20-F 1 ea0201198-20f_bit.htm ANNUAL REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

 REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2023

 

OR

 

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ___________.

 

OR

 

 SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report:

 

Commission file number: 001-38421

 

Bit Digital, Inc.

(Exact name of Registrant as Specified in its Charter)

 

Cayman Islands

(Jurisdiction of Incorporation or Organization)

 

33 Irving Place, New York, NY United States 10003

(Address of Principal Executive Offices)

 

Samir Tabar

Chief Executive Officer

Tel: (212) 463-5121; sam@bit-digital.com

33 Irving Place, New York, NY United States 10003

(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class   Name of Each Exchange on Which Registered
Ordinary shares, par value US$0.01 per share   Nasdaq Capital Market

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

None

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

None

(Title of Class)

 

 

 

 

The number of outstanding shares of each of the issuer’s classes of capital or Ordinary Shares as of December 31, 2023 was: 107,291,827 ordinary shares, par value $0.01 per share.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes ☐  No ☐

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

Yes ☐  No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Emerging growth company 

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

Indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP International Financial Reporting Standards as issued by the
International Accounting Standards Board
Other

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow: Item 17 ☐ Item 18 ☐

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No 

 

As of June 30, 2023, the last business day of the registrant’s second quarter of most recently completed fiscal year, the aggregate market value of the 84,783,128 ordinary shares held by non-affiliates of the registrant was approximately $344,219,500 based on the closing price of $4.06 as reported on the Nasdaq Capital Market for the registrant’s 85,028,667 ordinary shares. 

 

 

 

 

 

 

BIT DIGITAL, INC.

FORM 20-F ANNUAL REPORT

 

TABLE OF CONTENTS

 

    Page
PART I
Item 1. Identity of Directors, Senior Management and Advisers 1
Item 2. Offer Statistics and Expected Timetable 1
Item 3. Key Information 2
Item 4. Information on The Company 51
Item 4A. Unresolved Staff Comments 83
Item 5. Operating and Financial Review and Prospects 84
Item 6. Directors, Senior Management and Employees 105
Item 7. Major Shareholders and Related Party Transactions 114
Item 8. Financial Information 114
Item 9. The Offer and Listing 115
Item 10. Additional Information 115
Item 11. Quantitative and Qualitative Disclosures About Market Risk 130
Item 12. Description of Securities Other Than Equity Securities 130
  PART II  
Item 13. Defaults, Dividend Arrearages and Delinquencies 131
Item 14. Material Modifications to The Rights of Security Holders and Use of Proceeds 131
Item 15. Controls and Procedures 131
Item 16. [Reserved] 133
Item 16A. Audit Committee Financial Expert 133
Item 16B. Code of Ethics 133
Item 16C. Principal Accountant Fees and Services 133
Item 16D. Exemptions from The Listing Standards for Audit Committees 134
Item 16E. Purchases of Equity Securities by The Issuer and Affiliated Purchasers 134
Item 16F. Change in Registrant’s Certifying Accountant 134
Item 16G. Corporate Governance 134
Item 16H. Mine Safety Disclosure 134
Item 16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. 134
Item 16J. Insider Trading Policies 135
Item 16K. Cybersecurity 135
  PART III  
Item 17. Financial Statements F-1
     
Item 18. Exhibits 136

 

-i-

 

 

PART I

 

CERTAIN INFORMATION

 

In this Annual Report on Form 20-F, all references to “we,” “us,” “our,” “Company,” “Registrant” or similar terms used in this report refer to Bit Digital, Inc., a Cayman Islands exempted company (“Bit Digital”), including its consolidated subsidiaries, unless the context otherwise indicates. We currently conduct our business primarily through Bit Digital U.S.A. Inc., a Delaware corporation and our operating entity in the United States; Bit Digital Canada, Inc., our operating entity in Canada; Bit Digital Singapore Pte Ltd., a Singapore company; Bit Digital Hong Kong Limited and Bit Digital Strategies Limited, Hong Kong companies; and Bit Digital AI Inc. the parent company of Bit Digital Iceland ehf, our operating entity in Iceland.

 

FORWARD-LOOKING STATEMENTS

 

This report contains “forward-looking statements” for purposes of the safe harbor provisions provided by Section 27 of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that represent our beliefs, projections and predictions about future events. All statements other than statements of historical fact are “forward-looking statements,” including any projections of earnings, revenue or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed new projects or other developments, any statements regarding future economic conditions or performance, any statements of management’s beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the foregoing. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and similar expressions, as well as statements in the future tense, identify forward-looking statements.

 

These statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements described in or implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements, including with respect to correct measurement and identification of factors affecting our business or the extent of their likely impact, and the accuracy and completeness of the publicly available information with respect to the factors upon which our business strategy is based or the success of our business.

 

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, those factors discussed under the headings “Prospectus Summary”, “Risk Factors”, and elsewhere in this report.

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not Applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not Applicable.

 

1

 

 

ITEM 3. KEY INFORMATION

 

3.A. Selected Financial Data

 

Consolidated Statements of Operations

 

The following summary consolidated financial statements should be read in conjunction with our consolidated financial statements, the notes thereto and other information, included elsewhere in this report.

 

The following summary consolidated financial statements for the years ended 2023, 2022, and 2021 are derived from our audited consolidated financial statements included elsewhere in this report. Our consolidated financial statements are prepared and presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.

 

Our historical results for any period are not necessarily indicative of results to be expected for any future period. You should read the following summary financial information in conjunction with the consolidated financial statements and related notes and the information under “ITEM 5. Operating and Financial Review and Prospects” included elsewhere in this report.

 

Consolidated Statements of Operations

 

   For the Years Ended December 31, 
   2023   2022   2021 
Revenues  $44,916,131   $32,296,593   $96,078,570 
                
Operating costs and expenses               
Cost of revenues (exclusive of depreciation and amortization shown below)   (29,556,585)   (20,374,633)   (30,739,776)
Depreciation and amortization expenses   (14,426,733)   (27,829,730)   (13,113,964)
General and administrative expenses   (27,668,592)   (22,984,784)   (39,154,204)
Realized gain on exchange of digital assets   18,789,998    6,548,841    20,813,167 
Impairment of digital assets   (6,632,437)   (24,654,267)   (27,993,571)
Impairment of property and equipment   -    (50,038,650)   - 
Loss on write-off of deposit to hosting facility   (2,041,491)   (129,845)   - 
Total operating expenses   (61,535,840)   (139,463,068)   (90,188,348)
                
(Loss) income from operations   (16,619,709)   (107,166,475)   5,890,222 
                
Net (loss) gain from disposal of property and equipment   (165,160)   1,353,299    (3,746,247)
Gain from sale of investment security   8,220    1,039,999    - 
Other income (expense), net   3,162,412    (1,116,276)   702,414 
Total other income (expense), net   3,005,472    1,277,022    (3,043,833)
                
(Loss) income before income taxes   (13,614,237)   (105,889,453)   2,846,389 
                
Income tax (expenses) benefits   (279,044)   592,850    (3,856,341)
Net loss   (13,893,281)   (105,296,603)   (1,009,952)
                
Weighted average number of ordinary share outstanding               
Basic   87,534,052    78,614,174    55,440,527 
Diluted   87,534,052    78,614,174    55,440,527 
                
Loss per share               
Basic  $(0.16)  $(1.34)  $(0.02)
Diluted  $(0.16)  $(1.34)  $(0.02)

 

2

 

 

Consolidated Balance Sheet Data  

 

The following table presents our summary consolidated balance sheet data as of December 31, 2023 and 2022.

 

   December 31,
2023
   December 31,
2022
 
Cash and cash equivalents  $16,860,934   $32,691,060 
Restricted Cash   1,320,000    1,320,000 
USDC   405,596    626,441 
Digital assets   40,456,083    27,587,328 
Income tax receivable   -    736,445 
Other current assets   18,188,032    1,433,999 
Digital assets held in fund   6,115,538    - 
Total Current Assets   83,346,183    64,395,273 
Loans receivable   400,000    - 
Investment Securities   4,373,685    1,787,922 
Deposits for property and equipment   4,227,371    2,594,881 
Operating lease right-of-use assets   6,216,255    - 
Property and equipment, net   81,474,649    22,609,391 
Other non-current assets   9,290,239    9,033,200 
Total non-current assets   105,982,199    36,025,394 
Total Assets  $189,328,382   100,420,667 
Total Liabilities  $36,624,526    10,487,358 
Total Bit Digital, Inc.’s Shareholders’ Equity  $152,703,856    89,933,309 
Total Liabilities and Equity  $189,328,382    100,420,667 

 

3.B. Capitalization and Indebtedness

 

Not Applicable.

 

3.C. Reasons for The Offer and Use of Proceeds

 

Not Applicable.

 

3.D Risk Factors

 

3

 

 

 RISK FACTORS

 

An investment in our Ordinary Shares involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all other information contained in this report, including the matters discussed under the heading “Forward-Looking Statements” before you decide to invest in our Ordinary Shares. The Company may be subject to various legal and operational risks as a result of its previously being a China-based Issuer with substantial amounts of the Company’s operations previously in China and Hong Kong. The legal and regulatory environment in China is in many respects different from the United States. These risks and others could result in a material change in the value of our securities and/or significantly limit or completely limit or completely hinder our ability to offer or continue to offer our securities to investors and cause the value of such securities to significantly decline or be worthless. If any of the following risks, or any other risks and uncertainties that are not presently foreseeable to us, actually occur, our business, financial condition, results of operations, liquidity and our future growth prospects could be materially and adversely affected.

 

General Risks

 

We have a history of operating losses, and we may not be able to sustain profitability; we have recently shifted our digital assets mining business, and we may not be continuously successful in this business.

 

We experienced profitability from our continuing bitcoin mining operations in 2021. However, as a result of the decline in value of bitcoin in 2022 and the corresponding decline in revenue from digital assets mining, we recognized a net loss of $105.3 million for the year ended December 31, 2022 (“Fiscal 2022”), which included a $24.7 million impairment of digital assets and a $50.0 million impairment of property and equipment. We recognized a net loss of $13.9 million for the year ended December 31, 2023 (“Fiscal 2023”) representing a change of $91.4 million from Fiscal 2022. We may continue to incur losses and may have additional impairment of digital assets, as we continue to work to shift and grow our digital assets mining business. Our operations are focused on our bitcoin mining business located at our bitcoin mining facilities in the United States, Canada and Iceland, as well as our Ethereum staking operations. Our current business, including our growth strategy for our business, involves an industry that is itself new and constantly evolving and is subject risks, many of which are discussed below. See “Digital Assets Related Risks” below.

 

Our results of operations may fluctuate significantly and may not fully reflect the underlying performance of our business.

 

Our results of operations, including the levels of our net revenues, expenses, net loss and other key metrics, may vary significantly in the future due to a variety of factors, some of which are outside of our control, and period-to-period comparisons of our operating results may not be meaningful, especially given our limited bitcoin mining operating history. We terminated all bitcoin mining operations in China in June 2021. Our results of operations for Fiscal 2022 were adversely affected by the material decrease in bitcoins mined, including, in part, due to the need to migrate and replace a portion of our miners. We have migrated all miners to the United States by the end of November 2021 and expected to have had them and any newly purchased miners operational by year end 2022. However, as a result of adverse factors described below, there can be no assurance we will again achieve the level of profitability we experienced in late 2020 or the first quarter of 2021.

 

The results for any one quarter are not necessarily an indication of future performance. Fluctuations in quarterly results may adversely affect the market price of our Ordinary Shares. Factors that may cause fluctuations in our annual financial results include:

 

  the amount and timing of operating expenses related to our new business operations and infrastructure;

 

  fluctuations in the price of digital assets; and

 

  general economic, industry and market conditions.

 

We may acquire other businesses, form joint ventures or acquire other companies or businesses that could negatively affect our operating results, dilute our shareholders’ ownership, increase our debt or cause us to incur significant expense; notwithstanding the foregoing, our growth may depend on our success in uncovering and completing such transactions.

 

We seek to enter digital assets mining related businesses around the globe. However, we cannot offer any assurance that acquisitions of businesses, assets and/or entering into strategic alliances or joint ventures will be successful. We may not be able to find suitable partners or acquisition candidates and may not be able to complete such transactions on favorable terms, if at all. If we make any acquisitions, we may not be able to integrate these acquisitions successfully into our existing infrastructure. In addition, in the event we acquire any existing businesses we could assume unknown or contingent liabilities.

 

4

 

 

Any future acquisitions also could result in the issuance of shares, incurrence of debt, contingent liabilities or future write-offs of intangible assets or goodwill, any of which could have a negative impact on our cash flows, financial condition and results of operations. Integration of an acquired company may also disrupt ongoing operations and require management resources that otherwise would be focused on developing and expanding our existing business. We may experience losses related to potential investments in other companies, which could harm our financial condition and results of operations. Further, we may not realize the anticipated benefits of any acquisition, strategic alliance or joint venture if such investments do not materialize.

 

To finance any acquisitions or joint ventures, we may choose to issue Ordinary Shares, preferred shares or a combination of debt and equity as consideration, which could significantly dilute the ownership of our existing shareholders or provide rights to such preferred shareholders in priority over our Ordinary Shareholders. Additional funds may not be available on terms that are favorable to us, or at all. If the price of our Ordinary Shares is low or volatile, we may not be able to acquire other companies or fund a joint venture project using shares as consideration.

 

Our new services and changes to existing services could fail to attract or retain users or generate revenue and profits, or otherwise adversely affect our business.

 

Our ability to retain, increase, and engage our user base and to increase our revenue depends heavily on our ability to continue to evolve our existing services and to create successful new services, both independently and in conjunction with developers or other third parties. We may introduce significant changes to our existing services or acquire or introduce new and unproven services, including using technologies with which we have little or no prior development or operating experience. For example, we are making significant investments in artificial intelligence “AI” initiatives, including providing computing capacity to support AI. These efforts, including the introduction of new services or changes to existing services, may result in new or enhanced governmental or regulatory scrutiny, litigation, ethical concerns, or other complications that could adversely affect our business, reputation, or financial results. If our new services fail to engage users or developers, or if our business plans are unsuccessful, we may fail to attract or retain users or to generate sufficient revenue, operating margin, or other value to justify our investments, and our business may be adversely affected.

 

From time to time we may evaluate and potentially consummate strategic investments, combinations, acquisitions or alliances, which could require significant management attention, disrupt our business and adversely affect our financial results.

 

We may evaluate and consider strategic investments, combinations, acquisitions or alliances in the bitcoin mining or other digital assets businesses. These transactions could be material to our financial condition and results of operations if consummated. If we are able to identify an appropriate business opportunity, we may not be able to successfully consummate the transaction and, even if we do consummate such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction.

 

Strategic investments or acquisitions will involve risks commonly encountered in business relationships, including:

 

  difficulties in assimilating and integrating the operations, personnel, systems, data, technologies, products and services of the acquired business;

 

  inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits;

 

  difficulties in retaining, training, motivating and integrating key personnel;

 

  diversion of management’s time and resources from our normal daily operations;

 

5

 

 

  difficulties in successfully incorporating licensed or acquired technology and rights into our businesses;

 

  difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations;

 

  difficulties in retaining relationships with customers, employees and suppliers of the acquired business;

 

  risks of entering markets, in parts of the United States, in which we have limited or no prior experience;

 

  regulatory risks, including remaining in good standing with existing regulatory bodies or receiving any necessary pre-closing or post-closing approvals, as well as being subject to new regulators with oversight over an acquired business; assumption of contractual obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property rights or increase our risk for liability;

 

  failure to successfully further develop the acquired technology;

 

  liability for activities of the acquired business before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities;

 

  potential disruptions to our ongoing businesses; and

 

  unexpected costs and unknown risks and liabilities associated with strategic investments or acquisitions.

 

We may not make any investments or acquisitions, or any future investments or acquisitions may not be successful, may not benefit our business strategy, may not generate sufficient revenues to offset the associated acquisition costs or may not otherwise result in the intended benefits. In addition, we cannot assure you that any future investment in or acquisition of new businesses or technology will achieve market acceptance or prove to be profitable.

 

The loss of any member of our management team, our inability to execute an effective succession plan, or our inability to attract and retain qualified personnel could adversely affect our business.

 

Our success and future growth will depend to a significant degree on the skills and services of our management team, including Mr. Sam Tabar, our Chief Executive Officer, and Mr. Erke Huang, our Chief Financial Officer. We will need to continue to grow our management in order to alleviate pressure on our existing team and in order to continue to develop our business. If our management team, including any new hires that we may make, fails to work together effectively and to execute our plans and strategies on a timely basis, our business could be harmed. Furthermore, if we fail to execute an effective contingency or succession plan with the loss of any member of management, the loss of such management personnel may significantly disrupt our business.

 

The loss of key members of management could inhibit our growth prospects. Our future success also depends in large part on our ability to attract, retain and motivate key management and operating personnel. As we continue to develop and expand our operations, we may require personnel with different skills and experiences, and who have a sound understanding of our business and the digital asset industry. The market for highly qualified personnel in this industry is very competitive, and we may be unable to attract or retain such personnel. If we are unable to attract or retain such personnel, our business could be harmed.

 

6

 

 

We incur significant costs and demands upon management and accounting and finance resources as a result of complying with the laws and regulations affecting public companies; if we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements and otherwise make timely and accurate public disclosure could be impaired, which could harm our operating results, our ability to operate our business and our reputation.

 

As a public company, we are required to, among other things, maintain a system of effective internal control over financial reporting. Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis which is a costly and time-consuming effort that needs to be re-evaluated frequently. Substantial work will continue to be required to further implement, document, assess, test and remediate our system of internal controls.

 

If our internal control over financial reporting or our disclosure controls are not effective, we may be unable to issue our financial statements in a timely manner, we may be unable to obtain the required audit or review of our financial statements by our independent registered public accounting firm in a timely manner or we may be otherwise unable to comply with the periodic reporting requirements of the SEC, our Ordinary Shares listing on Nasdaq could be suspended or terminated and our share price could materially suffer. In addition, we or members of our management could be subject to investigation and sanction by the SEC and other regulatory authorities and to shareholder lawsuits, which could impose significant additional costs on us and divert management attention.

 

As of December 31, 2022, our disclosure controls and procedures were not effective, and management determined that we did not maintain effective internal control over financial reporting due to certain significant deficiencies and material weaknesses. Throughout 2023, management undertook actions to remediate these material weaknesses. As of December 31, 2023, the control deficiencies were remediated, and controls were found to be operating effectively. We will continue to periodically review our internal control over financial reporting as part of our ongoing efforts to ensure compliance with the requirements of Section 404 of the Sarbanes-Oxley Act.

 

If we cannot maintain our corporate culture as we grow, we could lose the innovation, collaboration and focus that contribute to our business.

 

We believe that a critical component of our success is our corporate culture, which we believe fosters innovation, encourages teamwork and cultivates creativity. As we continue to grow, we may find it difficult to maintain these valuable aspects of our corporate culture. Any failure to preserve our culture could negatively impact our future success, including our ability to attract and retain employees, encourage innovation and teamwork and effectively focus on and pursue our corporate objectives.

 

We do not have any business interruption or disruption insurance coverage.

 

Currently, we do not have any business liability or disruption insurance to cover our operations, other than director’s and officer’s liability insurance. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured business disruptions may result in our incurring substantial costs and the diversion of resources, which could have an adverse effect on our results of operations and financial condition.

 

If we are unable to successfully continue our digital assets mining business plan, it would affect our financial and business condition and results of operations.

 

There are various risks related to execution of our digital assets mining business plans. These efforts include the risk that these efforts may not provide the expected benefits in our anticipated time frame, if at all, and may prove costlier than expected; and the risk of adverse effects to our business, results of operations and liquidity if past and future undertakings, and the associated changes to our business, do not prove to be cost effective or do not result in the cost savings and other benefits at the levels that we anticipate. The execution of our business plan, and the timing of any related initiatives, are subject to change at any time based on management’s subjective evaluation of our overall business needs. If we are unable to successfully execute our business plan, whether due to failure to realize the anticipated benefits from our business initiatives in the anticipated time frame or otherwise, we may be unable to achieve our financial targets.

 

7

 

 

Failure to manage our liquidity and cash flows may materially and adversely affect our financial conditions and results of operations. As a result, we may need additional capital, and financing may not be available on terms acceptable to us, or at all.

 

Since May 20, 2021, we drew down an aggregate of $80 million under the Ionics Purchase Agreement and raised $80 million of gross proceeds in our September 2021 private placement. In 2022, the Company raised gross proceeds of approximately $22 million from the Ionics Purchase Agreement. In 2023, the Company raised gross proceeds of approximately $22 million from the Ionics Purchase Agreement and sold 14,744,026 shares of common stock for an aggregate purchase price of $45.3 million net of offering costs pursuant to an at-the-market offering. We incurred a net loss of $13.9 million for Fiscal 2023, which included $6.6 million impairment of digital assets, and a net loss of $105.3 million for Fiscal 2022, which included a $24.7 million impairment of digital assets and a $50 million impairment of property and equipment. We had positive cash flows from our operating activities of $1.1 million for Fiscal 2023 and negative cash flows from our operating activities of $8.5 million and $17.4 million for Fiscal 2022 and the year ended December 31, 2021 (“Fiscal 2021”), respectively. Positive cash flow during Fiscal 2023 resulted, in part, from gain from exchange of digital assets of $18.8 million offset by $6.6 million impairment of digital assets. Negative cash flow during Fiscal 2022 resulted, in part, from a net loss of approximately $105 million, including $27.8 million of depreciation of property and equipment and $50.0 million of impairment of property and equipment. Negative cash flow during fiscal 2021 resulted, in part, from $13.1 million of depreciation of property and equipment and $20.5 million of share-based compensation related to restricted share units. We cannot assure you our business model will allow us to continue to generate positive cash, given our substantial expenses in relation to our revenue at this stage of our Company’s development. Our inability to offset our expenses with adequate revenue will adversely affect our liquidity, financial condition and results of operations. Although we have adequate cash on hand and have drawn down on an effective $500 million at the market shelf registration statement and anticipated cash flows from operating activities are expected to be sufficient to meet our anticipated working capital requirements and capital expenditures in the ordinary course of business for the next 12 months, we cannot assure you that will be the case. We expect to need additional cash resources in the future as we wish to pursue opportunities for investment, acquisition, capital expenditure or similar actions in order to implement our business plan. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

 

Our cash balances are held at a number of financial institutions that expose us to their credit risk

 

We maintain our cash and cash equivalents at financial or other intermediary institutions. The combined account balances at each institution located in the United States typically exceed FDIC insurance coverage of $250,000 per depositor. The combined account balances at each institution located in Iceland typically exceed the deposit guarantee schemes of the equivalent of €100,000 in Icelandic Krona per depositor. As a result, there is a concentration of credit risk related to amounts on deposit in excess of the deposit insurance coverage amounts. At December 31, 2023, substantially all of our cash and cash equivalent balances held at financial institutions exceeded deposit insured limits. While we did not have any direct exposure to Silicon Valley Bank, Signature Bank, or First Republic, which suffered severe liquidity losses during 2023, if other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability, and the ability of our customers, clients and vendors, to access existing cash, cash equivalents and investments, or to access existing or enter into new banking arrangements or facilities, may be threatened and could have a material adverse effect on our business and financial condition.

 

Digital Assets Related Risks

 

Our results of operations are expected to be impacted by significant fluctuation of digital asset prices

 

The price of bitcoin has experienced significant fluctuations over its existence and may continue to fluctuate significantly in the future. Bitcoin average prices per coin have ranged from approximately $7,572.30 in 2018, to $7,395.25 in 2019, $11,116.38 in 2020, $47,436.93 in 2021, to $28,197.75 in 2022, to $28,859.45 in 2023 and $42,919.61 in January 2024, and a low of $41,879.19 per coin and a high of $63,913.13 per coin in February 2024 according to CoinMarketCap. The price of ETH has likewise experienced significant fluctuation over its existence since we started the ETH staking business in the fourth quarter of 2022. Ethereum average prices per coin have ranged from $1,987.39 in 2022; to $1,795.16 in 2023, $2,374.86 per coin in January 2024, and a low of $2,243.57 per coin and a high of $3,518.97 per coin in February 2024 according to CoinMarketCap.

 

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We expect our results of operations to continue to be affected by the digital asset prices as most of our revenue has been from bitcoin mining production. The reductions in the price of bitcoin, in the fourth quarter of 2022, had a material and adverse effect on our results of operations and financial condition. In March 2024, the price of bitcoin has increased to over $60,000 according to CoinMarketCap. We cannot assure you that the bitcoin price will remain high enough to sustain our operation or that the bitcoin price will not decline significantly in the future. Certain of our mining operations are costly and we have not yet powered back on, as it is not economical to do so. Fluctuations in the digital asset prices can have had and are expected to continue to have an immediate impact on the trading price of our Ordinary Shares even before our financial performance is affected, if at all.

 

Various factors, mostly beyond our control, could impact the bitcoin price. For example, the bankruptcy filings and regulatory proceedings described below, as well as the usage of bitcoins in the retail and commercial marketplace is relatively low in comparison with the usage for speculation, which contributes to bitcoin’s price volatility. Additionally, the reward for bitcoin mining will decline over time, with the last halving event occurred in May 2020 and next one to occur in or about April 2024, which may further contribute to bitcoin price volatility.

 

Our operating results have and will significantly fluctuate due to the highly volatile nature of digital assets.  

 

All of our sources of revenue are dependent on digital assets and the broader crypto-economy. Due to the highly volatile nature and the prices of digital assets, our operating results have, and will continue to, fluctuate significantly from quarter to quarter in accordance with market sentiments and movements in the broader digital assets economy. Our operating results will continue to fluctuate significantly as a result of a variety of factors, many of which are unpredictable and in certain instances are outside of our control, including, but not limited to:

 

  our ability to continue to mine bitcoin and acceptance of digital assets as a result of reputational harm from bankruptcies and regulatory proceedings;

 

  changes in the legislative or regulatory environment, or actions by governments or regulators, including fines, orders, or consent decrees;

 

  regulatory changes that impact our ability to mine various digital assets;

 

  our ability to diversify and grow our business;

 

  investments we make in the development of our business as well as technology offered to our industry partners and sales and marketing;

 

  mining new digital assets in compliance with the Federal securities laws and other compliance regulations;

 

  macroeconomic conditions;

 

  adverse legal proceedings or regulatory enforcement actions, judgments, settlements, or other legal proceeding and enforcement-related costs;

 

  increases in operating expenses that we expect to incur to grow and expand our operations and to remain competitive;

 

  breaches of security or privacy;

 

  our ability to attract and retain talent; and

 

  our ability to compete with our competitors.

 

As a result of these factors, it is difficult for us to forecast growth trends accurately and our business and future prospects are difficult to evaluate, particularly in the short term. In view of the rapidly evolving nature of our business and the digital assets industry, period-to-period comparisons of our operating results may not be meaningful, and you should not rely upon them as an indication of future performance. Quarterly and annual expenses reflected in our financial statements may be significantly different from historical or projected rates. Our operating results in one or more future quarters may fall below the expectations of securities analysts and investors. As a result, the trading price of our Ordinary Shares may increase or decrease significantly. See “The price of digital assets may be affected by the sale of such digital assets by other vehicles investing in digital assets or tracking bitcoin markets.”

 

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Our future success continues to depend, in part, upon the value of bitcoin, which the value of bitcoin may be subject to pricing risk and has historically been subject to wide swings.

 

Our operating results continue to depend, in part, upon the value of bitcoin. Specifically, our revenues from our bitcoin mining operations are principally based upon two factors: (1) the number of bitcoin rewards we successfully mine and (2) the value of bitcoin. We also receive transaction fees paid in bitcoin by participants who initiated transactions associated with new blocks that we mine. In addition, our operating results are directly impacted by changes in the value of bitcoin, because under the value measurement model, both realized and unrealized changes are reflected in our statement of operations (i.e., we will be marking bitcoin to fair value each quarter). This means that our operating results are subject to swings based upon increases or decreases in the value of bitcoin. Furthermore, our strategy has focused primarily on bitcoin (as opposed to other digital assets). Further, our current application-specific integrated circuit (“ASIC”) machines (which we refer to as “miners”) are principally utilized for mining bitcoin and bitcoin cash and cannot mine other digital assets, such as ETH, that are not mined utilizing the “SHA-256 algorithm.” If other digital assets were to achieve acceptance at the expense of bitcoin or bitcoin cash (a variant form of bitcoin created in 2017 by a hard fork of the bitcoin blockchain) causing the value of bitcoin or bitcoin cash to decline, or if bitcoin were to switch its proof of work algorithm from SHA-256 to another algorithm for which our miners are not specialized, or the value of bitcoin or bitcoin cash were to decline for other reasons, particularly if such decline were significant or over an extended period of time, our operating results would be adversely affected, and there could be a material adverse effect on our ability to continue as a going concern or to pursue our business strategy at all, which could have a material adverse effect on our business, prospects or operations, and harm investors.

 

Bitcoin and other digital asset prices, which have historically been volatile and are impacted by a variety of factors (including those discussed in the previous risk factor), are determined primarily using data from various exchanges, over-the-counter markets and derivative platforms. As described above, the digital assets industry has been negatively affected by recent bankruptcies. Furthermore, such prices may be subject to factors such as those that impact commodities, more so than business activities, which could be subjected to additional influence from fraudulent or illegitimate actors, real or perceived scarcity, and political, economic, regulatory or other conditions. Pricing may be the result of, and may continue to result in, speculation regarding future appreciation in the value of digital assets, or our share price, inflating and making their market prices more volatile or creating “bubble” type risks for both bitcoin and our Ordinary Shares.

 

Unfavorable Digital Asset Market Conditions

 

The prices of digital assets, including bitcoin, have experienced substantial volatility, as described above. During the year 2022, a number of companies in the digital assets industry have declared bankruptcy, including Core Scientific, Celsius Network, Voyager Digital Ltd., Three Arrows Capital, BlockFi, and FTX Trading Ltd. (“FTX”) and concerning us, Compute North, as described in the following risk factor. Such bankruptcies have contributed, at least in part, to further price decreases in bitcoin and other digital assets, a loss of confidence in the participants of the digital asset ecosystem and negative publicity surrounding digital assets more broadly. The bankruptcies also led to various SEC and criminal enforcement proceedings. All of the foregoing has had a macro decline in the price of securities of digital asset companies, including ours.

 

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Other than Compute North, we have not been directly impacted by any of the recent bankruptcies in the digital asset space, as we have no contractual privity or relationship to the relevant parties. The Company relocated its miners out of Compute North’s facilities to those hosted by Blockfusion and Coinmint in New York State. However, termination of the Master Agreement with Compute North had an adverse effect on the Company’s business and financial condition.  We are dependent on the overall digital assets industry, and such recent events have contributed, at least in part, to our and our peers stock price as well as the price of bitcoin. If the liquidity of the digital assets markets continues to be negatively impacted, digital asset prices (including the price of bitcoin) may continue to experience significant volatility and confidence in the digital asset markets may be further undermined. A perceived lack of stability in the digital asset exchange market and the closure or temporary shutdown of digital asset exchanges due to business failure, hackers or malware, government-mandated regulation, or fraud, may reduce confidence in digital asset networks and result in greater volatility in digital asset values. Any of these events may adversely affect our operations and results of operations and, consequently, an investment in us.

 

We may be unable to raise additional capital needed to grow our business.

 

We have operated and expect to continue to operate at a loss at least in the near term, if bitcoin prices decline further, or until we are able to profitably stake ETH. In addition, we expect to need to raise additional capital to expand our operations, pursue our growth strategies and to respond to competitive pressures or working capital requirements. While we have an effective $500,000,000 at the market shelf registration statement, we may not be able to obtain additional debt or equity financing on favorable terms, which could impair our growth and adversely affect our existing operations. The global economy, including credit and financial markets, has experienced extreme volatility and disruptions, including diminished credit availability, rising interest and inflation rates, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. Such macroeconomic conditions could also make it more difficult for us to incur additional debt or obtain equity financing. Further, the digital assets industry has been negatively impacted by recent event such as the bankruptcies described in the prior risk factor above and the criminal proceedings brought against FTX Trading Ltd. and Binace US. In response to these events, the digital asset markets, including the market for bitcoin and ETH specifically, have experienced extreme price volatility and several other entities in the digital asset industry have been, and may continue to be, negatively affected, further undermining confidence in the digital assets markets. In light of conditions impacting our industry, it may be more difficult for us to obtain equity or debt financing in the future.

 

If we raise additional equity financing, our shareholders may experience significant dilution of their ownership interests, and the per share value of our Ordinary Shares could decline. Furthermore, if we engage in debt financing, the holders of debt likely would have priority over the holders of our Ordinary Shares on order of payment preference. We may be required to accept terms that restrict or limit our ability to, among other things:

 

  Pay cash dividends to our stockholders, subject to certain limited exceptions;
     
  Redeem or repurchase our ordinary shares or other equity;
     
  Incur additional indebtedness;
     
  Permit liens on assets;
     
  Make certain investments (including through the acquisition of stock, shares, partnership or limited liability company interests, any loan, advance or capital contribution);
     
  Sell, lease, license, lend or otherwise convey an interest in a material portion of our assets; and
     
  Sell or otherwise issue ordinary shares or other capital stock subject to certain limited exceptions.

 

These restrictions may limit our ability to obtain additional financing, withstand downturns in our business or take advantage of business opportunities.

 

The impact of government responses to mining activity is uncertain.

 

Because of environmental-impact concerns related to the potential high demand for electricity to support digital asset mining activity, political concerns, and for other reasons, we may be required to cease mining operations in certain locations in the world without much or any prior notice by a national or local government’s formal or informal requirement or because of the anticipation of an impending requirement. For example, the Chinese government has required the mining of digital assets to be discontinued on very short notice in 2021. We had already migrated our bitcoin mining assets out of China to North America by September 2021; however, in light of the Chinese government’s actions, it still had had a material adverse effect on our operations in 2021.

 

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Such government action had a negative impact not only on the value of existing miners owned by us but also on our ability to dispose of obsolete miners and to purchase new miners and the prices to acquire the same. Such government action also had a significant impact on the price of bitcoin, including an increase in the volatility of the price (both up and down) of bitcoin and the price and value of miners owned by us (both up and down). These events had a negative impact on our earnings in 2022 and 2023.

 

Our mining operating costs outpace our mining revenues, which could seriously harm our business or increase our losses.

 

Our mining operations are costly, and our expenses may increase in the future. We intend to use funds on hand and from shares sold under an effective registration statement to continue to purchase bitcoin mining machines if our operating costs are lower than the value of bitcoin. This expense increase may not be offset by a corresponding increase in revenue. Our expenses may be greater than we anticipate, and our investments to make our business more efficient may not succeed and may outpace monetization efforts. Increases in our costs without a corresponding increase in our revenue would increase our losses and could seriously harm our business and financial performance.

 

We have an evolving business model which is subject to various uncertainties.

 

As digital assets may become more widely available, we expect the services and products associated with them to evolve. In order to stay current with the industry, our business model requires us to evolve as well. From time to time, we have modified and will continue to modify aspects of our business model relating to our strategy. We cannot offer any assurance that these or any other modifications will be successful or will not result in harm to our business. We may not be able to manage growth effectively, which could damage our reputation, limit our growth and negatively affect our operating results. Further, we cannot provide any assurance that we will successfully identify all emerging trends and growth opportunities in this business sector, and we may lose out on those opportunities. Such circumstances could have a material adverse effect on our business, prospects or operations.

 

The properties included in our mining network may experience damage, including damage that is not covered by insurance.

 

As of December 31, 2023, our mining operations in the states of Texas, Kentucky and New York in the United States and in Canada and Iceland are, and any future mining sites we may establish will be, subject to a variety of risks relating to physical condition and operation, including, but not limited to:

 

  the presence of construction or repair defects or other structural or building damage;

 

  any noncompliance with or liabilities under applicable environmental, health or safety regulations or requirements or building permit requirements;

 

  any damage resulting from natural disasters, such as hurricanes, earthquakes, fires, floods and windstorms; and

 

  claims by employees and others for injuries sustained at our properties.

 

For example, our mines could be rendered inoperable, temporarily or permanently, as a result of a fire or other natural disaster, the coronavirus or another pandemic, or by a terrorist or other attack. The security and other measures we take to protect against these risks may not be sufficient. Additionally, our mines could be materially adversely affected by a power outage or loss of access to the electrical grid or loss by the grid of cost-effective sources of electrical power generating capacity. Given the power requirements of our mines, it would not be feasible to run miners on back- up power generators in the event of a power outage. We do not have any insurance to cover the replacement cost of any lost or damaged miners, or any interruption of our mining activities. In the event of an uninsured loss, such mines may not be adequately repaired in a timely manner or at all, and we may lose some or all of the future revenues anticipated to be derived from such mines.

 

From time to time, our service providers have been unable to supply sufficient electric power for us to operate our miners, which has adversely affected our operations, causing us to relocate some or all of our miners to an alternative facility, which may have a less advantageous cost structure and our business and results of operations may suffer as a result.

 

We made a significant capital investment in purchasing second-hand miners in order to implement them rapidly to mine bitcoin at prices advantageous to us. Management believes, based on its knowledge of the industry, that the hosting agreements provided many advantages as opposed to other alternative arrangements. However, we have since been required to deploy or move our miners from their current hosting service providers to other mining facilities, and we may be forced to accept less advantageous terms. Further, during relocation to a new mining facility, we will not be able to operate our miners and therefore we will not be able to generate revenue.

 

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From May until September 2022, power was offline at the Niagara Falls, New York facility hosted by Blockfusion, due to an explosion and subsequent fire. We have estimated the loss of revenue at the Blockfusion site through September 13, 2022 to be approximately $3,200,000. Our methodology is based on the historical rate for those impacted miners and the average bitcoin and ETH earned during the above period. Shortly after power was restored, the Company and Blockfusion received a notice from the City of Niagara Falls, New York directing Blockfusion to cease and desist its cryptocurrency mining activities at Blockfusion’s Niagara Falls facility. The loss of power at Blockfusion facilities has had a material adverse effect on our operations. We relocated our miners from Blockfusion facilities to Digihost, Soluna and Bitdeer after our service agreement with Blockfusion ended in September 2023.

 

During the same time, a portion of our miners were offline and power has only been partially used at our hosting partner Digihost’s facility at North Tonawanda, New York. Based on the historical miner model hosted by Digihost, we calculated our loss at Digihost (based on a hash rate of 60 TH/s and power consumption of 3000W) to be non-material in 2022. In 2023, we did not operate any miners at the Digihost’s North Tonawanda facility. 

 

As a result of the bankruptcy filing by Compute North on September 22, 2022, as described above, we have experienced service disruptions.

 

If we are unable to secure sufficient power supply from the current hosting service providers, or if the current hosting service providers are unable to supply sufficient electric power, we may be forced to seek out alternative mining facilities. Should this occur, our operations may be disrupted, which may have a material adverse effect on our operations.

 

If our Hosting Agreements with the current hosting service providers in the U.S. and Canada are terminated, we may be forced to seek a replacement facility to operate our miners on acceptable terms; should this occur, our operations may be disrupted, which may have a material adverse effect on our operations.

 

Relocating our miners, as we did to migrate from China and from Compute North and Core Scientific facilities and Blockfusion facilities, required us to incur costs to transition to a new facility including, but not limited to, transportation expenses and insurance, downtime while we are unable to mine, legal fees to negotiate the new lease, de-installation at our current facility and, ultimately, installation at any new facility we identify. These costs may be substantial, and we cannot guarantee that we will be successful in transitioning our miners to a new facility. Since we are required to move our miners, our business may suffer, and our results of operations would be expected to be materially adversely affected.

 

The development and acceptance of cryptographic and algorithmic protocols governing the issuance of and transactions in digital assets is subject to a variety of factors that are difficult to evaluate.

 

The use of digital assets to, among other things, buy and sell goods and services and complete transactions, is part of a new and rapidly evolving industry that employs bitcoin assets based upon a computer-generated mathematical and/or cryptographic protocol. Large-scale acceptance of digital assets as a means of payment has not, and may never, occur. The growth of this industry in general, and the use of bitcoin, in particular, is subject to a high degree of uncertainty, and the slowing or stopping of the development or acceptance of developing protocols may occur unpredictably. The factors include, but are not limited to:

 

  continued worldwide growth in the adoption and use of digital assets as a medium to exchange;

 

  governmental and quasi-governmental regulation of digital assets and their use, or restrictions on or regulation of access to and operation of the network or similar bitcoin systems;

 

  changes in consumer demographics and public tastes and preferences;

 

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  the maintenance and development of the open-source software protocol of the network;

 

  the increased consolidation of contributors to the bitcoin blockchain through mining pools;

 

  the availability and popularity of other forms or methods of buying and selling goods and services, including new means of using fiat currencies;

 

  the use of the networks supporting digital assets for developing smart contracts and distributed applications;

 

  general economic conditions and the regulatory environment relating to digital assets; and

 

  negative consumer sentiment and perception of bitcoin specifically and digital assets generally.

 

The outcome of these factors could have negative effects on our ability to continue as a going concern or to pursue our business strategy at all, which could have a material adverse effect on our business, prospects or operations as well as potentially negative effect on the value of any bitcoin or other digital assets we mine or otherwise acquire or hold for our own account, which would harm investors in our securities.

 

Banks and financial institutions may not provide banking services, or may cut off services, to businesses that engage in cryptocurrency-related activities or that accept digital assets as payment, including financial institutions of investors in our securities.

 

A number of companies that engage in bitcoin and/or other bitcoin-related activities have been unable to find banks or financial institutions that are willing to provide them with bank accounts and other services. This is particularly true as a result of recent bank failures, which were connected to cryptocurrency activities. Similarly, a number of companies and individuals or businesses associated with digital assets may have had and may continue to have their existing bank accounts closed or services discontinued with financial institutions in response to government action, particularly in China, where regulatory response to digital assets has been to exclude their use for ordinary consumer transactions within its jurisdiction.

 

Subject to such restrictions, we also may be unable to obtain or maintain these services for our business. The difficulty that many businesses in our industry and in related industries have and may continue to have in finding banks and financial institutions willing to provide them services may now, and in the future, decrease the usefulness of digital assets as a payment system, harm public perception of digital assets and decrease their usefulness.

 

The usefulness of digital assets as a payment system and the public perception of digital assets could be damaged if banks or financial institutions were to close the accounts of businesses engaging in bitcoin and/or other bitcoin-related activities. This could occur as a result of compliance risk, cost, government regulation or public pressure. The risk applies to securities firms, clearance and settlement firms, national stock and derivatives on commodities exchanges, the over-the-counter market, and the Depository Trust Company, which, if any of such entities adopts or implements similar policies, rules or regulations, could negatively affect our relationships with financial institutions and impede our ability to convert digital assets to fiat currencies. Such factors could have a material adverse effect on our ability to continue as a going concern or to pursue our new strategy at all, which could have a material adverse effect on our business, prospects or operations and harm investors.

 

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Cyberattacks and security breaches of our system, or those impacting our third parties, could adversely impact our brand and reputation and our business, operating results, and financial condition.

 

Our business involves the collection, storage, processing, and transmission of confidential information, employee, service provider, and other personal data. We have built our system on the premise that we maintain a secure way to secure, store, and transact in digital assets. As a result, any actual or perceived security breach of us or our third-party partners may:

 

  harm our reputation and brand;

 

  result in our systems or services being unavailable and interrupt our operations;

 

  result in improper disclosure of data and violations of applicable privacy and other laws;

 

  result in significant regulatory scrutiny, investigations, fines, penalties, and other legal, regulatory, and financial exposure;

 

  cause us to incur significant remediation costs;

 

  lead to theft or irretrievable loss of our fiat currencies or digital assets;

 

  divert the attention of management from the operation of our business; and

 

  adversely affect our business and operating results.

 

Further, any actual or perceived breach or cybersecurity attack directed at other financial institutions or digital asset companies, whether or not we are directly impacted, could lead to a general loss of customer confidence in the digital asset industry or in the use of technology to conduct financial transactions, which could negatively impact us, including the market perception of the effectiveness of our security measures and technology infrastructure.

 

An increasing number of organizations, including large merchants, businesses, technology companies, and financial institutions, as well as government institutions, have disclosed breaches of their information security systems, some of which have involved sophisticated and highly targeted attacks, including on their websites, mobile applications, and infrastructure.

 

Attacks upon systems across a variety of industries, including the digital asset industry, are increasing in their frequency, persistence, and sophistication, and, in many cases, are being conducted by sophisticated, well-funded, and organized groups and individuals, including state actors. The techniques used to obtain unauthorized, improper, or illegal access to systems and information (including customers’ personal data and digital assets), disable or degrade services, or sabotage systems are constantly evolving, may be difficult to detect quickly, and often are not recognized or detected until after they have been launched against a target. These attacks may occur on our systems or those of our third-party service providers or partners. Certain types of cyberattacks could harm us even if our systems are left undisturbed. For example, attacks may be designed to deceive employees and service providers into releasing control of our systems to a hacker, while others may aim to introduce computer viruses or malware into our systems with a view to stealing confidential or proprietary data. Additionally, certain threats are designed to remain dormant or undetectable until launched against a target and we may not be able to implement adequate preventative measures.

 

Although we have developed systems and processes designed to protect the data we manage, prevent data loss and other security breaches, effectively respond to known and potential risks, and expect to continue to expend significant resources to bolster these protections, there can be no assurance that these security measures will provide absolute security or prevent breaches or attacks. We have experienced from time to time, and may experience in the future, breaches of our security measures due to human error, malfeasance, insider threats, system errors or vulnerabilities, or other irregularities. Unauthorized parties have attempted, and we expect that they will continue to attempt, to gain access to our systems and facilities, as well as those of our customers, partners, and third-party service providers, through various means, including hacking, social engineering, phishing, and attempting to fraudulently induce individuals (including employees, service providers, and our customers) into disclosing usernames, passwords, payment card information, or other sensitive information, which may, in turn, be used to access our information technology systems and our digital assets. Threats can come from a variety of sources, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, and insiders. Certain threat actors may be supported by significant financial and technological resources, making them even more sophisticated and difficult to detect. As a result, our costs and the resources we devote to protecting against these advanced threats and their consequences may continue to increase over time.

 

We may suffer significant and adverse effects due to hacking or one or more adverse software events.

 

In order to minimize risk, we have established processes to manage wallets that are associated with our digital assets holdings. 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 assets due to an adverse software or cybersecurity event. 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.

 

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The Company is evaluating several third-party custodian wallet alternatives, but there can be no assurance that such services will be more secure than those the Company presently employs. Human error and the constantly evolving state of cybercrime and hacking techniques may render present security protocols and procedures ineffective in ways which we cannot predict. If our security procedures and protocols are ineffectual and our digital assets are compromised by cybercriminals, we may not have adequate recourse to recover our losses stemming from such compromise and we may lose much of the accumulated value of our bitcoin mining activities. This would have a material adverse impact on our business and operations.

 

The impact of geopolitical and economic events on the supply and demand for digital assets is uncertain.

 

Geopolitical crises may motivate large-scale purchases of bitcoin and other digital assets, which could increase the price of bitcoin and other digital assets rapidly. This may increase the likelihood of a subsequent price decrease as crisis-driven purchasing behavior dissipates, adversely affecting the value of our inventory following such downward adjustment. Such risks are similar to the risks of purchasing commodities in general uncertain times, such as the risk of purchasing, holding or selling gold. Alternatively, as an emerging asset class with limited acceptance as a payment system or commodity, global crises and general economic downturn may discourage investment in digital assets as investors focus their investment on less volatile asset classes as a means of hedging their investment risk.

 

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. How such supply and demand will be impacted by geopolitical events is largely uncertain, but could be harmful to us and investors in our Ordinary Shares. Political or economic crises, including recent bank failures, may motivate large-scale acquisitions or sales of digital assets either globally or locally. Such events could have a material adverse effect on our ability to continue as a going concern or to pursue our new strategy at all, which could have a material adverse effect on our business, prospects or operations and potentially the value of any bitcoin or any other digital assets we mine or otherwise acquire or hold for our own account.

 

Acceptance and/or widespread use of bitcoin is uncertain.

 

Currently, there is a relatively limited use of any bitcoin in the retail and commercial marketplace, thus contributing to price volatility that could adversely affect an investment in our securities. Banks and other established financial institutions may refuse to process funds for bitcoin transactions, process wire transfers to or from bitcoin exchanges, bitcoin-related companies or service providers, or maintain accounts for persons or entities transacting in bitcoin. Conversely, a significant portion of bitcoin demand is generated by investors seeking a long-term store of value or speculators seeking to profit from the short- or long-term holding of the asset. Price volatility undermines any bitcoin’s role as a medium of exchange, as retailers are much less likely to accept it as a form of payment. Market capitalization for a bitcoin as a medium of exchange and payment method may always be low.

 

The relative lack of acceptance of bitcoins in the retail and commercial marketplace, or a reduction of such use, limits the ability of end users to use them to pay for goods and services. Such lack of acceptance or decline in acceptances could have a material adverse effect on our ability to continue as a going concern or to pursue our business strategy at all, which could have a material adverse effect on our business, prospects or operations and potentially the value of bitcoins we mine or otherwise acquire or hold for our own account.

 

Transactional fees may decrease demand for bitcoin and prevent expansion.

 

Currently, miners receive both rewards of new bitcoin and transaction fees paid in bitcoin by persons engaging in bitcoin transactions on the bitcoin blockchain for being the first to solve bitcoin blocks. As the number of bitcoins currency rewards awarded for solving a block in a blockchain decreases, the incentive for miners to continue to contribute to the bitcoin network may transition from a set reward and transaction fees to solely transaction fees. This transition could be accomplished by miners independently electing to record in the blocks they solve only those transactions that include payment of the highest transaction fees. If transaction fees paid for bitcoin transactions become too high, the marketplace may be reluctant to accept bitcoin as a means of payment and existing users may be motivated to switch from bitcoin to another digital asset or to fiat currency. Either the requirement from miners of higher transaction fees in exchange for recording transactions in a blockchain or a software upgrade that automatically charges fees for all transactions may decrease demand for bitcoin and prevent the expansion of the bitcoin network to retail merchants and commercial businesses, resulting in a reduction in the price of bitcoin that could adversely impact an investment in our securities. Decreased use of and demand for bitcoin may adversely affect its value and result in a reduction in the price of bitcoin and, consequently, the value of our Ordinary Shares.

 

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The decentralized nature of the governance of bitcoin systems may lead to ineffective decision making that slows development or prevents a network from overcoming emergent obstacles. Governance of many bitcoin systems is by voluntary consensus and open competition with no clear leadership structure or authority. To the extent lack of clarity in corporate governance of bitcoin systems leads to ineffective decision making that slows development and growth of such digital assets, the value of our Ordinary Shares may be adversely affected.

 

There is a lack of liquid markets for digital assets, and blockchain/bitcoin-based assets are susceptible to potential manipulation.

 

Digital assets that are represented and trade on a ledger-based platform may not necessarily benefit from viable trading markets. Stock exchanges have listing requirements and vet issuers; requiring them to be subjected to rigorous listing standards and rules and monitor investors transacting on such platform for fraud and other improprieties. These conditions may not necessarily be replicated on a distributed ledger platform, depending on the platform’s controls and other policies. As described above under “Unfavorable Digital Asset Market Conditions,” recent bankruptcies in the digital assets industry involved platforms which were not publicly listed without regulatory supervision. The laxer a distributed ledger platform is about vetting issuers of bitcoin assets or users that transact on the platform, the higher the potential risk for fraud or the manipulation of the ledger due to a control event. These factors may decrease liquidity or volume or may otherwise increase volatility of investment securities or other assets trading on a ledger-based system, which may adversely affect us. Such circumstances could have a material adverse effect on our ability to continue as a going concern or to pursue our business strategy at all, which could have a material adverse effect on our business, prospects or operations and potentially the value of any bitcoin or other digital assets we mine or otherwise acquire or hold for our own account and harm investors.

 

Our operations, investment strategies and profitability may be adversely affected by competition from other methods of investing in digital assets.

 

We compete with other users and/or companies that are mining digital assets and other potential financial vehicles, including securities backed by or linked to digital assets through entities similar to us. 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, which could limit the market for our shares and reduce their liquidity. The emergence of other financial vehicles and exchange-traded funds have been scrutinized by regulators and such scrutiny and the negative impressions or conclusions resulting from such scrutiny could be applicable to us and impact our ability to successfully pursue our business strategy or operate at all, or to maintain a public market for our securities. Such circumstances could have a material adverse effect on our ability to continue as a going concern or to pursue our business strategy at all, which could have a material adverse effect on our business, prospects or operations and potentially the value of any bitcoin or other digital assets we mine or otherwise acquire or hold for our own account, and harm investors.

 

The development and acceptance of competing blockchain platforms or technologies may cause consumers to use alternative distributed ledgers or other alternatives.

 

The development and acceptance of competing blockchain platforms or technologies may cause consumers to use alternative distributed ledgers or an alternative to distributed ledgers altogether. Our business utilizes presently existent digital ledgers and blockchains and we could face difficulty adapting to emergent digital ledgers, blockchains, or alternatives thereto. This may adversely affect us and our exposure to various blockchain technologies and prevent us from realizing the anticipated profits from our investments. Such circumstances could have a material adverse effect on our ability to continue as a going concern or to pursue our business strategy at all, which could have a material adverse effect on our business, prospects or operations and potentially the value of any bitcoin or other digital assets we mine or otherwise acquire or hold for our own account, and harm investors.

 

17

 

 

Our digital assets may be subject to loss, theft or restriction on access.

 

There is a risk that some or all of our digital assets, including bitcoin, ETH, liquid staking tokens and/or USD Coin could be lost, stolen or destroyed. Digital assets are stored in platforms commonly referred to as “wallets” by holders of bitcoins which may be accessed to exchange a holder’s bitcoin assets. Access to our digital assets could also be restricted by cybercrime (such as a denial-of-service attack) against a service at which we maintain a hosted hot wallet. We believe that our digital assets will be an appealing target to hackers or malware distributors seeking to destroy, damage or steal our digital assets. See Risk Factor “Cyberattacks and security breaches of our system, or those impacting our third parties, could adversely impact our brand and reputation and our business, operating results, and financial condition.” A hot wallet refers to any bitcoin wallet that is connected to the Internet. Generally, hot wallets are easier to set up and access than wallets in cold storage, but they are also more susceptible to hackers and other technical vulnerabilities. Cold storage refers to any bitcoin wallet that is not connected to the Internet. Cold storage is generally more secure from external attack than hot storage but is not ideal for quick or regular transactions and we may experience lag time in our ability to respond to market fluctuations in the price of our bitcoin assets. Moreover, cold storage may increase the risk of internal theft or malfeasance. We hold our digital assets in hot and cold wallets through third party custodians to reduce the risk of external malfeasance, but the risk of loss of our bitcoin assets cannot be wholly eliminated. If any of our bitcoin were lost or stolen, it is unlikely that we would ever be able to recover such bitcoin.

 

In addition, the Company participates in the Foundry USA Mining Pool (“Foundry”). Foundry is a mining pool operator which provides the Company with a digital currency mining pool. While Foundry does not provide wallet or custodial services, it deposits bitcoin rewards to our custodian wallet addresses. Accordingly, the risk of loss or theft of digital assets when Foundry transfers bitcoin rewards in a custodian account is no different than any other transfer from one wallet to another. 

 

Hackers or malicious actors may launch attacks to steal, compromise or secure digital assets, such as by attacking the digital asset network source code, exchange miners, third-party platforms, cold and hot storage locations or software, our general computer systems or networks, or by other means. We cannot guarantee that we will prevent loss, damage or theft, whether caused intentionally, accidentally or by act of God. Access to our digital assets could also be restricted by natural events (such as an earthquake or flood) or human actions (such as a terrorist attack). We may be in control and possession of one of the more substantial holdings of digital assets. As we increase in size, we may become a more appealing target of hackers, malware, cyber-attacks or other security threats. Any of these events may adversely affect our operations and, consequently, our investments and profitability. The loss or destruction of a private key required to access our digital wallets may be irreversible and we may be denied access for all time to our digital asset holdings held in those compromised wallets. Our loss of access to our private keys or our experience of a data loss relating to our digital wallets could adversely affect our investments and assets.

 

Digital assets are controllable only by the possessor of both the unique public and private keys relating to the local or online digital wallet in which they are held, which wallet’s public key or address is reflected in the network’s public blockchain. We will publish the public key relating to digital wallets in use when we verify the receipt of transfers and disseminate such information into the network, but we will need to safeguard the private keys relating to such digital wallets. To the extent such private keys are lost, destroyed or otherwise compromised, we will be unable to access our bitcoin rewards and such private keys may not be capable of being restored by any network. Any loss of private keys relating to digital wallets used to store our digital assets could have a material adverse effect on our ability to continue as a going concern or to pursue our business strategy at all, which could have a material adverse effect on our business, prospects or operations and potentially the value of any bitcoin or other digital assets we mine or otherwise acquire or hold for our own account.

 

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It is possible that, through computer or human error, theft or criminal action, our digital assets could be transferred in incorrect amounts or to unauthorized third parties or accounts. In general, digital asset transactions are irrevocable, and stolen or incorrectly transferred digital assets may be irretrievable, and we may have extremely limited or no effective means of recovering such digital assets.

 

We safeguard and keep private our digital assets, including the bitcoin that we mine, by utilizing storage solutions provided by Cactus Custody and Fireblocks (see “Summary of Information – Custodian Accounts”), which requires multi-factor authentication. While we are confident in the security of our digital assets held by Cactus Custody and Fireblocks, given the broader market conditions, there can be no assurance that other digital asset market participants, including Cactus Custody and Fireblocks as our custodian, will not ultimately be impacted. We continue to monitor the digital assets industry as a whole, although it is not possible at this time to predict all of the risks stemming from these events that may result to us, our service providers, our counterparties, and the broader industry as a whole. 

 

Incorrect or fraudulent bitcoin transactions may be irreversible.

 

Bitcoin transactions are irrevocable and stolen or incorrectly transferred digital assets may be irretrievable. As a result, any incorrectly executed or fraudulent bitcoin transactions could adversely affect our investments and assets.

 

Bitcoin transactions are not, from an administrative perspective, reversible without the consent and active participation of the recipient of the digital assets from the transaction. In theory, bitcoin transactions may be reversible with the control or consent of a majority of processing power on the network, however, we do not now, nor is it feasible that we could in the future, possess sufficient processing power to affect this reversal. Once a transaction has been verified and recorded in a block that is added to a blockchain, an incorrect transfer of a bitcoin or a theft thereof generally will not be reversible, and we may not have sufficient recourse to recover our losses from any such transfer or theft. It is possible that, through computer or human error, or through theft or criminal action, our bitcoin rewards could be transferred in incorrect amounts or to unauthorized third parties, or to uncontrolled accounts. Further, according to the SEC, at this time, there is no specifically enumerated U.S. or foreign governmental, regulatory, investigative or prosecutorial authority or mechanism through which to bring an action or complaint regarding missing or stolen bitcoin. We are, therefore, presently reliant on existing private investigative entities, such as Chainalysis and Kroll, to investigate any potential loss of our bitcoin assets. These third-party service providers rely on data analysis and compliance of ISPs with traditional court orders to reveal information such as the IP addresses of any attackers who may have targeted us. To the extent that we are unable to recover our losses from such action, error or theft, such events could have a material adverse effect on our ability to continue as a going concern or to pursue our business strategy at all, which could have a material adverse effect on our business, prospects or operations of and potentially the value of any bitcoin or other digital assets we mine or otherwise acquire or hold for our own account.

 

Our reliance primarily on a few models of miners may subject our operations to increased risk of mining failure.

 

The performance and reliability of our miners and our technology is critical to our reputation and our operations. Because we currently use MicroBT and Bitmain miners, if there are issues with those machines, our entire system could be affected. Any system error or failure may significantly delay response times or even cause our system to fail. Any disruption in our ability to continue mining could result in lower yields and harm our reputation and business. Any exploitable weakness, flaw, or error common to MicroBT and Bitmain miners affects all our miners, and if a defect other flaw is exploited, our entire mining operations could go offline simultaneously. Any interruption, delay or system failure could result in financial losses, a decrease in the trading price of our Ordinary Shares and/or damage to our reputation.

 

19

 

 

The Company’s reliance on a third-party mining pool service provider for our mining revenue payouts may have a negative impact on the Company’s operations.

 

We use third–party mining pools to receive our mining rewards from the network. Mining pools allow miners to combine their processing power, increasing their 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. Should the pool operator’s system suffer downtime due to a cyberattack, software malfunction or other similar issues, it will negatively impact our ability to mine and receive revenue. Furthermore, 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 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 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 the 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.

 

The limited rights of legal recourse available to us and our lack of insurance protection for risk of loss of our digital assets exposes us and our shareholders to the risk of loss of our digital assets for which no person may ultimately be held liable and we may not be able to recover our losses.

 

The digital assets held by us are not insured. Further, banking institutions will not accept our digital assets and they are therefore not insured by the Federal Deposit Insurance Corporation (“FDIC”) or the Securities Investor Protection Corporation (“SIPC”). Therefore, a loss may be suffered with respect to our digital assets which is not covered by insurance and we may not be able to recover any of our carried value in these digital assets if they are lost or stolen or suffer significant and sustained reduction in conversion spot price. If we are not otherwise able to recover damages from a malicious actor in connection with these losses, our business and results of operations may suffer, which may have a material negative impact on our share price.

 

Currently, we do not have any insurance to cover our digital assets or mining equipment. The market for such insurance is in the early stages and we intend to purchase such insurance in the future. One of our digital asset custodians, Cactus Custody, is self-insured for $4 million plus annual additions. Any uninsured losses may have an adverse effect on our results of operations and/or financial condition. Fireblocks offers Fireblocks Institutional Digital Asset Program which is insured by leading insurance companies which are A.M. Bests rated “A” (excellent). There is an aggregate of $30,000,000 digital asset crime insurance for theft of digital assets, external breach of Fireblocks’ software or any malicious or intentional misbehavior or fraud by employees. Fireblocks has $12,500,000 of aggregate insurance for errors and omissions; professional liability insurance and cyber/privacy liability insurance.

 

Digital assets face significant scaling obstacles that can lead to high fees or slow transaction settlement times.

 

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 is essential to the widespread acceptance of digital assets as a means of payment, which widespread acceptance is necessary to the continued growth and development of our business. Many bitcoin networks face significant scaling challenges. For example, digital assets are limited with respect to how many transactions can occur per second. Participants in the bitcoin 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 increasing the allowable sizes of blocks, and therefore the number of transactions per block, and sharding (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. However, there is no guarantee that any of the mechanisms in place or being explored for increasing the scale of settlement of bitcoin transactions will be effective, or how long they will take to become effective, which could adversely affect an investment in our securities.

 

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The price of digital assets may be affected by the sale of such digital assets by other vehicles investing in digital assets or tracking bitcoin markets.

 

The global market for digital assets is characterized by supply constraints that differ from those present in the markets for commodities or other assets such as gold and silver. The mathematical protocols under which certain digital assets are mined permit the creation of a limited, predetermined amount of currency, while others have no limit established on total supply. To the extent that other vehicles investing in digital assets or tracking digital assets markets form and come to represent a significant proportion of the demand for digital assets, large redemptions of the securities of those vehicles and the subsequent sale of digital assets by such vehicles could negatively affect digital asset prices and therefore affect the value of the digital asset inventory (i.e., bitcoin and ETH) we hold. The recent introduction of a spot bitcoin exchange traded fund (“ETF”) and the pending approval of an ETH ETF may attract speculative traders who seek short-term gains based on price movements. This increased speculative activity could lead to short-term price volatility. Such events could have a material adverse effect on our ability to continue as a going concern or to pursue our business strategy at all, which could have a material adverse effect on our business, prospects or operations and potentially the value of any digital assets we mine or otherwise acquire or hold for our own account.

 

There are risks related to technological obsolescence, the vulnerability of the global supply chain for bitcoin hardware disruption, and difficulty in obtaining new hardware which may have a negative effect on our business.

 

Our 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 a bitcoin. As our mining facility operates, our miners experience ordinary wear and tear, and may also face more significant malfunctions caused by a number of extraneous factors beyond our control. We have purchased second-hand miners from third parties. The degradation of our miners requires us to, over time, replace those miners which are no longer functional. Additionally, as the technology evolves, we are required to acquire newer models of miners to remain competitive in the market. Reports have been released which indicate that miner manufacturers or sellers adjust the prices of their miners according to bitcoin prices, so the cost of new machines is unpredictable but could be extremely high. As a result, at times, we may obtain miners and other hardware from third parties at premium prices, to the extent they are available. This upgrading process requires substantial capital investment, and we may face challenges. Further, the global supply chain for bitcoin miners is presently heavily dependent on China-based manufacturers. In addition, there have been shortages of the semiconductors which are key components in miner production. The global reliance on China as a main supplier of bitcoin miners has been called into question, particularly in the wake of the COVID-19 pandemic. Should similar outbreaks or other disruptions to the China-based global supply chain for bitcoin hardware on the spot market or otherwise occur, we may not be able to obtain adequate replacement parts for our existing miners or to obtain additional miners from the manufacturer or third parties on a timely basis. Such events could have a material adverse effect on our ability to pursue our business strategy, which could have a material adverse effect on our business and the value of our Ordinary Shares.

 

The bitcoin we mine is subject to halving; the bitcoin reward for successfully uncovering a block will halve several times in the future and bitcoin’s value may not adjust to compensate us for the reduction in the rewards we receive from our mining efforts.

 

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 cut in half, hence the term “halving.” For bitcoin, the reward was initially set at 50 bitcoin currency rewards per block and this was cut in half to 25 on November 28, 2012 at block 210,000 and again to 12.5 on July 9, 2016 at block 420,000. The next halving for bitcoin occurred in May 2020 at block 630,000 when the reward was reduced to 6.25. This reward rate is expected to next halve during April 2024 to 3.125 bitcoin per new block and will continue to halve at approximately four-year intervals until all potential 21 million bitcoin have been mined. If the award of bitcoin rewards for solving blocks and transaction fees are not sufficiently high, we may not have an adequate incentive to continue mining and may cease our mining operations. Halving may result in a reduction in the aggregate hash rate of the bitcoin network as the incentive for miners decreases. Miners ceasing operations would reduce the collective processing power on the network, which would adversely affect the confirmation process for transactions (i.e., temporarily decreasing the speed at which blocks are added to a blockchain until the next scheduled adjustment in difficulty for block solutions) and make bitcoin networks more vulnerable to a malicious actor or botnet obtaining control in excess of 50% of the processing power active on a blockchain, potentially permitting such actor or botnet to manipulate a blockchain in a manner that adversely affects the network and our activities. A reduction in confidence in the confirmation process or processing power of the network could result and be irreversible. Such events could have a material adverse effect on our ability to continue to pursue our business strategy at all, which could have a material adverse effect on our business, prospects or operations and potentially the value of any bitcoin or other digital assets we mine, whether now or in the future, or otherwise acquire or hold for our own account. While bitcoin prices have had a history of price fluctuations around the halving of its bitcoin rewards, there is no guarantee that the price change will be favorable or would compensate for the reduction in mining reward. If a corresponding and proportionate increase in the trading price of bitcoin does not follow these anticipated halving events, the revenue we earn from our mining operations would see a corresponding decrease, which would have a material adverse effect on our business and operations.

 

21

 

 

The impact of social media and influencers on the price for digital assets is uncertain.

 

Renowned persons, including social media influencers, may publicly discuss their holdings (or the holdings of companies with which they are affiliated) of bitcoin or their intent to buy or sell large quantities of bitcoin. This may have a dramatic impact on the price of bitcoin, both up and down. At a minimum, these public statements delivered through social media, such as X (formerly Twitter), may cause the price of bitcoin to experience significant volatility. These episodes could have a material adverse impact on the value of our bitcoin holdings as well as the prices of bitcoin that we may sell.

 

We may not be able to realize the benefits of forks.

 

To the extent that a significant majority of users and miners on a bitcoin network install software that changes the bitcoin network or properties of a bitcoin, including the irreversibility of transactions and limitations on the mining of new bitcoin, the bitcoin network would be subject to new protocols and software. However, if less than a significant majority of users and miners on the bitcoin network consent to the proposed modification, and the modification is not compatible with the software prior to its modification, the consequence would be what is known as a “fork” of the network, with one prong running the pre-modified software and the other running the modified software. The effect of such a fork would be the existence of two versions of the bitcoin running in parallel yet lacking interchangeability and necessitating exchange-type transaction to convert currencies between the two forks. Additionally, it may be unclear following a fork which fork represents the original asset and which is the new asset. Different metrics adopted by industry participants to determine which is the original asset include: referring to the wishes of the core developers of bitcoin, blockchains with the greatest amount of hashing power contributed by miners or validators; or blockchains with the longest chain. A fork in the network of a particular bitcoin could adversely affect an investment in our Company or our ability to operate.

 

We may not be able to realize the economic benefit of a fork, either immediately or ever, which could adversely affect an investment in our securities. If we hold a bitcoin at the time of a hard fork into two digital assets, industry standards would dictate that we would be expected to hold an equivalent amount of the old and new assets following the fork. However, we may not be able, or it may not be practical, to secure or realize the economic benefit of the new asset for various reasons. For instance, we may determine that there is no safe or practical way to custody the new asset, that trying to do so may pose an unacceptable risk to our holdings in the old asset, or that the costs of taking possession and/or maintaining ownership of the new bitcoin exceed the benefits of owning the new bitcoin. Additionally, laws, regulation or other factors may prevent us from benefitting from the new asset even if there is a safe and practical way to custody and secure the new asset.

 

There is a possibility of bitcoin mining algorithms transitioning to proof of stake validation and other mining related risks, which could make us less competitive and ultimately adversely affect our business and the value of our shares.

 

The protocol pursuant to which transactions are confirmed automatically on the bitcoin blockchain through mining is known as proof-of-work (or PoW). Proof-of-stake (or PoS) is an alternative method in validating digital asset transactions, such as Ethereum. The shift from a proof-of-work validation method to a PoS method, mining requires 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. We, as a result of our efforts to optimize and improve the efficiency of our bitcoin mining operations, 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 by a switch to proof-of-stake validation. This may additionally have an impact on other various investments of ours. Such events could have a material adverse effect on our ability to continue as a going concern or to pursue our business strategy at all, which could have a material adverse effect on our business, prospects or operations and potentially the value of any bitcoin or other digital assets we mine or otherwise acquire or hold for our own account.

 

22

 

 

To the extent that the profit margins of bitcoin mining operations are not high, operators of bitcoin mining operations are more likely to immediately sell bitcoin rewards earned by mining in the market, thereby constraining growth of the price of bitcoin that could adversely impact us, and similar actions could affect other digital assets.

 

Over the past several years, bitcoin mining operations have evolved from individual users mining with computer processors, graphics processing units and first-generation 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 for the acquisition of this hardware, the leasing of operating space (often in data centers or warehousing facilities), incurring of electricity costs and the employment of technicians to operate the mining farms. As a result, professionalized mining operations are of a greater scale than prior miners 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 bitcoin. To the extent the price of bitcoin declines and such profit margin is constrained, professionalized miners are incentivized to more immediately sell bitcoin earned from mining operations, whereas it is believed that individual miners in past years were more likely to hold newly mined bitcoin for more extended periods. The immediate selling of newly mined bitcoin greatly increases the trading volume of bitcoin, creating downward pressure on the market price of bitcoin rewards.

 

The extent to which the value of bitcoin 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 bitcoin 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 bitcoin prices. Lower bitcoin prices could result in further tightening of profit margins for professionalized mining operations creating a network effect that may further reduce the price of bitcoin until mining operations with higher operating costs become unprofitable forcing them to reduce mining power or cease mining operations temporarily.

 

If a malicious actor or botnet obtains control of more than 50% of the processing power on a bitcoin network, or 33% or more share of the Ethereum Validators, such actor or botnet could manipulate blockchains to adversely affect us, which would adversely affect an investment in us or our ability to operate.

 

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 a bitcoin, or the ability to valuate Ethereum transactions, it may be able to alter blockchains on which transactions of bitcoin or 33% or more of ETH reside and 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 is believed that it could not generate new units or transactions using such control. The malicious actor could “double-spend” its own digital asset (i.e., spend the same digital asset in more than one transaction) and prevent the confirmation of other users’ transactions for as long as it maintained control. To the extent that such malicious actor or botnet yields its control of the processing power on the network or the bitcoin and/or Ethereum communities do not reject the fraudulent blocks as malicious, reversing any changes made to blockchains may not be possible. The foregoing description is not the only means by which the entirety of blockchains or digital assets may be compromised but is only an example.

 

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Although there are no known reports of malicious activity or control of blockchains achieved through controlling over 50% of the processing power on the bitcoin network, it is believed that certain mining pools may have exceeded the 50% threshold in bitcoin. The possible crossing of the 50% threshold for bitcoin or 33% for Ethereum indicates a greater risk that a single mining pool could exert authority over the validation of digital asset transactions. To the extent that the digital asset ecosystem, and the administrators of mining pools, do not act to ensure greater decentralization of digital asset mining processing power, the feasibility of a malicious actor obtaining control of the processing power will increase because the botnet or malicious actor could compromise more than the threshold and thereby gain control of the blockchain, whereas if the blockchain remains decentralized it is inherently more difficult for the botnet of malicious actor to aggregate enough processing power to gain control of the blockchain, which may adversely affect an investment in our Ordinary Shares. Such lack of controls and responses to such circumstances could have a material adverse effect on our ability to continue as a going concern or to pursue our new strategy at all, which could have a material adverse effect on our business, prospects or operations and potentially the value of any bitcoin or other digital assets we mine or otherwise acquire or hold for our own account, and harm investors.

 

We are subject to risks associated with our need for significant electrical power. Government regulators may potentially restrict the ability of electricity suppliers to provide electricity to mining operations, such as ours.

 

The operation of a bitcoin or other digital asset mine can require massive amounts of electrical power. Further, our mining operations can only be successful and ultimately profitable if the costs, including electrical power costs, associated with mining a bitcoin are lower than the price of a bitcoin. As a result, any mine we establish can only be successful if we can obtain sufficient electrical power for that mine on a cost-effective basis, and our establishment of new mines requires us to find locations where that is the case. There may be significant competition for suitable mine locations, and government regulators may potentially restrict the ability of electricity suppliers to provide electricity to mining operations in times of electricity shortage or may otherwise potentially restrict or prohibit the provision or electricity to mining operations.

 

Any shortage of electricity supply or increase in electricity cost in a jurisdiction may negatively impact the viability and the expected economic return for bitcoin mining activities in that jurisdiction. In addition, the significant consumption of electricity may have a negative environmental impact, including contribution to climate change, which may give rise to public opinion against allowing the use of electricity for bitcoin mining activities or government measures restricting or prohibiting the use of electricity for bitcoin mining activities.

 

We may not adequately respond to price fluctuations and rapidly changing technology, which may negatively affect our business.

 

Competitive conditions within the digital asset industry require that we use sophisticated technology in the operation of our business. The industry for blockchain technology is characterized by rapid technological changes, new product introductions, enhancements and evolving industry standards. New technologies, techniques or products could emerge that might offer better performance than the software and other technologies we currently utilize, and we may have to manage transitions to these new technologies to remain competitive. We may not be successful, generally or relative to our competitors in the digital asset industry, in timely implementing new technology into our systems, or doing so in a cost-effective manner. During the course of implementing any such new technology into our operations, we may experience system interruptions and failures during such implementation. Furthermore, there can be no assurances that we will recognize, in a timely manner or at all, the benefits that we may expect as a result of our implementing new technology into our operations. As a result, our business and operations may suffer, and there may be adverse effects on the price of our Ordinary Shares.

 

The value of stable coins that we hold may be subject to volatility and risk of loss

 

As of December 31, 2023, we held approximately $0.4 million in USD Coin, a stablecoin issued by Circle Internet Financial Public Limited Company (“Circle”) that is backed by dollar denominated assets held by the issuer in segregated accounts with U.S. regulated financial institutions. Stablecoins such as USD Coin are usually backed by the U.S. Dollar and other short-dated U.S. government obligations, and are usually pegged to the U.S. dollar. On March 9, 2023, as a result of the closure of Silicon Valley Bank (“SVB”), Circle announced that $3.3 billion of its roughly $40 billion USD Coin reserves were held at SVB. As a result, Circle depegged the USD Coin from its $1.00 peg, trading as low as $0.87. Such a risk may result in the sell-off of USD Coin and volatility as to the value of stablecoins, which would expose us to risk of potential loss and could have a material adverse effect on our ability to raise new funding and on our business, financial condition, and results of operations and prospects.

 

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Ethereum Risk Factors

 

Risks Associated with Staking on Ethereum 2.0

 

In connection with the transition of the Ethereum network from PoW to PoS, which occurred on September 15, 2022, when the Ethereum Mainnet merged with the PoS Beacon Chain (the “Merge”), the Company is deploying Ethereum (ETH) to the beacon chain with a view to earning an ETH-denominated return thereon. On April 12, 2023, Ethereum’s Shanghai hard fork, also referred to as “Shapella,” has been finalized, enabling withdrawals for users who have “staked” their ETH to secure and validate transactions on the blockchain.

 

In addition, by running a validator node, the Company will be exposed to the risk of loss of its staked digital assets if it equivocates or fails to operate the node in accordance with applicable protocol rules, as the Company’s digital assets may be “slashed” or inactivity penalties may be applied if the validator node “double signs” or is offline for a prescribed period of time. Disputes on a liquid staking provider may lead to the value of staking assets diverging from ETH or failure to exit the liquid staking position. The Company intends to mitigate this risk by utilizing experienced service providers such as MarsLand Global Limited (“MarsLand”) for native staking and Liquid Collective for liquid staking and by carefully monitoring the staking activities performed by the Company in reliance on such services.

 

Risks under the Federal securities laws associated with Staking

 

The Merge and the switch from PoW to PoS did not change our characterization of ETH as a digital asset. We intend to hold our staked ETH for our own account. In the event we exchange ETH for other digital assets (such as liquid staking tokens) which may be deemed to be securities, it would be for our own account. In all instances, we will perform a risk-based analysis to evaluate whether the digital asset may be deemed to be a “security” under the Federal securities laws prior to mining the digital asset. We do not believe if we hold for our own account a particular digital asset which may be deemed to be a security, it will be a risk to our business operations. Nevertheless, we will continue to implement a compliance infrastructure to ensure full compliance with the federal securities laws. In the event our staking program is found to not be in compliance with the federal securities laws, we could face legal or regulatory consequences. We would also need to undertake a regulatory review to ensure compliance with the Federal securities laws if and when we decide to offer staking-as-a-service for value to individuals. The Company would need to install a fully compliant organic infrastructure or hire third-party contractors.

 

Speculative and Volatile Nature of ETH  

 

To date, the Company has deployed a portion of the capital it has raised into ETH. The price of ETH is subject to significant volatility. In addition, there is no guarantee that the Company will be able to sell its ETH at prices quoted on various cryptocurrency trading platforms or at all if it determines to do so. The supply of ETH is currently controlled by the source code of the Ethereum platform, and there is a risk that the developers of the code and the participants in the Ethereum network could develop and/or adopt new versions of the Ethereum software that significantly increase the supply of ETH in circulation, negatively impacting the trading price of ETH. Any significant decrease in the price of ETH may materially and adversely affect the value of the Company’s securities and, in turn, the Company’s business and financial condition.

 

The ETH markets are sensitive to new developments, and since volumes are still maturing, any significant changes in market sentiment (by way of sensationalism in the media or otherwise) can induce large swings in volume and subsequent price changes. Such volatility can adversely affect the business and financial condition of the Company.

 

Momentum pricing typically is associated with growth stocks and other assets whose valuation, as determined by the public, accounts for anticipated future appreciation in value. The Company believes that momentum pricing of ETH has resulted, and may continue to result, in speculation regarding future appreciation in the value of ETH, inflating and making more volatile the value of ETH. As a result, ETH may be more likely to fluctuate in value due to changing investor confidence in future appreciation, which could adversely affect the business and financial condition of the Company.

 

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Underlying Value Risk

 

ETH represents a relatively new form of digital value that is still being digested by society. Its underlying value is driven by its utility as a store of value, means of exchange, and unit of account, and notably, the demand for ETH within various use cases of the Ethereum network. Just as oil is priced by the supply and demand of global markets, as a function of its utility to, for instance, power machines and create plastics, so too is ETH priced by the supply and demand of global markets for its own utility within Ethereum’s use cases. There is a risk if we are working through a staking pool to valuate ETH investors. We rely upon a pool operator to run the validator. There is a counterparty risk that the party with which we trust our assets may not uphold their side of the deal and fees or penalties may be assessed to the pool. These fees are typically assessed if the pool operator has downtime or dishonest actions. Finally, blockchains are new technologies and there is always an outside risk of a catastrophic chain failure that could put locked or staked funds at risk. The speculative and volatile nature of ETH and blockchain may materially and adversely affect the value of the Company’s securities.

 

The staked ETH is subject to the volatility risks set forth under “Speculative and Volatile Nature of ETH” and the risks related to hacking set forth above under “Cyberattacks and security breaches of our system, or those impacting our third parties, could adversely impact our brand and reputation and our business, operating results, and financial condition” that could result in a loss of staked ETH.

 

The risks involved with liquid staking differ from direct staking. Liquid staking allows participants, including the Company, to maintain the liquidity of their digital assets while still earning staking rewards. However, it is subject to the following consequence risks apart from direct staking:

 

  Liquid staking requires a certain level of technical expertise to manage the staking process effectively. This can be a barrier for some investors, particularly those who are new to the world of digital asset investing.

 

  The price of the staked derivative may decrease from its original price. This may happen because the new token has a lower market price.

 

  In we lose our liquid token, we will also lose our staked token. This can result from bad trades, rebalancing losses when farming in liquidity pools, and liquidations at lending protocols.

 

  Token holders will likely choose to stake their tokens on liquid staking protocols. As a result, the balance of validator shares taking part in the network may be disrupted, giving room for undue control from more powerful validators.

 

Development of the Ethereum Platform

 

The Ethereum platform is an open-source project being developed by a network of software developers, including Vitalik Buterin, a founder of Ethereum. Mr. Buterin or another key participant within the core development group could cease to be involved with the Ethereum platform. Factions could form within the Ethereum community, resulting in different and competing versions of Ethereum being adopted by network participants. Furthermore, network participants running the Ethereum software may choose not to update their versions of the software, resulting in different versions of the Ethereum software running on the network. Any of the foregoing developments could have a significant negative impact on the viability and overall health of the Ethereum platform, the value of ETH and the Company’s business model and assets.

 

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The beacon chain (the PoS successor to the Ethereum PoW chain) launched in December 2020 and the “merging” of the Ethereum PoW chain into Ethereum 2.0 occurred on September 15, 2022. In addition, Ethereum’s Shanghai hard fork, also referred to as “Shapella,” has been finalized on April 12, 2023, enabling withdrawals for users who have “staked” their ETH to secure and validate transactions on the blockchain. Although management believes that these changes to the Ethereum platform will positively impact its potential for mainstream adoption, no assurance can be given that such impact will materialize. If the Company cannot successfully anticipate and react to the impacts of this shift, its business and results of operations may be adversely affected.   

 

Uncertainty Regarding the Growth of Blockchain and Web 3 Technologies

 

The further development and use of blockchain, Web 3 technologies and digital assets are subject to a variety of factors that are difficult to evaluate and predict, many of which are beyond the Company’s control. The slowing or stopping of the development or acceptance of blockchain networks, specifically Ethereum, and blockchain assets would be expected to have a material adverse effect on the Company. Furthermore, blockchain and Web 3 technologies, including Ethereum, may never be implemented to a scale that provides identifiable economic benefit to blockchain-based businesses, including the Company.

 

The Ethereum network and ETH as digital asset have a limited history. Due to this short history, it is not clear how all elements of ETH will unfold over time, specifically with regard to governance between miners, developers and users, as well as the long-term security model as the rate of inflation of ETH decreases. Since the ETH community has successfully navigated a considerable number of technical and political challenges since its inception, the Company believes that it will continue to engineer its way around future challenges. The history of open-source software development would indicate that vibrant communities are able to change the software under development at a pace sufficient to stay relevant. The continuation of such vibrant communities is not guaranteed, and insufficient software development or any other unforeseen challenges that the community is not able to navigate could have an adverse impact on the business of the Company.

 

Potential Decrease in Global Demand for ETH

 

As a currency, ETH must serve as a means of exchange, store of value, and unit of account. Many people using ETH as money-over-internet-protocol (MoIP) do so with it as an international means of exchange. Speculators and investors using ETH as a store of value then layer on top of means of exchange users, creating further demand. If consumers stop using ETH as a means of exchange, or its adoption therein slows, then ETH’s price may suffer, adversely affecting the Company.

 

Investors should be aware that there is no assurance that ETH will maintain its long-term value in terms of purchasing power in the future or that the acceptance of ETH for payments by mainstream retail merchants and commercial businesses will continue to grow. As relatively new products and technologies, ETH and the Ethereum network have yet to become generally accepted as a means of payment for goods and services by major retail and commercial outlets, and use of ETH by consumers to pay such retail and commercial outlets remains limited. Banks and other established financial institutions may refuse to process funds for Ethereum network-based transactions, process wire transfers to or from digital asset trading platforms, Ethereum-related companies or service providers, or maintain accounts for persons or entities transacting in ETH. Conversely, a significant portion of ETH demand is generated by speculators and investors seeking to profit from the short or long-term holding of ETH. The Company believes that, like any commodity, ETH will fluctuate in value, but over time will gain a level of acceptance as a store of value, medium of exchange or token of utility.

 

Smart Contract Risk

 

The Ethereum network is based upon the development and deployment of smart contracts, which are self-executing contracts with the terms of the agreement written into software code. There are thousands of smart contracts currently running on Ethereum network. Like any software code, smart contracts are exposed to risk that the code contains a bug or other security vulnerability, which can lead to loss of assets that are held on or transacted through the contract. The smart contract deployed on Ethereum and, as such, may contain a bug or other vulnerability that may lead to the loss of digital assets held in the wallet. The Ethereum developer community audits widely used smart contracts frequently and publishes the results of such audits on public forums. The Company currently relies on MarsLand for its native staking and Liquid Collective for its liquid staking solution. The smart contract code via MarsLand was audited by CertiK. The smart contract code via Liquid Collective was audited by Halborn and Spearbit. Nevertheless, there is no guaranty against a bug or other vulnerability leading to a loss of digital assets.

 

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Risks Associated with the Ethereum Network

 

Dependence on Ethereum Network Developers

 

While many contributors to the Ethereum network’s open-source software are employed by companies in the industry, most of them are not directly compensated for helping to maintain the protocol. As a result, there are no contracts or guarantees that they will continue to contribute to the Ethereum network’s software (https://github.com/ether and https://github.com/orgs/ether/people). 

 

Issues with the Cryptography Underlying the Ethereum Network

 

Although the Ethereum network is one of the world’s most established digital asset networks, the Ethereum network and other cryptographic and algorithmic protocols governing the issuance of digital assets represent a new and rapidly evolving industry that is subject to a variety of factors that are difficult to evaluate. In the past, flaws in the source code for digital assets have been exposed and exploited, including flaws that disabled some functionality for users, exposed users’ personal information and/or resulted in the theft of users’ digital assets. The cryptography underlying ETH could prove to be flawed or ineffective, or developments in mathematics and/or technology, including advances in digital computing, algebraic geometry and quantum computing, could result in such cryptography becoming ineffective. In any of these circumstances, a malicious actor may be able to take the ETH held by the Company. Moreover, functionality of the Ethereum network may be negatively affected such that it is no longer attractive to users, thereby dampening demand for ETH. Even if digital assets other than ETH were affected by similar circumstances, any reduction in confidence in the source code or cryptography underlying digital assets generally could negatively affect the demand for digital assets and therefore adversely affect the business of the Company.

 

Disputes on the Development of the Ethereum Network may lead to Delays in the Development of the Network

 

There can be disputes between contributors on the best paths forward in building and maintaining the Ethereum network’s software. Furthermore, the stakers supporting the network and other developers and users of the network can disagree with the contributors as well, creating greater debate. Therefore, the Ethereum community often iterates slowly upon contentious protocol issues, which many perceive as prudently conservative, while others worry that it inhibits innovation. It will be important for the community to continue to develop at a pace that meets the demand for transacting in ETH, otherwise users may become frustrated and lose faith in the network. As a decentralized network, strong consensus and unity is particularly important to respond to potential growth and scalability challenges.

 

The Ethereum Blockchain may Temporarily or Permanently Fork and/or Split

 

The Ethereum network’s software and protocol are open source. When a modification is released by the developers and a substantial majority of participants consent to the modification, the change is implemented and the Ethereum network continues uninterrupted. However, if a change were activated with less than a substantial majority consenting to the proposed modification, and the modification is not compatible with the software prior to its modification, the consequence would be what is known as a “hard fork” (i.e., a split) of the Ethereum network (and the blockchain). One blockchain would be maintained by the pre-modification software and the other by the post-modification software. The effect is that both blockchain algorithms would be running parallel to one another, but each would be building an independent blockchain with independent native assets.

 

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A hard fork could present problems such as two copies of a token for the same non-fungible tokens (NFTs).  It could also present a problem for a customer having to choose to provide services with respect to digital assets resulting from a fork. In addition, digital asset loan agreements often dictate when and how each of the lender or the borrower of a digital asset pledging a certain digital asset gets the benefit of forked coins in the event of a hard fork. Similarly, derivative counterparties using ISDA-based contractual documentation may be subject to hard fork-related termination events.

 

Although forks are likely to be addressed by a community-led effort to merge the two groups, such a fork could still adversely affect ETH’s viability.

 

Risk if a Person Gains a 33% or More Share of the Ethereum Validators

 

According to Ethereum.org, the likelihood of successful attacks on the Ethereum network increases as the proportion of staked ETH controlled by the attacker increases. If an attacker controls 33% or more of the total stake, they can prevent the chain from finalizing by having 33% or more of the staked ETH maliciously attesting or failing to attest. If an attacker controls about 50% of the total stake, they could theoretically split the chain into two equally sized forks and then simply use their entire 50.1% stake to vote contrarily to the honest validator set, thereby maintaining the two forks and preventing finality. If an attacker controls 66% or more of the total stake, they simply vote for their preferred fork and then finalize it, simply because they can vote with a dishonest supermajority.

 

Dependence on the Internet

 

ETH stakers relay transactions to one another via the Internet, and when blocks are mined, they are also forwarded via the Internet. Users and developers access Ethereum via the Internet. Thus, the Ethereum network is dependent upon the continued functioning of the Internet.

 

Attacks on the Ethereum Network

 

The Ethereum network is periodically subject to distributed denial of service attacks to clog the list of transactions being tabulated by miners, which can slow the confirmation of authentic transactions. Another avenue of attack would be if a large number of miners were taken offline then it could take some time before the difficulty of the mining process algorithmically adjusts, which would stall block creation time and therefore transaction confirmation time. Thus far these scenarios have not plagued the network for long or in a systemic manner. This risk is expected to be substantially mitigated on Ethereum 2.0, as the PoS method of validating transactions was expected to improve the speed and efficiency of the network.

 

Decrease in Block Reward or Yield

 

In the event of a material decrease in the block reward to the Ethereum network, stakers may cease to provide their staked ETH to the consensus mechanism for the Ethereum network blockchain. This risk was expected to be mitigated in part on Ethereum 2.0, as the rewards earned by stakers of ETH will proportionately decline as more stakers participate in the network. Conversely, if some stakers decide to stop participating because the yield is too low, remaining stakers will enjoy a higher yield. Consequently, Ethereum 2.0 is expected to attract a sufficient number of stakers and validators to keep the network running efficiently.

 

Competitors to ETH and the Ethereum Network

 

Currently, ETH is the second largest digital asset by market capitalization, with Coingecko citing more than 5,000 alternative digital assets. To the extent a competitor to ETH gains popularity and greater market share, the use and price of ETH could be negatively impacted, which may adversely affect the investments of the Company. Similarly, the price of ETH could be negatively impacted by competition from incumbents in the credit card and payments industries or from other developing blockchain protocols.

 

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Financial Institutions may Refuse to Support Transactions Involving ETH

 

In the uncertain regulatory climate for digital assets, including ETH, regulated financial institutions may refuse to support transactions involving digital assets, including the receipt of cash proceeds from sales of digital asset. Should this occur, the Company’s business, prospects, financial condition, results of operations or cash flows could be materially adversely affected.

 

Risks Related to United States Government Regulations

 

New York State Moratorium on Cryptocurrency Mining Operations

 

On November 22, 2022, the New York State enacted a moratorium on cryptocurrency mining operations that use proof-of-work authentication methods to validate blockchain operations; provided that such operations shall be subject to a full generic environmental impact statement review. While the Company’s bitcoin mining operations in upstate New York State use proof-of-work authentication, they were approximately 90% (now 99%) carbon free according to NYISO Power Trends 2023 Report. The law provides for a two-year moratorium on new applications or new permits for an electric generating facility that utilizes a carbon-based fuel. Therefore, the Company believes that its New York State hosting facilities, which primarily depended on hydroelectric power, will be able to comply with the law.

 

We are subject to an extensive and rapidly-evolving regulatory landscape and any adverse changes to, or our failure to comply with, any laws and regulations could adversely affect our brand, reputation, business, operating results and financial condition.

 

Our business may be or may become subject to extensive laws, rules, regulations, policies, orders, determinations, directives, treaties, and legal and regulatory interpretations and guidance in the markets in which we operate, including those typically applied to financial services and banking, securities, commodities, the exchange, and transfer of digital assets, cross-border and domestic money and digital asset transmission businesses, as well as those governing data privacy, data governance, data protection, cybersecurity, responsible use of AI, fraud detection, payment services (including payment processing and settlement services), consumer protection, antitrust and competition, bankruptcy, tax, anti-bribery, economic and trade sanctions, anti-money laundering, and counter-terrorist financing. Many of these legal and regulatory regimes were adopted prior to the advent of the internet, mobile technologies, digital assets, and related technologies. As a result, they often do not contemplate or address unique issues associated with digital assets, are subject to significant uncertainty, and vary widely across U.S. federal, state, and local jurisdictions. These legal and regulatory regimes, including the laws, rules, and regulations thereunder, evolve frequently and may be modified, interpreted, and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another. Moreover, the relative novelty and evolving nature of our business and the significant uncertainty surrounding the regulation of digital assets requires us to exercise our judgement as to whether certain laws, rules, and regulations apply to us, and it is possible that governmental bodies and regulators may disagree with our conclusions. To the extent we have not complied with such laws, rules, and regulations, we could be subject to significant fines, limitations on our business, reputational harm, and other regulatory consequences, as well as criminal penalties, each of which may be significant and could adversely affect our business, operating results and financial condition.

 

In addition to existing laws and regulations, various governmental and regulatory bodies, including legislative and executive bodies, in the United States, as well as in other countries may adopt new laws and regulations, or new interpretations of existing laws and regulations may be issued by such bodies or the judiciary, which may adversely impact the development and use of digital assets as a whole, digital asset mining operations, and our legal and regulatory status in particular by changing how we operate our business, how our operations are regulated, and what products or services we and our competitors can offer, requiring changes to our compliance and risk mitigation measures, imposing new licensing requirements or new costs of doing business, or imposing a total ban on certain activities or transactions with respect to digital assets, as has occurred in certain jurisdictions in the past.

 

Due to our business activities, if laws or regulations or their respective interpretation change, we may become subject to ongoing examinations, oversight, and reviews by U.S. federal and state regulators, which would have broad discretion to audit and examine our business if we become subject to their oversight. Adverse changes to, or our failure to comply with, any laws and regulations have had, and may continue to have, an adverse effect on our reputation and brand and our business, operating results and financial condition.

 

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Regulatory restrictions that target AI, including, but not limited to, export restrictions may have a material adverse impact on our intended operations.

 

The increasing focus on the strategic importance of AI technologies has already resulted in regulatory restrictions that target products and services capable of enabling or facilitating AI, and may in the future result in additional restrictions impacting some or all of our service offerings. Such restrictions could include additional unilateral or multilateral export controls on certain products or technology, including, but not limited to, AI technologies. As geopolitical tensions have increased, semiconductors associated with AI, including GPUs and associated products, are increasingly the focus of export control restrictions proposed by stakeholders in the U.S. and its allies, and it is likely that additional unilateral or multilateral controls will be adopted. Such controls may be very broad in scope and application, prohibit us from exporting our services to any or all customers in one or more markets or could impose other conditions that limit our ability to serve demand abroad and could negatively and materially impact our business, revenue, and financial results. Export controls targeting GPUs and semiconductors associated with AI, which are increasingly likely, would restrict our ability to export our technology, services even though competitors may not be subject to similar restrictions, creating a competitive disadvantage for us and negatively impacting our business and financial results. Increasing use of economic sanctions may also impact demand for our services, negatively impacting our business and financial results. Additional unilateral or multilateral controls are also likely to include deemed export control limitations that negatively impact the ability of our research and development teams to execute our roadmap or other objectives in a timely manner. Additional export restrictions may not only impact our ability to serve overseas markets, but also provoke responses from foreign governments, including China, that negatively impact our ability to provide our services to customers in all markets worldwide, which could also substantially reduce our revenue.

 

During the third quarter of fiscal year 2023, the U.S. government announced new export restrictions and export licensing requirements targeting China’s semiconductor and supercomputing industries. These restrictions impact exports of certain chips, as well as software, hardware, equipment, and technology used to develop, produce, and manufacture certain chips, to China (including Hong Kong and Macau) and Russia. The new license requirements also apply to any future NVIDIA integrated circuit achieving certain peak performance and chip-to-chip I/O performance thresholds, as well as any system or board that includes those circuits. There are also now licensing requirements to export a wide array of products, including networking products, destined for certain end users and for certain end uses in China.

 

Management of these new license and other requirements is complicated and time consuming. Our results and competitive position may be harmed if we are restricted in offering our services, if customers purchase services from competitors, if customers develop their own internal solution, if we are unable to provide contractual warranty or other extended service obligations, if the U.S. government does not grant licenses in a timely manner or denies licenses to significant customers, or if we incur significant transition costs. Even if the U.S. government grants any requested licenses, the licenses may be temporary or impose burdensome conditions that we cannot or choose not to fulfill. The new requirements may benefit certain of our competitors, as the licensing process will make our pre-sale and post-sale technical support efforts more cumbersome and less certain, and encourage customers to pursue alternatives to our services.

 

Issues in the development and use of AI may result in reputational or competitive harm or liability.

 

We are beginning to build AI into our infrastructure services, and we are also providing computing power for AI available for our customers to use in solutions that they build. We are providing supporting/computing power to clients, including our strategic partners who develop AI systems. We expect this integration of AI into our offerings and our business in general to grow. AI presents risks and challenges that could affect its adoption, and therefore our business. AI algorithms or training methodologies may be flawed. Datasets may be overbroad, insufficient, or contain biased information. Content generated by AI systems may be offensive, illegal, or otherwise harmful. Ineffective or inadequate AI development or deployment practices by our Company or others could result in incidents that impair the acceptance of AI solutions or cause harm to individuals, customers, or society, or result in our products and services not working as intended. Human review of certain outputs may be required. As a result of these and other challenges associated with innovative technologies, our implementation of AI systems could subject us to competitive harm, regulatory action, legal liability, including under new proposed legislation regulating AI in jurisdictions, new applications of existing data protection, privacy, intellectual property, and other laws, and brand or reputational harm. Some AI scenarios present ethical issues or may have broad impacts on society. If we provide supporting/computing AI services that have unintended consequences, unintended usage or customization by our customers and partners, or are controversial because of their impact on human rights, privacy, employment, or other social, economic, or political issues, we may experience brand or reputational harm, adversely affecting our business and consolidated financial statements.

 

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We are subject to governmental regulation and other legal obligations related to data privacy, data protection and information security. If we are unable to comply with these, we may be subject to governmental enforcement actions, litigation, fines and penalties or adverse publicity.

 

We collect and process data, including personal, financial and confidential information about individuals, including our employees and business partners; however, not of any customers or other third parties. The collection, use and processing of such data about individuals are governed by data privacy laws and regulations enacted in the U.S. (federal and state), and other jurisdictions around the world. These data privacy laws and regulations are complex, continue to evolve, and on occasion may be inconsistent between jurisdictions leading to uncertainty in interpreting such laws and it is possible that these laws, regulations and requirements may be interpreted and applied in a manner that is inconsistent with our existing information processing practices, and many of these laws are significantly litigated and/or subject to regulatory enforcement. The implication of this includes that various federal, state and foreign legislative or regulatory bodies may enact or adopt new or additional laws and regulations concerning data privacy, data retention, data transfer, and data protection. Such laws may continue to restrict or dictate how we collect, maintain, combine and disseminate information and could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

In the United States, there are numerous federal and state laws and regulations that could apply to our operations or the operations of our partners, including data breach notification laws, financial information and other data privacy laws, and consumer protection laws and regulations (e.g., Section 5 of the FTC Act), that govern the collection, use, disclosure, and protection of personal information.

 

Existing and increasing legal and regulatory requirements could adversely affect our results of operations.

 

We are subject to a wide range of laws, regulations, and legal requirements in the U.S. and globally, including those that may apply to our products and online services offerings, and those that impose requirements related to user privacy, telecommunications, data storage and protection, advertising, and online content. Laws in several jurisdictions, including EU Member State laws under the European Electronic Communications Code, increasingly define certain of our services as regulated telecommunications services. This trend may continue and will result in these offerings being subjected to additional data protection, security, law enforcement surveillance, and other obligations. Regulators and private litigants may assert that our collection, use, and management of customer data and other information is inconsistent with their laws and regulations, including laws that apply to the tracking of users via technology such as cookies. New environmental, social, and governance laws and regulations are expanding mandatory disclosure, reporting, and diligence requirements. Legislative or regulatory action relating to cybersecurity requirements may increase the costs to develop, implement, or secure our products and services. Compliance with evolving digital accessibility laws and standards will require engineering and is important to our efforts to empower all people and organizations to achieve more. Legislative and regulatory action is emerging in the areas of AI and content moderation, which could increase costs or restrict opportunity. For example, in the EU, an AI Act is being considered, and may entail increased costs or decreased opportunities for the operation of our AI services in the European market.

 

We are subject to extensive environmental, health and safety laws and regulations that may expose us to significant liabilities for penalties, damages or costs of remediation or compliance.

 

Our operations and properties are subject to extensive laws and regulations governing occupational health and safety, the discharge of pollutants into the environment or otherwise relating to health, safety and environmental protection requirements in the United States. These laws and regulations may impose numerous obligations that are applicable to our operations, including acquisition of a permit or other approval before conducting construction or regulated activities; restrictions on the types, quantities and concentration of materials that can be released into the environment; limitation or prohibition of construction and operating activities in environmentally sensitive areas, such as wetlands; imposing specific health and safety standards addressing worker protection; and imposition of significant liabilities for pollution resulting from our operations, including investigation, remedial and clean-up costs. Failure to comply with these requirements may expose us to fines, penalties and/or interruptions in our operations that could have a material adverse effect on our financial position, results of operations and cash flows. Certain environmental laws may impose strict, joint and several liability for costs required to clean up and restore sites where hazardous substances have been disposed or otherwise released into the environment, even under circumstances where the hazardous substances were released by prior owners or operators or the activities conducted and from which a release emanated complied with applicable law. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by noise or the release of hazardous substances into the environment.

 

The trend in environmental regulation has been to place more restrictions and limitations on activities that may be perceived to impact the environment, and thus there can be no assurance as to the amount or timing of future expenditures for environmental regulation compliance or remediation. New or revised regulations that result in increased compliance costs or additional operating restrictions could have a material adverse effect on our financial position, results of operations and cash flows.

 

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The regulatory and legislative developments related to climate change, may materially adversely affect our brand, reputation, business, operating results and financial condition.

 

A number of governments or governmental bodies have introduced or are contemplating legislative and regulatory changes in response to various climate change interest groups and the potential impact of climate change. Given the very significant amount of electrical power required to operate digital asset mining machines, as well the environmental impact of mining for the rare earth metals used in the production of mining servers, the digital asset mining industry may become a target for future environmental and energy regulation. For example, in June and July of 2021, the Chinese government prohibited the operation of mining machines and supply of energy to mining businesses, citing concerns regarding high levels of energy consumption, which resulted in our suspension of mining operations in China. U.S. legislation and increased regulation regarding climate change could impose significant costs on us and our suppliers, including costs related to increased energy requirements, capital equipment, environmental monitoring and reporting, and other costs to comply with such regulations. Specifically, imposition of a carbon tax or other regulatory fee in a jurisdiction where we operate or on electricity that we purchase could result in substantially higher energy costs, and due to the significant amount of electrical power required to operate digital asset mining machines, could in turn put our facilities at a competitive disadvantage. Any future climate change regulations could also negatively impact our ability to compete with companies situated in areas not subject to such limitations. Given the political significance and uncertainty around the impact of climate change and how it should be addressed, we cannot predict how legislation and regulation will affect our financial condition, operating performance and ability to compete. Furthermore, even without such regulation, increased awareness and any adverse publicity in the global marketplace about potential impacts on climate change by us or other companies in our industry could harm our reputation. Any of the foregoing could have a material adverse effect on our financial position, results of operations and cash flows.

 

A particular digital asset’s status as a “security” in any relevant jurisdiction is subject to a high degree of uncertainty and if a regulator disagrees with our characterization of a digital asset, we may be subject to regulatory scrutiny, investigations, fines, and other penalties, which may adversely affect our business, operating results and financial condition. Furthermore, a determination that bitcoin or any other digital asset that we own or mine is a “security” may adversely affect the value of bitcoin and our business.

 

The SEC and its staff have taken the position that certain digital assets fall within the definition of a “security” under the U.S. federal securities laws. The legal test for determining whether any given digital asset is a security, as described below, is a highly complex, fact-driven analysis that may evolve over time, and the outcome is difficult to predict. Our determination that the digital assets we hold are not securities is a risk-based assessment and not a legal standard or one binding on regulators. The SEC generally does not provide advance guidance or confirmation on the status of any particular digital asset as a security. Furthermore, the SEC’s views in this area have evolved over time and it is difficult to predict the direction or timing of any continuing evolution. It is also possible that a change in the governing administration or the appointment of new SEC commissioners could substantially impact the views of the SEC and its staff. Public statements made by senior officials at the SEC indicate that the SEC does not intend to take the position that bitcoin is a security (as currently offered and sold). However, such statements are not official policy statements by the SEC and reflect only the speakers’ views, which are not binding on the SEC or any other agency or court and cannot be generalized to any other digital asset. As of the date of this report, with the exception of certain centrally issued digital assets that have received “no-action” letters from the SEC staff, bitcoin and ETH are the only digital assets which senior officials at the SEC have publicly stated are unlikely to be considered securities. SEC Chairman Gensler stated (at the Penn Law Capital Markets Association Annual Conference on April 4, 2022) that “Issuers of crypto tokens that are securities must register their offers and sales of these assets with the SEC and comply with our disclosure requirements or meet an exemption.” As a digital asset mining company, we do not believe we are an issuer of any “securities” as defined under the federal securities laws. Our internal process for determining whether the digital assets we hold or plan to hold is based upon the public statements of the SEC and existing case law. The digital assets we hold or plan to hold, other than bitcoin and ETH, may have been created by an issuer as an investment contract under the Howey test, SEC v. Howey Co., 328 U.S. 293 (1946), and may be deemed to be securities by the SEC. However, the Company was not the issuer that created these digital assets and is holding them on an interim basis until liquidated. Should the SEC state in the future that bitcoin, ETH, U.S. digital currency tokens or other digital assets we hold are securities, we may subject to additional securities laws’ requirements and may no longer be able to hold any of these digital assets. It will then likely become difficult or impossible for such digital assets to be traded, cleared or custodied in the United States through the same channels used by non-security digital assets, which in addition to materially and adversely affecting the trading value of the digital assets is likely to cause substantial volatility and significantly impact their liquidity and market participants’ ability to convert the digital assets into U.S. dollars. Our inability to exchange bitcoin for fiat currency or other digital assets (and vice versa) and to administer our treasury management objectives may decrease our earnings potential and have an adverse impact on our business and financial condition.

 

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Under the Investment Company Act of 1940, as amended, a company may fall within the definition of an investment company under Section 3(c)(1)(A) thereof if 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 under Section 3(a)(1)(C) thereof if it is engaged or proposes to engage in business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire “investment securities” (as defined) having a value exceeding 40% of its total assets (exclusive of government securities and cash items) on an unconsolidated basis. There is no authoritative law, rule or binding guidance published by the SEC regarding the status of digital assets as “securities” or “investment securities” under the Investment Company Act. Although we believe that we are not engaged in the business of investing, reinvesting, or trading in investment securities, and we do not hold ourselves out as being primarily engaged, or proposing to engage primarily, in the business of investing, reinvesting or trading in securities, to the extent the digital assets which we mine, own, or otherwise acquire may be deemed “securities” or “investment securities” by the SEC or a court of competent jurisdiction, we may meet the definition of an investment company. If we fall within the definition of an investment company under the Investment Company Act, we would be required to register with the SEC. If an investment company fails to register, it likely would have to stop doing almost all business, and its contracts would become voidable. Generally non-U.S. issuers may not register as an investment company without an SEC order.

 

The classification of a digital asset as a security under the applicable law has wide-ranging implications for the regulatory obligations that flow from the mining, sale and trading of such assets. For example, a digital asset that is a security in the United States may generally only be offered or sold in the United States pursuant to a registration statement filed with the SEC or in an offering that qualifies for an exemption from registration. Persons that effect transactions in digital assets that are deemed securities in the United States may be subject to registration with the SEC as a “broker” or “dealer.”

 

There can be no assurances that we will properly characterize any given digital asset as a security or non-security for purposes of determining which digital assets to mine, hold and trade, or that the SEC, or a court, if the question was presented to it, would agree with our assessment. We could be subject to judicial or administrative sanctions for failing to offer or sell digital assets in compliance with the registration requirements, or for acting as a broker or dealer without appropriate registration. Such an action could result in injunctions, cease and desist orders, as well as civil monetary penalties, fines, and disgorgement, criminal liability, and reputational harm. Further, if bitcoin is deemed to be a security under the laws of any U.S. federal, state, or local jurisdiction, or in a proceeding in a court of law or otherwise, it may have adverse consequences for such digital asset. For instance, all transactions in such supported digital asset would have to be registered with the SEC, or conducted in accordance with an exemption from registration, which could severely limit its liquidity, usability and transactability. For instance, all transactions in such supported digital asset would have to be registered with the SEC, or conducted in accordance with an exemption from registration, which could severely limit its liquidity, usability and transactability. Further, it could draw negative publicity and a decline in the general acceptance of the digital asset. Also, it may make it difficult for such digital asset to be traded, cleared, and custodied as compared to other digital assets that are not considered to be securities.

 

Failure to comply with anti-corruption and anti-money laundering laws, including the Foreign Corrupt Practices Act (the “FCPA”) and similar laws associated with our activities outside of the United States, could subject us to penalties and other adverse consequences.

 

We operate an international business and may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. We are subject to the FCPA, and other applicable anti-corruption and anti-money laundering laws in certain countries in which we conduct activities. The FCPA prohibits providing, offering, promising, or authorizing, directly or indirectly, anything of value to government officials, political parties, or political candidates for the purpose of obtaining or retaining business or securing any improper business advantage. In addition, U.S. public companies are required to maintain records that accurately and fairly represent their transactions and have an adequate system of internal accounting controls.

 

In many foreign countries, including countries in which we may conduct business, it may be a local custom that businesses engage in practices that are prohibited by the FCPA, or other applicable laws and regulations. We face significant risks if we or any of our directors, officers, employees, contractors, agents or other partners or representatives fail to comply with these laws and governmental authorities in the United States and elsewhere could seek to impose substantial civil and/or criminal fines and penalties which could have a material adverse effect on our business, reputation, operating results, prospects and financial condition.

 

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Any violation of the FCPA, other applicable anti-corruption laws, or anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracts, any of which could have a materially adverse effect on our reputation, business, operating results, prospects and financial condition. In addition, responding to any enforcement action or internal investigation related to alleged misconduct may result in a significant diversion of management’s attention and resources and significant defense costs and other professional fees.

  

Enactment of the Infrastructure Investment and Jobs Act of 2021 (the “Infrastructure Act”) may have an adverse impact on our business and financial condition.

 

On November 15, 2021, President Joseph R. Biden signed the Infrastructure Act. Section 80603 of the Infrastructure Act modifies and amends the Internal Revenue Code of 1986 (the “Code”) by requiring brokers of digital asset transactions to report their customers to the IRS. This provision was included to enforce the taxability of digital asset transactions. Section 80603 defines “broker” as “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” That could potentially include miners, validators, and developers of decentralized applications. These functions play a critical role in our business and in the functioning of the blockchain ecosystem. Importantly, these functions have no way of identifying their anonymous users. Indeed, bitcoin’s blockchain was designed for anonymity.

 

This reporting requirement took effect on January 1, 2023, and the implementation of these requirements is ongoing. The Company is closely monitoring the situation and waiting for more issuance of updated guidance from government agencies. Disclosing the identity of our bitcoin mining operations and associated accounts to ensure they can be taxed by the IRS could cause a significant devaluing of our business, the bitcoin currency, and the entire digital assets market. Additionally, noncompliance with this provision could lead to significant fines and or regulatory actions against our company.

 

Risks related to material pending crypto legislation or regulations

 

On the federal level, by certain accounts, more than 100 bills were introduced in Congress to regulate cryptocurrency and digital assets. Except as described in other specific risk factors set forth herein, we do not believe that material pending crypto legislation or regulations would have a material effect on our business, financial condition and results of operations. Certain of the material pending bills are as follows:

 

  Digital Commodity Exchange Act of 2022 (DCEA), introduced on April 28, 2022 in the House of Representatives, would create a regulatory overview for digital commodity developers, dealers and exchanges, none of which would currently apply to the Company;

 

  Securities Clarity Act, introduced on July 16, 2021 in the House of Representatives, is intended to work with the proposed DCEA. The Securities Clarity Act would codify that an asset, whether tangible or intangible (including an asset in digital form), that is not per se a security, does not become a security as a result of being sold or otherwise transferred pursuant to an investment contract. Thus, certain digital assets which the Company may acquire, if sold pursuant to an investment contract, would not become securities, subject to SEC regulations;

 

  Digital Trading Clarity Act of 2022, introduced on September 29, 2022 in the Senate, provides that if a federal court or the SEC determines that a digital asset is a security, the bill requires the SEC Division of Enforcement to request information from an intermediary listing that asset to determine if the intermediary meets the requirements in the bill texts. As stated elsewhere herein, the Company will conduct an extensive compliance review prior to holding any digital asset that may be deemed to be a security, and would need to avoid holding any such digital asset if this bill becomes law.

 

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Our interactions with a blockchain and mining pools may expose us to SDN or blocked persons or cause us to violate provisions of law that did not contemplate distributive 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 or from countries on OFAC’s sanctioned countries’ list. We also rely on a third-party mining pool service provider for our mining revenue payments and other participants in the mining pool, that, unknown to us, may also be persons from countries on OFAC’s SDN list or from countries on OFAC’s sanctioned countries list. Our Company’s policy prohibits any transactions with such SDN individuals or persons from sanctioned countries, but we may not be adequately capable of determining the ultimate identity of the individual with whom we transact with respect to selling bitcoin assets. 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 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 affect the value of our Ordinary Shares.

  

If regulatory changes or interpretations of our activities require our registration as a money services business (“MSB”) under the regulations promulgated by FinCEN under the authority of the U.S. Bank Secrecy Act (“BSA”), 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 a money service business (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. The Digital Asset Anti-Money Laundering Act of 2022 (DAAMLA) was introduced on December 14, 2022 in the Senate. The bill would authorize FinCEN to designate digital asset wallet providers, miners, validators, and other select network participants as MSBs. This designation would require these parties to register with FinCEN and would extend to these parties’ anti-money laundering (AML) responsibilities under the BSA.

 

To the extent that our activities cause us to be deemed an MSB and/or a “money transmitter” (“MT”) or equivalent designation, under state law in any state in which we operate (currently, Texas, Kentucky and New York), 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 AML programs, maintenance of certain records and other operational requirements. Such additional federal or state regulatory obligations may cause us to incur extraordinary expenses, possibly affecting an investment in our securities in a materially adverse manner. Furthermore, the Company and our service providers 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 leave a particular state or the United States completely. Any such action would be expected to materially adversely affect our operations.

 

Current regulation of the exchange of bitcoins under the CEA by the CFTC is unclear; to the extent we become subject to regulation under the CFTC in connection with our exchange of bitcoin, we may incur additional compliance costs, which may be significant.

 

Current legislation, including the Commodities Exchange Act of 1936, as amended (the “CEA”) is unclear with respect to the exchange of bitcoins. Changes in the CEA or the regulations promulgated thereunder, as well as interpretations thereof and official promulgations by the Commodity Futures Trading Commission (“CFTC”), which oversees the CEA, may impact the classification of bitcoins and therefore may subject them to additional regulatory oversight by the CFTC.

 

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Presently, bitcoin derivatives are not excluded from the definition of a “commodity future” by the CFTC. We cannot be certain as to how future regulatory developments will impact the treatment of bitcoins under the law. Bitcoins have been deemed to fall within the definition of a commodity and, we may be required to register and comply with additional regulation under the CEA, including additional periodic report and disclosure standards and requirements. Moreover, we may be required to register as a commodity pool operator or as a commodity pool with the CFTC through the National Futures Association. Such additional registrations may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting an investment in us. If we determine not to comply with such additional regulatory and registration requirements, we may seek to curtail our U.S. operations. Any such action would be expected to materially adversely affect our operations. As of the date of this report, no CFTC orders or rulings are applicable to our business.

 

Because there has been limited precedent set for financial accounting of bitcoin and other digital assets, the determination that we have made for how to account for bitcoin and other digital assets transactions may be subject to change.

 

While there has been limited precedent set for the financial accounting of digital assets and related revenue recognition, on December 13, 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-08, which addresses the accounting and disclosure requirements for certain crypto assets. Under this new guidance, entities are required to subsequently measure certain crypto assets at fair value, with changes in fair value recorded in net income in each reporting period. Besides ASU 2023-08 issued, there has been little official guidance provided by the FASB, the Public Company Accounting Oversight Board (PCAOB) or the SEC, it is unclear how companies may in the future be required to account for bitcoin and other digital assets transactions and related revenue recognition. A change in regulatory or financial accounting standards could result in the necessity to change our accounting methods and restate our financial statements. Such a restatement could adversely affect the accounting for our newly mined bitcoin rewards and more generally negatively impact our business, prospects, financial condition and results of operation. Such circumstances would have a material adverse effect on our ability to continue as a going concern or to pursue our business strategy at all, which would have a material adverse effect on our business, prospects or operations as well as and potentially the value of any digital assets we hold or expects to acquire for our own account and harm investors.

 

Risks Related to Previously Operating in China

 

We may be subject to fines and penalties for operating in China without registration.

 

Prior to the commencement of the Company’s bitcoin mining business, and before the involvement of any of the Company’s current directors, officers or employees, Golden Bull Limited formerly operated a peer-to-peer lending business in the PRC, as discussed below. Additionally, from February 2020 to June 2021, the Company operated its bitcoin mining business in the PRC, but completed the migration of all of its bitcoin mining operations out of China by September 2021.

 

Pursuant to laws and regulations of the PRC, there are two ways for foreign legal persons/entities to be considered to be engaging in operation activities within the territory of China. One way is to establish a foreign-invested enterprise, that is incorporated, according to the Foreign Investment Law of PRC, within the territory of China and that is wholly or partly invested by a foreign investor. The organization form, institutional framework and standard of conduct of a foreign-invested enterprise are subject to the provisions of the Company Law of the PRC and the Partnership Enterprise Law of the PRC and other law related regulations. Another way to be deemed to be operating within China is to complete the approval and registration procedures with the relevant regulatory authorities in accordance with the provisions of Administrative Measures for the Registration of Enterprises of Foreign Countries (Regions) Engaging in Production and Operation Activities within the Territory of China (Revised in 2020), or Order No.31. However, in view of the ban on all new digital asset operations in China, we terminated the process of forming a subsidiary in mainland China. Since our Hong Kong subsidiary had not obtained business licenses in mainland China where Bit Digital Hong Kong used to carry out business, it may lead to a punishment of a warning, fine, confiscation of income and/or suspension of business for rectification.

 

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We may be subject to fines and penalties for our prior mining activities in mainland China.

 

The Chinese government implements the management systems of pre-establishment national treatment and negative list for foreign investment. Pre-establishment national treatment refers to the treatment given to foreign investors and their investments during the investment access stage, which is not lower than that given to their domestic counterparts; negative list for foreign investment refers to special administrative measures for the restricted or prohibited access of foreign investment in specific fields as stipulated by the Chinese government.

 

Pursuant to the Special Administrative Measures for Access of Foreign Investment Access (2021 Edition), or the 2021 Edition Negative List for Foreign, issued by The Ministry of Commerce of the PRC (the “MOFCOM”) and the National Development and Reform Commission (the “NDRC”) on December 27, 2021, which came into effect on January 1, 2022, our bitcoin mining business does not fall into the Negative List for Foreign. However, the 2021 Edition Negative List for Foreign indicates that “Fields not mentioned in the Negative List for Foreign Investment Access shall be subject to administration under the principle of consistency for domestic and foreign investments. The relevant provisions of the Negative List for Market Access shall apply to domestic and foreign investors on a unified basis.”

 

Also, based on the Negative List for Market Access (2022 Edition), “the Catalogue for Guidance on Industrial Restructuring shall be included in the Negative List for Market Access”; plus, according to the Decision of the State Council on Promulgating and Implementing the “Temporary Provisions on Promoting Industrial Structure Adjustment,” valid from December. 2, 2005, “In principle, the ‘Guidance Catalogue for the Industrial Structure Adjustment’ shall apply to various types of enterprises inside China.” “The industries of the eliminated category under the ‘Guidance Catalogue for the Industrial Structure Adjustment’ shall apply to the foreign investment enterprises.” and “Investments are prohibited from being contributed to projects under the eliminated category.” Additionally, the NDRC released on December 30, 2021 its No. 49 Decree, announcing that the Decision of the National Development and Reform Commission on Amending the Guiding Catalog for Industrial Restructuring (2019 Version) (the “Amended Catalog”). The Amended Catalog added “virtual currency mining activities” to the eliminated category of “1. outdated production processing and equipment under the original Catalog.” Therefore, foreign investment enterprises are prohibited from virtual currency activities and our bitcoin mining business are banned in China as well. There can be no assurance that our prior mining activities in China will not be subject to fines and penalties on a retroactive basis.

 

We may be subject measures from the Cyberspace Administration of China concerning the collection of data and required to obtain clearance from the CAC.

 

The Cybersecurity Review Measures (2021) (the “Measures”) were officially released to the public on December 28, 2021 and became effective on February 15, 2022. According to the Measures, to go public abroad, an online platform operator that possesses the personal information of more than 1 million users must seek cybersecurity review from the Office of Cybersecurity Review.

 

Currently, we have not been involved in any investigations on cybersecurity review initiated by the CAC or related governmental regulatory authorities, and we have not received any inquiry, notice, warning, or sanction in such respect.

 

We believe we currently are not required to obtain clearance from the CAC regarding our listing in the United States under the recently-enacted or proposed regulations or rules because we have never set an online platform for any user and we have not acted as an online platform operator. However, since these cybersecurity rules were recently enacted and uncertainties exist as to the interpretation or implementation of the Measures, if the Measures require us to obtain clearance or permissions from the CAC, we would file an application with CAC and seek to obtain the clearance or permissions from the CAC as required, however there can be no assurance we will obtain clearance or permission which could adversely affect our business. Compliance with the Measures, as well as additional laws, regulations and guidelines that the Chinese government promulgates in the future, may entail significant expenses and could materially affect our business.

 

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United States regulators may be limited in their ability to conduct investigations or inspections of our operations in Hong Kong.

 

The increased regulatory scrutiny of U.S.-listed companies with operations in China could add uncertainties to our business operations, share price and reputation. Although the audit reports of Audit Alliance LLP incorporated by reference into this report are prepared by our auditors in Singapore who are subject to inspection by the Public Company Accounting Overnight Board (the “PCAOB”), there is no guarantee that future audit reports will be prepared by auditors that are completely inspected by the PCAOB and, as such, future investors may be deprived of the benefit of such complete inspections, which could result in limitations or restrictions on our ability to access the U.S. capital markets. Furthermore, trading in our securities may be prohibited under the Holding Foreign Companies Accountable Act (the “HFCA Act”) or the Accelerating Holding Foreign Companies Accountable Act if the SEC subsequently determines our audit work is performed by auditors that the PCAOB is unable to inspect or investigate completely, and as a result, U.S. national securities exchanges, such as Nasdaq or the over-the-counter market, may determine to delist our securities.

 

U.S. public companies that have or had a substantial portion of their operations in China have been the subject of heightened scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered on financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate government policies or a lack of adherence thereto and, in many cases, allegations of fraud.

 

As part of increased regulatory focus in the United States on access to audit information, the United States enacted the Holding Foreign Companies Accountable Act, or the HFCA Act, in December 2020. The HFCA Act includes requirements for the SEC to identify issuers whose audit reports are prepared by auditors that the PCAOB is unable to inspect or investigate completely because of a restriction imposed by a non-U.S. authority in the auditor’s local jurisdiction. The HFCA Act also requires public companies on this SEC list to certify that they are not owned or controlled by a foreign government and make certain additional disclosures in their SEC filings. In addition, under the HFCA Act, if the auditor of a U.S. listed company’s financial statements is not subject to PCAOB inspections for three consecutive “non-inspection” years, the SEC is required to prohibit the securities of such issuer from being traded on a U.S. national securities exchange, such as the NYSE and Nasdaq, or in the U.S. over-the-counter markets. On December 29, 2022, the Consolidated Appropriations Act, 2023 was signed into law, which, among other things, amended the HFCA Act to reduce from three years to two years the number of consecutive years an issuer can be identified as an identified issuer before the SEC can prohibit an issuer’s securities from trading on any U.S. national securities exchange and on the over-the- counter market. Accordingly, our securities may be prohibited from trading on Nasdaq or other U.S. stock exchange if our auditor is not inspected by the PCAOB for two consecutive years, and this ultimately could result in our Ordinary Shares being delisted.

 

On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which if enacted into law, would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on U.S. stock exchanges if its auditors are not subject to PCAOB inspections for two consecutive “non-inspection” years instead of three. On September 22, 2021, the PCAOB adopted a final rule implementing the HFCA Act, which provides a framework for the PCAOB to use when determining, as contemplated under the HFCA Act, whether the Board is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction. On December 16, 2021, the PCAOB issued PCAOB Rule 6100 Board Determinations Under the Holding Foreign Companies Accountable Act. The PCAOB notified the SEC that it was unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and in Hong Kong because of the positions taken by authorities in mainland China and Hong Kong. The PCAOB issued a Determination Report on December 15, 2022, determining that the PCAOB secured complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong, and vacating the 2021 Determinations to the contrary. However, the PCAOB further noted that it will act immediately to consider the need to issue a new determination if the PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access. While the audit report of Audit Alliance LLP included in this report was prepared by auditors based in Singapore who are subject to inspection and investigation by the PCAOB, there can be no assurance that our auditor or we will be able to comply with these and other requirements imposed by U.S. regulators in the future. The market prices of our Ordinary Shares and/or other securities could be adversely affected as a result of possible negative impacts of the HFCA Act and other similar rules and regulations.

 

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Our Hong Kong subsidiaries could become subject to certain PRC laws if such laws are applied to Hong Kong.

 

The national laws of the PRC, including, but not limited to the Cybersecurity Review Measures that became effective on February 15, 2022, do not currently apply to our Hong Kong subsidiaries, except for those listed in the Basic Law of Hong Kong. However, due to changes in laws, regulations or policies, including how those laws, regulations or policies would be interpreted or implemented, and the national laws applicable in Hong Kong, the Basic Law might be revised in the future and our Hong Kong subsidiaries may be subject to certain PRC laws.

 

Pursuant to Article 18 of the Basic Law of the Hong Kong Special Administrative Region of the PRC (the “Basic Law”), the laws in force in the Hong Kong Special Administrative Region shall be the Basic Law, the laws previously in force in Hong Kong as provided for in Article 8 of this Law, and the laws enacted by the legislature of the Region. National laws shall not be applied in the Hong Kong Special Administrative Region except for those listed in Annex III to the Basic Law. The laws listed therein shall be applied locally by way of promulgation or legislation by the Region. Also, regarding the Annex III and several Instruments of the Basic Law, National Laws, which have applied in Hong Kong until now are as following:

 

“Resolution on the Capital, Calendar, National Anthem and National Flag of the PRC; Resolution on the National Day of the PRC; Declaration of the Government of the PRC on the Territorial Sea; Nationality Law of the PRC; Regulations of the PRC Concerning Diplomatic Privileges and Immunities; Law of the PRC on the National Flag; Regulations of the PRC Concerning Consular Privileges and Immunities; Law of the PRC on the National Emblem; Law of the PRC on the Territorial Sea and the Contiguous Zone; Law of the PRC on Garrisoning the Hong Kong Special Administrative Region; Law of the PRC on the Exclusive Economic Zone and the Continental Shelf; Law of the PRC on Judicial Immunity from Compulsory Measures Concerning the Property of Foreign Central Banks; and Law of the PRC on the National Anthem; Law of the PRC on Safeguarding National Security in the Hong Kong Special Administrative Region.”

 

As of the date of this report, the Hong Kong subsidiaries have not established any subsidiary or branch in mainland PRC and are not conducting any business operations in mainland PRC.

 

However, due to changes in laws, regulations or policies, including how these laws, regulations or policies would be interpreted or implemented, the national laws applicable in Hong Kong in the Basic Law might be revised in the future.

 

Therefore, we cannot assure you that we will not be affected by the foregoing or relevant laws, regulations or policies in the future, if there are any changes to the foregoing laws, regulations and policies, or if any new laws, regulations, and policies are published. We could not guarantee that the relevant laws, regulations, or policies would not be applied retroactively, so we might face penalties, and our reputation and results of operations could be materially and adversely affected.

 

Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on the indirect transfer of equity in the past and potential acquisitions we may pursue in the future.

 

The PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of certain taxable assets, including, in particular, equity interests in a PRC resident enterprise, by a non-resident enterprise by promulgating and implementing SAT Circular 59 and Circular 698, which became effective in January 2008, and a Circular 7 to replace some of the existing rules in Circular 698, which became effective in February 2015.

 

Under Circular 7, where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests of a PRC “resident enterprise” indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise, being the transferor, may be subject to PRC enterprise income tax if the indirect transfer is considered to be an abusive use of company structure without reasonable commercial purposes. As a result, gains derived from such indirect transfer may be subject to PRC tax at a rate of up to 10%.

 

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On October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Nonresident Enterprise Income Tax at Source partly revised, or SAT Circular 37, which came into effect on December 1, 2017. The SAT Circular 37 further clarifies the practice and procedure of the withholding of non-resident enterprise income tax. SAT Circular 698 was repealed from the date SAT Circular 37 was enacted. Also, the SAT Circular 37 has been partially revised by the Announcement of the State Administration of Taxation on the Revision to Certain Taxation Regulatory Documents, namely Circular 31, which has been effective on June 15, 2018.

 

Where a non-resident enterprise transfers taxable assets in China indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity whose equity is transferred, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes. We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our Company may be subject to filing obligations or taxed if our company is transferor in such transactions and may be subject to withholding obligations if our company is transferee in such transactions, under Circular 7 and/or SAT Circular 37. For transfer of shares in our Company by investors who are non-PRC resident enterprises, our former PRC subsidiaries may be requested to assist in the filing under SAT Circular 7 and/or Circular 37. As a result, we may be required to expend valuable resources to comply with SAT Circular 7 and/or Circular 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our Company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.

 

Risks Related to Singapore Government Regulations

 

Regulations on Payment Services in Singapore

 

Staking activities will be performed by one of our subsidiaries, Bit Digital Singapore Pte. Ltd. (“BTSG”) which is incorporated under the laws of the Republic of Singapore and currently does not possess any financial regulatory licenses.

 

BTSG intends to use its own proprietary assets to trade and stake ETH, which is defined as a digital payment token (“DPT”) (as defined under the Payment Services Act 2019 of Singapore (“PS Act”) with licensed or otherwise exempt third party service providers under applicable laws (including the PS Act or the Securities and Futures Act 2001 of Singapore (“SFA”)). BTSG’s current business practices in Singapore are subject to the following regulatory risks, as described herein.

 

The Monetary Authority of Singapore (“MAS”) regulates the provision of payment services in Singapore under the PS Act. Unless excluded or exempt, an entity must obtain the relevant license to carry on a business in providing regulated payment services under the PS Act, which include account issuance service, e-money issuance service, domestic money transfer service, cross-border money transfer service, merchant acquisition service, digital payment token service, and money-changing service.

 

Under the PS Act, licensees may be subject to obligations relating to general approval requirements for changes of control, appointment and removal of CEOs and directors, general notification and record-keeping requirements, audit requirements, base capital requirements, anti-money laundering requirements (see below), the requirement to furnish security (for a major payment institution), the requirement to safeguard customer monies (for a major payment institution), and other applicable requirements. Licensees are expected to implement certain systems, processes and controls in line with MAS’ Guidelines on Risk Management Practices applicable to financial institutions in Singapore.

 

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BTSG intends to trade and stake ETH on its own account, not to provide any payment service to customers and not to carry on a business of “dealing in” DPT as a service to any third-party. In particular, BTSG: (i) will use its own proprietary money for trading and/or staking (no customer money is used); (ii) will not trade or stake DPTs for or on behalf of customers; (iii) will not market or advertise that it provides any such service to customers; (iv) will not enter into trades with counterparties as a matter of course (e.g. at the customer’s request) or stake DPT at a customer’s request; (v) will only enter into trades or staking arrangements based on its own personal/proprietary needs; (vi) will not collect any fees from counterparties (instead, it is the counterparties that are service providers, providing services to BTSG); and (vii) will only trade or stake through or with licensed or licensed service providers. Accordingly, BTSG is unlikely to be regarded as carrying on a business in providing a “digital payment token service” under the PS Act’s current regulatory regime.

 

However, there remains a risk that MAS may take a more restrictive view, with the trading of ETH being construed as “dealing in DPT”, requiring a license under the PS Act. In addition, laws and regulations related to payments and financial services are evolving in Singapore, and changes in such laws and regulations could affect our business practices in the manner that we have done, expect to do, or at all. MAS could enact new regulations, change regulations that were previously adopted, modify, through supervision or enforcement, past regulatory guidance, or interpret existing regulations in a manner different or stricter than have been previously interpreted, any of which could adversely affect or require us to change BTSG’s business practices in Singapore.

 

Regulations on Anti-money Laundering and Countering the Financing of Terrorism (“AML/CFT”)

 

We and our partners who work with us are required to comply with certain anti-money laundering requirements in the jurisdictions where we and our partners operate. In Singapore, regulated financial institutions must comply with all applicable AML/CFT obligations, including the relevant AML/CFT Notices and Guidelines issued by MAS (e.g. the Notice PSN02 Prevention of Money Laundering and Countering the Financing of Terrorism – Digital Payment Token Service and the Guidelines to Notice PSN02 on Prevention of Money Laundering and Countering the Financing of Terrorism - Digital Payment Token Service). Among other things, the AML/CFT Notices require financial institutions to put in place robust controls to detect and deter the flow of illicit funds through Singapore’s financial system, identify and know their customers (including beneficial owners), conduct regular account reviews, and to monitor and report any suspicious transaction.

 

The primary AML/CFT legislation in Singapore that are of general application are the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act, Chapter 84A of Singapore (the “CDSA”) and Terrorism (Suppression of Financing) Act, Chapter 325 of Singapore (the “TSOFA”). The CDSA provides for the confiscation of benefits derived from, and to combat, corruption, drug dealing and other serious crimes. Generally, the CDSA criminalizes the concealment or transfer of the benefits of criminal conduct as well as the knowing assistance of the concealment, transfer or retention of such benefits. The TSOFA criminalizes terrorism financing and prohibits any person in Singapore from dealing with or providing services to a terrorist entity, including those designated pursuant to the TSOFA. The CDSA and the TSOFA also require suspicious transaction reports to be lodged with the Suspicious Transaction Reporting Office. If any person fails to lodge the requisite reports under the CDSA and the TSOFA, it may be subject to criminal liability. In addition, financial institutions, non-financial institutions and individuals in Singapore are required to comply with financial sanction requirements in relation to individuals and entities designated by the United Nations.

 

As BTSG does not currently hold any financial regulatory licenses in Singapore, it only complies with the CDSA and the TSOFA, the primary AML/CFT legislation in Singapore that are of general application (and does not comply with PSN02 and the related guidelines). It is possible that financial institutions in Singapore may not be willing to offer financial services to BTSG due to concerns on the origin of BTSG’s funds, from an AML/CFT perspective.

 

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The Company expects to acquire digital assets on liquid, regulated exchanges with robust anti-money laundering (“AML”) and know-your-client (“KYC”) policies and procedures. However, there are no assurances that cryptocurrency trading platforms on which the Company transacts business will continue to operate effectively, maintain adequate liquidity or that their AML and KYC policies and procedures will be effective, which could negatively impact the Company and its ability to acquire or sell ETH and other digital assets.

 

MAS could enact new regulations, change regulations that were previously adopted, modify, through supervision or enforcement, past regulatory guidance, or interpret existing regulations in a manner different or stricter than have been previously interpreted, any of which could adversely affect or require us to change BTSG’s business practices in Singapore.

 

Risks Involving Intellectual Property

 

We rely upon licenses of third-party intellectual property rights and may be unable to protect our software codes.

 

We actively use specific hardware and software for our bitcoin mining operation. In certain cases, source code and other software assets may be subject to an open source license, as much technology development underway in this sector is open source. For these works, the Company intends to adhere to the terms of any license agreements that may be in place.

 

We do not currently own, and do not have any current plans to seek, any patents in connection with our existing and planned blockchain and digital asset related operations. We rely upon trade secrets, trademarks, service marks, trade names, copyrights and other intellectual property rights and expect to license the use of intellectual property rights owned and controlled by others. In addition, we have developed and may further develop certain proprietary software applications for purposes of our digital asset mining operation. Our open source licenses may not afford us the protection we need to protect our intellectual property.

 

Our internal systems rely on software that is highly technical, and, if it contains undetected errors, our business could be adversely affected.

 

Our internal systems rely on software that is highly technical and complex. In addition, our internal systems depend on the ability of such software to store, retrieve, process and manage immense amounts of data. The software on which we rely has contained, and may now or in the future contain, undetected errors or bugs. Some errors may only be discovered after the code has been released for external or internal use. Any errors, bugs or defects discovered in the software on which we rely could result in harm to our reputation, or liability for damages, any of which could adversely affect our business, results of operations and financial conditions.

 

We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.

 

We regard trademarks, domain names, know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on a combination of intellectual property laws and contractual arrangements, including confidentiality and non-compete agreements with our employees and others, to protect our proprietary rights. Thus, we cannot assure you that any of our intellectual property rights would not be challenged, invalidated, circumvented or misappropriated, or such intellectual property will be sufficient to provide us with competitive advantages. In addition, because of the rapid pace of technological change in our industry, parts of our business rely on technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties on reasonable terms, or at all.

 

Preventing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. To the extent that our employees or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related know-how and inventions. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.

 

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We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.

 

We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties. We may be, from time to time in the future, subject to legal proceedings and claims relating to the intellectual property rights of others. In addition, there may be third-party trademarks, patents, copyrights, know-how or other intellectual property rights that are infringed by our products, services or other aspects of our business without our awareness. Holders of such intellectual property rights may seek to enforce such intellectual property rights against us in China, the United States or other jurisdictions. If any third-party infringement claims are brought against us, we may be forced to divert management’s time and other resources from our business and operations to defend against these claims, regardless of their merits. If we were found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. As a result, our business and results of operations may be materially and adversely affected.

 

Risks Related to Our Ordinary Shares

 

The trading price of our Ordinary Shares is subject to pricing factors that are not necessarily associated with traditional factors that influence stock prices or the value of non-bitcoin assets such as revenue, cash flows, profitability, growth prospects or business activity levels since the value and price, as determined by the investing public, may be influenced by future anticipated adoption or appreciation in value of digital assets or blockchains generally, factors over which we have little or no influence or control.

 

Other factors that could cause volatility in the market price of our Ordinary Shares include, but are not limited to:

 

actual or anticipated fluctuations in our financial condition and operating results or those of companies perceived to be similar to us;

 

actual or anticipated changes in our growth rate relative to our competitors;

 

commercial success and market acceptance of blockchain and bitcoin and other digital assets;

 

actions by our competitors, such as new business initiatives, acquisitions and divestitures;

 

strategic transactions undertaken by us;

 

additions or departures of key personnel;

 

prevailing economic conditions;

 

disputes concerning our intellectual property or other proprietary rights;

 

sales of our Ordinary Shares by our officers, directors or significant shareholders;

 

other actions taken by our shareholders;

 

future sales or issuances of equity or debt securities by us;

 

business disruptions caused by earthquakes, tornadoes or other natural disasters;

 

issuance of new or changed securities analysts’ reports or recommendations regarding us;

 

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legal proceedings involving our company, our industry or both;

 

changes in market valuations of companies similar to ours;

 

the prospects of the industry in which we operate;

 

speculation or reports by the press or investment community with respect to us or our industry in general;

 

the level of short interest in our shares; and

 

other risks, uncertainties and factors described in our Annual Report for the year ended December 31, 2023 on Form 20-F.

 

In addition, the stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of issuers. These broad market fluctuations may negatively impact the price or liquidity of our Ordinary Shares. When the price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the issuer, and we have been impacted in that way. See the risk factor below titled “We defended and settled a securities class action litigation which resulted in significant costs for the Company.” The pending lawsuit has required significant management time and attention, resulting in significant legal expenses and potential damages.

 

Our Chief Financial Officer and Chairman currently have voting power to control all significant corporate actions.

 

Erke Huang, our Chief Financial Officer and a director, and Zhaohui Deng, our Chairman of the Board, collectively beneficially own 1,000,000 preferred shares, each having fifty (50) votes, which equals approximately 42% of the voting power of our 118,122,690 outstanding Ordinary Shares as of March 1, 2024 or approximately 30% of all votes cast on an as-converted basis. The Board authorized the exchange by Messrs. Huang and Deng of 1,000,000 Ordinary Shares for an equivalent number of preferred shares, in the form of a poison pill, to enable them to carry out the Company’s business plan without the threat of a hostile takeover. Nevertheless, as a result of their shareholdings, Mr. Huang and Mr. Deng may be able to control the vote over decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, the election of directors, and other significant corporate actions. They may take action that is not in the best interests of our other shareholders. This concentration of voting power may discourage or delay our Company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of the sale of our Company and might reduce the market price of our Ordinary Shares. These actions may be taken even if they are opposed by our other shareholders.

 

We may be unable to comply with the applicable continued listing requirements of the Nasdaq Capital Market, which may adversely impact our access to capital markets and may cause us to default certain of our agreements.

 

Our Ordinary Shares are currently traded on the Nasdaq Capital Market. Nasdaq rules require us to maintain a minimum closing bid price of $1.00 per Ordinary Share. The closing bid price of our Ordinary Shares fell below $1.00 per share for 30 consecutive trading days twice, so we were not in compliance with Nasdaq’s rules for listing standards. Although we regained compliance each time, there can be no assurance we will continue to meet the minimum bid price requirements or any other Nasdaq requirements in the future, in which case our Ordinary Shares could be delisted.

 

In the event that our Ordinary Shares are delisted from Nasdaq and are not eligible for quotation or listing on another market or exchange, trading of our Ordinary Shares could be conducted only on the over-the-counter market or on an electronic bulletin board established for unlisted securities, such as the OTC. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our Ordinary Shares, and there would likely also be a reduction in our coverage by securities analysts and the news media, which could cause the price of our Ordinary Shares to decline further. In addition, our ability to raise additional capital may be severely impacted if our shares are delisted from Nasdaq, which may negatively affect our business plans and the results of our operations.

 

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If securities or industry analysts do not publish research or publish unfavorable research about our business, our share price and trading volume could decline.

 

The trading market for our Ordinary Shares will be influenced by whether industry or securities analysts publish research and reports about us, our business, our market or our competitors and, if any analysts do publish such reports, what they publish in those reports. We may not obtain or maintain analyst coverage in the future. Any analysts that do cover us may make adverse recommendations regarding our shares, adversely change their recommendations from time to time and/or provide more favorable relative recommendations about our competitors. If analysts who may cover us in the future were to cease coverage of our company or fail to regularly publish reports on us, or if analysts fail to cover us or publish reports about us at all, we could lose (or never gain) visibility in the financial markets, which in turn could cause the share price of our Ordinary Shares or trading volume to decline. Moreover, if our operating results do not meet the expectations of the investor community, one or more of the analysts who cover our Company may change their recommendations regarding our Company, and our share price could decline.

 

Our Ordinary Shares may be thinly traded, and you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.

 

Our Ordinary Shares may become “thinly-traded”, meaning that the number of persons interested in purchasing our Ordinary Shares at or near bid prices at any given time may be relatively small or non-existent. This situation may be attributable to a number of factors, including the fact that we may not be well-known to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that, even if we came to the attention of such persons, they tend to be risk-averse and might be reluctant to follow a relatively unknown company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. A broad or active public trading market for our Ordinary Shares may not develop or be sustained.

 

We defended and settled a securities class action litigation which resulted in significant costs for the Company.

 

The market for our Ordinary Shares may have, when compared to seasoned issuers, significant price volatility, and we expect that our share price may continue to be more volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. On January 20, 2021, a securities class action lawsuit was filed against the Company and its Chief Executive Officer and Chief Financial Officer titled Anthony Pauwels v. Bit Digital, Inc., Min Hu and Erke Huang (Case No. 1:21-cv-00515) (U.S.D.C. S.D.N.Y.). The class action was brought on behalf of persons that purchased or acquired our Ordinary Shares between December 21, 2020 and January 11, 2021, a period of volatility in our Ordinary Shares, as well as volatility in the price of bitcoin. On April 29, 2021, the Court consolidated several related cases under the caption In re Bit Digital, Inc. Securities Litigation. Joseph Franklin Monkam Nitcheu was appointed as lead plaintiff. On July 6, 2021, the lead plaintiff filed a consolidated class action complaint (the “Amended Complaint”). The Amended Complaint was still based primarily upon a January 11, 2021 short seller report and included, among other things, additional information concerning our previously discontinued peer to peer lending business. We filed a motion to dismiss the lawsuit and vigorously defended the action. While that motion was pending, the Company agreed with the lead plaintiff selected in the case to settle the class action by paying $2,100,000. The Company chose to do that to eliminate the burden, expense and uncertainties of further litigation. The Company continues to deny the allegations in the Amended Complaint and nothing in the settlement is evidence of any liability on the Company’s behalf.

 

On March 7, 2023, a final judgment in this matter was entered approving the settlement and certifying the class for purposes of enforcing the settlement and payment was then made by the Company.

 

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We have not paid Ordinary Share dividends in the past and do not anticipate paying cash dividends in the foreseeable future.

 

We have never declared or paid any cash dividends with respect to our Ordinary Shares and do not intend to pay any cash dividends in the foreseeable future. The Preference Shares held by our Chairman of the Board and Chief Financial Officer provide for an eight (8%) percent ($800,000) annual dividend when and if declared by the Board. On February 7, 2023 and again on December 8, 2023, the Board of Directors declared eight (8%) percent dividends on the preference shares to Geney Development Ltd., an entity beneficially owned by the Company’s Chairman and Chief Financial Officer. We currently plan to retain any future earnings to cover operating costs and otherwise fund the growth of our business. We cannot assure you that we would, at any time, generate sufficient surplus cash that would be available for distribution to the holders of our Ordinary Shares as a dividend. As a result, capital appreciation, if any, of our Ordinary Shares will be the sole source of gain for the foreseeable future. There is no guarantee that our Ordinary Shares will appreciate in value or even maintain the price at which a shareholder purchased such shareholder’s shares. 

 

You may face difficulties in protecting your interests as a shareholder, as Cayman Islands law provides substantially less protection when compared to the laws of the United States and it may be difficult for a shareholder of ours to effect service of process or to enforce judgements obtained in the U.S. courts.

 

Our corporate affairs are governed by our amended and restated memorandum and articles of association and by the Companies Act (Revised) of the Cayman Islands and common law of the Cayman Islands. The rights of shareholders to take legal action against our directors and us, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law. Decisions of the Privy Council (which is the final court of appeal for British overseas territories, such as the Cayman Islands) are binding on a court in the Cayman Islands. Decisions of the English courts, and particularly the Supreme Court of the United Kingdom and the Court of Appeal are generally of persuasive authority but are not binding on the courts of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws as compared to the United States and provide significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action before the U.S. federal courts. The Cayman Islands courts are also unlikely to impose liabilities against us in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws. It may be difficult for a shareholder to enforce against us judgments obtained in U.S. courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

 

As a result of all of the above, our shareholders may have more difficulty in protecting their interests through actions against us or our officers, directors or major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

 

You may experience difficulties in effecting service of legal process and enforcing judgments against us and our management, and the ability of U.S. authorities to bring actions abroad.

 

Currently, a portion of our operations and of our assets and personnel are located outside the United States. Four of five members of our Board of Directors are nationals or residents of jurisdictions other than the United States, and a substantial portion, if not all, of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in U.S. courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States. Foreign countries may have no arrangement for the reciprocal enforcement of judgments with the United States. As a result, recognition and enforcement in a foreign country of judgments of a court in the United States and any of the other jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or impossible. Even if you sue successfully in a U.S. court or any other jurisdictions, you may not be able to collect on such judgment against us or our directors and officers. In addition, the SEC, the U.S. Department of Justice and other U.S. authorities may also have difficulties in bringing and enforcing actions against us or our directors or officers outside the United States.

 

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We are currently a foreign private issuer within the meaning of the rules under the Exchange Act, and, as such, we are exempt from certain provisions applicable to United States domestic public companies.

 

We are currently a foreign private issuer within the meaning of the rules under the Exchange Act through December 31, 2023. As such, we are exempt from certain provisions applicable to United States domestic public companies. For example:

 

  we are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company;
     
  for interim reporting, we are permitted to comply solely with our home country requirements, which are less rigorous than the rules that apply to domestic public companies;
     
  we are not required to provide the same level of disclosure on certain issues, such as executive compensation;
     
  we are exempt from provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information;
     
  we are not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;

 

we are not required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction; and.

 

we file annual reports on Form 20-F and reports on Form 6-K as a foreign private issuer. As a result of our reduced reporting requirements, our shareholders may not have access to certain information they may deem important.

  

We incur significant costs as a result of being a public company and will continue to do so in the future, particularly as we cease to qualify as an “emerging growth company.”

 

We incur significant legal, accounting and other expenses as a public company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the NASDAQ Capital Market, impose various requirements on the corporate governance practices of public companies. We have been an “emerging growth company,” as set forth above, and remained an emerging growth company until December 31, 2023, which was the earlier of (1) the last day of the fiscal year (a) ending December 31, 2023, or (b) in which we have a total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our Ordinary Shares that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. Because, since January 1, 2024, we are no longer an emerging growth company, we may incur additional costs which could have a material adverse effect on our financial condition.

 

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If we are classified as a passive foreign investment company, United States taxpayers who own our Ordinary Shares may have adverse United States federal income tax consequences.

 

A non-U.S. corporation such as ourselves will be classified as a passive foreign investment company, which is known as a PFIC, for any taxable year if, for such year, either

 

at least 75% of our gross income for the year is passive income; or

 

the average percentage of our assets (determined at the end of each quarter) during the taxable year which produce passive income or which are held for the production of passive income is at least 50%.

 

Passive income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains from the disposition of passive assets.

 

If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. shareholder who holds our Ordinary Shares, the U.S. shareholder may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements.

 

Whether we are a PFIC for 2023 or any future taxable year is uncertain because, among other things, the treatment of digital asset such as bitcoin for purposes of the PFIC rules is unclear. We express no opinion with respect to our PFIC status and also express no opinion with regard to our expectations regarding our PFIC status. Given this uncertainty, prospective U.S. shareholders contemplating an investment in the Ordinary Shares may want to assume that we are a PFIC and are urged to consult their own tax advisors regarding our PFIC status and the resulting U.S. federal income tax consequences in light of their own particular. 

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical fact contained in this document and the materials accompanying this document are forward-looking statements. These statements are based on current expectations of future events. Frequently, but not always, forward-looking statements are identified by the use of the future tense and by words such as “believes,” “expects,” “anticipates,” “intends,” “will,” “may,” “could,” “would,” “predicts,” “anticipates,” “future,” “plans,” “continues,” “estimates” or similar expressions. Forward-looking statements are not guarantees of future performance and actual results could differ materially from those indicated by such forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by the forward-looking statements. These forward-looking statements speak only as of the date made and are subject to a number of known and unknown risks, uncertainties and assumptions, as updated by our subsequent filings under the Exchange Act and in our other filings with the SEC, that may cause our actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements.

 

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ITEM 4. INFORMATION ON THE COMPANY

 

History and Development of the Company

 

Bit Digital, Inc. (“BTBT” or the “Company”), a Cayman Islands exempted company (formerly known as Golden Bull Limited) is a holding company incorporated on February 17, 2017. The Company engages in the digital asset mining business, ETH staking business, and specialized cloud-infrastructure services for artificial intelligence applications through its wholly-owned subsidiaries in the United States, Canada, Hong Kong, Singapore, British Virgin Islands, and Iceland, and prior to June 21, 2021, in mainland China. Previously, before the involvement of the current management, employees and board of directors, Golden Bull Limited was primarily an online finance marketplace, or “peer-to-peer” lending company, in China that provided borrowers access to loans. On October 24, 2019, the Pudong Branch of the Shanghai Public Security Bureau (the “Bureau”) announced that it was conducting an investigation of Shanghai Dianniu Internet Finance Information Service Co., Ltd., which was a variable interest entity (“VIE”) of the Company, for suspected illegal collection of public deposits. The Bureau took criminal enforcement measures against 17 suspects in the case and detained at least six of those suspects. While the Company has not been subject to any enforcement actions or investigations, nine persons, including a former director of the Company, have been found guilty of fund-raising fraud or illegally collecting public deposits by the People’s Court of Shanghai Pudong New District and were sentenced to imprisonment.

 

The Company commenced its mining operations in February 2020 and now has operations in the United States, Canada, and Iceland. Our bitcoin mining operations, hosted by third party suppliers, use specialized computers, known as miners, to generate bitcoins, a digital asset. The miners use application specific integrated circuit (“ASIC”) chips. These chips enable the miners to apply greater computational power, or “hash rate”, to provide transaction verification services (known as solving a block) which helps support the bitcoin blockchain. For every block added, the bitcoin blockchain awards a bitcoin award equal to a set number of bitcoins per block. These bitcoin awards are subject to “halving,” whereby the bitcoin award per block is reduced by half in order to control the supply of bitcoins on the market. When bitcoin was first launched in 2009, miners were awarded 50 bitcoins if they first solved a new block; this award was halved to 25 bitcoin per new block in 2012, and halved again in 2016 to 12.5 bitcoin per new block. In May 2020, the then prevailing reward of 12.5 bitcoin per new block was halved to 6.25 bitcoin. This reward rate is expected to next halve in April 2024 to 3.125 bitcoin per new block and will continue to halve at approximately four-year intervals until all potential 21 million bitcoin have been mined. Miners with a greater hash rate generally have a higher chance of solving a block and receiving a bitcoin award.

 

After a third halving of bitcoins in May 2020, our mining strategy was to mine bitcoins as fast and as many as possible given there are less bitcoins and a lower efficiency of mining. We completed our miner fleet’s exit from China during the third quarter of 2021 and as of November 17, 2021, 100% of our miner fleet had arrived in North America. On June 9, 2022, the Company signed a hash rate swap agreement with Riot Platform, Inc. (f/k/a Riot Blockchain, Inc., hereinafter “Riot”), and concurrently signed a new hosting agreement with Coinmint LLC (“Coinmint”). Under the hash rate swap agreement, the Company received an approximate aggregate of 0.625 Exahash (“EH/s”) of hash rate from Riot, in exchange for 0.500 EH/s, delivered by the Company to Riot, representing a 25% premium to the hash rate delivered. This premium was primarily designed to reflect the fact that Riot received miners from the Company that were “factory new,” whereas Riot delivered miners that had previously been in operation. Bit Digital delivered S19j Pro miners to Riot in exchange for S19 Pro miners. According to the manufacturer Bitmain, S19j Pro miners achieve approximately 104 TH/s (+3%) and have a power consumption of 3068W (+5%) and power efficiency of 29.5 J/TH (+5%) while S19 Pro miners achieve approximately 110 TH/s (+3%) and have a power consumption of 3250 W(+5%) and power efficiency of 29.5 J/TH (+5%). Thus, the miners received from Riot have the same power efficiency and a slightly higher power consumption, but were expected to have experienced some degree of economic depreciation as a result of having previously been placed into service. The first tranche of the swap was delivered to the Company on June 17, 2022, and the final tranche was delivered on July 1, 2022. As of July 2, 2022, all of the Company’s newly-acquired miners were actively deployed at the Coinmint facility.

 

As previously announced on May 19, 2022, the Company faced interruptions at certain hosting partners’ sites. We signed a new hosting agreement with Coinmint, as described above, for approximately 20 MW of primarily carbon-free power, more than enough to offset the effect of the interruptions. Coinmint has fulfilled all of this capacity in 2022.

 

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We believe there is currently an excess supply of both used and new miners in the market. Historically, when the market for miners has been tighter, we have utilized the spot market for miner acquisitions which can result in delivery within a few weeks. If the supply for miners should tighten significantly, we may not be able to acquire the desired number of miners in a timely manner. However, management will only seek to deploy its miners if the economics present an acceptable return to us. In view of the long delivery time to purchase new miners from miner suppliers like Bitmain and MicroBT, as described below, we initially chose to acquire second-hand miners which can be delivered in only a few weeks.

 

On October 6, 2021, Bit Digital USA, Inc. entered into a Non-Fixed Price Sales and Purchase Agreement (the “Agreement”) with Bitmain Technologies Limited to purchase 10,000 Antminer bitcoin miners. The miners were expected to increase the Company’s miner fleet hash rate by approximately 1.0 Exahash (“EH/s”). The total maximum purchase price is estimated at $65 million (subject to certain potential discounts). Net of discounts, the Company paid $58 million for the order. As of September 30, 2022, the Company had received the previously announced 10,000-unit miner purchase from Bitmain.

 

As of December 31, 2022, the Company owned 37,676 bitcoin miners and 730 Ethereum miners, with an estimated maximum total hash rate of 2.6 EH/s and 0.3 TH/s, respectively. The reduction of hash rate compared to the beginning of 2021 was due to the aforementioned fleet repositioning from China, in which the Company sold or disposed of certain models (partially offset by purchases). For the year ended December 31, 2022, we received 1,247.5 bitcoins and 294.3 ETHs from one bitcoin mining pool operator one ETH mining pool operator. We managed to modestly increase bitcoin production on a sequential basis despite previous announced interruptions in our hosting partners’ operations.

 

Approximately 85% of our fleet’s run-rate electricity consumption was generated from carbon-free energy sources as of December 31, 2022, based on data provided by our hosts, publicly available sources, and internal estimates, demonstrating our commitment to sustainable practices in the digital asset mining industry.

 

As of December 31, 2022, we had 8,799.9 ETH and 2,004.0 sETH-h with a fair market value of approximately $13.0 million. A total of 2,164 ETH were actively staked as of December 31, 2022 using either native staking or liquid staking protocols.

 

For the year ended December 31, 2022, we recognized a net loss of $105,296,603, comprised of (a) a $24,654,267 impairment of digital assets as a result of the decline in value of bitcoin and ETH, (b) a $50,038,650 impairment of property and equipment, and (c) the decline in revenue from digital asset mining of $63,781,977 (66.4%) percent from $96,078,570 to $32,296,593 compared to the year ended December 31, 2021. The decrease in the average price of bitcoin during 2022, as well as the Merge involving Ethereum described below, reduced industrywide margins and forced difficult decisions across the industry. Fortunately, we believe that our strong balance sheet partially has insulated us from short-term price movements and has enabled us to advance our long-term vision. We ended the year 2022 with $32.7 million in cash and cash equivalents, over $62.2 million in total liquidity, zero debt, and no outstanding obligations under any miner purchase agreements. This provides us ample flexibility to continue deploying miners and canvas the market for opportunistic purchases at potentially distressed pricing.

 

As of December 31, 2023, the Company had 46,548 bitcoin miners owned or operating (in Iceland), with a total maximum total hash rate of 3.9 EH/s. The increase of hash rate compared to the end of 2022 was due to the increase in fleet of bitcoin miners. For the year ended December 31, 2023, we received 1,507.3 bitcoins one bitcoin mining pool operator. The increase in bitcoin production compared to 2022 was due to the increase in miners deployed.

 

Approximately 93% of our fleet’s run-rate electricity consumption was generated from carbon-free energy sources as of December 31, 2023, based on data provided by our hosts, publicly available sources, and internal estimates, demonstrating our commitment to sustainable practices in the digital asset mining industry.

 

While the Company remains bullish on bitcoin, and supporting the bitcoin blockchain, it also expects to derive revenue from the Ethereum network which powers a smart contract platform, that is the second biggest blockchain by market capitalization at $355 billion as of December 2023 per CoinMarketCap. After many years of development, in connection with the Merge (described below), the Ethereum blockchain made its transition from a proof-of-work (PoW) consensus mechanism, like the bitcoin network, to a proof-of-stake (PoS) model. A proof-of-stake system generally does not expend as much energy to verify transactions as does the bitcoin blockchain. Instead, a participant’s digital assets are deposited in a specific smart contract, which enters them in a lottery. Each time an exchange occurs, a participant is selected from the lottery to verify the transaction and win the reward. The transition to a PoS blockchain occurred on September 15, 2022, when the Ethereum Mainnet merged with the PoS Beacon Chain, a system upgrade that is referred to as the “Merge.” Notwithstanding the fact that a not-for-profit called The Ethereum Foundation helps supervise the blockchain, Ethereum is run by a decentralized group of engineers across the world.

 

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As of December 31, 2023, we had 15,108.0 ETH with a fair market value of approximately $34.5 million. A total of 12,752 ETH were actively staked as of December 31, 2023 using either native staking or liquid staking protocols.

 

For the year ended December 31, 2023, we recognized a net loss of $13.9 million, comprised of primarily a $6.6 million impairment of digital assets as a result of the decline in value of bitcoin and ETH. We ended the year 2023 with $16.9 million in cash and cash equivalents, over $56.3 million in working capital, zero debt, and no outstanding obligations under any miner purchase agreements. This provides us ample flexibility to continue deploying miners and canvas the market for opportunistic purchases at potentially distressed pricing.

 

Bit Digital, Inc. (“BTBT” or the “Company”), formerly known as Golden Bull Limited, is a holding company incorporated on February 17, 2017, under the laws of the Cayman Islands.

 

We listed our Ordinary Shares on the Nasdaq Capital Market under the symbol “DNJR” on March 19, 2018 and completed an initial public offering of 1,550,000 Ordinary Shares on March 22, 2018 (“IPO”), raising approximately $5.2 million in net proceeds after deducting underwriting commissions and the offering expenses payable by us. On March 28, 2018, ViewTrade Securities, Inc., who acted as the sole underwriter and book-runner of the Company’s IPO exercised the full over-allotment option to purchase an additional 232,500 Ordinary Shares raising approximately $850,000 in net proceeds after deducting underwriting commissions and the offering expenses payable by us.

 

On June 3, 2019, Golden Bull USA, Inc. was incorporated in the State of New York, as a wholly-owned subsidiary of the Company. This entity was formed to develop a car rental business in the United States, which did not commence and was terminated. On March 16, 2022, the Company entered into a Share Purchase Agreement with Star Choice Investments Limited (“Star Choice”). Pursuant to the agreement, Star Choice agreed to purchase 100% of the outstanding shares of Golden Bull USA, Inc for $10.00 and other good and valuable consideration. The sale was completed on March 16, 2022.

 

In October 2019, the Company decided to enter the bitcoin mining business and commenced operations in February 2020. On April 8, 2020 the Company acquired Bit Digital Hong Kong Limited (“Bit Digital Hong Kong”) (formerly known as XMAX Chain Limited and with no relation to XMAX Foundation PTE Ltd., a Singapore company), as a wholly-owned subsidiary in Hong Kong. Bit Digital Hong Kong was purchased from an unaffiliated third party. Management determined that Bit Digital Hong Kong was formed in March 2018 under the name XMAX Chain Limited.

 

On August 7, 2020, the Company changed its Nasdaq trading symbol to “BTBT”. On September 10, 2020, the Cayman Islands recorded the Certification of Incorporation on Change of Name, officially changing the Company’s name to “Bit Digital, Inc.”

 

On September 1, 2020, the Company formed Bit Digital USA, Inc. (“BT USA”), as a wholly-owned Delaware subsidiary in order to conduct its bitcoin mining business in the U.S.

 

On September 8, 2020, the Board approved the disposal of Point Cattle Holdings Limited, a former wholly owned subsidiary of the Company in the British Virgin Islands, and its subsidiaries and VIEs, through which Golden Bull Limited previously operated its peer-to-peer lending business and the car rental business in PRC. Prior to the sale, we discontinued our peer-to-peer lending business and the car rental business in the PRC (“discontinued operations”). On the same date, the Company entered into a certain share purchase agreement (the “Disposition SPA”) by and among a BVI company, Sharp Whale Limited (the “Purchaser”), Point Cattle Holdings Limited (the “Subsidiary”) and the Company (the “Seller”). Pursuant to the Disposition SPA, the Purchaser purchased the Subsidiary in exchange for nominal consideration of $10.00 and other good and valuable consideration. The former subsidiaries and VIEs in the PRC that had been engaged in the discontinued operations no longer have any relationship with the Company.

 

On December 31, 2020, the Company entered into a Securities Purchase Agreement (the “SPA”) with Ionic Ventures LLC (“Ionic”), an accredited institutional investor, for the sale of subordinated convertible notes due May 5, 2021 (the “Notes”) up to an aggregate original principal amount of $1,650,000 with an original issue discount (OID) of 10% in a private placement. On February 5 and March 12, 2021, the Company completed the sale of the Notes in the principal amounts of $1,100,000 and $550,000, respectively, to Ionic pursuant to a Securities Purchase Agreement dated as of January 11, 2021. On May 5, 2021, the Notes were automatically converted into 289,662 Ordinary Shares at $5.70 per share.

 

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On January 11, 2021, the Company entered into a Purchase Agreement, as amended and restated on July 30, 2021, with Ionic whereby we have the right, but not the obligation, to sell to Ionic, and Ionic is obligated to purchase up to in the aggregate $80,000,000 worth of Ordinary Shares. Sales of Ordinary Shares by the Company, if any, will be subject to certain limitations, and may occur from time, at the Company’s sole discretion, over the 36-month period commencing on May 20, 2021 (the “Commencement Date”). Since May 20, 2021, we drew down an aggregate of $80 million under the Ionics Purchase Agreement and; raised $80 million of gross proceeds in our September 2021 private placement. In 2022, the Company raised gross proceeds of approximately $22 million from the Ionics Purchase Agreement. In 2023, the Company raised gross proceeds of approximately $22 million from the Ionics Purchase Agreement.

 

On February 23, 2021, the Company formed Bit Digital Canada Inc., a Government of Alberta, Canada corporation as a wholly-owned subsidiary to conduct its digital asset mining operations in Canada.

 

On June 1, 2021, the Company formed Bit Digital Strategies Limited, as a wholly-owned Hong Kong subsidiary in order to conduct treasury management activities.

 

On June 24, 2021, the Company signed the Crypto Climate Accord, a private sector-led initiative that aims to decarbonize the crypto and blockchain sectors.

 

On July 1, 2021, the Company formed Bit Digital Singapore PTE. LTD., as a wholly-owned Singapore subsidiary in order to conduct digital asset staking activities.

 

On September 29, 2021, the Company entered into a Securities Purchase Agreement with certain purchasers thereto, pursuant to which the Company agreed to issue and sell, in a private offering, an aggregate of $80,000,017 of securities, consisting of 13,490,728 Ordinary Shares of the Company and Ordinary Share Purchase Warrants to purchase an aggregate of 10,118,046 Ordinary Shares at an exercise price of $7.91 per whole share (subject to adjustment), for a combined purchase price of $5.93 per share and accompanying warrant. The transaction was closed on October 4, 2021.

 

On December 7, 2021, the Company became a member of the Bitcoin Mining Council (“BMC”), joining MicroStrategy and other founding members to promote transparency, share best practices, and educate the public on the benefits of bitcoin and bitcoin mining.

 

On May 4, 2022, the SEC declared effective the Company’s Shelf Registration Statement on Form F-3. Under the registration statement, the Company may offer and sell equity securities from time to time in one or more offerings at the market (ATM) at prices and on terms which the Company will then determine for an initial aggregate offering price of $500,000,000. In 2022, no securities were sold under such registration statement. In 2023, the Company sold 14,744,026 shares of common stock for an aggregate purchase price of $45.3 million net of offering costs pursuant to this at-the-market offering.

 

On April 17, 2023, Bit Digital Investment Management Limited (“BT IM”) was established as the investment manager to oversee Bit Digital Innovation Master Fund SPC Limited (“BT SPC”), a segregated portfolio company which was incorporated in May 2023. Both entities are 100% owned by Bit Digital Strategies Limited.

 

On October 19, 2023 and August 17, 2023, Bit Digital AI, Inc. (“BT AI”) and Bit Digital Iceland ehf (“BT Iceland”) were incorporated to support the Company’s artificial intelligence (“AI”) workstreams. Bit Digital Iceland ehf is 100% owned by Bit Digital AI, Inc. which is 100% owned by Bit Digital, Inc.

 

Bit Digital has operations in North America, Hong Kong, Singapore, and Iceland. The Company has no subsidiary or VIE legal entities in mainland China, with a portion of non-mining assets and personnel located in Hong Kong. Four of five members of the Board of Directors are nationals or residents of jurisdictions, other than the United States.

 

As of the report date, the Company is a Cayman entity with two Hong Kong subsidiaries, two U.S. subsidiaries, one Canadian subsidiary, one Singapore subsidiary, two British Virgin Islands subsidiaries, and one Iceland subsidiary.

 

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Foreign Private Issuer Status

 

We are a foreign private issuer within the meaning of the rules under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, we are exempt from certain provisions applicable to United States domestic public companies. For example:

 

  we are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company;
     
  for interim reporting, we are permitted to comply solely with our home country requirements, which are less rigorous than the rules that apply to domestic public companies;
     
  we are not required to provide the same level of disclosure on certain issues, such as executive compensation;
     
  we are exempt from provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information;
     
  we are not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; and
     
  Our insiders are not required to comply with Section 16 of the Exchange Act requiring such individuals, and entities to file public reports of their share ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction.

  

Corporate Information

 

Our principal executive offices are located at 33 Irving Place, New York, New York 10003. Our telephone number at this address is +1 (212) 463-5121. Our office in Hong Kong is located at Room 3603, Tower 2 Metro Plaza, Hong Kong, China. Our registered office in the Cayman Islands is located at Corporate Filing Services Ltd., 3rd Floor, Harbour Centre, 103 South Church Street, George Town, Grand Cayman, KY 1-1002, Cayman Islands. Our office in Singapore is located at 21 Floor, 88 Market Street, Capital Spring, S048948. Our office in Iceland is located at Skogarhlid 12, 105 Reykjavik, Iceland. Our agent for service of process in the United States is Corporation Service Company, 19 West 44th Street, Suite 201, New York, NY 10036. The Company’s legal advisers are as follows: in the PRC: Tian Yuan Law Firm, Suite 509, Tower A, Corporate Square, 35 Financial Street, Xicheng District, Beijing, 100032 China; in the Cayman Islands: Ogier (Cayman) LLP, 89 Nexus Way, Camana Bay, Grand Cayman, Cayman Islands KY1-9009; and in the United States: Davidoff Hutcher & Citron LLP, 605 Third Avenue, New York, New York 10158. Our Auditors are: Audit Alliance, LLP, 10 Anson Road, #20-16 International Plaza, Singapore 079903, see “Experts.” Investors should contact us for any inquiries through the address and telephone number of our principal executive offices. 

 

We filed annual, semi-annual, quarterly (on a voluntary basis as a foreign private issuer) and current reports and other information with the SEC. Our public filings are available from the Internet web site maintained by the SEC at www.sec.gov. In addition, our Ordinary Shares are listed on the Nasdaq Capital Market. Accordingly, our reports, statements and other information may be inspected at the offices of Nasdaq, One Liberty Plaza, 165 Broadway, New York, New York 10006.

 

Capital Expenditures

 

For the years ended December 31, 2023, 2022, 2021, we incurred capital expenditures of approximately $66.7 million, $19.3 million, and $46.8 million, respectively for purchases of property and equipment for our operations in cash. These capital expenditures were financed by cash provided by operating and financing activities.

 

In addition, for the years ended December 31, 2023, 2022, and 2021, we expended $12.2 million, $2.4 million and $22.0 million, respectively, in USDC and/or USDT for purchases of bitcoin miners for our bitcoin mining business.

 

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Digital Asset Mining

 

Bitcoin mining operations

 

In view of the widespread adoption of blockchain technology and bitcoin worldwide, the Company determined to enter the bitcoin mining industry, which is focused on the production of bitcoin. We commenced investigation of the business in August 2019 and found that bitcoin mining is believed to be profitable and our business plan is viable. In On October 18, 2019, Mr. Erke Huang joined the Company as Chief Financial Officer and as a Director on October 29, 2019. On March 31, 2021, Bryan Bullett and Sam Tabar joined the Company as Chief Executive Officer (“CEO”) and Chief Strategy Officer (“CSO”), respectively, until March 31, 2023. The Company contemporaneously established its worldwide headquarters office in New York City. Mr. Bullett resigned his employment with the Company as CEO effective March 31, 2023 and became a non-executive senior advisor of the Company. Mr. Tabar succeeded Mr. Bullett as CEO effective March 31, 2023.

 

Today, we are a sustainability-focused generator of digital assets with large-scale, global mining operations in North America and Iceland. On June 24, 2021, the Company signed the Crypto-Climate Agreement, a private sector-led initiative to decarbonize the crypto and blockchain sector. On December 7, 2021, the Company became a member of the Bitcoin Mining Council (“BMC”), joining MicroStrategy and other founding members to promote transparency, share best practices, and educate the public on the benefits of bitcoin and bitcoin mining.

 

The Company operates, through its partnerships with third party hosting firms, for the purpose of mining bitcoin. Our facilities and mining platform are operating with the primary intent of accumulating bitcoin which we may sell for fiat currency from time to time depending on market conditions and management’s determination of our cash flow needs.

 

Migration and Status of Mining Operations

 

In October 2020, we commenced our strategy of migrating assets from China to North America. The Company had already migrated its miners out of Inner Mongolia when the government of China’s Inner Mongolia banned all crypto mining facilities in March 2021. On May 21, 2021, when the Financial Stability and Development Committee of the State Council in China proposed to “crack down on bitcoin mining and trading,” local governments began to issue corresponding measures to respond to the central government’s proposal. From May 21, 2021 until June 18, 2021, when the Sichuan Province issued a notice on the shutdown of digital asset mining operations, the Company had mining operations only in Sichuan Province which it terminated on June 21, 2021, prior to the June 25, 2021 deadline.

 

From April through June 2021, we migrated 14,500 miners from China to the United States. As of June 30, 2021, 9,489 of our miners in China were warehoused and were not in operation, awaiting disposition or migration to North America. As a result, a significant portion of our fleet was offline in 2021. Prior to shipment, we generally refurbished our miners in a facility in Shenzhen, China, to ensure resilience during transfer and operability upon arrival. Miners are securely packaged and shipped via air or by sea, depending on market conditions. We completed the migration of all of our remaining China-based miners out of China by September 2021. The last miner shipments arrived in the U.S. on November 17, 2021. 27.8% of our fleet, or 7,710 bitcoin miners representing 0.457 EH/s, was deployed in North America as of December 31, 2021.

 

We operate our mining assets with the primary intent of accumulating digital assets which we may sell for fiat currency from time to time depending on market conditions and management’s determination of our cash flow needs, exchange for other digital assets. Our mining strategy has been to mine bitcoins as quickly and as many as possible given the fixed supply of bitcoins. In view of historically long delivery lead times to purchase miners from manufacturers like Bitmain Technologies Limited (“Bitmain”) and MicroBT Electronics Technology Co., Ltd (“MicroBT”), and other considerations, we may choose to acquire miners on the spot market, which can typically result in delivery within a few weeks.

 

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We currently have mining operations in United States, Canada, and Iceland. We have signed service agreements with third-party hosting partners in North America and Iceland. These partners operate specialized mining data centers, where they install and operate the miners and provide IT consulting, maintenance, and repair work on site for us. Our mining facilities in New York are maintained by Coinmint LLC (“Coinmint”) and Digihost Technologies Inc. (“Digihost”). Our mining facility in Texas is maintained by Dory Creek, LLC, a subsidiary of Bitdeer Technologies Group (“Bitdeer”). Our mining facility in Kentucky is maintained by Soluna Computing, Inc (“Soluna”). Our mining facility in Canada is maintained by Blockbreakers Inc. (“Blockbreakers”). Our mining facility in Iceland is maintained by GreenBlocks ehf, an Icelandic private limited company (“GreenBlocks”). We’ve relocated some miners from our Texas and Nebraska facilities, once under Compute North LLC’s maintenance before a third-party takeover preceding their 2022 bankruptcy to facilities operated by Coinmint in New York. We have relocated those miners from our Georgia mining facility, previously maintained by Core Scientific, Inc to one of Coinmint’s facilities. We have relocated those miners from Blockfusion USA, Inc. (“Blockfusion”) facilities to Digihost, Bitdeer and Soluna after our service agreement with Blockfusion ended in September 2023. From time to time, the Company may change partnerships with hosting facilities to recalibrate its Bitcoin mining operations. These terminations are strategic, targeting reduced operational costs, enhanced energy efficiency for a smaller carbon footprint, increased flexibility in operational control, and minimized geopolitical risks. While a short-term decrease in mining output might occur, we expect these changes to yield long-term operational improvements.

 

Miner Fleet Update

 

As of December 31, 2022, we had 37,676 miners for bitcoin mining and 730 ETH miners, with a total maximum hash rate of 2.6 EH/S and 0.3 TH/s, respectively.

 

On April 28, 2023, we entered into a purchase agreement with an unaffiliated seller of bitcoin mining computers, from whom we acquired 3,600 S19 miners. As of the date of this report, the miners have been delivered.

 

On May 12, 2023, we entered into a purchase agreement with an unaffiliated seller of bitcoin mining computers, from whom we acquired 2,200 S19J Pro+ miners. As of the date of this report, the miners have been delivered.

 

On June 21, 2023, we entered into a purchase agreement with an unaffiliated seller of bitcoin mining computers, from whom we acquired 1,100 S19 Pro+ miners. As of the date of this report, the miners have been delivered.

 

On October 23, 2023, we entered into a purchase agreement with an unaffiliated seller of bitcoin mining computers, from whom we acquired 3,630 S19K Pro miners. As of the date of this report, the miners have been delivered.

 

On November 10, 2023, we entered into a purchase agreement with an unaffiliated seller of bitcoin mining computers, from whom we acquired 370 S19K Pro miners. As of the date of this report, the miners have been delivered.

 

For the year ended December 31, 2023, the Company wrote off 5,328 bitcoin miners and 730 ETH miners.

 

As of December 31, 2023, we had 46,548 miners owned or operating (in Iceland) for bitcoin mining with a total maximum hash rate of 3.9 EH/S.

 

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Digital Asset Production

 

From the inception of our bitcoin mining business in February 2020 to December 31, 2023, we earned an aggregate of 6,330.2 bitcoins.

 

The following table presents our bitcoin mining activities for the year ended December 31, 2023.

 

   Number of
bitcoins
   Amount (1) 
         
Balance at December 31, 2022   946.4   $15,796,147 
Receipt of BTC from mining services   1,507.3    44,240,418 
Exchange of BTC into ETH   (630.8)   (11,756,006)
Sales of and payments made in BTC   (1,185.0)   (24,082,611)
Receipt of BTC from other income   4.5    140,724 
Impairment of BTC   -    (4,519,692)
Balance at December 31, 2023   642.4   $19,818,980 

   

(1) Receipt of digital assets from mining services are the product of the number of bitcoins received multiplied by the bitcoin price obtained from CoinMarketCap, calculated on a daily basis. Sales of digital assets are the actual amount received from sales.

 

Due to the volatile price of bitcoin and ETH and the uncertainty of the number of digital assets mined, it is very difficult for the Company to perform and rely on a breakeven analysis. However, the Company monitors the direct costs related to our mining business. We have disclosed the direct costs related to the production of digital assets, cost of revenues, in our quarterly financial statements. Cost of revenues is primarily comprised of direct production cost of the mining operations, including utilities and other service charges, and excludes general and administrative expenses and other indirect and overhead costs. Below is the cost of revenues per bitcoin/ETH in fiscal years 2021, 2022 and 2023.

 

Below is the cost of revenue per bitcoin/ETH in fiscal years 2021, 2022 and in 2023:

 

Year  Bitcoin   ETH 
2021  $14,884    N/A 
2022  $15,996   $1,428 
2023  $19,610   $N/A 

 

Performance Metrics of Bitcoin

 

The Company operates mining hardware which performs computational operations in support of the bitcoin blockchain network 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 bitcoin. 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 in the mining industry by Application Specific Integrated Circuits (ASIC) chips like those found in the miners currently utilized by the Company at its mining facilities. These ASIC chips are designed specifically to maximize the rate of hashing operations.

 

The Company measures our mining performance and competitive position based on the overall hash rate being produced in our mining sites. The mining hardware we currently operate are on the cutting edge of available mining equipment; however, advances and improvements to the technology are ongoing and may be available in quantities to the market in the future which may affect our perceived position.

 

An individual mining company such as Bit Digital has a total company hash rate of its miners seeking to mine a specific coin, and system wide there is a total hash rate of all miners seeking to mine each specific coin. A higher total hash rate of a specific mining company, as a percentage of the system wide total hash rate, generally results over time in a correspondingly higher success rate in coin rewards as compared to miners with lower hash rates.

 

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Mining Pools

 

A “mining pool” is the pooling of resources by miners, who share their processing power over a network and split rewards according to the amount of work they contributed to the probability of placing a block on the blockchain. Mining pools emerged in response to the growing difficulty and available hashing power that compete to place a block on the bitcoin blockchain. Mining pools are subject to various risks such as disruption and down time. Bit Digital has internally created software that monitors its hashing performance and reward rates to monitor credits for our contributed hashing power. In the event that a pool experiences down time or is not yielding returns, our results may be impacted.

 

Our former pool operators didn’t charge mining pool fees. As of the date of this report, the Company participates in the Foundry USA Mining Pool (“Foundry”) solely for mining digital asset pursuant to the Foundry USA Pool Service Agreement between the Company and Foundry (the “Pool Service Agreement”). Foundry provides the Company with digital currency mining pool and ancillary services and products. Foundry is a mining pool structured to provide transparency and stable payments to contributing miners. The Company contributes its processing power to Foundry and receives a fractional share of the pool’s total mining rewards that is based on its proportionate share of computational power contributed towards solving the aggregate block rewards. Foundry receives both the block reward and the transaction fees when successfully adding a block to the blockchain. Thus, the consideration received by the Company is variable. Likewise, the number of digital assets mined by pool participants is variable. The monthly service, power costs and profit-sharing charge are not used in determining the variable consideration. Prior to April 19, 2023, in consideration of the Company being an early strategic customer of Foundry and in view of competition, Foundry had not charged the Company with a fee for its services. Beginning April 19, 2023, Foundry applies a 0.27% fee on the total Bitcoin (BTC) earnings of the Company, referred to as the “Pool Fee.” Foundry calculates and deducts the Pool Fee from the total BTC earned and deposits the remaining net amount into our wallet. Pursuant to the Pool Service Agreement, Foundry will reimburse digital assets or U.S. Dollars, at its sole discretion, in the event of a disruption in service which is caused by their fault. A service agreement is in full force and effect while the Company’s usage rights to the pool are in effect. The average and median number of bitcoins we received per month from Foundry is 125.6 and 124.8, respectively, from January to December 2023. The range of number of bitcoins received per month from Foundry is 86.1 to 169.5 for the same period. Foundry does not currently provide wallet or custodial services to the Company. Currently, digital asset rewards are deposited to our custodian wallet addresses by Foundry on a daily basis. The risk of loss or theft of digital assets when Foundry transfers digital assets in a custodian wallet is no different than any other transfer from one wallet to another.

 

Hosting Agreements

 

In order to achieve lower utility costs, our mining facilities are maintained by third-party hosting service providers. Our hosts generally install our miners, and provide IT consulting, maintenance and repair work on site for us.

 

Blockbreakers

 

The Company’s subsidiary, Bit Digital Canada, Inc., entered into a Mining Services Agreement effective September 1, 2022, for Blockbreakers, Inc. to provide five (5) MW of incremental hosting capacity at its facility in Canada. The facility utilizes an energy source that is primarily hydroelectric.

 

On May 8, 2023, the Company entered into a Master Mining Services Agreement with Blockbreakers, pursuant to which Blockbreakers, Inc. agreed to provide the Company with four (4) MW of additional mining capacity at its hosting facility in Canada. The agreement is for two (2) years automatically renewable for additional one (1) year terms unless either party gives at least sixty (60) days’ advance written notice. The performance fee is 15% of profit. Additionally, Bit Digital has secured a side letter agreement with Blockbreakers, granting the Company the right of first refusal for any future mining hosting services offered by Blockbreakers in Canada. This new agreement brings the Company’s total contracted hosting capacity with Blockbreakers to approximately 9 MW. As of December 31, 2023, Blockbreakers provided approximately 5.4 MW of capacity for our miners at their facility.

 

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Coinmint

 

On June 7, 2022, we entered into a Master Mining Services Agreement (the “MMSA”) with Coinmint LLC, pursuant to which Coinmint will provide the required mining colocation services for a one-year period automatically renewing for three-month periods unless earlier terminated. The Company will pay Coinmint electricity costs, plus operating costs required to operate the Company’s mining equipment, as well as a performance fee equal to 27.5% of profit, subject to a ten percent (10%) reduction if Coinmint fails to provide uptime of ninety-eight (98%) percent or better for any period. We are not privy to the emissions rate at the Coinmint facility or at any other hosting facility. However, the Coinmint facility operates in an upstate New York region that reportedly utilizes power that is 99% emissions-free, as determined based on the 2023 Load & Capacity Data Report published by the New York Independent System Operator, Inc. (“NYISO”).

 

On April 5, 2023, the Company entered into a letter agreement and MMSA Amendment with Coinmint pursuant to which Coinmint agreed to provide the Company with up to ten (10) MW of additional mining capacity to energize the Company’s mining equipment at Coinmint’s hosting facility in Plattsburgh, New York. The agreement is for two (2) years automatically renewable for three (3) months unless not renewed by either party on at least ninety (90) days prior written notice. The performance fees under this letter agreement range from 30% to 33% of profit. This new agreement brings the Company’s total contracted hosting capacity with Coinmint to approximately 30 MW at this facility.

 

On April 27, 2023, the Company entered into a letter agreement and MMSA Amendment with Coinmint pursuant to which Coinmint agreed to provide the Company with up to ten (10) MW of additional mining capacity to energize the Company’s mining equipment at Coinmint’s hosting facility in Massena, New York. The agreement is for one (1) year automatically renewable for three (3) months unless not renewed by either party on at least ninety (90) days prior written notice. The performance fees under this letter agreement are 33% of profit. This new agreement brings the Company’s total contracted hosting capacity with Coinmint to approximately 40 MW.

 

On January 26, 2024, the Company entered into a letter agreement and MMSA Amendment with Coinmint pursuant to which Coinmint agreed to provide the Company with up to six (6) MW of additional mining capacity to energize the Company’s mining equipment at Coinmint’s hosting facility in Massena, New York. The agreement is for one (1) year automatically renewable for three (3) months unless not renewed by either party on at least ninety (90) days prior written notice. The performance fees under this letter agreement are 28% of profit. This new agreement brings the Company’s total contracted hosting capacity with Coinmint to approximately 46 MW. As of December 31, 2023, Coinmint provided approximately 40.0 MW of capacity for our miners at their facilities.

 

Digihost

 

In June 2021, we entered into a strategic co-mining agreement with Digihost Technologies in North America. Pursuant to the terms of the agreement, Digihost provides certain premises to Bit Digital for the purpose of the operation and storage of a 20 MW bitcoin mining system to be delivered by Bit Digital. Digihost provides services to maintain the premises for a term of two years. Digihost shall also be entitled to 20% of the profit generated by the miners.

 

In April 2023, we renewed the co-mining agreement with Digihost, previously executed in June 2021. Pursuant to the terms of the new agreement, Digihost provides certain premises to Bit Digital for the purpose of the operation and storage of an up to 20 MW bitcoin mining system to be delivered by Bit Digital. Digihost also provides services to maintain the premises for a term of two years, automatically renewing for a period of one (1) year. Digihost shall also be entitled to 30% of the profit generated by the miners. As of December 31, 2023, Digihost provided approximately 6.0 MW of capacity for our miners at their facility.

 

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GreenBlocks

 

On May 9, 2023 (“Effective Date”), the Company entered into a Term Loan Facility and Security Agreement (“Loan Agreement”) with GreenBlocks. Pursuant to the Loan Agreement, GreenBlocks has requested the Company to extend one or more loans (“advances”) under a senior secured term loan facility in an aggregate outstanding principal amount not to exceed $5 million. The interest rate of the Loan Agreement is 0% and advances are to be repaid on the maturity date, which is the thirty-nine-month anniversary of the Effective Date. GreenBlocks will exclusively use the advances to buy miners that will be operated for the benefit of the Company at a facility in Iceland, with an overall capacity of 8.25 MW. To secure the prompt payment of advances, the Company has been granted a continuing first priority lien and security interest in all of GreenBlocks’s rights, title and interest to the financed miners. The miners are the sole property of GreenBlocks, of which they are responsible for the purchase, installation, operation, and maintenance.

 

On May 9, 2023, the Company entered into a Computation Capacity Services Agreement (“Agreement”) with GreenBlocks. Pursuant to the Agreement, GreenBlocks will provide computational capacity services and other necessary ancillary services, such as operation, management, and maintenance, at the facility in Iceland for a term of two (2) years. GreenBlocks will own and operate the miners financed through the Loan Agreement for the purpose of providing Computational Capacity of up to 8.25 MW. The Company will pay power costs of five cents ($0.05) per kilowatt hour, a Pod fee of $22,000 per pod per month, and a depreciation fee equal to 1/36 of the facility size per month. The performance fees under this agreement are 20% of profit. The Company submitted to Greenblocks a deposit in the amount of $1,052,100, which was exclusively for the purpose of paying the landlord of the facility for hosting space.

 

On June 1, 2023, the Company and GreenBlocks entered the Omnibus Amendment to Loan Documents and Other Agreements (“Omnibus Amendment”). This amendment revised both the Loan Agreement and the Computation Capacity Services Agreement previously entered on May 9, 2023. While the core terms remained consistent, notable modifications pertained to the facility size and contracted capacity. Specifically, the facility size was increased from $5 million to $6.7 million. Moreover, GreenBlocks agreed to expand the computation capacity to approximately 10.7 MW. Advances of $6.4 million have been financed by the Company to GreenBlocks. As of December 31, 2023, GreenBlocks provided approximately 10.6 MW of capacity for our miners at their facility.

 

Soluna

 

In October 2023, we entered into a strategic co-location agreement with Soluna Computing, Inc. (“Soluna”) for a term of one year automatically renewing on a month-to-month basis unless terminated by either party. Pursuant to the terms of the agreement, Soluna provides certain required mining colocation services to Bit Digital for the purpose of the operation and storage of an up to 4.4 MW bitcoin mining system to be delivered by Bit Digital. Soluna shall also be entitled to 42.5% of the net profit generated by the miners. As of December 31, 2023, Soluna provided approximately 4.3 MW of capacity for our miners at their facility.

 

Bitdeer

 

In November 2023, we entered into a hosting services agreement with Dory Creek, LLC, a subsidiary of Bitdeer Technologies Group (“Bitdeer”), for a term of one year automatically renewing on an annual basis unless terminated by either party by giving a 30-day prior notice to the other Party in writing. Pursuant to the terms of the agreement, Bitdeer provides maintenance and operation services to Bit Digital to support 17.5 MW of capacity. Bitdeer shall also be entitled to 30% of the net profit generated by the miners. Bit Digital shall have the first right, but not obligation, to accept services for any extra capacity under the terms of this Agreement. As of December 31, 2023, Bitdeer provided approximately 13.9 MW of capacity for our miners at their facility.

 

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Blockfusion

 

In May 2022, our hosting partner Blockfusion advised us that the substation at its Niagara Falls, NY facility was damaged by an explosion and fire, and power was cut off to approximately 2,515 of the Company’s bitcoin miners and approximately 710 ETH miners that had been operating at the site immediately prior to the incident. The explosion and fire are believed to have been caused by faulty equipment owned by the power utility. Blockfusion and the Company have entered into a common interest agreement to jointly pursue any claims evolving from the explosion and fire. Prior to the incident, our facility with Blockfusion in Niagara Falls, provided approximately 9.4 MW to power our miners. Power was restored to the facility in September 2022. However, we received a notice dated October 4, 2022, from the City of Niagara Falls, which ordered the cease and desist from any cryptocurrency mining or related operations at the facility until such time as Blockfusion complies with Section 1303.2.8 of the City of Niagara Falls Zoning Ordinance (the “Ordinance”), in addition to all other City ordinances and codes. Blockfusion has advised us that the Ordinance came into practical effect on October 1, 2022, following the expiration of a related moratorium on September 30, 2022. Blockfusion has further advised that it has submitted applications for new permits based on the Ordinance’s new standards and that the permits may take several months to process. Pursuant to the Mining Services Agreement between Bit Digital and Blockfusion dated August 25, 2021, Blockfusion represents, warrants and covenants that it “possesses, and will maintain, all licenses, registrations, authorizations and approvals required by any governmental agency, regulatory authority or other party necessary for it to operate its business and engage in the business relating to its provision of the Services.” On October 5, 2022, Bit Digital further advised Blockfusion that it expects it to comply with directives of the Notice. Our service agreement with Blockfusion ended in September 2023.

 

Competition

 

In digital asset mining, companies, individuals and groups generate units of digital asset through mining. Miners can range from individual enthusiasts to professional mining operators with dedicated data centers. Miners may organize themselves in mining pools. The Company compete may in the future compete with other companies that focus all or a portion of their activities on owning or operating digital asset exchanges, developing programming for the blockchain, and mining activities. At present, information concerning the activities of these enterprises is not 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.

 

Our competitors in bitcoin mining include Riot Blockchain, Inc., Marathon Digital Holdings, Greenidge Generation Holdings Inc., ArgoBlockchain PLC, Digihost Technology Inc., Hive Digital Technologies Ltd., Hut 8 Corp., Bitcoin Investment Trust, Blockchain Industries, Inc., Bitfarms Technologies Ltd., DMG Blockchain Solutions Inc., HashChain Technology, Inc., MGT Capital Investments, Inc., Ault Global Holdings, Inc., Layer1 Technologies, LLC., Northern Data AG, Cipher Mining Technologies Inc., and TeraWulf Inc. The bitcoin industry is a highly competitive and rapidly changing industry and new competitors and/or emerging technologies could enter the market and affect our competitiveness in the future. For more information regarding those risk factors known to us, see the section entitled “Risk Factors” herein.

 

In the Ethereum staking ecosystem, various entities, including companies, individuals, and groups, stake a specific number of tokens on the network. This process enables them to actively contribute to block creation and receive rewards in return. Rather than direct competition, the dynamic between validators is characterized by indirect or cooperative interaction. Validators are randomly selected by the Ethereum protocol to perform the validation process. The likelihood of being chosen as a validator is directly proportional to the size of their stake. In simpler terms, the more ETH staked, the greater the chance of being selected as a validator and earning rewards.

 

Key competitors in the Ethereum staking landscape are intermediary staking services such as Lido, Coinbase Global, Inc., and Binance Holdings Ltd. These companies pool their customers’ Ethereum holdings to collectively stake on the Ethereum network.

 

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Custodian Accounts

 

Generally, we only sell bitcoins when there is a need to fund our working capital requirements and the purchase of mining equipment. We otherwise store the balance in custody. As of December 31, 2023, we used Cactus Custody, a division of Matrixport Guard Limited (“Cactus Custody”), as our custodian (the “Custodian”) to store our digital assets. While the Custodian holds our digital assets, the ownership and operation rights are always 100% attributed to the Company. Our custody account status and assets transactions are clearly recorded, and we can log into the Custodian’s system to query and download those records at any time. The Custodian will not loan, hypothecate, pledge and/or encumber our assets without express instructions from us.

 

Cactus Custody can transfer any digital assets to either cold or hot wallet addresses which transactions are assigned and managed under the Custodian’s management. The transactions are broadcast to the blockchain network, where they are validated and then enter the Custodian’s custody. Digital assets are kept in unique and segregated blockchain addresses accessible by us and verifiable on blockchain at any time.

 

For storage of digital assets, the Cactus Custody wallet arrangement includes hardware and software infrastructure and security controls over key generation, storage, management and transaction signing. Hot storage refers to online key storage. The Cactus Custody’s proprietary solution adopts HSM (Hardware Security Module) for key generation, storage and transaction signing. An HSM is a physical computing device that safeguards and manages digital keys for strong authentication and provides cryptoprocessing. HSMs provide tamper evidence, tamper resistance and tamper responsiveness features that can safeguard client’s private keys. Private keys will be generated in HSM by a true random number generator; the plaintext of the private key will never leave the HSM. Cactus Custody’s proprietary storage applies industry best practice in security design for cold storage, such as the highest security level HSM, multi-sig, private key split and stored in geographically distributed vaults. Vault here refers to a highly secured data center with stringent access control and high-quality environment control. Each cold storage vault only stores one-half of the encrypted private key in HSM. Vaults are located in three continents and are not prone to single point of failure.

 

The physical backup is the disaster recovery measure. Private keys are generated in HSM. Matrixport will split encrypted private keys into 8 pieces. Each piece will be stored in an encrypted hard disk which will be then kept in a safe deposit box in different banks. Three (3) of eight (8) pieces held by management, the Company and a third party would be needed to recover private keys. Cold storage withdrawal can only be made to the user’s hot storage address. The Custodian provides internal risk control measures like withdrawal limit and whitelist as a tool to help protect client’s digital assets.

 

Institutional Digital Asset Platform

 

Pursuant to a License Agreement effective August 31, 2022 (the “Agreement”), Fireblocks, Inc (“Fireblocks”). granted the Company’s subsidiary a non-exclusive, non-sublicensable, non-transferable license to Fireblocks Institutional Digital Asset Platform which provides access and use its services to securely store, manage and administer its own holdings of digital assets on various blockchains, using a combination of encrypted public and private keys (hereinafter, the “Service”). The Company retained ownership of all rights, title and interest to all Licensee Data (as defined) provided by the Company to Fireblocks.

 

The Company is required to activate a private key shard generated on its mobile device via the Fireblock’s app in order to use the Service. In order to access and use the Service’s app, the Company’s permitted users must have an individual recovery passphrase used to remove the private key shard, in the event the mobile device or the Service’s app is damaged, stolen or otherwise inaccessible. For a setup of each Fireblocks vault sub-account and exchange or counterparty connection, the Company must perform testing to the Service by receiving a digital asset to a Fireblocks vault and executing a transaction from the Fireblocks vault. The Company is solely responsible for maintaining insurance policies for its digital assets and/or its products, services and operations.

 

Fireblocks may, from time to time in its sole discretion, offer to provide optional additional services in connection with its provision of the Fireblocks vault service (such services, the “Optional Software Services”). Optional Software Services are offered on an opt-in basis to the Company if it affirmatively accesses the Optional Software Services or otherwise specifies them in an order. During the Initial Term of the Agreement, the Company may elect to use any and all Optional Software Services without any additional fees on top of those applicable subscription fees which are set forth in the order. The license granted for the Service and the provision of related services, to the extent applicable, are subject to the full payment of the applicable subscription fees. Payment for the Service is $40,000 per year. However, if quarterly outgoing volume exceeds $10,000,000, there is an additional charge based on usage.

 

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Fireblocks may, from time to time, provide updates or upgrades to the Service, but is not under any obligation to do so. Such updates and upgrades will be supplied according to Fireblocks’ then-current policies, which may include automatic updating and upgrading. The Service and the services provided by Fireblocks to the Company are provided “as is” and Fireblocks and its suppliers, if any, make no warranty of any kind, express or implied, regarding the Service, and specifically disclaim the warranties of merchantability, fitness for a particular purpose, to the maximum extent possible by law. Fireblocks does not warrant that the Service will meet the Company’s requirements, operate without interruption or be error free. Fireblocks has no responsibility for any damage resulting from (including, but not limited to, any damage to the Company’s account) and the warranty does not apply to any security breach resulting from: (i) any modifications or alteration of the Service, its functionality or capabilities that is not made by Fireblocks or its agents; and/or (ii) by malicious code, malware, bots, worms, trojans, backdoors, exploits, cheats, fraud, hacks, hidden diagnostics or other mechanisms to disable security or content protection that is resulting from the Company’s network system.

 

Fireblocks agreed to defend, at its expense, any third-party action or suit brought against the Company alleging that the Service, when used as permitted under this Agreement, infringes intellectual property rights of a third party; and Fireblocks will pay any damages awarded in a final judgment against the Company that are attributable to any such claim.

 

The License is effective for a one-year term, which shall automatically be renewed for additional one-year terms unless terminated by either party on at least thirty (30) days’ prior written notice given before the end of the term. Either party may terminate the Agreement upon written notice if the other party is in breach or default of any material provision of the Agreement and, if curable, fails to cure the breach or default within thirty (30) days of receipt of written notice of the breach or default.

 

The Company agreed that its use of the Service will comply with applicable export control and trade sanctions laws, rules and regulations, including, without limitation, the regulations administered by the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) and the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) (collectively, “Export Control Laws”).

 

Digital Asset Transactions

 

We use Amber Group’s OTC desk for selling or exchanging bitcoins for U.S. dollars, USDC (USD Coin) or ETH (Ethereum token). Subsequent to September 30, 2021, we exited our holdings of WBTC and USDT and have no plans to hold these assets in the future. As of the date of this report, we only own bitcoin, ETH, ETH liquid staking token, and USDC. We are in the early stage of implementing treasury management alternatives to increase earnings of the bitcoins we mine and hold. In that regard, we may continue to hold Ethereum (ETH), liquid staking tokens (described below) and/or USDC (in addition to bitcoin) in order to fund the purchase of property and equipment for operations, to pay operational expenses such as hosting company fees and for working capital and other general corporate purposes, including treasury management, and in the case of ETH and/or other digital assets, to stake in connection with our Ethereum staking strategy described herein. We have temporarily taken receipt of other digital assets aside from bitcoin, ETH, liquid staking tokens and/or USDC, we do not maintain long-time positions in other types of digital assets.

 

Our evaluation as to whether the digital assets we hold may be deemed securities under the Federal securities laws is a risk-based assessment and not a legal standard or binding on the SEC or any other regulators. If bitcoin, ETH, liquid staking tokens and/or USDC tokens are deemed to be securities under the laws of any U.S. federal, state, or foreign jurisdiction, or in a proceeding in a court of law or otherwise, it may have adverse consequences for such digital asset. See “Risk Factors – Risks Related to United States Government Regulation–A particular digital asset’s status as a “security” in any relevant jurisdiction is subject to a high degree of uncertainty and if a regulator disagrees with our characterization of a digital asset, we may be subject to regulatory scrutiny, investigations, fines, and other penalties, which may adversely affect our business, operating results and financial condition. Furthermore, a determination that bitcoin, ETH, liquid staking tokens and/or USDC that we own or mine is a “security” may adversely affect the value of the digital asset and our business.”

 

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We expect our results of operations to continue to be affected by bitcoin prices as most of our revenue, to date, is sourced from bitcoin mining production. The fluctuation in bitcoin price has affected our results of operations and financial condition. As of December 31, 2023, we held 642.4 bitcoin, with a carrying value of $19.8 million. The carrying value of our bitcoin assets as of December 31, 2023 reflects the $4.5 million of impairment charges we recorded against the carrying value of our bitcoin assets due to decrease in the fair value of our bitcoin assets after receipt. The increase in our revenue from bitcoin mining from January to December 2023 is primarily driven by increase of bitcoin production. Our bitcoin production for the months of January – December 2023 was as follows:

 

   USA   Iceland   Canada   Total 
January   125.9    -    8.5    134.4 
February   102.4    -    5.7    108.1 
March   111.6    -    7.8    119.4 
April   79.1    -    7.0    86.1 
May   104.2    0.9    8.1    113.2 
June   95.0    18.0    6.1    119.1 
July   99.8    28.3    4.8    132.9 
August   107.5    28.2    4.3    140.0 
September   99.9    26.2    4.1    130.2 
October   80.8    24.7    6.1    111.6 
November   109.1    24.8    8.8    142.7 
December   145.0    14.2    10.4    169.6 
Total:   1260.3    165.3    81.7    1507.3 

 

Ethereum

 

The Company expanded during 2022 from mining bitcoin to also validating transactions on the Ethereum blockchain. We currently only hold bitcoin, Ether (ETH), liquid staking tokens (described below) and/or USDC. Transactions on the chain are conducted in ETH. A total of 730 ETH miners we own were first purchased in December 2021 and put into operation in January 2022. We earned 294.3 ETH from mining operations for the year ended December 31, 2022. As the Merge occurred on September 15, 2022, as described below, all of our ETH miners can no longer be used to mine ETH. In the fourth quarter of 2023, the Company wrote off the ETH miners with a carrying amount of $105,571 in the consolidated financial statements for the year ended December 31, 2023.

 

While the Company remains bullish on bitcoin, and supporting the bitcoin blockchain, it expects to derive revenue from the Ethereum network which powers a smart contract platform, that is one of the biggest blockchain by market capitalization at $355 billion as of December 2023 per CoinMarketCap. After many years of development, in connection with the Merge, the Ethereum blockchain made its transition from a proof-of-work (PoW) consensus mechanism, like the bitcoin network, to a proof-of-stake (PoS) model. A proof-of-stake system generally does not expend as much energy to verify transactions as does the bitcoin blockchain. Instead, a participant’s digital assets are deposited in a specific smart contract, which enters them in a lottery. Each time an exchange occurs, a participant is selected from the lottery to verify the transaction and win the reward. The transition to a PoS blockchain occurred on September 15, 2022, when the Ethereum Mainnet merged with the PoS Beacon Chain, a system upgrade that is referred to as the “Merge.” Notwithstanding the fact that a not-for-profit called The Ethereum Foundation helps supervise the blockchain, Ethereum is run by a group of engineers across the world.

 

The Merge and the switch from PoW to PoS did not change our characterization of ETH as a digital asset. As a result of the Merge, PoW mining is no longer the means of validating Ethereum transactions and producing new ETH. Instead, the PoS validators assumed this role and are responsible for processing the validity of all transactions and preparing blocks. The Company intends to accumulate and actively stake ETH to generate yields. We intend to hold our staked ETH for our own account, as described below. We have no current plans to convert ETH to cash, other than when needed to support our operations. By actively staking ETH, we intend to diversify the Company’s operations into a second highly regarded digital asset ecosystem and provide our shareholders with exposure to the smart contract economy. This is also expected to provide a new, predictable and recurring stream of digital asset rewards. Our staking strategy is intended to generate staking-derived yield denominated in ETH, a digital asset that is expected to have deflationary properties. Consequently, there is a potential for our ETH balances to compound over time. Furthermore, the net asset value of our held ETH has the potential to appreciate, in the event of an increase in the price for ETH, driven by demand for participation in Ethereum’s smart contract economy, a reduction in issuance with “burning” of tokens, removing them from systems and other factors beyond our control.

 

On April 12, 2023, Ethereum’s Shanghai hard fork, also referred to as “Shapella,” has been finalized, enabling withdrawals for users who have “staked” their ETH to secure and validate transactions on the blockchain. 

 

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Blockdaemon Agreement

 

As of August 30, 2022 (the “Effective Date”), the Company’s wholly-owned subsidiary, Bit Digital Singapore Pte Ltd., entered into a Master Services Agreement (the “MSA”) with Blockdaemon Ltd. (“Blockdaemon”), an Irish company, which is a leading institutional-grade blockchain infrastructure company for node management and staking.

 

The Company has deployed ETH liquid staking tokens into Harbour, a liquid staking solution provider under the consortium of Blockdaemon and Stakewise. In exchange for depositing ETH into Harbour’s liquid staking protocols, the Company received sETH-h and rETH. In 2022, the Company had 8,800 ETH, 2,004 sETH-h, and 16 rETH with a combined carrying value of approximately $11.8 million. 2,164 ETH were actively staked as of that date, using either native staking or liquid staking protocols.

 

Considering sETH-h has less liquidity, less utility, and more technical (smart contract) risk than ETH, an event including a hash, governance attack, slash across modified node operators or market-wide liquidity crisis, would result in cascading liquidations and a large dislocation in sETH-h, ETH and rETH-h/ETH. In addition, should Harbur suffer liquidation, it will negatively impact our ability to redeem sETH-h and rETH-h back to ETH. The Company intends to continue accumulating Ethereum and stake substantially all of its ETH position over time. However, since the Merge users have been unable to remove their staked tokens, the Shanghai Upgrade occurred on April 12, 2023 resolves this issue and adds withdrawal functionality.

 

Blockdaemon granted the Company a non-exclusive right and license to access the services (the “Services”) and, when applicable, use the nodes with an actual uptime of at least 99.9% during each rolling thirty (30) day period. The nodes are the server or virtual server that contains a copy of the distributed ledger and serves as a communication point that excludes various essential retail functions, such as creating, reviewing or sending information and validating transactions within a blockchain. The Company will be paid Net Revenue generated by the Services. The Company will pay Blockdaemon a percentage of Net Revenue directly attributable to customer funds that will vary by protocol specified in the applicable order form. The Company will pay $8 per validation per month and a three (3%) percent share of participation rewards received by the Company. All rewards paid to the Company will be made in the same digital assets in which the Company’s funds sent to Blockdaemon are downloaded.

 

In connection with the performance of the Services, Blockdaemon will use commercially reasonable endeavors to ensure that it has implemented security procedures that represent good industry practice. Blockdaemon will provide access to and update daily a dashboard detailing the performance of the Services to the Company. The dashboard will provide sufficient detail to enable the accurate calculation of Net Revenue. Blockdaemon must keep the dashboard accurate, complete and up-to-date. The Company will receive a service credit of 10% if service performance is greater than or equal to 99% but less than 99.9%, and a 25% credit if less than 99%.

 

Blockdaemon must maintain insurances during the term adequate to cover the potential liability arising under the MSA. The MSA commenced on the Effective Date and continues in full force and effect until terminated. The term of each subscription to the Services commences as of the date set forth in the relevant Order Form and continues for a period of twelve (12) months (“Initial Term”). Thereafter, the Initial Term of the relevant Order Form will automatically renew for successive twelve (12) month periods (each, a “Renewal Term” and together with the Initial Term, the “Term”) unless written notice is given by one party to the other party of its intention not to renew the Order Form at least ninety (90) days before the expiration of the then-current Term.

 

Either party may terminate the MSA (or any Order Form under it) upon the following events: (i) at any time, for any reason, upon ninety (90) calendar days advance written notice to the party, or (ii) upon written notice to the other party if the other party materially breaches the Agreement and fails to cure such breach within thirty (30) calendar days of its receipt of written notice identifying the breach (for “Cause”), or (iii) the other party is insolvent. In addition, Blockdaemon may terminate the Agreement (and any Order Form under it) for Cause immediately upon written notice, after a cure period of seven (7) calendar days if (i) the Company uses the Services in any manner that violates applicable law, (ii) the Company’s use of the Services infringes the intellectual property or privacy rights of a third party, (iii) the Company transmits or attempts to transmit any harmful code of Services, or (iv) Blockdaemon determines that it is appropriate under limited circumstances of indemnification. The Company may terminate the MSA (and any Order Form) immediately upon written notice (A) should its continued participation in this Agreement result in a breach of licensing or regulatory requirements on its part, (B) if instructed by any relevant authority, or (C) should Blockdaemon be instructed by relevant authority that it is in breach of licensing or regulatory requirements (“Regulatory Breach”). Notwithstanding anything to the contrary if the Company would be prevented from withdrawing the customer funds or participatory rewards following a termination of the Services because such transfer is not permitted under the protocol rules, Blockdaemon must, upon receipt of a notice from the Company, continue to provide the Services (and the terms of this Agreement will apply) until such time as the transfer and payment can be made in accordance with the protocol rules.

 

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All right, title, and interest in and to the Services, the Nodes, the documentation, and the service performance data, including all modifications, improvements, adaptations, enhancements, derivatives, or translations made thereto or therefrom, and all intellectual property rights therein, are and will remain the sole and exclusive property of Blockdaemon. The Company will indemnify, defend and hold Blockdaemon harmless from and against any and all damages, losses, liabilities, costs and expenses, including reasonable attorneys’ fees (“Losses”) incurred by Blockdaemon in connection with any third-party action, claim or proceeding (each, a “Claim”) arising from or relating to (i) the Company’s breach or violation of the Agreement; or (ii) the Company’s gross negligence or willful misconduct.

 

Blockdaemon will indemnify, defend and hold the Company harmless from and against any Losses incurred by the Company in connection with any third-party Claim arising from (i) Blockdaemon’s gross negligence or willful misconduct; (ii) Blockdaemon’s breach of the Agreement; (iii) allegations that the Company’s access to and use of the Services or Nodes in compliance with the Agreement infringes or misappropriates any third-party intellectual property rights (an “Infringement Claim”); or (iv) any slashing penalties that are the result of any defect of a Node operated by Blockdaemon on behalf of the Company, excluding any missed Participatory Rewards or imperfect yields resulting from insufficient staking or inactive Nodes or network-forced inactivity.

 

Pursuant to the order form entered into among Blockdaemon, DeFi Primitive Ltd. (“Stakewise”) and the Company, the Company will also participate in liquid staking via Portara, the liquid staking protocol developed by Blockdaemon and StakeWise and the first of its kind tailored to institutions. Liquid staking allows participants to (1) achieve greater capital efficiency by utilizing their staked ETH as collateral and (2) withdraw from staked positions earlier than natively possible by trading their staked ETH tokens on the secondary market. Unlike other liquid staking solutions, Portara’s key differentiator is that it ensures that users can only interact with verified counterparties. As a result, several regulated institutions which were previously unable to participate in liquid staking have now on-boarded with Portara and are actively liquid staking. The Company’s initial order form for liquid staking was for a maximum of 2,000 ETH, unless otherwise approved by liquid staking providers. Blockdaemon is entitled to a fee equal to 8% of all participation rewards earned.

 

While the Company has no current plans to offer staking-as-a-service (“SaaS”) except as set forth below, it is a potential source of revenue in the future. Subject to developing this potential line of business and a variety of contingencies and uncertainties, among other things, the Company is aware of the issue that if and when it decides to provide such services for others for consideration (e.g., either cash or other digital assets), it will need to comply with the Federal securities laws. The Company will disclose that prior to initiating any SaaS plans, it will undertake a regulatory review to ensure compliance with all regulatory requirements, including, but not limited to, the Federal securities laws. As described above under “Digital Asset Transactions,” our evaluation of whether a digital asset we hold may be deemed to be a “security” under the Federal Securities laws is a risk-based assessment and not a legal standard. The Company will need to install a fully compliant infrastructure, via either an organic buildout or hiring a third-party contractor. The Company may also elect to stake and validate other leading proof-of-stake blockchains, such as liquid staking, which may be deemed to be securities. In addition to traditional Ethereum staking, we also participated in liquid staking solutions of Harbur, a protocol which allows participants to (1) achieve greater capital efficiency by utilizing their staked ETH as collateral and (2) withdraw from staked positions earlier than natively possible by trading their staked ETH tokens on the secondary market. In liquid staking, customers who have staked ETH in a smart contract receive receipt tokens. However, the customer retains ownership of the staked ETH and is in full control of the receipt tokens.

 

After the Ethereum’s Shanghai hard fork in April 2023, the Company reassessed our Ethereum network staking approaches, weighing the advantages of traditional staking against liquid staking solutions. The withdrawal feature in native staking, coupled with yields that are on par with those of liquid staking, encouraged us to expand our collaborations with other service providers in this domain. As a result, we terminated all liquid staking activities with StakeWise in the third quarter of 2023, reclaiming all staked Ethereum along with the accumulated rewards. In the fourth quarter of 2023, the Company terminated the native staking activities and reclaimed all staked Ethereum with Blockdaemon. As of December 31,2023, we had all of our native staking activities with MarsLand.

 

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Marsprotocol Agreement

 

On February 8, the Company’s wholly-owned subsidiary, Bit Digital Singapore Pte Ltd., entered into a Master Right of Use and Services Agreement with Marsprotocol Technologies Pte. Ltd (“Marsprotocol”) which provides native staking technology tools in digital assets through the staking platform.

 

Marsprotocol granted the Company a limited, non-exclusive, nontransferable right, without the right to grant sub-license rights, to access and use the number of nodes solely for the Company’s own business purposes. The Company shall be solely responsible for providing, monitoring, accessing, controlling, and staking its own digital assets, and Marsprotocol is separate and independent from any transactions, disputes, and legal or factual issues concerning or arising out of digital assets, including but not limited to whether the digital assets, and any transactions involving the digital assets, comply with, or violate, any applicable laws. Marsprotocol shall use commercially reasonable efforts to make the right of use available to the Company and shall provide the level of services in a manner that meets or exceeds the service levels: (1) quality assurance and testing of all included subsystems (monitoring, logging, balancing) (2) full hardware / software maintenance and servicing upgrades and deployments within 24 hours (3) individual node uptime of 99.9% (4) on-call support - 24/7 direct access to Marsprotocol via several channels (5) log collection & display - standard UI component, available for full review and audit. In the event that the actual uptime for any nodes is less than 99.9%, Marsprotocol shall provide a credit to the next billing.

 

The Company will pay Marsprotocol participatory rewards of 4.5% from the ETH rewards received for the nodes from 1 to 99, participatory rewards of 3.5% from the ETH rewards received for the nodes from 100 to 499 and participatory rewards of 3% from the ETH rewards received for the nodes above 500. On top of the variable participatory rewards, the Company will pay a fixed node service fee of $10 per validator node per month.

 

MarsLand Agreement

 

Starting August 2023, the Company’s wholly-owned subsidiary, Bit Digital Singapore Pte Ltd., entered into a Master Right of Use and Services Agreement with MarsLand Global Limited (“MarsLand”) which provides native staking technology tools in digital assets through the staking platform.

 

MarsLand granted the Company a limited, non-exclusive, nontransferable right, without the right to grant sub-license rights, to access and use the number of nodes solely for the Company’s own business purposes. The Company shall be solely responsible for providing, monitoring, accessing, controlling, and staking its own digital assets, and MarsLand is separate and independent from any transactions, disputes, and legal or factual issues concerning or arising out of digital assets, including but not limited to whether the digital assets, and any transactions involving the digital assets, comply with, or violate, any applicable laws. MarsLand shall use commercially reasonable efforts to make the right of use available to the Company and shall provide the level of services in a manner that meets or exceeds the service levels: (1) quality assurance and testing of all included subsystems (monitoring, logging, balancing) (2) full hardware / software maintenance and servicing upgrades and deployments within 24 hours (3) individual node uptime of 99.9% (4) on-call support - 24/7 direct access to MarsLand via several channels (5) log collection & display - standard UI component, available for full review and audit. In the event that the actual uptime for any nodes is less than 99.9%, MarsLand shall provide a credit to the next billing.

 

The Company will pay MarsLand participatory rewards of 4.5% from the ETH rewards received for the nodes from 1 to 99, participatory rewards of 3.5% from the ETH rewards received for the nodes from 100 to 499 and participatory rewards of 3% from the ETH rewards received for the nodes above 500. On top of the variable participatory rewards, the Company will pay a fixed node service fee of $10 per validator node per month.

 

The Company has deployed a total of 12,352 ETH into MarsLand as of December 31, 2023.

 

Figment Agreement

 

On January 11, 2024, the Company’s wholly-owned subsidiary, Bit Digital Singapore Pte Ltd., entered into a staking agreement with Figment Inc. (“Figment”), an Ontario corporation which provides comprehensive staking solutions.

 

Figment will provide services of: (1) exercise validation rights in a manner reasonably intended to generate Rewards (2) provision and operate validator nodes and (3) provide reports to the Company showing the calculation of any rewards payable by the Supported Blockchains to the Company in connection with the exercise by Figment of validation rights. Figment will perform the services in a commercially reasonable manner using industry appropriate technology, skill, and care at levels in accordance with industry standards. The Company may request access to the Figment APIs, and Figment may, in its sole discretion, make the Figment APIs available to the Company.

 

The Company may stake and/or unstake tokens at any time in its sole discretion, subject to, respectively, bonding and unbonding periods imposed by the supported blockchains. During any such bonding or unbonding period, tokens and rewards may be unavailable to the Company and subject to other restrictions imposed by the supported blockchains. Accordingly, Figment will not be obligated to perform the services with respect to those tokens. Figment may, in its sole discretion, discontinue operating validator nodes for any supported blockchain at any time upon reasonable prior written notice to the Company. If Figment undergoes a discontinuance, the Company should unstake its tokens in a timely manner. Upon the Company’s written request, Figment will provide one or more pre-signed exit transactions to enable the validator nodes operated by Figment with respect to the Company’s staked ETH to exit the active set of validator nodes operating on the Ethereum network, if applicable. The Company acknowledges and agrees that: (a) once the pre-signed exit transactions are broadcast to the Ethereum network, the relevant validator nodes will exit the active set and Figment will be unable to continue performing the Services with respect to the exiting validator nodes (together, an “Exit”); and (b) Exits are permanent and irreversible.

 

The performance of the services by Figment is intended to result in the direct transfer of rewards by the supported blockchains on-chain in either of the following ways: (1) to the Company at the wallet address designated by the Company, and to Figment in the amount of the Service Fee at the wallet address designated by Figment (the “Standard Flow”); or (2) to either (A) the Company at the wallet address designated by the Company (inclusive of the amount of the Service Fee payable to Figment); or (B) Figment at the wallet address designated by Figment (inclusive of the Rewards payable to the Company) (collectively, the “Non-Standard Flow”).

 

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The Company agrees to pay Figment 3.35% of the rewards and a fixed fee per validator of $5.45 if the number of staked ETH is below 3,000, 3.00% of the rewards and a fixed fee per validator of $5.00 if the number of staked ETH is between 3,000 – 5,000 by March 2024, 2.80% of the rewards and a fixed fee per validator of $4.80 if the number of staked ETH more than 5,000 by June 2024. When a new service fee tier is reached, that fee and fixed fee per validator shall apply to all staked ETH and not on a waterfall basis (i.e. if the Company stakes 3,000 ETH by March 2024, 3% fee and $5 fixed fee per validator will apply to all ETH staked, starting in the calendar month in which the 3,000 ETH milestone is reached).

 

The Company commenced its staking activities with Figment in January 2024.

 

Mega Matrix Joint Venture

 

On March 1, 2023, the Company formed a joint venture with Mega Matrix Corp. (NYSE: MPU) (“Mega Matrix”) by entering into a shareholders’ agreement (the “Agreement”) with MarsProtocol Technologies Pte. Ltd., the joint venture company (the “Joint Venture Company”), to jointly develop proof-of-stake technology tools for digital assets through the staking platform “MarsProtocol,” an institutional grade non-custodial staking technology (the “Joint Venture”). Through MarsProtocol, the Joint Venture will seek to provide non-custodial staking tools whereby users’ private keys are not stored in its database to ensure the safety of its users’ digital assets. Pursuant to the Agreement, Bit Digital will own forty (40%) percent of the Joint Venture Company. The Company and Saving Digital Pte Ltd., the Singapore subsidiary of Mega Matrix, will each appoint one director and Saving Digital will appoint a third director ordinarily residing in Singapore.

 

Mega Matrix is a holding company located in Palo Alto, California that focuses on digital asset-related businesses. The Joint Venture Company will be domiciled in Singapore. Before offering any services, the Joint Venture Company will undertake a regulatory review to ensure that its services are fully compliant with the laws of Singapore and any other nation in which it seeks to conduct business. The services will not be offered to U.S. individual residents. 

 

In August 2023, the Company divested its stake in the Joint Venture Company for consideration of $89,519 and recognized a gain of $8,220. 

 

Coinbase Prime Broker Agreement

 

On February 1, 2023, Bit Digital Singapore, Ltd. (BTSP), the Company’s wholly-owned subsidiary, entered into a Prime Broker Agreement (the “Coinbase PBA”) with Coinbase, Inc. and its affiliated entities. Under the Prime Broker Agreement, Coinbase will provide services relating to custody, trade execution, lending or post-trade credit (if applicable) for bitcoin, ETH and other orders. Under the Coinbase PBA, the Company can submit orders to purchase and sell specified digital assets in accordance with Coinbase Trading Rules (as defined). The Company’s digital assets are held, at Coinbase’s discretion, in either hot wallets, cold wallets or a Connected Trading Venture. Those assets held in the Trading Venture are held on an omnibus basis and the Company does not have a claim to any particular digital asset. The Company’s cash may be held in either an omnibus account or with U.S. insured depository accounts in Coinbase’s name designed to enable repayment of FDIC deposit insurance where applicable. The Company agreed to transfer any assets off of the Trading Platform within thirty (30) days of receipt of termination from Coinbase unless prohibited by law.

 

Insurance

 

We currently do not have any insurance of our miners; however, we intend to purchase insurance in the future. The market is in its early stages. We monitor the market for insurance for our miner assets, as well as for our digital assets.

 

For our AI-related equipment, we have obtained liability coverage with an aggregate limit of approximately $51 million for each incident, as well as an annual aggregate limit of the same amount. The policy includes a 10% deductible, with a minimum of approximately $230 and a maximum of approximately $2,300.

 

Cactus

 

Cactus Custody is self-insured for its secure asset fund (the “Fund”). The Fund size is $4 million, with an additional 35% of custody service annual revenue each year to be added to this Fund, at no additional cost to the Company.

 

The Fund covers:

 

damage caused by insider theft or dishonest acts by Cactus Custody employees or executives;

 

third-party hacks, copying, or theft of private keys for both hot and cold storage; and

 

damage caused by loss of keys for both hot and cold storage

 

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Fireblocks

 

The Fireblocks Institutional Digital Asset Program is insured by leading insurance companies which are A.M. Bests rated “A” (excellent). There is an aggregate of $30,000,000 digital asset crime insurance for theft of digital assets, external breach of Fireblocks’ software or any malicious or intentional misbehavior or fraud by employees. Fireblocks has $12,500,000 of aggregate insurance for errors and omissions; professional liability insurance and cyber/privacy liability insurance.    

 

Liquid Collective Slashing Coverage Program

 

Nexus Mutual is providing the Company with slashing coverage under Liquid Collective’s program for up to 2.0 ETH per validator. Liquid Collective is a protocol developed in collaboration with a diverse group of industry leaders to meet the need for an enterprise-grade liquid staking standard that can be widely adopted. The coverage is fully scalable and automatically adjusts with the protocol’s assets on a platform directly for the Company’s custody account on platforms it is using for staking ETH. Slashing incidents may result from network-wide events such as a natural disaster or client bug.

 

Transfer of cash

 

Since the Company’s commencement of mining operations in February 2020 to December 31, 2023, the Company did not transfer any cash from the holding company to any of its subsidiaries.

 

In 2021, the Company raised proceeds of approximately $37 million from an equity line of credit. The proceeds were directly transferred from investors to designated accounts of Bit Digital USA, Inc. (“BT USA”), the Company’s subsidiary in the U.S. The net proceeds raised in our $80 million September 2021 private placement were transferred to BT USA.

 

In 2022, the Company raised gross proceeds of approximately $22 million from an equity line of credit. The net proceeds of $21 million were directly transferred from investors to designated accounts of BT USA.

 

In 2023, the Company raised gross proceeds of approximately $22 million from an equity line of credit. The net proceeds of $21 million were directly transferred from investors to designated accounts of BT USA.

 

In 2023, the Company raised gross proceeds of approximately 46.7 million from at-the-market offering. The net proceeds of $45.3 million were directly transferred from investors to designated accounts of BT USA.

 

Transfer of other assets

 

During the period from February 2020 to September 30, 2021, Bit Digital Hong Kong transferred 25,006 miners to BT USA, with a carrying value of $19.8 million.

 

Payment of dividends or distributions 

 

During the period from February 2020 to the date of this report, the Company did not receive any dividends or distributions from any of its subsidiaries, nor did the Company make any dividends or distributions to its investors, except as follows:

 

  In March 2024, Bit Digital Hong Kong Limited declared a dividend of $353,357 to the Company. Such dividend was paid directly to Bit Digital Canada Inc. and Bit Digital USA Inc. as its payment-in-kind capital contribution.  
     
  In March 2024, Bit Digital USA Inc. returns a total of $4,200,000 in capital contributions to Bit Digital, Inc., which, in turn, will contribute the same amount to Bit Digital Singapore Ptd Ltd.  
     
  In March 2024, Bit Digital USA Inc. returns a total of $1,400,000 in capital contribution to Bit Digital Inc., which, in turn, will contribute the same amount to Bit Digital Strategies Limited.  
     
 

In March 2024, Bit Digital USA Inc. returns a total of $48,800,000 in capital contributions to Bit Digital, Inc., which, in turn, will contribute the same amount to Bit Digital AI, Inc., which, in turn contributes the same amount to its subsidiary Bit Digital Iceland ehf.

 

On October 24, 2022, Bit Digital Hong Kong Limited declared a dividend of $353,357 to the Company. Such dividend was paid directly to Bit Digital Singapore Pte Ltd. (“BDSG”) as its payment-in-kind capital contribution for the Company’s 500,000 ordinary shares of BDSG.

 

On February 7, 2023, and again on December 8, 2023, the Board of Directors declared an eight (8%) percent ($800,000) dividend on the preference shares to Geney Development Ltd. (“Geney”). Erke Huang, our Chief Financial Officer, is the President of Geney and the beneficial owner of thirty (30%) percent of the equity of Geney, with the remaining seventy (70%) percent held by Zhao Hui Deng, the Company’s Chairman of the Board.

 

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Pursuant to the Enterprise Income Tax Law of the People’s Republic of China and its implementation rules, if a non-resident enterprise has not set up an organization or establishment in the PRC, or has set up an organization or establishment, but the income derived has no actual connection with such organization or establishment, it will be subject to a withholding tax on its PRC-sourced income at a rate of 10%. Pursuant to the Arrangement between mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise is reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to enjoy the reduced withholding tax: (i) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (ii) it must have directly owned such percentage in the PRC resident enterprise throughout the 12 months prior to receiving the dividends. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations. In October 2019, Announcement of State Taxation Administration on Promulgation of the Administrative Measures on Non-resident Taxpayers Enjoying Treaty Benefits, or Circular 35, which became effective on January 1,2020. Circular 35 provides that non-resident taxpayers claiming treaty benefits shall be handled in accordance with the principles of “self-assessment, claiming benefits, retention of the relevant materials for future inspection”. Where a non-resident taxpayer self-assesses and concludes that it satisfies the criteria for claiming treaty benefits, it may enjoy treaty benefits at the time of tax declaration or at the time of withholding through the withholding agent, simultaneously gather and retain the relevant materials pursuant to the provisions of these Measures for future inspection, and accept follow-up administration by the tax authorities.

 

Restrictions or limitations

 

As of the date of this report, the Company had nine subsidiaries incorporated in and based in the United States, Canada, Hong Kong, Singapore, British Virgin Islands, and Iceland. The Company is not aware of any restrictions or limitations on foreign exchange in these countries or areas, or its ability to transfer cash between entities, across borders or to U.S. investors, nor is the Company aware of any restrictions and limitations on its ability to distribute earnings from its businesses, including the businesses of its subsidiaries, to the holding company and its U.S. investors.

 

Intellectual Property

 

We actively use specific hardware and software for our digital asset mining operation. In certain cases, source code and other software assets may be subject to an open source license, as much technology development underway in this sector is open source. For these works, we intend to adhere to the terms of any license agreements that may be in place.

 

We do not currently own, and do not have any current plans to seek, any patents in connection with our existing and planned blockchain and digital asset related operations. We rely upon trade secrets, trademarks, service marks, trade names, copyrights and other intellectual property rights and expect to license the use of intellectual property rights owned and controlled by others. In addition, we have developed and may further develop certain proprietary software applications for purposes of our digital asset mining operation.

 

Legal Proceedings

 

Except as set forth herein, we are not currently a party to any material legal or administrative proceedings.

 

On January 20, 2021, a securities class action lawsuit was filed against the Company and its former Chief Executive Officer and current Chief Financial Officer titled Anthony Pauwels v. Bit Digital, Inc., Min Hu and Erke Huang (Case No. 1:21-cv-00515) (U.S.D.C. S.D.N.Y.). The class action was on behalf of persons that purchased or acquired our ordinary shares between December 21, 2020 and January 11, 2021, a period of volatility in our Ordinary Shares, as well as volatility in the price of bitcoin. We believe the complaints are based solely upon a research article issued on January 11, 2021, which included false claims and to which the Company responded in a press release filed on Form 6-K on January 19, 2021. On April 21, 2021, the Court consolidated several related cases under the caption In re Bit Digital Securities Litigation. Joseph Franklin Monkam Nitcheu was appointed as lead plaintiff. We filed a motion to dismiss the lawsuits and vigorously defended the action. While that motion was pending, the Company agreed with the lead plaintiff selected in the case to settle the class action by paying $2,100,000. The Company recorded the liabilities of $2,100,000 in the account of “accrued litigation settlement costs”. The Company chose to do that to eliminate the burden, expense and uncertainties of further litigation. The Company continues to deny the allegations in the Amended Complaint and nothing in the settlement is evidence of any liability on the Company’s behalf.

 

On March 7, 2023, a final judgment in this matter was entered approving the settlement and certifying the class for purposes of enforcing the settlement and payment was then made by the Company. 

 

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Regulations

 

U.S. Government Regulation

 

U.S. government regulation of blockchain and digital asset is being actively considered by the United States federal government via its agencies and regulatory bodies, as well as similar entities in other countries and transnational organizations, such as the European Union. 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 digital asset business.

 

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.

 

Holding Foreign Companies Accountable Act/PCAOB

 

Although the audit reports of Audit Alliance LLP incorporated by reference into this report are prepared by Singapore auditors who are subject to inspection by the Public Company Accounting Overnight Board (the “PCAOB”), there is no guarantee that future audit reports will be prepared by auditors that are completely inspected by the PCAOB and, as such, future investors may be deprived of such inspections, which could result in limitations or restrictions to our access in the U.S. capital markets under the Holding Foreign Companies Accountable Act (the “HFCA Act”) or the Accelerating Holding Foreign Companies Accountable Act. The United States enacted the Holding Foreign Companies Accountable Act, or the HFCA Act, in December 2020. The HFCA Act includes requirements for the SEC to identify issuers whose audit reports are prepared by auditors that the PCAOB is unable to inspect or investigate completely because of a restriction imposed by a non-U.S. authority in the auditor’s local jurisdiction. The HFCA Act also requires public companies on this SEC list to certify that they are not owned or controlled by a foreign government and make certain additional disclosures in their SEC filings. In December 2022, the HFCA Act was amended to reduce from three years to two years the number of consecutive years an issuer can be identified as an identified issuer before the SEC can prohibit an issuer’s securities from trading on any U.S. national securities exchange and on the over-the- counter market. Accordingly, our securities may be prohibited from trading on Nasdaq or other U.S. stock exchange. If our auditor is not inspected by the PCAOB for two consecutive years, and this ultimately could result in our Ordinary Shares being delisted.

 

On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which if enacted into law would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on U.S. stock exchanges if its auditors are not subject to PCAOB inspections for two consecutive “non-inspection” years instead of three. On September 22, 2021, the PCAOB adopted a final rule implementing the HFCA Act, which provides a framework for the PCAOB to use when determining, as contemplated under the HFCA Act, whether the Board is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction. On December 16, 2021, the PCAOB issued PCAOB Rule 6100 Board Determinations Under the Holding Foreign Companies Accountable Act. The PCAOB notified the SEC that it was unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and in Hong Kong, because of the positions taken by authorities in mainland China and Hong Kong. As stated above, our current auditors are based in Singapore and the PCAOB is permitted to inspect and investigate them. The PCAOB issued a Determination Report on December 15, 2022, determining that the PCAOB secured complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong, and vacating the 2021 Determinations to the contrary. However, the PCAOB further noted that it will act immediately to consider the need to issue a new determination if the PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access. While the audit reports of Audit Alliance LLP included in this report was prepared by auditors based in Singapore who are subject to inspection and investigation by the PCAOB, there can be no assurance that our auditor or we will be able to comply with these and other requirements imposed by U.S. regulators in the future. The market prices of our Ordinary Shares and/or other securities could be adversely affected as a result of possible negative impacts of the HFCA Act and other similar rules and regulations.

 

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Data Privacy

 

We collect and process data, including personal, financial and confidential information about individuals, including our employees and business partners; however, none of any customers or other third parties. The collection, use and processing of such data about individuals are governed by data privacy laws and regulations enacted in the United States (federal and state), and other jurisdictions around the world. These data privacy laws and regulations are complex, continue to evolve, and, on occasion, may be inconsistent between jurisdictions leading to uncertainty in interpreting such laws and it is possible that these laws, regulations and requirements may be interpreted and applied in a manner that is inconsistent with our existing information processing practices, and many of these laws are significantly litigated and/or subject to regulatory enforcement. The implication of this includes that various federal, state and foreign legislative or regulatory bodies may enact or adopt new or additional laws and regulations concerning data privacy, data retention, data transfer, and data protection. Such laws may continue to restrict or dictate how we collect, maintain, combine and disseminate information and could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

In the United States, there are numerous federal and state laws and regulations that could apply to our operations or the operations of our partners, including data breach notification laws, financial information and other data privacy laws, and consumer protection laws and regulations (e.g., Section 5 of the FTC Act), that govern the collection, use, disclosure, and protection of personal information.

 

Environmental, Health and Safety Laws and Regulations

 

Our operations and properties are subject to extensive laws and regulations governing occupational health and safety, the discharge of pollutants into the environment or otherwise relating to health, safety and environmental protection requirements in the United States. These laws and regulations may impose numerous obligations that are applicable to our operations, including acquisition of a permit or other approval before conducting construction or regulated activities; restrictions on the types, quantities and concentration of materials that can be released into the environment; limitation or prohibition of construction and operating activities in environmentally sensitive areas, such as wetlands; imposing specific health and safety standards addressing worker protection; and imposition of significant liabilities for pollution resulting from our operations, including investigation, remedial and clean-up costs. Certain environmental laws may impose strict, joint and several liability for costs required to clean up and restore sites where hazardous substances have been disposed or otherwise released into the environment, even under circumstances where the hazardous substances were released by prior owners or operators or the activities conducted and from which a release emanated complied with applicable law. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by noise or the release of hazardous substances into the environment.

 

The trend in environmental regulation has been to place more restrictions and limitations on activities that may be perceived to impact the environment, and thus there can be no assurance as to the amount or timing of future expenditures for environmental regulation compliance or remediation. New or revised regulations that result in increased compliance costs or additional operating restrictions could have a material adverse effect on our financial position, results of operations and cash flows.

 

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Climate Change

 

A number of governments or governmental bodies have introduced or are contemplating legislative and regulatory changes in response to various climate change interest groups and the potential impact of climate change. Given the very significant amount of electrical power required to operate digital asset mining machines, as well the environmental impact of mining for the rare earth metals used in the production of mining servers, the digital asset mining industry may become a target for future environmental and energy regulation. For example, in June and July of 2021, the Chinese government prohibited the operation of mining machines and supply of energy to mining businesses, citing concerns regarding high levels of energy consumption, which resulted in our suspension of mining operations in China. U.S. (federal and state) legislation and increased regulation regarding climate change could impose significant costs on us and our suppliers, including costs related to increased energy requirements, capital equipment, environmental monitoring and reporting, and other costs to comply with such regulations. Specifically, imposition of a carbon tax or other regulatory fee in a jurisdiction where we operate or on electricity that we purchase could result in substantially higher energy costs, and due to the significant amount of electrical power required to operate digital asset mining machines, could in turn put our facilities at a competitive disadvantage. Any future climate change regulations could also negatively impact our ability to compete with companies situated in areas not subject to such limitations. Given the political significance and uncertainty around the impact of climate change and how it should be addressed, we cannot predict how legislation and regulation will affect our financial condition, operating performance and ability to compete. Furthermore, even without such regulation, increased awareness and any adverse publicity in the global marketplace about potential impacts on climate change by us or other companies in our industry could harm our reputation. Any of the foregoing could have a material adverse effect on our financial position, results of operations and cash flows.

 

Federal Securities Laws

 

The SEC and its staff have taken the position that certain digital assets fall within the definition of a “security” under the U.S. federal securities laws. The legal test for determining whether any given digital asset is a security is a highly complex, fact-driven analysis that may evolve over time, and the outcome is difficult to predict. Our determination that the digital assets we hold are not securities is a risk-based assessment and not a legal standard or binding on regulators. The SEC generally does not provide advance guidance or confirmation on the status of any particular digital asset as a security. Furthermore, the SEC’s views in this area have evolved over time and it is difficult to predict the direction or timing of any continuing evolution. It is also possible that a change in the governing administration or the appointment of new SEC commissioners could substantially impact the views of the SEC and its staff. Public statements made by senior officials at the SEC indicate that the SEC does not intend to take the position that Bitcoin is a security (as currently offered and sold). However, such statements are not official policy statements by the SEC and reflect only the speakers’ views, which are not binding on the SEC or any other agency or court and cannot be generalized to any other digital asset. As of the date of this report, with the exception of certain centrally issued digital assets that have received “no-action” letters from the SEC staff, bitcoin and ETH are the only digital assets which senior officials at the SEC have publicly stated are unlikely to be considered securities. chairman Gensler stated (at the Penn Law Capital Markets Association Annual Conference on April 4, 2022) that “Issuers of crypto tokens that are securities must register their offers and sales of these assets with the SEC and comply with our disclosure requirements or meet an exemption.” As a bitcoin mining company, we do not believe we are an issuer of any “securities” as defined under the federal securities laws. Our internal process for determining whether the digital assets we hold or plan to hold is based upon the public statements of the SEC and existing case law. The digital assets we hold or plan to hold, other than bitcoin and ETH, may have been created by an issuer as an investment contract under the Howey test, SEC v. Howey Co., 328 U.S. 293 (1946), and may be deemed to be securities by the SEC. However, the Company was not the issuer that created these digital assets and is holding them on an interim basis until liquidated. Should the SEC state in the future that bitcoin, ETH or USDC tokens we hold are securities, we may no longer be able to hold any of these digital assets. It will then likely become difficult or impossible for such digital asset to be traded, cleared or custodied in the United States through the same channels used by non-security digital assets, which in addition to materially and adversely affecting the trading value of the digital asset is likely to cause substantial volatility and significantly impact its liquidity and market participants’ ability to convert the digital asset into U.S. dollars. Our inability to exchange bitcoin for fiat currency or other digital assets (and vice versa) to administer our treasury management objectives may decrease our earnings potential and have an adverse impact on our business and financial condition.

 

Under the Investment Company Act of 1940, as amended, a company may fall within the definition of an investment company under section 3(c)(1)(A) thereof if 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 under section 3(a)(1)(C) thereof if it is engaged, or proposes to engage, in business of investing, reinvesting, owning, holding, or trading in securities, and owns, or proposes to acquire, “investment securities” (as defined) having a value exceeding 40% of its total assets (exclusive of government securities and cash items) on an unconsolidated basis. There is no authoritative law, rule or binding guidance published by the SEC regarding the status of digital assets as “securities” or “investment securities” under the Investment Company Act. Although we believe that we are not engaged in the business of investing, reinvesting, or trading in investment securities, and we do not hold ourselves out as being primarily engaged, or proposing to engage primarily, in the business of investing, reinvesting or trading in securities to the extent the digital assets which we mine, own, or otherwise acquire may be deemed “securities” or “investment securities” by the SEC or a court of competent jurisdiction, we may meet the definition of an investment company. If we fall within the definition of an investment company under the Investment Company Act, we would be required to register with the SEC. If an investment company fails to register, it likely would have to stop doing almost all business, and its contracts would become voidable. Generally non-U.S. issuers may not register as an investment company without an SEC order.

 

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The classification of a digital asset as a security under applicable law has wide-ranging implications for the regulatory obligations that flow from the mining, sale and trading of such assets. For example, a digital asset that is a security in the United States may generally only be offered or sold in the United States pursuant to a registration statement filed with the SEC or in an offering that qualifies for an exemption from registration. Persons that effect transactions in digital assets that are securities in the United States may be subject to registration with the SEC as a “broker” or “dealer.”

 

There can be no assurances that we will properly characterize any given digital asset as a security or non-security for purposes of determining which digital assets to mine, hold and trade, or that the SEC, or a court, if the question was presented to it, would agree with our assessment. We could be subject to judicial or administrative sanctions for failing to offer or sell digital assets in compliance with the registration requirements, or for acting as a broker or dealer without appropriate registration. Such an action could result in injunctions, cease and desist orders, as well as civil monetary penalties, fines, and disgorgement, criminal liability, and reputational harm. Further, if any of our digital assets  is deemed to be a security under the laws of any U.S. federal, state, or foreign jurisdiction, or in a proceeding in a court of law or otherwise, it may have adverse consequences for such digital asset. For instance, all transactions in such supported digital asset would have to be registered with the SEC, or conducted in accordance with an exemption from registration, which could severely limit its liquidity, usability and transactability. For instance, all transactions in such supported digital asset would have to be registered with the SEC, or conducted in accordance with an exemption from registration, which could severely limit its liquidity, usability and transactability. Further, it could draw negative publicity and a decline in the general acceptance the digital asset. Also, it may make it difficult for such digital asset to be traded, cleared, and custodied as compared to other digital assets that are not considered to be securities.

 

Anti-corruption and anti-money laundering laws, including the Foreign Corrupt Practices Act (the “FCPA”)

 

We operate an international business and may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. We are subject to the FCPA, and other applicable anti-corruption and anti-money laundering laws in certain countries in which we conduct activities. The FCPA prohibits providing, offering, promising, or authorizing, directly or indirectly, anything of value to government officials, political parties, or political candidates for the purpose of obtaining or retaining business or securing any improper business advantage. In addition, U.S. public companies are required to maintain records that accurately and fairly represent their transactions and have an adequate system of internal accounting controls.

 

In many foreign countries, including countries in which we may conduct business, it may be a local custom that businesses engage in practices that are prohibited by the FCPA, or other applicable laws and regulations. We face significant risks, if we or any of our directors, officers, employees, contractors, agents or other partners or representatives fail to comply with these laws. Governmental authorities in the United States and elsewhere could seek to impose substantial civil and/or criminal fines and penalties which could have a material adverse effect on our business, reputation, operating results, prospects and financial condition.

 

Any violation of the FCPA, other applicable anti-corruption laws, or anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracts, any of which could have a materially adverse effect on our reputation, business, operating results, prospects and financial condition. In addition, responding to any enforcement action or internal investigation related to alleged misconduct may result in a significant diversion of management’s attention and resources and significant defense costs and other professional fees.

 

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Infrastructure Investment and Jobs Act of 2021 (the “Infrastructure Act”)

 

On November 15, 2021, President Joseph R. Biden signed the Infrastructure Act. Section 80603 of the Infrastructure Act modifies and amends the Internal Revenue Code of 1986 (the “Code”) by requiring brokers of digital asset transactions to report their customers to the IRS. This provision was included to enforce the taxability of digital asset transactions. Section 80603 defines “broker” as “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” That could potentially include miners, validators, and developers of decentralized application. These functions play a critical role in our business and in the functioning of the blockchain ecosystem. Importantly, these functions have no way of identifying their anonymous users. Indeed, bitcoin’s blockchain was designed for anonymity.

 

This reporting requirement took effect on  January 1, 2023 and thus affects tax returns filed in 2024. The implementation of these requirements is ongoing. The Company is closely monitoring the situation and waiting for more issuance of updated guidance from government agencies. Disclosing the identity of our digital asset mining/staking operations and associated accounts to ensure they can be taxed by the IRS could cause a significant devaluing of our business, the bitcoin currency, and the entire digital asset market. Additionally, noncompliance with this provision could lead to significant fines and or regulatory actions against our Company.

 

Office of Financial Assets Control (OFAC)

 

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 or from countries on OFAC’s sanctioned countries’ list. We also rely on a third-party mining pool service provider for our mining revenue payments and other participants in the mining pool, unknown to us, may also be persons from countries on OFAC’s SDN list or from countries on OFAC’s sanctioned countries list. Our Company’s policy prohibits any transactions with such SDN individuals or persons from sanctioned countries, but we may not be adequately capable of determining the ultimate identity of the individual with whom we transact with respect to selling bitcoin assets. 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 enforce these and other laws and regulations that relate to 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 affect the value of our Ordinary Shares.

 

U.S. Bank Secrecy Act

 

To the extent that our activities cause us to be deemed a money services business, herein an “MSB”, pursuant to 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 cause us to be deemed a “money transmitter” (“MT”) or equivalent designation, under state law in any state in which we operate (currently, New York), 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. Such additional federal or state regulatory obligations may cause us to incur extraordinary expenses, possibly affecting an investment in our securities in a materially adverse manner. Furthermore, the Company and our service providers 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 leave a particular state or the United States completely. Any such action would be expected to materially adversely affect our operations.

 

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Commodities Exchange Act of 1936

 

Current legislation, including the Commodities Exchange Act of 1936, as amended (the “CEA”) is unclear with respect to the exchange of bitcoins and other digital assets. Changes in the CEA or the regulations promulgated thereunder, as well as interpretations thereof and official promulgations by the Commodity Futures Trading Commission (“CFTC”), which oversees the CEA, may impact the classification of bitcoins and therefore may subject them to additional regulatory oversight by the CFTC. Presently, bitcoin derivatives are not excluded from the definition of a “commodity future” by the CFTC.

 

We cannot be certain as to how future regulatory developments will impact the treatment of bitcoins under the law. Bitcoins have been deemed to fall within the definition of a commodity and, we may be required to register and comply with additional regulation under the CEA, including additional periodic report and disclosure standards and requirements. Moreover, we may be required to register as a commodity pool operator or as a commodity pool with the CFTC through the National Futures Association. Such additional registrations may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting an investment in us. If we determine not to comply with such additional regulatory and registration requirements, we may seek to curtail our U.S. operations. Any such action would be expected to materially adversely affect our operations. As of the date of this report, no CFTC orders or rulings are applicable to our business.

 

Regulations in the People’s Republic of China (the PRC) 

 

Registration to do business

 

Pursuant to laws and regulations of the  PRC, there are two ways for foreign legal persons/entities to be considered to be engaging in operation activities within the territory of China. One way is to establish a foreign-invested enterprise, that is incorporated, according to the Foreign Investment Law of the  PRC, within the territory of China and that is wholly or partly invested by a foreign investor. The organization form, institutional framework and standard of conduct of a foreign-invested enterprise are subject to the provisions of the Company Law of the PRC and the Partnership Enterprise Law of the PRC and other law related regulations. Another way to be deemed to be operating within China is to complete the approval and registration procedures with the relevant regulatory authorities in accordance with the provisions of Administrative Measures for the Registration of Enterprises of Foreign Countries (Regions) Engaging in Production and Operation Activities within the Territory of China (Revised in 2020), or Order No. 31. Notwithstanding the fact that we no longer have bitcoin mining operations in China and we have not received any penalty, our prior operations may subject us to the statutes and regulations of China, as the Company conducted its bitcoin mining operations in the PRC through its Hong Kong subsidiary and did not register to do business in the PRC and, as described below, we may be subject to fines, penalties and other sanctions.

 

Regulations and Government Policies Relating to Digital Assets

 

China has now taken harsh regulatory action to ban digital asset mining operations and to severely restrict the right to acquire, own, hold, sell or use these virtual currencies  or to exchange them for fiat currency. Such restrictions may adversely affect us as the large-scale use of digital assets as a means of exchange is presently confined to certain regions globally. Ongoing and future regulatory actions may impact our ability to continue to operate, and such actions could affect our ability to continue as a going concern or to pursue our business strategy at all, which could have a material adverse effect on our business, prospects or operations.

 

On May 21, 2021, the Financial Stability and Development Committee of the State Council in China proposed to “crack down on bitcoin mining and trading.” However, it was not until September 24, 2021 that all digital asset transactions were banned in China. In May 2021, local governments began to issue corresponding measures in succession to respond to the central government, including Xinjiang Changji Hui Autonomous Prefecture Development and Reform Commission issuing a notice on the immediate shutdown of enterprises engaged in digital asset mining on June 9, 2021. At the time of the announcement of the ban in Xinjiang, we no longer had  mining operations in Xinjiang. On June 18, 2021, according to public media reports — the Sichuan Provincial Development and Reform Commission and Sichuan Energy Bureau issued a notice on the shutdown of digital asset mining projects with the deadline of June 25, 2021. That is the reason why we had already ceased all remaining operations in PRC on June 21, 2021. Accordingly, we ceased all of our remaining operations in PRC on June 21, 2021. On September 24, 2021, the newly issued Notification of Overhauling the Mining Activity of Cryptocurrency (or the Notification No. 1283), by the National Development and Reform Commission (the “NDRC”), banned all new digital asset operations in China. The NDRC notice set forth penalties on a going forward basis for all of the PRC. In consideration of the PRC government’s policies and general attitude toward our industry, as well as our business plans, we will not conduct any digital asset mining operations or digital asset trading operations in mainland PRC. All of our miners have been migrated out of the PRC as of September 30, 2021.

 

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Foreign Investment-Access

 

The Chinese government implements the management systems of pre-establishment national treatment and negative list for foreign investment. Pre- establishment national treatment refers to the treatment given to foreign investors and their investments during the investment access stage, which is not lower than that given to their domestic counterparts; negative list for foreign investment refers to special administrative measures for the restricted or prohibited access of foreign investment in specific fields as stipulated by the Chinese government.

 

Pursuant to the Special Administrative Measures for Foreign Investment Access (2021 Edition), or the 2021 Edition Negative List for Foreign, issued by the Ministry of Commerce of the PRC (the “MOFCOM”) and the National Development and Reform Commission (the “NDRC”) on December 27, 2021 which came into effect on January 1, 2022, our bitcoin mining business does not fall into the Negative List for Foreign. However, the 2021 Edition Negative List for Foreign regulates that “Fields not mentioned in the Negative List for Foreign Investment Access shall be subject to administration under the principle of consistency for domestic and foreign investments. The relevant provisions of the Negative List for Market Access shall apply to domestic and foreign investors on a unified basis.”

 

Also, based on the Negative List for Market Access (2022 Edition), “the Catalogue for Guidance on Industrial Restructuring shall be included in the Negative List for Market Access”; plus, according to the Decision of the State Council on Promulgating and Implementing the “Temporary Provisions on Promoting Industrial Structure Adjustment”, valid from December 2, 2005, “In principle, the ‘Guidance Catalogue for the Industrial Structure Adjustment’ shall apply to various types of enterprises inside China”, “The industries of the eliminated category under the ‘Guidance Catalogue for the Industrial Structure Adjustment’ shall apply to the foreign investment enterprises.” and “Investments are prohibited from being contributed to projects under the eliminated category.” Furthermore, on December 30, 2021, the NDRC released its No. 49 Decree, announcing that the Decision of the National Development and Reform Commission on Amending the Guiding Catalog for Industrial Restructuring (2019 Version) (the “Amended Catalog”). The Amended Catalog added ‘virtual currency mining activities’ to the eliminated category of ’1. outdated production processing and equipment’ under the original Catalog. Therefore, the foreign investment enterprises are prohibited from virtual currency activities and our bitcoin mining business is banned in China as well. There can be no assurance that our prior mining activities in China will not be subject to fines and penalties on a retroactive basis.

 

Regulations on Illegal Fund-Raising

 

Raising funds by entities or individuals from the general public must be conducted in strict compliance with applicable PRC laws and regulations to avoid administrative and criminal liabilities. The Notice on Relevant Issues Concerning the Penalty on Illegal Fund-Raising (the “Notice”), issued by the General Office of the State Council in July 2007, explicitly prohibits illegal public fund-raising. In accordance with the Notice, the main features of illegal public fund-raising include: (i) illegally soliciting and raising funds from the general public by means of issuing stocks, bonds, lotteries or other securities without obtaining the approval of relevant authorities, (ii) promising a return of interest or profits or investment returns in cash, properties or other forms within a specified period of time, and (iii) using a legitimate form to disguise the unlawful purpose.

 

To further clarify the criminal charges and punishments relating to illegal public fund-raising, the Supreme People’s Court promulgated the Judicial Interpretations to Issues Concerning Applications of Laws for Trial of Criminal Cases on Illegal Fund-Raising, or the Illegal Fund-Raising Judicial Interpretations, which came into force in January 2011 and was amended in February 2022. The Illegal Fund-Raising Judicial Interpretations, provide that a public fund-raising will constitute a criminal offense related to “illegally soliciting deposits from the public” under the PRC Criminal Law, if it meets all the following four criteria: (i) the fund-raising has not been approved by the relevant authorities or is concealed under the guise of legitimate acts; (ii) the fund-raising employs public solicitation via such channels as internet, social media, promotion meetings, leafleting and SMS advertising; (iii) the fundraiser promises to repay, after a specified period of time, the capital and interests, or investment returns in cash, properties in kind, equity and other forms; and (iv) the fund-raising targets at the general public as opposed to specific individuals. An illegal fund-raising activity will be fined or prosecuted in the event that it constitutes a criminal offense. Pursuant to the Illegal Fund-Raising Judicial Interpretations, an offender that is an entity will be subject to criminal liabilities, if it illegally solicits deposits from the general public or illegally solicits deposits in disguised form (i) with the amount of deposits involved exceeding RMB1,000,000; (ii) with over 150 fund-raising targets involved, or (iii) with the direct economic loss caused to fund-raising targets exceeding RMB500,000. Also, in accordance with the Illegal Fund-Raising Judicial Interpretations, whoever accepts illegally or in a disguised manner deposits from the general public in an amount of more than RMB500,000 or causes direct economic losses of more than RMB250,000 to the depositors and falls under any of the following circumstances concurrently will be investigated for criminal liability in accordance with the law: (i) where it/he has been criminally prosecuted due to illegal fundraising practices; (ii) where it/he has been subject to any administrative penalty due to any illegal fundraising practice within two years; and (iii) where there is adverse social influence or other serious consequences. In accordance with the Opinions of the Supreme People’s Court, the Supreme People’s Procurator and the Ministry of Public Security on Several Issues concerning the Application of Law in the Illegal Fund-Raising Criminal Cases, an individual or an entity who has aided in illegal fund-raising from the general public and charges fees including but not limited to agent fees, rewards, rebates and commission, constitute an accomplice of the crime of illegal fund-raising. In addition, the administrative proceeding for determining the nature of illegal fund-raising activities is not a prerequisite procedure for the initiation of criminal proceeding concerning the crime of illegal fund-raising, and the administrative departments’ failure in determining the nature of illegal fund-raising activities does not affect the investigation, prosecution and trial of cases concerning the crime of illegal fund-raising.

 

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Anti-money Laundering Regulations

 

The PRC Anti-money Laundering Law, which became effective in January 2007, sets forth the principal anti-money laundering requirements applicable to financial institutions as well as non-financial institutions with anti-money laundering obligations, including the adoption of precautionary and supervisory measures, establishment of various systems for client identification, retention of clients’ identification information and transactions records, and reports on large transactions and suspicious transactions. According to the PRC Anti-money Laundering Law, financial institutions subject to the PRC Anti-money Laundering Law include banks, credit unions, trust investment companies, stock brokerage companies, futures brokerage companies, insurance companies and other financial institutions as listed and published by the State Council, while the list of the non-financial institutions with anti-money laundering obligations will be published by the State Council. The PBOC and other governmental authorities issued a series of administrative rules and regulations to specify the anti-money laundering obligations of financial institutions and certain non-financial institutions, such as payment institutions. Also, according to the PRC Anti-money Laundering Law, the scope of the special non-financial institutions subject to the performance of the duties of anti-money laundering, the duties to be performed by them and the specific measures for their regulatory shall be formulated by the competent administrative authority of anti-money laundering under the State Council jointly with the relevant departments of the State Council.

 

Administrative Measures for Anti-money Laundering and Counter-terrorism Financing by Internet Finance Service Agencies (for Trial Implementation)(the “Measures for AML and CTF”), which became effective in January 2019, provides that institutions established within the territory of the PRC to legally carry out internet finance business, upon approval of, or after filing a record with, the department with the authority, shall be governed by the Measures for AML and CTF. Internet finance governed by the Measures for AML and CTF is a new-type financial business model under which internet-based technologies and information communication technologies are employed to make possible fund financing, payments, investments and information intermediary services.

 

According to the Measures for AML and CTF, the entity that subject to AML and CTF obligations has two elements: (1) the entity is established in China with the approval or filing of the authorities; (2) the entity operates Internet financial business. Internet finance institutions including online payment, P2P lending, P2P lending information intermediary services, equity crowdfunding financing, internet fund sale, internet insurance, internet trust and internet consumption finance etc. naturally become the subject of Anti-money Laundering and Counter-terrorism Financing obligations under the Measures for AML and CTF.

 

Regulations on Internet Information Security

 

Internet information in China is also regulated and restricted from a national security standpoint. The National People’s Congress, China’s national legislative body, has enacted the Decisions on Maintaining Internet Security, which has been partly amended in August 2009. According to the Decisions on Maintaining Internet Security, some behaviors may subject violators to criminal punishment in China for any effort to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv) spread false commercial information; or (v) infringe intellectual property rights and so on.

 

In addition, Guiding Opinions on Promoting the Healthy Development of Internet Finance (“Guiding Opinions”) jointly released by ten PRC regulatory agencies in July 2015 purport, among other things, to require internet finance service providers, including peer-to-peer lending platforms, to improve technology security standards, and safeguard customer and transaction information. The PBOC and other relevant regulatory authorities will jointly adopt the implementing rules and technology security standards.

 

Cybersecurity Law of the PRC became effective on June 1, 2017, which shall apply to the construction, operation, maintenance and use of the network as well as the supervision and administration of the cybersecurity within the territory of the PRC.

 

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Regulations on Privacy Protection

 

According to Cybersecurity Law of the PRC, personal information refers to all kinds of information recorded by electronic or otherwise that can be used to independently identify or be combined with other information to identify natural persons’ personal information, including but not limited to: natural persons’ names, dates of birth, ID numbers, biologically identified personal information, addresses, telephone numbers, and other similar information.

 

The National Standard Entitled Information Security Technology-Personal Information Security Specifications (GB/T 35273-2020, “Personal Information Security Specification”) issued by the State Administration for Market Supervision of the PRC and Standardization Administration of the PRC on March 6, 2020, which has been implemented on October 1, 2020 and replaced GB/T 35273-2017, it further defines the connotation and extension of “sensitive personal information”. In accordance with the Personal Information Security Specification, personal sensitive information means the personal information that may cause harm to personal or property security or is very likely to result in damage to an individual’s personal reputation or physical or mental health or give rise to discriminatory treatment, etc., once it is leaked, unlawfully provided or abused.

 

The Cybersecurity Review Measures (2021) was officially released to the public on December 28, 2021, and became effective on February 15, 2022. According to the Cybersecurity Review Measures (2021) (the “Measures”)” to go public abroad, an online platform operator who possesses the personal information of more than 1 million users shall declare to the Office of Cybersecurity Review for cybersecurity review. Currently, we have not been involved in any investigations on cybersecurity review initiated by the CAC or related governmental regulatory authorities, and we have not received any inquiry, notice, warning, or sanction in such respect.

 

Regulations Relating to PRC Enterprise Income Tax

 

Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with a “de facto management body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control over and overall management of the business, productions, personnel, accounts and properties of an enterprise. In April 2009, the State Administration of Taxation issued a circular, known as Circular 82, (partly amended) which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners like us, the criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.

 

Regulations Relating to Dividend Withholding Tax

 

Pursuant to the Enterprise Income Tax Law and its implementation rules, if a non-resident enterprise has not set up an organization or establishment in the PRC or has set up an organization or establishment but the income derived has no actual connection with such organization or establishment, it will be subject to a withholding tax on its PRC-sourced income at a rate of 10%. Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise is reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to enjoy the reduced withholding tax: (i) it must be limited to a company in accordance with the tax treatment; (ii) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (iii) it must have directly owned such percentage in the PRC resident enterprise throughout the 12 months prior to receiving the dividends. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations. In October 2019, the State Administration of Taxation promulgated the Announcement of the State Taxation Administration on Issuing the Administrative Measures for Entitlement to Treaty Benefits for Non-resident Taxpayers or Circular 35, which became effective on January1, 2020. Circular 35 provides that non-resident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax rate. Instead, non-resident enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities.

 

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Regulations on Foreign Exchange Registration of Overseas Investment by PRC Residents

 

State Administration of Foreign Exchange (the “SAFE”) issued SAFE Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, that became effective in July 2014, replacing the previous SAFE Circular 75. SAFE Circular 37 regulates foreign exchange matters in relation to the use of special purpose vehicles, or SPVs, by PRC residents or entities to seek offshore investment and financing or conduct round trip investment in China. Under SAFE Circular 37, a SPV refers to an offshore entity established or controlled, directly or indirectly, by PRC residents or entities for the purpose of seeking offshore financing or making offshore investment, using legitimate onshore or offshore assets or interests, while “round trip investment” refers to direct investment in China by PRC residents or entities through SPVs, namely, establishing foreign-invested enterprises to obtain the ownership, control rights and management rights. SAFE Circular 37 provides that, before making contribution into an SPV, PRC residents or entities are required to complete foreign exchange registration with SAFE or its local branch. SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which took effect on June 1, 2015 and partly repealed by the Notice of State Administration of Foreign Exchange on Repeal or Invalidation of Five Regulatory Documents on Foreign Exchange Administration and Some Clauses of Seven Regulatory Documents on Foreign Exchange Administration. This notice has amended SAFE Circular 37 requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.

 

PRC residents or entities who had contributed legitimate onshore or offshore interests or assets to SPVs but had not obtained registration as required before the implementation of the SAFE Circular 37 must register their ownership interests or control in the SPVs with qualified banks. An amendment to the registration is required if there is a material change with respect to the SPV registered, such as any change of basic information (including change of the PRC residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, and mergers or divisions. Failure to comply with the SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

 

Regulations Concerning our Hong Kong Subsidiary

 

The national laws of the PRC, including but not limited to the Cybersecurity Review Measures which became effective on February 15, 2022 do not currently apply to our Hong Kong subsidiaries, except for those listed in the Basic Law of Hong Kong and set forth under “Risk Factors” above. However, due to the changes in laws, regulations or policies, including how these laws, regulations or policies would be interpreted or implemented, and the national laws applicable in Hong Kong, the Basic Law might be revised in the future.

 

Pursuant to Article 18 of the Basic Law of the Hong Kong Special Administrative Region of the PRC (the “Basic Law”), “The laws in force in the Hong Kong Special Administrative Region shall be the Basic Law, the laws previously in force in Hong Kong as provided for in Article 8 of this Law, and the laws enacted by the legislature of the Region. National laws shall not be applied in the Hong Kong Special Administrative Region except for those listed in Annex III to the Basic Law. The laws listed therein shall be applied locally by way of promulgation or legislation by the Region. Also, regarding the Annex III and several Instruments of the Basic Law, National Laws, which have applied in Hong Kong until now are as following:

 

Resolution on the Capital, Calendar, National Anthem and National Flag of the PRC; Resolution on the National Day of the PRC; Declaration of the Government of the PRC on the Territorial Sea; Nationality Law of the PRC; Regulations of the PRC Concerning Diplomatic Privileges and Immunities; Law of the PRC on the National Flag; Regulations of the PRC Concerning Consular Privileges and Immunities; Law of the PRC on the National Emblem; Law of the PRC on the Territorial Sea and the Contiguous Zone; Law of the PRC on Garrisoning the Hong Kong Special Administrative Region; Law of the PRC on the Exclusive Economic Zone and the Continental Shelf; Law of the PRC on Judicial Immunity from Compulsory Measures Concerning the Property of Foreign Central Banks; Law of the PRC on the National Anthem; Law of the PRC on Safeguarding National Security in the Hong Kong Special Administrative Region.”

 

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Indirect Transfer of Equity

 

The PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of certain taxable assets, including, in particular, equity interests in a PRC resident enterprise, by a non-resident enterprise by promulgating and implementing SAT Circular 59 and Circular 698, which became effective in January 2008, and a Circular 7 to replace some of the existing rules in Circular 698, which became effective in February 2015.

 

Under Circular 7, where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests of a PRC “resident enterprise” indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise, being the transferor, may be subject to PRC enterprise income tax if the indirect transfer is considered to be an abusive use of company structure without reasonable commercial purposes. As a result, gains derived from such indirect transfer may be subject to PRC tax at a rate of up to 10%.

 

On October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Nonresident Enterprise Income Tax at Source (partly revised), or SAT Circular 37, which came into effect on December 1, 2017. The SAT Circular 37 further clarifies the practice and procedure of the withholding of non-resident enterprise income tax. SAT Circular 698 was repealed from the date SAT Circular 37 was enacted. Also, the SAT Circular 37 has been partially revised by the Announcement of the State Administration of Taxation on the Revision to Certain Taxation Regulatory Documents, namely Circular 31, which has been effective on June 15,2018.

 

Where a non-resident enterprise transfers taxable assets in China indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity whose equity is transferred, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes. We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our Company may be subject to filing obligations or taxed if our company is transferor in such transactions and may be subject to withholding obligations if our company is transferee in such transactions, under Circular 7 and/or SAT Circular 37. For transfer of shares in our Company by investors who are non-PRC resident enterprises, our former PRC subsidiaries may be requested to assist in the filing under SAT Circular 7 and/or Circular 37. As a result, we may be required to expend valuable resources to comply with SAT Circular 7 and/or Circular 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our Company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.

 

Regulations in Iceland

 

A curtailment or disruption in energy supply in Iceland due to regulations and policies implemented by the Icelandic government, which prioritize energy supply, may cause a substantial disruption or discontinuance of the Company’s mining and AI business operations based in Iceland, and therefore impair the Company’s financial condition or results of operations.

 

Through its subsidiary Bit Digital USA, Inc., in May 2023, the Company expanded its mining capacity in Iceland. As of December 31, 2023, GreenBlocks provided approximately 10.6 MW of capacity for our miners at their facility using hydro and geothermal energy sources. Additionally, through Bit Digital Iceland ehf, the Company established and has been operating its AI business line since November 2023, developing a fleet of 256 servers at a data center located in Northern Iceland.

 

In order to maintain the mining facility and the AI data center operational, the Company must acquire sufficient supplies of electricity generated by hydroelectric and geothermal energy. In addition, the Company’s mining and AI facilities need also to maintain reliable and adequate infrastructure and cooling systems to ensure optimal performance

 

Currently, Icelandic-based data centers and similar facilities, including the ones contracted with the Company, may face significant risks of energy disruption, curtailment or discontinuance due to low water level in Icelandic reservoirs utilized by hydropower plants, which provide hydro-generated energy in the country. In the event of a water shortage, and therefore a shortage of hydro-generated energy, the prioritization framework for Icelandic energy favors residential and certain business uses over data centers and similar facilities. In addition, volcanic eruptions might interrupt the generation of electricity from geothermal energy, as occurred several times in 2023.

 

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Accordingly, the energy supply for the Company’s mining facility and AI data center may be subject to disruption and could become insufficient to support our operations.

 

The Company’s financial condition or results of operations may be adversely affected if the operations of the Icelandic mining facility and AI datacenter are disrupted or discontinued due to a curtailment or interruption of the energy supply.

 

Our business may be adversely affected by future changes in the European Union’s regulations related to AI, which could be reflected in Icelandic domestic laws and regulations.

 

While no current Icelandic legislation directly impacts AI operations, Iceland, being a member of the European Economic Area, is likely to be influenced by forthcoming European Union acts such as the Artificial Intelligence Act and the AI Liability Directive. These acts may shape the future regulatory landscapes in Iceland and lead the Icelandic government to adopt such regulations domestically.

 

The potential adoption of said AI regulatory framework could introduce new compliance requirements for AI applications, as well as other legal and regulatory obligations, impacting operational practices and liability considerations for the Company’s AI business line. This could ultimately adversely affect our Company’s business and financial results.

 

Employees

 

As of the date of this report, we had 24 employees across our Company and subsidiaries, including our Chief Executive Officer, Chief Financial Officer, Senior Vice President of Finance, Managing Directors, Marketing Manager, Senior Accounting Managers, Head of Investor Relations, and Senior Mining Hardware Engineer. In addition, we retain consulting services as needed.

 

Property, Plant and Equipment

 

The principal executive office is located on leased premise at 33 Irving Place Room 2006, New York, New York, United States 10003. The lease for our principal executive office is for a term ending August 31, 2024, with a monthly rental of $9,818. In addition, we leased another office, Room 2055 in the same building. The lease is for a term ending November 30, 2024, with a monthly rental of $4,171.

 

We have two offices in Hong Kong. The first office is located in Room 1913 on a leased premise at Fortune Commercial Building, 362 Sha Tsui Road, Tsuen Wan, Hong Kong. The lease is for a term ending on May 31, 2025, with a monthly rental of $300. The second office is located at Room 1915 on a leased premise at Fortune Commercial Building, 362 Sha Tsui Road, Tsuen Wan, Hong Kong. The lease is for a term ending on May 31, 2025, with a monthly rental of $300.

 

We have one office in Reykjavik, Iceland, located at Skógarhlíð 12, 105 Reykjavík, Iceland. The lease is for a term ending December 31, 2024, with a monthly rental of approximately $620.

 

We have one warehouse in Houston, Texas, located at 2830 Produce Row, Houston, TX 77023. This lease is for a term ending April 2, 2024, with a monthly rental of $10,000.

 

We believe that we will be able to obtain adequate facilities, principally through leasing, to accommodate our future expansion plans. We believe that our current property rights are sufficient for our current operations.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes included elsewhere in this report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Disclosure Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks, and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this report. 

 

Overview

 

Bit Digital Inc. or the (“Company”), a sustainable platform for digital assets and artificial intelligence (“AI”) infrastructure. The Company engages in digital asset mining business, ETH staking business, and specialized cloud-infrastructure services for artificial intelligence applications.

 

Digital Asset Mining Business

 

We are a sustainable digital infrastructure platform for digital assets and artificial intelligence (“AI”) with mining operations in the United States, Canada and Iceland. We commenced our bitcoin mining business in February 2020. We initiated limited Ethereum mining operations in January 2022 and discontinued the operations by September 2022 due to Ethereum blockchain switching from proof-of-work (“PoW”) consensus mechanism to proof-of-stake (“PoS”) validation. Our mining operations, hosted by third-party providers, use specialized computers, known as miners, to generate digital assets. Our miners use application specific integrated circuit (“ASIC”) chips. These chips enable the miners to apply high computational power, expressed as “hash rate”, to provide transaction verification services (generally known as “solving a block”) which helps support the blockchain. For every block added, the blockchain provides an award equal to a set number of digital assets per block. Miners with a greater hash rate generally have a higher chance of solving a block and receiving an award.

 

We operate our mining assets with the primary intent of accumulating digital assets which we may sell for fiat currency from time to time depending on market conditions and management’s determination of our cash flow needs, exchange for other digital assets. Our mining strategy has been to mine bitcoins as quickly and as many as possible given the fixed supply of bitcoins. In view of historically long delivery lead times to purchase miners from manufacturers like Bitmain Technologies Limited (“Bitmain”) and MicroBT Electronics Technology Co., Ltd (“MicroBT”), and other considerations, we may choose to acquire miners on the spot market, which can typically result in delivery within a few weeks.

 

We have signed service agreements with third-party hosting partners in North America and Iceland. These partners operate specialized mining data centers, where they install and operate the miners and provide IT consulting, maintenance, and repair work on site for us. Our mining facilities in New York are maintained by Coinmint LLC (“Coinmint”) and Digihost Technologies Inc. (“Digihost”). Our mining facility in Texas is maintained by Dory Creek, LLC, a subsidiary of Bitdeer Technologies Group (“Bitdeer”). Our mining facility in Kentucky is maintained by Soluna Computing, Inc (“Soluna”). Our mining facility in Canada is maintained by Blockbreakers Inc. (“Blockbreakers”). Our mining facility in Iceland is maintained by GreenBlocks ehf, an Icelandic private limited company (“GreenBlocks”). We have relocated some miners from our Texas and Nebraska facilities, once under Compute North LLC’s maintenance before a third-party takeover preceding their 2022 bankruptcy to facilities operated by Coinmint in New York. We have relocated those miners from our Georgia mining facility, previously maintained by Core Scientific, Inc to one of Coinmint’s facilities. We have relocated those miners from Blockfusion USA, Inc. (“Blockfusion”) facilities to Digihost, Bitdeer and Soluna after our service agreement with Blockfusion ended in September 2023. From time to time, the Company may change partnerships with hosting facilities to recalibrate its Bitcoin mining operations. These terminations are strategic, targeting reduced operational costs, enhanced energy efficiency for a smaller carbon footprint, increased flexibility in operational control, and minimized geopolitical risks. While a short-term decrease in mining output might occur, we expect these changes to yield long-term operational improvements.

 

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We are a sustainability-focused digital asset mining company. On June 24, 2021, we signed the Crypto Climate Accord, a private sector-led initiative that aims to decarbonize the crypto and blockchain sectors.

 

On December 7, 2021, we became a member of the Bitcoin Mining Council (“BMC”), joining MicroStrategy and other founding members to promote transparency, share best practices, and educate the public on the benefits of bitcoin and bitcoin mining.

 

ETH Staking Business

 

In the fourth quarter of 2022, we formally commenced Ethereum staking operations. We intend to delegate or stake our ETH holdings to an Ethereum validator node to help secure and strengthen the blockchain network. Stakers are compensated for this commitment in the form of a reward of the native network token.

 

Our native staking operations are enhanced by a partnership with Blockdaemon, the leading institutional-grade blockchain infrastructure company for node management and staking. In the fourth quarter of 2022, following a similar mechanism to native Ethereum staking, we also participated in liquid staking via Portara protocol (formerly known as Harbour), the liquid staking protocol developed by Blockdaemon and StakeWise and the first of its kind tailored to institutions. With the introduction of staked ETH withdrawals in April 2023, we have reassessed our Ethereum network staking approaches, weighing the advantages of traditional staking against liquid staking solutions. The withdrawal feature in native staking, coupled with yields that are on par with those of liquid staking, has encouraged us to expand our collaborations with other service providers in this domain. As a result, we terminated all liquid staking activities with StakeWise in the third quarter of 2023, reclaiming all staked Ethereum along with the accumulated rewards. In the fourth quarter of 2023, the Company terminated the native staking activities and reclaimed all staked Ethereum with Blockdaemon.

 

Our native staking operations with Marsprotocol commenced in the first quarter of 2023 and concluded in July.  After ceasing operations with Marsprotocol, we initiated our native staking with MarsLand Global Limited in August 2023. As of December 31,2023, we had all of our native staking activities with MarsLand.

 

In addition, we started participating in liquid staking via Liquid Collective protocol on the Coinbase platform in the first quarter of 2023. Liquid staking allows participants to achieve greater capital efficiency by utilizing their staked ETH as collateral and trading their staked ETH tokens on the secondary market.

 

Miner Deployments

 

During the year ended December 31, 2023, we continued to work with our hosting partners to deploy our miners in North America and Iceland.

 

During the second quarter of 2023, the Company deployed an additional 3,600 miners at one of Coinmint’s hosting facilities.

 

During the third quarter of 2023, the Company deployed an additional 310 miners at Digihost’s hosting facility.

 

During the third quarter of 2023, the Company deployed an additional 1,890 miners at one of Coinmint’s hosting facilities.

 

During the second and third quarter of 2023, the Company deployed 3,300 miners at GreenBlocks’s hosting facility.

 

During the fourth quarter of 2023, the Company deployed an additional 4,000 miners at Bitdeer’s hosting facility.

 

As of December 31, 2023, the Company’s active hash rate totals approximately 2.5 EH/s, with operations in North America and Iceland.

 

Power and Hosting Overview

 

During the year ended December 31, 2023, our hosting partners continued to prepare sites to deliver our contracted hosting capacity, bringing additional power online for our miners.

 

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The Company’s subsidiary, Bit Digital Canada, Inc., entered into a Mining Services Agreement effective September 1, 2022, for Blockbreakers, Inc. to provide five (5) MW of incremental hosting capacity at its facility in Canada. The facility utilizes an energy source that is primarily hydroelectric.

 

On May 8, 2023, the Company entered into a Master Mining Services Agreement with Blockbreakers, pursuant to which Blockbreakers, Inc. agreed to provide the Company with four (4) MW of additional mining capacity at its hosting facility in Canada. The agreement is for two (2) years automatically renewable for additional one (1) year terms unless either party gives at least sixty (60) days’ advance written notice. The performance fee is 15% of profit. Additionally, Bit Digital has secured a side letter agreement with Blockbreakers, granting the Company the right of first refusal for any future mining hosting services offered by Blockbreakers in Canada. This new agreement brings the Company’s total contracted hosting capacity with Blockbreakers to approximately 9 MW. As of December 31, 2023, Blockbreakers provided approximately 5.4 MW of capacity for our miners at their facility.

 

On June 7, 2022, we entered into a Master Mining Services Agreement (the “MMSA”) with Coinmint LLC, pursuant to which Coinmint will provide the required mining colocation services for a one-year period automatically renewing for three-month periods unless earlier terminated. The Company will pay Coinmint electricity costs, plus operating costs required to operate the Company’s mining equipment, as well as a performance fee equal to 27.5% of profit, subject to a ten percent (10%) reduction if Coinmint fails to provide uptime of ninety-eight (98%) percent or better for any period. We are not privy to the emissions rate at the Coinmint facility or at any other hosting facility. However, the Coinmint facility operates in an upstate New York region that reportedly utilizes power that is 99% emissions-free, as determined based on the 2023 Load & Capacity Data Report published by the New York Independent System Operator, Inc. (“NYISO”).

 

On April 5, 2023, the Company entered into a letter agreement and MMSA Amendment with Coinmint pursuant to which Coinmint agreed to provide the Company with up to ten (10) MW of additional mining capacity to energize the Company’s mining equipment at Coinmint’s hosting facility in Plattsburgh, New York. The agreement is for two (2) years automatically renewable for three (3) months unless not renewed by either party on at least ninety (90) days prior written notice. The performance fees under this letter agreement range from 30% to 33% of profit. This new agreement brings the Company’s total contracted hosting capacity with Coinmint to approximately 30 MW at this facility.

 

On April 27, 2023, the Company entered into a letter agreement and MMSA Amendment with Coinmint pursuant to which Coinmint agreed to provide the Company with up to ten (10) MW of additional mining capacity to energize the Company’s mining equipment at Coinmint’s hosting facility in Massena, New York. The agreement is for one (1) year automatically renewable for three (3) months unless not renewed by either party on at least ninety (90) days prior written notice. The performance fees under this letter agreement are 33% of profit. This new agreement brings the Company’s total contracted hosting capacity with Coinmint to approximately 40 MW.

 

On January 26, 2024, the Company entered into a letter agreement and MMSA Amendment with Coinmint pursuant to which Coinmint agreed to provide the Company with up to six (6) MW of additional mining capacity to energize the Company’s mining equipment at Coinmint’s hosting facility in Massena, New York. The agreement is for one (1) year automatically renewable for three (3) months unless not renewed by either party on at least ninety (90) days prior written notice. The performance fees under this letter agreement are 28% of profit. This new agreement brings the Company’s total contracted hosting capacity with Coinmint to approximately 46 MW. As of December 31, 2023, Coinmint provided approximately 40.0 MW of capacity for our miners at their facilities.

 

In June 2021, we entered into a strategic co-mining agreement with Digihost Technologies in North America. Pursuant to the terms of the agreement, Digihost provides certain premises to Bit Digital for the purpose of the operation and storage of a 20 MW bitcoin mining system to be delivered by Bit Digital. Digihost provides services to maintain the premises for a term of two years. Digihost shall also be entitled to 20% of the profit generated by the miners.

 

In April 2023, we renewed the co-mining agreement with Digihost, previously executed in June 2021. Pursuant to the terms of the new agreement, Digihost provides certain premises to Bit Digital for the purpose of the operation and storage of an up to 20 MW bitcoin mining system to be delivered by Bit Digital. Digihost also provides services to maintain the premises for a term of two years, automatically renewing for a period of one (1) year. Digihost shall also be entitled to 30% of the profit generated by the miners. As of December 31, 2023, Digihost provided approximately 6.0 MW of capacity for our miners at their facility.

 

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On May 9, 2023 (“Effective Date”), the Company entered into a Term Loan Facility and Security Agreement (“Loan Agreement”) with GreenBlocks. Pursuant to the Loan Agreement, GreenBlocks has requested the Company to extend one or more loans (“advances”) under a senior secured term loan facility in an aggregate outstanding principal amount not to exceed $5 million. The interest rate of the Loan Agreement is 0% and advances are to be repaid on the maturity date, which is the thirty-nine-month anniversary of the Effective Date. GreenBlocks will exclusively use the advances to buy miners that will be operated for the benefit of the Company at a facility in Iceland, with an overall capacity of 8.25 MW. To secure the prompt payment of advances, the Company has been granted a continuing first priority lien and security interest in all of GreenBlocks’s rights, title and interest to the financed miners. The miners are the sole property of GreenBlocks, of which they are responsible for the purchase, installation, operation, and maintenance.

 

On May 9, 2023, the Company entered into a Computation Capacity Services Agreement (“Agreement”) with GreenBlocks. Pursuant to the Agreement, GreenBlocks will provide computational capacity services and other necessary ancillary services, such as operation, management, and maintenance, at the facility in Iceland for a term of two (2) years. GreenBlocks will own and operate the miners financed through the Loan Agreement for the purpose of providing Computational Capacity of up to 8.25 MW. The Company will pay power costs of five cents ($0.05) per kilowatt hour, a Pod fee of $22,000 per pod per month, and a depreciation fee equal to 1/36 of the facility size per month. The performance fees under this agreement are 20% of profit. The Company submitted to Greenblocks a deposit in the amount of $1,052,100, which was exclusively for the purpose of paying the landlord of the facility for hosting space.

 

On June 1, 2023, the Company and GreenBlocks entered the Omnibus Amendment to Loan Documents and Other Agreements (“Omnibus Amendment”). This amendment revised both the Loan Agreement and the Computation Capacity Services Agreement previously entered on May 9, 2023. While the core terms remained consistent, notable modifications pertained to the facility size and contracted capacity. Specifically, the facility size was increased from $5 million to $6.7 million. Moreover, GreenBlocks agreed to expand the computation capacity to approximately 10.7 MW. Advances of $6.4 million have been financed by the Company to GreenBlocks. As of December 31, 2023, GreenBlocks provided approximately 10.6 MW of capacity for our miners at their facility.

 

In October 2023, we entered into a strategic co-location agreement with Soluna Computing, Inc. (“Soluna”) for a term of one year automatically renewing on a month-to-month basis unless terminated by either party. Pursuant to the terms of the agreement, Soluna provides certain required mining colocation services to Bit Digital for the purpose of the operation and storage of an up to 4.4 MW bitcoin mining system to be delivered by Bit Digital. Soluna shall also be entitled to 42.5% of the net profit generated by the miners. As of December 31, 2023, Soluna provided approximately 4.3 MW of capacity for our miners at their facility.

 

In November 2023, we entered into a hosting services agreement with Dory Creek, LLC, a subsidiary of Bitdeer Technologies Group (“Bitdeer”), for a term of one year automatically renewing on an annual basis unless terminated by either party by giving a 30-day prior notice to the other Party in writing. Pursuant to the terms of the agreement, Bitdeer provides maintenance and operation services to Bit Digital to support 17.5 MW of capacity. Bitdeer shall also be entitled to 30% of the net profit generated by the miners. Bit Digital shall have the first right, but not obligation, to accept services for any extra capacity under the terms of this Agreement. As of December 31, 2023, Bitdeer provided approximately 13.9 MW of capacity for our miners at their facility.

 

In May 2022, our hosting partner Blockfusion advised us that the substation at its Niagara Falls, NY facility was damaged by an explosion and fire, and power was cut off to approximately 2,515 of the Company’s bitcoin miners and approximately 710 ETH miners that had been operating at the site immediately prior to the incident. The explosion and fire are believed to have been caused by faulty equipment owned by the power utility. Blockfusion and the Company have entered into a common interest agreement to jointly pursue any claims evolving from the explosion and fire. Prior to the incident, our facility with Blockfusion in Niagara Falls, provided approximately 9.4 MW to power our miners. Power was restored to the facility in September 2022. However, we received a notice dated October 4, 2022, from the City of Niagara Falls, which ordered the cease and desist from any cryptocurrency mining or related operations at the facility until such time as Blockfusion complies with Section 1303.2.8 of the City of Niagara Falls Zoning Ordinance (the “Ordinance”), in addition to all other City ordinances and codes. Blockfusion has advised us that the Ordinance came into practical effect on October 1, 2022, following the expiration of a related moratorium on September 30, 2022. Blockfusion has further advised that it has submitted applications for new permits based on the Ordinance’s new standards and that the permits may take several months to process. Pursuant to the Mining Services Agreement between Bit Digital and Blockfusion dated August 25, 2021, Blockfusion represents, warrants and covenants that it “possesses, and will maintain, all licenses, registrations, authorizations and approvals required by any governmental agency, regulatory authority or other party necessary for it to operate its business and engage in the business relating to its provision of the Services.” On October 5, 2022, Bit Digital further advised Blockfusion that it expects it to comply with directives of the Notice. Our service agreement with Blockfusion ended in September 2023.

 

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Miner Fleet Update and Overview

 

As of December 31, 2022, we had 37,676 miners for bitcoin mining and 730 ETH miners, with a total maximum hash rate of 2.6 EH/S and 0.3 TH/s, respectively.

 

On April 28, 2023, we entered into a purchase agreement with an unaffiliated seller of bitcoin mining computers, from whom we acquired 3,600 S19 miners. As of the date of this report, the miners have been delivered.

 

On May 12, 2023, we entered into a purchase agreement with an unaffiliated seller of bitcoin mining computers, from whom we acquired 2,200 S19J Pro+ miners. As of the date of this report, the miners have been delivered.

 

On June 21, 2023, we entered into a purchase agreement with an unaffiliated seller of bitcoin mining computers, from whom we acquired 1,100 S19 Pro+ miners. As of the date of this report, the miners have been delivered.

 

On October 23, 2023, we entered into a purchase agreement with an unaffiliated seller of bitcoin mining computers, from whom we acquired 3,630 S19K Pro miners. As of the date of this report, the miners have been delivered.

 

On November 10, 2023, we entered into a purchase agreement with an unaffiliated seller of bitcoin mining computers, from whom we acquired 370 S19K Pro miners. As of the date of this report, the miners have been delivered.

 

For the year ended December 31, 2023, the Company wrote off 5,328 bitcoin miners and 730 ETH miners.

 

As of December 31, 2023, we had 46,548 miners owned or operating (in Iceland) for bitcoin mining with a total maximum hash rate of 3.9 EH/S.

  

Bitcoin Production

 

From the inception of our bitcoin mining business in February 2020 to December 31, 2023, we earned an aggregate of 6,330.2 bitcoins.

 

The following table presents our bitcoin mining activities for the year ended December 31, 2023.

 

   Number of
bitcoins
   Amount (1) 
         
Balance at December 31, 2022   946.4   $15,796,147 
Receipt of BTC from mining services   1,507.3    44,240,418 
Exchange of BTC into ETH   (630.8)   (11,756,006)
Sales of and payments made in BTC   (1,185.0)   (24,082,611)
Receipt of BTC from other income   4.5    140,724 
Impairment of BTC   -    (4,519,692)
Balance at December 31, 2023   642.4   $19,818,980 

   

(1) Receipt of digital assets from mining services are the product of the number of bitcoins received multiplied by the bitcoin price obtained from CoinMarketCap, calculated on a daily basis. Sales of digital assets are the actual amount received from sales.

 

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Environmental, Social and Governance 

 

Sustainability is a major strategic focus for us. Several of our mining locations in the US and Canada provide access to partially carbon-free energy and other sustainability-related solutions, in varying amounts depending on location, including components of hydroelectric, solar, wind, nuclear and other carbon-free generation sources, based on information provided by our hosts and publicly available data, which we believe helps mitigate the environmental impact of our operations. We work with an independent ESG (Environmental, Social and Governance) consultant to self-monitor and adopt an environmental policy to help us to improve our percentage of green electricity and other sustainability initiatives. As we continue to align ourselves with the future of technology and business, we are dedicated to continuously enhancing sustainability, which we believe future-proofs our operations and the larger bitcoin network.

 

We believe that the bitcoin network and the mining that powers it are important inventions in human progress. The process of problem-solving and verifying bitcoin transactions using advanced computers is energy intensive, and scrutiny has been applied to the industry for this reason. It follows that the environmental costs of mining bitcoin should be surveyed and mitigated by every company in our fast-growing sector. We aim to contribute to the acceleration of bitcoin’s decarbonization and act as a role model in our industry, responsibly stewarding digital assets.

 

We work with Apex Group Ltd, an independent ESG consultancy, with the goal of becoming one the first publicly-listed bitcoin miners to receive an independent ESG rating on our operations, which we anticipate will provide transparency on the environmental sustainability of our operations, as well as other metrics. Apex’s ESG Ratings & Advisory tools allow us to benchmark our ESG performance against international standards and our peers to identify opportunities for improvement and progress over time. We believe this is an integral approach to improving our sustainable practices and mitigating our environmental impact. By measuring the sustainability and footprint of Bit Digital’s mining, we are able to develop targets to continuously improve as we shift towards our goal of 100% clean energy usage.

 

On December 7, 2021, the Company became a member of the Bitcoin Mining Council (“BMC”), joining MicroStrategy and other founding members to promote transparency, share best practices, and educate the public on the benefits of bitcoin and bitcoin mining.

 

COVID-19  

 

In March 2020, the World Health Organization declared the COVID-19 outbreak (“COVID-19”) a global pandemic. We continue to actively monitor the situation and the possible effects on our financial condition, liquidity, operations, suppliers and industry, and may take further actions that alter our operations and business practices as may be required by federal, state or local authorities or that we determine are in the best interests of our partners, customers, suppliers, vendors, employees and shareholders. The extent to which the COVID-19 outbreak will further impact the Company’s financial results will depend on future developments, which are unknown and cannot be predicted, including the duration and ultimate scope of the pandemic, advances in testing, treatment and prevention, as well as actions taken by governments and businesses.

 

Additionally, we have evaluated the potential impact of the COVID-19 outbreak on our financial statements, including, but not limited to, the impairment of long-lived assets and valuation of digital assets. Where applicable, we have incorporated judgments and estimates of the expected impact of COVID-19 in the preparation of the financial statements based on information currently available. These judgments and estimates may change, as new events develop and additional information is obtained, and are recognized in the consolidated financial statements as soon as they become known. Based on our current assessment, we do not expect any material impact on our long-term strategic plans, operations and liquidity.

 

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Results of operations

 

Results of Operations for the Year Ended December 31, 2023 and 2022

 

The following table summarizes the results of our operations during the years ended December 31, 2023 and 2022, respectively, and provides information regarding the dollar increase or (decrease) during period.

 

   For the Years Ended
December 31,
   Variance in 
   2023   2022   Amount 
Revenues  $44,916,131   $32,296,593   $12,619,538 
                
Operating costs and expenses               
Cost of revenues (exclusive of depreciation and amortization shown below)   (29,556,585)   (20,374,633)   (9,181,952)
Depreciation and amortization expenses   (14,426,733)   (27,829,730)   13,402,997 
General and administrative expenses   (27,668,592)   (22,984,784)   (4,683,808)
Realized gain on exchange of digital assets   18,789,998    6,548,841    12,241,157 
Impairment of digital assets   (6,632,437)   (24,654,267)   18,021,830 
Impairment of property and equipment   -    (50,038,650)   50,038,650 
Loss on write-off of deposit to hosting facility   (2,041,491)   (129,845)   (1,911,646)
                
Total operating expenses   (61,535,840)   (139,463,068)   77,927,228 
                
(Loss) income from operations   (16,619,709)   (107,166,475)   90,546,766 
                
Other income (expense)               
Net (loss) gain from disposal of property and equipment   (165,160)   1,353,299    (1,518,459)
Gain from sale of investment security   8,220    1,039,999    (1,031,779)
Other income (expense), net   3,162,412    (1,116,276)   4,278,688 
Total other income (expense), net   3,005,472    1,277,022    1,728,450 
                
(Loss) income before income taxes   (13,614,237)   (105,889,453)   92,275,216 
                
Income tax (expenses) benefits   (279,044)   592,850    (871,894)
Net (loss)  $(13,893,281)  $(105,296,603)  $91,403,322 

 

Revenues

 

We generate revenues from digital asset mining and ETH staking business.

 

Revenues from digital asset mining

 

We provide computing power to digital asset mining pools, and receive consideration in the form of digital assets, the value of which is determined using the market price of the related digital asset at the time of receipt. By providing computing power to successfully add a block to the blockchain, the Company is entitled to a fractional share of the digital assets award from the mining pool operator, which is based on the proportion of computing power the Company contributed to the mining pool to the total computing power contributed by all mining pool participants in solving the current algorithm.

 

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For the year ended December 31, 2023, we received 1,507.3 bitcoins from Foundry USA Pool (“Foundry”) mining pool. As of December 31, 2023, our maximum hash rate was at an aggregate of 3.9 EH/s for our bitcoin miners. For the year ended December 31, 2023, we recognized revenue of $44.2 million from bitcoin mining services.

 

For the year ended December 31, 2022, we received 1,247.5 bitcoins from Foundry USA Pool (“Foundry”) mining pool and 294.3 ETHs from Ethermine mining pool (“Ethermine”) operated by Bitfly Gmbh. We discontinued the ETH mining operations in September 2022 due to Ethereum blockchain switching from proof-of-work (“PoW”) consensus mechanism to proof-of-stake (“PoS”) validation. For the year ended December 31, 2022, we recognized revenue of $31.4 million and $0.9 million from bitcoin mining services and ETH mining services, respectively.

 

Our revenues from digital asset mining services increased by $12.0 million, or 37.1%, to $44.2 million for the year ended December 31, 2023 from $32.3 million for the year ended December 31, 2022. The increase was primarily due to an increase of 259.8 in the number of BTC earned from mining services and an increase in the average price of BTC for the year ended December 31, 2023 compared to the year ended December 31, 2022.

 

We expect to continue to opportunistically invest in miners to increase our hash rate capacity.

 

Revenues from ETH staking

 

During the fourth quarter of 2022, we commenced ETH staking business, in both native staking and liquid staking.

 

For the ETH native staking business with Blockdaemon, Marsprotocol  and MarsLand, we stake ETH, through network-based smart contracts, on a node for the purpose of validating transactions and adding blocks to the network. Through these contracts, the Company stakes ETH on nodes for the purpose of validating transactions and adding blocks to the Ethereum blockchain network. The Company is able to withdraw staked ETH under contracted staking since April 12, 2023 when the announced Shanghai upgrade was completed. In exchange for staking the ETH and validating transactions on blockchain networks, the Company is entitled to block rewards and transaction fees for successfully validating or adding a block to the blockchain. These rewards are received by the Company directly from the Ethereum network and are calculated approximately based on the proportion of the Company’s stake to the total ETH staked by all validators. In the fourth quarter of 2023, the Company terminated the native staking activities and reclaimed all staked Ethereum with Blockdaemon.

 

Our native staking operations with Marsprotocol commenced in the first quarter of 2023 and concluded in July of the same year. After ceasing operations with Marsprotocol, we initiated our native staking with MarsLand Global Limited in August 2023. As of December 31,2023, we had all of our native staking activities with MarsLand. 

 

For the liquid staking business, the Company has deployed ETH into Portara protocol (formerly known as Harbour) supported by liquid staking solution provider under the consortium of Blockdaemon and Stakewise, and Liquid Collective protocol supported by Coinbase. By staking, we receive receipt tokens for the ETH staked which could be redeemed to ETH or can be traded or collateralized elsewhere, at any time. In addition, we receive rETH-H for rewards earned from Portara protocol. With the introduction of staked ETH withdrawals in April 2023, we have reassessed our Ethereum network staking approaches, weighing the advantages of traditional staking against liquid staking solutions. The withdrawal feature in native staking, coupled with yields that are on par with those of liquid staking, has encouraged us to expand our collaborations with other service providers in this domain. As a result, we terminated all liquid staking activities with StakeWise in the third quarter of 2023, reclaiming all staked Ethereum along with the accumulated rewards. As of December 31,2023, we had all of our liquid staking activities with Liquid Collective protocol which began in the first quarter of 2023.

 

For the year ended December 31, 2023, we earned 287.0 ETH  in native staking and 81.9 ETH/rETH-h in liquid staking, respectively. For the year ended December 31, 2023, we recognized revenues of $531,702 and $144,011 from native staking and liquid staking, respectively.

 

For the year ended December 31, 2022, we earned 3.7 ETH in native staking and 16.2 rETH-h in liquid staking, respectively. For the year ended December 31, 2022, we recognized revenues of $5,722 and $20,182 from native staking and liquid staking, respectively.

 

Our revenues from ETH staking increased by $0.6 million or 2,508.5%, to $0.7 million for the year ended December 31, 2023 from $25,904 for the year ended December 31, 2022. The increase was primarily due to an increase of 349.0 ETH earned from staking services partially offset by a decrease in the average price of ETH for the year ended December 31, 2023 compared to the year ended December 31, 2022.

 

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Cost of revenues

 

The Company’s cost of revenue consists primarily of i) direct production costs related to mining operations, including electricity costs, profit-sharing fees and other relevant costs, but excluding depreciation and amortization, which are separately stated in the Company’s consolidated statements of operations, and ii) direct costs related to specialized cloud-infrastructure services for artificial intelligence applications and ETH staking business including service fee and profit-sharing fees to the service providers, which were immaterial during the year ended December 31, 2023.

 

For the years ended December 31, 2023 and 2022, the cost of revenue were comprised of the following:

 

   For the Years Ended
December 31,
 
   2023   2022 
Electricity costs  $22,277,038   $15,113,046 
Profit-sharing fees   5,902,205    4,027,597 
Other costs   1,377,342    1,233,990 
Total  $29,556,585   $20,374,633 

  

Electricity costs. These expenses were incurred by mining facilities for the miners in operation and were closely correlated with the number of deployed miners.

 

In the year ended December 31, 2023, electricity costs increased by $7.2 million, or 47%, compared to the electricity costs incurred in the year of 2022. The increase primarily resulted from an increased number of deployed miners.

 

Profit-sharing fees. In 2021, we entered into hosting agreements with certain mining facilities, which included performance fees calculated as a fixed percentage of net profit generated by the miners. We refer to these fees as profit-sharing fees.

 

In the year ended December 31, 2023, profit-sharing fees increased by $1.9 million, or 47%, compared to profit-sharing fees incurred in the year of 2022. This increase was primarily due to an increase in the number of digital assets generated and the comparatively higher average price of bitcoin during 2023.  

  

We expect a proportionate increase in cost of revenue as we continue to focus on the expansion and upgrade of our miner fleet.

  

Depreciation and amortization expenses

 

For the years ended December 31, 2023 and 2022, depreciation and amortization expenses were $14.4 million and $27.8 million, respectively, primarily based on an estimated useful life of three years for the miners.

 

General and administrative expenses 

 

For the year ended December 31, 2023, our general and administrative expenses, totaling $27.7 million, were primarily comprised of shared-based compensation expenses of $9.1 million, salary and bonus expenses of $5.5 million, professional and consulting expenses of $5.4 million, directors and officers insurance expenses of $1.7 million, marketing expenses of $1.2 million, travel expenses of $0.8 million, and transportation expenses of $0.2 million to relocate miners.

 

For the year ended December 31, 2022, our general and administrative expenses, totaling $23.0 million, were primarily comprised of professional and consulting expenses of $7.7 million, transportation expenses of $0.7 million to relocate miners, salary and bonus expenses of $2.7 million, shared-based compensation expenses of $2.3 million related to RSUs and share options granted to our employees, consultants and director, directors and officers liability insurance expenses of $3.3 million, marketing expenses of $1.1 million, and litigation settlement costs of $2.1 million.

 

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Realized gain on exchange of digital assets

 

Digital assets are recorded at cost less impairment. Any gains or losses from sales of digital assets are recorded as “Realized gain on exchange of digital assets” in the consolidated statements of operations. For the year ended December 31, 2023, we recorded a gain of $18.8 million from the exchange of 1,811.2 bitcoins and 5,712.4 ETH. For the year ended December 31, 2022, we recorded a gain of $6.5 million from the exchange of 1,109.3 bitcoins and 87.2 ETH.
 

Impairment of digital assets

 

Impairment of digital assets was $6.6 million and $24.7 million for the years ended December 31, 2023 and 2022, respectively. We utilized the intraday low price of digital assets in calculation of impairment of digital assets.

 

For the year ended December 31, 2023, the impairment of $6.6 million was comprised of impairment of $4.5 million and $2.1 million on bitcoins and ETH, respectively. For the year ended December 31, 2022, the impairment of $24.7 million was comprised of impairment of $21.2 million and $3.5 million on bitcoins and ETH, respectively.

 

Impairment of property and equipment

 

For the year ended December 31, 2023, the Company did not record impairment against property and equipment.

 

For the year ended December 31, 2022, the Company recorded impairment of $50.0 million against miners, consisting of impairment of $46.4 million and $3.7 million against bitcoin miners and ETH miners, respectively. The Company recognized impairment on miners because the estimated fair value of the miners was less than their carrying value.

 

Loss on write-off of deposit to hosting facility

 

For the year ended December 31, 2023, the Company wrote off $2.0 million relating to hosting facility deposits. For the year ended December 31, 2022, the Company wrote off $0.1 million relating to hosting facility deposits.

 

Net (loss) gain from disposal of property and equipment

 

For the year ended December 31, 2023, the Company wrote off 5,238 BTC miners and 730 ETH miner during the year, and the Company recorded a loss of $0.2 million resulting from the write-off in the account of “net (loss) gain from disposal of property and equipment”.

 

During the year ended December 31, 2022, we sold 1,115 bitcoin miners to certain third-party purchasers for a total consideration of $1.8 million. The Company recognized a gain of $1.5 million from the sale of miners which was recorded in the account of “net gain from disposal of property and equipment”. In addition, the Company wrote off 917 BTC miners and 1 ETH miner during the year, and the Company recorded a loss of $0.2 million resulting from the write-off in the account of “net (loss) gain from disposal of property and equipment”.

 

Gain from sale of investment security

 

For the year ended December 31, 2023, we sold our investment in one privately held company with a cost of $81,299 for consideration of $89,519. We recognized a gain of $8,220 from the sale which was recorded in the account of “gain from sale of investment security”.

 

For the year ended December 31, 2022, we sold a portion of our investment in one privately held company with a cost of $0.7 million for consideration of $1.7 million. We recognized a gain of $1.0 million from the sale which was recorded in the account of “gain from sale of investment security”.

 

Income tax expenses

 

Income tax expense was $0.3 million for the year ended December 31, 2023, which was comprised of an income tax expense of $12,766 from our U.S. operations, an income tax expense of $112,251 from our Canada operations, a tax expense of $1,827 from our Iceland operations, and a tax expense of $152,200 from our Hong Kong operations. The income tax expense of $112,251 from Canada operations is primarily driven by the increase of deferred tax liability in the year ended December 31, 2023. Given the Offshore Non-taxable Claim is still subject to review and agreement by the HKIRD and there are uncertainties surrounding the claim as well as the Company’s stock-based compensation deduction tax position, the Hong Kong subsidiary recorded an unrecognized tax benefit of $152,200 in the year ended December 31, 2023 for additional penalty accrued in the year ended December 31, 2023.

 

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Income tax benefits were $0.6 million for the year ended December 31, 2022, which was comprised of income tax benefits of $943,578 from our U.S. operations, a tax expense of $292,646 from our Hong Kong operations, and an unrecognized tax benefit of $58,082 from our Canada operations. The income tax benefits from U.S. operations are primarily driven recognition of deferred tax assets from net operating losses in the year ended December 31, 2022, resulting in an income tax benefits of $943,578. The unrecognized tax benefit is related to uncertain Hong Kong profits tax positions due to offshore non-taxable claim lodged on the business profits and tax deduction claim on share-based compensation which is however subject to review and approval by the Hong Kong tax authority.  

 

Net loss and loss per share

 

For the year ended December 31, 2023, our net loss was $13.9 million, representing a change of $91.4 million from a net loss of $105.3 million for the year ended December 31, 2022.

 

Basic and diluted loss per share was $0.16 and $1.34 for the years ended December 31, 2023 and 2022, respectively. Weighted average number of shares was 87,534,052 and 78,614,174 for the years ended December 31, 2023 and 2022, respectively.

 

Results of Operations for the Year Ended December 31, 2022 and 2021

 

The following table summarizes the results of our operations during the years ended December 31, 2022 and 2021, respectively, and provides information regarding the dollar increase or (decrease) during period.

 

   For the Years Ended
December 31,
   Variance in 
   2022   2021   Amount 
Revenues  $32,296,593   $96,078,570   $(63,781,977)
                
Operating costs and expenses               
Cost of revenues (exclusive of depreciation and amortization shown below)   (20,374,633)   (30,739,776)   10,365,143 
Depreciation and amortization expenses   (27,829,730)   (13,113,964)   (14,715,766)
General and administrative expenses   (22,984,784)   (39,154,204)   16,169,420 
Realized gain on exchange of digital assets   6,548,841    20,813,167    (14,264,326)
Impairment of digital assets   (24,654,267)   (27,993,571)   3,339,304 
Impairment of property and equipment   (50,038,650)   -    (50,038,650)
Loss on write-off of deposit to hosting facility   (129,845)   -    (129,845)
Total operating expenses   (139,463,068)   (90,188,348)   (49,274,720)
                
(Loss) income from operations   (107,166,475)   5,890,222    (113,056,697)
                
Other income (expenses)               
Net (loss) gain from disposal of property and equipment   1,353,299    (3,746,247)   5,099,546 
Gain from sale of investment security   1,039,999    -    1,039,999 
Other income (expense), net   (1,116,276)   702,414    (1,818,690)
Total other income (expense), net   1,277,022    (3,043,833)   4,320,855 
                
(Loss) income before income taxes   (105,889,453)   2,846,389    (108,735,842)
                
Income tax (expenses) benefits   592,850    (3,856,341)   4,449,191 
Net (loss)   (105,296,603)   (1,009,952)   (104,286,651)

 

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Revenues

 

We generate revenues from digital asset mining and ETH staking business.

 

Revenues from digital asset mining

 

We provide computing power to digital asset mining pools, and receive consideration in the form of digital assets, the value of which is determined using the market price of the related digital asset at the time of receipt. By providing computing power to successfully add a block to the blockchain, the Company is entitled to a fractional share of the digital assets award from the mining pool operator, which is based on the proportion of computing power the Company contributed to the mining pool to the total computing power contributed by all mining pool participants in solving the current algorithm.

 

For the year ended December 31, 2022, we received 1,247.5 bitcoins from Foundry USA Pool (“Foundry”) mining pool and 294.3 ETHs from Ethermine mining pool (“Ethermine”) operated by Bitfly Gmbh. We discontinued the ETH mining operations in September 2022 due to Ethereum blockchain switching from proof-of-work (“PoW”) consensus mechanism to proof-of-stake (“PoS”) validation.

  

As of December 31, 2022, our maximum hash rate was at an aggregate of 2.6 EH/s and 0.3 TH/s for our bitcoin miners and ETH miners, respectively. For the year ended December 31, 2022, we recognized revenue of $31.4 million and $0.9 million from bitcoin mining services and ETH mining services, respectively.

 

For the year ended December 31, 2021, we received 2,065.3 bitcoins   from three mining pool operators. Among the total bitcoins, 589.4, 1,267.1, 208.8 bitcoins were mined through Foundry, Huobi Pool and Antpool, accounting for 29%, 61% and 10% of total bitcoins, respectively. As of December 31, 2021, our maximum hash rate was 1.60 EH/s. For the year ended December 31, 2021, we recognized revenue of $96.1 million from bitcoin mining operations.

 

Our revenues from digital asset mining services decreased by $63.8 million, or 66.4%, to $32.3 million for the year ended December 31, 2022 from $96.1 million for the year ended December 31, 2021. The decrease was primarily due to a decrease of 817.8 in the number of BTC earned from mining services, and a decrease in the average price of BTC for the year ended December 31, 2022 compared to the year ended December 31, 2021.

 

We expect to continue to opportunistically invest in miners to increase our hash rate capacity.

 

Revenues from ETH staking

 

During the fourth quarter of 2022, we commenced ETH staking business, in both native staking and liquid staking.

 

For the ETH native staking business, we stake ETH, through network-based smart contracts, on a node for the purpose of validating transactions and adding blocks to the network. Through these contracts, the Company stakes ETH on nodes for the purpose of validating transactions and adding blocks to the Ethereum blockchain network. The staked ETHs remained locked up until the Shanghai upgrade occurred on April 12, 2023. In exchange for staking the ETH and validating transactions on blockchain networks, the Company is entitled to the block rewards and transaction fees for successfully validating or adding a block to the blockchain. These rewards are received by the Company directly from the Ethereum network and are calculated approximately based on the proportion of the Company’s stake to the total ETH staked by all validators. 

 

For the liquid staking business, the Company has deployed ETH liquid staking tokens into Portara (formerly known as Harbour), a liquid staking solution provider under the consortium of Blockdaemon and Stakewise. We receive receipt tokens for the ETH staked and rETH-h for rewards earned which could be redeemed to ETH or can be traded or collateralized elsewhere, at any time.

 

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For the year ended December 31, 2022, we earned 3.68 ETH in native staking and 16.25 rETH-h in liquid staking, respectively. For the year ended December 31, 2022, we recognized revenues of $5,722 and $20,182 from native staking and liquid staking, respectively.

 

Cost of revenues

 

The Company’s cost of revenue consists primarily of i) direct production costs related to mining operations, including electricity costs, profit-sharing fees and other relevant costs, but excluding depreciation and amortization, which are separately stated in the Company’s consolidated statements of operations, and ii) direct cost related to ETH staking business including service fee and profit-sharing fees to the service providers, which is immaterial during the year ended December 31, 2022.

  

For the years ended December 31, 2022 and 2021, the cost of revenue were comprised of the following:

 

   For the Years Ended
December 31,
 
   2022   2021 
Electricity costs  $15,113,046   $24,790,688 
Profit-sharing fees   4,027,597    5,669,700 
Other costs   1,233,990    279,388 
Total  $20,374,633   $30,739,776 

  

Electricity costs. These expenses were incurred by mining facilities for the miners in operation and were closely correlated with the number of deployed miners.

 

In the year ended December 31, 2022, electricity costs decreased by $9.7 million, or 39%, compared to the electricity costs incurred in the year of 2021. The decline resulted primarily from a reduced number of deployed miners due to i) the sale or disposal of certain miners before relocating them from Hong Kong to North America, and ii) partial offline status of miners in two facilities because of previously announced power cut-off incidents.

 

Profit-sharing fees. In 2021, we entered into hosting agreements with certain mining facilities, which included performance fees calculated as a fixed percentage of net profit generated by the miners. We refer to these fee as profit-sharing fees.

 

In the year ended December 31, 2022, profit-sharing fees decreased by $1.6 million, or 29%, compared to profit-sharing fees incurred in the year of 2021. This reduction was primarily due to a decrease in the number of digital assets generated and the comparatively lower average price of bitcoin during 2022.  

  

We expect a proportionate increase in cost of revenue as we continue to focus on expansion and upgrade of our miner fleet.

  

Depreciation and amortization expenses

 

For the years ended December 31, 2022 and 2021, depreciation and amortization expenses were $27.8 million and $13.1 million, respectively, based on an estimated useful miner life of three years.

 

General and administrative expenses 

 

For the year ended December 31, 2022, our general and administrative expenses, totaling $23.0 million, were primarily comprised of professional and consulting expenses of $7.7 million, transportation expenses of $0.7 million to relocate miners, salary and bonus expenses of $2.7 million, shared-based compensation expenses of $2.3 million related to RSUs and share options granted to our employees, consultants and directors, directors and officers liability insurance expenses of $3.3 million, marketing expenses of $1.1 million, and litigation settlement costs of $2.1 million.

 

For the year ended December 31, 2021, our general and administrative expenses, totaling $39.2 million, were primarily comprised of professional and consulting expenses of $6.4 million, transportation expenses of $2.2 million mainly incurred to relocate miners from China to North America, shared-based compensation expenses of $20.5 million related to RSUs issued to our directors, management and consultants, shared-based compensation expenses of $1.4 million related to ordinary shares issued to consultants, insurance expenses of $0.9 million, travel expenses of $1.1 million, salary and bonus expenses of $4.6 million and office expenses of $0.8 million.

 

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Realized gain on exchange of digital assets

 

Digital assets are recorded at cost less impairment. Any gains or losses from sales of digital assets are recorded as “Realized gain on exchange of digital assets” in the consolidated statements of operations. For the year ended December 31, 2022, we recorded a gain of $6.5 million from the exchange of 1,109.3 bitcoins and 87.2 ETH. For the year ended December 31, 2021, we recorded a gain of $20.8 million from the exchange of 1,527.3 bitcoins.

 

Impairment of digital assets

 

Impairment of digital assets was $24.7 million and $28.0 million for the years ended December 31, 2022 and 2021, respectively. We utilized the intraday low price of digital assets in calculation of impairment of digital assets.

 

For the year ended December 31, 2022, the impairment of $24.7 million was comprised of impairment of $21.2 million and $3.5 million on bitcoins and ETH, respectively. For the year ended December 31, 2021, the impairment of $28.0 million was comprised of impairment of $27.9 million and $0.1 million on bitcoins and ETH, respectively.

 

Impairment of property and equipment

 

For the year ended December 31, 2022, the Company recorded impairment of $50.0 million against miners, consisting of impairment of $46.4 million and $3.7 million against bitcoin miners and ETH miners, respectively. The Company recognized impairment on miners because the estimated fair value of the miners was less than their carrying value.

 

For the year ended December 31, 2021, the Company did not record any impairment against property and equipment.

  

Net gain (loss) from disposal of property and equipment

 

For the year ended December 31, 2022, we sold 1,115 bitcoin miners to certain third-party purchasers for a total consideration of $1.8 million. The Company recognized a gain of $1.5 million from the sale of miners which was recorded in the account of “net gain from disposal of property and equipment”. In addition, the Company wrote off 917 BTC miners and 1 ETH miner during the year, and the Company recorded a loss of $0.2 million resulting from the write-off in the account of “net gain from disposal of property and equipment”.

 

During the year ended December 31, 2021, we sold or disposed of certain miners, partially in anticipation of purchase opportunities for newer, more efficient machines. As a result, we recognized a net loss of $3.7 million from sales and disposal of these miners, comprised of a gain of $0.6 million from sales of 15,808 miners to three third parties and a loss of $4.4 million from disposal of 1,779 miners at $nil consideration.

 

Gain from sale of investment security

 

For the year ended December 31, 2022, we sold a portion of our investment in one privately held company with a cost of $0.7 million for a consideration of $1.7 million. We recognized a gain of $1.0 million from the sale which was recorded in the account of “gain from sale of investment security”.

 

Income tax expenses

 

Income tax benefits were $0.6 million for the year ended December 31, 2022, which was comprised of income tax benefits of $943,578 from our U.S. operations, a tax expense of $292,646 from our Hong Kong operations, and an unrecognized tax benefit of $58,082 from our Canada   operations. The income tax benefits from U.S. operations are primarily driven recognition of deferred tax assets from net operating losses in the year ended December 31, 2022, resulting in an income tax benefits of $943,578. The unrecognized tax benefit is related to uncertain Hong Kong profits tax positions due to offshore non-taxable claim lodged on the business profits and tax deduction claim on share-based compensation which is however subject to review and approval by the Hong Kong tax authority.

 

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Income tax expense was $3.9 million for the year ended December 31, 2021, which was comprised of income tax expenses of $1.1 million from our U.S. operations, unrecognized tax benefit of $2.8 million from our Hong Kong operations and a tax benefit of $58,081 from other jurisdictions. The unrecognized tax benefit is related to uncertain Hong Kong profits tax positions due to offshore non-taxable claim lodged on the business profits and tax deduction claim on stock-based compensation which is however subject to review and approval by the Hong Kong tax authority.

 

Net loss and loss per share

 

For the year ended December 31, 2022, our net loss was $105.3 million, representing a change of $104.3 million from a net loss of $1.0 million for the year ended December 31, 2021.

 

Basic and diluted loss per share was $1.34 and $0.02 for the years ended December 31, 2022 and 2021, respectively. Weighted average number of shares was 78,614,174 and 55,440,527 for the years ended December 31, 2022 and 2021, respectively.

 

Discussion of Certain Balance Sheet Items

 

The following table sets forth selected information from our consolidated balance sheets as of December 31, 2023 and December 31, 2022. This information should be read together with our consolidated financial statements and related notes included elsewhere in this report. 

 

   December 31,   December 31,   Variance in 
   2023   2022   Amount 
ASSETS               
Current Assets               
Cash and cash equivalents  $16,860,934   $32,691,060   $(15,830,126)
Restricted cash   1,320,000    1,320,000    - 
USDC   405,596    626,441    (220,845)
Digital assets   40,456,083    27,587,328    12,868,755 
Income tax receivable   -    736,445    (736,445)
Other current assets   18,188,032    1,433,999    16,754,033 
Digital assets held in fund   6,115,538    -    6,115,538 
Total Current Assets   83,346,183    64,395,273    18,950,910 
                
Loans receivable   400,000    -    400,000 
Investment securities   4,373,685    1,787,922    2,585,763 
Deposits for property and equipment   4,227,371    2,594,881    1,632,490 
Operating lease right-of-use assets   6,216,255    -    6,216,255 
Property and equipment, net   81,474,649    22,609,391    58,865,258 
Other non-current assets   9,290,239    9,033,200    257,039 
Total Assets  $189,328,382   $100,420,667   $89,907,715 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY               
Current Liabilities               
Accounts payable  $2,316,343   $3,628,619   $(1,312,276)
Deferred Revenue   13,073,449    -    13,073,449 
Current portion of operating lease liability   1,864,779    -    1,864,779 
Income tax payable   50,973    -    50,973 
Accrued litigation settlement cost   -    2,100,000    (2,100,000)
Other payables and accrued liabilities   9,775,718    1,714,735    8,060,983 
Total Current Liabilities   27,081,262    7,443,354    19,637,908 
                
Other long-term liabilities   1,883,333    -    1,883,333 
Non-current portion of operating lease liability   4,351,476    -    4,351,476 
Long-term income tax payable   3,196,204    3,044,004    152,200 
Deferred tax liability   112,251    -    112,251 
Total Liabilities  $36,624,526   $10,487,358   $26,137,168 

 

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Cash and cash equivalents

 

Cash and cash equivalents primarily consist of funds deposited with banks, which are highly liquid and are unrestricted as to withdrawal or use. The total balance of cash and cash equivalents were $16.9 million and $32.7 million as of December 31, 2023 and December 31, 2022, respectively. The decrease in the balance of cash and cash equivalents was a result of net cash of $69.2 million used in investing activities, partially offset by net cash of $52.2 million provided by financing activities, and net cash of $1.1 million provided by operating activities.

 

USDC

 

USD Coin (“USDC”) is accounted for as a financial instrument; one USDC can be redeemed for one U.S. dollar on demand from the issuer. The balance of USDC was $0.4 million and $0.6 million as of December 31, 2023 and December 31, 2022, respectively. The decrease in the balance of USDC was primarily attributable to payment of USDC for property and equipment of $12.2 million and payment of other expenses of $2.3 million, partially offset by collection of USDC of $13.5 million from exchange of cash and other digital assets, and collection of USDC of $0.7 million from sales of Antminer coupons.

  

Digital assets

 

Digital assets primarily consist of bitcoin and ETH. For the year ended December 31, 2023, we earned bitcoins from mining services and ETH from staking services. In addition, we exchanged bitcoins into ETH, USDC and cash, or used bitcoin and ETH to pay certain operating costs and other expenses. Digital assets held are accounted for as intangible assets with indefinite useful lives and are subject to impairment losses if the fair value of digital assets decreases below the carrying value at any time during the period. The fair value is measured using the intraday low price of the digital assets.

 

As compared with the balance as of December 31, 2022, the balance of digital assets as of December 31, 2023 increased by $12.9 million, which was primarily attributable to the generation of bitcoin from our mining business, totaling $44.2 million, partially offset by exchange of bitcoins of $17.3 million into USDC, exchange of bitcoins and ETH for a total of $7.9 million into cash, and a combined impairment of $6.6 million.

 

Digital assets held in Fund

 

Digital assets held in fund consists of an investment made by the Company in Bit Digital Innovation Master Fund SPC Ltd. As of December 31, 2023, the total balance of this investment was $6.1 million, compared to a $nil balance as of December 31, 2022. The increase of $6.1 million was due to an initial investment of $4.7 million, and subsequent fair value adjustments of 1.4 million.

 

Loans Receivable

 

Loans receivable consists of loans issued by the Company to third parties. The total balance of loans receivable was $0.4 million and $nil as of December 31, 2023, and 2022, respectively. The increase in the balance of loan receivables was due to the outstanding loan amounts of $0.4 million with Blockbreakers as of December 31, 2023.

 

Investment Securities

 

As of December 31, 2023, our portfolio consists of investments in one fund and three privately held companies over which the Company neither has control nor significant influence. The total balance of investment securities was $4.4 million and $1.8 million as of December 31, 2023, and 2022, respectively. The increase of $2.6 million in the value of our investment securities reflects the net impact of several transactions in 2023: $2.0 million investments in Auros Global Limited, $0.1 million investment in Marsprotocol Technologies Pte. Ltd (“Marsprotocol”), $0.1 million investment in Ingonyama Ltd, fair value adjustments of $0.5 million to the investment, and $0.1 million divestment in Marsprotocol.

 

Deposits for property and equipment

 

Deposits for property and equipment represented advance payments for property and equipment. The balance was derecognized once the control of the property and equipment was transferred to us.

 

Compared with December 31, 2022, the balance as of December 31, 2023 increased by $1.6 million, which was mainly due to deposits made for property and equipment for our specialized cloud-infrastructure services for artificial intelligence applications.

 

Property and equipment, net

 

Property and equipment is primarily comprised of BTC miners and ETH miners, each with an estimated 3-year useful life as well as construction in progress representing assets received but not yet put into service.

 

As of December 31, 2023, we had 46,548 bitcoin miners with net book value of $30.2 million and construction in progress of $51.0 million. For the year ended December 31, 2022, we recorded impairment of $46.4 million on BTC miners and $3.7 million on ETH miners, as the estimated fair value of these miners was less than their net carrying amount. As of December 31, 2022, we had 37,676 bitcoin miners and 730 ETH miners with net book value of $22.4 million and $0.2 million, respectively.

 

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Operating lease right-of-use assets and operating lease liability

 

As of December 31, 2023, the Company’s operating lease right-of-use assets and total operating lease liability were $6.2 million and $6.2 million respectively. The Company has amortized the operating lease right-of-use assets totaling $74 thousand for the year ended December 31, 2023. As of December 31, 2022, the Company’s operating lease right-of-use assets and operating lease liability were $nil.

 

Accounts payable

 

Accounts payable primarily represented the amount due to the maintenance service provided by our hosting partners. Compared with December 31, 2022, the balance of accounts payable decreased by $1.3 million, largely due to the payments to our hosting partners in the first half of 2023.

 

Deferred revenue

 

Deferred revenue pertains to prepayments received from a customer for provision of Graphics Processing Unit (GPU) processing power which commenced operations in January 2024. As of December 31, 2023, the Company’s deferred  revenue was $13.1 million. As of December 31, 2022, the Company’s deferred revenue was nil.

 

Long-term income tax payable

 

Compared with December 31, 2022, the balance as of December 31, 2023 increased by $152,200, which was recognized for the incremental penalty accrued on the existing unrecognized tax benefits for the years ended December 31, 2023. Refer to Note 12. Income Taxes for further details.  

 

Non-GAAP Financial Measures 

 

In addition to consolidated U.S. GAAP financial measures, we consistently evaluate our use of and calculation of the non-GAAP financial measures, “Adjusted EBITDA” and Adjusted earnings per share (“Adjusted EPS”).

 

Adjusted EBITDA is a financial measure defined as our EBITDA, adjusted to eliminate the effects of certain non-cash and / or non-recurring items, that do not reflect our ongoing strategic business operations. EBITDA is computed as net income before interest, taxes, depreciation, and amortization. Adjusted EBITDA is EBITDA further adjusted for certain income and expenses, which management believes results in a performance measurement that represents a key indicator of the Company’s core business operations of digital asset mining. The adjustments currently include fair value adjustments such as investment securities value changes and non-cash share-based compensation expense, in addition to other income and expense items.

 

Adjusted EPS is a financial measure defined as our EBITDA divided by our diluted weighted-average shares outstanding, adjusted with the EPS impact related to the adjustments made to EBITDA to derive Adjusted EBITDA.

 

We believe Adjusted EBITDA and Adjusted EPS can be important financial measures because they allow management, investors, and our board of directors to evaluate and compare our operating results, including our return on capital and operating efficiencies, from period-to-period by making such adjustments.

 

Adjusted EBITDA and Adjusted EPS are provided in addition to and should not be considered to be a substitute for, or superior to net income, the comparable measures under U.S. GAAP. Further, Adjusted EBITDA and Adjusted EPS should not be considered as an alternative to revenue growth, net income, diluted earnings per share or any other performance measure derived in accordance with U.S. GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity. Adjusted EBITDA and Adjusted EPS have limitations as analytical tools, and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported under U.S. GAAP.

 

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Reconciliations of Adjusted EBITDA and Adjusted EPS to the most comparable U.S. GAAP financial metric for historical periods are presented in the table below: 

 

   For the Years Ended December 31, 
   2023   2022   2021 
Reconciliation of non-GAAP income from operations:            
Net (loss)  $(13,893,281)  $(105,296,603)  $(1,009,952)
Depreciation and amortization expenses   14,426,733    27,829,730    13,113,964 
Income tax expenses (benefits)   279,044    (592,850)   3,856,341 
EBITDA   812,496    (78,059,723)   15,960,353 
                
Adjustments:               
Share based compensation expenses   9,118,812    2,262,691    21,907,416 
Loss on write-off of deposit to hosting facility   2,041,491    129,845    - 
Net loss (gain) from disposal of property and equipment   165,160    (1,353,299)   3,746,247 
(Gain) from sale of investment security   (8,220)   (1,039,999)   - 
(Gain) from disposal of a subsidiary   -    (52,383)   - 
Changes in fair value of long-term investments   306,612    545,412    - 
Liquidated damage expenses   -    619,355    - 
Impairment of property and equipment   -    50,038,650    - 
Adjusted EBITDA  $12,436,351   $(26,909,451)  $41,614,016 

 

   For the Years Ended December 31, 
   2023   2022   2021 
Reconciliation of non-GAAP Basic and Dilutive (Loss) Earnings Per Share:            
Basic and dilutive (loss) per share  $(0.16)  $(1.34)  $(0.02)
Depreciation and amortization expenses   0.16    0.35    0.24 
Income tax expenses (benefits)   -    (0.01)   0.07 
EBITDA per share   -    (1.00)   0.29 
                
Adjustments:               
Share based compensation expenses   0.10    0.03    0.40 
Loss on write off of deposit to hosting facility   0.02    0.00    - 
Net loss (gain) from disposal of property and equipment   0.00    (0.02)   0.07 
(Gain) from sale of investment security   0.00    (0.01)   - 
(Gain) from disposal of a subsidiary   -    (0.00)   - 
Changes in fair value of long-term investments   0.00    0.01    - 
Liquidated damage expenses   -    0.01    - 
Impairment of property and equipment   -    0.64    - 
Adjusted basic and dilutive (loss) earnings per share  $0.12   $(0.34)  $0.76 

  

Liquidity and capital resources

 

As of December 31, 2023, we had working capital of $56.3 million which includes USDC of $0.4 million and digital assets of $40.5 million. Working capital is the difference between the Company’s current assets and current liabilities.

 

To date, we have financed our operations primarily through cash flows from operations, and equity financing through public and private offerings of our securities. We plan to support our future operations primarily from cash generated from our operations and equity financings. We may also consider debt, preferred and convertible financing.

 

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We have sold and intend to continue to offer and sell equity securities from time to time in one or more offerings at the market (ATM) at prices and on terms which the Company will then determine for an initial aggregate offering price of $500 million pursuant to a registration statement on Form F-3 declared effective by the SEC on May 4, 2022.

 

Under the Company’s Purchase Agreement with Ionic Ventures LLC, the Company had the right, but not the obligation, to sell to Ionic up to $22 million of registered Ordinary Shares.

 

In May and June 2023, the Company issued an aggregate of 2,401,776 ordinary shares to Ionic Ventures LLC for gross proceeds of $7.0 million. The Company received net proceeds of approximately $6.7 million after deducting commissions payable to the placement agent.

 

In July and August 2023, the Company issued an aggregate of 4,345,887 ordinary shares to Ionic Ventures LLC for gross proceeds of $15.0 million. The Company received net proceeds of $14.3 million after deducting commissions payable to the placement agent.

 

In August and September 2023, the Company sold an aggregate of 781,602 ordinary shares in connection with the at-the-market offering. The Company received net proceeds of $1.9 million, net of offering costs.

 

In the fourth quarter of 2023, the Company sold an aggregate of 13,962,424 ordinary shares in connection with the at-the-market offering. The Company received net proceeds of $43.3 million, net of offering costs.

 

Revenue from Operations

 

Funding our operations on a going-forward basis will rely significantly on our ability to continue to mine digital assets and the spot or market price of the digital assets we mine, and our ability to earn ETH rewards from ETH native staking and liquid staking and the spot or market price of ETH.

 

We expect to generate ongoing revenues primarily from the production of digital assets, primarily bitcoin, in our mining facilities. Our ability to liquidate digital assets at future values will be evaluated from time to time to generate cash for operations. Generating digital assets, for example, with spot market values which exceed our production and other costs, will determine our ability to report profit margins related to such mining operations. Furthermore, regardless of our ability to generate revenue from our digital assets, we may need to raise additional capital in the form of equity or debt to fund our operations and pursue our business strategy.

 

The ability to raise funds as equity, debt or conversion of digital assets to maintain our operations is subject to many risks and uncertainties and, even if we are successful, future equity issuances would result in dilution to our existing stockholders and any future debt or debt securities may contain covenants that limit our operations or ability to enter into certain transactions. Our ability to realize revenue through digital asset production and successfully convert digital assets into cash or fund overhead with digital asset is subject to a number of risks, including regulatory, financial and business risks, many of which are beyond our control. Additionally, the value of digital asset rewards has been extremely volatile historically, and future prices cannot be predicted.

 

If we are unable to generate sufficient revenue from our digital asset production when needed or secure additional funding, it may become necessary to significantly reduce our current rate of expansion or to explore other strategic alternatives.

 

Cash flows

 

   For the Years Ended December 31, 
   2023   2022   2021 
Net Cash Provided by (Used in) in Operating Activities  $1,105,588   $(8,496,028)  $(17,351,892)
Net Cash Used in Investing Activities   (69,159,064)   (18,605,265)   (46,841,220)
Net Cash Provided by Financing Activities   52,223,350    18,713,825    106,186,507 
Net (decrease) increase in cash, cash equivalents, and restricted cash   (15,830,126)   (8,387,468)   41,993,395 
Cash, cash equivalents and restricted cash, beginning of year   34,011,060    42,398,528    405,133 
Cash, cash equivalents and restricted cash, end of year  $18,180,934   $34,011,060   $42,398,528 

 

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Operating Activities

 

Net cash collected from operating activities was $1.1 million for the year ended December 31, 2023, derived mainly from (i) net loss of $13.9 million for the year ended December 31, 2023 adjusted for digital assets of $44.2 million from our mining services, depreciation expenses of property and equipment of $14.4 million, gain from exchange of digital assets of $18.8 million, impairment of digital assets of $6.6 million, and share-based compensation expenses of $9.1 million, and (ii) net changes in our operating assets and liabilities, principally comprising of a decrease in digital assets and stable coins of $46.9 million as net proceeds from sales of and payments of digital assets and stable coins.

 

Net cash used in operating activities was $8.5 million for the year ended December 31, 2022, derived mainly from (i) net loss of $105.3 million for the year ended December 31, 2022, adjusted for digital assets of $32.3 million from our mining services, depreciation expenses of miners of $27.8 million, gain from exchange of digital assets of $6.5 million, impairment of digital assets of $24.7 million, impairment of property and equipment of $50.0 million, and share-based compensation expenses of $2.3 million, and (ii) net changes in our operating assets and liabilities, principally comprising of a decrease in digital assets and stable coins of $25.1 million as net proceeds from sales of digital assets and stable coins, and an increase in accounts payable of $3.2 million.

 

Net cash used in operating activities was $17.4 million for the year ended December 31, 2021, derived mainly from (i) digital assets of $96.1 million from our mining services, depreciation expenses of miners of $13.1 million, impairment of digital assets of $28.0 million, loss from sales and disposal of miners of $3.7 million, gain from exchange of digital assets of $20.8 million, issuance of ordinary shares to certain service providers for provision of promotion and marketing services and advisory services of $1.4 million, share-based compensation related to restricted share units granted to the Company’s directors, senior management and consultants of $20.5 million, and (ii) net changes in our operating assets and liabilities, principally comprising of (a) a decrease in digital assets and stable coins of $5.7 million as net proceeds from sales of digital assets and stable coins, and (b) a change in accounts payable of $21.6 million, primarily because we paid hosting and power cost of $24.3 million in digital assets.

 

Investing Activities

 

Net cash used in investing activitie