| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation and principles of
consolidation The accompanying
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States
of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The consolidated
financial statements include the accounts of the Company and its wholly owned subsidiaries. All material transactions and balances among
the Company and its subsidiaries have been eliminated upon consolidation. Use of estimates In preparing the consolidated financial statements
in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. These estimates are based on information as of the date of the consolidated financial statements. Significant
estimates required to be made by management include, but are not limited to, the valuation of digital assets and other current assets,
useful lives of property and equipment, the recoverability of long-lived assets, provision necessary for contingent liabilities and realization
of deferred tax assets. Actual results could differ from those estimates. Fair value of financial instruments ASC 825-10 requires certain disclosures regarding
the fair value of financial instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes
the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of
unobservable inputs. The three levels of inputs used to measure fair value are as follows:
● Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
● Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable and inputs derived from or corroborated by observable market data.
● Level 3 - inputs to the valuation methodology are unobservable. Fair value of digital assets is based on quoted
prices in active markets. The fair value of the Company’s other financial instruments including cash and cash equivalents, restricted
cash, loans receivable, deposits, other receivables, accounts payable, and other payables, approximate their fair values because of the
short-term nature of these assets and liabilities. Warrants were measured at fair value using unobservable inputs and categorized in Level
3 of the fair value hierarchy (Note 11). Cash
and cash equivalents Cash includes
cash on hand and demand deposits in accounts maintained with commercial banks. The Company considers all highly liquid investment instruments
with an original maturity of three months or less from the date of purchase to be cash equivalents. USDC USD Coin (“USDC”) is accounted for
as a financial instrument; USDC which can be redeemed one USDC for one U.S. dollar on demand from the issuer. While not accounted for
as cash or cash equivalents, we treat our USDC holdings as a liquidity resource. Digital assets Digital assets (primarily include bitcoin and
ETH) are included in current assets in the accompanying consolidated balance sheets. Digital assets purchased are recorded at cost and
digital assets awarded to the Company through its mining activities and staking activities are accounted for in accordance with the Company’s
revenue recognition policy disclosed below. An intangible asset with an indefinite useful
life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating
that it is more likely than not that the indefinite-lived asset is impaired. Digital assets held are accounted for as intangible assets
with indefinite useful lives and are subject to impairment losses if the fair value of digital assets decreases below the carrying value
at any time during the period. The fair value is measured using the quoted price of the digital assets at the time its fair value is being
measured. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more
likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative
impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the
extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses
is not permitted. Purchases of digital assets by the Company and
digital assets awarded to the Company through its mining activities and staking activities are included within operating activities on
the accompanying consolidated statements of cash flows. The changes of digital assets are included within operating activities in the
accompanying consolidated statements of cash flows and any realized gains or losses from such sales are included in “realized gain
(loss) on exchange of digital assets” in the consolidated statements of operations and comprehensive loss. The Company accounts
for its gains or losses in accordance with the first-in first-out method of accounting. ASC 820 defines “principal market”
as the market with the greatest volume and level of activity for the asset or liability. The determination of the principal market (and,
as a result, the market participants in the principal market) is made from the perspective of the reporting entity. The digital assets
held by the Company are traded on a number of active markets globally. The Company does not use any exchanges to buy or sell of digital
assets. Instead, the Company uses Amber Group’s OTC desk for selling or exchanging bitcoins for U.S. dollars or vice versa. The
Company determines CoinMarketCap as its principal market, as it is one of the earliest and the most trusted sources by users, institutions,
and media for comparing thousands of crypto assets and selected by the U.S. government. The Company recognizes revenue by utilizing daily close prices obtained
from CoinMarketCap, except for the year 2022. During that specific year, the Company also used hourly close price from CryptoCompare to
recognize revenue from our digital asset mining activities. The Company believed the hourly close price can better reflect revenue recognized
from our digital asset mining activities as compared to daily close price from CoinMarketCap. Digital assets held in fund On October 1, 2023, the Company made of investment
of 2,701 Ethereum, with a fair value of $4.7 million, into Bit Digital Innovation Master Fund SPC Ltd. (the “Fund”). The Fund
was subsequently consolidated based on the Company’s financial control interest. As a result, the assets held in the Fund are included
in current assets in the Consolidated Balance Sheets under the caption digital assets held in Fund. The Fund qualified and operated as an investment
company for accounting purposes pursuant to the accounting and reporting guidance under ASC 946 – “Financial Services –
Investment Companies” (“ASC 946”), which requires fair value measurement of the Fund. The Company retains the Fund’s
investment company specific accounting principles under ASC 946 upon consolidation. The digital assets held by the Fund were traded on
a number of active markets globally. A fair value measurement under ASC 820 - “Fair Value Measurement” (“ASC 820”)
for an asset assumes that the asset is exchanged in an orderly transaction between market participants either in the principal market
for the asset or, in the absence of a principal market, the most advantageous market for the asset (ASC 820-10-35-5). The fair value of
the assets within the Fund was primarily determined using the price from CoinMarketCap. Any changes in the fair value of the assets were
recorded in the Consolidated Statements of Operations under the caption realized and unrealized gains (losses) on digital assets held
in fund. The activity in the Fund for the twelve months ended December 31, 2023 was as follows:
Digital assets held in fund as of December 31, 2023
Initial investment in digital assets held in Fund $ 4,683,021
Unrealized gains on digital assets held in Fund 1,432,517
Digital assets held in fund as of December 31, 2023 $ 6,115,538 Investment
securities As of December
31, 2023, investment securities represent the Company’s investments in one fund and three privately held companies over which the
Company neither has control nor significant influence through investments in ordinary shares or preferred shares. In the third quarter
of 2023, the Company divested an equity method investee over which the Company had significant influence. As of December 31, 2022, investment
securities represent the Company’s investment in one fund and one privately held company, over which the Company neither had control
nor significant influence through investment in ordinary share. Investment in equity method investee In accordance with ASC 323, Investments - Equity
Method and Joint Ventures Under the equity method, the Company initially
records its investment at cost and prospectively recognizes its proportionate share of each equity investee’s net income or loss
into its consolidated statements of operations. When the Company’s share of losses in the equity investee equals or exceeds its
interest in the equity investee, the Company does not recognize further losses, unless the Company has incurred obligations or made payments
or guarantees on behalf of the equity investee. The Company continually reviews its investment
in the equity investee to determine whether a decline in fair value below the carrying value is other-than-temporary. The primary factors
the Company considers in its determination include the financial condition, operating performance and the prospects of the equity investee;
other company specific information such as recent financing rounds; the geographic region, market and industry in which the equity investee
operates; and the length of time that the fair value of the investment is below its carrying value. If the decline in fair value is deemed
to be other-than-temporary, the carrying value of the equity investee is written down to fair value. Investment
in the fund Equity securities not accounted for using the
equity method are carried at fair value with unrealized gains and losses recorded in the consolidated income statements, according to
ASC 321, Investments - Equity Securities. As a practical expedient, the Company uses Net Asset Value (“NAV”) or its equivalent
to measure the fair value of the investment in the fund. NAV is primarily determined based on information provided by the fund administrator. Investment
in the privately held company Equity securities
not accounted for using the equity method are carried at fair value with unrealized gains and losses recorded in the consolidated income
statements, according to ASC 321, Investments - Equity Securities. The Company elected to record the equity investments in privately held
companies using the measurement alternative at cost, less impairment, with subsequent adjustments for observable price changes resulting
from orderly transactions for identical or similar investments of the same issuer. Equity investments
in privately held companies accounted for using the measurement alternative are subject to periodic impairment reviews. The Company’s
impairment analysis considers both qualitative and quantitative factors that may have a significant effect on the fair value of these
equity securities, including consideration of the impact of the COVID-19 pandemic. In computing realized gains and losses on equity securities,
the Company calculates cost based on amounts paid using the average cost method. Dividend income is recognized when the right to receive
the payment is established. Leases The Company determines whether an arrangement
contains a lease at the inception of the arrangement. If a lease is determined to exist, the term of such lease is assessed based on the
date on which the underlying asset is made available for the Company’s use by the lessor. The Company’s assessment of the
lease term reflects the non-cancelable term of the lease, inclusive of any rent-free periods and/or periods covered by early-termination
options which the Company is reasonably certain of not exercising, as well as periods covered by renewal options which the Company is
reasonably certain of exercising. The Company also determines lease classification as either operating or finance at lease commencement,
which governs the pattern of expense recognition and the presentation reflected in the consolidated statements of operations over the
lease term. For leases with a term exceeding 12 months, an
operating lease liability is recorded on the Company’s consolidated balance sheet at lease commencement reflecting the present value
of its fixed minimum payment obligations over the lease term. A corresponding operating lease right-of-use asset equal to the initial
lease liability is also recorded, adjusted for any prepaid rent and/or initial direct costs incurred in connection with execution of the
lease and reduced by any lease incentives received. For purposes of measuring the present value of its fixed payment obligations for a
given lease, the Company uses its incremental borrowing rate, determined based on information available at lease commencement, as rates
implicit in its leasing arrangements are typically not readily determinable. The Company’s incremental borrowing rate reflects the
rate it would pay to borrow on a secured basis and incorporates the term and economic environment of the associated lease. For the Company’s operating leases, fixed
lease payments are recognized as lease expense on a straight-line basis over the lease term. For leases with a term of 12 months or less,
any fixed lease payments are recognized on a straight-line basis over the lease term and are not recognized on the Company’s consolidated
balance sheet as an accounting policy election. Leases qualifying for the short-term lease exception were insignificant. Variable lease
costs are recognized as incurred and primarily consist of utility charges not included in the measurement of right-of-use assets and operating
lease liabilities. Deposits for property and equipment The deposits for property and equipment represented
advance payments for miner purchases. The Company initially recognizes deposits for property and equipment when cash is advanced to suppliers
of our miners. Subsequently, the Company derecognizes and reclassifies deposits for property and equipment to property and equipment when
control over these miners is transferred to and obtained by the Company. Below is the roll forward of the balance of deposits
for property and equipment for the years ended December 31, 2023 and 2022, respectively.
For the Years Ended
2023 2022
Opening balance $ 2,594,881 $ 43,094,881
Reclassification to property and equipment (66,051,642 ) (59,810,389 )
Addition of deposits for property and equipment 67,684,132 19,310,389
Ending balance $ 4,227,371 $ 2,594,881 Property
and equipment, net Property and equipment is stated at cost and depreciated
using the straight-line method over the estimated useful lives of the assets. The Company’s property and equipment were primarily
comprised of digital asset miners with estimated useful lives of three years, artificial intelligence servers with estimated useful lives
of three years, and one vehicle with estimated useful life of five years. Impairment
of long-lived assets Management
reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted
future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Revenue recognition The Company recognizes revenue in accordance with
ASC 606, Revenue from Contracts with Customers To determine revenue recognition for contracts
with customers, the Company performs the following five steps: (i) identify the contract with the customer, (ii) identify the performance
obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable
that a significant future reversal will not The Company recognizes revenue when it transfers
its goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. Digital asset mining The Company has entered into digital asset mining pools by executing
contracts with the mining pool operators to provide computing power to the mining pool. The contract is terminable at any time by either
party with no termination penalty. Our enforceable right to compensation begins when, and lasts for as long as, we provide computing power
to the mining pool operator; our performance obligation extends over the contract term given our continuous provision of computing power.
This period of time corresponds with the period of service for which the mining pool operator determines compensation due to us. Given
cancellation terms of the contract, and our customary business practice, the contract effectively provides the option to renew for successive
contract terms daily. In exchange for providing computing power, the Company is entitled to a fractional share of the fixed digital assets
award the mining pool operator receives, for successfully adding a block to the blockchain. 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. The Company is entitled to its relative share of consideration even if a block
is not successfully placed. Providing computing power in digital asset transaction verification
services is an output of the Company’s ordinary activities. The provision of 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.
ASC 606-10-32-21 requires entities to measure the estimated fair value of noncash consideration at contract inception. Because the consideration
to which the Company expects to be entitled for providing computing power is entirely variable, as well as being noncash consideration,
the Company assesses the estimated amount of the variable noncash consideration at contract inception and subsequently, to determine when
and to what extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur once the uncertainty
associated with the variable consideration is subsequently resolved. Because it is probable that a significant reversal of cumulative
revenue will not occur and the Company is able to calculate the payout based on the contractual formula, this amount should be estimated
and recognized in revenue upon inception, which is when the hash rate is provided. For reasons of operational practicality, the Company applies an accounting
convention to use the daily quoted closing U.S. dollar spot rate of digital asset each day to determine the fair value of digital asset
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. Below table presents the Company’s revenues
generated from digital asset mining business by countries:
For the Years Ended December 31,
2023 2022 2021
United States $ 36,733,222 $ 31,132,771 $ 33,573,412
Iceland 5,096,883 - -
Canada 2,410,313 1,137,918 640,554
Hong Kong - - 61,864,604
$ 44,240,418 $ 32,270,689 $ 96,078,570 Below table presents the Company’s revenues by mining pool operators:
For the Years Ended December 31,
2023 2022 2021
Foundry USA Pool $ 44,240,418 $ 31,414,104 $ 27,862,786
Ethermine Mining Pool - 856,585 -
Huobi Pool - - 58,607,927
Antpool - - 9,607,857
$ 44,240,418 $ 32,270,689 $ 96,078,570 Note: The revenue by the mining pool operator
is allocation of total revenue based on the number of digital assets mined for the years ended December 31, 2022 and 2021. ETH staking business The Company also generates revenue
through ETH staking rewards. The ETH staking business is comprised of native staking and liquid staking. With the introduction of staked ETH withdrawals in April 2023, we have
reassessed our Ethereum network staking approaches, weighing the advantages of traditional staking against liquid staking solutions. The
withdrawal feature in native staking, coupled with yields that are on par with those of liquid staking, has encouraged us to expand our
collaborations with other service providers in this domain. As a result, we terminated all liquid staking activities with StakeWise in
the third quarter of 2023, reclaiming all staked Ethereum along with the accumulated rewards. In the fourth quarter of 2023, the Company
terminated the native staking activities and reclaimed all staked Ethereum with Blockdaemon.
(a) Native staking The Company has entered into network-based smart
contracts by staking ETH on nodes run by third-party operators or nodes maintained by us in 2022. Through these contracts, the Company
stakes ETH on nodes for the purpose of validating transactions and adding blocks to the Ethereum blockchain network. The Company is able
to withdraw the staked ETH which was previously locked-up in staking contracts since the Shanghai upgrade was successfully completed on
April 12, 2023. In exchange for staking the ETH and validating transactions on blockchain networks, the Company is entitled to the block
rewards and transaction fees for successfully validating or adding a block to the blockchain. These rewards are received by the Company
directly from the Ethereum network and are calculated approximately based on the proportion of the Company’s stake to the total
ETH staked by all validators. The provision of validating blockchain transactions
is an output of the Company’s ordinary activities. Each separate block creation or validation under a smart contract with a network
represents a performance obligation. The transaction consideration the Company receives, the digital asset awards, is a non-cash consideration,
which the Company measures at fair value on the date received. The fair value of the ETH reward received is determined using the quoted
price of the ETH at the time of receipt. The satisfaction of the performance obligation for transaction verification services occurs at
a point in time when confirmation is received from the network indicating that the validation is complete, and the awards are deposited
to our address. At that point, revenue is recognized. The Company commenced native staking business
in the year ended December 31, 2022. For the years ended December 31, 2023 and 2022, the Company generated revenues of $531,702 and $5,722
from native staking. (b) Liquid staking Liquid staking is similar to native staking in
terms of performance obligations, determination of transaction price and revenue recognition. When we participate in liquid staking
via Portara protocol, a liquid staking solution provider under the consortium of Blockdaemon and Stakewise, the Company receives receipt
tokens sETH-H to represent the staked ETH at 1:1 ratio. The liquid staking rewards are in the form of rETH-H which could be redeemed for
ETH from the liquid staking provider or exchange for ETH via OTC. When we participate in liquid staking via Liquid Collective protocol, the
Company receives receipt tokens Liquid Staked ETH (LsETH) to represent the staked ETH. LsETH uses a floating conversion rate, or protocol
conversion rate, between the receipt token and staked tokens, reflecting the value of accrued network rewards, penalties, and fees associated
with the staked tokens. The Company commenced liquid staking business
in the year ended December 31, 2022. For the years ended December 31, 2023 and 2022, the Company generated revenues of $144,011 and $20,182
from liquid staking. Disaggregation of revenues Below table presents the disaggregation of Company’s revenues
by revenue streams.
For the Years Ended December 31,
2023 2022 2021
Digital asset mining $ 44,240,418 $ 32,270,689 $ 96,078,570
ETH native staking 531,702 5,722 -
ETH liquid staking 144,011 20,182 -
$ 44,916,131 $ 32,296,593 $ 96,078,570 Cost of revenue The Company’s
cost of revenue consists primarily of i) direct production costs related to mining operations, including electricity costs, profit-sharing
fees/variable performance fees and/or other relevant costs paid to our hosting facilities, but excluding depreciation and amortization,
which are separately stated in the Company’s consolidated statements of operations, and ii) direct cost related to ETH staking business,
including Contract costs The Company capitalizes commission
expenses directly related to obtaining customer contracts, which would not have been incurred if the contract had not been obtained. As
of December 31, 2023, capitalized costs to obtain a contract totaled $2.8 million, and the outstanding commission expense payable was
$1. million. These amounts are included in the accompanying consolidated balance sheets,
with the capitalized costs to be amortized to commission expense over the expected period of benefit and commission expense payable included
in Other long-term liabilities. The Company
capitalizes lease expense that are directly related to fulfilling its specialized cloud infrastructure services which commenced operations
in January 2024. The lease expense is directly related to fulfill customer contracts and is expected to be recovered. As of December 31,
2023, capitalized costs to fulfil a contract totaled $100 thousand which are included in the accompanying consolidated balance sheets
and are amortized to lease expense over the expected period of benefit. Deferred Revenue Deferred revenue primarily pertains
to prepayments received from a customer for the provision of Graphics Processing Unit (GPU) processing power, which commenced in January
2024:
For the Years Ended
2023 2022
Beginning balance $ - $ -
Prepayment received 13,073,449 -
Ending balance $ 13,073,449 $ - Remaining performance obligation The following table presents
estimated revenue expected to be recognized in the future related to the unsatisfied portion of the performance obligation as of December
31, 2023:
2024
GPU processing power $ 13,073,449
Total deferred revenue $ 13,073,449 The remaining performance obligation
is expected to be fulfilled completely in the second quarter of 2024. Income taxes The Company
accounts for income taxes under the asset and liability method, in which 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 and operating loss and tax credit carry forwards. 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.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the
enactment date. A valuation allowance is required to the extent any deferred tax assets may not be realizable. ASC Topic
740, Income Taxes, (“ASC 740”), also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement
of a tax position 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. ASC 740 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim period, disclosure and transition. Loss per share Basic loss
per share is computed by dividing net loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding
during the period. The computation of diluted net loss per share does not include dilutive ordinary shares equivalents in the weighted
average shares outstanding, as they would be anti-dilutive. Commitments
and contingencies In the normal
course of business, the Company is subject to contingencies, such as legal proceedings and claims arising out of its business, which cover
a wide range of matters. Liabilities for contingencies are recorded when it is probable that a liability has been incurred and the amount
of the assessment can be reasonably estimated. If the assessment
of a contingency indicates that it is probable that a material loss is incurred and the amount of the liability can be estimated, then
the estimated liability is accrued in the Company’s financial statements. If the assessment indicates that a potentially material
loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent
liability, together with an estimate of the range of possible loss, if determinable and material, would be disclosed. Loss contingencies
considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed. Share-based compensation The Company expenses stock-based compensation
to employees and non-employees over the requisite service period based on the grant-date fair value of the awards. The Company estimates
the fair value of stock option grants using the Black-Scholes option pricing model and the assumptions used in calculating the fair value
of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s
judgment. These assumptions are the expected stock volatility, the risk-free interest rate, the expected life of the option, and the dividend
yield on the underlying stock. Expected volatility is calculated based on the historical volatility of the Company’s common stock
over the expected term of the option. Risk-free interest rates are calculated based on risk–free rates for the appropriate term.
The Company has elected to account for forfeitures of awards as they occur. Treasury
stock The Company
accounts for treasury stocks using the cost method. Under this method, the cost incurred to purchase the shares is recorded in the treasury
stocks account on the consolidated balance sheets. The Company
treats shares withheld for tax purposes on behalf of employees in connection with the vesting of restricted share grants as ordinary share
repurchases because they reduce the number of shares that would have been issued upon vesting. Reclassification Certain items in the financial statements of the
comparative period have been reclassified to conform to the financial statements for the current period. The reclassification has no impact
on the total assets and total liabilities as of December 31, 2023 or on the statements of operations for the year ended December 31, 2023. Recent accounting pronouncements The Company continually assesses any new accounting
pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s
financial reporting, the Company undertakes a study to determine the consequences of the change to its consolidated financial statements
and assures that there are proper controls in place to ascertain that the Company’s consolidated financial statements properly reflect
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