BTC Digital Ltd.

BTC Digital Ltd. is a crypto asset technology company based in the U.S. primarily focused on bitcoin mining, with additional revenue streams from mining machine resale and rental operations. The company stores all mined bitcoins in hot wallets and may exchange them for fiat currency to fund business operations. Its growth in the crypto asset business, launched in 2022, is attributed to diversified revenue streams, a dedicated team focused on regulatory compliance, and an experienced management team. The company previously operated as an English language training (ELT) service provider in China through Variable Interest Entities (VIEs), but these contractual arrangements were terminated in November 2022, and the ELT business is no longer consolidated into the company's financial statements.

The company's core business model revolves around generating revenue from bitcoin mining and mitigating bitcoin price fluctuations through its mining machine resale and rental business. It sources mining machines from a major manufacturer, AGM Technologies Ltd, often at prices lower than market rates, to resell them during periods of market shortage and higher resale prices. Additionally, it rents out mining machines to customers, with rental rates based on total bitcoins mined, particularly when bitcoin prices are lower, to generate cash flow. The company also emphasizes research and development to improve mining efficiency and expand service offerings.

For the fiscal year ended December 31, 2023, BTC Digital Ltd. generated a substantial majority of its revenue from bitcoin mining ¹. The company owned a total of 2,021 mining machines ², with 1,801 ³, or 89.1% ⁴, under operation, contributing a total hash rate of 213PH/S ⁵. These machines are managed and operated at a hosting facility in New Tazewell, Tennessee. In 2023, the company mined 99.7607 bitcoins ⁶, generating US$2.9 million ⁷ in revenue from this activity. The company also sold 815 bitcoin mining machines ⁸ in 2023, generating US$5.5 million ⁹ in revenue, which represented 60.5% ¹⁰ of its total revenue for the year, with a gross margin of 16.7% ¹¹. Revenue from mining machine rental business was US$0.3 million ¹², accounting for 2.8% ¹³ of total revenue in 2023.

Total revenue for the fiscal year ended December 31, 2023, decreased by 84.3% ¹⁴ to US$9.1 million ¹⁵ from US$57.9 million ¹⁶ in 2022, primarily due to the deconsolidation of the ELT business. Focusing solely on the ongoing cryptocurrency business, revenue decreased by 23.3% ¹⁷ from US$11.8 million ¹⁸ in 2022 to US$9.1 million ¹⁹ in 2023. The company reported a gross loss of US$1.1 million ²⁰ in 2023, a decrease from a gross profit of US$20.1 million ²¹ in 2022, with the gross profit margin declining from 34.6% ²² to negative 12.5% ²³. Operating expenses also decreased significantly, with selling and marketing expenses falling from US$11.4 million ²⁴ in 2022 to US$225 thousand ²⁵ in 2023, and general and administrative expenses decreasing by 92.1% ²⁶ from US$14.2 million ²⁷ to US$1.1 million ²⁸. The company recorded a net loss of US$2.8 million ²⁹ in 2023, compared to a net income of US$5.6 million ³⁰ in 2022. Cash and cash equivalents stood at US$43,000 ³¹ as of December 31, 2023, a slight decrease from US$48,000 ³² in 2022. Total assets were US$24,543,000 ³³ and total liabilities were US$5,101,000 ³⁴ as of December 31, 2023.

During the fiscal year, BTC Digital Ltd. underwent several significant operational developments. The company completed a twenty-for-one share consolidation, effective August 23, 2023, which consolidated 500,000,000 issued and unissued ordinary shares of par value US$0.003 each into 25,000,000 ordinary shares of nominal or par value US$0.06 each. The company also changed its name from "Meten Holding Group Ltd." to "BTC Digital Ltd.," effective August 18, 2023. In July 2023, the company acquired 200 Bitcoin mining machines ³⁵ in exchange for 4,549,069 ordinary shares ³⁶ valued at $880,000 ³⁷. Additionally, in August 2023, the company issued 4,000,000 ordinary shares ³⁸ at a purchase price of $0.25 per share ³⁹ for an aggregate of $1.0 million ⁴⁰ in gross proceeds. In December 2023, it entered into subscription agreements to issue 303,497 ordinary shares ⁴¹ at $3.342 per share ⁴² for gross proceeds of approximately $1,014,286 ⁴³, with the closing occurring on January 5, 2024. The company also acquired 220 units of Antminer S19j Pro ⁴⁴ in October 2023, issuing 276,572 ordinary shares ⁴⁵ to the sellers.

BTC Digital Ltd. plans to implement several growth strategies to expand its cryptocurrency business. The company intends to increase the number of mining machines in its fleet to benefit from a higher combined hash rate, which is expected to enhance profitability from bitcoin mining when bitcoin prices are high and provide greater bargaining power in mining machine resale and rental operations. This expansion is also aimed at further diversifying revenue streams and contributing to long-term growth.

A key growth area for the company is increasing its research and development (R&D) efforts. Recognizing the rapid technological development in the global cryptocurrency industry, the company believes its future success depends on its ability to mine cryptocurrencies at a faster pace, with greater computing power, lower energy costs, and reduced environmental impact. Through an affiliated company, Met Chain Co., Ltd., in which BTC Digital Ltd. holds 24.3% ⁴⁶ equity interests, it has participated in the design and development of equipment for mining machines and infrastructure, including high voltage power supply, liquid-cooling systems, and hash boards. In the near future, the company plans to continue investing in R&D through its subsidiaries and the affiliated company to accumulate knowledge in the cryptocurrency industry, specifically intending to design and develop a proprietary model of ASIC mining machines dedicated to bitcoin mining. To support these R&D capabilities, the company plans to expand its R&D team and upgrade its facilities in 2024, aiming to attract talent in algorithm optimization, software development, and mining machine design.

Another strategic growth area is offering crypto asset management services. The company launched Bitcoin miner management and technical services in 2023 and plans to gradually introduce additional services such as crypto wallets, custody solutions, and trust services in 2024 and 2025. These services are intended to meet the increasing market demand from investors seeking to manage and grow their crypto assets and to add to the company's service value chain.

Regarding its operational outlook, the company's capital expenditures amounted to US$2.5 million ⁴⁷ in 2023, a decrease from US$8.9 million ⁴⁸ in 2022. It expects to continue making capital expenditures to support business growth and anticipates that cash generated from operating and financing activities will meet these needs in the foreseeable future. The company has a capital commitment totaling $4.79 million ⁴⁹ as of December 31, 2023, specifically for the purchase of miners. In a subsequent event, on January 2, 2024, the company entered into an asset purchase agreement to acquire 2,000 units of T21 Miners ⁵⁰ for $5,320,000 ⁵¹, with delivery and operation expected in the first half of 2024. Additionally, on March 12, 2024, the company entered into a definitive agreement to acquire a BTC mining facility in North Carolina with a stable power load of 10 megavolts (MV) ⁵² for a total consideration of $3.4 million ⁵³.

BTC Digital Ltd. faces several material risks, including its limited operating history in the blockchain and cryptocurrency business, which makes evaluating future prospects difficult. The company's revenue and cash flow are materially dependent on the market value and volume of digital assets from mining efforts, making it highly susceptible to significant fluctuations in bitcoin prices. The cost of acquiring new mining machines is capital intensive and may increase with bitcoin prices, potentially affecting profitability. The company's reliance on bitcoin as its sole mined cryptocurrency means its success is largely tied to bitcoin's value, and any sustained decline could adversely affect operations. Operational risks include the degradation and obsolescence of mining machines, the need for significant electrical power, and the potential for accidental or unauthorized loss or theft of cryptocurrencies stored in hot wallets, as the company does not maintain commercial insurance for its operations or bitcoin holdings. Geopolitical and economic events can also impact bitcoin supply and demand, leading to price volatility. Furthermore, the company faces risks from an evolving and potentially underregulated cryptocurrency market, with possible future regulations, including those from the SEC and CFTC, that could impose additional compliance costs or require changes to its business model. There is also a risk that bitcoin could be deemed an investment security, potentially subjecting the company to the Investment Company Act of 1940. The open-source nature of the bitcoin network protocol and the potential for "halving events" that reduce mining rewards could also negatively impact profitability. The company has identified material weaknesses in its internal control over financial reporting, specifically a lack of sufficient finance and accounting personnel and comprehensive accounting policies, as well as inadequate internal controls for approval mechanisms and periodic reviews of user accounts in financial systems.

Management's message to shareholders emphasizes the company's transition and focus on the cryptocurrency business, highlighting its competitive strengths in diversified revenue streams, regulatory compliance efforts, and an experienced leadership team. The company attributes its growth since launching its crypto asset business in 2022 to these factors. Management explicitly states that for the fiscal year ended December 31, 2023, the company generated a substantial majority of its revenue from bitcoin mining ¹. They note the historical volatility of bitcoin prices and their direct impact on profitability, which they aim to mitigate through a mining machines resale and rental business. Strategic priorities for the period ahead include growing current business lines by increasing the mining machine fleet, increasing research and development efforts to enhance mining efficiency and diversify service offerings, and launching new crypto asset management services such as crypto wallets, custody solutions, and trust services in 2024 and 2025. Management also acknowledges the need to address identified material weaknesses in internal controls by obtaining additional resources, conducting training, and optimizing financial systems.