Bitmine Immersion (BMNR) 10-Q2024 Q1 Quarterly report

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended November 30, 2023

Or

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

For the transition period from ______ to ______

Commission file number: 000-56220

Registrant’s telephone number, including area code (404) 816-8240

_________________________________________

(Former name, former address and former fiscal year, if changed since last report)

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

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 pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes   ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, 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 is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes   ☒ No

The number of shares outstanding of the registrant’s common stock as of January 12, 2024 was 49,748,705 shares.

DOCUMENTS INCORPORATED BY REFERENCE — NONE

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Information contained in this quarterly report on Form 10-Q contains “forward-looking statements.” All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q may be forward-looking statements. These forward-looking statements are contained principally in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology. The forward-looking statements herein represent our expectations, beliefs, plans, intentions, or strategies concerning future events, including, but not limited to: our future financial performance; the continuation of historical trends; the sufficiency of our resources in funding our operations; our intention to engage in mergers and acquisitions; and our liquidity and capital needs. Our forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that any projections or other expectations included in any forward-looking statements will come to pass. Moreover, our forward-looking statements are subject to various known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by any forward-looking statements. These risks, uncertainties, and other factors include but are not limited to:

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise.

As used in this quarterly report on Form 10-Q, “we”, “our”, “us” and the “Company” refer to Bitmine Immersion Technologies, Inc., a Delaware corporation unless the context requires otherwise.

Item 1. Financial Statements.

Index to Financial Statements

Bitmine Immersion Technologies, Inc.

Condensed Balance Sheets

The accompanying notes are an integral part of these unaudited condensed financial statements.

Bitmine Immersion Technologies, Inc.

Condensed Statements of Operations

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed financial statements.

Bitmine Immersion Technologies, Inc.

Condensed Statements of Changes in Stockholders' Equity

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed financial statements.

Bitmine Immersion Technologies, Inc.

Statements of Cash Flows

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed financial statements.

BITMINE IMMERSION TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT POLICIES

About Bitmine Immersion Technologies, Inc.

Bitmine Immersion Technologies Inc. f/k/a Sandy Springs Holdings, Inc. (“Bitmine” or the “Company”) is a Delaware corporation that commenced operations on July 16, 2020. A predecessor to the Company was incorporated in the state of Nevada on August 16, 1995, as Interactive Lighting Showrooms, Inc.

By a written consent dated July 16, 2021, holders of a majority of the Company’s issued and outstanding common stock approved a resolution to appoint Jonathan Bates, Raymond Mow, Michael Maloney, and Seth Bayles to the board of directors of the Company, and to appoint Jonathan Bates as Chairman, Seth Bayles as Corporate Secretary, Raymond Mow as Chief Financial Officer, and Ryan Ramnath as Chief Operating Officer (collectively, the “New O&Ds”). Erik S. Nelson remained a director and the chief executive officer. At the same time, the shareholders approved the issuance of 32,994,999 shares of common stock in the Company’s offering of common stock at $0.015 per share, and the grant of 4,750,000 shares for services, which were valued at $0.015 per share. As a result of the foregoing stock issuances, the New O&Ds (or entities controlled by them) collectively acquired 24,893,877 shares of common stock, which represented approximately 62% of the issued and outstanding shares at the time.

The appointment of certain of the New O&Ds to the Company’s board, and issuance to the New O&Ds of a controlling interest in the Company, were made in order to enable the Company to enter the business of creating a hosting center for Bitcoin mining computers primarily utilizing immersion cooling technology, as well mining the Bitcoin digital currency for its own account. Prior to the change of control to the New O&Ds, the Company was a shell company.

During the fiscal year ended August 31, 2022, the Company began implementing its business plan by generating revenue from the mining of Bitcoin digital currency, hosting a third party Bitcoin miner and the sale of mining equipment.

The Company’s year-end is August 31st.

Basis of Presentation

The foregoing unaudited interim condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, these condensed financial statements do not include all of the disclosures required by GAAP for complete condensed financial statements. These unaudited interim condensed financial statements should be read in conjunction with the audited condensed financial statements and the notes thereto included on Form 10-K for the year ended August 31, 2023. In the opinion of management, the unaudited interim condensed financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim period presented.

The preparation of condensed financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the condensed financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company’s condensed financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions that could have a material effect on the reported amounts of the Company’s financial position and results of operations.

Operating results for the three months ended November 30, 2023, are not necessarily indicative of the results that may be expected for the year ending August 31, 2024.

Management’s Representation of Interim Condensed Financial Statements

The accompanying unaudited condensed financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The Company uses the same accounting policies in preparing quarterly and annual condensed financial statements. Certain information and footnote disclosures normally included in condensed financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These condensed financial statements include all of the adjustments, which in the opinion of management are necessary to a fair presentation of financial position and results of operations. All such adjustments are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year.

Use of Estimates

The preparation of condensed 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 condensed financial statements. The most significant estimates relate to the calculation of stock-based compensation, calculation of the Company’s derivative liability, useful lives and impairment of fixed 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 condensed 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 condensed financial statements for the fiscal year ended August 31, 2023.

Segment Reporting

The Company operates in one segment - the cryptocurrency mining industry. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. All material Company operations qualify for aggregation due to their similar customer base and similarities in economic characteristics, nature of products and services, and procurement, manufacturing and distribution processes.

Revenue Recognition

On July 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). Results for reporting periods beginning after January 1, 2018, are presented under ASC 606.

Revenues from digital currency mining

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: The Company enters into a contract with a bitcoin mining pool operator (i.e., the customer) to provide computing power to the mining pools. The Company only utilizes pool operators that determine awards under the Full Pay-Per-Share method. The contracts are terminable at any time by either party without penalty and the Company’s enforceable right to compensation only begins when the Company starts providing computing power to the mining pool operator (which occurs daily at midnight Universal Time Coordinated (UTC)). Mining revenue generally consists of two parts, (1) the block reward (current bitcoin block reward is 6.25 bitcoin) paid by the network to the miner and (2) the transaction fees paid by the users to the miner. When a mining pool successfully finds a block, it is awarded all of the transaction fees in that block and the reward from the network. In exchange for providing computing power to the pool, the Company is entitled to an award of bitcoin equal to the expected reward per block over the measurement period of midnight-to-midnight UTC time. The Company is also entitled to an aware of transaction fees per block based on the average of the transaction fees over the latest 144 blocks, each of which is about 10 minutes, and the total of 144 blocks equals one day. At the end of each day that runs from midnight-to-midnight UTC time, the pool operator calculates the pool participant’s expected block reward and transaction fees for the day based on the computing power provided by the pool participant that day, less net digital asset fees due to the mining pool operator over the measurement period. Applying the criteria per ASC 606-10-25-1, the contract arises at the point that the Company provides computing power to the mining pool operator, which is the beginning of each contract day at midnight UTC (contract inception), because customer consumption is in tandem with daily delivery of the computing power.

Step 2: 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:

Based on these criteria, the Company has a single performance obligation in providing computing power (i.e., hashrate) to the mining pool operator (i.e., customer). The performance obligation of computing power is fulfilled daily over-time, as opposed to a point in time, because the Company provides the hashrate throughout the day and the customer simultaneously obtains control of it and uses the asset to produce bitcoin. The Company has full control of the mining equipment utilized in the mining pool and if the Company determines it will increase or decrease the processing power of its machines and/or fleet (i.e., for repairs or when power costs are excessive) the computing power provided to the customer will be reduced.

Step 3: The transaction consideration the Company earns is non-cash digital consideration in the form of bitcoin, which the Company measures at fair value on the date earned at the daily closing price, which is not materially different from the fair value at contract inception, which is the daily opening price. According to the customer contract, daily earnings are calculated from midnight-to-midnight UTC time, and the sub-account balance is credited to the Company’s account shortly thereafter.

The transaction consideration the Company earns is all variable since it is dependent on the daily computing power provided by the Company, as well as other factors outside the control of the Company, such as the difficulty index of the bitcoin network. The Company’s bitcoins earned through the contractual payout formula is not known until the Company’s computational hashrate contributed over the daily measurement period is fulfilled over-time daily between midnight-to-midnight UTC time. The Company’s expected amount of the global network transaction fee rewards earned are calculated at the end of each transactional day (midnight to midnight UTC time). There are no other forms of variable considerations, such as discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, or other similar items.

The Company fully constrains all variable consideration as a result of ASC 606-10-32-11 and 12 because the amount of consideration is highly susceptible to factors outside of our control as defined by the Company’s customer’s payout methodology. The variable consideration is constrained until the Company receives confirmation of the amount, usually via settlement of the fractional share of block reward and transaction fee in the Company’s digital wallet (i.e., at that point, the variability is resolved and there is no longer the reasonable possibility of significant reversal of revenue). Before settlement occurs, estimation of the variable consideration to which the Company is entitled, which depends on inputs unknowable to the Company, carries the risk of a significant revenue reversal from mis-estimation. Settlement of consideration typically occurs within 24 hours after the end of each day.

Step 4: The transaction price is allocated to the single performance obligation upon verification for the provision of computing power to the mining pool operator. There is a single performance obligation (i.e., computing power or hashrate) for the contract; therefore, all consideration from the mining pool operator is allocated to this single performance obligation.

Step 5: The Company’s performance is complete in transferring the computing power over-time (midnight to midnight UTC) to the customer and the customer obtains control of that asset.

In exchange for providing computing power, the Company is entitled to the expected bitcoin awards earned over the measurement period, plus the expected global transaction fee rewards for the respective measurement period, less net digital asset fees due to the mining pool operator over the measurement period. The transaction consideration the Company receives is non-cash consideration, in the form of bitcoin. The Company measures the bitcoin at the closing U.S. dollar spot rate at the end of the date earned (midnight UTC). However, this accounting convention does not result in materially different revenue recognition from using the fair value of the bitcoin earned at contract inception and has been consistently applied in all periods presented. 

There are no deferred revenues or other liability obligations recorded by the Company since there are no payments in advance of the performance. At the end of the 24 hour “midnight-to-midnight” period, there are no remaining performance obligations.

During the period ending August 31, 2023, the Company utilized one mining pool for its self-mining operations, which charges 0.3% of the bitcoin payable to the Company as a pool management fee.

During the three months ending November 30, 2023, the Company generated $329,723 in revenues from mining cryptocurrency.

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. The Company gives hosting customers the option of having all mining proceeds paid into a cold wallet address in the Company’s name, which case the Company pays the hosting client its share of mining awards on a daily basis, or having all mining awards sent to an account of the customer, in which case the Company bills the customer monthly for any hosting fee that is contingent on the amount of the client’s award. All performance obligations are achieved simultaneously by providing the hosting environment for the customers’ operations. Hosting revenues consist of amounts billed in U.S. dollars for electricity and other fees, and a percentage of cryptocurrency generated by the client’s hosting activities. With regard to hosting revenues that are billed in U.S. dollars, revenues are recorded at the time of invoicing. With regard to hosting revenues that are based on a percentage of cryptocurrency generated by the customer, revenues are recorded based on the Company’s share of cryptocurrency received from the mining pool on the date of receipt or invoicing.

During the three months ending November 30, 2023, the Company generated $11,864 in revenues from hosting services.

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. During the three months ending November 30, 2023, the Company generated $169,721 in revenues from the sale of mining equipment.

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 November 30, 2023, and August 31, 2023, respectively, the Company’s cash equivalents totaled $470,529 and $270,547, respectively.

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. During the three months ended November 30, 2023, the Company recorded an impairment charge of $-0- due to a reduction in the quoted price of cryptocurrency. Subsequent reversal of impairment losses, if the price of cryptocurrency increases, is not permitted. Additionally, during the three months ended November 30, 2023, the Company realized a gain from sale of cryptocurrency of $-0-.

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 moving weighted average 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 accounts with Gemini Trust Company, LLC, which is a qualified custodian regulated by the New York Department of Financial Services, and BitGo Trust, a well-known Bitcoin custodian. (“BitGo”) Currently, the Company does not store cryptocurrencies at Gemini or BitGo, and only transfers cryptocurrencies that it desires to liquidate to its account at either Gemini or BitGo immediately prior to the liquidation. The Company uses Gemini’s multi-signature feature for account access. The Company intends to use BitGo for a significant amount of custody moving forward.

Income taxes

The Company accounts for income taxes under FASB ASC 740, “Accounting for Income Taxes”. Under FASB ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under FASB ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. FASB ASC 740-10-05, “Accounting for Uncertainty in Income Taxes” prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company assesses the validity of its conclusions regarding uncertain tax positions quarterly to determine if facts or circumstances have arisen that might cause it to change its judgment regarding the likelihood of a tax position’s sustainability under audit.

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 Accounting Standards Codification for disclosure about Stock-Based Compensation. This section requires a public entity to measure the cost of 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 an employee is required to provide service in exchange for the award- the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service.

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 Financial Accounting Standards, ASC Topic 260, “Earnings per Share.” Basic earnings per common share (“EPS”) calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding.

Stock Purchase Warrants

The Company accounts for warrants issued to purchase shares of its common stock as equity in accordance with FASB ASC 480, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities from Equity. We determine the accounting classification of warrants we issue, as either liability or equity classified, by first assessing whether the warrants meet liability classification in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, then in accordance with ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. Under ASC 480, warrants are considered liability classified if the warrants are mandatorily redeemable, obligate us to settle the warrants or the underlying shares by paying cash or other assets, and warrants that must or may require settlement by issuing variable number of shares. If warrants do not meet the liability classification under ASC 480-10, we assess the requirements under ASC 815-40, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature.

If the warrants do not require liability classification under ASC 815-40, in order to conclude equity classification, we also assess whether the warrants are indexed to our common stock and whether the warrants are classified as equity under ASC 815-40 or other GAAP. After all such assessments, we conclude whether the warrants are classified as liability or equity. Liability classified warrants require fair value accounting at issuance and subsequent to initial issuance with all changes in fair value after the issuance date recorded in the statements of operations. Equity classified warrants only require fair value accounting at issuance with no changes recognized subsequent to the issuance date. We do not have any liability classified warrants as of any period presented.

Property and equipment

Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Estimated useful lives for leasehold improvements are typically the lesser of the estimated useful life of the asset or the life of the term of the lease. The estimated useful lives for all other property and equipment are as follows:

No depreciation is recorded on an asset until it is placed in service. Due to the nature of the equipment, it can only be placed in service when the hosting site is properly configured to turn on the machines. As of November 30, 2023, and August 31, 2023, the Company had $3,017,714 and $4,453,466, respectively, of fixed assets not in service.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes a new lease accounting model for lessees. The updated guidance requires an entity to recognize assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. In March 2019, the FASB issued ASU 2019-01, Codification Improvements, which clarifies certain aspects of the new lease standard. The FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases in July 2018. Also in 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements, which provides an optional transition method whereby the new lease standard is applied at the adoption date and recognized as an adjustment to retained earnings. The amendments have the same effective date and transition requirements as the new lease standard.

We adopted ASC 842 on July 16, 2020. The adoption of this guidance did not have any impact on our condensed financial statements.

In March 2022, the SEC staff released Staff Accounting Bulletin No. 121 (“SAB 121”), which requires entities that hold crypto assets on behalf of platform users to recognize a liability to reflect the entity’s obligation to safeguard the crypto assets held for its platform users, whether directly or through an agent or another third party acting on its behalf, along with a corresponding safeguarding asset. Both the liability and corresponding safeguarding asset shall be measured at fair value. SAB 121 also requires disclosure of the nature and amount of crypto assets being safeguarded, how the fair value is determined, an entity’s accounting policy for safeguarding liabilities and corresponding safeguarding assets, and may require disclosure of other information about risks and uncertainties arising from the entity’s safeguarding activities. The Company is not in the business of holding its customer’s crypto assets for safekeeping. For crypto assets that are not maintained on our platform and for which the Company does not maintain a private key or the ability to recover a customer’s private key, these balances are not recorded, as there is no related safeguarding obligation in accordance with SAB 121. This guidance is effective from the first interim period after June 15, 2022 and should be applied retrospectively. We adopted SAB 121 during the three months ended August 31, 2023, and it did not have any impact on our condensed financial statements.

NOTE 2 – CRYPTOCURRENCIES

The following table presents additional dollar information about the Company’s Bitcoin for the three months ended November 30, 2023:

The following table presents unit information (each bitcoin represents one unit) about the Company’s bitcoin activity for the three months ended November 30, 2023:

As of November 30, 2023 the Company had an unrealized gain on its bitcoin holdings of approximately $96,000.

NOTE 3 – REVENUE FROM CONTRACTS WITH CUSTOMERS

The following table presents the Company’s revenues disaggregated into categories based on the nature of such revenues:

NOTE 4 – PROPERTY AND EQUIPMENT

The following table sets forth the components of the Company’s property and equipment at November 30, 2023 and August 31, 2023:

Equipment not in service as of November 30, 2023 was comprised of the following:

_________________

For the three months ended November 30, 2023 and 2022, the Company recorded $222,530 and $59,053, respectively, in depreciation expense.

NOTE 5 – INVESTMENTS AND NOTES RECEIVABLE

Policy on Doubtful Accounts

We evaluate notes receivable for impairment under the guidelines of ASC 310-10-35-41. We establish an allowance for doubtful accounts when we determine that collectability of the note is in question.

Investment

In October 2022, we entered into a joint venture arrangement with ROC Digital Mining to jointly develop and operate a Bitcoin mining operation in Pecos, Texas. Under the joint venture, we contributed one immersion container, six transformers and cash with a value of $987,429 as a capital contribution to ROC Digital Mining I, LLC (the “ROC Digital”). In return, we received 240 Class B Units of ROC Digital pursuant to an ongoing offering of a total of 1,000 Class B Units at $4,400 per unit. We simultaneously sold ROC Digital four immersion containers for $1,200,000, which is payable pursuant to a promissory note the bears interest at 5% per annum, and is payable pursuant to monthly payments of $31,204 per month commencing on December 30, 2022, with any remaining principal and interest payable in full on May 31, 2026. The note is secured by the equipment that was sold. We also obtained the right to locate one container at the location that we would be able to use for self-mining.

As of November 30, 2023 the joint venture arrangement was classified as a long term asset on the Company’s balance sheet with a value of $944,215. The equipment at the joint venture location in Pecos, Texas was in the set-up and testing phase and the initial revenues generated by the joint venture occurred in the three months ended November 30, 2023. The reduction in the value of the investment of $43,214 during the three months ended November 30, 2023 represents the Company’s approximate 30% portion of the ROC Digital’s operating losses during the period. This loss was recorded as “other expense” on the Company’s Condensed Statements of Operations for the three months ended November 30, 2023.

Notes Receivable

Notes receivable consist of notes received as partial consideration for the sale of mining equipment, and are collateralized by the mining equipment that was the subject of the sale. As of November 30, 2023 and August 31, 2023, notes receivable consist of the following:

As of November 30, 2023 and August 31, 2023 the balance of notes receivable was $1,667,582 and $1,761,193, respectively. During the three months ended November 30, 2023, the Company recorded $14,793 in interest income on these notes.

NOTE 6 – RELATED PARTY LOANS PAYABLE

On October 19, 2022, the Company entered into a Line of Credit Agreement (the “2022 LOC Agreement”) with Innovative Digital Investors Emerging Technology, L.P. (“IDI), a limited partnership controlled by Jonathan Bates, the Company’s Chairman, and Raymond Mow, the Company’s Chief Financial Officer and a Director. The 2022 LOC Agreement provided for loans of up to $1,000,000 at the request of the Company to finance the purchase of equipment necessary for the operation of the Company’s business, and related working capital. Loans under the 2022 LOC Agreement accrue interest at twelve percent (12%) per annum, compounded on a 30/360 monthly basis until the loans have been repaid in full. The Company had the right to submit draw requests under the 2022 LOC Agreement until April 15, 2023. Each draw request is subject to the approval of IDI in its sole discretion. The amount drawn, plus all accrued interest therein, is repayable in full on December 1, 2023.

Effective May 13, 2023, the Company and IDI amended the 2022 LOC Agreement to increase the amount that the Company may borrow thereunder to $1,750,000, extended the date by which the Company could borrow funds thereunder to December 1, 2023, and extended the maturity date to December 1, 2024. Simultaneous with the extension, the Company borrowed an additional $500,000, primarily to fund the purchase of ASIC miners. As of November 30, 2023, the amount of principal and interest due to related party was $1,625,000 and $146,451, respectively, as compared to $1,300,000 and $97,460 at August 31, 2023.

NOTE 7 – BITCOIN LOAN AND DERIVATIVE LIABILITY

On October 4, 2023, the Company purchased 1,050 used ASIC miners from Luxor Technology Corporation (“Luxor”) for $488,775, and simultaneously entered into a Co-Location Services Agreement to host the miners at a hosting facility owned by Soluna SW, LLC (“Soluna”) in Murray, Kentucky. The purchase price of the used 1,050 ASIC miners was partially financed by selling 100 S19 Pro+/117/220 owned by the Company to Luxor for $149,250. The Company recorded a loss of $31,641 on this sale.

The remaining purchase price of $339,525 was financed via a forward sale of future Bitcoin production with Luxor via a hashrate derivatives contract (“Luxor Bitcoin Financing”, or “LBF”). Under the terms of the LBF, on October 4, 2023 the Company received 18.97542 Bitcoin valued at $27,799.39, each or a total of $527,505.19 in Bitcoin. In return the Company agreed to pay back Luxor 20.78946 Bitcoin in daily increments from bitcoin production generated by the 1,050 ASIC miners. The Bitcoin loan is due no later than April 1, 2024 and cannot be repaid in cash. The repayment must be in Bitcoin. As of November 30, 2023 the Company had repaid 6.583329 Bitcoin and recorded a loss of $37,537 on the extinguishment of debt as well as $50,429 in financing costs. Under the terms of the LBF, as of November 30, 2023 the Company owed Luxor 14.206131 Bitcoin. Since the price of Bitcoin is subject change and cannot be paid in cash this created a derivative liability for the Company. The Company performed a Black-Scholes calculation on the remaining 14.206131 Bitcoin to be delivered using the following variables.

Derivative liability calculation using the variables above was $152,612.

On November 30, 2023 the Company had a Bitcoin loan balance due of $394,922 and a derivative liability of $152,612 on its balance sheet.

NOTE 8 – STOCKHOLDERS’ EQUITY

Stockholders’ Equity

The Company is authorized to issue 500,000,000 shares of Common Stock with a par value of $0.0001 per share, and 20,000,000 shares of preferred stock with a par value of $0.0001 per share. As of November 30, 2023, and August 31, 2023, there were 49,748,705 and 49,665,649 shares of common stock outstanding, respectively. As of November 30, 2023 and August 31, 2023, our board of directors had authorized the issuance of one series of preferred stock, the Series A Convertible Preferred Stock (the “Series A Preferred”), for 500,000 shares, of which 453,966 shares had been issued.

Issuance of Shares

During the three months ended November 30, 2023, the Company issued the following shares:

The Company estimates the fair value of stock-based compensation based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award- the requisite service period (usually the vesting period). The Company attributes compensation to expense using the straight-line method. Since the Company’s common stock is thinly traded, the Company utilizes the value, or an estimate thereof, paid by third parties for common stock in arms-length transactions with the Company. In particular, the Company used the estimated fair value of its common stock derived from a Unit Offering completed in June 2022. Under the Unit Offering, the Company issued investors Units consisting of one share of common stock, one Class C-1 Warrant and one Class C-2 Warrants for $1.25 per Unit. The value of the Class C-1 and 2 Warrants were deducted from the Unit price to determine the fair value of the common stock included in the Units. The Class C-1 and 2 Warrants were valued under the Black-Scholes method using the following assumptions: volatility 223.30%; annual rate of quarterly dividends 0%; term 3 years; treasury bill rate 0.4%.

Warrants

As of November 30, 2023, and August 31, 2023, the Company had the following warrants outstanding:

NOTE 9 – COMMITMENTS AND CONTINGENCIES

As of November 30, 2023 and August 31, 2023, the Company had no contractual commitments.

NOTE 10 – SUBSEQUENT EVENTS

In December 2023, the Company entered into a consulting agreement, under which the Company agreed to pay the consultant a fee of $15,000 per quarter, 100,000 shares of common stock, the right to purchase 3,000,000 warrants with a $1.00 exercise price for $0.10 per warrant, and a success fee of 2% of the amount paid by the Company for any acquisition or business combination introduced by the consultant. The shares have not been issued yet.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of the results of operations and financial condition of the Company for the three and three months ended November 30, 2023, and 2022, should be read in conjunction with the other sections of this Quarterly Report, including the Financial Statements and notes thereto of the Company included in this Quarterly Report. The various sections of this discussion contain forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this Quarterly Report as well as other matters over which we have no control. See “Cautionary Note Regarding Forward-Looking Statements.” Our actual results may differ materially. The Company does not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report.

Overview

Since July 2021, our business has been as a blockchain technology company that is building out industrial scale digital asset mining, equipment sales and hosting operations. The Company’s primary business is hosting third-party equipment used in mining of digital asset coins and tokens, specifically Bitcoin, as well as self-mining for its own account. Our state-of-the-art facilities will be specifically designed and constructed for housing advanced mining equipment. Our data centers will provide power, racks, proprietary thermodynamic management (heat dissipation and airflow management), redundant connectivity, 24/7 security, as well as software which provide infrastructure management and custom firmware that boost performance and energy efficiency.

We plan to operate our data centers using immersion cooling technology. Immersion cooling is the process of submerging computer components (or full servers) in a thermally, but not electrically, conductive liquid (dielectric coolant) allowing higher heat transfer performance than air and many other benefits. Immersion cooling can be up to 95% more efficient than standard air cooling, producing an estimated PUE (power usage effectiveness) of 1.05. This cooler environment has been shown to extend machine lives by 30% or longer.

Our digital asset mining operation is focused on the generation of digital assets by solving complex cryptographic algorithms to validate transactions on specific digital asset network blockchains, which is commonly referred to as “mining.” Mining requires the use of specialized computers equipped with application-specific integrated circuit (ASIC) chips (known as “miners”) to solve complex cryptographic algorithms in support of the Bitcoin blockchain (in a process known as “solving a block”) in exchange for digital asset rewards (to date, only bitcoin). Whether we are hosting our client’s computers or mining for our own account with our own computers, the miners participate in “mining pools” organized by “mining pool operators” in which we or our clients share mining power (known as “hash rate”) with the hash rate generated by other miners participating in the pool to earn digital asset rewards. The mining pool operator provides a service that coordinates the 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, and records how much hash rate each participant contributes to the pool. Pools typically pay rewards in two different ways: as a percentage of the total reward received by the mining pool each day based on each pool participant’s proportionate share of hashing power provided that day (the “Actual Reward Method”); or based on the theoretical reward the pool participant should have received each day based on its hashing power contributed to the pool each day times the difficulty index (the “Expected Reward Method”). We only use mining pools that pay rewards under the Expected Reward Method. Even though we plan to effect our self-mining operations in data centers that we own, we reserve the right to operate miners in third-party data centers when we receive advantageous terms and/or do not have sufficient capacity in our own data centers.

Our digital asset self-mining activity competes with a myriad of mining operations throughout the world to complete new blocks in the blockchain and earn the reward in the form of an established unit of a digital asset. Revenue from digital asset mining and hosting third party digital asset miners are impacted by volatility in bitcoin prices, as well as increases in the Bitcoin blockchain’s network hash rate resulting from the growth in the overall quantity and quality of miners working to solve blocks on the Bitcoin blockchain and the difficulty index associated with the secure hashing algorithm employed in solving the blocks.  Gross profits from digital asset mining are primarily impacted by the cost of electricity to operate the miners and to a lesser extent by other operating costs. While we expect to sell or exchange a portion of the digital assets we mine to fund our growth strategies or for general corporate purposes, we reserve the right to hold our digital assets as a long-term investment.

As the demand for digital assets increases and digital assets become more widely accepted, there is an increasing demand for professional-grade, scalable infrastructure to support growth of the blockchain ecosystem. We expect to continually evaluate the performance of our data centers, including our ability to access additional megawatts of electric power and to expand our total self-mining and customer and related party hosting hash rates.

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

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

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

Revenues from cryptocurrency mining, whether derived from hosting clients or from proprietary mining, are impacted significantly by volatility in Bitcoin prices, as well as increases in the Bitcoin blockchain’s network hash rate resulting from the growth in the overall quantity and quality of miners working to solve blocks on the Bitcoin blockchain and the difficulty index associated with the secure hashing algorithm employed in solving the blocks. Below are changes in key metrics effecting the profitability of mining Bitcoin during the quarter ended November 30, 2023:

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

Trinidad Operations

We initially decided to locate our initial facilities in Trinidad, because it has some of the cheapest electricity in the world due to its abundant supplies of oil and gas and because some of our technical staff is located there. We have entered into an agreement with Telecommunications Services of Trinidad & Tobago Limited (“TSTT”), the largest and oldest telecom company in Trinidad, to co-locate up to 125 800 kw containers for hosting digital asset miners. TSTT has up to 93 potential locations for co-location of our containers. Under the agreement, we have the option, but not obligation, to co-locate containers at our own pace. We pay a fixed amount per container, plus the actual electricity costs incurred by our containers in the amount billed to TSTT by the local utility without any markup. The agreement provides that our hosting containers will be billed for electricity usage at the local utility’s standard rates, which is the greater of 3.5 cents per kwh or 75% of the declared reserve capacity, which is equal to the customer’s highest expected monthly kilovolt-ampere demand at $7.40. The term of the agreement expires on October 14, 2031. We have the right to terminate our agreement with TSTT at any time that the price for electricity consumption exceeds $0.05 per kwh.

In October 2022, we completed the installation of initial hosting containers under our agreement with TSTT. However, prior to commencing operations, TSTT advised us that the utility refused to honor its existing agreement with TSTT with respect to electricity supplied to our pilot hosting site, and instead indicated that the rate would be approximately $0.09 per kwh, which TSTT disputed. At this time, the dispute has been resolved, the site became operational in October 2023, and our rate for electricity will be TSTT’s existing rate of 3.5 cents per kwh. As of January 5, 2024, we had 135 miners located at our initial TSTT facility. While our TSTT site was delayed pending electrification, we entered into a hosting agreement with a third party in Trinidad to host up to 192 miners in one immersion container until August 31, 2024, and are leasing space with a third party on an at will basis to co-host 60 miners. We ultimately intend to move all of our currently owned and customer owned miners to our new TSTT hosting facilities.

Despite the expective favorable resolution of our dispute in Trinidad, we are currently focusing our efforts on the development of hosting centers in the United States and Canada, both directly and in joint ventures with third parties. We are exploring situations where medium to long-term power agreements may be available at affordable prices, whether using traditional power sources such as coal or natural gas, as well as environmentally friendly sources such as hydroelectric, wind and solar-backed projects, which might allow us to generate collateral revenue from the sale of excess power to the local utility grid and from the generation of saleable carbon credits.

Pecos, Texas Operations

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

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

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

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

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

In April 2023, the joint venture entered into a new one year agreement with the electricity provider, under which the site will receive electricity at $0.03991 per kwh for at least 95% of the annualized hourly intervals during the period. The initial agreement had a term of four years and seven months, and supplied electricity at $0.06896 per kwh, which the joint venture expected to reduce by reselling electricity during peak periods. The new agreement provides the joint venture with more predictable pricing, although a new agreement will need to be negotiated after the one year term. At the same time, we finalized a hosting agreement with the joint venture, under which we will locate one immersion container at the site for $500 per month, plus payment of our pro rata share of electricity, internet and insurance for the site. Under the hosting agreement, we also agreed to contribute $100,000 toward the electricity deposit for the site, which is refundable to us at the earlier of the date the electricity provider releases the deposit or 90 days after the expiration or termination of the hosting agreement. The hosting agreement has a term of one year, subject to our right to renew the agreement for two one year terms after receipt of notice of the renewal terms of the joint venture’s electricity supply agreement for the upcoming year. The site became fully electrified in June 2023. As of January 5, 2024, we had deployed 96 Antminer S-19 pro miners to our hosting container at the site. The joint venture has filled its five immersion containers with ASIC miners provided by hosting clients.

Murray, Kentucky Operations

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

Miner Summary

Set forth below is a summary of the Company’s ASIC miner inventory as of November 30, 2023:

Results of Operations

Comparison of Results of Operations for the Three Months Ended November 30, 2023 and 2022.

Revenues

During the three months ended November 30, 2023, the Company generated $511,308 in revenue, compared to $101,716 of revenue in the three months ended November 30, 2022.

During the three months ended November 30, 2023, the Company generated $329,723 in Bitcoin revenue from self-mining digital assets, compared to $28,916 of revenue from self-mining in the three months ended November 30, 2022. At November 30, 2023, the Company owned 1,716 miners, of which only 1,429 were deployed for self-mining. The number of undeployed miners was higher than normal at the end of the period as a result of miners that were being transitioned to new hosting locations, miners that were being transitioned from air-cooled to immersion cooled environment, and miners that were offline due to maintenance issues. Mining revenue should be higher in future periods as many of the undeployed miners are deployed into new hosting environments. Mining revenues in the three months ended November 30, 2023 were positively impacted due to resolution of operating issues at the Company’s first hosting facilities in Trinidad and Pecos, Texas, and the commencement of operations at a facility in Murray, Kentucky that is hosted by a third-party.

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

During the three months ended November 30, 2023 and November 2022, the Company generated $169,721 in revenue from equipment sales, compared to $72,800 in revenue in the three months ended November 30, 2022. The revenue from equipment sales in the three months ended November 30, 2023 were derived from the following transactions:

Under the guidelines of ASC 606, the Company reports revenue from both equipment sales described above under the installment sale method, under which the Company reports its gross profit on the sales as payments are received from the purchaser. As of February 1, 2023, the Company reached an agreement with the obligor under the $910,000 note to convert the note into an interest only note commencing as of February 1, 2023, with a balloon payment being due at maturity on August 31, 2024, and an agreement that the principal balance on the note was $731,472. One effect of the agreement with the obligor is to materially reduce any deferred revenue associated with the sale, as the note is scheduled to receive interest only payments until August 31, 2024. As a result, the Company expects revenue from these two equipment sales to be lower in future periods. During the three months ended November 30l 2023, the Company recorded $20,071 in equipment sales as a result of the receipt of three payments of $31,204 each on the October 2022 note. No revenue was recorded on the August 2022 note since all payments were of interest only.

During the three months ended November 30, 2023, the Company sold 100 new ASIC miners to a third party for $149,250. Under the guidelines of ASC 606, the Company reported revenue from the June 2023 equipment sales under the completed sale method.

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

The Company generated $11,864 revenues from hosting in the three months ended November 30, 2023, as compared to $-0- in hosting revenues in the three months ended November 30, 2022. In October 2022, the Company reached an agreement to terminate its only hosting client at the time and repurchased the miners which it had previously sold to the hosting client, which resulted in the Company not having any hosting revenues in the three months ended November 2022. In June 2023, the Company signed two new hosting clients. In the current market environment, the price of ASIC miners has fallen to the point that we believe self-mining is more profitable than hosting third party miners, however we will pursue hosting opportunities on a selective basis. While the Company still sees good opportunities to acquire mining equipment at attractive prices, the price of mining equipment has recently increased with the recent increase in the price of Bitcoin.

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

Cost of Sales

Cost of sales were $918,534 in the three months ended November 30, 2023, compared to $220,191 in the three months ended November 30, 2022.

Cost of sales related to mining was $222,942 in the three months ended November 30, 2023, compared to $43,080 in the three months ended November 30, 2022. Cost of sales normally includes electricity, utilities, facilities costs, and supplies. Major components of cost of sales include rent to house mining and hosting equipment in temporary facilities, electricity, and supplies. The Company believes that cost of sales related to mining as a percentage of revenues were greater in the three months ended November 30, 2023 than what it expects to incur in future periods. Cost of sales in the most recent period were inflated by costs associated with maintaining temporary hosting facilities, and initial commencement of operations at both our Trinidad and Pecos, Texas facilities.

The table below describes the average cost of mining each bitcoin for the years ended November 30, 2023 and 2022, and the total energy usage and cost per each kilowatt hour ("KWH") utilized within both our facilities.

Energy prices can be highly volatile and global events (including the war in Ukraine and the resulting natural gas shortage) have caused fuel prices, and to a lesser extent power prices, to fluctuate widely over the past year. All of our sites are currently subject to variable prices and market rate fluctuations with respect to wholesale power costs over the long-term. While this renders energy prices less predictable, it also gives us greater ability and flexibility to actively manage the energy we consume with an eye towards increasing profitability and energy efficiency. Energy prices are also highly sensitive to weather events, such as winter storms and polar vortices, which increase the demand for power regionally. When such events occur, we may curtail our operations to avoid using power at increased rates. The average power prices we paid in our facilities for the three months ended November 30, 2023 and 2022 was $0.0415 and $0.0767 per kilowatt hour, respectively.

Cost of sales related to hosting was $3,393 in the three months ended November 30, 2023, compared to $-0- in the three months ended November 30, 2022. Cost of sales normally includes utilities, facilities costs, and supplies. Unlike cost of sales from mining, cost of sales from hosting does not include electricity costs, as such costs are passed on to the hosting client.

Cost of sales related to sales of mining equipment was $180,891 for the three months ended November 30, 2023, compared to $43,080 in the three months ended November 30, 2022. Cost of sales during the three months ended November 30, 2023 consisted of the purchase price of equipment sold, plus shipping and value added tax on the equipment for sales reported under the completed sales method. Cost of sales from equipment sales in the three months ended November 30, 2022 were materially lower as a result of the fact that most of the equipment sales in that period were reported under the installment sales method under the guidelines of ASC 606.

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

Operating Expenses

During the three months ended November 30, 2023, the Company incurred $715,961 in operating expenses, compared to $475,136 in operating expenses during the three months ended November 30, 2022. Major components of operating expenses for the 2023 period as compared to the 2022 period were:

The higher level of operating expenses in the 2023 period as compared to the 2022 period is partly attributable to increased depreciation in 2023 as compared 2022 as a result of higher level of equipment in service, and increased related party compensation in 2023 as compared to 2022. Included in operating expenses in the three months ended November 30, 2023 was $279,497 in non-cash expenses due to the issuance of common stock for professional services and to related parties as compensation, as compared to $59,053 in the three months ended November 30, 2022. Additionally, we incurred $222,530 in depreciation expense in the three months ended November 30, 2023 due to the deployment of new mining equipment compared to $59,053 during the same three month period in 2022. The Company expects that operating expenses will trend materially higher in future periods as the Company begins paying regular compensation to existing officers and directors, hires additional employees, and incurs other costs, such as increased depreciation expense due to the addition of new mining equipment and the completion of the buildout of the operating facilities.

Other Income (Expense)

During the three months ended November 30, 2023, the Company had ($317,990) in other (expense), net as compared to $21,230 of other income in the three months ended November 30, 2022. The significant increase in other (expense) was mainly attributable to a number of factors, including higher interest expense in the three months ended November 30, 2023 of ($99,420) as compared to ($4,808) in the three months ended November 30, 2022, which was due to higher outstanding loan balances during the 2023 period compared to the 2022 period. The Company also recorded a loss of ($37,537) from the extinguishment of debt, a loss of ($43,214) from the Company’s investment in ROC Digital and an expense of ($152,612) from a change in derivative liability in 2023 as compared to $-0- in 2022.

In addition, the Company recorded interest income of $14,793 in the three months ended November 30, 2023 compared to $9,099 in the three months ended November 30, 2022.

Net (Loss)

As a result of the foregoing, during the three months ended November 30, 2023, the Company incurred a net loss of $(929,870), or ($0.02) per share, as compared to a net loss of ($470,665) or $(0.01) per share during the three months ended November 30, 2022. The increase in the Company’s net loss in the three months ended November 30, 2023, compared to the three months ended November 30, 2022, is attributable to the factors discussed above.

Liquidity and Capital Resources

As of November 30, 2023, the Company had $470,529 in cash on hand.

During the three months ended November 30, 2023, the Company had a net loss of $(929,870).

Cash flows used in operating activities were $(45,290) for the three months ended November 30, 2023, compared to cash flows used of ($611,904) for the three months ended November 30, 2022. The substantial decrease in cash flows used in operating activities for the three months ended November 30, 2023 was primarily attributable to substantial increases in non-cash expenses, such as an increase in depreciation expense from $59,053 in 2022 to $222,530 in 2023, an increase in non-cash stock-based compensation from $75,429 in 2022 as compared to $279,497 in 2023, an increase in change in derivative liability from $-0- in 2022 to $152,612 in 2023, and a loss on investment of $-0- in 2022 as compared to $43,214 in 2023. Other factors that impacted cash flow from operations were an increase in accounts payable of $127,610 in 2023 and an increase in prepaid expenses of $125,452 in 2023, as well as minor changes in other balance sheet accounts.

Cash flows used in investing activities were $(79,728) for the three months ended November 30, 2023, compared to cash flows used in investing activities of $-0- for the three months ended November 30, 2022. Cash flows used in investing activities consisted entirely of purchases of equipment for $(79,728) in 2023 as compared to $-0- in 2022.

Cash flows provided by financing activities were $325,000 for the three months ended November 30, 2023, compared to cash flows provided by financing activities of $400,000 for the three months ended November 30, 2022. The cash flows provided by financing activities in both periods included draws of $325,000 in 2023 and $400,000 in 2022 under a line of credit with Innovative Digital Investors Emerging Technology, L.P. (“IDI”), a limited partnership controlled by Jonathan Bates, our Chairman, and Raymond Mow, our chief financial officer.

On October 19, 2022, the Company entered into a new Line of Credit Agreement with IDI (the “2022 LOC Agreement”), under which the Company has the right to borrow up to $1,000,000 to finance the purchase of equipment necessary for the operation of the Company’s business, and related working capital. Loans under the 2022 LOC Agreement accrue interest at twelve percent (12%) per annum, compounded on a 30/360 monthly basis until the loans have been repaid in full. Effective May 13, 2023, the Company and IDI amended the 2022 LOC Agreement. As amended, the 2022 LOC Agreement allows the Company to up to $1,750,000 thereunder until December 1, 2023. Each draw request is subject to the approval of IDI in its sole discretion. As amended, all principal and interest due under the 2022 LOC Agreement are due and payable on December 1, 2024. As of June 30, 2023, the amount borrowed under the 2022 LOC Agreement was $1,625,000.

The Company believes that cash on hand, amounts that it may borrow under the 2022 LOC Agreement, and expected receipts from the sale of equipment, and revenue from self-mining and hosting will provide it with sufficient liquidity to fund its operations for the next 12 months. The Company expects revenue from self-mining to increase throughout the year as it deploys more miners in its Trinidad and Pecos-Texas locations, and as it completes repayment of the purchase price of its Murray, Kentucky miners in March 2024, after which we are entitled to receive all of the cash flow from those miners. However, those improvements from self-mining will be negatively impacted in the short-term from a halving event that is scheduled to take place in April 2024. The halving will reduce the block rewards from mining by exactly 50%. However, the halving will not reduce revenues from self-mining by exactly 50% since part of the rewards consist of transaction fees which are not impacted by the halving. In recent periods, transaction fees have made up an ever-increasing share of mining revenue due to the impact of “ordinals,” which are increased transaction fees that occur result as parties have discovered ways to imbed data regarding other assets, such as art, in the bitcoin blockchain. In past halving events, the price of bitcoin typically increased in the six months after the halving event, in part as a result of the retirement of miners that were rendered uneconomic as a result of the reduced rewards. Furthermore, there has been a sufficient increase in the price of bitcoin this fiscal year, which will lessen the impact of the halving event. Nevertheless, the upcoming halving event has increased the difficulty of predicting cash flows from mining activities for all industry participants, including the Company.

The Company also expects to receive approximately $4,572 in interest payments monthly from the sale of two immersion containers in August 2022, and a balloon payment of approximately $730,000 in principal in August 2024, and approximately $31,000 per month from the sale of four immersion containers to a joint venture in which the Company is both a lender to and equity investor. As of January 5, 2024 the Company owned 1,961 miners, most of which the Company intends to use for self-mining. Other sources of revenue that the Company expects to receive include equity distributions from the ROC Digital. The Company does not budget to include any proceeds from the exercise of its outstanding warrants because it is not able to predict when or if the market price of its common stock will exceed the exercise price of its warrants. Nevertheless, the Company still may not achieve profitable operations within the next 12 months. In that event, the Company may need to raise additional capital or liquidate part of its operations to sustain its business. At this time, the Company does not have any commitments for additional capital after the next 12 months, and there is no assurance that it be able to locate additional capital on terms that are not unduly dilutive to existing shareholders.

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

Critical Accounting Policies and Estimates

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

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

Off-Balance Sheet Arrangements

None.

Item 3. Quantitative And Qualitative Disclosures About Market Risk.

As a smaller reporting company, we are not required to provide the information called for by this Item.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

Our Principal Executive Officer and Principal Financial Officer, with the assistance of management, conducted an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of November 30, 2023. These controls are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”), and that such information is accumulated and communicated to our management, including the Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting.

During the quarter ended November 30, 2023, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

The Company may be involved in certain legal proceedings that arise from time to time in the ordinary course of its business. Legal expenses associated with any contingency are expensed as incurred. The Company’s officers and directors are not aware of any threatened or pending litigation to which the Company is a party.

Item 1A. Risk Factors.

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

The upcoming “halving” of rewards available on the Bitcoin network could have a negative impact on our ability to generate revenue as from self-mining and on our hosting customers’ ability to mine profitably, which could have a material adverse effect on our business, financial condition and results of operations.

Under the current protocols governing the Bitcoin network, the reward for validating a new block on that network is cut in half from time to time, which has been referred to in our industry as the “halving.” When the Bitcoin network was first launched, the reward for validating a new block was 50 Bitcoin. In 2012, the reward for validating a new block was reduced to 25 Bitcoin. In July 2016, the reward for validating a new block was reduced to 12.5 Bitcoin, and in May 2020, the reward was further reduced to 6.25 Bitcoin. The next halving for the Bitcoin blockchain is currently anticipated to occur in April 2024 at block height 840,000. We, and our current and potential hosting customers, currently rely on these rewards to generate a significant portion of our total revenue from mining. If the award of digital assets for solving blocks and transaction fees are not sufficiently high, neither we nor our customers may have an adequate incentive to continue transaction processing and may cease transaction processing operations altogether, which as a result may significantly reduce demand for our hosting services. As a result, the halving of available rewards on the Bitcoin network, or any reduction of rewards on other networks, would have a negative impact on our revenues and may have a material adverse effect on our business, financial condition and results of operations.

While Bitcoin prices have historically increased around these halving events, there is no guarantee that the price change will be favorable or would compensate for the reduction in mining rewards. If a corresponding and proportionate increase in the price of Bitcoin does not follow future halving events, the revenue we earn from our mining operations would see a decrease, which could have a material adverse effect on our results of operations and financial condition.

The halving will reduce the block rewards from mining by exactly 50%. However, the halving will not reduce revenues from mining by exactly 50% since part of the rewards consist of transaction fees which are not impacted by the halving. In recent periods, transaction fees have made up an ever-increasing share of mining revenue due to the impact of “ordinals,” which are increased transaction fees that are paid as parties have discovered ways to imbed data regarding other assets, such as art, in the bitcoin blockchain.

One consequence of a halving event is that the rewards from mining may fall below the marginal cost of mining, with the result that we would have to subsidize mining losses until the price of bitcoin rises high enough for us to cover our marginal mining costs. In some locations (Trinidad and Pecos, Texas), we will be able to minimize our losses by furloughing our miners until the price of bitcoin recovers. In our Murray, Kentucky location we are not allowed to curtail our production, and could be subject to substantial penalties or the loss of the miners if we curtail production. However, our Murray, Kentucky location has the lowest electricity costs, such that we do not expect our mining rewards will fall below our marginal mining costs in that location.

The halving event may also adversely impact our operations negatively if the reduction in rewards causes our hosting clients to suffer losses form mining, as the losses may jeopardize their ability to pay their share of electricity costs or our mining fees.

The elimination of ordinals could have a material adverse effect on our results of operations and financial condition.

Since early January 2023, transaction fees have made up an ever-increasing share of mining revenue due to the impact of “ordinals,” which are increased transaction fees that are paid as parties have discovered ways to imbed data regarding other assets, such as art, in the bitcoin blockchain. There is some concern among the parties who manage the bitcoin blockchain as to whether ordinals should be permitted, since their inclusion tends to slow down validation of transactions on the blockchain. If the bitcoin blockchain managers decide to eliminate ordinals, we could lose an important source of revenue from our mining operations, which could have a material adverse effect on our results of operations and financial condition.

Item 2. Unregistered Sales of Equity Securities and Use Of Proceeds.

During the three months ended November 30, 2023, the Company issued securities in the following private transactions:

All of the securities were issued pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

The exhibits listed on the Exhibit Index below are provided as part of this report.

* Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.