BITMINE IMMERSION TECHNOLOGIES, INC. The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto included elsewhere in this Form 10-
Overview
Since
We plan to operate our data centers using immersion cooling technology. Immersion cooling is the process of submerging computer components (or full servers) in a thermally, but not electrically, conductive liquid (dielectric coolant) allowing higher heat transfer performance than air and many other benefits. Immersion cooling can be up to 95% more efficient than standard air cooling, producing an estimated PUE (power usage effectiveness) of 1.05. This cooler environment has been shown to extend machine lives by 30% or longer.
We initially decided to locate our initial facilities in
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Until our permanent hosting facilities are operational, we are temporarily leasing space for a small number of ASIC computers with a co-host. We intend to move all of our currently owned and customer owned miners to our new TSTT hosting facilities once they are operational.
In
In light of the recent developments in
We recently entered into a joint arrangement whereby we would contributed one
immersion contain and six transformers, and sold four immersion containers to a
joint venture with a third party that has procured a location and a medium or
long-term power purchase agreement in
Our digital asset mining operation is focused on the generation of digital assets by solving complex cryptographic algorithms to validate transactions on specific digital asset network blockchains, which is commonly referred to as "mining." Mining requires the use of specialized computers equipped with application-specific integrated circuit (ASIC) chips (known as "miners") to solve complex cryptographic algorithms in support of the Bitcoin blockchain (in a process known as "solving a block") in exchange for digital asset rewards (primarily bitcoin). Whether we are hosting our client's computers or mining for our own account with our own computers, the miners participate in "mining pools" organized by "mining pool operators" in which we or our clients share mining power (known as "hash rate") with the hash rate generated by other miners participating in the pool to earn digital asset rewards. The mining pool operator provides a service that coordinates the computing power of the independent mining enterprises participating in the mining pool. Fees are paid to the mining pool operator to cover the costs of maintaining the pool. The pool uses software that coordinates the pool members' mining power, identifies new block rewards, records how much hash rate each participant contributes to the pool, and assigns digital asset rewards earned by the pool among its participants in proportion to the hash rate each participant contributed to the pool in connection with solving a block.
Our digital asset self-mining activity competes with a myriad of mining operations throughout the world to complete new blocks in the blockchain and earn the reward in the form of an established unit of a digital asset. Revenue from digital asset mining and hosting third party digital asset miners are impacted by volatility in bitcoin prices, as well as increases in the Bitcoin blockchain's network hash rate resulting from the growth in the overall quantity and quality of miners working to solve blocks on the Bitcoin blockchain and the difficulty index associated with the secure hashing algorithm employed in solving the blocks. Gross profits from digital asset mining are primarily impacted by the cost of electricity to operate the miners and to a lesser extent by other operating costs. While we expect to sell or exchange a portion of the digital assets we mine to fund our growth strategies or for general corporate purposes, we may hold our digital assets as investments in anticipation of continued adoption of digital assets as a "store of value" and a more efficient medium of exchange than traditional fiat currencies.
As the demand for digital assets increases and digital assets become more widely accepted, there is an increasing demand for professional-grade, scalable infrastructure to support growth of the blockchain ecosystem. We expect to continually evaluate the performance of our data centers, including our ability to access additional megawatts of electric power and to expand our total self-mining and customer and related party hosting hash rates.
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We also generate revenues from the advantageous purchase and sale of equipment
used for digital asset mining and hosting. We have relationships with some
suppliers that enable us to acquire highly desired equipment at attractive
prices, which we plan to resell to third parties. In most cases, resales of
digital asset mining equipment would be to our hosting customers, which have the
dual benefit of generating short-term gross profits from the equipment sale as
well as growing the customer base of our hosting business. We have recently
resold some hosting equipment in
The primary factors that will impact future hosting revenues include: (i) the
price of bitcoin, since hosting revenues are primarily a percentage of bitcoin
mined by clients; (ii) the completion of operational hosting facilities, as
potential hosting clients have been reluctant to sign contracts prior to the
date the Company has a fully operational hosting facility; and (iii) the
availability of attractive electricity prices, since power usage is the primary
marginal cost for any mining operation. Our hosting revenues will also be
impacted by the resolution of the dispute between TSTT and the local utility
regarding the electricity rate that will be charged our co-location facilities
in
The primary factors that will impact proprietary mining revenues include: (i)
the price of bitcoin; (ii) the completion of operational facilities to provide
us with a cost-effective facility to operate in; (iii) the availability of
attractive electricity prices, since power usage is the primary marginal cost
for any mining operation; and (iv) the availability of mining equipment suitable
for the Company's immersion hosting environment at attractive prices and
available capacity in the Company's hosting facilities. Our proprietary mining
activities will also be impacted by the resolution of the dispute between TSTT
and the local utility regarding the electricity rate that will be charged our
co-location facilities in
Revenues from cryptocurrency mining, whether derived from hosting clients or
from proprietary mining, are impacted significantly by volatility in Bitcoin
prices, as well as increases in the Bitcoin blockchain's network hash rate
resulting from the growth in the overall quantity and quality of miners working
to solve blocks on the Bitcoin blockchain and the difficulty index associated
with the secure hashing algorithm employed in solving the blocks. From
The primary factors that will impact resales of mining equipment include the availability of equipment at attractive prices and the number of participants willing to enter the mining business or expand their existing operations, which is highly correlated to the margin from mining, as determined by the market price of bitcoin and prevailing energy costs. Also, our resales of mining equipment will be impacted by the existence of hosting capacity with attractive electricity rates in our hosting operations.
Results of Operations
Comparison of Results of Operations for Years Ended
Revenues
During the year ended
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During the year ended
During the year ended
The Company also sold two immersion crypto containers to
The Company expects hosting revenues in future periods to be lower as a result
of our decision to focus on self-mining over hosting third party miners. In the
current market environment, the price of ASIC miners has fallen to the point
that we believe self-mining is more profitable than hosting third party miners.
The Company currently owns 362 miners that it plans to use for proprietary
mining, the deployment of which will occur when its immersion hosting
environment is operational. The Company also expects to generate additional
revenues from the resale of certain hosting equipment, primarily containers and
transformers. In the fourth quarter of 2022, the Company sold two hosting
containers to a third party, and subsequent to
The primary factors that will impact our revenues in subsequent periods are described in the "-Overview" above.
Cost of Sales
Cost of sales related to Bitcoin hosting and mining revenue was
Cost of sales related to sales of mining equipment was
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Since we are in the early stages of setting up our infrastructure to generate higher levels of revenues, we expect that our cost of sales to generate asset revenue from hosting or mining for our own account will exceed the revenue we generate until we achieve sufficient economies of scale by deploying more miners. In future periods, the largest component of our cost of sales will consist of electricity costs, which will increase substantially as our hosting facilities are fully utilized. However, hosting clients will be responsible for reimbursing their pro rata share of electricity costs. The balance of the electricity costs attributable to our proprietary mining operations will be paid for by bitcoin revenues generated from those operations.
Operating Expenses
During the year ended
Other Income (Expense)
During the year ended
Net Income (Loss)
As a result of the foregoing, during the year ended
Liquidity and Capital Resources
As of
During the year ended
Cash flows used in operating activities were
Cash flows used in investing activities were
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Cash flows provided by financing activities were
Through
On
The Company believes that cash on hand, amounts that may borrow under the 2022
LOC Agreement, and expected receipts from sale transactions will provide it with
sufficient liquidity to fund its operations for the next 12 months. The Company
expects to receive approximately
Nevertheless, while the Company does not need additional capital to maintain operations, it will need additional capital to expand its digital asset hosting and mining business, and take advantage of opportunities in the market place that currently exist due to the recent decline in digital asset prices. Therefore, the Company has engaged an investment banker and is pursuing additional capital-raising alternatives, including the potential issuance of common stock in a private placement, or the issuance of convertible notes or preferred stock. There is no assurance that the Company will be able to raise additional capital or that the terms of any capital raise are not dilutive to current shareholders or carry other terms that are unfavorable to the Company and its shareholders.
Bitcoin Holdings
At
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the Company's financial condition, changes in financial condition, and results of operations, liquidity or capital resources.
55 Related Party Transactions
Starting in 2020,
On
On
Critical Accounting Policies General
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon our financial statements, which have been prepared in
accordance with
We describe in this section certain critical accounting policies that require us to make significant estimates, assumptions and judgments. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are uncertain at the time the estimate is made and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes the following critical accounting policies reflect its most significant estimates and assumptions used in the preparation of the financial statements. For further information on the critical accounting policies, see Note 1 of the Financial Statements.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with the
56 Use of Estimates
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. The most significant estimates relate to the
calculation of stock-based compensation, useful lives and recoverability of
long-lived assets, income taxes and contingencies. The Company bases its
estimates on historical experience, known or expected trends, and various other
assumptions that are believed to be reasonable given the quality of information
available as of the date of these financial statements. The results of these
assumptions provide the basis for making estimates about the carrying amounts of
assets and liabilities that are not readily apparent from other sources. Actual
results could differ from these estimates. There have been no material changes
to the Company's accounting estimates since the Company's financial statements
for the fiscal year ended
Revenue Recognition
On
Revenues from digital currency mining - General
The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
· Step 1: Identify the contract with the customer;
· Step 2: Identify the performance obligations in the contract;
· Step 3: Determine the transaction price;
· Step 4: Allocate the transaction price to the performance obligations
in the contract; and
· Step 5: Recognize revenue when the Company satisfies a performance
obligation.
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606's definition of a "distinct" good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
· Variable consideration · Constraining estimates of variable consideration · The existence of a significant financing component in the contract · Noncash consideration · Consideration payable to a customer 57
Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
The Company has entered into digital asset mining pools by executing contracts, as amended from time to time, with the mining pool operators to provide computing power to the mining pool. The contracts are terminable at any time by either party and the Company's enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. In exchange for providing computing power, the Company is entitled to a fractional share of the fixed cryptocurrency award the mining pool operator receives (less digital asset transaction fees to the mining pool operator which are immaterial and are recorded as a deduction from revenue), for successfully adding a block to the blockchain. The terms of the agreement provide that neither party can dispute settlement terms after thirty-five days following settlement. The Company's fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm.
Providing computing power to solve complex cryptographic algorithms in support of the Bitcoin blockchain (in a process known as "solving a block") is an output of the Company's ordinary activities. The provision of providing such computing power is the only performance obligation in the Company's contracts with mining pool operators. The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date received, which is not materially different than the fair value at contract inception or the time the Company has earned the award from the pools. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions.
Fair value of the cryptocurrency award received is determined using the market rate of the related cryptocurrency at the time of receipt.
Revenues from Hosting
The Company provides energized space to customers who locate their equipment
within the Company's co-hosting facility. The equipment generating the hosting
revenue is owned by the customer. Currently, the Company accepts the mining
proceeds daily from the mining pool into a cold wallet address in the Company's
name. The Company sends its hosting client its portion daily, as the Company
receives such proceeds. All performance obligations are achieved simultaneously
by providing the hosting environment for the customers' operations. Hosting
revenues consist of amounts billed in
During the period ending
Revenues from the sale of mining equipment
The Company records revenue from the resale of mining equipment it has purchased. Revenue for the sale of mining equipment is recognized under the guidelines of ASC 606.
Revenues From Mining
Revenues from mining cryptocurrency for its own account will be recorded at the spot price for the cryptocurrency on a daily basis based on the Company's proportionate share of cryptocurrency earned by the mining pools in which the Company participates on the date the Company receives its share from the pool.
58 Cash and cash equivalents
The Company considers all highly liquid temporary cash investments with an
original maturity of three months or less to be cash equivalents. On
Cryptocurrency
Cryptocurrencies held are accounted for as intangible assets with indefinite
useful lives. An intangible asset with an indefinite useful life is not
amortized but assessed for impairment quarterly, when events or changes in
circumstances occur indicating that it is more likely than not that the
indefinite-lived asset is impaired. Impairment exists when the carrying amount
exceeds its fair value, which is measured using the quoted price of
the cryptocurrency at the time its fair value is being measured. In testing for
impairment, the Company has the option to first perform a qualitative assessment
to determine whether it is more likely than not that an impairment exists. If it
is determined that it is not more likely than not that an impairment exists, a
quantitative impairment test is not necessary. If the Company concludes
otherwise, it is required to perform a quantitative impairment test. To the
extent an impairment loss is recognized, the loss establishes the new cost basis
of the asset. Subsequent reversal of impairment losses, if the price of
cryptocurrency increases is not permitted. During the year ended
Cryptocurrency earned by the Company through its mining activities are included within operating activities on the accompanying consolidated statements of cash flows. The sales of digital currencies are included within investing activities in the accompanying consolidated statements of cash flows and any realized gains or losses from such sales are included in other income (expense) in the consolidated statements of operations and comprehensive income (loss). The Company accounts for its gains or losses in accordance with the first in first out ("FIFO") method of accounting.
The Company holds its cryptocurrencies in a cold storage wallet account in its
name, and not with a custodian or other intermediary. The Company has an account
with
Stock-based Compensation
The Company accounts for stock-based compensation using the fair value method following the guidance outlined in Section 718-10 of the FASB ASC for disclosure about stock-based compensation. This section requires a public entity to measure the cost of employee and non-employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which service is provided. No compensation cost is recognized for equity instruments for which service is not provided or rendered.
Related party transactions
The Company follows ASC 850, Related Party Disclosures, for the identification of related parties and disclosure of related party transactions. In accordance with ASC 850, the Company's financial statements include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business, as well as transactions that are eliminated in the preparation of financial statements.
Net Loss per Share
Net loss per common share is computed by dividing net loss by the weighted
average common shares outstanding during the period as defined by ASC Topic 260,
"Earnings per Share." Basic earnings per common share calculations are
determined by dividing net income (loss) by the weighted average number of
shares of common stock outstanding during the year. Diluted earnings per common
share calculations are determined by dividing net income (loss) by the weighted
average number of common shares and dilutive common share equivalents
outstanding. As of
59 Income Taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between depreciation which is deductible for tax purposes prior to being deductible for book purposes. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future taxable income.
From time to time, the Company may have differences in computing the book and tax bases of property and equipment; reserves for bad debts; capitalized overhead included in inventories; bonus plan payables, and accrued wages to shareholders/employees. Deferred tax expense or benefit is the result of the changes in the deferred tax assets, net of the valuation reserve, and liabilities.
The Company accounts for income taxes in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 740 ("FASB ASC 740"), Income Taxes, which clarifies the accounting and disclosure requirements for uncertainty in tax positions. It requires a two-step approach to evaluate tax positions and determine if they should be recognized in the financial statements. The two-step approach involves recognizing any tax positions that are "more likely than not" to occur and then measuring those positions to determine if they are recognizable in the financial statements. Management regularly reviews and analyzes all tax positions and has determined that no uncertain tax positions requiring recognition have occurred.
In general, the Company's income tax returns are subject to examination by the taxing authorities for three years after they were filed. The Company has not filed any tax returns.
Recent Accounting Pronouncements
All other newly issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable.
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