance.
The SEC has issued guidance and made numerous statements
regarding the application of securities laws to digital assets. The SEC’s guidance has included its position that the initial offering
of digital currencies for the purpose of raising capital constitutes a securities transaction, and therefore are subject to the federal
securities laws.
Although our activities are not focused on raising
capital or assisting others that do so, the federal securities laws are very broad. We cannot provide assurance as to whether the SEC
will continue or increase its enforcement with respect to digital assets, including taking enforcement action against any person engaged
in the sale of unregistered securities in violation of the Securities Act or any person acting as an unregistered investment company in
violation of the Investment Company Act of 1940, as amended (the “Investment Company Act”). Because the SEC has held that
certain digital assets are securities based on the current rules and law, we may be required to register and comply with the rules and
regulations under federal securities laws.
We cannot be certain as to how future regulatory
developments will impact the treatment of digital assets under the law, including, but not limited to, whether digital assets will be
classified as a security, commodity, currency and/or new or other existing classification. Such additional regulations may result in extraordinary,
non- recurring expenses, thereby materially and adversely affecting an investment in us. If we determine not to comply with such additional
regulatory and registration requirements, we may seek to cease certain or all of our operations. Any such action could have a material
adverse effect on our business, financial condition and results of operations.
Federal or state agencies may impose additional
regulatory burdens on our business. Changing laws and regulations and changing enforcement policies and priorities have the potential
to cause additional expenditures, restrictions, and delays in connection with our business operations.
Federal and state laws and regulations may be subject
to change or changes in enforcement policies or priorities, including changes that may result from changes in the political landscape
and changing technologies. Future legislation and regulations, changes to existing laws and regulations, or interpretations thereof, or
changes in enforcement policies or priorities, could require significant management attention and cause additional expenditures, restrictions,
and delays in connection with our business operations.
Increasing scrutiny and changing expectations
from investors, lenders, customers, government regulators and other market participants with respect to our Environmental, Social and
Governance (“ESG”) policies may impose additional costs on us or expose us to additional risks.
Companies across all industries and around the
globe are facing increasing scrutiny relating to their ESG policies. Investors, lenders and other market participants are increasingly
focused on ESG practices and in recent years have placed increasing importance on the implications and social cost of their investments.
In February 2021, the Acting Chair of the SEC issued a statement directing the Division of Corporation Finance to enhance its focus on
climate-related disclosure in public company filings and in March 2021 the SEC announced the creation of a Climate and ESG Task Force
in the Division of Enforcement. The increased focus and activism related to ESG may hinder our access to capital, as investors and lenders
may reconsider their capital investment allocation as a result of their assessment of our ESG practices. If we do not adapt to or comply
with investor, lender or other industry shareholder expectations and standards and potential government regulations, which are evolving
but may relate to the suitable deployment of electric power, or which are perceived to have not responded appropriately to the growing
concern for ESG issues, our reputation may suffer, which would have a material adverse effect on our business, financial condition and
results of operations.
We may be subject to risks associated with misleading
and/or fraudulent disclosure or use by the creators of digital assets. Generally, we rely primarily on a combination of white papers and
other disclosure documents prepared by the creators of applicable digital assets, as well as on our management’s ability to obtain
adequate information to evaluate the potential implications of transacting in these digital assets. However, such white papers and other
disclosure documents and information may contain misleading and/or fraudulent statements (which may include statements concerning the
creators’ ability to deliver in a timely fashion the product and/or service disclosed in their white papers and other disclosure
documents) and/or may not reveal any unlawful activities by the creators. Recently, there has been an increasing number of investigations
and lawsuits by the SEC and the CFTC involving digital asset creators for fraud and misappropriation, among other charges. Additionally,
FinCEN has increased its enforcement efforts involving digital asset creators regarding compliance with anti-money laundering and Know-Your-Customer
laws.
To the extent that any of these creators make misleading
and/or fraudulent disclosures or do not comply with federal, state or foreign laws, or if we are unable to uncover all material information
about these digital assets and/or their creators, we may not be able to make a fully informed business decision relating to our transacting
in or otherwise involving such digital assets, which could have a material adverse effect on our business, financial condition and results
of operations.
Risks Related to Digital Assets
Because there has been limited precedent
set for financial accounting for Bitcoin and other digital assets, the determinations that we have made for how to account for digital
assets transactions may be subject to change.
Because there has been limited precedent set for
the financial accounting for Bitcoin and other digital assets and related revenue recognition and no official guidance has yet been provided
by the Financial Accounting Standards Board or the SEC, it is unclear how companies may in the future be required to account for digital
asset transactions and assets and related revenue recognition. A change in regulatory or financial accounting standards could result in
the necessity to change the accounting methods we currently intend to employ in respect of our anticipated revenues and assets and restate
any financial statements produced based on those methods. Such a restatement could adversely affect our business, prospects, financial
condition and results of operation.
Digital assets exchanges and other trading
venues are relatively new and, in some cases, partially unregulated and may therefore be more exposed to fraud and failure.
To the extent that digital asset exchanges or other
trading venues are involved in fraud or experience security failures or other operational issues, a reduction in digital asset prices
could occur. Digital asset market prices depend, directly or indirectly, on the prices set on exchanges and other trading venues, which
are new and, in most cases, largely unregulated as compared to established, regulated exchanges for securities, derivatives and other
currencies. For example, during the past three years, a number of Bitcoin exchanges have been closed due to fraud, business failure or
security breaches. Failures of digital asset companies have accelerated in 2022 with the substantial drop in digital assets prices. In
many of these instances, the customers of the closed Bitcoin exchanges were not compensated or made whole for the partial or complete
losses of their account balances in such Bitcoin exchanges. While smaller exchanges are less likely to have the infrastructure and capitalization
that provide larger exchanges with additional stability, larger exchanges may be more likely to be appealing targets for hackers and “malware”
(i.e., software used or programmed by attackers to disrupt computer operation, gather sensitive information, or gain access to private
computer systems) and may be more likely to be targets of regulatory enforcement action. Continued failures of digital asset companies,
and resulting customer losses, could create a crisis of confidence in digital assets that jeopardizes the future of the industry, and
by extension our business.
Digital asset transactions are irrevocable
and, if stolen or incorrectly transferred, digital assets may be irretrievable. As a result, any incorrectly executed digital asset transactions
could have a material adverse effect on our business, financial condition and results of operations.
Typically, digital asset transactions are not,
from an administrative perspective, reversible without the consent and active participation of the recipient of the transaction or, in
theory, control or consent of a majority of the processing power on the applicable network. Once a transaction has been confirmed and
verified in a block that is added to the network blockchain, an incorrect transfer of a digital asset or a theft of a digital asset generally
will not be reversible and we may not be capable of seeking compensation for any such transfer or theft. Although transfers of any digital
assets we hold will regularly be made to or from vendors, consultants, services providers, etc., it is possible that, through computer
or human error, or through theft or criminal action, our digital assets could be transferred from us in incorrect amounts or to unauthorized
third parties. To the extent that we are unable to seek a corrective transaction with such third party or are incapable of identifying
the third party that has received our digital assets through error or theft, we will be unable to revert or otherwise recover our incorrectly
transferred digital assets. To the extent that we are unable to seek redress for such error or theft, such loss could have a material
adverse effect on our business, financial condition and results of operations.
We may not have adequate sources of recovery
if the digital assets held by us are lost, stolen or destroyed due to third-party digital asset services, which could have a material
adverse effect on our business, financial condition and results of operations.
Certain digital assets held by us may be a third-party
digital asset service. We intend to evaluate the security procedures of any third party service to ensure that its dual authentication
security, secured facilities, segregated accounts and cold storage are reasonably designed to safeguard our Bitcoin from theft, loss,
destruction or other issues relating to hackers and technological attack. Nevertheless, the security procedures cannot guarantee the prevention
of any loss due to a security breach, software defect or act of God that may be borne by us. In addition, our service providers may have
limited liability under their services agreement, which may limit our ability to recover losses relating to our Bitcoin. If such digital
assets are lost, stolen or destroyed under circumstances rendering a third party liable to us, it is possible that the responsible third
party may not have the financial resources or insurance sufficient to satisfy any or all of our claims against the third party, or have
the ability to retrieve, restore or replace the lost, stolen or destroyed digital assets due to governing network protocols and the strength
of the cryptographic systems associated with such digital assets. To the extent that we are unable to recover on any of our claims against
any such third party, such loss could have a material adverse effect on our business, financial condition and results of operations.
Losses relating to our business may be uninsured,
or insurance may be limited.
Our hosting and colocation operations are subject
to hazards and risks normally associated with the daily operations of hosting facilities. Currently, we do not have any insurance, except
for insurance covering loss of equipment while in transit. Once our operations become more significant, we plan to obtain insurance that
is standard for businesses of our nature, including insurance covering business interruption for lost profits, property and casualty,
public liability, commercial employee, workers’ compensation, personal property and auto liability. However, until we procure such
insurance, we are subject to wide variety of business risks without any insurance to reimburse us for any damages we suffer. However,
it may not be possible, either because of a lack of available policies, limits on coverage or prohibitive cost, for us to obtain insurance
of any type that would cover losses associated with our digital asset portfolio. In general, we anticipate that certain losses related
to our business may be uninsurable, or the cost of insuring against these losses may not be economically justifiable.
The digital assets held by us are not insured.
Therefore, a loss may be suffered with respect to our digital assets which is not covered by insurance and for which no person is liable
in damages which could adversely affect our operations and, consequently, an investment in us.
The impact of geopolitical, economic or other
events on the supply of and demand for digital assets is uncertain, but could motivate large-scale sales of digital assets, which could
result in a reduction in the price of such digital asset and could have a material adverse effect on our business, financial condition
and results of operations.
As an alternative to fiat currencies that are backed
by central governments, digital assets, which are relatively new, are subject to supply and demand forces based upon the desirability
of an alternative, decentralized means of buying and selling goods and services. It is unclear how this supply and demand will be impacted
by geopolitical events. Nevertheless, political or economic crises may motivate large-scale acquisitions or sales of digital assets either
globally or locally. Large-scale sales of digital assets likely would result in a reduction in the price of the subject digital asset
and could have a material adverse effect on our business, financial condition and results of operations.
Digital assets, such as Bitcoin, face significant
scaling obstacles that can lead to high fees or slow transaction settlement times and any mechanisms of increasing the scale of digital
asset settlement may significantly alter the competitive dynamics in the market.
Digital assets face significant scaling obstacles
that can lead to high fees or slow transaction settlement times, and attempts to increase the volume of transactions may not be effective.
Scaling digital assets, and particularly Bitcoin, is essential to the widespread acceptance of digital assets as a means of payment, which
is necessary to the growth and development of our business.
Many digital asset networks face significant scaling
challenges. For example, digital assets are limited with respect to how many transactions can occur per second. In this respect, Bitcoin
may be particularly affected as it relies on the “proof of work” validation, which due to its inherent characteristics may
be particularly hard to scale to allow simultaneous processing of multiple daily transactions by users. Participants in the digital asset
ecosystem debate potential approaches to increasing the average number of transactions per second that the network can handle and have
implemented mechanisms or are researching ways to increase scale, such as “sharding,” which is a term for a horizontal partition
of data in a database or search engine, which would not require every single transaction to be included in every single miner’s
or validator’s block.
There is no guarantee that any of the mechanisms
in place or being explored for increasing the scale of settlement of digital asset transactions will be effective, how long they will
take to become effective or whether such mechanisms will be effective for all digital assets. There is also a risk that any mechanisms
of increasing the scale of digital asset settlements may significantly alter the competitive dynamics in the digital asset market and
may adversely affect the value of Bitcoin and the price of our common stock. Any of which could have a material adverse effect on our
business, prospects, financial condition, and operating results.
The IRS and certain states have taken the
position that digital assets are property for income tax purposes.
In early 2014, the IRS issued basic guidance on
the tax treatment of digital assets. The IRS has taken the position that a digital asset is “property” rather than “currency”
for tax purposes. Thus, general tax principles applicable to property transactions apply to the acquisition, ownership, use or disposition
of digital assets. This overall treatment creates a potential tax liability for, and potential tax reporting requirements applicable to
us in any circumstance where we mine or otherwise acquire, own or dispose of a digital asset. In 2019, the IRS issued additional guidance specifically relating
to the taxation consequences that could arise from a digital asset hard fork event in which a new unit
of digital asset may or may not be received, and released frequently asked questions to address certain
digital asset topics such as basis, gain or loss on the sale or exchange of certain kinds of digital assets and how to determine the fair
market value of such digital assets. The IRS’s treatment of digital assets as “property” may prevent the widespread
adoption of digital assets in retail transactions, due to the need to report each transaction as a separate taxable event and track the
tax basis of all digital assets used in a transaction.
There is no guarantee that the IRS will not alter
its position with respect to the taxation of digital assets, or that legislation or judicial determinations in the future will not result
in a tax treatment of digital assets and transactions in digital assets for U.S. federal and state tax purposes that differs from the
treatment described above. You are urged to consult your own tax advisor as to the tax implications of our acquisition, ownership, use
and disposition of digital assets. The taxation of digital assets for state, local or foreign tax purposes may not be the same as the
taxation of digital assets for U.S. federal income tax purposes.
In addition, under the Tax Cuts and Jobs Act of
2017 (the “Tax Cuts and Jobs Act”), as of January 1, 2018, “like-kind exchange” treatment does not apply
to digital assets. This means that gain from the sale or exchange of digital assets cannot be deferred by undertaking an exchange of one
type of virtual currency for another.
Certain states, including New York and New Jersey,
generally follow IRS guidance with respect to the treatment of digital assets for state income tax purposes, but it is unclear if other
states will do so. Transactions involving digital assets for other goods and services also may be subject to sales and use or similar
taxes under barter transaction treatment or otherwise. The treatment of digital assets for state income tax and sales tax purposes may
have negative consequences, including the imposition of a greater tax burden on investors in digital assets or a higher cost with respect
to the acquisition, ownership and disposition of digital assets generally. In either case, this could have a negative effect on prices
in the relevant digital asset exchange market and could have a material adverse effect on our business, financial condition and results
of operations.
Foreign jurisdictions also may elect to treat digital
assets in a manner that results in adverse tax consequences. To the extent that a foreign jurisdiction with a significant share of the
market of digital asset owners or users imposes onerous tax burdens on such owners or users, or imposes sales, use or value added tax
on purchases and sales of digital assets for fiat currency, such actions could result in decreased demand for digital assets in such jurisdiction,
which could impact the price of digital assets and could have a material adverse effect on our business, financial condition and results
of operations.
Changes to, or changes to interpretations
of, the U.S. federal, state, local or other jurisdictional tax laws could have a material adverse effect on our business, financial condition
and results of operations.
All statements contained herein concerning U.S.
federal income tax (or other tax) consequences are based on existing law and interpretations thereof. The tax regimes to which we are
subject or under which we operate, including income and non-income taxes, are unsettled and may be subject to significant change.
While some of these changes could be beneficial, others could negatively affect our after-tax returns. Accordingly, no assurance
can be given that the currently anticipated tax treatment will not be modified by legislative, judicial or administrative changes, possibly
with retroactive effect. In addition, no assurance can be given that any tax authority or court will agree with any particular interpretation
of the relevant laws.
In 2021, significant changes to U.S. federal income
tax laws were proposed, including increasing the U.S. income tax rate applicable to corporations from 21% to 28% and changes implicating
information reporting with respect to digital assets. Congress may include some or all of these proposals in future legislation. There
is uncertainty regarding whether these proposals will be enacted and, if enacted, their scope, when they would take effect, and whether
they would have retroactive effect.
State, local or other jurisdictions could impose,
levy or otherwise enforce tax laws against us. Tax laws and regulations at the state and local levels frequently change, especially in
relation to the interpretation of existing tax laws for new and emerging industries, and we cannot always reasonably predict the impact
from, or the ultimate cost of compliance with, current or future taxes, which could have a material adverse effect on our business, financial
condition and results of operations.
Concerns about greenhouse gas emissions and
global climate change may result in environmental taxes, charges, assessments or penalties and could have a material adverse effect on
our business, financial condition and results of operations.
The effects of human activity on global climate
change have attracted considerable public and scientific attention, as well as the attention of the United States and other foreign governments.
Efforts are being made to reduce greenhouse gas emissions, particularly those from coal combustion power plants, some of which plants
we may rely upon for power. The added cost of any environmental taxes, charges, assessments or penalties levied on such power plants could
be passed on to us, increasing the cost to run our hosting facilities. Any enactment of laws or promulgations of regulations regarding
greenhouse gas emissions by the United States, or any domestic or foreign jurisdiction in which we conduct business, could have a material
adverse effect on our business, financial condition or results of operations.
Latency in confirming transactions on a network
could result in a loss of confidence in the network, which could have a material adverse effect on our business, financial condition and
results of operations.
Latency in confirming transactions on a network
can be caused by a number of factors, such as transaction processors ceasing to support the network and/or supporting a different network.
To the extent that any transaction processors cease to record transactions on a network, such transactions will not be recorded on the
blockchain of the network until a block is solved by a transaction processor that does not require the payment of transaction fees or
other incentives. Currently, there are no known incentives for transaction processors to elect to exclude the recording of transactions
in solved blocks. However, to the extent that any such incentives arise (for example, with respect to Bitcoin, a collective movement among
transaction processors or one or more transaction processing pools forcing Bitcoin users to pay transaction fees as a substitute for,
or in addition to, the award of new Bitcoin upon the solving of a block), transaction processors could delay the recording and verification
of a significant number of transactions on a network’s blockchain. If such latency became systemic, and sustained, it could result
in greater exposure to double-spending transactions and a loss of confidence in the applicable network, which could have a material adverse
effect on our business, financial condition and results of operations.
In addition, increasing growth and popularity of
digital assets, as well as non-digital asset related applications that utilize blockchain technology on certain networks,
can cause congestion and backlog, and as result, increase latency on such networks. An increase in congestion and backlogs could result
in longer transaction confirmation times, an increase in unconfirmed transactions (that is, transactions that have yet to be included
in a block on a network and therefore are not yet completed transactions), higher transaction fees and an overall decrease in confidence
in a particular network, which could ultimately affect our ability to transact on that particular network and, in turn, could have a material
adverse effect on our business, financial condition and results of operations.
Significant or unexpected changes to our
transaction processing operations may have a material adverse effect on our business, financial condition and results of operations.
We and our potential customers are engaged in the
business of verifying and confirming transactions on a blockchain, also known as transaction processing, or “mining.” We may
have to make changes to the specifications of our transaction processing operations for any number of reasons beyond our control (e.g.,
increased governmental and quasi-governmental regulation of blockchain-related digital assets; changes in methods of validating digital
asset transactions; creation of new digital assets; general economic conditions; changes in consumer demographics and public tastes and
preferences; and rising energy costs, among other reasons), or we may be unable to develop our transaction processing operations in a
manner that realizes those specifications or any form of functioning and profitable transaction processing operations. Furthermore, it
is still possible that our transaction processing operations may experience malfunctions, electrical power failure, hacking, cybersecurity
breaches or otherwise fail to be adequately developed or maintained. Any of the above risks, which could also impact our potential hosting
customers, may have a material adverse effect on our business, financial condition and results of operations.
Currently, we believe there is relatively
limited use of digital assets in the retail and commercial marketplace in comparison to relatively sizable use by speculators, thus contributing
to price volatility that could adversely affect an investment in our stock.
We believe digital assets have not yet gained widespread
acceptance as a means of payment for goods and services by any major retail or commercial outlets. We believe a significant portion of
the demand for digital assets is generated by speculators and investors, some of whom may have no knowledge of the inner workings of those
assets. Certain of these investors may seek to profit from the short-term or long-term holding of digital assets, and thus, may contribute
to digital asset price volatility. A lack of expansion in the use of digital assets in retail and commercial markets, or a contraction
of such use, may result in increased price volatility of digital assets or a reduction in the market price of digital assets or in the
demand for digital assets which would reduce the demand of our hosting and colocation services or in the value of the digital assets held
by us, any of which could have a material adverse effect on our business, financial condition and results of operations.
We may diversify our business by mining or
investing in additional digital assets which could require significant investment or expose us to trading risks.
The field of digital assets is constantly expanding
with over 4,000 digital assets in existence as of January 2021. We intend to evaluate the potential for mining or investing in existing,
new and alternative digital assets. To the extent we elect to commence activities to generate digital assets, we would be required to
invest our assets either to obtain mining equipment configured to generate digital assets based on a “proof of work” protocol
or to post “stakes” to generate digital assets based on a “proof of stake” protocol. In addition, or in the alternative,
we may trade our digital assets for other digital assets on centralized or decentralized exchanges. Optimization of such trades may vary
depending on the exchange on which the trade is conducted because we may not have access to all exchanges on which such trades are available.
Further, trading on centralized and decentralized exchanges may expose us to additional risks if such exchanges experience breaches of
security measures, system errors or vulnerabilities, software corruption, hacking or other irregularities. Any new digital asset obtained
through generation or trading may be more volatile or fail to increase in value compared to digital assets we currently hold. As a result,
any investment in different digital assets may not achieve our goals, may be viewed negatively by analysts or investors and may negatively
affect our revenues and results of operations.
If the transaction fees for recording digital
assets in a blockchain increase, demand for digital assets may be reduced and prevent the expansion of the networks to retail merchants
and commercial business, resulting in a reduction in the acceptance or price of digital assets.
As the number of digital assets awarded for solving
a block in a blockchain decreases, the incentive for mining participants to contribute processing power to networks will transition from
a set reward to transaction fees. In order to incentivize mining participants to continue to contribute processing power to the networks,
the network may transition from a set reward to transaction fees earned upon solving for a block. If mining participants demand higher
transaction fees to record transactions in a blockchain or a software upgrade automatically charges fees for all transactions, the cost
of using digital assets may increase and the marketplace may be reluctant to accept digital assets as a means of payment. Existing users
may be motivated to switch from one digital asset to another or back to fiat currency. Decreased use and demand for digital assets may
adversely affect their value and result in a reduction in the value of our common stock.
If the award of new digital assets and/or
transaction fees for solving blocks is not sufficiently high to incentivize transaction processors, such processors may reduce or cease
expending processing power on a particular network, which could negatively impact the utility of the network, reduce the value of its
digital assets and have a material adverse effect on our business, financial condition and results of operations.
As the number of digital assets rewarded to transaction
processors for validating blocks in a network decreases, the incentive for transaction processors to continue contributing processing
power to the network may shift toward transaction fees. Such a shift may increase the transaction fees on a network. Higher transaction
fees may reduce the utility of a network for an end user, which may cause end users to reduce or stop their use of that network. In such
case, the price of the relevant digital asset may decline substantially and could go to zero. Such reduced price and demand for, and use
of, the relevant digital asset and network, either as it applies to our transaction processing services or to those of our potential hosting
customers, may have a material adverse effect on our business, financial condition and results of operations.
As more processing power is added to a network,
our relative percentage of total processing power on that network is expected to decline absent significant capital investment, which
has an adverse impact on our ability to generate revenue from processing transactions on that network and could have a material adverse
effect on our business, financial condition and results of operations.
Processing power on networks has been increasing
rapidly over time while the rewards and transaction fees available on those networks tends to decline over time. In order to grow or maintain
the revenue we generate from processing transactions on such networks, we are required to invest significant capital to acquire new computer
servers, expand our power capacity and otherwise increase our effective processing power on such networks. In the event we are unable
to invest sufficient capital to grow or maintain the level of our processing power on a network relative to the total processing power
of such network, our revenue from the applicable network will decline over time and as a result, it could have a material adverse effect
on our business, financial condition and results of operations.
In addition, a decrease in the price of computer
servers may result in an increase in transaction processors, which may lead to more competition for fees in a particular network. In the
event we are unable to realize adequate fees on a network due to increased competition, our revenue from the applicable network will decline
over time and in turn, it could have a material adverse effect on our business, financial condition and results of operations.
We may only have limited control over our
mining operation.
Our mining operation comprises blockchain mining
technologies that depend on a network of computers to run certain software programs to solve complex transactions in competition with
other mining operations and to process transactions. Because of this less centralized model and the complexity of our mining operation,
we have limited control over the success of our mining operations. While we participate in mining pools to combine our mining operations
with other mining participants to increase processing power to solve blocks, there can be no assurance that such pools will adequately
address this risk.
Our reliance on third-party mining pool service
providers for our mining revenue payouts may have a negative impact on our operations.
We may utilize third party mining pools to receive
our mining rewards from a given network. Mining pools allow mining participants to combine their processing power, which increases the
chances of solving a block and getting paid by the network. The rewards are distributed by the pool operator, proportionally to our contribution
to the pool’s overall mining power used to generate each block. We are dependent on the accuracy of the mining pool operator’s
record keeping to accurately record the total processing power provided to the pool for a given Bitcoin or other digital asset mining
application in order to assess the proportion of that total processing power we provided. While we have internal methods of tracking both
our power provided and the total power used by the pool, the mining pool operator uses its own record-keeping to determine our proportion
of a given reward. We have little means of recourse against the mining pool operator if we determine the proportion of the reward paid
out to us by a mining pool operator is incorrect, other than leaving the pool. If we are unable to consistently obtain accurate proportionate
rewards from our mining pool operators, we may experience reduced reward for our efforts, which would have an adverse effect on our business
and operations.
Malicious actors or botnet may obtain control
of more than 50% of the processing power on the Bitcoin or other network.
If a malicious actor or botnet (a volunteer or
hacked collection of computers controlled by networked software coordinating the actions of the computers) obtains a majority of the processing
power dedicated to mining on the Bitcoin or other network, it may be able to alter the blockchain on which the Bitcoin or other network
and most Bitcoin or other digital asset transactions rely by constructing fraudulent blocks or preventing certain transactions from completing
in a timely manner, or at all. The malicious actor or botnet could control, exclude, or modify the ordering of transactions, though it
could not generate new Bitcoin or digital assets or transactions using such control. The malicious actor could “double-spend”
its own Bitcoin or digital assets (i.e., spend the same Bitcoin or digital assets in more than one transaction) and prevent the confirmation
of other users’ transactions for so long as it maintained control. To the extent that such malicious actor or botnet did not yield
its control of the processing power on the Bitcoin or other network, or the Bitcoin or other community did not reject the fraudulent blocks
as malicious, reversing any changes made to the blockchain may not be possible.
Although there are no known reports of malicious
activity or control of the Bitcoin blockchain achieved through controlling over 50% of the processing power on the network, it is believed
that certain mining pools may have exceeded the 50% threshold. The possible crossing of the 50% threshold indicates a greater risk in
that a single mining pool could exert authority over the validation of Bitcoin transactions. To the extent that the Bitcoin or other digital
asset ecosystems, including developers and administrators of mining pools, do not act to ensure greater decentralization of Bitcoin or
other digital asset mining processing power, the feasibility of a malicious actor obtaining control of the processing power on the Bitcoin
or other network will increase, which may adversely affect an investment us.
Transaction processing operators may sell
a substantial amount of digital assets into the market, which may exert downward pressure on the price of the applicable digital asset
and, in turn, could have a material adverse effect on our business, financial condition and results of operations.
Transaction processing requires the investment
of significant capital for the acquisition of hardware, leasing or purchasing space, involves substantial electricity costs and requires
the employment of personnel to operate the data facilities, which may lead transaction processing operators to liquidate their positions
in digital assets to fund these capital requirements. In addition, if the reward of new digital assets for transaction processing declines,
and/or if transaction fees are not sufficiently high, profit margins for transaction processing operators may be reduced, and such operators
may be more likely to sell a higher percentage of their digital assets. Whereas it is believed that individual operators in past years
were more likely to hold digital assets for more extended periods, the immediate selling of newly transacted digital assets by operators
may increase the supply of such digital assets on the applicable exchange market, which could create downward pressure on the price of
the digital assets and, in turn, could have a material adverse effect on our business, financial condition and results of operations.
To the extent that the profit margins of
digital asset mining operations are not high, mining participants are more likely to sell their earned Bitcoin, which could constrain
Bitcoin prices.
Over the past few years, digital asset mining operations
have evolved from individual users mining with computer processors, graphics processing units and first-generation application-specific
integrated circuit (“ASIC”) servers. Currently, new processing power is predominantly added by incorporated and unincorporated
“professionalized” mining operations. Professionalized mining operations may use proprietary hardware or sophisticated ASIC
machines acquired from ASIC manufacturers. They require the investment of significant capital to acquire this hardware, to lease operating
space (often in data centers or warehousing facilities), and to pay the costs of electricity and labor to operate the mining farms. As
a result, professionalized mining operations are of a greater scale than prior mining operations and have more defined and regular expenses
and liabilities. These regular expenses and liabilities require professionalized mining operations to maintain profit margins on the sale
of digital assets. To the extent the price of digital assets decline and such profit margin is constrained, professionalized mining participants
are incentivized to more immediately sell digital assets earned from mining operations, whereas it is believed that individual mining
participants in past years were more likely to hold newly mined digital assets for more extended periods. The immediate selling of newly
mined digital assets greatly increases the trading volume of the digital assets, creating downward pressure on the market price of digital
asset rewards. The extent to which the value of digital assets mined by a professionalized mining operation exceeds the allocable capital
and operating costs determines the profit margin of such operation. A professionalized mining operation may be more likely to sell a higher
percentage of its newly mined digital assets rapidly if it is operating at a low profit margin and it may partially or completely cease
operations if its profit margin is negative. In a low profit margin environment, a higher percentage could be sold more rapidly, thereby
potentially depressing digital asset prices. Lower digital asset prices could result in further tightening of profit margins for professionalized
mining operations creating a network effect that may further reduce the price of digital assets until mining operations with higher operating
costs become unprofitable forcing them to reduce mining power or cease mining operations temporarily. Such circumstances could have a
material adverse effect on our business, prospects or operations and potentially the value of Bitcoin and any other digital assets we
mine or otherwise acquire or hold for our own account.
The “halving” of rewards available
on the Bitcoin network, or the reduction of rewards on other networks, has had and in the future could have a negative impact on our ability
to generate revenue as our customers may not have an adequate incentive to continue transaction processing and customers may cease transaction
processing operations altogether, which could have a material adverse effect on our business, financial condition and results of operations.
Under the current protocols governing the Bitcoin
network, the reward for validating a new block on that network is cut in half from time to time, which has been referred to in our industry
as the “halving.” When the Bitcoin network was first launched, the reward for validating a new block was 50 Bitcoin. In 2012,
the reward for validating a new block was reduced to 25 Bitcoin. In July 2016, the reward for validating a new block was reduced to 12.5
Bitcoin, and in May 2020, the reward was further reduced to 6.25 Bitcoin. In addition, other networks may operate under rules that, or
may alter their rules to, limit the distribution of new digital assets. We, and to our knowledge, our potential hosting customers, currently
rely on these rewards to generate a significant portion of our total revenue. If the award of digital assets for solving blocks and transaction
fees are not sufficiently high, neither we nor our customers may have an adequate incentive to continue transaction processing and may
cease transaction processing operations altogether, which as a result may significantly reduce demand for our hosting services. As a result,
the halving of available rewards on the Bitcoin network, or any reduction of rewards on other networks, would have a negative impact on
our revenues and may have a material adverse effect on our business, financial condition and results of operations.
In addition, the reduction of rewards may reduce
our profit margins, which could result in us selling a substantial portion of our digital assets, which are subject to high volatility.
If we are forced to sell digital assets at low prices, it could have a material adverse effect on our business, financial condition and
results of operations.
We expect to sell most or all of our digital
assets to pay for costs and expenses, which will reduce the amount of digital assets we hold, thus preventing us from recognizing any
gain from the appreciation in value of the digital assets we have sold and may sell in the future.
We expect to sell most or all of the digital assets
that we earn from mining or hosting to pay for costs and expenses we incur, capital expenditures and other working capital, irrespective
of then-current digital asset prices. When we sell a digital asset, we are unable to benefit from any future appreciation in the underlying
value of that digital asset. However, we also avoid a loss on the digital asset to the extent it declines in price after the sale.
Consequently, our digital assets may be sold at
a time when the price is lower than it otherwise might be in the future, which could reduce the gain we might have realized on the sale
of that digital asset at a different time. If we sell any digital assets in the future, the loss of potential realized gains from the
sale of such digital assets could have a material adverse effect on our business, financial condition and results of operations.
Digital assets are subject to extreme price
volatility. The value of digital assets is dependent on a number of factors, any of which could have a material adverse effect on our
business, financial condition and results of operations.
We expect that a large portion of our revenue will
come from processing blockchain transactions in the form of Bitcoin. We believe the value of digital assets related to our business is
dependent on a number of factors, including, but not limited to:
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global digital asset supply; |
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global digital asset demand, which can be influenced by the growth of retail merchants’ and commercial businesses’ acceptance of digital assets as payment for goods and services, the security of online digital asset exchanges and digital wallets that hold digital assets, the perception that the use and holding of digital assets is safe and secure, and the regulatory restrictions on their use; |
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investors’ expectations with respect to the rate of inflation of fiat currencies; |
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investors’ expectations with respect to the rate of deflation of digital assets; |
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cyber theft of digital assets from online wallet providers, or news of such theft from such providers or from individuals’ online wallets; |
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the availability and popularity of businesses that provide digital asset-related services; |
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fees associated with processing a digital asset transaction; |
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changes in the software, software requirements or hardware requirements underlying digital assets; |
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changes in the rights, obligations, incentives, or rewards for the various participants in digital asset mining; |
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currency exchange rates, including the rates at which digital assets may be exchanged for fiat currencies; |
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fiat currency withdrawal and deposit policies on digital asset exchanges and liquidity on such exchanges; |
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interruptions in service or failures of major digital asset exchanges; |
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investment and trading activities of large investors, including private and registered funds, that may directly or indirectly invest in digital assets; |
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monetary policies of governments, trade restrictions, currency devaluations and revaluations; |
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regulatory measures, if any, that affect the use of digital assets, restrict digital assets as a form of payment, or limit the purchase of digital assets; |
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global or regional political, economic or financial events and conditions; |
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expectations that the value of digital assets will change in the near or long term. A decrease in the price of a single digital asset may cause volatility in the entire digital asset industry and may affect other digital assets. For example, a security breach that affects investor or user confidence in Bitcoin or another digital asset may affect the industry as a whole and may also cause the price of other digital assets to fluctuate; or |
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with respect to Bitcoin, increased competition from other forms of digital assets or payments services. |
Bitcoin and other digital assets have historically
experienced significant intraday and long-term price volatility, significantly impacted by momentum pricing. Momentum pricing typically
is associated with growth stocks and other assets whose valuation, as determined by the investing public, accounts for anticipated future
appreciation in value. The market price for digital assets is determined using data from various digital asset exchanges, over-the-counter markets,
digital asset futures markets, derivative platforms and other digital asset investment vehicles. We believe that momentum pricing may
have resulted, and may continue to result, in significant and rampant speculation regarding future appreciation (or depreciation) in the
value of digital assets, inflating and making their market prices more volatile, even more so than with traditional asset classes, such
as equities. In addition, there is currently growing but limited acceptance of digital assets in the retail and commercial marketplace,
as compared to the demand generated by investors seeking a long-term value retention or by speculators seeking to profit from the short-
or long-term holding of such digital assets, which may contribute to their extreme levels of price volatility.
Even if shareholders are able to hold their common
stock for the long-term, their common stock may never generate a profit, since digital asset markets have historically experienced extended
periods of flat or declining prices, in addition to sharp fluctuations. Investors should be aware that there is no assurance that Bitcoin
or other digital assets will maintain their long-term value in terms of future purchasing power or that the acceptance of digital asset
payments by mainstream retail merchants and commercial businesses will continue to grow. If the price of Bitcoin or other digital assets
declines, we expect our profitability to decline.
Any loss or destruction of a private key
required to access a digital asset of ours is irreversible. We also may temporarily lose access to our digital assets.
Digital assets are each accessible and controllable
only by the possessor of both the unique public key and private key associated with the digital asset, wherein the public and private
keys are held in an offline or online digital wallet. To the extent a private key is lost, destroyed or otherwise compromised and no backup
of the private key is available, we will be unable to access the applicable digital asset associated with that private key and the private
key cannot be restored. As a result, any digital assets associated with such key could be irretrievably lost. Any loss of private keys
relating to digital wallets used to store the applicable digital assets could have a material adverse effect on our business, financial
condition and results of operations.
Currently, we hold the majority of our digital
currencies in cold storage to reduce the risk of malfeasance, but this risk cannot be eliminated. In order to minimize risk, we have established
processes to manage wallets that are associated with our digital currency holdings. We utilize several layers of threat reduction
techniques, including: (i) the use of hardware wallets to store sensitive private key information; (ii) performance of transactions offline;
and (iii) offline generation storage and use of private keys. There can be no assurances that any processes we have adopted or will
adopt in the future are or will be secure or effective, and we would suffer significant and immediate adverse effects if we suffered a
loss of our digital currency due to an adverse software or cybersecurity event.
We are presently evaluating several third-party
custodial wallet alternatives with multi-signature enterprise storage solution to safeguard our digital assets from theft, loss,
destruction or other issues relating to hackers and technological attack. There can be no assurance that we will utilize such services,
as other new options may develop in the future, and if a custodial wallet is used there can be no assurance that such services will be
more secure than those that we presently employ.
Intellectual property rights claims may adversely
affect the operation of any or all of the networks.
Third parties may assert intellectual property
rights claims relating to the operation of digital assets and the holding and transfer of such assets. Regardless of the merit of any
intellectual property rights claims or other legal action, any threatened action that reduces confidence in the long-term viability of
any or all of the networks or other similar peer-to-peer networks, or in the ability of end-users to hold and transfer
digital assets, may have a material adverse effect on our business, results of operations and financial condition. Additionally, a meritorious
intellectual property rights claim could prevent us and other end-users from holding or transferring the digital assets, which
could have a material adverse effect on our business, financial condition and results of operations.
A soft or hard fork on a network could have
a material adverse effect on our business, financial condition and results of operations.
The rules governing a network’s protocol
are subject to constant change and, at any given time, there may be different groups of developers that can modify a network’s protocol.
As network protocols are not sold and their use does not generate revenues for their development teams, the core developers are generally
not compensated for maintaining and updating the network protocols. Consequently, there is a lack of financial incentive for developers
to maintain or develop networks and the core developers may lack the resources to adequately address emerging issues with network protocols.
Although the Bitcoin and other leading networks are currently supported by core developers, there can be no guarantee that such support
will continue or be sufficient in the future. To the extent that material issues arise with the Bitcoin or another network protocol and
the core developers and open-source contributors are unable to address the issues adequately or in a timely manner, the networks may be
adversely affected.
Any individual can download the applicable network
software and make any desired modifications that alter the protocols and software of the network, which are proposed to developers, users
and transaction processors on the applicable network through software downloads and upgrades, typically posted to development forums such
as GitHub.com. Such proposed modifications can be agreed upon, developed, adopted and implemented by a substantial majority of developers,
transaction processors and users, which, in such event, results in a “soft fork” or “hard fork” on the relevant
network. A “soft fork” occurs when an updated version of the validating protocol is still “backwards compatible”
with previous versions of the protocol. As a result, non-upgraded network participants with an older version of the validating
protocol will still recognize new blocks or transactions and may be able to confirm and validate a transaction; however, the functionality
of the non-upgraded network participant may be limited. Thus, non-upgraded network participants are incentivized to adopt
the updated version of the protocol. The occurrence of a soft fork could potentially destabilize transaction processing and increase transaction
and development costs and decrease trustworthiness of a network.
A “hard fork” occurs when the updated
version of the validating protocol is not “backwards compatible” with previous versions of the protocol, and therefore, requires
forward adoption by network participants in order to recognize new blocks, validate and verify transactions and maintain consensus on
the relevant blockchain. Since the updated version of the protocol is not backwards compatible, a hard fork can cause the relevant
blockchain to permanently diverge into two separate blockchains on a network. For example, in the case of Bitcoin, a hard fork created
two new digital assets: Bitcoin Cash and Bitcoin Gold. The value of a newly created digital asset from a hard fork (“forked digital
asset”) may or may not have value in the long-run and may affect the price of other digital assets if interest and resources
are shifted away from previously existing digital assets to the forked digital asset. The value of a previously existing digital asset
after a hard fork is subject to many factors, including the market reaction and value of the forked digital asset and the occurrence of
other soft or hard forks in the future. As such, the value of certain digital assets could be materially reduced if existing and future
hard forks have a negative effect on their value.
If a soft fork or hard fork occurs on a network,
which we or our hosting customers are processing transactions or hold digital assets in, we may be required to upgrade our hardware or
software in order to continue our transaction processing operations, and there can be no assurance that we may be able to make such upgrades.
A soft fork or hard fork in a particular digital asset that we process could have a negative effect on the value of that digital asset
and could have a material adverse effect on our business, financial condition and results of operations.
The digital assets held by us may be subject
to loss, damage, theft or restriction on access, which could have a material adverse effect on our business, financial condition or results
of operations.
There is a risk that some or all of the digital
assets held or hosted by us could be lost, stolen or destroyed. We believe that the digital assets held or hosted by us and our mining
operation will be an appealing target to hackers or malware distributors seeking to destroy, damage or steal our digital assets. Our security
procedures and operational infrastructure may be breached due to the actions of outside parties, error or malfeasance of one of our employees,
or otherwise, and, as a result, an unauthorized party may obtain access to our digital asset accounts, private keys, data or digital assets.
Although we implement a number of security procedures with various elements such as two-factor verification, segregated accounts
and secured facilities and plan to implement the maintenance of data on computers and/or storage media that is not directly connected
to, or accessible from, the internet and/or networked with other computers, or (“cold storage”), to minimize the risk of loss,
damage and theft, and we update such security procedures whenever reasonably practicable, we cannot guarantee the prevention of such loss,
damage or theft, whether caused intentionally, accidentally or by an act of God.
Additionally, outside parties may attempt to fraudulently
induce our employees to disclose sensitive information in order to gain access to our infrastructure. As the techniques used to obtain
unauthorized access, disable or degrade service, or sabotage systems change frequently, or may be designed to remain dormant until a predetermined
event, and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate
preventative measures. As technological change occurs, the security threats to our Bitcoin will likely adapt and previously unknown threats
may emerge. Our ability to adopt technology in response to changing security needs or trends may pose a challenge to the safekeeping of
our digital assets. To the extent we are unable to identify and mitigate or stop new security threats, our digital assets may be subject
to theft, loss, destruction or other attack.
Currently, we hold the majority of our digital
currencies in cold storage to reduce the risk of malfeasance, but this risk cannot be eliminated. In order to minimize risk,
we have established processes to manage wallets that are associated with our digital currency holdings. We utilize several layers
of threat reduction techniques, including: (i) the use of hardware wallets to store sensitive private key information; (ii) performance
of transactions offline; and (iii) offline generation storage and use of private keys. There can be no assurances that any processes
we have adopted or will adopt in the future are or will be secure or effective, and we would suffer significant and immediate adverse
effects if we suffered a loss of our digital currency due to an adverse software or cybersecurity event.
We are presently evaluating several third-party
custodial wallet alternatives with multi-signature enterprise storage solution to safeguard our digital assets from theft, loss,
destruction or other issues relating to hackers and technological attack. There can be no assurance that we will utilize such services,
as other new options may develop in the future, and if a custodial wallet is used there can be no assurance that such services will be
more secure than those that we presently employ.
Any of these events could expose us to liability,
damage our reputation, reduce customer confidence in our services and otherwise have a material adverse effect on our business, financial
condition and results of operations. Furthermore, we believe that as our assets grow, we may become a more appealing target for security
threats, such as hackers and malware. If an actual or perceived breach of our digital asset accounts occurs, the market perception of
our effectiveness could be harmed.
Our ability to adopt technology in response
to changing security needs or trends poses a challenge to the safekeeping of our digital assets.
The history of digital asset exchanges has shown
that exchanges and large holders of digital assets must adapt to technological change in order to secure and safeguard their digital assets.
We currently keep all of our digital assets in a cold storage wallet in our name to reduce the risk of malfeasance, but this risk cannot
be eliminated. In order to minimize risk, we have established processes to manage wallets that are associated with our
digital currency holdings. We utilize several layers of threat reduction techniques, including: (i) the use of hardware wallets to
store sensitive private key information; (ii) performance of transactions offline; and (iii) offline generation storage and use of private
keys. There can be no assurances that any processes we have adopted or will adopt in the future are or will be secure or effective,
and we would suffer significant and immediate adverse effects if we suffered a loss of our digital currency due to an adverse software
or cybersecurity event.
We are presently evaluating several third-party
custodial wallet alternatives with multi-signature enterprise storage solution to safeguard our digital assets from theft, loss,
destruction or other issues relating to hackers and technological attack. There can be no assurance that we will utilize such services,
as other new options may develop in the future, and if a custodial wallet is used there can be no assurance that such services will be
more secure than those that we presently employ.
The digital assets held by us are not subject
to FDIC or SIPC protections.
We do not hold our digital assets with a banking
institution or a member of the Federal Deposit Insurance Corporation (“FDIC”) or the Securities Investor Protection Corporation
(“SIPC”), and to date, neither the FDIC nor the SIPC has extended any such protections to depositors of digital assets. Accordingly,
our digital assets are not subject to the protections by FDIC or SIPC member institutions and any loss of our digital assets could have
a material adverse effect on our business, financial condition and results of operations.
We may not be able to maintain our competitive
position as digital asset networks experience increases in total network hash rate.
As the relative market prices of a digital asset,
such as Bitcoin, increases, more companies are encouraged to mine for that digital asset and as more miners are added to the network,
its total hash rate increases. In order for us to maintain its competitive position under such circumstances, we must increase our total
hash rate by acquiring and deploying more mining machines, including new miners with higher hash rates. There are currently only a few
companies capable of producing a sufficient number of machines with adequate quality to address the increased demand. If we are not able
to acquire and deploy additional miners on a timely basis, our proportion of the overall network hash rate will decrease and we will have
a lower chance of solving new blocks which will have an adverse effect on our business and results of operations.
To the extent that any miners cease to record
transactions in solved blocks, transactions that do not include the payment of a transaction fee will not be recorded on the blockchain
until a block is solved by a miner who does not require the payment of transaction fees. Any widespread delays in the recording of transactions
could result in a loss of confidence in that digital asset network, which could adversely impact an investment in us.
To the extent that any miners cease to record transactions
in solved blocks, such transactions will not be recorded on the blockchain. Currently, there are no known incentives for miners to elect
to exclude the recording of transactions in solved blocks; however, to the extent that any such incentives arise (e.g., a collective movement
among miners or one or more mining pools forcing Bitcoin users to pay transaction fees as a substitute for or in addition to the award
of new Bitcoins upon the solving of a block), actions of miners solving a significant number of blocks could delay the recording and confirmation
of transactions on the blockchain.
Any systemic delays in the recording and confirmation
of transactions on the blockchain could result in greater exposure to double-spending transactions and a loss of confidence in certain
or all digital asset networks, which could have a material adverse effect on our business, prospects, financial condition, and operating
results.
Our interactions with a blockchain may expose us
to SDN or blocked persons or cause us to violate provisions of law that did not contemplate distribute ledger technology.
The Office of Financial Assets Control of the U.S.
Department of Treasury (“OFAC”) requires us to comply with its sanction program and not conduct business with persons named
on its specially designated nationals (“SDN”) list. However, because of the pseudonymous nature of blockchain transactions,
we may inadvertently and without our knowledge engage in transactions with persons named on OFAC’s SDN list. Our internal policies
prohibit any transactions with such SDN individuals, but we may not be adequately capable of determining the ultimate identity of the
individual with whom we transact with respect to selling digital assets. In addition, in the future, OFAC or another regulator, may require
us to screen transactions for OFAC addresses or other bad actors before including such transactions in a block, which may increase our
compliance costs, decrease our anticipated transaction fees and lead to decreased traffic on our network. Any of these factors, consequently,
could have a material adverse effect on our business, prospects, financial condition, and operating results.
Moreover, federal law prohibits any U.S. person
from knowingly or unknowingly possessing any visual depiction commonly known as child pornography. Recent media reports have suggested
that persons have imbedded such depictions on one or more blockchains. Because our business requires us to download and retain one or
more blockchains to effectuate our ongoing business, it is possible that such digital ledgers contain prohibited depictions without our
knowledge or consent. To the extent government enforcement authorities literally enforce these and other laws and regulations that are
impacted by decentralized distributed ledger technology, we may be subject to investigation, administrative or court proceedings, and
civil or criminal monetary fines and penalties, all of which could harm our reputation and could have a material adverse effect on our
business, prospects, financial condition, and operating results.
Risks Related to Ownership of Our Common Stock
An active trading market for our common stock
may never develop or be sustained.
Our common stock is quoted on the Pink OTC Market
under the symbol “BMNR.” However, despite being quoted, there is currently no established market for our common stock. We
cannot assure you that an active trading market for our common stock will develop on that exchange or elsewhere or, if developed, that
any market will be sustained. Accordingly, we cannot assure you of the likelihood that an active trading market for our common stock will
develop or be maintained, your ability to sell your shares of our common stock when desired or the prices that you may obtain for your
shares.
The trading price of our common stock may
be volatile, and you could lose all or part of your investment.
The trading price of our common stock is likely
to be volatile and could be subject to fluctuations in response to various factors, some of which are beyond our control. These fluctuations
could cause you to lose all or part of your investment in our common stock as you might be unable to sell your shares at or above the
price you paid for those shares. Factors that could cause fluctuations in the trading price of our common stock include the following:
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price and volume fluctuations in the overall stock market from time to time; |
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volatility in the trading prices and trading volumes of technology stocks; |
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volatility in the price of Bitcoin and other digital assets; |
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changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular; |
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sales of shares of our common stock by us or our stockholders; |
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failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors; |
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the financial projections we may provide to the public, any changes in those projections, or our failure to meet those projections; |
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announcements by us or our competitors of new products, features, or services; |
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the public’s reaction to our press releases, other public announcements and filings with the SEC; |
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rumors and market speculation involving us or other companies in our industry; |
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actual or anticipated changes in our results of operations or fluctuations in our results of operations; |
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actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally; |
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litigation involving us, our industry, or both, or investigations by regulators into our operations or those of our competitors; |
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developments or disputes concerning our intellectual property or other proprietary rights; |
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announced or completed acquisitions of businesses, products, services or technologies by us or our competitors; |
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new laws or regulations or new interpretations of existing laws or regulations applicable to our business; |
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changes in accounting standards, policies, guidelines, interpretations or principles; |
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any significant change in our management; and |
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general economic conditions and slow or negative growth of our markets. |
In
addition, in the past, following periods of volatility in the overall market and in the market price of a particular company’s securities,
securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could
result in substantial costs and a diversion of our management’s attention and resources.
The concentration of our capital stock ownership
with insiders will likely limit your ability to influence corporate matters.
As of December 1, 2022, our executive officers,
directors, significant shareholders and affiliated persons and entities collectively, beneficially owned approximately 57.3% of our outstanding
common stock and 100% of our Series A Convertible Preferred Stock, and as a result control 63.2% of the votes on any matter submitted
to a vote of shareholders. As a result, these persons and entities have the ability to exercise control over most matters that require
approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action
might be taken even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing
a change in control of our company that other stockholders may view as beneficial.
Compliance with the Sarbanes-Oxley Act of
2002 will require substantial financial and management resources.
Section 404 of the Sarbanes-Oxley Act of
2002 requires that we evaluate and report on our system of internal controls and, if and when we are no longer a “smaller reporting
company,” will require that we have such a system of internal controls audited. If we fail to maintain the adequacy of our internal
controls, we could be subject to regulatory scrutiny, civil or criminal penalties and/or stockholder litigation. Any inability to provide
reliable financial reports could harm our business. Furthermore, any failure to implement required new or improved controls, or difficulties
encountered in the implementation of adequate controls over our financial processes and reporting in the future, could harm our operating
results or cause us to fail to meet our reporting obligations. Inferior internal controls could also cause investors to lose confidence
in our reported financial information, which could have a negative effect on the trading price of our securities.
Future sales and issuances of our capital
stock or rights to purchase capital stock could result in additional dilution of the percentage ownership of our stockholders and could
cause our stock price to decline.
We expect to raise capital to fund our business
by issuing additional shares of common stock and/or securities convertible into common stock. Future sales and issuances of our capital
stock or rights to purchase our capital stock could result in substantial dilution to our existing stockholders. We may sell common stock,
convertible securities and other equity securities in one or more transactions at prices and in a manner as we may determine from time
to time. If we sell any such securities in subsequent transactions, investors may be materially diluted. New investors in such subsequent
transactions could gain rights, preferences and privileges senior to those of holders of our common stock.
We depend on key personnel and could be harmed
by the loss of their services because of the limited number of qualified people in our industry.
Because of our small size, we require the
continued service and performance of our management team, all of whom we consider to be key employees. Competition for highly qualified
employees in the data storage industry is intense. Our success will depend to a significant degree upon our ability to attract, train,
and retain highly skilled directors, officers, management, business, financial, legal, marketing, sales, and technical personnel and upon
the continued contributions of such people. In addition, we may not be able to retain our current key employees. The loss of the services
of one or more of our key personnel and our failure to attract additional highly qualified personnel could impair our ability to expand
our operations and provide service to our customers.
We currently do not have employment agreements
with most of our management and are not currently paying them any compensation. As a result, management’s only incentive for continuing
to work for us is due to their stock ownership in us. Our management will not be able to work for us indefinitely without being paid.
We plan to enter into employment contracts with management, and begin paying them compensation, once we are able to raise capital to fund
our business.
Substantial future sales of shares of our
common stock could cause the market price of our common stock to decline.
Sales of a substantial number of shares of our
common stock in the public market following the completion of the merger, or the perception that these sales might occur, could depress
the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. Many
of our existing equity holders have substantial unrecognized gains on the value of the equity they hold, and therefore they may take steps
to sell their shares or otherwise secure the unrecognized gains on those shares.
Our common stock market price and trading
volume could decline if securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our
business.
The trading market for our common stock will depend
in part on the research and reports that securities or industry analysts publish about us or our business. The analysts’ estimates
are based upon their own opinions and are often different from our estimates or expectations. If one or more of the analysts who cover
us downgrade our common stock or publish inaccurate or unfavorable research about our business, the price of our securities would likely
decline. If few securities analysts commence coverage of us, or if one or more of these analysts cease coverage of us or fail to publish
reports on us regularly, demand for our securities could decrease, which might cause the price and trading volume of our common stock
to decline.
We will incur costs and demands upon management
as a result of complying with the laws and regulations affecting public companies in the United States, which may harm our business.
As a public company quoted in the United States,
we will incur significant additional legal, accounting and other expenses. In addition, changing laws, regulations and standards relating
to corporate governance and public disclosure, including regulations implemented by the SEC and any exchange on which we list our shares,
may increase legal and financial compliance costs and make some activities more time consuming. These laws, regulations and standards
are subject to varying interpretations, and as a result, their application in practice may evolve over time as new guidance is provided
by regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment
may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating
activities to compliance activities. If, notwithstanding our efforts, we fail to comply with new laws, regulations and standards, regulatory
authorities may initiate legal proceedings against us, and our business may be harmed.
Failure to comply with these rules might also make
it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and we might be forced
to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of
these events would also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees
of our board of directors or as members of senior management.
We do not intend to pay dividends for the
foreseeable future.
We have never declared nor paid cash dividends
on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we
do not expect to declare or pay any dividends in the foreseeable future. As a result, stockholders must rely on sales of their common
stock after price appreciation as the only way to realize any future gains on their investment.