What changed in this filing

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Item 1. Business

2023-08-02 compared with 2022-08-29 · 102 added, 165 removed, 34 unchanged (89% of the section changed)

Hosting Operation

We design, build, and operate Next-Gen datacenters which are designed to provide massive computing power and support high-compute applications.

Initially, these datacenters will primarily host servers securing the Bitcoin network but can also host hardware for other applications such as artificial intelligence, machine learning and other blockchain networks in the future.

We have a colocation business model where our customers place hardware they own into our facilities and we provide full operational and maintenance services for a monthly recurring fee.

typically enter into long term contracts with our customers.

We purchased property in North Dakota on which we constructed our first co-hosting facility.

We entered into an Amended and Restated Energy Services Agreement for the purpose of supplying 100 megawatts ("MW") of electricity to be used by our co-hosting customers at this facility.

We also entered into agreements with five customers (JointHash Holding Limited (a subsidiary of GMR), Spring Mud (a subsidiary of GMR), Bitmain Technologies Limited, F2Pool Mining, Inc.

and Hashing LLC, ) which are expected to utilize the total available energy under the Amended and Restated Energy Services Agreement at our first facility and 85MW of energy at our second facility, once it is built and able to provide such energy.

The company pays for energy from part of the revenue from customers.

Working with expert advisors in the fields of power, crypto mining operations, procurement, and construction, we have designed a plan for a prefabricated facility and organization within the facility that can be delivered and installed quickly and maximize performance and efficiency of the facility and our customers’ crypto mining equipment.

Construction of our first co-hosting facility began in September 2021.

On February 2, 2022, we brought our first facility online.

It is now fully operational.

On November 24, 2021, we entered into a letter of intent to develop a second datacenter facility.

On April 13, 2022, the Company entered into a 99-year ground lease in Garden City, TX, with the intent to build our second datacenter facility on this site.

On April 25, 2022 the Company began construction on this site.

This facility is collocated with a wind farm and upon completion is expected to provide 200 MW of power to hosting customers.

The facility is expected to begin operating in calendar Q4 of 2022 and the 200 MW capacity is fully contracted with our customers.

On January 6, 2022, we and Antpool, an affiliate of Bitmain Technologies Holding Company, entered into a Limited Liability Company Agreement of 1.21 Gigawatts, LLC ("1.21 Gigawatts"), pursuant to which we and Antpool contributed $8,000 and $2,000, respectively, and will initially own 80% and 20%, respectively, of 1.21 Gigawatts.

1.21 Gigawatts will develop, acquire, construct, finance, operate, maintain and own one or more Next-Gen datacenters with up to 1.5 gigawatts ("GW") of capacity for hosting blockchain infrastructure.

We are the managing member of 1.21 Gigawatts and are primarily responsible for all site development, construction and the eventual operations of the datacenters.

However, certain activities of 1.21 Gigawatts and its subsidiaries require the vote of 90% of the then outstanding units of each such entity.

As long as Antpool owns 10% or more of the total issued and outstanding units of 1.21 Gigawatts, Antpool may appoint an individual with industry expertise to serve as an advisor to 1.21 Gigawatts.

1.21 Gigawatts will pay fees to such advisor as reasonably determined by us as managing member.

Transfers by members of units of 1.21 Gigawatts are prohibited without approval of 90% of units then outstanding, which consent may be granted or withheld for any reason, and transfers of such units to non-affiliates, after obtaining consent, are subject to a right of first refusal of the other members to purchase some or all of such units.

Additionally, Antpool has the right at any time to convert all or any portion of its 1.21 Gigawatts units into a number of shares of our common stock.

The number of shares that Antpool may convert is equal to the capital contributions of 1.21 Gigawatts made by Antpool divided by $7.50, which will result in an increase in our ownership percentage of 1.21 Gigawatts.

As our co-hosting operations expand, we believe our business structure will become conducive to a REIT structure, comparable to Digital Realty Trust (NYSE:

We are a designer, builder and operator of next-generation digital infrastructure.

We have three primary business streams, artificial intelligence (“AI”) cloud services, high performance computing (“HPC”) datacenter hosting, and crypto datacenter hosting.

AI Cloud Service

Our AI Cloud service operates through our Sai Computing brand and provides cloud services applicable to artificial intelligence.

On October 13, 2022, we formed Sai Computing, LLC (“Sai Computing”).

Sai Computing was formed to provide artificial intelligence and machine learning application customers with access to machines and a hosting environment.

On May 15, 2023, we announced the formal launch of our AI cloud services business through Sai Computing.

On May 16, 2023, we announced that Sai Computing secured its first major AI customer with an agreement worth up to $180 million over a 24-month period.

The customer will make a significant prepayment as part of the agreement.

On May 25, 2023, we formed Sai Computing Holdings LLC (“Sai Holdings”) and Sai-Foundry Computing LLC (“Sai-Foundry”).

Sai Holdings serves as the parent entity over Sai Computing and Sai-Foundry, and Sai-Foundry will serve as the joint venture entity between the Company and Foundry Technologies (“Foundry”).

We have a 98% ownership interest in Sai-Foundry and consolidate the entity.

On June 23, 2023, we announced that we had signed our second customer in our AI cloud hosting business.

This agreement has a value worth up to $460 million over 36 months.

To support our AI Cloud Services business, we have placed orders for over 26,000 Graphics Processing Units ("GPUs").

We have also entered into two contracts with colocation service providers for secure space and energy for our hosting services.

Our current strategy is to use a mix of third-party colocation centers and our HPC datacenters to deliver AI Cloud services to customers.

HPC Datacenter Hosting

Our HPC datacenter business designs, builds, and operates Next-Gen datacenters which are designed to provide massive computing power and support high-compute applications within a cost-effective model.

On December 14, 2022, we announced the beginning of construction of a 5 megawatt (“MW”) facility next to the Company’s currently operating 100-MW hosting facility in Jamestown, North Dakota.

We subsequently determined to increase the capacity of this facility to 9 MW.

This separate and unique building, designed and purpose-built for GPUs, will sit separate from our crypto hosting buildings and will host more traditional high performance computing applications, such as natural language processing, machine learning, and additional HPC developments.

This facility is expected to be brought online in the second half of calendar year 2023.

During early calendar year 2023, we began testing HPC hosting at this facility.

The systems in this facility passed initial testing in the second calendar quarter of 2023.

We have current plans to expand our HPC hosting capacity up to 200 MW through build outs at existing and future locations.

Crypto Datacenter Hosting

Our crypto datacenter hosting business provides infrastructure and colocation services to crypto mining customers.

With expert advisors in the fields of power, crypto mining operations, procurement, and construction, we have designed and implemented a plan for a prefabricated facility and organization within the facility that can be delivered and installed quickly and maximize performance and efficiency of the facility and our customers’ crypto mining equipment.

We provide energized space for customers to host computing equipment.

We have a colocation business model where our customers place hardware they own into our facilities and we provide operational and maintenance services for a fixed fee.

We typically enter into long-term fixed rate contracts with our customers.

As of May 31, 2023, we had approximately 185 MW of capacity online and available to service crypto mining customers.

Subsequent to May 31, 2023, we brought another 100 MW of capacity online, bringing total energized capacity to approximately 285 MW as of the date of this report.

Additionally, there is another 200 MW of capacity the Company has committed to energize, all of which is contracted for under multi-year arrangements.

During the fiscal year ended May 31, 2023, the Company entered into a joint venture agreement with GMR Limited ("GMR") to form Highland Digital Holdings, LLC ("Highland Digital").

Highland Digital is dormant and the Company currently has no plans to use the entity for any activities.

REIT structure

As our operations expand, we believe our business structure may become conducive to a REIT structure, comparable to Digital Realty Trust (NYSE:

DLR) and Equinix, Inc.

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We have begun to investigate the possibility, costs and benefits of converting to a REIT structure.

Mining Operation

Our initial mission was to quickly scale a large mining operation focused on Bitcoin and Ethereum (Ether).

With a specialized algorithm and expertise provided by strategic partners and mining pool managers, we were able to mine the most profitable cryptoassets in the market and adjust in real-time.

As a result of changes to Chinese regulations of cryptoasset mining, ultimately leading to the shut down on mining facilities in locations across China, we were compelled to explore other co-hosting locations outside of China.

By July 2021, we had entered into a co-hosting

agreement with Coinmint LLC, had our initial order of mining equipment delivered and installed at Coinmint's co-hosting facility, and began our mining operations.

We also determined that constructing our own co-hosting facilities would enable us to generate a stable cash flow stream through long-term hosting agreements, lower the cost of power for our own mining operations, and eliminate risks to us of relying on a third-party host.

During the development of our co-hosting operations, we determined that it would be beneficial to our stockholders to focus more of our resources on building our co-hosting operations than on expanding our mining operations.

Accordingly, in December 2021, we began selling our crypto mining equipment.

On March 9, 2022 we ceased all crypto mining operations and completed the sale of all crypto mining equipment in service.

We have no plans to return to crypto mining operations in the future.

Company History

Applied Blockchain, Inc.

was incorporated in Nevada in May 2001 and conducted business under several names until July 2009, when we filed a Form 15 with the SEC to suspend the registration of our common stock and our obligations to file annual, quarterly and other periodic reports with the SEC in order to conserve financial and other resources for the continuing development and commercialization of our business.

Our common stock continued to trade on the OTC Pink Market.

In 2021, we changed our name to Applied Blockchain, Inc.

and began our current next-gen data center business.

On February 2, 2022, we brought our first North Dakota facility online.

It is now fully operational.

In April 2022, we completed our initial public offering and our common stock began trading on The Nasdaq Global Select Market.

Our Competitive Strengths

Premier strategic partnerships with leading industry participants.

In March 2021, we executed a strategy planning and portfolio advisory services agreement (“Services Agreement”) with GMR Limited, a British Virgin Island limited liability company (“GMR”), Xsquared Holding Limited, a British Virgin Island limited liability company (“SparkPool”) and Valuefinder, a British Virgin Islands limited liability company (“Valuefinder”) and, together with GMR and SparkPool, (the “Service Provider(s)”).

Jason Zhang, one of our board members, is the sole equity holder and manager of Valuefinder and a related party.

Pursuant to the Services Agreement, the Service Providers agreed to provide cryptoasset mining management and analysis and to assist us in securing difficult to obtain equipment and we agreed to issue 7,440,148 shares of our common stock to GMR or its designees, 7,440,148 shares of our common stock to SparkPool or its designees and 3,156,426 shares of our common stock to Valuefinder or its designees.

Each Service Provider has provided such services to us which services commenced in June 2021.

Each of these Service Providers assisted in the creation of our crypto mining operations, which we then terminated on March 9, 2022.

Each of them also advised us in connection with the design and buildout of our co-hosting operations.

GMR and SparkPool have since become customers of our co-hosting operations.

As of June 2022, SparkPool ceased all operations and is no longer in a position to provide services under the Services Agreement.

On June 2, 2022, SparkPool forfeited 4,965,432 shares of our common stock back to us.

We believe that our partnerships with GMR, Bitmain and certain other partners have provided, and continue to provide, us with a significant competitive advantage.

GMR has also been a proponent of our hosting strategy, having signed a contract for approximately 50% of our 100 MW capacity as part of our hosting operation under development.

Bitmain, provides leads for potential hosting customers.

SparkPool, GMR, and Bitmain are each strategic equity investors in our company.

Each of them also advised us in connection with the design and buildout of our co-hosting operations.

GMR, SparkPool and Bitmain have since become customers of our co-hosting operations.

Premier strategic collaboration with leading industry participants.

On May 24, 2023, we announced that we are working with Super Micro Computer, Inc.

("Super Micro"), a global leader in Application-Optimized Total IT Solutions, to deliver Applied Digital’s AI Cloud service.

Super Micro is a leading provider of application-optimized, high-performance server and storage solutions that address a broad range of computational-intensive workloads.

Super Micro’s next-generation GPU servers significantly lower the power requirements of data centers.

With the amount of power required to enable today's rapidly evolving large scale AI models, optimizing the Total Cost of Ownership (TCO) and the Total Cost to Environment (TCE) is crucial to data center operators.

On June 30, 2023, we announced a collaboration with Hewlett Packard Enterprise Company ("HPE"), a global edge-to-cloud company.

As part of the collaboration, HPE will deliver its powerful, energy-efficient supercomputers that are proven to support large-scale AI through Applied Digital's AI cloud service.

Access to low-cost power with long-term services agreement

One of the main benefits of our Amended and Restated Electric Service Agreement is the low cost of power for mining.

Even prior to the crypto mining restrictions in China, power capacity available for Bitcoin mining was scarce, especially at scalable sites with over 100 MW of potential capacity.

This scarcity of mining power allows us to realize attractive hosting rates in the current market, in particular given our ability to provide long-term (3-5 year) hosting contracts.

One of the main benefits of our electrical services agreements for our Jamestown, North Dakota and Ellendale,

North Dakota facilities is the low cost of power.

Power capacity available for high computing power processes is

scarce, especially at scalable sites with over 100 MW of potential capacity.

This scarcity of power allows us to

realize attractive hosting rates in the current market, in particular given our ability to provide long-term (3-5 year)

hosting contracts.

Benefits of Next-Gen datacenters compared to traditional datacenters.

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Geographically, traditional datacenters are at a disadvantage because they require fiber bases, low-latency connections and connection redundancies that are usually found in high-cost areas with high-density populations.

Hosting provides predictable, recurring revenue and cash flow as compared to more volatile mining operations.

As compared to our previous mining operations, co-hosting revenues are less subject to volatility related to the underlying cryptoasset markets.

Through our Amended and Restated Electric Service Agreement with a utility in the upper Midwest, we have a contractual ceiling for our energy costs.

The Electric Service Agreement has also enabled us to launch our hosting business with long-term customer contracts.

Cambridge Bitcoin Electricity Consumption Index reported that as of February 1, 2021 more than 6 GW of Bitcoin was mined in China (or $4.3 billion of power cost, assuming $0.08 per kWh average hosting cost).

China has since banned cryptoasset mining related activity.

We expect much of the demand for hosting locations previously met in China will move to the United States due to its reliable power options.

We intend for the steady cash flows generated by our hosting operations to be reinvested into the hosting business.

Strong management team and board of advisors with deep experience in crypto mining and hosting operations.

We have recently expanded our leadership team by attracting top talent in the hosting space.

Recent hires from both publicly traded and private companies have allowed us to build a team capable of designing and constructing hosting facilities.

In addition, our board of advisors includes experts in the crypto space, including the co-founders of SparkPool and GMR.

Hosting provides predictable, recurring revenue and cash flow

Within each of our business streams, we have entered into long-term fixed rate contracts with our customers.

In addition, we have obtained access to low cost energy through our energy services agreements, which provides us with consistent margins and cash flow.

We intend for the steady cash flows generated by our operations to be reinvested into our AI Cloud services and HPC datacenter businesses.

Strong management team

We have continued to expand our leadership team by attracting top talent in the digital infrastructure space.

Recent hires from both publicly traded and private companies have allowed us to build a team capable of designing and

constructing hosting facilities, for example, our Chief Technology Officer, Michael Maniscalco.

Maniscalco was an Entrepreneur in Residence at Stanley Black & Decker Venture Studio (StanleyX AI) in 2021.

He was a founder and Chief Executive Officer of Better Living Technologies from 2018 to 2022.

Prior to that, Mr.

Maniscalco founded, and was Vice President of Product, of Ihiji from 2009 to 2018.

Our Growth Strategies

Leverage partners to grow hosting operations while minimizing risk.

Our strategic partners GMR and Bitmain have entered into hosting contracts with us that will utilize the available capacity from our currently operating 100 MW hosting site, which enabled us to pre-fill our initial site before breaking ground.

Beyond their own use of our hosting capabilities, our partners have strong relationships across the cryptocurrency ecosystem, and we believe that we will be able to leverage their networks to identify leads for our expansion of hosting operations.

We believe we have sufficient demand to fill our planned hosting expansion.

Secure scalable power sites in areas favorable for crypto mining.

We have developed a pipeline of potential power sources.

Our first hosting site in the Midwest is fully operational and we have begun construction on our second facility in Garden City, TX.

We also expect to begin construction in North Dakota on our third facility, resulting in a total combined capacity of roughly 500 MW.

Through our build-out of our first Midwest facility and the prior experience our leadership team brings to our initiatives, we believe that we have developed a repeatable power strategy to significantly scale our operations.

In addition, we are currently focused on and will continue to target states that have favorable laws and regulations for the crypto mining industry, which we believe further minimizes the associated with risks the scaling of our operations.

Continued expansion of businesses.

We have started expansion into hosting for HPC applications.

We have current plans to expand our HPC hosting capacity up to 200 MW through build outs at existing and future locations.

Further, we launched our AI cloud hosting services business through Sai Computing and have announced our first major customer.

Leverage leading equipment vendors to grow operations while minimizing risk.

We believe that the signing of our initial customers for our AI cloud service business will help us elevate our profile within the market.

Further, we are working with Super Micro and HPE, which are both leading vendors in the AI hosting space, and we believe that we will be able to leverage their networks to identify leads for the expansion of our AI cloud services and HPC datacenter hosting businesses.

Secure scalable power sites.

We have developed a pipeline of potential power sources across our sites in Jamestown, North Dakota;

Garden City, Texas;

and Ellendale, North Dakota.

Through our build-out of our first North Dakota facility and the prior

experience our leadership team brings to our initiatives, we believe that we have developed a repeatable power

strategy to significantly scale our operations.

In addition, we are currently focused on and will continue to target

states that have favorable laws and regulations for HPC application industries, which we believe further minimizes

the associated with risks the scaling of our operations.

Vertically integrate power assets.

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Our management team has experience not only in evaluating and acquiring power assets, but also in the conversion of power assets to crypto mining/hosting operations and the construction of datacenters with the specific purpose of mining cryptocurrency assets.

Expand into other high computing processing applications and businesses.

While we no longer mine cryptoassets and have no plans to return to crypto mining operations, we see potential value in the ecosystems developing around cryptoassets.

We deem the following factors important in making a decision to enter into a particular line of business:

advice from securities and regulatory legal counsel about the regulatory framework applicable to such line of business, including the Howey test for whether or not a particular

asset could be a security and consequences thereof, as applicable at the time, economic conditions, costs and benefits resulting from investing in a new line of business rather than our current co-hosting business, other costs of establishing such new or additional line of business, investor appetite, and other factors that may arise from time to time which could impact the costs and benefits to us and our stockholders.

Strategic Relationships

Each Service Provider has provided services to us pursuant to the Services Agreement which services commenced in June 2021.

Each of these Service Providers assisted in the creation of our crypto mining operations, which we then terminated on March 9, 2022.

Each of them also advised us in connection with the design and buildout of our co-hosting operations.

GMR and SparkPool have since become customers of our co-hosting operations.

In July 2021, the Company issued 7,440,148 shares of our common stock to each GMR and SparkPool, and 3,156,426 shares of our common stock to Jason Zhang, Valuefinder’s designee.

In July 2021, we added a strategic partner, Bitmain Technologies Limited (“Bitmain”), a producer of products for blockchain and artificial intelligence (AI) applications.

Bitmain has assisted us in the identification and analysis of other strategic business initiatives.

As of June 2022, SparkPool ceased all operations and is no longer in a position to provide services under the Services Agreement.

On June 2, 2022, SparkPool forfeited 4,965,432 shares of our common stock back to us.

Future Business Expansion

Currently, plans for our future business expansion entail building and operating several more facilities.

The Company has the opportunity to expand the existing 100 MW Jamestown, North Dakota facility.

The facility in Garden City, Texas currently under construction is expected to be 200 MW, and the future facility on the North Dakota site we acquired in August 2022 is expected to be 180 MW.

In addition to the aforementioned facilities, we are actively evaluating a pipeline of potential sites throughout the US.

Site Selection Criteria

Our site selection criteria considers geographic diversity, attractive return on investment, and environmental impact.

To the extent we are building new facilities, our site selection criteria considers geographic diversity, attractive return on investment, and environmental impact.

Geographic Diversity

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We expect to choose locations in environments that are policy and regulation friendly, and find sites with less expensive stable energy.

Attractive Return on Investment:

We expect to achieve attractive return on investments in low-cost renewable assets with strict underwriting standards to achieve targeted returns.

Moreover, we aim to have a balanced mix of high-volume, blue-chip customers and higher margin, smaller scale customers with one anchor customer at each facility that has signed a 3 – 5 year long-term contract at each site and filling the rest of the facility with customers with 18 – 36 month terms.

Environmental Impact

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Further, because Next-Gen datacenters like ours represent a unique power load, we believe our demand for renewable energy and entry into agreements with renewable energy providers will increase and accelerate the buildout of renewable energy infrastructures.

We have material customer concentration in our co-hosting business as of May 31, 2022.

We have entered into contracts with JointHash Holding Limited (a subsidiary of GMR), Spring Mud, LLC (a subsidiary of GMR) Bitmain Technologies Limited, F2Pool Mining, Inc.

and Hashing LLC (a subsidiary of GMR) to utilize our first co-hosting facility.

Together these customers will account for 100% of our co-hosting facility revenue until our second facility is constructed and operational.

These customers have agreed to use an additional 85 MW of power at our second facility, once it is constructed and operational.

We are currently exploring options with respect to property on which our second facility will be built as well as energy services arrangements to provide power to the second facility.

Additionally, on July 12, 2022, the Company entered into a five-year hosting contract with Marathon Digital Holdings, Inc.

("Marathon") for 200 MW of mining capacity.

As a result of this arrangement, the Company will supply Marathon with 90 MW of hosting capacity at its facility in Texas and at least 110 MW of hosting capacity at its second facility in North Dakota.

As part of this agreement, the Company has also provided Marathon with the option to increase hosting capacity utilizing up to an additional 70 MW in North Dakota, which would increase the total amount of hosting across all of the Company's facilities to 270 megawatts if the option is exercised.

Pursuant to our co-hosting contracts with all of the five above customers we agree to provide energized space, for which our customers pay us hosting fees.

Operation fees and maintenance fees are to be determined by the parties in each contract and on each purchase order.

The agreements with certain customers are effective until terminated.

In addition to providing for termination for breaches or defaults (subject to certain cure periods) and by mutual agreement of the relevant parties, these customers may terminate their agreements with respect to all or part of their equipment subject to the relevant agreement with payment of a termination fee calculated by reference to the equipment as to which the agreement is being terminated and its forecasted energy usage.

The terms of the agreements with other customers is 60 months from the date on which no less than a negotiated number of megawatts of power are available at our first facility.

The term may be extended for an additional 24 months without change to the fee structure by agreement of both parties.

Unilateral termination rights are only available upon defaults or breaches of the agreement (subject to cure periods), bankruptcy or similar situations and certain assignment.

Our site level strategy consists of having one key anchor tenant that has signed a 3 – 5 year long-term contract at the site and filling the rest of the facility with customers with 18 – 36 month terms.

Government Regulations

Our customers’ businesses are subject to extensive laws, rules, regulations, policies and legal and regulatory guidance, including those governing securities, commodities, cryptoasset custody, exchange and transfer, data governance, data protection, cybersecurity and tax.

Many of these legal and regulatory regimes were adopted prior to the advent of the Internet, mobile technologies, cryptoassets and related technologies.

As a result, they do not contemplate or address unique issues associated with the crypto economy, are subject to significant uncertainty, and vary widely across U.S.

federal, state and local and international jurisdictions.

These legal and regulatory regimes, including the laws, rules and regulations thereunder, evolve frequently and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another.

Moreover, the complexity and evolving nature of our business and the significant uncertainty surrounding the regulation of the crypto economy requires us to exercise our judgement as to whether certain laws, rules and regulations apply to us or our customers, and it is possible that governmental bodies and regulators may disagree with our or our customers’ conclusions.

To the extent we or our customers have not complied with such laws, rules and regulations, we could be subject to significant fines and other regulatory consequences, which could adversely affect our business, prospects or operations.

As cryptoassets have grown in popularity and in market size, the Federal Reserve Board, U.S.

Congress and certain U.S.

agencies (e.g., the Commodity Futures Trading Commission, the SEC, the Financial Crimes Enforcement Network and the Federal Bureau of Investigation) have begun to examine the operations of cryptoasset networks, cryptoasset users and cryptoasset exchange markets.

On September 24, 2021, China imposed a ban on all crypto transactions and mining.

Other governments around the world are also reviewing their rules and regulations concerning the cryptoasset industry, including the United States.

In 2018, the SEC Director of Corporate Finance William Hinman announced that the Commission would not treat Ether or Bitcoin as securities.

The legal test for determining whether or not any given cryptoasset is a security (the Howey test) is a highly complex, fact-driven analysis the outcome of which is difficult to predict.

The SEC took the position that initial coin offerings (“ICOs”) are issuances of securities, a position that was upheld by the U.S.

District Court for the Southern District of NY in the 2020 case SEC v.

Telegram Group Inc.

& TON Issuer Inc.

The SEC’s position on most other cryptoassets, other than Bitcoin, Ether and ICOs, is that it is up to market participants to determine whether or not a particular cryptoasset is a “security.” The SEC generally does not provide advance guidance or confirmation on the status of any particular cryptoasset as a security.

Furthermore, the SEC’s views in this area have evolved over time and it is difficult to predict the direction or timing of any evolution.

It is also possible that a change in the governing administration or the appointment of new SEC commissioners could substantially impact the views of the SEC and its staff.

Public statements by senior officials at the SEC indicate that the SEC does not intend to take the position that Bitcoin or Ether are securities (in their current form).

With respect to all other cryptoassets, there is currently no certainty under the applicable legal test that such assets are not securities, notwithstanding the conclusions we may draw based on our risk-based assessment regarding the likelihood that a particular cryptoasset could be deemed a “security” under applicable laws.

Similarly, though the SEC’s Strategic Hub for Innovation and Financial Technology published a framework for analyzing whether any given cryptoasset is a security in April 2019, this framework is also not a rule, regulation or statement of the SEC and is not binding on the SEC.

Ongoing and future regulatory actions could effectively prevent our customers’ crypto mining operations and our ongoing or planned co-hosting operations, limiting or preventing future revenue generation by us or rendering our operations obsolete.

Such actions could severely impact our ability to continue to operate and our ability to continue as a going concern or to pursue our strategy at all, which would have a material adverse effect on our business, prospects or operations.

There is no assurance that selection criteria will be met or that viable sites will be selected.

We have material customer concentration in our crypto datacenter hosting business.

We have entered into service contracts with Spring Mud, LLC (a subsidiary of GMR Limited) Bitmain Technologies Limited, Arrakis, Inc., Hashing LLC, Marathon Digital Holdings, Inc., and Global Operating Infrastructure, LLC ("GOI"), who have collectively contracted to use the entire capacity of our three crypto hosting datacenters.

GMR Limited (“GMR”) holds more than 5% of our outstanding Common Stock.

Guo Chen, a 50% owner and sole director of GMR, is also deemed to beneficially own shares of our Common Stock held by GMR.

Chen owns 60% of Alternity Fund Ltd., which owns 100% of GOI.

On December 8th, 2021, we entered into a Service Order with GOI pursuant to which we provide energized space for mining activities of GOI.

Our hosting arrangements with Spring Mud and GOI are therefore considered related party transactions.

We have disclosed related party revenue in the accompanying footnotes to the financial statements,

Our crypto hosting site-level strategy consists of having one key anchor tenant that has signed a 3 – 5 year long-term contract at the site and filling the rest of the facility with customers with 18 – 36 month terms.

We have also material customer concentrations in our AI cloud services business, as we only have two customers.

On May 16, 2023, we announced that we had signed our first customer in our AI cloud hosting business.

This agreement has a value worth up to $180 million over 24 months, and contains a significant prepayment.

On June 23, 2023, we announced that we had signed our second customer in our AI cloud hosting business with a total value worth up to $460 million over 36 months.

If we acquire rights to additional properties and build additional facilities, we intend to use a mix of third-party colocation centers and our HPC datacenters to deliver AI Cloud services to customers.

Environmental Regulations

We have observed increasing media attention directed at the environmental concerns associated with cryptocurrency mining, particularly its energy-intensive nature.

While we do not believe any U.S.-based regulators have taken a position adverse to our business, in March 2021, the governmental authorities for the Chinese province of Inner Mongolia, which represented roughly 8% of the world’s total mining power, banned bitcoin mining in the province due to the industry’s intense electrical power demands and its negative environmental impacts (both in terms of the waste produced by mining the rare Earth metals used to manufacture miners and the production of electrical power used in bitcoin mining).

We have, and continue to, monitor domestic and international regulations, including regulations relating to environmental impacts of our business.

Our currently operating co-hosting facility is located in North Dakota.

North Dakota is one of the states leading the United States in wind power generation.

We signed an energy services agreement with a utility in North Dakota to power this facility.

The power comes off a grid and we cannot control whether that energy is generated by wind or other methods.

Currently, we do not have access to such information.

In addition, our second facility, which is currently being constructed in Texas, will be fully supplied with power that is generated from wind.

In addition, we expect our Texas facility will be largely supplied with power that is generated from wind, including power generated by the adjacent wind farm.

Beyond the wind farm, the data center will be connected to the Wind Energy Transmission of Texas transmission lines, which for the most part transmit wind generated power.

We are, however, not purchasing the renewable energy credits from the wind generation facility.

We have, and will continue to, consider opportunities for limiting the impact of our business on the environment.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business