Item 1A. Risk Factors.
Not applicable to smaller reporting companies.
However, our principal risk factors are described under “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We maintain our corporate offices at 350 North
Orleans Street, Suite 9000N, Chicago, IL 60654 under a virtual office lease. We lease these premises under a monthly rental agreement
at a nominal cost.
Item 3. Legal Proceedings.
We are not a party to any
pending or threatened litigation.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Our common stock is quoted on the OTCQB Markets,
Inc. under the symbol “FWAV.” As of March 31, 2022, the last reported sale price of our common stock as reported by the
OTCQB Markets was $0.25 per share. As of that date, there were approximately 200 shareholders of record. This number does not include
beneficial owners whose shares are held in the names of various securities brokers, dealers and registered clearing agencies.
Recent Sales of Unregistered Securities
In addition to those unregistered securities previously
disclosed in reports filed with the SEC, we have sold securities without registration under the Securities Act, as described below.
Name or Class of Investor Date of Sale No. of Securities Reason for Issuance
————————
Item 6. [Reserved]
The following discussion and analysis should be
read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report on Form 10-K.
Overview
Prior to closing the Transaction, we were a shell company with no operations.
Effective with the closing of the Transaction, we are an early-stage cryptocurrency mining. Although Edgemode, our new wholly-owned
subsidiary, has historically mined Ethereum, we are now focused on expanding the operations by mining Bitcoin.
12 Months Ended December 31, 2021 (“2021 Period”) Compared
to the 12 Months Ended December 31, 2020 (“2020 Period”).
Results of operations
We had no revenues in either of the 2021 Period
nor the 2020 Period. Our revenues will ramp up as completed the Transaction and we continue to implement and grow our cryptocurrency business
which we acquired January 31, 2022.
Our operating expenses for the 2021 Period was
approximately $1.8 million and $4.5 million for the 2020 Period.
We expect that our operating expenses will increase
as we continue to develop our new mining business and we devote additional resources toward our new technologies and business opportunities,
promoting that growth, most notably reflected in anticipated increases in general overhead, salaries for personnel and technical resources,
as well as increased costs associated with our SEC reporting obligations. However, as set forth elsewhere in this report, our ability
to continue to develop our business and achieve our operational goals is dependent upon our ability to raise significant additional working
capital. As the availability of this capital is unknown, we are unable to quantify at this time the expected increases in operating expenses
in future periods.
Other Expenses
Our Other Expenses were approximately $9.9
million of the 2021 Period compared to approximately $0.6 million for the 2020 Period. The Other Expenses for 2021 were comprised
primarily by approximately $1.5 million of interest expense related to outstanding convertible notes and $8.1 million related to
non-cash derivative liability expenses.
Net Loss
Our Net Loss was approximately $11.7 million of
the 2021 Period compared to approximately $5.1 million for the 2020 Period.
Liquidity and Capital Resources
As of March 31, 2022, the Company had approximately
$25,000 of cash. Our liquidity is primarily derived from selling the crypto that we mine, and debt and equity investments from accredited
investors. To grow the business and help fund operations for the next 12 months, the Company is seeking to raise $60 million in
equity capital through private placements and is also seeking a significant debt facility. We can provide no assurances that any such
financings will be successful nor will they be on terms
We will be required to raise a significant amount of more capital if
we want to purchase all of the bitcoin mining equipment under our $270,000,000 purchase order. We can provide no assurance to investors
that we will have access to such a large amount of capital and if so that it will be available on terms that we would accept. In such
event, the Company may incur significant and/or shareholders will suffer large dilution.
If we fail to raise sufficient additional funds
when needed or do not have sufficient cash flows from mining, we may be required to scale back our plan of operations.
The Company has approximately $2.3 million of
debt for equipment that the Company is currently mining of which approximately $1.4 million is due in 2022 and $850,000 is due in 2023.
Additionally, we have a significant amount funds committed to the purchase of new Bitcoin miners. We can provide no assurance that we
will have the ability to meet these payment requirements or that we will be successful raising capital to meet our working capital requirements.
Summary of cash flows
Net cash (used) in operating activities $ (782,387 ) $ (620,792 )
Net cash (used) in investing activities $ (850,000 ) $ –
Critical accounting policies
See
Note 2 to the December 31, 2021 financial statements included as part of this report for a discussion of our Significant Accounting Policies.
Recent Accounting Pronouncements
The Company does not believe that any recently
issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying
financial statements.
Off Balance Sheet Arrangements
As of the date of this report, we do not have
any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material
to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement
to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative
instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that
serves as credit, liquidity or market risk support for such assets.
RISK FACTORS
Summary Risk Factors
Our business and an investment in our common stock
are subject to numerous risks and uncertainties that investors should consider before investing in our common stock. Set forth below is
a summary of the principal risks we face:
There are numerous and varied risks, known and
unknown, that may prevent us from achieving our goals. If any of these risks actually occur, our business, financial condition or results
of operation may be materially adversely affected. In such case, the trading price of our common stock could decline and investors could
lose all or part of their investment.
Risks Related to Our Cryptocurrency Mining Business
We will need significant additional capital
to execute our business plan, which includes purchasing, installing and operating Bitcoin mining equipment to replace our current Ethereum
mining operations, and any failure to raise such capital as and when intended or at all will materially harm our business and prospectus.
Our business plan envisions shifting our focus
from mining Ethereum to mining Bitcoin. Because the blockchains for each of these two cryptocurrencies use different algorithms, different
mining equipment is needed to mine Bitcoin rather than Ethereum. Therefore, in order to mine Bitcoin as intended, we will need to purchase
and install Bitcoin mining equipment at our hosted facilities. The price of cryptocurrency mining equipment in general and Bitcoin mining
equipment in particular is high, and can be volatile with sudden and dramatic changes depending on uncontrollable factors such as the
price of Bitcoin and supply shortages. Additionally, the removal and installation of mining equipment, which will be necessary given our
limited access to sufficient mining facilities, is also costly. We have executed a purchase agreement with a supplier to provide us with
Katena K10 Bitcoin miners having a combined hash rate of 10,000,000 PH/s, however the total purchase price is $270,000,000, of which we
have only paid the supplier $1,250,000. Further, we are past due on the payment of an $8,000,000 installment of the purchase price, with
future periodic installments in increasing increments continuing to come due through September 2022. The miners are scheduled to be delivered
in quarterly increments from September 2022 through September 2023. Because we failed to make a payment under the agreement when due,
and will likely continue to be behind on future payments unless and until we can raise sufficient capital, the agreement allows the supplier
to terminate the agreement, with any amounts we have paid as of such termination date being non-refundable. Further, if the agreement
is terminated by the supplier for our failure to timely make one or more payments, by the agreement’s terms the supplier will no
longer be obligated to deliver the equipment. If we are unable to raise these amounts for any reason, any amounts paid towards the purchase
price of undelivered equipment will be lost if the purchase agreement is terminated, and we will be forced to incur additional costs to
locate and obtain miners from another source, in which case our results of operation will be harmed and our future prospects will be hindered.
Any delay or inability to raise and deploy the necessary capital in a timely manner, on favorable terms, or at all, will have the effect
of delaying or preventing us from executing our business plan and meeting our growth objectives, which could materially harm your investment
in us.
We may be unable to raise additional capital needed to grow our
business.
We will likely continue to operate at a loss,
at least until our business strategy is implemented, or if Bitcoin or other cryptocurrency prices decline, and we expect to need to raise
additional capital to expand our operations and pursue our growth strategies, including the acquisition of new or additional miners to
commence Bitcoin mining as planned, and to respond to competitive pressures or unanticipated working capital requirements. We may not
be able to obtain additional debt or equity financing on favorable terms, if at all, which could impair our growth and adversely affect
our existing operations. If we raise additional equity financing, our shareholders may experience significant dilution of their ownership
interests, and the per share value of our common stock could decline. Furthermore, if we engage in additional debt financing, the holders
of such debt would have priority over the holders of common stock on order of liquidation preference. We may be required to accept terms
that restrict our ability to incur additional indebtedness or take other actions including terms that require us to maintain specified
liquidity or other ratios that could otherwise not be in the interests of our shareholders.
Even if we are able to raise sufficient capital,
we may encounter delays or difficulties in obtaining and deploying Bitcoin mining equipment as planned.
In order to be successful in executing our business
plan, we need to efficiently replace our Ethereum mining equipment with Bitcoin mining equipment in a timely, efficient, and cost-effective
manner. Assuming we are able to raise sufficient capital to do so, we may encounter a variety of potential risks or problems with respect
to deploying the funds towards our new mining focus. There has been shortages of cryptocurrency mining equipment due to limited materials
such as computer chips. Further, to obtain Bitcoin mining equipment, we will be reliant on one or more manufacturers and/or suppliers
to provide us with the miners, who may require us to agree to excessive prices or fees, or may fail to deliver the purchased equipment
on schedule. Additionally, we will need skilled labor to remove the Ethereum mining equipment we currently operate and replace it with
Bitcoin mining equipment. Also, because Bitcoin mining uses a proof of work method which generally requirements more energy than the proof
of stake system employed by Ethereum’s blockchain, our hosts’ current electricity supply may be inadequate to launch our Bitcoin
mining as envisioned without added costs to us, if at all. Any unexpected delays or heightened costs will adversely effect our results
of operation both by extending the period of time in which we are not mining cryptocurrencies at our maximum potential capacity and increasing
the costs of operating. Further, because of the volatile nature of the cryptocurrency markets, including the prices of Bitcoin and Ethereum,
any such delay could prevent us from mining and selling Bitcoin at higher prices. For example, in early 2022 the price of Bitcoin declined
by over $12,000 in a matter of weeks. If we are unable to purchase, deploy and operate Bitcoin mining equipment in sufficient quantities,
at reasonable prices or on the delivery schedules that meet our business needs, or at all, it could have a material adverse effect on
our business, results of operations and future prospects.
We are at an early stage of development of our cryptocurrency mining
business and currently have limited sources of revenue and may never become profitable.
Until February 2021, we had no operations. Although
we began generating revenue in 2021 from our cryptocurrency mining activities, we are subject to the risks and uncertainties of a new
business, including the risk that we may never develop, complete development or market any of our proposed services or be able to liquidate
our cryptocurrencies. Accordingly, we have only a limited history upon which an evaluation of our prospects and future performance can
be made. If we are unable to increase our generation of revenue, we will not become profitable, and we may be unable to continue our operations.
Furthermore, our proposed operations are subject to all business risks associated with new enterprises. In order to expand our operations,
we will need to enter into new agreements and strategic relationships which will expose us to additional financial obligations and contingencies,
including the possibility of contractual disputes and reliance on third parties which are beyond our control. The likelihood of our success
must be considered in light of the problems, expenses, difficulties, complications, and delays frequently encountered in connection with
the expansion of a business, operation in a competitive industry, and the continued development of advertising, promotions and a corresponding
customer base. There can be no assurances that we will operate profitably.
We have a history of operating losses, and
we may not be able to achieve or sustain profitability.
To date, we have mainly mined Ethereum. Moving
forward, our primary focus is on mining Bitcoin, and those operations are expected to be located in North Carolina. Our current strategy
will continue to expose us to the numerous risks and volatility associated within the cryptocurrency sector, including due to the high
costs of purchasing miners and sourcing power for them, while monitoring the price of Bitcoin, which has historically been volatile. Further,
we have experienced recurring losses and negative cash flows from operations. To date, we have relied on debt or equity financings to
fund our operations, and if the price of our cryptocurrencies are not sufficiently high to enable us to sell the cryptocurrencies we mine
at prices above our cost to mine it, then we are likely to continue to be unable to fund our operations without raising additional capital.
Further, even if prices are sufficiently high for our mining activities, we are likely to need to raise additional capital to fund the
acquisition of new miners to repair or replace our existing miners and expand our number of miners to be competitive. We expect to incur
additional net losses over the next several years as we seek to expand operations. The amount of future losses and when, if ever, we will
achieve profitability are uncertain. If we are unsuccessful at executing on our business plan, our business, prospects, and results of
operations may be materially adversely affected.
Our auditors have issued a “going concern”
audit opinion.
Our independent auditors have indicated in
their report on our December 31, 2021 financial statements that there is substantial doubt about our ability to continue as a going
concern. A “going concern” opinion indicates that the financial statements have been prepared assuming that we will
continue as a going concern for one year from the date the financial statements are issued and do not include any adjustments to
reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of
liabilities that may result if we do not continue as a going concern. Therefore, you should not rely on our balance sheet as an
indication of the amount of proceeds that would be available to satisfy claims of creditors, and potentially be available for
distribution to shareholders, in the event of liquidation.
Our mining operating costs have historically
outpaced our mining revenues, which has and could continue to put a strain on our business or increase our losses.
Our mining operations are costly and our expenses
may increase in the future, including as we transition to mining Bitcoin which will involve purchasing new mining equipment and potentially
deploying a greater amount of electricity to the mining process. This expense increase may not be offset by a corresponding increase in
revenue. Our expenses may be greater than we anticipate, and our investments to make our business more efficient may not succeed and may
outpace monetization efforts. Increases in our costs without a corresponding increase in our revenue would increase our losses and could
seriously harm our business and financial performance.
The cost of obtaining new and replacement miners
and parts is highly capital intensive and may have a material and adverse effect on our business and results of operations.
Our mining operations can only be successful and
ultimately profitable if the costs, including hardware and electricity costs, associated with mining Bitcoin, Ethereum and other cryptocurrencies
are lower than the price for which we mine when we sell them. Our miners are subject to ordinary wear and tear from operation and may
also face more significant malfunctions caused by factors which may be beyond our control. For example, approximately 10% of our miners
have experienced glitches and defects and as a result have seen either limitations on mining capabilities or outright inability to mine,
such that they had to be or will have to be replaced or repaired. The result of this development has not only been increased costs to
us, but also a reduced ability to generate revenue while these miners were not operating, whether because they were under repair and/or
failing to operate at their optimal hash rate. Circumstances such as these, or a general need to replace outdated miners in the future,
are highly cost intensive and can be a serious hindrance on our mining operations and ability to generate revenue or obtain profitability.
Additionally, as the mining technology, our business
strategy and/or the cryptocurrency industry evolves, we may need to acquire newer models of miners to remain competitive in the market.
For example, as discussed above we will need to obtain new miners in order to mine Bitcoin as planned. We intend to purchase and install
Katena K10 miners, although we have encountered and expect to continue to face challenges in paying purchase price installments for these
miners under our purchase agreement. Certain models of Bitcoin miners such as the Bitmain S17 model have been subject to defects diminishing
our even eliminating their mining efficacy. Further, over time, we may replace those miners which are no longer functional or efficient
or powerful enough with new miners purchased from third-party manufacturers, the cost of which may be higher than what we spent on prior
models and/or such that we will need to raise more capital to do so. For instance, the price of Bitcoin miners has historically been somewhat
correlated to the price of Bitcoin, which has appreciated in recent years. Depending on the price of new miners and our operational needs
at the time we decide to replace miners in the future, we may have to do so at higher costs than we could have previously, which would
add to our losses. Alternatively, even absent defects or reductions in computing power, mining machine models are upgraded frequently,
and we are and will continue to be subject to either higher competitive pressure as a result, or will be forced to expend large amounts
of capital to remain competitive and maintain optimal hash rates.
Inevitably, our older models will need to be repaired
or replaced as a product of ordinary wear and tear and depreciation and/or competitive forces in the marketplace or other factors rendering
our current miners obsolete. Any upgrading we may need or chose to undertake will require substantial capital investment, and we may face
challenges in locating the requisite capital in a timely manner and/or on terms favorable to us or not highly dilutive to our investors.
If we are unable to obtain adequate numbers of new and replacement miners in sufficient quantities or without delay, we may be unable
to compete in our highly competitive and continuously developing industry. If this happens, we may not be able to mine Bitcoin or other
cryptocurrency as efficiently or in sufficient amounts relative to our competition or at all and, as a result, our business and financial
results could suffer which could, in turn, have a material adverse effect on the trading price of our common stock.
Because there are several competitors in our
industry that are purchasing mining equipment at scale and due to supply chain disruptions, we may encounter delays or difficulty in us
obtaining new miners, which could materially and adversely affect our business and results of operations.
We will need new mining equipment to further our
operations, both to implement our short-term business plan of shifting to Bitcoin mining and to address potential issues such as ordinary
wear and tear and defects which may arise in the future. Many of the competitors in our industry have also been purchasing mining equipment
at scale, which has caused a world-wide shortage of mining equipment and components used to produce them, as well as delayed delivery
schedules for new miner purchases. There can be no assurances the mining equipment manufacturers on which we will rely will be able to
keep pace with the surge in demand for mining equipment when we obtain, upgrade and/or expand upon our current miners. The supply chain
disruptions we are facing may adversely affect us including the shortages of transformers needed to power our miners. Additionally, the
supply of the materials used to produce miners, such as the application-specific integrated circuit (“ASIC”) computer
chips that are the primary feature in their computing power, may become subject to shortages, which could also either increase the cost
beyond what we can reasonably afford or reduce their availability without unreasonable delay or at all. It is uncertain how manufacturers
will respond to these trends and whether they can deliver on the schedules promised to any or all of their customers in the future. In
the event manufacturers of mining equipment or component parts or materials are not able to keep pace with demand or avoid supply shortages,
we may not be able to purchase such products in sufficient quantities, at reasonable prices or on the delivery schedules that meet our
business needs, which could have a material adverse effect on our business and results of operations.
To the extent that the profit margins of Bitcoin
mining operations are not high, Bitcoin mining companies or other participants in the Bitcoin industry are more likely to immediately
sell Bitcoins in the market, thereby constraining growth of the price of Bitcoin that could adversely impact us.
Over the years, Bitcoin mining operations have
shifted from individual users mining with computer processors, graphics processing units and first-generation ASIC servers to larger enterprises
with newer, more “professionalized” sources of processing power which has been predominantly added by “professionalized”
mining operations and resulting demand for more professionalized and powerful miners having faster hash rates. These professionalized
mining operations may use proprietary hardware or sophisticated ASIC machines acquired from ASIC manufacturers. Acquiring this specialized
hardware at scale requires the investment of significant up-front capital, and mine operators incur significant expenses related
to the operation of this hardware at scale, such as the leasing of operating space, which is often done in data centers or warehousing
facilities, obtaining and paying for an electricity supply to run the miners and employing technicians to operate the mining facilities.
As a result, these professionalized mining operations
are of a greater scale than prior miners and have more defined and regular expenses and liabilities. Because these regular expenses and
liabilities require professionalized mining operations to maintain profit margins on the sale of Bitcoin, to the extent the price of Bitcoin
declines and such profit margin is constrained, such mining companies are incentivized to sell Bitcoin earned from mining operations more
rapidly than individual mining companies who in past years were more likely to hold newly mined Bitcoin for longer periods. The immediate
selling of newly mined Bitcoin greatly increases the trading volume of Bitcoin, creating downward pressure on the market price of Bitcoin
rewards.
The extent to which the value of Bitcoin mined
by a professionalized mining operation exceeds the allocable capital and operating costs determines the profit margin of such an operation.
A professionalized mining operation may be more likely to sell a higher percentage of its newly mined Bitcoin rapidly if it is operating
at a low profit margin and it may partially or completely cease operations if its profit margin is negative. In a low profit margin environment,
a higher percentage could be sold more rapidly, thereby potentially depressing Bitcoin prices. Lower Bitcoin prices could result in further
tightening of profit margins for professionalized mining operations creating a network effect that may further reduce the price of Bitcoin
until mining operations with higher operating costs become unprofitable forcing them to reduce mining power or cease mining operations
temporarily.
Because the new miners we plan to obtain will
be designed specifically to mine Bitcoin, our future success will depend in large part upon the value of Bitcoin, and any sustained decline
in its value could adversely affect our business and results of operations.
Our operating results will depend in large part
upon the value of Bitcoin because it is the primary cryptocurrency we intend to mine moving forward, assuming we can raise the necessary
capital to obtain and install the Bitcoin mining equipment. Specifically, our revenues from our Bitcoin mining operations will be based
upon two factors: (1) the number of Bitcoin rewards we successfully mine and (2) the value and liquidity of Bitcoin. This means that our
operating results will be subject to swings based upon increases or decreases in the value of Bitcoin. Furthermore, our business strategy
focuses solely on producing Bitcoin (as opposed to other cryptocurrencies). Previously, we focused solely on mining Ethereum as that was
the only mining equipment available to us. If other cryptocurrencies overtake Bitcoin in terms of acceptance, the value of Bitcoin could
decline. Further, if Bitcoin were to switch its proof of work algorithm from SHA-256 to another algorithm for which our miners (which
we have contracts to acquire) would not be suited or if the value of Bitcoin were to decline for other reasons, particularly if such decline
were significant or over an extended period of time, we would likely incur very significant costs in retooling or replacing our existing
miners with miners better suited for this new protocols and our operating results could be adversely affected. This could result in a
material adverse effect on our ability to continue as a going concern or to pursue our business strategy at all, which could have a material
adverse effect on our business, prospects or operations, and thus harm investors.
Bitcoin is subject to halving, meaning that
the Bitcoin rewarded for solving a block will be reduced in the future and its value may not commensurately adjust to compensate us for
such reductions, and the overall supply of Bitcoin is finite.
Bitcoin is subject to “halving,” which
is the process by which the Bitcoin reward for solving a block is reduced by 50% every 210,000 blocks that are solved. This means that
the amount of Bitcoin we (or any other miner) are rewarded for solving a block in the blockchain is permanently cut in half. For example,
the latest halving having occurred in May 2020, with a revised payout of 6.25 Bitcoin per block solved, down from the previous reward
rate of 12.5 Bitcoin per block solved. There can be no assurance that the price of Bitcoin will sufficiently increase to justify the increasingly
high costs of mining for Bitcoin given the halving feature. If a corresponding and proportionate increase in the trading price of these
cryptocurrencies does not follow these anticipated halving events, the revenue we earn from our mining operations would see a corresponding
decrease, which would have a material adverse effect on our business and operations. To illustrate, even if the price of Bitcoin remains
at its price as of today, all other factors being equal (including the same number of miners and a stable hash rate) our revenue would
decrease substantially upon the next halving (which is anticipated to occur in 2024).
Further, due to the halving process, unless the
underlying code of the Bitcoin blockchain is altered (which may be unlikely or difficult given its decentralized nature), the supply of
Bitcoin is finite. Once 21 million Bitcoin have been generated by virtue of solving blocks in the blockchain, the network will stop producing
more. Currently, there are approximately 19 million Bitcoin in circulation representing about 90% of the total supply of Bitcoin under
the current source code. For the foregoing reasons, the halving feature exposes us to inherent uncertainty and reliance upon the historically
volatile price of Bitcoin, rendering an investment in us particularly speculative, especially in the long-term. If the price of Bitcoin
does not significantly increase in value, your investment could become worthless.
Interruptions to internet access could disrupt our operations, which
could adversely affect our business and results of operations.
Our cryptocurrency mining operations require access
to high-speed internet to be successful. If we lose internet access for a prolonged period, we may be required to reduce our operations
or cease them altogether. A disruption of the Internet may affect the use of cryptocurrencies and subsequently the value of our securities.
Generally, cryptocurrencies and our business of mining cryptocurrencies is dependent upon the Internet. A significant disruption in Internet
connectivity could disrupt a currency’s network operations until the disruption is resolved and have an adverse effect on the price
of Bitcoin and our ability to mine Bitcoin. If this occurs, our business and results of operations may suffer, and our investors may be
materially and adversely effected.
Bitcoin has forked multiple times and additional
forks may occur in the future which may affect the value of Bitcoin held or mined by the Company.
To the extent that a significant majority of users
and mining companies on a cryptocurrency network install software that changes the cryptocurrency network or properties of a cryptocurrency,
including the irreversibility of transactions and limitations on the mining of new cryptocurrency, the cryptocurrency network would be
subject to new protocols and software. However, if less than a significant majority of users and mining companies on the cryptocurrency
network consent to the proposed modification, and the modification is not compatible with the software prior to its modification, the
consequence would be what is known as a “fork” of the network, with one prong running the pre-modified software and the
other running the modified software. The effect of such a fork would be the existence of two versions of the cryptocurrency running in
parallel yet lacking interchangeability and necessitating exchange-type transaction to convert currencies between the two forks.
Additionally, it may be unclear following a fork which fork represents the original cryptocurrency and which is the new cryptocurrency.
Different metrics adopted by industry participants to determine which is the original asset include: referring to the wishes of the core
developers of a cryptocurrency, blockchains with the greatest amount of hashing power contributed by miners or validators; or blockchains
with the longest chain. A fork in the network of a particular cryptocurrency could adversely affect an investment in our securities or
our ability to operate. Since August 1, 2017, Bitcoin’s blockchain was forked multiple times creating alternative versions
of the cryptocurrency such as Bitcoin Cash, Bitcoin Gold and Bitcoin SV. The forks resulted in a new blockchain being created with
a shared history, and a new path forward. The value of the newly created versions including Bitcoin Cash, Bitcoin Gold and Bitcoin SV
may or may not have value in the long run and may affect the price of Bitcoin if interest is shifted away from Bitcoin to the newly created
cryptocurrencies. The value of Bitcoin after the creation of a fork is subject to many factors including the value of the fork product,
market reaction to the creation of the fork product, and the occurrence of forks in the future. As such, the value of Bitcoin could be
materially reduced if existing and future forks have a negative effect on Bitcoin’s value.
Our reliance primarily on a single model of miner may subject our
operations to increased risk of mine failure.
The performance and reliability of our miners
and our technology is critical to our operations. Because we currently plan on using Katena, Bitmain and Whatsminer models for mining
Bitcoin models for mining Bitcoin, if there are issues with those machines, such as a design flaw in the ASIC chips they employ, our entire
system could be affected. This would result in both lost revenue from inhibited mining operations and increased costs to repair and replace
our mining infrastructure. Therefore, any disruption in our ability to continue mining, even with a portion of our total miners, could
result in a material reduction to Bitcoin reward yields which would harm our business. Any weakness, flaw, or error which arises with
our miners such similar to or more severe and widespread than the problems we experienced with our miners may affect all or a large portion
of our miners; therefore, if a defect or other flaw exists, our entire mine could go offline simultaneously. Any such interruption, delay
or inability to continue operations could result in financial losses, a decrease in the trading price of our common stock and reputational
harm, in which case you could lose some or all of your investment.
Because of the reliance on third-party mining
pool service providers for our mining, its operations may have a negative impact on the Company’s results of operations.
The third party hosting company will arrange our
cryptocurrency mining operations using a mining pool, in which multiple cryptocurrency mining operators agree to join together and if
any of them are rewarded Bitcoin for mining a block on the blockchain, the pool participants receive a portion of such reward based on
the computing power contributed to mining that block. Under this arrangement, we would receive Bitcoin mining rewards from our mining
activity through a third-party mining pool operator. Mining pools allow miners to combine their processing power, increasing their
chances of solving a block and getting paid by the network. Should the pool operator’s system suffer downtime due to a cyber-attack,
software malfunction or other similar issues, it will negatively impact our ability to mine and receive revenue. Furthermore, we are dependent
on the accuracy of the mining pool operator’s record keeping to accurately record the total processing power provided to the pool
for a given Bitcoin mining application in order to assess the proportion of that total processing power we provided. We would have limited
means of recourse against the mining pool operator if we determine the proportion of the reward paid out to us by the mining pool operator
is incorrect, other than leaving the pool. If we are unable to consistently obtain accurate proportionate rewards from our mining pool
operators, we may experience reduced reward for our efforts, which would have an adverse effect on our business and operations.
There is a possibility of cryptocurrency mining
algorithms transitioning to proof of stake validation and other mining related risks, which could make us less competitive and ultimately
adversely affect our business and the value of our stock.
As previously mentioned, we are winding down our
Ethereum mining operations and solely focusing on Bitcoin. There is a high possibility of Ethereum mining algorithms transitioning to
proof of stake validation in the near future. Proof of stake is an alternative method in validating cryptocurrency transactions that is
less dependent on the consumption of electricity. Should the algorithm, whether it relates to Bitcoin or Ethereum, or other cryptocurrencies
we mine shift from a proof of work validation method to a proof of stake method, mining would likely require less energy, which may render
any company that maintains advantages in the current climate (for example, from lower priced electricity, processing, real estate, or
hosting) less competitive. We, as a result of our efforts to optimize and improve the efficiency of our mining operations, may be exposed
to the risk in the future of losing the relative competitive advantage we may have over some of our competitors as a result, and may be
negatively impacted if a switch to proof of stake validation were to occur. This is because we are investing heavily in equipment based
on the mining algorithms method of validation. Such events could have a material adverse effect on our ability to continue as a going
concern, which could have a material adverse effect on our business, prospects or results of operations, the value of Bitcoin, Ethereum
or other cryptocurrencies we mine or otherwise acquire and your investment in us.
We may be accused of infringing intellectual
property rights of third parties.
We may be subject to legal claims of alleged infringement
of the intellectual property rights of third parties. Due to the open-source and constantly evolving nature of our business, we may not
always be able to determine that we are using or accessing protected information or software. For example, there could be issued patents
of which we are not aware that our activities or the equipment or software we use may infringe. The ready availability of damages, royalties
and the potential for injunctive relief has increased the defense litigation costs of patent infringement claims, especially those asserted
by third parties whose sole or primary business is to assert such claims. Such claims, even if not meritorious, may result in significant
expenditure of financial and managerial resources, and the payment of damages or settlement amounts. Additionally, we may become subject
to injunctions prohibiting us from using software or business processes we currently use or may need to use in the future or requiring
us to obtain licenses from third parties when such licenses may not be available on financially feasible terms or terms acceptable to
us or at all. In addition, we may not be able to obtain on favorable terms, or at all, licenses or other rights with respect to intellectual
property we do not own in providing ecommerce services to other businesses and individuals under commercial agreements.
Risks Related to Our Dependence on Bitcoin
Because of our focus on Bitcoin mining, the
trading price of shares of our common stock may increase or decrease with the trading price of Bitcoin, which subjects investors to pricing
risks, including “bubble” type risks, and volatility.
Because of our dependence on Bitcoin, the trading
prices of our common stock may at times be tied to the trading prices of Bitcoin. Specifically, we may experience adverse effects on our
stock price when the value of Bitcoin drops. Furthermore, if the market for Bitcoin mine operators’ stocks or the stock market in
general experiences a loss of investor confidence, the trading price of our stock could decline for reasons unrelated to our business,
operating results or financial condition. The trading price of our common stock could be subject to arbitrary pricing factors that are
not necessarily associated with traditional factors that influence stock prices or the value of non-cryptocurrency assets such as
revenue, cash flows, profitability, growth prospects or business activity since the value and price, as determined by the investing public,
may be influenced by uncertain contingencies such as future anticipated adoption or appreciation in value of cryptocurrencies or blockchains
generally, and other factors over which we have little or no influence or control.
Bitcoin and other cryptocurrency market prices,
which have historically been volatile and are impacted by a variety of factors (including those discussed below), are determined primarily
using data from various exchanges, over-the-counter markets and derivative platforms. Furthermore, such prices may be subject to
factors such as those that impact commodities, more so than business activities, which could be subjected to additional influence from
fraudulent or illegitimate actors, real or perceived scarcity, and political, economic, regulatory or other conditions. Pricing may be
the result of, and may continue to result in, speculation regarding future appreciation in the value of cryptocurrencies, or our share
price, making their market prices more volatile or creating “bubble” type risks for the trading price of Bitcoin.
During the year ended December 31, 2020,
the trading price of Bitcoin appreciated significantly, from a low closing value of approximately $5,000 per Bitcoin in March 2020, to
a high closing value of approximately $29,400 per Bitcoin in December 2020. During 2021 the trading price of Bitcoin has been volatile
with a high of approximately $66,999 on October 19, 2021 and lows of $33,077 on July 12, 2021 and $35,513 on February 2,
2021. On November 19, 2021 the price was as low as $55,936, down from as high as $66,125 earlier in the week before recovering slightly.
This volatility was reflected on September 24, 2021, when at 1:30 pm Eastern Time, the price of Bitcoin was approximately $41,151,
down almost $4,000 from earlier in the day following news of China’s blanket ban on cryptocurrencies and again in late 2021
and early 2022 when it declined from $66,938 on November 9, 2021 to as low as $33,113.50 on January 24, 2022. In 2017, the trading price
of Bitcoin increased to nearly $20,000 per Bitcoin (then an all-time high), only to decline significantly and sharply to a low of
approximately $3,400 per Bitcoin in December 2018. There can be no assurances that similar fluctuations in the trading price of Bitcoin
will not occur in the future. Accordingly, since our revenue will depend on the price of Bitcoin, and the trading price of our securities
may therefore at times be connected to the trading price of Bitcoin, if the trading price of Bitcoin again experiences a significant decline,
we could experience a similar decline in revenue and/or in the trading price for shares of our common stock. If this occurs, you may lose
some or all of your investment.
The markets for Bitcoin, Ethereum and other
cryptocurrencies we mine and the existing markets may be under regulated and, as a result, the market price of our cryptocurrency may
be subject to significant volatility or manipulation, which could decrease consumer confidence in cryptocurrencies and have a materially
adverse effect on our business and results of operations.
Cryptocurrencies that are represented and trade
on a ledger-based platform and those who hold them may not enjoy the same benefits as traditional securities available on trading markets
and their investors. Stock exchanges have listing requirements and vet issuers, requiring them to be subjected to rigorous listing standards
and rules, and monitor investors transacting on such platforms for fraud and other improprieties. These conditions may not necessarily
be replicated on a distributed ledger platform, depending on the platform’s controls and other policies. The more lax a distributed
ledger platform is about vetting issuers of cryptocurrency assets or users that transact on the platform, the higher the potential risk
for fraud or the manipulation of the ledger due to a control event.
Cryptocurrency market prices have historically
been volatile, are impacted by a variety of factors, and are determined primarily using data from various exchanges, over-the-counter
markets and derivative platforms. Furthermore, such prices may be subject to factors such as those that impact commodities, more so than
business activities, which could be subjected to additional influence from fraudulent or illegitimate actors, real or perceived scarcity,
and political, economic, regulatory or other conditions. Pricing may be the result of, and may continue to result in, speculation regarding
future appreciation in the value of cryptocurrencies, or our share price, making their market prices more volatile or creating “bubble”
type risks for both our cryptocurrencies and shares of our common stock.
These factors may inhibit consumer trust in and
market acceptance of cryptocurrencies as a means of exchange which could have a material adverse effect on our business, prospects, or
operations and potentially the value of any Bitcoin or other cryptocurrencies we mine or otherwise acquire.
If we undertake to mine digital assets other
than Bitcoin and Ethereum, such digital assets may be deemed to be securities by regulators, notwithstanding any assessment by us and/or
our advisors to the contrary.
While we plan to mine only Bitcoin and, to a much
lesser extent, Ethereum for the foreseeable future, we may choose to mine other cryptocurrencies. We intend to only mine cryptocurrencies
that are not securities, and to consult counsel prior to attempting to mine any cryptocurrency other than Bitcoin and Ethereum in order
to avoid inadvertently dealing in a cryptocurrency which may be deemed a security. However, the processes employed for determining whether
particular digital assets are securities within the meaning of U.S. federal securities laws involve complex legal questions, are risk
based assessments and are not a legal standard or binding on the SEC or other regulators. Because of these and other characteristics,
the analysis of whether a digital asset is a security is subject to substantial uncertainty. Therefore, if we begin mining digital assets
other than Bitcoin or Ethereum in the future and, notwithstanding advice form securities counsel to the contrary, those digital assets
are found by regulators to be securities, we could face significant legal costs in defending our position and any enforcement or civil
claims which may result. Additionally, if our assessment with respect to the digital asset in question is incorrect, we could be found
to have acted in violation of federal or state securities laws, and could as a result become subject to fines, sanctions, civil damages,
or criminal penalties, any of which may have a material adverse effect on our business, financial condition and results of operations.
The development and acceptance of cryptographic
and algorithmic protocols governing the issuance of and transactions in cryptocurrencies is subject to a variety of factors that are difficult
to evaluate.
The use of cryptocurrencies, including Bitcoin,
to, among other things, buy and sell goods and services and complete transactions, is part of a new and rapidly evolving industry that
employs cryptocurrency assets based upon a computer-generated mathematical and/or cryptographic protocol. Large-scale acceptance of cryptocurrencies
as a means of payment has not, and may never, occur. The growth of this industry in general, and the use of Bitcoin in particular, is
subject to a high degree of uncertainty, and the slowing or stopping of the development or acceptance of developing protocols may occur
unpredictably. The factors include, but are not limited to:
A decline in the popularity or acceptance of the
Bitcoin network could adversely affect an investment in us.
The outcome of these factors could have negative
effects on our ability to continue as a going concern or to pursue our business strategy at all, which could have a material adverse effect
on our business, prospects or operations as well as potentially negative effects on the value of any Bitcoin or other cryptocurrencies
we mine or otherwise acquire, which would harm investors in our securities.
Currently, there is relatively small use of
Bitcoins in the retail and commercial marketplace in comparison to relatively large use by speculators, thus contributing to price volatility
that could adversely affect an investment in us.
As relatively new products and technologies, Bitcoins
and the Bitcoin network have only recently become widely accepted as a means of payment for goods and services by many major retail and
commercial outlets, and use of Bitcoins by consumers to pay such retail and commercial outlets remains limited. Conversely, a significant
portion of Bitcoin demand is generated by speculators and investors seeking to profit from the short- or long-term holding of Bitcoins.
A lack of expansion by Bitcoins into retail and commercial markets, or a contraction of such use, may result in increased volatility or
a reduction in the price of Bitcoin, either of which could adversely impact an investment in us. If Bitcoin or other cryptocurrencies
we mine do not gain widespread market acceptance or accrete in value over time, our prospects and your investment in us would diminish.
Banks and financial institutions may not provide
banking services, or may cut off services, to businesses that engage in cryptocurrency-related activities.
A number of companies that engage in Bitcoin and/or
other cryptocurrency-related activities have been unable to find banks or financial institutions that are willing to provide them
with bank accounts and other services. Similarly, a number of companies and individuals or businesses associated with cryptocurrencies
may have had and may continue to have their existing bank accounts closed or services discontinued with financial institutions in response
to government action, particularly in China, where regulatory response to cryptocurrencies has been to initially exclude their use for
ordinary consumer transactions within China and later to deem all cryptocurrency-related transactions illegal in September 2021.
The difficulty that many businesses that provide Bitcoin and/or derivatives on other cryptocurrency-related activities have and may
continue to have in finding banks and financial institutions willing to provide them services may be decreasing the usefulness of cryptocurrencies
as a payment system and harming public perception of cryptocurrencies, and could decrease their usefulness and harm their public perception
in the future.
The usefulness of cryptocurrencies as a payment
system and the public perception of cryptocurrencies could be damaged if banks or financial institutions were to close the accounts of
businesses engaging in Bitcoin and/or other cryptocurrency-related activities. This could occur as a result of compliance risk, cost,
government regulation or public pressure. The risk applies to securities firms, clearance and settlement firms, national stock and derivatives
on commodities exchanges, the over-the-counter market, and the Depository Trust Company, which, if any of such entities adopts or
implements similar policies, rules or regulations, could negatively affect our relationships with financial institutions and impede our
ability to convert cryptocurrencies to fiat currencies. Such factors could have a material adverse effect on our ability to continue as
a going concern or to monetize our mining efforts, which could have a material adverse effect on our business, prospects or operations
and harm investors.
Political or economic crises may motivate large-scale sales of cryptocurrencies,
which could result in a reduction in values of cryptocurrencies such as Bitcoin and Ethereum adversely affect an investment in us.
Geopolitical crises may motivate large-scale sales
of cryptocurrencies, which could rapidly decrease the price of cryptocurrencies such as Bitcoin and Ethereum. Alternatively, as an emerging
asset class with limited acceptance as a payment system or commodity, global crises and general economic downturn may discourage investment
in cryptocurrencies as investors focus their investment on less volatile asset classes as a means of hedging their investment risk.
As an alternative to fiat currencies that are
backed by central governments, cryptocurrencies which are relatively new, are subject to supply and demand forces based upon the desirability
of an alternative, decentralized means of buying and selling goods and services, and it is unclear how such supply and demand will be
impacted by geopolitical events. Nevertheless, political or economic crises may motivate large-scale acquisitions or sales of cryptocurrencies
either globally or locally. Large-scale sales of cryptocurrencies would result in a reduction in digital asset values and could adversely
affect an investment in us.
The decentralized nature of cryptocurrency
systems may lead to slow or inadequate responses to crises, which may negatively affect our business.
The decentralized nature of the governance of
cryptocurrency systems may lead to ineffective decision making that slows development or prevents a network from overcoming emergent obstacles.
Governance of many cryptocurrency systems is by voluntary consensus and open competition with no clear leadership structure or authority.
To the extent lack of clarity in corporate governance of cryptocurrency systems leads to ineffective decision making that slows development
and growth of such cryptocurrencies, the value of our common stock may be adversely affected.
It may be illegal now, or in the future, to
acquire, own, hold, sell or use digital assets in one or more countries, and ownership of, holding or trading in our securities may also
be considered illegal and subject to sanction.
As digital assets have grown in both popularity
and market size, governments around the world have reacted differently to digital assets; certain governments have deemed them illegal,
and others have allowed their use and trade without restriction, while in some jurisdictions, such as in the U.S., subject to extensive,
and in some cases overlapping, unclear and evolving regulatory requirements. Ongoing and future regulatory actions may impact our ability
to continue to operate, and such actions could affect our ability to continue as a going concern or to pursue our new strategy at all,
which could have a material adverse effect on our business, prospects or operations.
The emergence of competing blockchain platforms
or technologies may harm our business as presently conducted.
If blockchain platforms or technologies which
compete with Bitcoin and its blockchain, including competing cryptocurrencies which our miners may not be able to mine, such as cryptocurrencies
being developed or may be developed by popular social media platforms, online retailers, or government sponsored cryptocurrencies, consumers
may use such alternative platforms or technologies. If that were to occur, we would face difficulty adapting to emergent such digital
ledgers, blockchains, or alternative platforms or digital assets. This may adversely affect us by preventing us from realizing the anticipated
profits from our investments and forcing us to expend additional capital in an effort to adapt. Further, to the extent we cannot adapt,
be it due to our specialized miners or otherwise, we could be forced to cease operations. Such circumstances would have a material adverse
effect on our business, and in turn investors’ investments in our securities.
Cryptocurrencies face significant scaling obstacles
that can lead to high fees or slow transaction settlement times.
Cryptocurrencies face significant scaling obstacles
that can lead to high fees or slow transaction settlement times, and attempts to increase the volume of transactions may not be effective.
Therefore, scaling cryptocurrencies will be essential to the widespread acceptance of cryptocurrencies as a means of payment, which widespread
acceptance is necessary to the continued growth and development of our business. Many cryptocurrency networks face significant scaling
challenges, such as limitations on how many transactions can occur per second. There can be no guarantee that any of the systems in place
or being considered to increasing the scale of settlement of cryptocurrency transactions will be effective, or how long they will take
to become effective, which could adversely affect an investment in our securities.
The price of cryptocurrencies may be affected
by the sale of such cryptocurrencies by other vehicles investing in cryptocurrencies or tracking cryptocurrency markets.
The global market for cryptocurrency is characterized
by supply constraints that differ from those present in the markets for commodities or other assets such as gold and silver. The mathematical
protocols under which certain cryptocurrencies are mined permit the creation of a limited, predetermined amount of digital currency, while
others have no limit established on total supply. Increased numbers of miners and deployed mining power globally will likely continue
to increase the available supply of Bitcoin and other cryptocurrencies, which may depress their market price. Further, large “block
sales” involving significant numbers of Bitcoin following appreciation in the market price of Bitcoin may also increase the supply
of Bitcoin available on the market, which, without a corresponding increase in demand, may cause its price to fall. Additionally, to the
extent that other vehicles investing in cryptocurrencies or tracking cryptocurrency markets form and come to represent a significant proportion
of the demand for cryptocurrencies, large redemptions of the securities of those vehicles and the subsequent sale of cryptocurrencies
by such vehicles could negatively affect cryptocurrency prices and therefore affect the value of the cryptocurrency inventory we hold.
Such events could have a material adverse effect on our business, prospects or operations and potentially the value of any Bitcoin or
other cryptocurrencies we mine.
The Bitcoin we mine may be subject to loss,
damage, theft or restriction on access.
There is a risk that some or all of the Bitcoin
we mine could be lost or stolen. In general, cryptocurrencies are stored in cryptocurrency sites commonly referred to as “wallets”
by holders of cryptocurrencies which may be accessed to exchange a holder’s cryptocurrency assets. Access to our Bitcoin could also
be restricted by cybercrime (such as a denial of service attack). While we take steps to attempt to secure the Bitcoin we hold, there
can be no assurance our efforts to protect our digital assets will be successful. Hackers or malicious actors may launch attacks to steal,
compromise or secure cryptocurrencies, such as by attacking the cryptocurrency network source code, exchange miners, third-party platforms,
cold and hot storage locations or software, or by other means. Any of these events may adversely affect our operations and, consequently,
our ability to generate revenue and become profitable. The loss or destruction of a private key required to access our digital wallets
may be irreversible and we may be denied access for all time to our Bitcoin holdings. Our loss of access to our private keys or our experience
of a data loss relating to our digital wallets could adversely affect our business. Cryptocurrencies are controllable only by the possessor
of both the unique public and private keys relating to the local or online digital wallet in which they are held, which wallet’s
public key or address is reflected in the network’s public blockchain. We are required to publish the public key relating to digital
wallets in use when we verify the receipt of transfers and disseminate such information into the network, but we will need to safeguard
the private keys relating to such digital wallets. To the extent such private keys are lost, destroyed or otherwise compromised, we will
be unable to access our Bitcoin rewards and such private keys may not be capable of being restored by any network. Any loss of private
keys relating to digital wallets used to store our mined Bitcoin could have a material adverse effect on our results of operations and
ability to continue as a going concern, which could have a material adverse effect on our business, prospects or operations and potentially
the value of any Bitcoin we mine. For example, the New York Times reported in January 2021 that about 20% of existing Bitcoin appears
to be “lost” due to password issues.
Incorrect or fraudulent cryptocurrency transactions
may be irreversible.
Cryptocurrency transactions are irrevocable and
stolen or incorrectly transferred cryptocurrencies may be irretrievable. As a result, any incorrectly executed or fraudulent cryptocurrency
transactions, such as a result of a cybersecurity breach against our Bitcoin holdings, could adversely affect our investments and assets.
This is because cryptocurrency transactions are not, from an administrative perspective, reversible without the consent and active participation
of the recipient of the cryptocurrencies from the transaction. Once a transaction has been verified and recorded in a block that is added
to a blockchain, an incorrect transfer of a cryptocurrency or a theft thereof generally will not be reversible and we may not have sufficient
recourse to recover our losses from any such transfer or theft. Further, it is possible that, through computer or human error, or through
theft or criminal action, our cryptocurrency rewards could be transferred in incorrect amounts or to unauthorized third parties, or to