Bitmine Immersion Technologies, Inc.: Form 10-Q for the period ended Feb 29, 2024

The following discussion and analysis of the results of operations and financial condition of the Company for the three and six months ended February 29, 2024*, and February 28, 2023, should be read in conjunction with the other sections of this Quarterly Report, including the Financial Statements and notes thereto of the Company included in this Quarterly Report. The various sections of this discussion contain forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this Quarterly Report as well as other matters over which we have no control. See “Cautionary Note Regarding Forward-Looking Statements.” Our actual results may differ materially. The Company does not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report.*

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.

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 (to date, only 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 hash calculation services 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, and records how much hash rate each participant contributes to the pool. Pools typically pay rewards in two different ways: as a percentage of the total reward received by the mining pool each day based on each pool participant’s proportionate share of hashing power provided that day (the “Actual Reward Method”); or based on the theoretical reward the pool participant should have received each day based on its hashing power contributed to the pool each day times the difficulty index (the “Expected Reward Method”). We only use mining pools that pay rewards under the Expected Reward Method. Even though we plan to effect our self-mining operations in data centers that we own, we reserve the right to operate miners in third-party data centers when we receive advantageous terms and/or do not have sufficient capacity in our own data centers.

Our digital asset self-mining activity competes with a myriad of mining operations throughout the world to complete new blocks in the blockchain and earn the reward in the form of an established unit of a digital asset. Revenue from digital asset mining and hosting third party digital asset miners 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. Gross profits from digital asset mining are primarily impacted by the cost of electricity to operate the miners and to a lesser extent by other operating costs. While we expect to sell or exchange a portion of the digital assets we mine to fund our growth strategies or for general corporate purposes, we reserve the right to hold our digital assets as a long-term investment.

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.

We also generate revenues from the advantageous purchase and sale of equipment used for digital asset mining and hosting. We have relationships with some suppliers that enable us to acquire highly desired equipment at attractive prices, which we plan to resell to third parties. In most cases, resales of digital asset mining equipment would be to our hosting customers, which have the dual benefit of generating short-term gross profits from the equipment sale as well as growing the customer base of our hosting business.

The primary factors that will impact future hosting revenues include: (i) the price of bitcoin, since hosting revenues are primarily a percentage of bitcoin mined by clients; (ii) the completion of operational hosting facilities, as potential hosting clients have been reluctant to sign contracts prior to the date the Company has a fully operational hosting facility; and (iii) the availability of attractive electricity prices, since power usage is the primary marginal cost for any mining operation.

The primary factors that will impact proprietary mining revenues include: (i) the price of bitcoin; (ii) the completion of operational facilities to provide us with a cost-effective facility to operate in; (iii) the availability of attractive electricity prices, since power usage is the primary marginal cost for any mining operation; and (iv) the availability of mining equipment suitable for the Company’s immersion hosting environment at attractive prices and available capacity in the Company’s hosting facilities.

Revenues from cryptocurrency mining, whether derived from hosting clients or from proprietary mining, are impacted significantly 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. Below are changes in key metrics effecting the profitability of mining Bitcoin during the six months ended February 29, 2024:

The primary factors that will impact resales of mining equipment include the availability of equipment at attractive prices and the number of participants willing to enter the mining business or expand their existing operations, which is highly correlated to the margin from mining, as determined by the market price of bitcoin and prevailing energy costs. Also, our resales of mining equipment will be impacted by the existence of hosting capacity with attractive electricity rates in our hosting operations.

Trinidad Operations

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.

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 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, which TSTT disputed. At this time, the dispute has been resolved, the site became operational in October 2023, and our rate for electricity will be TSTT’s existing rate 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. As of April 9, 2024, we had 135 miners located at our initial TSTT facility. While our TSTT site was delayed pending electrification, we entered into a hosting agreement with a third party in Trinidad to host up to 192 miners in one immersion container until August 31, 2024. We do not pay a hosting fee for this space, but we do reimburse the host for its actual electricity costs, which are a variable rate that averages approximately $0.05 per kwh each month. We are also leasing space with a third party on an at will basis to co-host 56 miners, for which we pay a flat rate of $0.06 per kwh for the electricity used by our miners. We ultimately intend to move all of our currently owned and customer owned miners to our new TSTT hosting facilities.

Despite the expective favorable resolution of our dispute in Trinidad, we are currently focusing our efforts on the development of hosting centers in the United States and Canada, both directly and in joint ventures with third parties. 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.

Pecos, Texas Operations

In October 2022, we entered into a joint venture arrangement with ROC Digital Mining to jointly develop and operate a Bitcoin mining operation in Pecos, Texas. Under the joint venture, we contributed one immersion container, six transformers and cash with a value of $987,429 as a capital contribution to ROC Digital Mining I, LLC (the “ROC Digital”). In return, we received 240 Class B Units of ROC Digital pursuant to an ongoing offering of a total of 1,000 Class B Units at $4,400 per unit. We simultaneously sold ROC Digital four immersion containers for $1,200,000, which is payable pursuant to a promissory note the bears interest at 5% per annum, and is payable pursuant to monthly payments of $31,203.64 per month commencing on December 30, 2022, with any remaining principal and interest payable in full on May 31, 2026. The note is secured by the equipment that was sold. We also obtained the right to locate one container at the location that we would be able to use for self-mining. As of August 31, 2023 the note receivable from ROC Digital amounted to $1,029,721.

Any distributions of assets by ROC Digital are allocated as follows: i) 100% to the Class B Members until each Class B Member has received the return of its capital contributions; ii) 100% to the Class B Members until each Class B Member has received a non-compounded preferred return of 1% per month (12% per year) on its capital contribution, provided that a Class Member will no longer entitled to a preferred return once it has received total distributions equal to five times its capital contributions; iii) 70% to the Class Members and 30% to the Class A Members until each Class B Member has received total distributions equal to three times its capital contributions; (iv) 60% to the Class Members and 40% to the Class A Members until each Class B Member has received total distributions equal to four times its capital contributions; (v) 50% to the Class Members and 50% to the Class A Members until the seventh anniversary of the final closing of Class B Units; and (vi) thereafter, all to the Class A Members.

ROC Digital is managed by ROC Digital Mining Manager LLC (“ROC Manager”), which owns all of the Class A Units of ROC Digital. The Class A Units have the sole right to vote on any matter that requires a vote of members, including in the selection of the manager. We own 33 1/3% of ROC Manager. ROC Manager is managed by from one to three managers selected by a vote of the members. We do not currently have a representative or designee serving as manager of ROC Manager. However, the operating agreement for ROC Manager provides that ROC Manager may not take a number of actions in relation to ROC Digital without the unanimous consent of its members, such as incurring more than $50,000 of indebtedness, approval of operating budget, filing for bankruptcy, making any material change in ROC Digital’s business, merging, consolidating or combining ROC Digital with another entity, selling off a substantial part of ROC Digital’s assets, amending the operating agreement of ROC Digital, or causing ROC Digital to enter into any agreement with a related party.

Day to day management of the operations of ROC Digital is provided by ROC Digital Mining LLC (“ROC Mining”), an affiliate of ROC Manager in which we do not have an interest. ROC Mining is entitled to a monthly management fee equal to 3% of ROC Digital’s gross revenue, subject to a monthly minimum of $10,000 and a monthly maximum of $15,000. In additional ROC Mining is entitled to an acquisition fee of 1% of the cost of any assets acquired by ROC Digital.

Our joint venture partner initially expected the site would be operational by December 31, 2022. After the site work was substantially completed, the commencement of operations was delayed as a result of a request by the electricity provider for an additional deposit as a result of recent bankruptcies in the mining and hosting industry. In addition, a dispute with the joint venture’s vendor for ASIC miners delayed the delivery of miners for the facility.

In April 2023, the joint venture entered into a new one year agreement with the electricity provider, under which the site will receive electricity at $0.03991 per kwh for at least 95% of the annualized hourly intervals during the period. The initial agreement had a term of four years and seven months, and supplied electricity at $0.06896 per kwh, which the joint venture expected to reduce by reselling electricity during peak periods. The new agreement provides the joint venture with more predictable pricing, although a new agreement will need to be negotiated after the one year term. At the same time, we finalized a hosting agreement with the joint venture, under which we will locate one immersion container at the site for $500 per month, plus payment of our pro rata share of electricity, internet and insurance for the site. Under the hosting agreement, we also agreed to contribute $100,000 toward the electricity deposit for the site, which is refundable to us at the earlier of the date the electricity provider releases the deposit or 90 days after the expiration or termination of the hosting agreement. The hosting agreement has a term of one year, subject to our right to renew the agreement for two one year terms after receipt of notice of the renewal terms of the joint venture’s electricity supply agreement for the upcoming year. The site became fully electrified in June 2023. As of April 9, 2024, we had deployed 145 Antminer S-19 pro miners to our hosting container at the site. The joint venture has filled its five immersion containers with ASIC miners provided by hosting clients, although the hosting clients agreements currently terminate in April 2024.

Murray, Kentucky Operations

On October 4, 2023, the Company purchased 1,050 used ASIC miners from Luxor Technology Corporation (“Luxor”) for $488,775, and simultaneously entered into a Co-Location Services Agreement to host the miners at a hosting facility owned by Soluna SW, LLC (“Soluna”) in Murray, Kentucky. The hosting agreement with Soluna has a term of 18 months, and provides that the Company is obligated to reimburse Soluna for the actual cost of the electricity used by the Company’s machines and pay a hosting fee equal to 50% of the net profit generated by the machines each month. The hosting fee is payable in bitcoin. The hosting facility has an electricity cost of $0.025 per kwh and guarantees uptime of 83% per week.

Miner Summary

Set forth below is a summary of the Company’s ASIC miner inventory as of February 29, 2024:

Results of Operations

Comparison of Results of Operations for the Three Months Ended February 29, 2024 and February 28, 2023.

Revenues

During the three months ended February 29, 2024, the Company generated $891,613 revenue, compared to $156,090 of revenue in the three months ended February 28, 2023.

During the three months ended February 29, 2024, the Company generated $861,026 in Bitcoin revenue from self-mining digital assets, compared to $104,526 of revenue from self-mining in the three months ended February 28, 2023. At February 29, 2024, the Company owned 1,644 miners, of which 1,526 were deployed for self-mining. The number of undeployed miners was mainly impacted by miners that were offline due to maintenance issues. Mining revenue should be lower in future periods as a halving expected to occur in April 2024 could significantly reduce the rewards from mining. However, the impact of the halving may be offset by a rise in the price of the bitcoin due to fewer miners online after halving event, as has historically occurred after a halving event. Mining revenues in the three months ended February 29, 2024 were positively impacted due to resolution of operating issues at the Company’s first hosting facilities in Trinidad and Pecos, Texas, and the commencement of operations at a facility in Murray, Kentucky that is hosted by a third-party.

Despite the expective favorable resolution of our dispute in Trinidad, we are currently focusing our efforts on the development of hosting centers in the United States and Canada, both directly and in joint ventures with third parties.

During the three months ended February 29, 2024 and February 28, 2023, the Company generated $20,471 in revenue from equipment sales, compared to $51,564 in revenue in the three months ended February 28, 2023. The revenue from equipment sales in the three months ended February 29, 2024 were derived from the following transactions:

• In October 2022, the Company sold four hosting containers to a joint venture that is constructing a hosting facility in Texas for $1,200,000. The purchase price is payable pursuant to a promissory note bearing interest at 5% per annum, and is paid by 41 equal monthly payments of $31,204 commencing December 30, 2022.
• In August 2022, the Company sold two hosting containers to a private party in Trinidad for $960,000. After a down payment of $50,000, the balance of the purchase price is payable pursuant to a promissory note bearing interest at 7.5% per annum, and is paid by 24 equal monthly payments of $40,950 commencing September 30, 2022. On February 1, 2023, the Company modified this agreement in conjunction with its entry into a new hosting agreement with the party, under which the Company agreed that the remaining principal balance of the note was $731,472, and that the note would be converted into an interest only note until August 31, 2024, at which time all principal and interest due is payable in full. In addition, the Company agreed to allow the note obligor to repay the note principal at a 10% discount if it was repaid prior to February 28, 2023.

Under the guidelines of ASC 606, the Company reports revenue from both equipment sales described above under the installment sale method, under which the Company reports its gross profit on the sales as payments are received from the purchaser. As of February 1, 2023, the Company reached an agreement with the obligor under the $910,000 note to convert the note into an interest only note commencing as of February 1, 2023, with a balloon payment being due at maturity on August 31, 2024, and an agreement that the principal balance on the note was $731,472. One effect of the agreement with the obligor is to materially reduce any deferred revenue associated with the sale, as the note is scheduled to receive interest only payments until August 31, 2024. As a result, the Company expects revenue from these two equipment sales to be lower in future periods. During the three months ended February 29, 2024, the Company recorded $20,471 in equipment sales as a result of the receipt of three payments of $31,204 each on the October 2022 note. No revenue was recorded on the August 2022 note since all payments were of interest only.

In future periods, the Company expects to generate additional revenues from the resale of certain hosting equipment, primarily containers and transformers, and of miners in “buy/host” transactions, in which the Company sells miners already installed in its hosting facilities to buyers that simultaneously execute a hosting agreement for the purchased miners, and in some cases additional miners.

The Company generated $10,116 in revenues from hosting in the three months ended February 29, 2024, as compared to $-0- in hosting revenues in the three months ended February 28, 2023. The Company did not have any hosting clients during the three months ended February 29, 2023. In June 2023, the Company signed two new hosting clients. In the current market environment, the price of ASIC miners has fallen to the point that we believe self-mining is more profitable than hosting third party miners, however we will pursue hosting opportunities on a selective basis. While the Company still sees good opportunities to acquire mining equipment at attractive prices, the price of mining equipment has recently increased with the recent increase in the price of Bitcoin.

The primary factors that will impact our revenues in subsequent periods are described in the “—Overview” above.

Cost of Sales

Cost of sales were $567,991 in the three months ended February 29, 2024, compared to $95,457 in the three months ended February 28, 2023.

Cost of sales related to mining was $556,849 in the three months ended February 29, 2024, compared to $93,957 in the three months ended February 28, 2023. Cost of sales normally includes electricity, utilities, facilities costs, and supplies where we perform mining from our own facilities, but not depreciation of equipment, which is stated separately. Major components of cost of sales include rent to house mining and hosting equipment, electricity, and supplies. Where our miners are hosted by third parties, cost of sales normally includes hosting fees and/or electricity costs. The Company believes that cost of sales related to mining as a percentage of revenues will be greater in futures periods as revenues will be adversely impacted by a halving that is expected to occur in April 2024.

The table below describes the average cost of mining each bitcoin for the three months ended February 29, 2024 and February 28, 2023, and the total energy usage and cost per each kilowatt hour (“KWH”) utilized within our facilities.

(1) Weighted average cost of mining one bitcoin is calculated by dividing the sum of total energy expense, other direct costs of mining and depreciation (owned facilities) and energy costs, hosting fee expense and depreciation (hosted facilities) by the total bitcoin mined during the respective periods.

(2) Average revenue of each bitcoin mined is calculated by dividing the sum of bitcoin mining revenue for both owned and hosted facilities by the total number of bitcoin mined during the respective periods. We have determined that Coinbase is the principal market for valuing bitcoin transactions and uses the daily closing prices as the source of recording revenue.

Energy prices can be highly volatile and global events (including the war in Ukraine and the resulting natural gas shortage) have caused fuel prices, and to a lesser extent power prices, to fluctuate widely over the past year. All of our sites are currently subject to relatively fixed rates during the term of their current power supply agreements, but variable prices and market rate fluctuations with respect to wholesale power costs over the long-term. While this renders energy prices less predictable, it also gives us greater ability and flexibility to actively manage the energy we consume with an eye towards increasing profitability and energy efficiency. Energy prices are also highly sensitive to weather events, such as winter storms and polar vortices, which increase the demand for power regionally. When such events occur, we may curtail our operations to avoid using power at increased rates.

Cost of sales related to hosting was $11,142 in the three months ended February 29, 2024, compared to $-0- in the three months ended February 28, 2023. Cost of sales normally includes utilities, facilities costs, and supplies. Unlike cost of sales from mining, cost of sales from hosting does not include electricity costs, as such costs are passed on to the hosting client.

Cost of sales related to sales of mining equipment was $-0- for the three months ended February 29, 2024, compared to $1,500 in the three months ended February 28, 2023. Cost of sales from equipment sales includes the purchase price of equipment sold, plus shipping and value added tax on the equipment for sales reported under the completed sales method. There is no cost of sales associated with equipment sales reported under the installment sales method. Cost of sales from equipment sales in the six months ended February 28, 2024 and 2023 were low as a result of the fact that most of the equipment sales in those periods were reported under the installment sales method under the guidelines of ASC 606.

Operating Expenses

During the three months ended February 29, 2024, the Company incurred $972,363 in operating expenses, compared to $349,580 in operating expenses during the three months ended February 28, 2023. Major components of operating expenses for the 2024 period as compared to the 2023 period were:

The higher level of operating expenses in the 2024 period as compared to the 2023 period is partly attributable to increased depreciation in 2024 as compared 2023 as a result of higher level of equipment in service, and increased related party compensation in 2024 as compared to 2023. Included in operating expenses in the three months ended February 29, 2024 was $277,465 in non-cash expenses due to the issuance of common stock for professional services and to related parties as compensation, as compared to $49,785 in the three months ended February 28, 2023. Additionally, we incurred $235,370 in depreciation expense in the three months ended February 29, 2024 due to the deployment of new mining equipment compared to $88,213 during the same three month period in 2023. The Company expects that operating expenses will trend materially higher in future periods as the Company begins paying regular compensation to existing officers and directors, hires additional employees, and incurs other costs, such as increased depreciation expense due to the addition of new mining equipment and the completion of the buildout of the operating facilities.

Other Income (Expense)

During the three months ended February 29, 2024, the Company had $253,941 in other (expense), net as compared to $18,460 of other (expense) in the three months ended February 28, 2023. The significant increase in other (expense) was mainly attributable to a number of factors, including higher interest expense in the three months ended February 29, 2024 of $54,279 as compared to $22,211 in the three months ended February 28, 2023, which was due to higher outstanding loan balances during the 2024 period compared to the 2023 period. The Company also recorded a loss of $183,670 from the extinguishment of debt in the 2024 period compared to $-0- in the 2023 period, a loss of $68,559 from the Company’s investment in ROC Digital in 2024 period compared to $-0- in the 2023 period, and income of $37,777 from a change in derivative liability in 2024 as compared to $-0- in 2023.

In addition, the Company recorded interest income of $14,791 in the three months ended February 29, 2024 compared to $3,751 in the three months ended February 28, 2023.

Net (Loss)

As a result of the foregoing, during the three months ended February 29, 2024, the Company incurred a net loss of $902,682 or $(0.02) per share, as compared to a net loss of $307,407 or $(0.01) per share during the three months ended February 28, 2023. The increase in the Company’s net loss in the three months ended February 29, 2024, compared to the three months ended February 28, 2023, is attributable to the factors discussed above.

Comparison of Results of Operations for the Six Months Ended February 29, 2024 and February 28, 2023.

Revenues

During the six months ended February 29, 2024, the Company generated $1,402,921 revenue, compared to $257,807 of revenue in the six months ended February 28, 2023.

During the six months ended February 29, 2024, the Company generated $1,190,749 in Bitcoin revenue from self-mining digital assets, compared to $133,443 of revenue from self-mining in the six months ended February 28, 2023. At February 29, 2024, the Company owned 1,644 miners, of which 1,526 were deployed for self-mining. The number of undeployed miners was mainly impacted by miners that were offline due to maintenance issues. Mining revenue should be lower in future periods as a halving expected to occur in April 2024 could significantly reduce the rewards from mining. However, the impact of the halving may be offset by a rise in the price of the bitcoin due to fewer miners online after halving event, as has historically occurred after a halving event. Mining revenues in the six months ended February 29, 2024 were positively impacted due to resolution of operating issues at the Company’s first hosting facilities in Trinidad and Pecos, Texas, and the commencement of operations at a facility in Murray, Kentucky that is hosted by a third-party.

Despite the expective favorable resolution of our dispute in Trinidad, we are currently focusing our efforts on the development of hosting centers in the United States and Canada, both directly and in joint ventures with third parties.

During the six months ended February 29, 2024 and February 28, 2023, the Company generated $190,192 in revenue from equipment sales, compared to $124,364 in revenue in the six months ended February 28, 2023. The revenue from equipment sales in the six months ended February 29, 2024 were derived from the following transactions:

• In October 2022, the Company sold four hosting containers to a joint venture that is constructing a hosting facility in Texas for $1,200,000. The purchase price is payable pursuant to a promissory note bearing interest at 5% per annum, and is paid by 41 equal monthly payments of $31,204 commencing December 30, 2022.
• In August 2022, the Company sold two hosting containers to a private party in Trinidad for $960,000. After a down payment of $50,000, the balance of the purchase price is payable pursuant to a promissory note bearing interest at 7.5% per annum, and is paid by 24 equal monthly payments of $40,950 commencing September 30, 2022. On February 1, 2023, the Company modified this agreement in conjunction with its entry into a new hosting agreement with the party, under which the Company agreed that the remaining principal balance of the note was $731,472, and that the note would be converted into an interest only note until August 31, 2024, at which time all principal and interest due is payable in full. In addition, the Company agreed to allow the note obligor to repay the note principal at a 10% discount if it was repaid prior to February 28, 2023.

Under the guidelines of ASC 606, the Company reports revenue from both equipment sales described above under the installment sale method, under which the Company reports its gross profit on the sales as payments are received from the purchaser. As of February 1, 2023, the Company reached an agreement with the obligor under the $910,000 note to convert the note into an interest only note commencing as of February 1, 2023, with a balloon payment being due at maturity on August 31, 2024, and an agreement that the principal balance on the note was $731,472. One effect of the agreement with the obligor is to materially reduce any deferred revenue associated with the sale, as the note is scheduled to receive interest only payments until August 31, 2024. As a result, the Company expects revenue from these two equipment sales to be lower in future periods. During the six months ended February 29, 2024, the Company recorded $40,942 in equipment sales as a result of the receipt of six payments of $31,204 each on the October 2022 note. No revenue was recorded on the August 2022 note since all payments were of interest only.

During the six months ended February 29, 2024, the Company sold 100 new ASIC miners to a third party for $149,250. Under the guidelines of ASC 606, the Company reported revenue from the June 2023 equipment sales under the completed sale method.

In future periods, the Company expects to generate additional revenues from the resale of certain hosting equipment, primarily containers and transformers, and of miners in “buy/host” transactions, in which the Company sells miners already installed in its hosting facilities to buyers that simultaneously execute a hosting agreement for the purchased miners, and in some cases additional miners.

The Company generated $21,980 in revenues from hosting in the six months ended February 29, 2024, as compared to $-0- in hosting revenues in the six months ended February 28, 2023. The Company did not have any hosting clients during the three months ended February 29, 2023. In June 2023, the Company signed two new hosting clients. In the current market environment, the price of ASIC miners has fallen to the point that we believe self-mining is more profitable than hosting third party miners, however we will pursue hosting opportunities on a selective basis. While the Company still sees good opportunities to acquire mining equipment at attractive prices, the price of mining equipment has recently increased with the recent increase in the price of Bitcoin.

The primary factors that will impact our revenues in subsequent periods are described in the “—Overview” above.

Cost of Sales

Cost of sales were $975,217 in the six months ended February 29, 2024, compared to $213,932 in the six months ended February 28, 2023.

Cost of sales related to mining was $779,791 in the six months ended February 29, 2024, compared to $169,352 in the six months ended February 28, 2023. Cost of sales normally includes electricity, utilities, facilities costs, and supplies where we perform mining from our own facilities, but not depreciation of equipment, which is stated separately. Major components of cost of sales include rent to house mining and hosting equipment, electricity, and supplies. Where our miners are hosted by third parties, cost of sales normally includes hosting fees and/or electricity costs. The Company believes that cost of sales related to mining as a percentage of revenues will be greater in futures periods as revenues will be adversely impacted by a halving that is expected to occur in April 2024.

The table below describes the average cost of mining each bitcoin for the six months ended February 29, 2024 and February 28, 2023, and the total energy usage and cost per each kilowatt hour (“KWH”) utilized within our facilities.

(1) Weighted average cost of mining one bitcoin is calculated by dividing the sum of total energy expense, other direct costs of mining and depreciation (owned facilities) and energy costs, hosting fee expense and depreciation (hosted facilities) by the total bitcoin mined during the respective periods.

(2) Average revenue of each bitcoin mined is calculated by dividing the sum of bitcoin mining revenue for both owned and hosted facilities by the total number of bitcoin mined during the respective periods. We have determined that Coinbase is the principal market for valuing bitcoin transactions and uses the daily closing prices as the source of recording revenue.

Energy prices can be highly volatile and global events (including the war in Ukraine and the resulting natural gas shortage) have caused fuel prices, and to a lesser extent power prices, to fluctuate widely over the past year. All of our sites are currently subject to relatively fixed rates during the term of their current power supply agreements, but variable prices and market rate fluctuations with respect to wholesale power costs over the long-term. While this renders energy prices less predictable, it also gives us greater ability and flexibility to actively manage the energy we consume with an eye towards increasing profitability and energy efficiency. Energy prices are also highly sensitive to weather events, such as winter storms and polar vortices, which increase the demand for power regionally. When such events occur, we may curtail our operations to avoid using power at increased rates.

Cost of sales related to hosting was $14,534 in the six months ended February 29, 2024, compared to $-0- in the six months ended February 28, 2023. Cost of sales normally includes utilities, facilities costs, and supplies. Unlike cost of sales from mining, cost of sales from hosting does not include electricity costs, as such costs are passed on to the hosting client.

Cost of sales related to sales of mining equipment was $180,891 for the six months ended February 29, 2024, compared to $44,580 in the six months ended February 28, 2023. Cost of sales from equipment sales includes the purchase price of equipment sold, plus shipping and value added tax on the equipment for sales reported under the completed sales method. There is no cost of sales associated with equipment sales reported under the installment sales method. Cost of sales from equipment sales in the six months ended February 28, 2024 and 2023 were low as a result of the fact that most of the equipment sales in those periods were reported under the installment sales method under the guidelines of ASC 606.

Since we are in the early stages of setting up our infrastructure to generate higher levels of revenues, we expect that our cost of sales as a percentage of revenue from hosting or mining for our own account will be higher than we expect to incur when we achieve sufficient economies of scale by deploying more miners. In future periods, the largest component of our cost of sales will consist of electricity costs.

Operating Expenses

During the six months ended February 29, 2024, the Company incurred $1,686,294 in operating expenses, compared to $824,716 in operating expenses during the six months ended February 28, 2023. Major components of operating expenses for the 2024 period as compared to the 2023 period were:

The higher level of operating expenses in the 2024 period as compared to the 2023 period is partly attributable to increased depreciation in 2024 as compared 2023 as a result of higher level of equipment in service, and increased related party compensation in 2024 as compared to 2023. Included in operating expenses in the six months ended February 29, 2024 was $554,931 in non-cash expenses due to the issuance of common stock for professional services and to related parties as compensation, as compared to $125,214 in the six months ended February 28, 2023. Additionally, we incurred $457,901 in depreciation expense in the six months ended February 29, 2024 due to the deployment of new mining equipment compared to $147,265 during the same six month period in 2023. The Company expects that operating expenses will trend materially higher in future periods as the Company begins paying regular compensation to existing officers and directors, hires additional employees, and incurs other costs, such as increased depreciation expense due to the addition of new mining equipment and the completion of the buildout of the operating facilities.

Other Income (Expense)

During the six months ended February 29, 2024, the Company had $571,931 in other (expense), net as compared to $2,770 of other income, net in the six months ended February 28, 2023. The significant increase in other (expense) was mainly attributable to a number of factors, including higher interest expense in the six months ended February 29, 2024 of $153,699 as compared to $27,019 in the six months ended February 28, 2023, which was due to higher outstanding loan balances during the 2024 period compared to the 2023 period. The Company also recorded a loss of $221,208 from the extinguishment of debt, a loss of $111,773 from the Company’s investment in ROC Digital and an expense of $114,835 from a change in derivative liability in 2024 as compared to $-0- for these three categories in 2023.

In addition, the Company recorded interest income of $29,584 in the six months ended February 29, 2024 compared to $12,850 in the six months ended February 28, 2023.

Net (Loss)

As a result of the foregoing, during the six months ended February 29, 2024, the Company incurred a net loss of $1,830,522, or $(0.04) per share, as compared to a net loss of 778,071 or $(0.02) per share during the six months ended February 28, 2023. The increase in the Company’s net loss in the six months ended February 29, 2024, compared to the six months ended February 28, 2023, is attributable to the factors discussed above.

Liquidity and Capital Resources

As of February 29, 2024, the Company had $342,296 in cash on hand.

During the six months ended February 29, 2024, the Company had a net loss of $1,830,522.

Cash flows used in operating activities were $204,304 for the six months ended February 29, 2024, compared to cash flows used of $452,160 for the six months ended February 28, 2023. The decrease in cash flows used in operating activities for the six months ended February 29, 2024 was primarily attributable a change in balance sheet accounts in 2024 compared to 2023, partially offset by a decrease in profitability in 2024 net of non-cash items.

Cash flows used in investing activities were $48,946 for the six months ended February 29, 2024, compared to cash flows used in investing activities of $469,843 for the six months ended February 28, 2023. Cash flows used in investing activities consisted primarily of purchases of $57,335 and $469,843 in equipment, respectively in the 2024 and 2023 periods. In the 2024 period the Company also received a return on investment of $8,408.

Cash flows provided by financing activities were $325,000 for the six months ended February 29, 2024, compared to cash flows provided by financing activities of $800,00 for the six months ended February 28, 2023. The cash flows provided by financing activities in both periods in both the 2024 and 2023 period were made pursuant to a line of credit with Innovative Digital Investors Emerging Technology, L.P. (“IDI”), a limited partnership controlled by Jonathan Bates, our Chairman, and Raymond Mow, our chief financial officer.

On October 19, 2022, the Company entered into a new Line of Credit Agreement with IDI (the “2022 LOC Agreement”), under which the Company has the right to borrow up to $1,000,000 to finance the purchase of equipment necessary for the operation of the Company’s business, and related working capital. Loans under the 2022 LOC Agreement accrue interest at twelve percent (12%) per annum, compounded on a 30/360 monthly basis until the loans have been repaid in full. Effective May 13, 2023, the Company and IDI amended the 2022 LOC Agreement. As amended, the 2022 LOC Agreement allows the Company to up to $1,750,000 thereunder until December 1, 2023. Each draw request is subject to the approval of IDI in its sole discretion. As amended, all principal and interest due under the 2022 LOC Agreement are due and payable on December 1, 2024. As of February 29, 2024, the amount borrowed under the 2022 LOC Agreement was $1,650,000.

The Company believes that cash on hand, amounts that it may borrow under the 2022 LOC Agreement, expected receipts from the sale of equipment, and revenues from self-mining and hosting will provide it with sufficient liquidity to fund its operations for the next 12 months. The Company expects revenue from self-mining to decrease following the halving expected to occur in April 2024, but the decrease will be mitigated by an expected increase in the price of bitcoin, as has typically happened following a halving event, as well as increased cash flow from our Murray, Kentucky miners after the derivative financing used to acquire them is repaid. The halving will reduce the block rewards from mining by exactly 50%. However, the halving will not reduce revenues from self-mining by exactly 50% since part of the rewards consist of transaction fees which are not impacted by the halving. In recent periods, transaction fees have made up an ever-increasing share of mining revenue due to the impact of “ordinals,” which are increased transaction fees that occur result as parties have discovered ways to imbed data regarding other assets, such as art, in the bitcoin blockchain. In past halving events, the price of bitcoin typically increased in the six months after the halving event, in part as a result of the retirement of miners that were rendered uneconomic as a result of the reduced rewards. Furthermore, there has been a sufficient increase in the price of bitcoin this fiscal year, which will lessen the impact of the halving event. Nevertheless, the upcoming halving event has increased the difficulty of predicting cash flows from mining activities for all industry participants, including the Company.

The Company also expects to receive approximately $4,572 in interest payments monthly from the sale of two immersion containers in August 2022, and approximately $31,000 per month from the sale of four immersion containers to a joint venture in which the Company is both a lender to and equity investor. While the Company is scheduled to receive a balloon payment of approximately $734,000 in principal in August 2024, the Company expects to extend the maturity of that note to a later date. The Company does not budget to include any further equity distributions from ROC Digital in the short-term, as ROC Digital will have significant vacancies in its facilities when an agreement with a major hosting client expires in April 2024, and it is unknown how long it will take the joint venture to fill the facility with a new hosting client or its own miners. The Company does not budget to include any proceeds from the exercise of its outstanding warrants because it is not able to predict when or if the market price of its common stock will exceed the exercise price of its warrants. Nevertheless, the Company still may not achieve profitable operations within the next 12 months. In that event, the Company may need to raise additional capital or liquidate part of its operations to sustain its business. At this time, the Company does not have any commitments for additional capital after the next 12 months, and there is no assurance that it be able to locate additional capital on terms that are not unduly dilutive to existing shareholders.

Nevertheless, while the Company does not need additional capital to maintain operations, it will need additional capital to expand its digital asset hosting and mining business, and take advantage of opportunities in the marketplace that currently exist due to the recent decline in digital asset prices. Therefore, the Company has engaged an investment banker and is pursuing additional capital-raising alternatives, including the potential issuance of common stock in a private placement, or the issuance of convertible notes or preferred stock. There is no assurance that the Company will be able to raise additional capital or that the terms of any capital raise are not dilutive to current shareholders or carry other terms that are unfavorable to the Company and its shareholders.

Critical Accounting Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or “GAAP.” The preparation of these condensed financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed financial statements, and the reported amounts of revenue and expenses during the reported period. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are fully described in Note 1 to our condensed financial statements appearing elsewhere in this Quarterly Report, and we believe those accounting policies are critical to the process of making significant judgments and estimates in the preparation of our condensed financial statements.

Off-Balance Sheet Arrangements

None.

Evaluation of Disclosure Controls and Procedures.

Our Principal Executive Officer and Principal Financial Officer, with the assistance of management, conducted an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of February 29, 2024. These controls are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”), and that such information is accumulated and communicated to our management, including the Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting.

During the quarter ended February 29, 2024, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item. However, please carefully consider the information set forth in this Quarterly Report on Form 10-Q and the risk factors discussed in Part I, Item I A. of our Annual Report on Form 10-K for the year ended August 31, 2023, which could materially affect our business, financial condition or future results. In evaluating our business, you should carefully consider the risk factors discussed in our Annual Report on Form 10-K, as updated by our subsequent filings under the Exchange Act. The occurrence of any of the risks discussed in such filings, or other events that we do not currently anticipate or that we currently deem immaterial, could harm our business, prospects, financial condition and results of operations. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. Furthermore, we are amending the following risk factors that were set forth in prior reports filed with the SEC:

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 (if any) we mine or otherwise acquire or hold 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 (if any) 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.

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 (if any) we mine or otherwise acquire or hold for our own account.

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:

• global digital asset supply;
• 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;
• investors’ expectations with respect to the rate of inflation of fiat currencies;
• investors’ expectations with respect to the rate of deflation of digital assets;
• cyber theft of digital assets from online wallet providers, or news of such theft from such providers or from individuals’ online wallets;
• the availability and popularity of businesses that provide digital asset-related services;
• fees associated with processing a digital asset transaction;
• changes in the software, software requirements or hardware requirements underlying digital assets;
• changes in the rights, obligations, incentives, or rewards for the various participants in digital asset mining;
• interest rates;
• currency exchange rates, including the rates at which digital assets may be exchanged for fiat currencies;
• fiat currency withdrawal and deposit policies on digital asset exchanges and liquidity on such exchanges;
• interruptions in service or failures of major digital asset exchanges;
• investment and trading activities of large investors, including private and registered funds, that may directly or indirectly invest in digital assets;
• momentum pricing;
• monetary policies of governments, trade restrictions, currency devaluations and revaluations;
• 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;
• global or regional political, economic or financial events and conditions;
• 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
• with respect to Bitcoin, increased competition from other forms of digital assets or payments services.

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We are dependent on the sale of bitcoin that we generate from our self-mining operations to pay any of our expenses that are payable in U.S. Dollars. We generally liquidate our bitcoin within 2-3 weeks of receipt in order to pay operational expenses. Therefore, we do not expect to incur material losses on bitcoin that we hold due to the short holding period. However, the lack of a set policy on how long we hold bitcoin, combined with the volatility of bitcoin prices, makes it more likely that we experience losses from holding bitcoin, which could have a material, adverse impact on our liquidity and our business.

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.