What changed in American Bitcoin Corp.'s 10-K — 2022 vs 2023

Item 1. Business. Unless the context requires otherwise, references to “Gryphon,” “we,” “us” or “our” in this section are to the business and operations of Legacy Gryphon prior to the Business Combination and to the Company and its subsidiaries following the Business Combination.

Corporate History and Background We were originally incorporated in Delaware on October 3, 2018 under the name “MTech Acquisition Holdings Inc.” for the purpose of effecting a business combination with one or more target businesses.

On June 17, 2019, we consummated a business combination pursuant to a Merger Agreement among several companies, including MTech Acquisition Corp., which was special purpose acquisition company established for the purpose of entering into a business combination.

In connection with such business combination, MTech Acquisition Holdings Inc. changed its name to Akerna Corp., which was the Company immediately prior to the Business Combination (“Akerna”). Akerna was a leading provider of enterprise software solutions within the cannabis industry. The Business Combination with Legacy Gryphon was closed on February 9, 2024.

In light of the fact that the Business Combination has closed and our ongoing business will be the business formerly operated by Legacy Gryphon, this business section primarily includes information regarding Legacy Gryphon’s business. Overview Founded in October 2020, Gryphon is a bitcoin mining company based in Las Vegas, Nevada. Gryphon commenced its digital assets mining operations in September 2021.

Gryphon’s mission is to create a net carbon neutral bitcoin miner. Gryphon’s revenue model is to mine and hold bitcoin, and then sell only the bitcoin that is necessary to pay its operating expenses and to reinvest in operational expansion.

Gryphon’s operations encompass the following: ● Self-Mining: Gryphon operates approximately 7,400 bitcoin ASIC mining computers, referred to as “miners,” from Bitmain Technologies Limited (“Bitmain”) that Gryphon has installed at third-party hosted mining data centers located in New York.

Revenue generated by the mining of bitcoin is measured on a dollar per megawatt-hour (“MWh”) basis and is variable based on the price of Bitcoin, the measure of difficulty, transaction volume and global hash rates. ● ESG-Led Mining: Gryphon is an ESG-committed bitcoin miner with the mission to create the world’s largest bitcoin miner with a neutral carbon footprint.

Gryphon currently uses net carbon neutral energy in its power mix. Gryphon launched its mining operations in September 2021 upon the receipt of the first of 12 batches of 600 Bitmain S19j Pro Antminers. Gryphon has deployed a total of approximately 9,000 S19 series Antminers from Bitmain pursuant to the Bitmain Agreement (as defined below) and subsequent market purchases.

Given the significant amount of power that ASIC miners require to operate, Gryphon believes most mining companies focus completely on low-cost electricity without considering the impact of the power’s production on the climate. Gryphon’s strategy is to focus on working with power hosting partners that are committed to climate science and also can produce reliable, low-cost power.

Gryphon uses 28 megawatts of space at its primary hosting facility in New York, which relies on renewable hydro energy. As it deploys additional miners, Gryphon will work with hosting partners that have committed to providing carbon neutral power.

Bitcoin Mining Overview Bitcoin miners use ASIC computers to validate Bitcoin transactions and add “blocks” of validated transactions to Bitcoin’s peer-to-peer blockchain network. Miners earn bitcoin rewards for every block they add to the network as well as the corresponding transaction fees associated with the transactions in the “mined” block.

Only one miner or group of miners operating together can receive the block rewards and may also receive the corresponding transaction fees per block added to the Bitcoin blockchain.

The amount of bitcoin rewards per block (not including transaction fees) is fixed, and the number of blocks that can be added over time is able to be projected with reliable accuracy; therefore, the expected amount of bitcoin rewarded per miner is based on the number of miners actively participating in the Bitcoin network.

Miners will typically only participate if the value of the expected bitcoin rewards is higher than their cost of production. 1 Miners consume electricity in order to compete for rewards.

This means that the economics of bitcoin mining largely depend on: ● the cost of electricity to competing miners; ● the efficiency of mining equipment operated by competing miners; and ● fluctuations in the price of Bitcoin, Bitcoin difficulty (the relative measure of the amount of resources required to confirm a block of bitcoin transactions and receive bitcoin rewards), and global hash rates (the overall amount of computing power consumed by the network).

To achieve scale, mining requires access to large amounts of low-cost electricity. Introduction to Bitcoin, the Bitcoin Network and Bitcoin Mining Bitcoin is a digital asset that is created and transmitted through the operations of a peer-to-peer decentralized network of computers, known as the Bitcoin network, which operates on cryptographic protocols.

No single entity owns or operates the Bitcoin network, the infrastructure of which is collectively maintained by a decentralized user base. The Bitcoin network allows people to exchange digital tokens of value, called bitcoins, which are recorded on a publicly distributed transaction ledger known as a blockchain.

The Bitcoin blockchain is a digital, publicly distributed bookkeeping ledger that holds the record of every Bitcoin transaction. The Bitcoin network is decentralized and does not require governmental authorities or financial institution intermediaries to create, transmit or determine the value of Bitcoin.

Rather, bitcoin is created and allocated by the Bitcoin network protocol through a process referred to as “mining” and the persons or machines that provide transaction verification services to the Bitcoin network and are rewarded with new bitcoin are called “miners.” The Bitcoin blockchain is a digital chain of blocks with each block containing information relating to a group of Bitcoin transactions.

Miners validate Bitcoin transactions, securing the blocks and adding the blocks of transactions to the blockchain record by using computer processing power to solve complex mathematical problems. Solving the problems will result in the block being successfully added to the chain.

This means that the Bitcoin transaction information in the block is verified and locked into the blockchain where it remains as a permanent record on the blockchain network. The record set maintained by the Bitcoin network is publicly viewable and accessible to all.

As an incentive to those who incur the computational cost of securing the Bitcoin network by validating transactions, the miner who correctly solves the problem resulting in a block being added to the Bitcoin blockchain is awarded bitcoin.

To begin bitcoin mining, a user can download and run Bitcoin network mining software, which turns the user’s computer into a “node” on the Bitcoin network that validates blocks.

Each block contains the details of some or all of the most recent transactions of Bitcoin submitted by users of the Bitcoin network that are not already included in prior blocks, and a transaction awarding an amount of bitcoin to the miner who will add the new block.

Each unique block can be solved and added to the blockchain by only one miner. Therefore, individual miners and mining pools (i.e., groups of miners acting together) on the Bitcoin network are engaged in a competitive process of increasing their computing power to improve their likelihood of solving for new blocks and receiving bitcoin rewards.

As more miners join the Bitcoin network and its collective processing power increases, the Bitcoin network adjusts the complexity of the block-solving equation to maintain a predetermined pace of adding a new block to the blockchain approximately every ten minutes.

A miner’s proposed block is added to the blockchain once a majority of the nodes on the Bitcoin network confirms the miner’s work. Miners that are successful in adding a block to the blockchain are awarded bitcoin for their effort and may also receive transaction fees paid by transferors whose transactions are recorded in the block.

This reward system is the method by which new bitcoin enter into circulation. 2 The Bitcoin network is designed in such a way that the reward for adding new blocks to the blockchain decreases over time. The number of bitcoin awarded for solving a new block is automatically halved after every 210,000 blocks are added to the blockchain record.

Each block takes approximately 10 minutes to be solved and as a result, rewards are halved approximately every four years. Currently, the fixed reward for solving a new block is 6.25 bitcoin per block and this number is expected to decrease by half to become 3.125 bitcoin sometime in mid-2024.

While Bitcoin prices have historically increased around these halving events, which increases in price have correspondingly mitigated the decrease in mining reward, there is no guarantee that the price change would be favorable or would compensate for the reduction in mining reward.

Gryphon aims to mitigate the impacts of halving by maintaining a breakeven profitability floor far below the network average. To do so, Gryphon has developed and implemented a curtailment agreement with its hosting partners to maximize the marginal profitability of its machines.

Under this arrangement, on a daily basis, Gryphon’s hosting partner calculates the expected profitability of Gryphon’s machines based on announced day-ahead electricity rates provided by the local utility and using current bitcoin prices.

On days when it is forecast that the cost of electricity exceeds Gryphon’s revenue, whether for the entire day or part of the day, the machines are curtailed for the corresponding time period. This program was developed by Gryphon’s hosting partner in collaboration with Gryphon and is in use for several of Gryphon’s hosting partner’s clients.

This program improves Gryphon’s profitability as it avoids operating the machines in periods when electricity costs exceed the expected revenue generated without impacting efficiency. The impact of the program on Gryphon’s hashpower is relatively minor as Gryphon’s machines are hosted in upstate New York with a strong power grid that does not often require curtailments (unlike Texas).

The program has implemented occasional curtailments that often coincide with high temperature periods or extreme cold weather in the region that would cause the demand for local electricity to spike. Gryphon’s partners have also implemented standard operating procedures to maximize the operational efficiency of its sites, such as preventative maintenance and cleaning of equipment.

Gryphon believes that these steps can enable it to maintain survivability above its competitors and mitigate the downside risk of decreased rewards. Performance Metrics — Network Hash Rate and Difficulty In bitcoin mining, “hash rate” or “hashes per second” are the measuring units of the processing speed of a mining computer mining bitcoin.

“Hash rate” is defined as the speed at which a computer can take any set of information and use an algorithm to reduce that information into a string of letters and numbers of a certain length, known as a “hash.” A “hash” is the computation run by mining hardware in support of the blockchain; therefore, a miner’s “hash rate” refers to the rate at which it is capable of solving such computations.

An individual miner has a hash rate measured as the total hash rate of all of the miners it deploys in its bitcoin mining operations, and network-wide there is a total hash rate of all miners seeking to mine bitcoin.

The higher total hash rate of a specific miner, as a percentage of the network wide total hash rate, generally results over time in a corresponding higher success rate in bitcoin rewards as compared to miners with lower hash rates.

Item 1A. Risk Factors. Risks Related to the Price of Bitcoin Gryphon’s future success will depend upon the value of Bitcoin; the value of Bitcoin may be subject to pricing risk and has historically been subject to wide swings. Gryphon’s operating results depend on the value of Bitcoin because it is the only cryptocurrency that Gryphon mines.

Specifically, Gryphon’s revenues from its bitcoin mining operations are based on two factors: (1) the number of bitcoin rewards Gryphon successfully mines and (2) the value of Bitcoin.

In addition, Gryphon’s operating results are directly impacted by changes in the value of Bitcoin, because under the value measurement model, impairment of Bitcoin and realized gains will be reflected in Gryphon’s statement of operations (i.e., Gryphon will be marking bitcoin to fair value each closing period).

This means that Gryphon’s operating results will be subject to swings based upon increases or decreases in the value of Bitcoin.

Further, Gryphon’s current application-specific integrated circuit, or ASIC, machines (which Gryphon refers to as “miners”) are principally utilized for mining bitcoin and cannot mine other cryptocurrencies, such as ether, that are not mined utilizing the “SHA-256 algorithm.” If other cryptocurrencies were to achieve acceptance at the expense of Bitcoin causing the value of Bitcoin to decline, or if Bitcoin were to switch its proof of work algorithm from SHA-256 to another algorithm for which Gryphon’s miners are not specialized, or the value of Bitcoin were to decline for other reasons, particularly if such decline were significant or over an extended period of time, Gryphon’s operating results would be adversely affected, and there could be a material adverse effect on Gryphon’s ability to continue as a going concern or to pursue Gryphon’s strategy at all, which could have a material adverse effect on Gryphon’s business, prospects or operations, and harm investors.

Bitcoin 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 Bitcoin, which inflates and makes its market prices more volatile or creates “bubble” type risks for Bitcoin. Bitcoin prices are highly volatile, which may affect our ability to effectively manage growth plans and our profitability.

The price of bitcoin is extremely volatile and in fiscal 2023 the price range of bitcoin was between approximately $16,600 and $44,000.

The cost to mine a bitcoin is independent of the then current price of bitcoin, so when prices are low, the cost per coin to mine may consume much of our available cash, which means that there is less capital with which to invest in future company growth.

Similarly, when prices are low, our profitability is decreased on a dollar-for-dollar basis correlated to the then price of bitcoin. Given the volatility of bitcoin, these factors render us unable to accurately predict in advance what our growth plans may be and accurately forecast any revenue and profitability projections for any reporting period.

Gryphon may face several risks due to disruptions in the crypto asset markets, including but not limited to the risk from depreciation in Gryphon’s stock price, financing risk, risk of increased losses or impairments in its investments or other assets, risks of legal proceedings and government investigations, and risks from price declines or price volatility of crypto assets.

The use of crypto assets to, among other things, buy and sell goods and services and complete other transactions is part of a new and rapidly evolving industry that employs crypto assets based upon a computer generated mathematical and/or cryptographic protocol.

The growth of this industry in general, and the use of crypto assets in particular, is subject to a high degree of uncertainty, and the slowing or stopping of the development or acceptance of developing protocols may adversely affect Gryphon’s operations.

The factors affecting the further development of the industry, include, but are not limited to: ● Continued worldwide growth in the adoption and use of crypto assets; ● Governmental and quasi-governmental regulation of crypto assets and their use, or restrictions on or regulation of access to and operation of the network or similar crypto asset systems; ● Changes in consumer demographics and public tastes and preferences; ● The maintenance and development of the open source software protocol of the network; ● The availability and popularity of other forms or methods of buying and selling goods and services, including new means of using fiat currencies; ● General economic conditions and the regulatory environment relating to crypto assets; and ● Consumer sentiment and perception of Bitcoin specifically and crypto assets generally. 12 Many crypto asset exchanges currently do not provide the public with significant information regarding their ownership structure, management teams, corporate practices or regulatory compliance.

As a result, the marketplace may lose confidence in, or may experience problems relating to, crypto asset exchanges, which may cause the price of Bitcoin to decline. For example, in the first half of 2022, each of Celsius Network LLC, et al. (“Celsius”), Voyager Digital Ltd., et al.

(“Voyager”), and Three Arrows Capital (“Three Arrows”) declared bankruptcy, resulting in a loss of confidence among participants in the crypto asset ecosystem and negative publicity surrounding crypto assets more broadly. In November 2022, BlockFi Inc. (“BlockFi”) and FTX Trading Ltd.

(“FTX”), the third largest crypto asset exchange by volume at the time, halted customer withdrawals and shortly thereafter, FTX and its subsidiaries filed for bankruptcy. In December 2022, Core Scientific Inc. (“Core”), one of the largest publicly traded crypto mining companies in the U.S., filed for bankruptcy. Most recently, in January 2023, Genesis Global Holdco, LLC, et al.

(“Genesis”) filed for bankruptcy. In response to these events, the crypto asset markets, including the market for Bitcoin specifically, have experienced extreme price volatility and several other entities in the crypto asset industry have been, and may continue to be, negatively affected, further undermining confidence in the crypto asset market and in Bitcoin.

These events have also negatively impacted the liquidity of the crypto asset market as certain entities affiliated with FTX engaged in significant trading activity.

If the liquidity of the crypto asset market continues to be negatively impacted by these events, crypto asset prices, including the price of Bitcoin, may continue to experience significant volatility and confidence in the crypto asset markets may be further undermined.

A perceived lack of stability in the crypto asset exchange market and the closure or temporary shutdown of crypto asset exchanges due to business failure, hackers or malware, government-mandated regulation or fraud, may reduce confidence at least in part in crypto asset networks and result in greater volatility in Bitcoin’s value.

Because the value of Bitcoin is derived from the continued willingness of market participants to exchange government-issued currency that is designated as legal tender in its country of issuance through government decree, regulation or law for Bitcoin, should the marketplace for Bitcoin be jeopardized or disappear entirely, permanent and total loss of the value of Bitcoin may result.

Such a decrease in Bitcoin price may have a material and adverse effect on Gryphon’s results of operations and financial condition as the results of Gryphon’s operations are significantly tied to the price of Bitcoin.

The failure or insolvency of large exchanges like FTX may cause the price of Bitcoin to fall and decrease confidence in the ecosystem, which could adversely affect an investment in Gryphon.

Such market volatility and decrease in Bitcoin price may have a material and adverse effect on Gryphon’s results of operations and financial condition as the results of Gryphon’s operations are significantly tied to the price of Bitcoin.

As of the date hereof, Gryphon has not experienced any material impact resulting from the bankruptcy filings of FTX, Three Arrows, Celsius, Voyager, BlockFi, and Genesis and the attendant disruptions in the crypto asset markets. Genesis is owned by Digital Currency Group Inc. (“DCG”), which also owns Foundry Digital LLC (“Foundry”), one of Gryphon’s mining pool providers.

However, at this time, Gryphon believes it is not subject to any material risks arising from its previous exposure to Genesis.

Other than the Genesis entities, Gryphon (i) has no direct exposure to any crypto asset entities that have recently filed for bankruptcy; (ii) has no assets that may not be recovered due to these bankruptcies; and (iii) has no exposure to any other counterparties, customers, custodians or other crypto asset market third parties known to Gryphon to have (x) experienced material excessive redemptions or withdrawals or suspended redemptions or withdrawals of crypto assets, (y) the crypto assets of their customers unaccounted for, or (z) experienced material compliance failures.

Similarly, Gryphon believes it is not subject to any material risks arising from its previous exposure to Core. Core provides hosting services for approximately 2% of Gryphon’s existing fleet and has continued to provide services throughout its bankruptcy process, with no noticeable impact to the level of service provided.

Gryphon does not have any assets which may be lost due to the bankruptcy proceedings of Core. The lack of regulation of digital asset exchanges which Bitcoin, and other cryptocurrencies, are traded on, may expose Gryphon to the effects of negative publicity resulting from fraudulent actors in the cryptocurrency space, and can adversely affect an investment in Gryphon.

The digital asset exchanges on which Bitcoin is traded are relatively new and largely unregulated. Many digital asset exchanges do not provide the public with significant information regarding their ownership structure, management teams, corporate practices, or regulatory compliance.

As a result, the marketplace may lose confidence in, or may experience problems relating to, such digital asset exchanges, including prominent exchanges handling a significant portion of the volume of digital asset trading.

In 2022, FTX and a number of other digital asset exchanges filed for bankruptcy proceedings after failing to solve financial issues caused by the falling prices of Bitcoin and other cryptocurrencies.