BITMINE IMMERSION TECHNOLOGIES, INC. - Quarter Report: 2023 May (Form 10-Q)

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 May 31, 2023

Or

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

For the transition period from ______ to ______

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 July 14, 2023 was 49,444,222 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.

Balance Sheets

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

Bitmine Immersion Technologies, Inc.

Statements of Operations

(Unaudited)

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

Bitmine Immersion Technologies, Inc.

Statements of Changes in Stockholders’ Equity

(Unaudited)

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

Bitmine Immersion Technologies, Inc.

Statements of Cash Flows

(Unaudited)

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

BITMINE IMMERSION TECHNOLOGIES, INC.

NOTES TO UNAUDITED 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 financial statements do not include all of the disclosures required by GAAP for complete financial statements. These unaudited interim condensed financial statements should be read in conjunction with the audited financial statements and the notes thereto included on Form 10-K for the year ended August 31, 2022. 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 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 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 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 nine months ended May 31, 2023, are not necessarily indicative of the results that may be expected for the year ending August 31, 2023.

Reverse Stock Split

On June 25, 2020, the Board of Directors and the shareholders of the Company approved a 1 for 40,000 reverse split, with all fractional shares rounded up to the nearest whole share, and immediately after the completion of the reverse split, effected a 200 for 1 forward stock split. The net effect of the splits was a 1 for 200 reverse split of the Company’s common shares. The stock splits were effective April 27, 2021. No fractional shares of common stock were issued connection with the Reverse Split. If, as a result of the Reverse Split, a shareholder would have otherwise held a fractional share, the shareholder received, instead of the issuance of such fractional share, one whole share of common stock.

The Company’s financial statements in this Report for the periods ended May 31, 2023, and August 31, 2022, and all references thereto have been retroactively adjusted to reflect the split unless specifically stated otherwise.

Management’s Representation of Interim 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 financial statements. Certain information and footnote disclosures normally included in 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 financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The most significant estimates relate to the calculation of stock-based compensation, useful lives and 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 financial statements. The results of these assumptions provide the basis for making estimates about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates. There have been no material changes to the Company’s accounting estimates since the Company’s financial statements for the fiscal year ended August 31, 2022.

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:

In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).

If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:

Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.

The Company has entered into digital asset mining pools by executing contracts, as amended from time to time, with the mining pool operators to provide computing power to the mining pool. The contracts are terminable at any time by either party and the Company’s enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. In exchange for providing computing power, the Company is entitled to a fractional share of the fixed cryptocurrency award the mining pool operator receives (less digital asset transaction fees to the mining pool operator which are immaterial and are recorded as a deduction from revenue), for successfully adding a block to the blockchain. The terms of the agreement provide that neither party can dispute settlement terms after thirty-five days following settlement. The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm.

Providing computing power to solve complex cryptographic algorithms in support of the Bitcoin blockchain (in a process known as “solving a block”) is an output of the Company’s ordinary activities. The provision of providing such computing power is the only performance obligation in the Company’s contracts with mining pool operators. The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date received, which is not materially different than the fair value at contract inception or the time the Company has earned the award from the pools. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions.

Fair value of the cryptocurrency award received is determined using the market rate of the related cryptocurrency at the time of receipt.

Revenues from Hosting

The Company provides energized space to customers who locate their equipment within the Company’s co-hosting facility. The equipment generating the hosting revenue is owned by the customer. Currently, the Company accepts the mining proceeds daily from the mining pool into a cold wallet address in the Company’s name. The Company sends its hosting client its portion daily, as the Company receives such proceeds. All performance obligations are achieved simultaneously by providing the hosting environment for the customers’ operations.  Hosting revenues consist of amounts billed in 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.

During the nine months ending May 31, 2023, the Company did not generate any revenue 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 nine months ending May 31, 2023, the Company generated $138,011 in revenues from the sale of mining equipment.

Revenues From Mining

Revenues from mining cryptocurrency for its own account will be recorded at the spot price for the cryptocurrency on a daily basis based on the Company’s proportionate share of cryptocurrency earned by the mining pools in which the Company participates on the date the Company receives its share from the pool. During the nine months ending May 31, 2023, the Company generated $261,921 in revenues from mining cryptocurrency.

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 May 31, 2023, and August 31, 2022, respectively, the Company’s cash equivalents totaled $518,425 and $392,550, 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 nine months ended May 31, 2023, the Company recorded an impairment charge of $3,523 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 nine months ended May 31, 2023, the Company realized a gain from sale of cryptocurrency of $18,420.

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 an account with Gemini Trust Company, LLC, which is a qualified custodian regulated by the New York Department of Financial Services. Currently, the Company does not store cryptocurrencies at Gemini, and only transfers cryptocurrencies that it desires to liquidate to its account at Gemini immediately prior to the liquidation. The Company uses Gemini’s multi-signature feature for account access.

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 May 31, 2023, and August 31, 2022, the Company had $3,938,427 and $6,509,602, respectively, of fixed assets not in service. During the nine months ended May 31, 2023 the Company performed an analysis of the carrying cost of its mining equipment compared to the current market price for the same equipment. As a result, the Company determined that its fixed assets had been impaired by an amount of $122,950. This amount was recorded as an “impairment of fixed assets” on its statements of operations for the nine months ended May 31, 2023.

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 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, 2022, and it did not have any impact on our financial statements.

NOTE 2 – CRYPTOCURRENCIES

The following table presents additional information about the Company’s Bitcoin for the nine months ended May 31, 2023:

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 May 31, 2023 and August 31, 2022:

For the nine months ended May 31, 2023 and May 31, 2022, the Company recorded $294,270 and $7,803, respectively, in depreciation expense.

NOTE 5 – 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 May 31, 2023 and August 31, 2022, notes receivable consist of the following:

As of May 31, 2023 and August 31, 2022 the balance of notes receivable was $1,886,007 and $1,023,741, respectively. During the nine months ended May 31, 2023, the Company recorded $27,284 in interest income on these notes.

NOTE 6 – LOANS PAYABLE AND ACCRUED LIABILITIES, RELATED PARTY

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 May 31, 2023, the amount of principal and interest due to related party was $1,300,000 and $55,641, respectively, as compared to $-0- and $-0- at August 31, 2022.

NOTE 7 – 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 May 31, 2023, and August 31, 2022, there were 49,444,222 and 48,606,915 shares of common stock outstanding, respectively. As of May 31, 2023 and August 31, 2022, 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 nine months ended May 31, 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.

Warrants

As of May 31, 2023, and August 31, 2022, the Company had the following warrants outstanding:

NOTE 8 – COMMITMENTS AND CONTINGENCIES

As of May 31, 2023 and August 31, 2022, the Company had no contractual commitments.

NOTE 9 – SUBSEQUENT EVENTS

In October 2022, the Company entered into a joint venture arrangement whereby it contributed one immersion container 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 in Pecos, Texas. We also obtained the right to locate one container at the location that we would be able use for self-mining. The joint venture partner initially expected the site would be operational by December 31, 2022. After the site work was substantially completed, a dispute arose with the electricity provider as a result of its request for substantial additional deposit as a result of recent bankruptcies in the mining and hosting industry, which delayed the commencement of operations at the location.  In April 2023, the joint venture entered into a new one year agreement with the electricity provider. In June 2023, the site became fully electrified. As of June 30, 2023, the Company has deployed 96 Antminer S-19 pro miners to its hosting container at the site, of which 75 were operational. Also, the joint venture’s business model changed from utilizing the joint venture’s immersion containers for self-mining to a model where it will use the containers to host third-party miners on a fee basis.

The Company has completed certain improvements requested by the local electric utility in Trinidad that were necessary to commence the delivery of electricity to the Company’s first hosting location there, and has been informed that the site will be fully electrified by August 1, 2023. The Company plans to locate two immersion containers there initially. The Company expects to use the site for self-mining, and to sell installed, operational miners in “buy/host” transactions.

Subsequent to May 31, 2023, the Company sold 34 S-19 ASCI miners in two “buy/host" transactions. One sale was of 24 S-19s for $2,000 each. The purchase price was paid in Bitcoin. The second sale was for 10 S-19 miners for $2,200 each for cash. In both cases, the buyers simultaneously executed a hosting agreement with the Company.

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 nine months ended May 31, 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 (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 in Trinidad 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 below.

The primary factors that will impact future hosting revenues include: (i) the price of bitcoin, since hosting revenues are primarily a percentage of bitcoin mined by clients; (ii) the completion of operational hosting facilities, as potential hosting clients have been reluctant to sign contracts prior to the date the Company has a fully operational hosting facility; and (iii) the availability of attractive electricity prices, since power usage is the primary marginal cost for any mining operation. Our hosting revenues will also be impacted by the resolution of the dispute between TSTT and the local utility regarding the electricity rate that will be charged our co-location facilities in Trinidad, 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 in Trinidad, 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 ended May 31, 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

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.

Until our permanent hosting facilities are operational, we are temporarily leasing space for a small number of ASIC computers with a co-host. We intend to move all of our currently owned and customer owned miners to our new TSTT hosting facilities once they are operational.

In 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. 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 by August 1, 2023. In the interim, the Company entered into a hosting agreement with a third party in Trinidad to host 192 machines until August 31, 2024, and is hosting an additional 70 machines with another party in Trinidad on an at will basis, both of which provide competitive electricity rates.

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

In October 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 in Pecos, 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 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 has 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, 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. The site became fully electrified in June 2023, and the Company has deployed 96 Antminer S-19 pro miners to its hosting container at the site, of which 75 were operational.

Results of Operations

Comparison of Results of Operations for the Three Months Ended May 31, 2023, and 2022.

Revenues

During the three months ended May 31, 2023, the Company generated $142,146 in revenue, compared to $16,567 of revenue in the three months ended May 31, 2022.

During the three months ended May 31, 2023, the Company generated $128,479 in Bitcoin revenue from self-mining digital assets, compared to $0 revenue from self mining in the three months ended May 31, 2022. At May 31, 2023, the Company owned 506 miners, of which only 209 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 May 31, 2023 were adversely impacted by delays in opening the Company’s first hosting facilities in Trinidad and Pecos, Texas. The Trinidad facility was completed in October 2022, but its opening has been delayed pending resolution of a dispute between our co-location partner in Trinidad and the electricity company in Trinidad over the price that will be charged for electricity provided to our hosting operations. At this time, we understand that the dispute has been resolved and all requirements have been satisfied to render the site operational by August 1, 2023. The Company also entered into a joint venture with a third party to open a hosting facility in Pecos, Texas, which was expected to open by December 31, 2022. Under the joint venture, the Company has the right to locate one immersion container at the site for its proprietary use. However, the opening was delayed as a result of a request from the utility provider for a substantial additional retainer. In April 2023, the joint venture entered into a new agreement with the utility that resolved the dispute, and the site became fully operational in June 2023. The Company has located 96 machines at the site, of which 75 were fully operational as of June 30, 2023. In the interim, the Company entered into a hosting agreement with a third party in Trinidad to host 192 machines until August 31, 2024, and is hosting an additional 70 machines with another party in Trinidad on an at will basis, both of which provide competitive electricity rates.

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 May 31, 2023, the Company generated $13,647 in revenue from equipment sales, compared to $0 revenue in the three months ended May 31, 2022. The revenue from equipment sales in the three months ended May 31, 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. Revenue from equipment sales in the three months ended May 31, 2023 were adversely impacted as the Company only received two payments on the $1,200,000 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. The Company received all payments due on this note during the period. 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.

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 $0 revenues from hosting in the three months ended May 31, 2023, as compared to $16,567 in hosting revenues in the three months ended May 31, 2022. The lack of hosting revenues in the three months ended May 31, 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. In October 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 primary factors that will impact our revenues in subsequent periods are described in the “—Overview” above.

Cost of Sales

Cost of sales were $72,392 in the three months ended May 31, 2023, compared to $99,711 in the three months ended May 31, 2022.

Cost of sales related to mining and hosting was 72,392 n the three months ended May 31, 2023, compared to $99,711 in the three months ended May 31, 2022. Cost of sales normally includes electricity, utilities, facilities costs, depreciation and supplies. For the three months ended May 31, 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 ended May 31, 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 $-0- for the three months ended May 31, 2023, compared to $186,657 in the three months ended May 31, 2022. Cost of sales during the three months ended May 31, 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 ended May 31, 2023 were materially lower as a result of the fact that all 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 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 ended May 31, 2023, the Company incurred $584, 908 in operating expenses, compared to $329,964 in operating expenses during the three months ended May 31, 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 primarily attributable to increased professional fees in 2023 as compared to 2022. Included in operating expenses in the three months ended May 31, 2023 was $293,335  in non-cash expenses due to the issuance of common stock for professional services and to related parties as compensation, as compared to $134,345 in the three months ended May 31, 2022. Additionally, we incurred $147,005 in depreciation expense in the three months ended May 31, 2023 due to the deployment of new mining equipment compared to $-0- 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.

Other Income (Expense)

During the three months ended May 31, 2023, the Company had $8,530 in other (expense), net as compared to ($73,805) of other expense in the three months ended May 31, 2022. The significant decrease in other (expense) was mainly attributable to lower interest expense in the three months ended May 31, 2023 of ($28,622) as compared to ($78,290) in the three months ended May 31, 2022, which was due to lower outstanding loan balances during the 2023 period. In addition, the Company recorded other income of $14,433 of realized gain from the sale of cryptocurrency in the three months ended May 31, 2023 compared to $-0- in three months ended May 31, 2022, and interest income of $14,433 in the three months ended May 31, 2023 compared to $4,485 in the three months ended May 31, 2022.

Interest income was adversely impacted during the three months ended May 31, 2023 as a result of the receipt of only two payments on a note receivable of $1,200,000, although the third payment was received after May 31, 2023, and will be reflected in the following quarter’s financial results. In February 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 of February 1, 2023, with a balloon payment being due at maturity on August 31, 2024, 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. The Company received all payments due under this note. As a result of the foregoing factors, 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 ended May 31, 2023, the Company incurred a net loss of ($523,704), or ($0.01) per share, as compared to a net loss of ($486,912) or $(0.01) per share during the three months ended May 31, 2022. The increase in the Company’s net loss in the three months ended May 31, 2023, compared to the three months ended May 31, 2022, is attributable to the factors discussed above.

Comparison of Results of Operations for the Nine months Ended May 31, 2023, and 2022.

Revenues

During the nine months ended May 31, 2023, the Company generated $399,932 in revenue, compared to $365,841 of revenue in the nine months ended May 31, 2022.

During the nine months ended May 31, 2023, the Company generated $261,921 in Bitcoin revenue from self-mining digital assets, compared to $4,574 revenue in the nine months ended May 31, 2022. At May 31, 2023, the Company owned 506 miners, of which only 209 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 nine months ended May 31, 2023 were adversely impacted by delays in opening the Company’s first hosting facilities in Trinidad and Pecos, Texas. The Trinidad facility was completed in October 2022, but its opening has been delayed pending resolution of a dispute between our co-location partner in Trinidad and the electricity company in Trinidad over the price that will be charged for electricity provided to our hosting operations. At this time, we understand that the dispute has been resolved and all requirements have been satisfied to render the site operational by August 1, 2023. The Company also entered into a joint venture with a third party to open a hosting facility in Pecos, Texas, which was expected to open by December 31, 2022. Under the joint venture, the Company has the right to locate one immersion container at the site for its proprietary use. However, the opening was delayed as a result of a request from the utility provider for a substantial additional retainer. In April 2023, the joint venture entered into a new agreement with the utility that resolved the dispute, and the site became fully operational in June 2023. The Company has located 96 machines at the site, of which 75 were fully operational as of June 30, 2023. In the interim, the Company entered into a hosting agreement with a third party in Trinidad to host 192 machines until August 31, 2024, and is hosting an additional 70 machines with another party in Trinidad on an at will basis, both of which provide competitive electricity rates.

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 nine months ended May 31, 2023, the Company generated $138,011 in revenue from equipment sales, compared to $344,700 revenue in the nine months ended May 31, 2022. The revenue from equipment sales in the nine months ended May 31, 2023 were derived from the following transactions:

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 nine months ended May 31, 2023 were adversely impacted as the Company only received four of six payments on the $1,200,000 note receivable. The Company received the two missing payments 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. The Company received all payments due on this note during the period. 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 nine months ended May 31, 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, 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.

During the nine months ended May 31, 2023, the Company generated $-0- in revenue from hosting, compared to $16,567 revenue from hosting in the nine months ended May 31, 2022. The lack of hosting revenues in the three months ended May 31, 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. In October 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 primary factors that will impact our revenues in subsequent periods are described in the “—Overview” above.

Cost of Sales

Cost of sales were $286,324 in the nine months ended May 31, 2023, compared to $331,836 in the nine months ended May 31, 2022.

Cost of sales related to mining and hosting was $241,743 in the nine months ended May 31, 2023, compared to $145,179 in the nine months ended May 31, 2022. Cost of sales normally includes electricity, utilities, facilities costs, depreciation and supplies. For the nine months ended May 31, 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 nine months ended May 31, 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 nine months ended May 31, 2023, compared to $186,657 in the nine months ended May 31, 2022. Cost of sales during the nine months ended May 31, 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 nine months ended May 31, 2023 were materially lower as a result of the fact that all 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 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 nine months ended May 31, 2023, the Company incurred $1,422,385 in operating expenses, compared to $1,150,119 in operating expenses during the nine months ended May 31, 2022. Major components of operating expenses for the 2023 period as compared to the 2022 period were:

The increase in operating expenses in the 2023 period as compared to the 2022 period is primarily attributable to increased general and administrative expenses, depreciation, and related party compensation in 2023 as compared to 2022, partially offset by a decrease in professional fees over the 2022 period. Included in operating expenses in the nine months ended May 31, 2023 was $418,549 in non-cash expenses due to the issuance of common stock for professional services and to related parties as compensation, as compared to $699,805 in the nine months ended May 31, 2022. We also incurred $122,950 in impairment expenses in the nine months ended May 31, 2023 to write-down certain mining equipment to current market prices. Additionally, we incurred $3,523 in impairment expenses in the nine months ended May 31, 2023 on our cryptocurrency holdings due to the temporary decline in the price of Bitcoin we were holding, as compared to an impairment expense of $3,775 in the nine months ended May 31, 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 associated with the commencement of operations.

Other Income (Expense)

During the nine months ended May 31, 2023, the Company realized $7,002 in other income, as compared to ($191,680) of other expense in the nine months ended May 31, 2022. The significant change in other income (expense) was mainly attributable to lower interest expense in the nine months ended May 31, 2023 of ($55,641), as compared to ($196,165) in the nine months ended May 31, 2022, which was due to lower outstanding loan balances during the 2023 period. In addition, in the nine months ended May 31, 2023, the Company recorded other income of $16,939 attributable to the termination of a hosting contract, interest income of 27,284, and a gain from the sale of cryptocurrencies of $18,420 in the nine months ended May 31, 2023, as compared to $-0-, $4,485 and $-0-, respectively, in the nine months ended May 31, 2022.

Interest income was adversely impacted during the nine months ended May 31, 2023 as a result of the failure of the obligor on a $910,000 note receivable to make all two of the six scheduled amortizing payments due in the period, although the two late payments were received after May 31, 2023 and will be reflected in the following quarter’s financial results. In February 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 of February 1, 2023, with a balloon payment being due at maturity on August 31, 2024, 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. The Company received all payments due on this note. As a result of the foregoing factors, 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 nine months ended May 31, 2023, the Company incurred a net loss of ($1,301,755) or ($0.03) per share, as compared to a net loss of ($1,307,795) or $(0.03) per share during the nine months ended May 31, 2022. The slight decrease in the Company’s net loss in the nine months ended May 31, 2023, compared to the three months ended May 31, 2022, is attributable to the factors discussed above.

Liquidity and Capital Resources

As of May 31, 2023, the Company had $518,425 in cash on hand.

During the nine months ended May 31, 2023, the Company had a net loss of ($1,301,775)

Cash flows used in operating activities were ($1,427,882) for the nine months ended May 31, 2023, compared to cash flows used of ($454,327) for the nine months ended May 31, 2022. The substantial increase in cash flows used in operating activities for the nine months ended May 31, 2023 was primarily attributable to the loss from operations and an increase in notes receivable of $862,266 from the sale of equipment, which was offset by a decrease in non-cash stock-based compensation from $699,805 in 2022 as compared to $418,549 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 $16,573 in 2023, and an increase in depreciation from $7,803 in 2022 to $294,270 in 2023, as well as minor changes in other balance sheet accounts.

Cash flows generated by investing activities were $253,757 for the nine months ended May 31, 2023, compared to cash flows used in investing activities of ($2,268,811) for the nine months ended May 31, 2022. Cash flows from investing activities were mainly impacted by purchases of equipment for $2,268,811 in the nine months ended May 31, 2022, as compared to equipment sales, net of purchases, of $1,241,286 in the nine months ended May 31, 2023, which was offset by the contribution of $987,429 of equipment to a joint venture in the nine months ended May 31, 2023.

Cash flows provided by financing activities were $1,300,000 for the nine months ended May 31, 2023, compared to cash flows provided by financing activities of $3,004,313 for the nine months ended May 31, 2022. The cash flows provided by financing activities in the nine months ended May 31, 2023 were entirely provided by draws 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. During the nine months ended May 31, 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 $1,387,500 from the sale of common stock and warrants in a private placement.

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 $1,300,000.

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 in August 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 506 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 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.

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 with U.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.

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 May 31, 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 May 31, 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, 2022, and the additional risk factors included in the Quarterly Report on Form 10-Q for the quarter ended November 30, 2022, 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:

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

During the three months ended May 31, 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.