BITMINE IMMERSION TECHNOLOGIES, INC. The following discussion and analysis of the results of operations and financial condition of the Company for the three and six months endedFebruary 28, 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 SinceJuly 2021 , our business has been as a blockchain technology company that is building out industrial scale digital asset mining, equipment sales and hosting operations. The Company's primary business is hosting third-party equipment used in mining of digital asset coins and tokens, specifically Bitcoin, as well as self-mining for its own account. Our state-of-the-art facilities will be specifically designed and constructed for housing advanced mining equipment. Our data centers will provide power, racks, proprietary thermodynamic management (heat dissipation and airflow management), redundant connectivity, 24/7 security, as well as software which provide infrastructure management and custom firmware that boost performance and energy efficiency. We plan to operate our data centers using immersion cooling technology. Immersion cooling is the process of submerging computer components (or full servers) in a thermally, but not electrically, conductive liquid (dielectric coolant) allowing higher heat transfer performance than air and many other benefits. Immersion cooling can be up to 95% more efficient than standard air cooling, producing an estimated PUE (power usage effectiveness) of 1.05. This cooler environment has been shown to extend machine lives by 30% or longer. We initially decided to locate our initial facilities inTrinidad , 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 ofTrinidad & Tobago Limited ("TSTT"), the largest and oldest telecom company inTrinidad , 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 of3.5 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 onOctober 14, 2031 . We have the right to terminate our agreement with TSTT at any time that the price for electricity consumption exceeds$0.05 per kwh.
Until our permanent hosting facilities are operational, we are temporarily leasing space for a small number of ASIC computers with a co-host. We intend to move all of our currently owned and customer owned miners to our new TSTT hosting facilities once they are operational.
InOctober 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. TSTT has informed us that it does not believe that its contract with the local utility entitles it to vary the rate it charges for the use of electricity and has protested the decision. At this time, we believe that the dispute has been resolved and the site will be operational in mid-2023 when some updates requested by the utility have been completed to the site. In the interim, the Company entered into a hosting agreement with a third party inTrinidad to host 192 machines untilAugust 31, 2024 , and is hosting an additional 70 machines with another party inTrinidad on an at will basis, both of which provide competitive electricity rates. Despite the expective favorable resolution of our dispute inTrinidad , we are currently focusing our efforts on the development of hosting centers inthe United States andCanada , both directly and in joint ventures with third parties. 19 In light of the recent developments inTrinidad , we are focusing our efforts in the near term on developing hosting locations inthe United States andCanada . 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. InOctober 2022 , we entered into a joint venture arrangement whereby we 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 power purchase agreement inPecos, Texas . We also obtained the right to locate one container at the location that we would be able use for self-mining. Our joint venture partner initially expected the site would be operational byDecember 31, 2023 . 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 has delayed the delivery of miners for the facility.
InApril 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, the Company finalized a hosting agreement with the joint venture, under which it will locate one immersion container at the site for$500 per month, plus payment of its pro rata share of electricity, internet and insurance for the site. Under the hosting agreement, the Company also agreed to contribute$100,000 toward the electricity deposit for the site, which is refundable to the Company 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 the Company's 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. 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. 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 inTrinidad to third parties that we determined would not be needed in the short-term due to the dispute between TSTT and the local utility described above. 20 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 inTrinidad , as well as by the timing of the resolution. 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 inTrinidad , as well as by the timing of the resolution. 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 endedFebruary 28, 2023 : As of February As of August 31, 2022 Percent Change 28, 2023 Network hash rate 293.21 EH/s 219.86 EH/s 33.36% Difficulty index 43.05 trillion 30.98 trillion 38.94% Bitcoin market price$23,147.35 $20,049.76 15.45% 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 the Three Months Ended
Revenues During the three months endedFebruary 28, 2023 , the Company generated$156,090 in revenue, compared to$349,274 of revenue in the three months endedFebruary 28, 2022 . During the three months endedFebruary 28, 2023 , the Company generated$104,526 in Bitcoin revenue from self-mining digital assets, compared to$4,574 revenue in the three months endedFebruary 28, 2022 . The Company currently deploys 362 miners, all of which were deployed for self-mining atFebruary 28, 2023 . Mining revenues in the three months endedFebruary 28, 2023 were adversely impacted by delays in opening the Company's first hosting facility inTrinidad . The facility was completed inOctober 2022 , but its opening has been delayed pending resolution of a dispute between our co-location partner inTrinidad and the electricity company inTrinidad over the price that will be charged for electricity provided to our hosting operations. At this time, we believe that the dispute has been resolved and the site will be operational in mid-2023 when some updates requested by the utility have been completed to the site. In the interim, the Company entered into a hosting agreement with a third party inTrinidad to host 192 machines untilAugust 31, 2024 , and is hosting an additional 70 machines with another party inTrinidad on an at will basis, both of which provide competitive electricity rates. Despite the expective favorable resolution of our dispute inTrinidad , we are currently focusing our efforts on the development of hosting centers inthe United States andCanada , both directly and in joint ventures with third parties. 21 During the three months endedFebruary 28, 2023 , the Company generated$51,564 in revenue from equipment sales, compared to$344,700 revenue in the three months endedFebruary 28, 2022 . The revenue from equipment sales in the three months endedFebruary 28, 2023 were derived from the following transactions:
· In
venture that is constructing a hosting facility in
The purchase price is payable pursuant to a promissory note bearing
interest at 5% per annum, and is paid by 41 equal monthly payments of
$31,204 commencing December 30, 2022 .
· In
in
the purchase price is payable pursuant to a promissory note bearing
interest at 7.5% per annum, and is paid by 24 equal monthly payments of
modified this agreement in conjunction with its entry into a new hosting
agreement with the party, under which the Company agreed that the remaining
principal balance of the note was $731,472 , and that the note would be
converted into an interest only note until August 31, 2024 , at which timeall principal and interest due is payable in full. In addition, the Company
agreed to allow the note obligor to repay the note principal at a 10%
discount.
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. Revenue from equipment sales in the three months ended February 28,
2023 were adversely impacted as the Company only received two payments on the
$1,200,000 note receivable and one payment on the $910,000 note receivable. The
Company received the third payment on the $1,200,000 note shortly after the end
of the quarter, which will impact revenues in the following quarter. 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 , an agreement that the principal balance on the note was $731,472 , and an
agreement to offset note payments due for December 2022 , January 2023 and the
interest only payment due for February 2023 against amounts due the obligor
under a separate hosting agreement. One effect of the agreement with the obligor
is to materially reduce any deferred revenue associated with the sale. As a
result, the Company expects revenue from these two equipment sales to be lower
in future periods.
During the three months endedFebruary 28, 2022 , the revenue from equipment sales was generated from a sale to the Company's first hosting client of 72 Antminer T-17's and 25 Whatsminer M31S. The terms of the sale were a cash payment of$168,750 and the execution of a note by the purchaser for$168,750 , payable with interest at 10% in two installments, one in the amount of$84,375 due onApril 15, 2022 and a second installment of$84,375 in principal and all accrued interest due onMay 15, 2022 . Under the guidelines of ASC 606, the Company reported revenue from this equipment sale 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.
The Company did not have any revenues from hosting during the three months endedFebruary 28, 2023 or 2022. The lack of hosting revenues in the three months endedFebruary 28, 2023 was because of the Company's decision to cease hosting third party miners, and concentrate on self-mining. 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. 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. InOctober 2022 , the Company reached an agreement to terminate its only hosting client, and repurchased the miners which it had previously sold to the hosting client. The lack of hosting revenues in the three months endedFebruary 28, 2022 was because the Company's first hosting client relationship had not commenced yet.
The primary factors that will impact our revenues in subsequent periods are described in the "-Overview" above.
22 Cost of Sales
Cost of sales were
Cost of sales related to mining was$93,957 in the three months endedFebruary 28, 2023 , compared to$45,468 in the three months endedFebruary 28, 2022 . Cost of sales normally includes electricity, utilities, facilities costs, depreciation and supplies. For the three months endedFebruary 28, 2023 , 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 endedFebruary 28, 2023 than what it expects to incur in future periods, as cost of sales in the most recent period were inflated by costs associated with maintaining temporary hosting facilities while our permanent hosting facility was being completed, and costs from the completion of our new hosting facility that we determined not to capitalize. Furthermore, our temporary hosting facilities carried electricity costs that were somewhat higher than the electricity costs that we expect to incur in our permanent facilities. Cost of sales related to sales of mining equipment was$1,500 for the three months endedFebruary 28, 2023 , compared to$186,657 in the three months endedFebruary 28, 2022 . Cost of sales during the three months endedFebruary 28, 2022 consisted of the purchase price of equipment sold, plus shipping and value added tax on the equipment. Cost of sales from equipment sales in the three months endedFebruary 28, 2023 were materially lower as a result of the fact that 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 to generate 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 from mining will consist of electricity costs. Operating Expenses During the three months endedFebruary 28, 2023 , the Company incurred$362,341 in operating expenses, compared to$156,114 in operating expenses during the three months endedFebruary 28, 2022 . Major components of operating expenses for the 2023 period as compared to the 2022 period were: Three months Three months ended ended Percentage February 28, February 28, 2023 2022 Change % General and administrative expenses$ 42,633 $ 12,331 246% Professional fees 101,065 43,520 132% Related party compensation 130,430 92,460 41% Depreciation 88,213 7,803 1030% Total operating expenses$ 362,341 $ 156,114 132% The higher level of operating expenses in the 2023 period as compared to the 2022 period is primarily attributable to reduced professional fees in 2023 as compared to 2022. Included in operating expenses in the three months endedFebruary 28, 2023 was$49,785 in non-cash expenses due to the issuance of common stock for professional services and to related parties as compensation, as compared to$15,460 in the three months endedFebruary 28, 2022 . Additionally, we incurred$88,213 in depreciation expense due to the deployment of new mining equipment compared to$7,803 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. associated with
the commencement of operations. 23 Other Income (Expense)
During the three months endedFebruary 28, 2023 , the Company had$5,699 in other (expense), net as compared to ($73,162 ) of other expense in the three months endedFebruary 28, 2022 . The significant decrease in other (expense) was mainly attributable to lower interest expense in the three months endedFebruary 28, 2023 of ($22,211 ), as compared to ($73,162 ) in the three months endedFebruary 28, 2022 , which was due to lower outstanding loan balances during the 2023 period. In addition, the Company recorded other income of$12,761 of realized gain from the sale of cryptocurrency in the three months endedFebruary 28, 2023 compared to$-0 - in three months endedFebruary 28, 2022 , and interest income of$3,751 in the three months endedFebruary 28, 2023 compared to$-0 - in the three months endedFebruary 28, 2022 . Interest income was adversely impacted during the three months endedFebruary 28, 2023 as a result of the receipt of only two payments on a note receivable of$1,200,000 and one payment on a note receivable of$910,000 . InFebruary 2023 , the Company entered into an agreement to amend its note receivable of$910,000 to convert the note into an interest only note commencing as ofFebruary 1, 2023 , with a balloon payment being due at maturity onAugust 31, 2024 , and an agreement to offset note payments due forDecember 2022 ,January 2023 and the interest only payment due forFebruary 2023 against amounts due the obligor under a separate hosting agreement. As a result, the Company expects interest income to trend higher in future periods as the obligor under the$910,000 note (now with a balance of$731,472 ) resumes making monthly interest payments on schedule. Interest income will also trend higher to the extent the Company finances the sale of more equipment. Net (Loss) As a result of the foregoing, during the three months endedFebruary 28, 2023 , the Company incurred a net loss of ($307,401 ), or ($0.01 ) per share, as compared to a net loss of ($112,127 ) or$(0.00) per share during the three months endedFebruary 28, 2022 . The increase in the Company's net loss in the three months endedFebruary 28, 2023 , compared to the three months endedFebruary 28, 2022 , is attributable to the factors discussed above.
Comparison of Results of Operations for the Six Months Ended
Revenues During the six months endedFebruary 28, 2023 , the Company generated$257,807 in revenue, compared to$349,274 of revenue in the six months endedFebruary 28, 2022 . During the six months endedFebruary 28, 2023 , the Company generated$133,443 in Bitcoin revenue from self-mining digital assets, compared to$4,574 revenue in the six months endedFebruary 28, 2022 . The Company currently owns 362 miners that it plans to use for proprietary mining, of which all were deployed for self-mining atFebruary 28, 2023 . Mining revenues in the three months endedFebruary 28, 2023 were adversely impacted by delays in opening the Company's first hosting facility inTrinidad . The facility was completed inOctober 2022 , but its opening has been delayed pending resolution of a dispute between our co-location partner inTrinidad and the electricity company inTrinidad over the price that will be charged for electricity provided to our hosting operations. At this time, we believe that the dispute has been resolved and the site will be operational in mid-2023 when some updates requested by the utility have been completed to the site. In the interim, the Company entered into a hosting agreement with a third party inTrinidad to host 192 machines untilAugust 31, 2024 , and is hosting an additional 70 machines with another party inTrinidad on an at will basis, both of which provide competitive electricity rates. Despite the expective favorable resolution of our dispute inTrinidad , we are currently focusing our efforts on the development of hosting centers inthe United States andCanada , both directly and in joint ventures with third parties. During the six months endedFebruary 28, 2023 , the Company generated$124,364 in revenue from equipment sales, compared to$344,700 revenue in the six months endedFebruary 28, 2022 . The revenue from equipment sales in the six months endedFebruary 28, 2023 were derived from the following transactions:
· In
venture that is constructing a hosting facility in
The purchase price is payable pursuant to a promissory note bearing
interest at 5% per annum, and is paid by 41 equal monthly payments of
$31,204 commencing December 30, 2022 .
· In
in
the purchase price is payable pursuant to a promissory note bearing
interest at 7.5% per annum, and is paid by 24 equal monthly payments of
modified this agreement in conjunction with its entry into a new hosting
agreement with the party, under which the Company agreed that the remaining
principal balance of the note was $731,472 , and that the note would be
converted into an interest only note until August 31, 2024 , at which timeall principal and interest due is payable in full. In addition, the Company
agreed to allow the note obligor to repay the note principal at a 10%
discount.
24
Under the guidelines of ASC 606, the Company reports revenue from both equipment
sales which are vendor financed by the Company under the installment sale
method, under which the Company reports its gross profit on the sales as
payments are received from the purchaser. Revenue from equipment sales in the
six months ended February 28, 2023 were adversely impacted as the Company only
received two payments on the $1,200,000 note receivable and one payment on the
$910,000 note receivable. The Company received the third payment on the
$1,200,000 note shortly after the end of the quarter, which will impact revenues
in the following quarter. 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 , an agreement that the principal
balance on the note was $731,472 , and an agreement to offset note payments due
for December 2022 , January 2023 and the interest only payment due for February
2023 against amounts due the obligor under a separate hosting agreement. One
effect of the agreement with the obligor is to materially reduce any deferred
revenue associated with the sale. As a result, the Company expects revenue from
these two equipment sales to be lower in future periods.
During the six months ended February 28, 2022 , the revenue from equipment sales
was generated from a sale to the Company's first hosting client of 72 Antminer
T-17's and 25 Whatsminer M31S. The terms of the sale were a cash payment of
$168,750 and the execution of a note by the purchaser for $168,750 , payable with
interest at 10% in two installments, one in the amount of $84,375 due on April
15, 2022 and a second installment of $84,375 in principal and all accrued
interest due on May 15, 2022 . Under the guidelines of ASC 606, the Company
reported revenue from this equipment sale 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.
The Company did not have any revenues from hosting during the six months endedFebruary 28, 2023 or 2022. The lack of hosting revenues in the six months endedFebruary 28, 2023 was because of the Company's decision to cease hosting third party miners, and concentrate on self-mining. 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. 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. InOctober 2022 , the Company reached an agreement to terminate its only hosting client, and repurchased the miners which it had previously sold to the hosting client. The lack of hosting revenues in the six months endedFebruary 28, 2022 was because the Company's first hosting client relationship had not commenced yet.
The primary factors that will impact our revenues in subsequent periods are described in the "-Overview" above.
Cost of Sales
Cost of sales were
Cost of sales related to mining was$169,352 in the six months endedFebruary 28, 2023 , compared to$45,468 in the six months endedFebruary 28, 2022 . Cost of sales normally includes electricity, utilities, facilities costs, depreciation and supplies. For the six months endedFebruary 28, 2023 , 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 six months endedFebruary 28, 2023 than what it expects to incur in future periods, as cost of sales in the most recent period were inflated by costs associated with maintaining temporary hosting facilities while our permanent hosting facility was being completed, and costs from the completion of our new hosting facility that we determined not to capitalize. Furthermore, our temporary hosting facilities carried electricity costs that were somewhat higher than the electricity costs that we expect to incur in our permanent facilities. Cost of sales related to sales of mining equipment was$44,580 for the six months endedFebruary 28, 2023 , compared to$186,657 in the six months endedFebruary 28, 2022 . Cost of sales during the six months endedFebruary 28, 2022 consisted of the purchase price of equipment sold, plus shipping and value added tax on the equipment. Cost of sales from equipment sales in the six months endedFebruary 28, 2023 were materially lower as a result of the fact that 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 to generate 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 from mining will
consist of electricity costs. 25 Operating Expenses During the six months endedFebruary 28, 2023 , the Company incurred$837,477 in operating expenses, compared to$820,157 in operating expenses during the six months endedFebruary 28, 2022 . Major components of operating expenses for the 2023 period as compared to the 2022 period were: Six months ended Six months ended Percentage February 28, 2023 February 28, 2022 Change %
General and administrative expenses $ 61,113 $
40,869 50% Depreciation 147,265 7,803 1787% Professional fees 262,803 667,025 (61% ) Related party compensation 239,823 104,460 130% Impairment of fixed assets 122,950 - N/A Impairment of cryptocurrency 3,523 - N/A Total operating expenses $ 837,477 $ 820,157 2% The relatively flat level of operating expenses in the 2023 period as compared to the 2022 period is primarily attributable to reduced professional fees in 2023 as compared to 2022, offset by increased depreciation, related party compensation and impairment of fixed assets. Included in operating expenses in the six months endedFebruary 28, 2023 was$125,214 in non-cash expenses due to the issuance of common stock for professional services and to related parties as compensation, as compared to$565,460 in the six months endedFebruary 28, 2022 . We also incurred$122,950 in impairment expenses in the six months endedFebruary 28, 2023 to write-down certain mining equipment to current market prices. Additionally, we incurred$3,523 in impairment expenses on our cryptocurrency holdings due to the decline in the price of Bitcoin we are holding. 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 associated with the commencement of operations. Other Income (Expense)
During the six months endedFebruary 28, 2023 , the Company realized$15,532 in other income, as compared to ($117,874 ) of other expense in the six months endedFebruary 28, 2022 . The significant change in other income (expense) was mainly attributable to lower interest expense in the six months endedFebruary 28, 2023 of ($27,019 ), as compared to ($117,874 ) in the six months endedFebruary 28, 2022 , which was due to lower outstanding loan balances during the 2023 period. In addition, in the six months endedFebruary 28, 2023 , the Company recorded other income of$16,939 attributable to the termination of a hosting contract, interest income of$12,850 , and a gain from the sale of cryptocurrencies of$12,761 in the six months endedFebruary 28, 2023 , as compared to$-0 -,$-0 - and$-0 -, respectively, in the six months endedFebruary 28, 2022 . Interest income was adversely impacted during the six months endedFebruary 28, 2023 as a result of the failure of the obligor on a$910,000 note receivable to make scheduled amortizing payments inDecember 2022 orJanuary 2023 . InFebruary 2023 , the Company entered into an agreement to amend its note receivable of$910,000 to convert the note into an interest only note commencing as ofFebruary 1, 2023 , with a balloon payment being due at maturity onAugust 31, 2024 , and an agreement to offset note payments due forDecember 2022 ,January 2023 and the interest only payment due forFebruary 2023 against amounts due the obligor under a separate hosting agreement. As a result, the Company expects interest income to trend higher in future periods as the obligor under the$910,000 note (now with a balance of$731,472 ) resumes making monthly interest payments on schedule. Interest income will also trend higher to the extent the Company finances the sale of more equipment. Net (Loss) As a result of the foregoing, during the six months endedFebruary 28, 2023 , the Company incurred a net loss of ($778,071 ), or ($0.02 ) per share, as compared to a net loss of ($820,883 ) or$(0.02) per share during the six months endedFebruary 28, 2022 . The increase in the Company's net loss in the six months endedFebruary 28, 2023 , compared to the three months endedFebruary 28, 2022 , is attributable to the factors discussed above. 26
Liquidity and Capital Resources
As of
During the six months ended
Cash flows used in operating activities were ($1,305,119 ) for the six months endedFebruary 28, 2023 , compared to cash flows used of ($56,788 ) for the six months endedFebruary 28, 2022 . The substantial increase in cash flows used in operating activities for the six months endedFebruary 28, 2023 was primarily attributable to the loss from operations and an increase in notes receivable of ($924,673 ) from the sale of equipment, which was offset by a decrease in non-cash stock-based compensation from$565,460 in 2022 as compared to$125,214 in 2023, an increase in impairment losses from$-0 - in 2022 to$122,950 in 2023, an increase in deferred revenues from$-0 - in 2022 to$30,938 in 2023, and an increase in depreciation from$7,803 in 2022 to$147,265 in 2023, as well as minor changes in other balance sheet accounts. Cash flows generated by investing activities were$515,014 for the six months endedFebruary 28, 2023 , compared to cash flows used in investing activities of ($1,602,546 ) for the six months endedFebruary 28, 2022 . Cash flows from investing activities were mainly impacted by purchases of equipment for$1,602,546 in the six months endedFebruary 28, 2022 , as compared to equipment sales, net of purchases, of$1,502,443 in the six months endedFebruary 28, 2023 , which was offset by the contribution of$987,429 of equipment to a joint venture in the six months endedFebruary 28, 2023 . Cash flows provided by financing activities were$800,000 for the six months endedFebruary 28, 2023 , compared to cash flows provided by financing activities of$2,341,813 for the six months endedFebruary 28, 2022 . The cash flows provided by financing activities in the six months endedFebruary 28, 2023 were entirely provided by draws under a line of credit withInnovative Digital Investors Emerging Technology, L.P. ("IDI"), a limited partnership controlled byJonathan Bates , our Chairman, andRaymond Mow , our chief financial officer. During the six months endedFebruary 28, 2022 , cash flows provided by financing activities were derived from$1,616,813 in draws under a line of credit from IDI and proceeds of$725,000 from the sale of common stock and warrants in a private placement. OnOctober 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. The Company has the right to submit draw requests under the 2022 LOC Agreement untilApril 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 onDecember 1, 2023 . As of the date of this Report the amount borrowed under the 2022 LOC Agreement was$800,000 . The Company believes that cash on hand, amounts that may borrow under the 2022 LOC Agreement, and expected receipts from the sale of equipment, and revenue from self-mining will provide it with sufficient liquidity to fund its operations for the next 12 months. The Company expects to receive approximately$4,572 in interest payments monthly from the sale of two immersion containers inAugust 2022 , and approximately$31,000 per month from the sale of four immersion containers to a joint venture in which the Company will be both lender to and equity investor. Currently, the Company owns 362 miners which it plans to use for self-mining, all of which were in use as ofFebruary 28, 2023 . Assuming neither the price of bitcoin nor the difficulty index changes, and based on the Company's expected electricity costs, the Company estimates that it could generate approximately$12,988 in monthly gross profit from the miners. Other sources of revenue that the Company expects to receive include equity distributions from the ROC Digital joint venture once it becomes operational in mid-2023. 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, 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. 27
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles, or "GAAP." The preparation of these 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 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 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 financial statements.
Off-Balance Sheet Arrangements
None.
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