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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 8-K/A
(Amendment No. 1)
______________________
CURRENT REPORT
Pursuant to Section 13
OR 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 31, 2024
______________________
SEMLER SCIENTIFIC, INC.
(Exact name of registrant as specified in its charter)
Delaware |
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001-36305 |
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26-1367393 |
(State or other jurisdiction of
incorporation) |
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(Commission
File Number) |
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(IRS Employer
Identification No.) |
2340-2348 Walsh Avenue, Suite 2344 Santa Clara, CA |
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95051 |
(Address of principal executive offices) |
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(Zip Code) |
Registrant's telephone number, including area code: (877) 774-4211
______________________
Check the appropriate box
below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following
provisions:
¨ |
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
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¨ |
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
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¨ |
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
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¨ |
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading
Symbol(s) |
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Name of each exchange on which registered |
Common Stock, $0.001 par value per share
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SMLR |
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The Nasdaq Stock Market LLC
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Indicate by check mark whether the registrant
is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2
of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).
Emerging growth company ¨
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Item 8.01. Other Events.
On May 28, 2024, we announced a new bitcoin treasury strategy
and the initial purchase of 581 bitcoins for an aggregate amount of $40.0 million, inclusive of fees and expenses, and on June 6,
2024, we announced the purchase of an additional 247 bitcoins for an aggregate amount of $17.0 million, inclusive of fees and expenses
as of such date.
We are filing updated information regarding our new bitcoin
strategy for the purpose of supplementing and updating our business section disclosures and our risk factor disclosures contained in
our prior public filings, including those discussed under the headings “Item 1. Business” and “Item 1A. Risk
Factors” in our annual
report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission, or SEC, on
March 7, 2024, and to supersede our prior updated disclosures included in our
current reports on Form 8-K filed with the SEC on June 6, 2024 and July 11, 2024. The supplemental business section and risk
factor disclosures are filed herewith as Exhibit 99.1 and are incorporated herein by reference.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly
authorized.
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SEMLER SCIENTIFIC, INC. |
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Date: July 31, 2024 |
By: |
/s/ Renae Cormier |
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Name: |
Renae Cormier |
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Title: |
Chief Financial Officer |
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(Principal Financial Officer and Principal Accounting Officer) |
Exhibit 99.1
Bitcoin Strategy Related Supplemental Disclosures
Bitcoin Treasury Strategy
WE ARE NOT REGISTERED AS AN INVESTMENT
COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940 AND STOCKHOLDERS DO NOT HAVE THE PROTECTIONS ASSOCIATED WITH OWNERSHIP OF SHARES IN A
REGISTERED INVESTMENT COMPANY NOR THE PROTECTIONS AFFORDED BY THE COMMODITIES EXCHANGE ACT.
Summary
This section summarizes our current acquisition strategy
for bitcoin, including our historical purchases, trading execution, custody, storage, and accounting considerations. We reserve the right
to update and alter our acquisition strategy from time to time. We view bitcoin as a reliable store of value and a compelling investment.
We believe it has unique characteristics as a scarce and finite asset that can serve as a reasonable inflation hedge and safe haven amid
global instability. Bitcoin is often compared to gold, which has been viewed as a dependable store of value throughout history. Gold’s
value has appreciated substantially over time. For example, 25 years ago, the price of gold was approximately $500 per ounce. In 2024,
the price of gold has traded higher than $2,400 per ounce. As of July 2024, the total market capitalization of gold was approximately
$16.1 trillion compared to approximately $1.1 trillion for bitcoin. Bitcoin is a highly volatile asset that has traded below $26,000 per
bitcoin and above $70,000 per bitcoin on Coinbase in the 12 months preceding the date of the current report on Form 8-K to which this supplement is filed as an Exhibit. While highly volatile, bitcoin’s
price has also appreciated significantly since bitcoin’s inception in January 2009 (at zero per bitcoin). We believe that a
substantial portion of bitcoin’s appreciation is attributable to the view that bitcoin is or will become a reliable store of value.
Like gold, bitcoin is also viewed as a scarce asset; the ultimate supply of bitcoin is limited to 21 million coins and approximately 94%
of its supply already exists. We believe that bitcoin’s finite, digital and decentralized nature as well as its architectural resilience
make it preferable to gold, which, as noted above, has a market capitalization 16 times higher than the market capitalization of bitcoin
as of July 2024. Given our belief that bitcoin is a comparable and possibly better store of value than gold, we believe that bitcoin
has the potential to approach or exceed the value of gold over time. Given the substantial gap in value between gold and bitcoin based
on current market capitalization, we believe that bitcoin has the potential to generate outsize returns as it gains increasing acceptance
as “digital gold.” We believe that the growing global acceptance and “institutionalization” of bitcoin support
our view that bitcoin is a reliable store of value. We believe that bitcoin’s unique attributes discussed above not only differentiate
it from fiat money, but also from other cryptocurrency assets, and for that reason, we have no plans to purchase cryptocurrency assets
other than bitcoin.
Institutionalization of Bitcoin
We are encouraged by the growing global acceptance and “institutionalization”
of bitcoin – reflected by the January 2024 Securities and Exchange Commission, or SEC, approval of 11 bitcoin exchange-traded
funds. These funds have reported billions of dollars of net inflows, with investments from a large number of institutions, including global
banks, pensions, endowments and registered investment advisors. It is currently estimated that more than 10% of all bitcoins are now held
by institutions.
Our Decision to Adopt Bitcoin as Our Primary Reserve Strategy
Our board of directors and senior management have been examining
potential uses of cash, including acquisitions and stock repurchases. After studying various alternatives, we decided that investing in
bitcoin is currently the best use of our cash. Bitcoin will be our principal treasury holding on an ongoing basis, subject to market conditions
and our anticipated cash needs. As we embark on our new acquisition strategy, our board intends to proactively evaluate our use of cash,
ensuring we maintain adequate working capital.
Other than acquiring bitcoin with our liquid assets that
exceed working capital requirements, our bitcoin treasury strategy also involves issuing debt or equity securities or engaging in other
capital raising transactions with the objective of using the proceeds to purchase bitcoin from time to time, and subject to market conditions.
We view bitcoin as a core holding and expect to continue to accumulate bitcoin. We have not set any specific target for the amount of
bitcoin we seek to hold, and we will continue to monitor market conditions in determining whether to engage in financings to purchase
additional bitcoin. This overall strategy also contemplates that we may (i) periodically sell bitcoin for general corporate purposes,
including to generate cash for treasury management (which may include debt repayment, if appropriate at such time), for acquisitions,
or for strategies that generate tax benefits in accordance with applicable law, (ii) enter into additional capital raising transactions
that are collateralized by our bitcoin holdings, and (iii) pursue strategies to create income streams or otherwise generate funds
using our bitcoin holdings. At this time, we do not have a specific policy governing the percentage of our treasury holdings that will
be bitcoin.
Historical Bitcoin Acquisitions
In May 2024, we announced our initial purchases of an
aggregate 581 bitcoins for an aggregate purchase price of $40.0 million, and have subsequently acquired additional bitcoins. As of June 6,
2024, we held an aggregate 828 bitcoins, which we acquired for an aggregate purchase price of $57.0 million, inclusive of fees and expenses.
Accounting
Bitcoin accounting guidance has been evolving. According
to the American Institute of Certified Public Accountants’ “Accounting for and auditing of Digital Assets practice aid,”
bitcoin would satisfy the definition of an indefinite-lived intangible asset and would be accounted for under ASC 350, Intangibles
— Goodwill and Other issued by Financial Accounting Standards Board, or FASB. Under these guidelines, bitcoin holdings would be
accounted for initially at cost and subject to impairment losses if their fair value fell below carrying value. In December 2023,
the FASB issued Accounting Standards Update No. 2023-08, Accounting for and Disclosure of Crypto Assets (ASU 2023-08), which revised
bitcoin accounting treatment. Under this new guidance, the valuation of bitcoin is to be measured based on fair value.
Hedging Strategy
We do not currently intend to hedge our bitcoin holdings
and have not adopted a hedging strategy with respect to bitcoin. However, we may from time to time engage in hedging strategies as part
of our treasury management operations if deemed appropriate.
Overview of the Bitcoin Industry and Market
Bitcoin is a digital asset that is issued by and transmitted
through an open-source protocol, known as the bitcoin protocol, collectively maintained by a peer-to-peer network of decentralized user
nodes. This network hosts a public transaction ledger, known as the bitcoin blockchain, on which bitcoin holdings and all validated transactions
that have ever taken place on the bitcoin network are recorded. Balances of bitcoin are stored in individual “wallet” functions,
which associate network public addresses with one or more “private keys” that control the transfer of bitcoin. The bitcoin
blockchain can be updated without any single entity owning or operating the network.
Creation of New Bitcoin and Limits on Supply
New bitcoin is created and allocated by the bitcoin protocol
through a “mining” process that rewards users that validate transactions in the bitcoin blockchain. Validated transactions
are added in “blocks” approximately every 10 minutes. The mining process serves to validate transactions and secure the bitcoin
network. Mining is a competitive and costly operation that requires a large amount of computational power to solve complex mathematical
algorithms. This expenditure of computing power is known as “proof of work.” To incentivize miners to incur the costs of mining
bitcoin, the bitcoin protocol rewards miners that successfully validate a block of transactions with newly generated bitcoin.
The bitcoin protocol limits the total number of bitcoin that
can be generated over time to 21 million. As part of bitcoin's coin issuance, miners are rewarded a certain amount of bitcoins whenever
a block is produced. When bitcoin first started, 50 bitcoins per block were given as a reward to miners. After every 210,000 blocks are
mined (approximately every four years), the block reward halves and will keep on halving until the block reward per block becomes 0 (approximately
by year 2140). The block reward as of April 2024 is 3.125 coins per block and will decrease to 1.5625 coins per block post halving.
Modifications to the Bitcoin Protocol
Bitcoin is an open-source network that has no central authority,
so no one person can unilaterally make changes to the software that runs the network. However, there is a core group of developers that
maintain the code for the bitcoin protocol as well as various bitcoin end-user software, and they can propose changes to the source code
and release periodic updates and other changes. Unlike most software that has a central entity that can push updates to users, bitcoin
is a peer-to-peer network in which individual network participants, called miners or nodes, decide whether to upgrade the software and
accept the new changes. As a practical matter, a modification becomes part of the bitcoin protocol only if the proposed changes are accepted
by participants collectively having the most processing power, known as hash rate, on the network. If a certain percentage of the nodes
reject the changes, then a “fork” takes place and participants can choose the version of the software they want to run.
Forked or Airdropped Asset Policy
We intend to recognize forked and airdropped assets consistent
with our custodians. We may not immediately or ever have the ability to withdraw a forked or airdropped bitcoin by virtue of bitcoins
that we hold with our custodians. Future forks may occur at any time. A fork can lead to a disruption of networks and our information
technology systems, cybersecurity attacks, replay attacks, or security weaknesses, any of which can further lead to temporary or even
permanent loss of our and our assets.
Forms of Attack Against the Bitcoin Network and Wallets
Blockchain technology has many built-in security features
that make it difficult for hackers and other malicious actors to corrupt the protocol or blockchain. However, as with any computer network,
the bitcoin network may be subject to certain attacks. Some forms of attack include unauthorized access to wallets that hold bitcoin and
direct attacks on the network, like “51% attacks” or “denial-of-service attacks” on the bitcoin protocol.
Bitcoin is designed to be controllable only by the possessor
of both the unique public key and private key(s) relating to the local or online digital wallet in which the bitcoin is held. Private
keys used to access bitcoin balances are not widely distributed and are typically held on hardware (which can be physically controlled
by the holder or by a third party such as a custodian) or via software programs on third-party servers. One form of obtaining unauthorized
access to a wallet occurs following a phishing attack where the attacker deceives the victim and manipulates them into sharing their private
keys for their digital wallet or other sensitive information. Other similar attacks may also result in the loss of private keys and the
inability to access, and effective loss of, the corresponding bitcoin. See “Supplemental Risk Factors—Risks Related to Our
Bitcoin Treasury Strategy and Holdings—We face risks relating to the custody of our bitcoin, including the loss or destruction of
private keys required to access our bitcoin and cyberattacks or other data loss relating to our bitcoin” elsewhere in this supplement.
A “51% attack” may occur when a group of miners
attain more than 50% of the bitcoin network’s mining power, thereby enabling them to control the bitcoin network and protocol and
manipulate the blockchain. A “denial-of-service attack” occurs when legitimate users are unable to access information systems,
devices, or other network resources due to the actions of a malicious actor flooding the network with traffic until the network is unable
to respond or crashes. The bitcoin network has been, and can be in the future, subject to denial-of-service attacks, which can result
in temporary delays in block creation and in the transfer of bitcoin. See “Supplemental Risk Factors—Risks Related to Our
Bitcoin Treasury Strategy and Holdings—Bitcoin and other digital assets are novel assets, and are subject to significant legal,
commercial, regulatory and technical uncertainty” elsewhere in this supplement.
Bitcoin Industry Participants
The primary bitcoin industry participants are miners, investors
and traders, digital asset exchanges and service providers, including custodians, brokers, payment processors, wallet providers and financial
institutions.
Miners.
Miners range from bitcoin enthusiasts to professional mining operations that design and build dedicated mining machines and data centers,
including mining pools, which are groups of miners that act cohesively and combine their processing power to mine bitcoin blocks. See
“—Creation of New Bitcoin and Limits on Supply” above.
Investors
and Traders. Bitcoin investors and traders include individuals and institutional investors who, directly or indirectly, purchase,
hold, and sell bitcoin or bitcoin-based derivatives. On January 10, 2024, the SEC issued an order approving several applications
for the listing and trading of shares of spot bitcoin exchange-traded products, or ETPs on U.S. national securities exchanges. While the
SEC had previously approved exchange-traded funds where the underlying assets were bitcoin futures contracts, this order represents the
first time the SEC has approved the listing and trading of ETPs that acquire, hold and sell bitcoin directly. ETPs can be bought and sold
on a stock exchange like traditional stocks, and provide investors with another means of gaining economic exposure to bitcoin through
traditional brokerage accounts.
Digital
Asset Exchanges. Digital asset exchanges provide trading venues for purchases and sales of bitcoin in exchange for fiat or
other digital assets. Bitcoin can be exchanged for fiat currencies, such as the U.S. dollar, at rates of exchange determined by market
forces on bitcoin trading platforms, which are not regulated in the same manner as traditional securities exchanges. In addition to these
platforms, over-the-counter markets and derivatives markets for bitcoin also exist. The value of bitcoin within the market is determined,
in part, by the supply of and demand for bitcoin in the global bitcoin market, market expectations for the adoption of bitcoin as a store
of value, the number of merchants that accept bitcoin as a form of payment, and the volume of peer-to-peer transactions, among other factors.
For a discussion of risks associated with digital asset exchanges, see “Supplemental Risk Factors—Risks Related to Our Bitcoin
Treasury Strategy and Holdings—Due to the currently unregulated nature and lack of transparency surrounding the operations of many
bitcoin trading venues, bitcoin trading venues may experience greater fraud, security failures or regulatory or operational problems than
trading venues for more established asset classes, which may result in a loss of confidence in bitcoin trading venues and adversely affect
the value of our bitcoin” elsewhere in this supplement.
Service
providers. Service providers offer a multitude of services to other participants in the bitcoin industry, including custodial
and trade execution services, commercial and retail payment processing, loans secured by bitcoin collateral, and financial advisory services.
If adoption of the bitcoin network continues to materially increase, we anticipate that service providers may expand the currently available
range of services and that additional parties will enter the service sector for the bitcoin network.
Other Digital Assets
As of the date of the current report on Form 8-K to
which this supplement is filed as an Exhibit, bitcoin was the largest digital asset by market capitalization. However, there are numerous
alternative digital assets and many entities, including consortia and financial institutions, are researching and investing resources
into private or permissioned blockchain platforms or digital assets that do not use proof-of-work mining like the bitcoin network. For
example, in late 2022, the ethereum network transitioned to a “proof-of-stake” mechanism for validating transactions that
requires significantly less computing power than proof-of-work mining. Other alternative digital assets that compete with bitcoin in certain
ways include “stablecoins,” which are designed to maintain a peg to a reference price because of their issuers’ promise
to hold high-quality liquid assets (such as U.S. dollar deposits and short-term U.S. treasury securities) equal to the total value of
stablecoins in circulation. Stablecoins have grown rapidly as an alternative to bitcoin and other digital assets as a medium of exchange
and store of value, particularly on digital asset trading platforms. As of March 31, 2024, two of the seven largest digital assets
by market capitalization are U.S. dollar-backed stablecoins.
Additionally, central banks in some countries have started
to introduce digital forms of legal tender. For example, China’s central bank digital currency, or CBDC, project was made available
to consumers in January 2022, and governments including the United States and the European Union have been discussing the potential
creation of new CBDCs. For a discussion of risks relating to the emergence of other digital assets, see “Supplemental Risk Factors
—Risks Related to Our Bitcoin Treasury Strategy and Holdings—The emergence or growth of other digital assets, including those
with significant private or public sector backing, could have a negative impact on the price of bitcoin and adversely affect our financial
condition and results of operations” elsewhere in this supplement.
Execution of Bitcoin Transactions
We have
purchased bitcoin through multiple bitcoin trade execution, or liquidity, providers, who may also serve as custodians of our bitcoin,
and expect to continue to do so in the future. We may also in the future acquire or dispose of bitcoin via trade orders executed on exchanges
such as Coinbase. Our liquidity providers and custodians, or our BTC Service Providers, are regulated and licensed entities that operate
under high security, regulatory, audit and governance standards. We transact with multiple BTC Service Providers for both trade execution
and custodial services to spread our risk and to limit our exposure to any single service provider or counterparty.
In selecting
our liquidity providers, we evaluate regulatory status, pricing, annual trading volume, security and customer service. We also leverage
the due diligence we conduct in connection with our custodial arrangements when conducting due diligence on our liquidity providers. Our
current agreements with our liquidity providers are non-exclusive, may be terminated by us at any time, do not impose any requirements
for minimum purchases or volumes with such providers, and generally provide that we are responsible for the costs associated with transfers
of bitcoin.
To date,
our liquidity providers, acting as our agents, have executed trades of bitcoin on our behalf using time-weighted average price over a
prearranged time period, or TWAP, pricing and purchasing methodology, and we expect them to continue to do so in the future. The prearranged
periods over which trades may be executed vary in length depending on the amount of bitcoin to be purchased and other factors, and are
selected because they are expected to have lower price volatility and higher market liquidity, thereby limiting cost and pricing risks.
Our liquidity providers use TWAP in their trading algorithms to execute large orders of bitcoin, without significantly affecting market
price, by breaking large orders into several smaller orders that are independently traded at different time intervals in a generally
linear fashion across different trading venues our liquidity providers select. Our liquidity providers execute trades based on the best
possible terms reasonably available, taking into consideration all relevant facts and circumstances. As our agents, our liquidity providers
use their discretion to select the counterparties to the transactions as well as the trading venues and platforms on which they execute
trades on our behalf, and they may execute trades via cryptocurrency exchanges or in over-the-counter transactions. Our liquidity providers
may calculate time-weighted average price using any number of resources, including various trading platforms. Our liquidity providers
have policies and procedures pursuant to which they conduct trades with institutions that possess licenses or registrations to the extent
required by their activities and have been AML/KYC approved pursuant to our liquidity providers’ internal programs. We may in the
future utilize TWAP pricing or another pricing methodology in connection with the execution of our bitcoin trades.
Custody of our Bitcoin
We currently
hold and intend to continue to hold all of our bitcoin in custodial accounts at U.S.-based, institutional-grade custodians (who may hold
our bitcoin in the United States or other territories) that have demonstrated records of regulatory compliance and information security.
Our custodians may also serve as liquidity providers. As of July 31, 2024, we have entered into custodial agreements with Coinbase Custody
Trust Company, LLC, or Coinbase Custody, a subsidiary of Coinbase Global, Inc., or Coinbase, and NYDIG Trust Company LLC, or NYDIG, a
subsidiary of New York Digital Investment Group LLC. Our agreements with these custodians are filed as exhibits to the registration statement
of which this prospectus forms a part. As we further execute on our strategy, we intend to include additional custodians.
We carefully
select our custodians after undertaking a due diligence process pursuant to which we evaluate, among other things, the quality of their
security protocols, including the multifactor and other authentication procedures designed to safekeep our bitcoin that they may employ,
as well as other security, regulatory, audit and governance standards. Our custodians are required to hold our bitcoin in trust for our
benefit in segregated accounts which are not commingled with their assets or the assets of their affiliates or other clients. Should we
enter into custodial agreements with additional custodians, such agreements may not prohibit such custodians from commingling our bitcoin
with the digital assets of others. Our custodial agreement with NYDIG provides that NYDIG will store our bitcoin in offline, or “cold”
storage, and our custodial agreement with Coinbase Custody provides that Coinbase Custody will hold our bitcoin in an online “hot”
wallet until it receives an instruction from us to effectuate a transfer of our bitcoin into cold storage. Cold storage is designed to
mitigate risks that a system may be susceptible to when connected to the internet, including the risks associated with unauthorized network
access and cyberattacks.
Our custodians
have access to the private key information associated with our bitcoin, or private keys, and they deploy security measures to secure our
bitcoin holdings such as advanced encryption technologies, multi-factor identification, and a policy of storing our private keys in redundant,
secure and geographically dispersed facilities. We never store, view or directly access our private keys. The operational procedures of
our custodians are reviewed periodically by third-party advisors. All movement of our bitcoin by our custodians is coordinated, monitored
and audited. Our custodians’ procedures to prove control over the digital assets they hold in custody are also examined by their
auditors. Additionally, we periodically verify our bitcoin holdings by reconciling our custodial service ledgers to the public blockchain.
Our custodial agreements are terminable by us at any time, for any or no reason, upon advance notice given to the custodian.
Risk Mitigation Practices Related to Our Liquidity
and Custodial Arrangements
We believe
that our primary counterparty risk with respect to our bitcoin holdings is performance obligations under our various custody arrangements.
We intend to custody our bitcoin with multiple custodians to diversify our potential risk exposure to any one custodian. Our custodial
services contracts do not restrict our ability to reallocate our bitcoin among our custodians or require us to hold a minimum amount of
bitcoin with any particular custodian. Our bitcoin holdings may be concentrated with a single custodian from time to time, particularly
as we negotiate new arrangements or move our assets among our various service providers.
As regulated
entities, our BTC Service Providers have policies, procedures and controls designed to comply with the Bank Secrecy Act, as amended by
the USA PATRIOT Act, the implementing regulations of the U.S. Treasury Department’s FinCEN, the Executive Orders and economic sanctions
regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Control, or OFAC, as well as state Anti-Money
Laundering, or AML laws. Pursuant to these policies, procedures and controls, our BTC Service Providers use information systems developed
in-house and by third-party vendors to conduct know your customer, or KYC, identification verification, background checks and other due
diligence on counterparties and customers, and on the affiliates, related persons and authorized representatives of their customers, and
to screen these parties against published sanctions lists. These checks may, where appropriate, assess financial strength, reputation,
trading capabilities and other risks that may be associated with a given customer or counterparty. Our BTC Service Providers perform these
checks and screenings during initial onboarding or in advance of a transaction, as applicable, and periodically thereafter, particularly
when the sanctions lists that they monitor are updated. Our BTC Service Providers also utilize systems that monitor and screen blockchain
transactions and digital wallet addresses in their efforts to detect and report suspicious or unlawful activity.
Our due
diligence process when selecting BTC service providers involves giving consideration to their reputation and security level, confirming
their internal compliance with applicable laws and regulations and ensuring their undertakings of contractual obligations on compliance.
With respect to our custodians, we also conduct due diligence reviews during the custodial relationship to monitor the safekeeping of
our bitcoin. As part of our process, we obtain and review our custodians’ services organization controls reports if available. We
are also contractually entitled to review our custodians’ relevant internal controls through a variety of methods. We have in the
past conducted, and expect to conduct in the future, supplemental due diligence when we believe it is warranted by market circumstances
or otherwise. For example, we obtained supporting documentation to verify certain factual information, including documentation and analysis
regarding financial solvency, exposure to troubled exchanges, regulatory compliance, security protocols and our ownership of our bitcoin.
We negotiate
liability provisions in our custodial contracts pursuant to which our custodians are held liable for their failure to safekeep our bitcoin.
For example, our custodial agreement with Coinbase Custody provides that Coinbase Custody will be liable to us for up to an amount equal
to the greater of the aggregate amount of fees paid in the 12 month period preceding a liability event or the value, at the time of a
liability event, of the supported digital assets in our vault account that are directly affected by the liability event, in either case
subject to a cap of $100 million. Our custodial agreement with NYDIG provides that NYDIG will be liable to us for up to an amount equal
to the greater of the fair market value of the custodied assets at the time the events giving rise to such liability occurred and the
fair market value of the custodied assets at the time we are notified or otherwise have actual knowledge of the events giving rise to
such liability. In addition to custodial arrangements, we also intend to utilize affiliates of our bitcoin custodians to execute bitcoin
acquisition and disposition transactions on our behalf (who may be our liquidity providers discussed elsewhere).
We also
negotiate specific contractual terms and conditions with our custodians that we believe will help establish, under existing law, that
our property interest in the bitcoin held by our custodians is not subject to the claims of the custodian’s creditors in the event
the custodian enters bankruptcy, receivership or similar insolvency proceedings. Our current custodians, and intended future custodians,
are U.S.-based and are subject to U.S. regulatory regimes intended to protect customers in the event that a custodian enters bankruptcy,
receivership or similar insolvency proceedings. Our custodians are required to comply with the Bank Secrecy Act, as amended by the USA
PATRIOT Act, the implementing regulations of the U.S. Treasury Department’s FinCEN, the Executive Orders and economic sanctions
regulations administered by the OFAC, as well as state AML laws. However, applicable insolvency law is not fully developed with respect
to the holding of digital assets in custodial accounts. If our custodially-held bitcoin were nevertheless considered to be the property
of our custodians’ estates in the event that any such custodians were to enter bankruptcy, receivership or similar insolvency proceedings,
we could be treated as a general unsecured creditor of such custodians, inhibiting our ability to exercise ownership rights with respect
to such bitcoin and this may ultimately result in the loss of the value related to some or all of such bitcoin. Even if we are able to
prevent our bitcoin from being considered the property of a custodian’s bankruptcy estate as part of an insolvency proceeding, it
is possible that we would still be delayed or may otherwise experience difficulty in accessing our bitcoin held by the affected custodian
during the pendency of the insolvency proceedings. Additionally, the bitcoin we hold with our custodians and transact with our trade execution
partners does not enjoy the same protections as are available to cash or securities deposited with or transacted by institutions subject
to regulation by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation.
Regardless
of efforts we have made to securely store and safeguard assets, there can be no assurance that our crypto assets will not be subject
to loss or other misappropriation. Although our custodians carry insurance policies with policy limits ranging from $320 million to
$500 million to cover losses for commercial crimes such as asset theft and other covered losses, such policy limits would be shared
among all of their affected customers and subject to various limitations and exclusions (such as if a loss arises due to our failure
to protect our login credentials and devices). As such, the insurance that covers losses of our bitcoin holdings may cover only a
small fraction of the value of the entirety of our bitcoin holdings, and there can be no guarantee that our custodians will maintain
such insurance policies or that such policies will cover any or all of our losses with respect to our bitcoin. For a discussion of
risks relating to the custody of our bitcoin, see “Supplemental Risk Factors—Risks Related to Our Bitcoin Treasury
Strategy and Holdings—Our bitcoin treasury strategy exposes us to various risks associated with bitcoin,” and
“—Our bitcoin treasury strategy exposes us to risk of non-performance by counterparties” elsewhere in this
supplement.
Potential Advantages and Disadvantages of Holding Bitcoin
We believe that bitcoin is an attractive asset because it
can serve as a store of value, supported by a robust and public open-source architecture, that is untethered to sovereign monetary policy.
We also believe that, due to its limited supply, bitcoin offers the potential to serve as a hedge against inflation in the long-term and,
if its adoption increases, the opportunity for appreciation in value.
Bitcoin exists entirely in electronic form, as virtually
irreversible public transaction ledger entries on the blockchain, and transactions in bitcoin are recorded and authenticated not by a
central repository, but by a decentralized peer-to-peer network. This decentralization mitigates the risks of certain threats common to
centralized computer networks, such as denial-of-service attacks, and reduces the dependency of the bitcoin network on any single system.
The decentralization of user nodes and miners also mitigates the risk of a 51% attack, which would be very costly and difficult to execute
with respect to bitcoin because the bitcoin network is open source and widely distributed, and transactions on the blockchain require
significant computing power to be validated. However, while the bitcoin network as a whole is decentralized, the private keys used to
access bitcoin balances are not widely distributed and are susceptible to phishing and other attacks designed to obtain sensitive information
or gain access to password-protected systems. Loss of such private keys can result in an inability to access, and effective loss of, the
corresponding bitcoin. Consequently, bitcoin holdings are susceptible to all of the risks inherent in holding any electronic data, such
as power failure, data corruption, security breach, communication failure and user error, among others. These risks, in turn, make bitcoin
substantially more susceptible to theft, destruction, or loss of value from hackers, corruption, viruses and other technology-specific
factors as compared to conventional fiat currency or other conventional financial assets. See “Supplemental Risk Factors—Risks
Related to Our Bitcoin Treasury Strategy and Holdings—If we or our third-party service providers experience a security breach or
cyberattack and unauthorized parties obtain access to our bitcoin, or if our private keys are lost or destroyed, or other similar circumstances
or events occur, we may lose some or all of our bitcoin and our financial condition and results of operations could be materially adversely
affected” elsewhere in this supplement.
In addition, the bitcoin network relies on open-source developers
to maintain and improve the bitcoin protocol. Accordingly, bitcoin may be subject to protocol design changes, governance disputes such
as “forked” protocols, competing protocols, and other open source-specific risks that do not affect conventional proprietary
software. Unless and until a forked asset is deemed by our custodians to be an eligible asset, we may not immediately or ever have the
ability to withdraw a forked asset.
We believe that in the context of the economic uncertainty
precipitated by escalating geopolitical tensions and central banks having adopted inflationary measures at various times in recent history,
as well as the breakdown of trust in and between political institutions and political parties in the United States and globally, bitcoin
represents an attractive store of value, and that opportunity for appreciation in the value of bitcoin exists in the event that such factors
lead to more widespread adoption of the use and acceptance of bitcoin and the adoption of bitcoin as a treasury reserve alternative by
institutions.
Government Regulation
The laws and regulations applicable to bitcoin and digital
assets are evolving and subject to interpretation and change.
Governments around the world have reacted differently to
digital assets; certain governments have deemed them illegal, and others have allowed their use and trade without restriction, while in
some jurisdictions, such as the U.S., digital assets are subject to overlapping, uncertain and evolving regulatory requirements.
As digital assets have grown in both popularity and market
size, the U.S. Executive Branch, Congress and a number of U.S. federal and state agencies, including the Financial Crimes Enforcement
Network, the CFTC, the SEC, the Financial Industry Regulatory Authority, the Consumer Financial Protection Bureau, the Department of Justice,
the Department of Homeland Security, the Federal Bureau of Investigation, the IRS and state financial regulators, have been examining
the operations of digital asset networks, digital asset users and digital asset exchanges, with particular focus on the extent to which
digital assets can be used to violate state or federal laws, including to facilitate the laundering of proceeds of illegal activities
or the funding of criminal or terrorist enterprises, and the safety and soundness and consumer-protective safeguards of exchanges or other
service-providers that hold, transfer, trade or exchange digital assets for users. Many of these state and federal agencies have issued
consumer advisories regarding the risks posed by digital assets to investors. In addition, federal and state agencies, and other countries
have issued rules or guidance regarding the treatment of digital asset transactions and requirements for businesses engaged in activities
related to digital assets.
Depending on the regulatory characterization of bitcoin,
the markets for bitcoin in general, and our activities in particular, our business and our bitcoin acquisition strategy may be subject
to regulation by one or more regulators in the United States and globally. Ongoing and future regulatory actions may alter, to a materially
adverse extent, the nature of digital assets markets, the participation of industry participants, including service providers and financial
institutions in these markets, and our ability to pursue our bitcoin strategy. Additionally, U.S. state and federal and foreign regulators
and legislatures have taken action against industry participants, including digital assets businesses, and enacted restrictive regimes
in response to adverse publicity arising from hacks, consumer harm, or criminal activity stemming from digital assets activity. U.S. federal
and state energy regulatory authorities are also monitoring the total electricity consumption of cryptocurrency mining, and the potential
impacts of cryptocurrency mining to the supply and dispatch functionality of the wholesale grid and retail distribution systems. Many
state legislative bodies have passed, or are actively considering, legislation to address the impact of cryptocurrency mining in their
respective states.
The CFTC takes the position that some digital assets, including
bitcoin, fall within the definition of a “commodity” under the Commodities Exchange Act of 1936, as amended, or CEA. Under
the CEA, the CFTC has broad enforcement authority to police market manipulation and fraud in spot digital assets markets in which we may
transact. Beyond instances of fraud or manipulation, the CFTC generally does not oversee cash or spot market exchanges or transactions
involving digital asset commodities that do not utilize margin, leverage, or financing. In addition, CFTC regulations and CFTC oversight
and enforcement authority apply with respect to futures, swaps, other derivative products and certain retail leveraged commodity transactions
involving digital asset commodities, including the markets on which these products trade.
The SEC and its staff have taken the position that certain
other digital assets fall within the definition of a “security” under the U.S. federal securities laws. Public statements
made by senior officials and senior members of the staff at the SEC indicate that the SEC does not consider bitcoin to be a security under
the federal securities laws, and the approval of the spot bitcoin ETPs support this view. However, such statements are not official policy
statements by the SEC and reflect only the speakers’ views, which are not binding on the SEC or any other agency or court and cannot
be generalized to any other digital assets.
In addition, because transactions in bitcoin provide a degree
of anonymity, they are susceptible to misuse for criminal activities, such as money laundering. This misuse, or the perception of such
misuse, could lead to greater regulatory oversight of bitcoin and bitcoin platforms, and there is the possibility that law enforcement
agencies could close bitcoin platforms or other bitcoin-related infrastructure with little or no notice and prevent users from accessing
or retrieving bitcoin held via such platforms or infrastructure. For example, in her January 2021 nomination hearing before the Senate
Finance Committee, Treasury Secretary Janet Yellen noted that cryptocurrencies have the potential to improve the efficiency of the financial
system but that they can be used to finance terrorism, facilitate money laundering, and support activities that threaten U.S. national
security interests and the integrity of the U.S. and international financial systems. The OFAC has issued updated advisories regarding
the use of virtual currencies, added a number of digital asset exchanges and service providers to the Specially Designated Nationals and
Blocked Persons list and engaged in several enforcement actions, including a series of enforcement actions that have either shut down
or significantly curtailed the operations of several smaller digital asset exchanges associated with Russian and/or North Korean nationals.
As noted above, activities involving bitcoin and other digital
assets may fall within the jurisdiction of more than one financial regulator and various courts and such laws and regulations are rapidly
evolving and increasing in scope. On March 9, 2022, President Biden signed an executive order relating to cryptocurrencies. While
the executive order did not mandate the adoption of any specific regulations, it instructed various federal agencies to consider potential
regulatory measures, including the evaluation of the creation of a U.S. CBDC. On September 16, 2022, the White House released a framework
for digital asset development, based on reports from various government agencies, including the U.S. Department of Treasury, the Department
of Justice, and the Department of Commerce. Among other things, the framework encourages regulators to pursue enforcement actions, issue
guidance and rules to address current and emergent risks, support the development and use of innovative technologies by payment providers
to increase access to instant payments, consider creating a federal framework to regulate nonbank payment providers, and evaluate whether
to call upon Congress to amend the Bank Secrecy Act and laws against unlicensed money transmission to apply explicitly to digital asset
service providers. There have also been several bills introduced in Congress that propose to establish additional regulation and oversight
of the digital asset markets.
Supplemental Risk Factors
Risks Related to Our Bitcoin Treasury Strategy and Holdings
Our bitcoin treasury strategy exposes us to various
risks associated with bitcoin.
Our bitcoin treasury strategy exposes us to various risks
associated with bitcoin, including the following:
Bitcoin
is a highly volatile asset. Bitcoin is a highly volatile asset that has traded below $26,000 per bitcoin and above $70,000
per bitcoin on the Coinbase exchange in the 12 months preceding the date of the current report on Form 8-K to which this supplement
is filed as an Exhibit. The trading price of bitcoin significantly decreased during prior periods, and such declines may occur again in
the future. Notwithstanding this volatility, we do not currently intend to hedge our bitcoin holdings and have not adopted a hedging strategy
with respect to bitcoin. However, we may from time to time engage in hedging strategies as part of our treasury management operations
if deemed appropriate.
Bitcoin
does not pay interest or dividends. Bitcoin does not pay interest or other returns and we can only generate cash from our bitcoin
holdings if we sell our bitcoin or implement strategies to create income streams or otherwise generate cash by using our bitcoin holdings.
Even if we pursue any such strategies, we may be unable to create income streams or otherwise generate cash from our bitcoin holdings,
and any such strategies may subject us to additional risks.
Our
bitcoin holdings may significantly impact our financial results and the market price of our common stock. Our bitcoin holdings
may significantly affect our financial results and if we continue to increase our overall holdings of bitcoin in the future, they will
have an even greater impact on our financial results and the market price of our common stock. See “—Our historical financial
statements do not reflect the potential variability in earnings that we may experience in the future relating to our bitcoin holdings”
below.
Our
bitcoin treasury strategy has not been tested over an extended period of time or under different market conditions. We only
recently adopted our bitcoin treasury strategy and will need to continually examine the risks and rewards of this new strategy. This new
strategy has not been tested over an extended period of time or under different market conditions. For example, although we believe bitcoin,
due to its limited supply, has the potential to serve as a hedge against inflation in the long term, the short-term price of bitcoin declined
in recent periods during which the inflation rate increased. Some investors and other market participants may disagree with our bitcoin
treasury strategy or actions we undertake to implement it. If bitcoin prices were to decrease or our bitcoin treasury strategy otherwise
proves unsuccessful, our financial condition, results of operations, and the market price of our common stock could be materially adversely
affected.
We
are subject to counterparty risks, including in particular risks relating to our custodians. Although we have implemented various
measures that are designed to mitigate our counterparty risks, including by storing substantially all of the bitcoin we own in custody
accounts at U.S.-based, institutional-grade custodians and negotiating contractual arrangements intended to establish that our property
interest in custodially-held bitcoin is not subject to claims of our custodians’ creditors, applicable insolvency law is not fully
developed with respect to the holding of digital assets in custodial accounts. If our custodially-held bitcoin were nevertheless considered
to be the property of our custodians’ estates in the event that any such custodians were to enter bankruptcy, receivership or similar
insolvency proceedings, we could be treated as a general unsecured creditor of such custodians, inhibiting our ability to exercise ownership
rights with respect to such bitcoin and this may ultimately result in the loss of the value related to some or all of such bitcoin. Even
if we are able to prevent our bitcoin from being considered the property of a custodian’s bankruptcy estate as part of an insolvency
proceeding, it is possible that we would still be delayed or may otherwise experience difficulty in accessing our bitcoin held by the
affected custodian during the pendency of the insolvency proceedings. Any such outcome could have a material adverse effect on our financial
condition and the market price of our common stock.
The
broader digital assets industry is subject to counterparty risks, which could adversely impact the adoption rate, price, and use of bitcoin.
A series of recent high-profile bankruptcies, closures, liquidations, regulatory enforcement actions and other events relating
to companies operating in the digital asset industry, including the filings for bankruptcy protection by Three Arrows Capital, Celsius
Network, Voyager Digital, FTX Trading and Genesis Global Capital, the closure or liquidation of certain financial institutions that provided
lending and other services to the digital assets industry, including Signature Bank and Silvergate Bank, SEC enforcement actions against
Coinbase, Inc. and Binance Holdings Ltd., the placement of Prime Trust, LLC into receivership following a cease-and-desist order
issued by Nevada’s Department of Business and Industry, and the filing and subsequent settlement of a civil fraud lawsuit by the
New York Attorney General against Genesis Global Capital, its parent company Digital Currency Group, Inc., and former partner Gemini
Trust Company, have highlighted the counterparty risks applicable to owning and transacting in digital assets. Although these bankruptcies,
closures, liquidations and other events have not resulted in any loss or misappropriation of our bitcoin, nor have such events adversely
impacted our access to our bitcoin, they have, in the short-term, likely negatively impacted the adoption rate and use of bitcoin. Additional
bankruptcies, closures, liquidations, regulatory enforcement actions or other events involving participants in the digital assets industry
in the future may further negatively impact the adoption rate, price, and use of bitcoin, limit the availability to us of financing collateralized
by bitcoin, or create or expose additional counterparty risks.
Changes
in our ownership of bitcoin could have accounting, regulatory and other impacts. While we currently own or will own bitcoin
directly, we may investigate other potential approaches to owning bitcoin, including indirect ownership (for example, through ownership
interests in a fund that owns bitcoin). If we were to own all or a portion of our bitcoin in a different manner, the accounting treatment
for our bitcoin, our ability to use our bitcoin as collateral for additional borrowings, and the regulatory requirements to which we are
subject, may correspondingly change. For example, the volatile nature of bitcoin may force us to liquidate our holdings to use it as collateral,
which could be negatively effected by any disruptions in the crypto market, and if liquidated, the value of the collateral would not reflect
potential gains in market value of bitcoin, all of which could negatively affect our business and implementation of our bitcoin strategy.
Changes
in the accounting treatment of our bitcoin holdings could have significant accounting impacts, including increasing the volatility of
our results. In December 2023, the FASB issued ASU 2023-08, which upon our adoption will require us to measure in-scope
crypto assets (including our bitcoin holdings) at fair value in our statement of financial position, and to recognize gains and losses
from changes in the fair value of our bitcoin in net income each reporting period. ASU 2023-08 will also require us to provide certain
interim and annual disclosures with respect to our bitcoin holdings. The standard is effective for our interim and annual periods beginning
January 1, 2025. Early adoption is permitted in any interim or annual period for which our financial statements have not been issued
as of the beginning of the annual reporting period and we plan to early adopt. Due in particular to the volatility in the price of bitcoin,
we expect the adoption of ASU 2023-08 to have a material impact on our financial results in future periods, increase the volatility of
our financial results, and affect the carrying value of our bitcoin on our balance sheet, and could have adverse tax consequences, which
in turn could have a material adverse effect on our financial results and the market price of our common stock.
The broader digital assets industry, including the technology
associated with digital assets, the rate of adoption and development of, and use cases for, digital assets, market perception of digital
assets, and the legal, regulatory, and accounting treatment of digital assets are constantly developing and changing, and there may be
additional risks in the future that are not possible to predict.
Bitcoin is a highly volatile asset, and fluctuations
in the price of bitcoin are likely to influence our financial results and the market price of our common stock.
Bitcoin is a highly volatile asset, and fluctuations in the
price of bitcoin are likely to influence our financial results and the market price of our common stock. Our financial results and the
market price of our common stock would be adversely affected, and our business and financial condition would be negatively impacted, if
the price of bitcoin decreased substantially (as it has in the past, such as during 2022), including as a result of:
| · | decreased user and investor confidence in bitcoin, including due to the various factors described herein; |
| · | investment and trading activities, such as (i) trading activities of highly active retail and institutional users, speculators,
miners and investors, (ii) actual or expected significant dispositions of bitcoin by large holders, and (iii) actual or perceived
manipulation of the spot or derivative markets for bitcoin or spot bitcoin ETPs; |
| · | negative publicity, media or social media coverage, or sentiment due to events in or relating to, or perception of, bitcoin or the
broader digital assets industry, for example, (i) public perception that bitcoin can be used as a vehicle to circumvent sanctions,
including sanctions imposed on Russia or certain regions related to the ongoing conflict between Russia and Ukraine, or to fund criminal
or terrorist activities, such as the purported use of digital assets by Hamas to fund its terrorist attack against Israel in October 2023;
(ii) expected or pending civil, criminal, regulatory enforcement or other high profile actions against major participants in the
bitcoin ecosystem, including the SEC’s enforcement actions against Coinbase, Inc. and Binance Holdings Ltd.; (iii) additional
filings for bankruptcy protection or bankruptcy proceedings of major digital asset industry participants, such as the bankruptcy proceeding
of FTX Trading and its affiliates; and (iv) the actual or perceived environmental impact of bitcoin and related activities, including
environmental concerns raised by private individuals, governmental and non-governmental organizations, and other actors related to the
energy resources consumed in the bitcoin mining process; |
| · | changes in consumer preferences and the perceived value or prospects of bitcoin; |
| · | competition from other digital assets that exhibit better speed, security, scalability, or energy efficiency, that feature other more
favored characteristics, that are backed by governments, including the U.S. government, or reserves of fiat currencies, or that represent
ownership or security interests in physical assets; |
| · | a decrease in the price of other digital assets, including stablecoins, or the crash or unavailability of stablecoins that are used
as a medium of exchange for bitcoin purchase and sale transactions, such as the crash of the stablecoin Terra USD in 2022, to the extent
the decrease in the price of such other digital assets or the unavailability of such stablecoins may cause a decrease in the price of
bitcoin or adversely affect investor confidence in digital assets generally; |
| · | the identification of Satoshi Nakamoto, the pseudonymous person or persons who developed bitcoin, or the transfer of substantial amounts
of bitcoin from bitcoin wallets attributed to Mr. Nakamoto or other “whales” that hold significant amounts of bitcoin; |
| · | disruptions, failures, unavailability, or interruptions in service of trading venues for bitcoin, such as, for example, the announcement
by the digital asset exchange FTX Trading that it would freeze withdrawals and transfers from its accounts and subsequent filing for bankruptcy
protection and the recent SEC enforcement action brought against Binance Holdings Ltd., which initially sought to freeze all of its assets
during the pendency of the enforcement action; |
| · | the filing for bankruptcy protection by, liquidation of, or market concerns about the financial viability of digital asset custodians,
trading venues, lending platforms, investment funds, or other digital asset industry participants, such as the filing for bankruptcy protection
by digital asset trading venues FTX Trading and BlockFi and digital asset lending platforms Celsius Network and Voyager Digital Holdings
in 2022, the ordered liquidation of the digital asset investment fund Three Arrows Capital in 2022, the announced liquidation of Silvergate
Bank in 2023, the government-mandated closure and sale of Signature Bank in 2023, the placement of Prime Trust, LLC into receivership
following a cease-and-desist order issued by the Nevada Department of Business and Industry in 2023, and the exit of Binance Holdings
Ltd. from the U.S. market as part of its settlement with the Department of Justice and other federal regulatory agencies; |
| · | regulatory, legislative, enforcement and judicial actions that adversely affect the price, ownership, transferability, trading volumes,
legality or public perception of bitcoin, or that adversely affect the operations of or otherwise prevent digital asset custodians, trading
venues, lending platforms or other digital assets industry participants from operating in a manner that allows them to continue to deliver
services to the digital assets industry; |
| · | further reductions in mining rewards of bitcoin, including block reward halving events, which are events that occur after a specific
period of time that reduce the block reward earned by “miners” who validate bitcoin transactions, or increases in the costs
associated with bitcoin mining, including increases in electricity costs and hardware and software used in mining, that may cause a decline
in support for the Bitcoin network; |
| · | transaction congestion and fees associated with processing transactions on the bitcoin network; |
| · | macroeconomic changes, such as changes in the level of interest rates and inflation, fiscal and monetary policies of governments,
trade restrictions, and fiat currency devaluations; |
| · | developments in mathematics or technology, including in digital computing, algebraic geometry and quantum computing, that could result
in the cryptography used by the bitcoin blockchain becoming insecure or ineffective; and |
| · | changes in national and international economic and political conditions, including, without limitation, the adverse impact attributable
to the economic and political instability caused by the current conflict between Russia and Ukraine and the economic sanctions adopted
in response to the conflict, and the potential broadening of the Israel-Hamas conflict to other countries in the Middle East. |
Bitcoin and other digital assets are novel assets,
and are subject to significant legal, commercial, regulatory and technical uncertainty.
Bitcoin and other digital assets are relatively novel and
are subject to significant uncertainty, which could adversely impact their price. The application of state and federal securities laws
and other laws and regulations to digital assets is unclear in certain respects, and it is possible that regulators in the United States
or foreign countries may interpret or apply existing laws and regulations in a manner that adversely affects the price of bitcoin.
The U.S. federal government, states, regulatory agencies,
and foreign countries may also enact new laws and regulations, or pursue regulatory, legislative, enforcement or judicial actions, that
could materially impact the price of bitcoin or the ability of individuals or institutions such as us to own or transfer bitcoin. For
example, the U.S. executive branch, SEC, the European Union’s Markets in Crypto Assets Regulation, among others have been active
in recent years, and in the U.K., the Financial Services and Markets Act 2023, or FSMA 2023 became law. It is not possible to predict
whether, or when, any of these developments will lead to Congress granting additional authorities to the SEC or other regulators, or whether,
or when, any other federal, state or foreign legislative bodies will take any similar actions. It is also not possible to predict the
nature of any such additional authorities, how additional legislation or regulatory oversight might impact the ability of digital asset
markets to function or the willingness of financial and other institutions to continue to provide services to the digital assets industry,
nor how any new regulations or changes to existing regulations might impact the value of digital assets generally and bitcoin specifically.
The consequences of increased regulation of digital assets and digital asset activities could adversely affect the market price of bitcoin
and in turn adversely affect the market price of our common stock.
Moreover, the risks of engaging in a bitcoin treasury strategy
are relatively novel and have created, and could continue to create, complications due to the lack of experience that third parties have
with companies engaging in such a strategy, such as increased costs of director and officer liability insurance or the potential inability
to obtain such coverage on acceptable terms in the future.
The growth of the digital assets industry in general, and
the use and acceptance of bitcoin in particular, may also impact the price of bitcoin and is subject to a high degree of uncertainty.
The pace of worldwide growth in the adoption and use of bitcoin may depend, for instance, on public familiarity with digital assets, ease
of buying, accessing or gaining exposure to bitcoin, institutional demand for bitcoin as an investment asset, the participation of traditional
financial institutions in the digital assets industry, consumer demand for bitcoin as a means of payment, and the availability and popularity
of alternatives to bitcoin. Even if growth in bitcoin adoption occurs in the near or medium-term, there is no assurance that bitcoin usage
will continue to grow over the long-term.
Because bitcoin has no physical existence beyond the record
of transactions on the bitcoin blockchain, a variety of technical factors related to the bitcoin blockchain could also impact the price
of bitcoin. For example, malicious attacks by miners, inadequate mining fees to incentivize validating of bitcoin transactions, hard “forks”
of the bitcoin blockchain into multiple blockchains, and advances in digital computing, algebraic geometry, and quantum computing could
undercut the integrity of the bitcoin blockchain and negatively affect the price of bitcoin. The liquidity of bitcoin may also be reduced
and damage to the public perception of bitcoin may occur, if financial institutions were to deny or limit banking services to businesses
that hold bitcoin, provide bitcoin-related services or accept bitcoin as payment, which could also decrease the price of bitcoin. Similarly,
the open-source nature of the bitcoin blockchain means the contributors and developers of the bitcoin blockchain are generally not directly
compensated for their contributions in maintaining and developing the blockchain, and any failure to properly monitor and upgrade the
bitcoin blockchain could adversely affect the bitcoin blockchain and negatively affect the price of bitcoin.
Recent actions by U.S. banking regulators have reduced the
ability of bitcoin-related services providers to gain access to banking services and liquidity of bitcoin may also be impacted to the
extent that changes in applicable laws and regulatory requirements negatively impact the ability of exchanges and trading venues to provide
services for bitcoin and other digital assets.
Our historical financial statements do not reflect
the potential variability in earnings that we may experience in the future relating to our bitcoin holdings.
Our historical financial statements do not reflect the potential
variability in earnings that we may experience in the future from holding or selling significant amounts of bitcoin.
The price of bitcoin has historically been subject to dramatic
price fluctuations and is highly volatile. We expect to determine the fair value of our bitcoin based on quoted (unadjusted) prices on
the Coinbase exchange, and following early adoption of ASU 2023-08, will be required to measure our bitcoin holdings at fair value in
our statement of financial position, and to recognize gains and losses from changes in the fair value of our bitcoin in net income each
reporting period, which may create significant volatility in our reported earnings and decrease the carrying value of our digital assets,
which in turn could have a material adverse effect on the market price of our common stock. Conversely, any sale of bitcoins at prices
above our carrying value for such assets creates a gain for financial reporting purposes even if we would otherwise incur an economic
or tax loss with respect to such transaction, which also may result in significant volatility in our reported earnings.
Due in particular to the volatility in the price of bitcoin,
we expect our early adoption of ASU 2023-08 to increase the volatility of our financial results and it could significantly affect the
carrying value of our bitcoin on our balance sheet. As of June 6, 2024, we held an aggregate 828 bitcoins, which we acquired for
$57.0 million, inclusive of fees and expenses, compared to a carrying of no digital assets at March 31, 2024 and $62.9 million in
cash and cash equivalents.
Because we intend to purchase additional bitcoin in future
periods and increase our overall holdings of bitcoin, we expect that the proportion of our total assets represented by our bitcoin holdings
will increase in the future. As a result, and in particular with respect to the quarterly periods and full fiscal year with respect to
which ASU 2023-08 will apply, and for all future periods, volatility in our earnings may be significantly more than what we experienced
in prior periods.
The availability of spot bitcoin ETPs may adversely
affect the market price of our common stock.
Although bitcoin and other digital assets have experienced
a surge of investor attention since bitcoin was invented in 2008, until recently investors in the United States had limited means to gain
direct exposure to bitcoin through traditional investment channels, and instead generally were only able to hold bitcoin through “hosted”
wallets provided by digital asset service providers or through “unhosted” wallets that expose the investor to risks associated
with loss or hacking of their private keys. Given the relative novelty of digital assets, general lack of familiarity with the processes
needed to hold bitcoin directly, as well as the potential reluctance of financial planners and advisers to recommend direct bitcoin holdings
to their retail customers because of the manner in which such holdings are custodied, some investors have sought exposure to bitcoin through
investment vehicles that hold bitcoin and issue shares representing fractional undivided interests in their underlying bitcoin holdings.
These vehicles, which were previously offered only to “accredited investors” on a private placement basis, have in the past
traded at substantial premiums to net asset value, or NAV, possibly due to the relative scarcity of traditional investment vehicles providing
investment exposure to bitcoin.
On January 10, 2024, the SEC approved the listing and
trading of spot bitcoin ETPs, the shares of which can be sold in public offerings and are traded on U.S. national securities exchanges.
The approved ETPs commenced trading directly to the public on January 11, 2024, with a trading volume of approximately $4.6 billion
on the first trading day. To the extent investors view our common stock as providing exposure to bitcoin, it is possible that the value
of our common stock may also have included a premium over the value of our bitcoin due to the prior scarcity of traditional investment
vehicles providing investment exposure to bitcoin, and that the value declined due to investors now having a greater range of options
to gain exposure to bitcoin and investors choosing to gain such exposure through ETPs rather than our common stock.
Although we are an operating company providing technology
solutions to improve the clinical effectiveness and efficiency of healthcare providers, and we believe we offer a different value proposition
than a passive bitcoin investment vehicle such as a spot bitcoin ETP, investors may nevertheless view our common stock as an alternative
to an investment in an ETP, and choose to purchase shares of a spot bitcoin ETP instead of our common stock. They may do so for a variety
of reasons, including if they believe that ETPs offer a “pure play” exposure to bitcoin that is generally not subject to federal
income tax at the entity level as we are, or the other risk factors applicable to an operating business, such as ours. Additionally, unlike
spot bitcoin ETPs, we (i) do not seek for our shares of common stock to track the value of the underlying bitcoin we hold before
payment of expenses and liabilities, (ii) do not benefit from various exemptions and relief under the Securities Exchange Act of
1934, as amended, or the Exchange Act, including Regulation M, and other securities laws, which enable spot bitcoin ETPs to continuously
align the value of their shares to the price of the underlying bitcoin they hold through share creation and redemption, (iii) are
a Delaware corporation rather than a statutory trust, and do not operate pursuant to a trust agreement that would require us to pursue
one or more stated investment objectives, and (iv) are not required to provide daily transparency as to our bitcoin holdings or our
daily NAV. Furthermore, recommendations by broker-dealers to buy, hold, or sell complex products and non-traditional ETPs, or an investment
strategy involving such products, may be subject to additional or heightened scrutiny that would not be applicable to broker-dealers making
recommendations with respect to our common stock. Based on how we are viewed in the market relative to ETPs, and other vehicles that offer
economic exposure to bitcoin, such as bitcoin futures ETFs and leveraged bitcoin futures ETFs, any premium or discount in our common stock
relative to the value of our bitcoin holdings may increase or decrease in different market conditions.
As a result of the foregoing factors, availability of spot
bitcoin ETPs on U.S. national securities exchanges could have a material adverse effect on the market price of our common stock.
Our bitcoin treasury strategy subjects us to enhanced
regulatory oversight.
As noted above, several spot bitcoin ETPs have received approval
from the SEC to list their shares on a U.S. national securities exchange with continuous share creation and redemption at NAV. Even though
we are not, and do not function in the manner of, a spot bitcoin ETP, it is possible that we nevertheless could face regulatory scrutiny
from the SEC or other federal or state agencies due to our bitcoin holdings.
In addition, there has been increasing focus on the extent
to which digital assets can be used to launder the proceeds of illegal activities, fund criminal or terrorist activities, or circumvent
sanctions regimes, including those sanctions imposed in response to the ongoing conflict between Russia and Ukraine. While we have implemented
and maintain policies and procedures reasonably designed to promote compliance with applicable anti-money laundering and sanctions laws
and regulations and take care to only acquire our bitcoin through entities subject to anti-money laundering regulation and related compliance
rules in the United States, if we are found to have purchased any of our bitcoin from bad actors that have used bitcoin to launder
money or persons subject to sanctions, we may be subject to regulatory proceedings and any further transactions or dealings in bitcoin
by us may be restricted or prohibited.
We may consider issuing debt or other financial instruments
that may be collateralized by our bitcoin holdings. We may also consider pursuing strategies to create income streams or otherwise generate
funds using our bitcoin holdings. These types of bitcoin-related transactions are the subject of enhanced regulatory oversight. These
and any other bitcoin-related transactions we may enter into, beyond simply acquiring and holding bitcoin, may subject us to additional
regulatory compliance requirements and scrutiny, including under federal and state money services regulations, money transmitter licensing
requirements and various commodity and securities laws and regulations.
Additional laws, guidance and policies may be issued by domestic
and foreign regulators following the filing for Chapter 11 bankruptcy protection by FTX Trading, one of the world’s largest cryptocurrency
exchanges, in November 2022. U.S. and foreign regulators have also increased, and are highly likely to continue to increase, enforcement
activity, and are likely to adopt new regulatory requirements in response to FTX Trading’s collapse. Increased enforcement activity
and changes in the regulatory environment, including changing interpretations and the implementation of new or varying regulatory requirements
by the government or any new legislation affecting bitcoin, as well as enforcement actions involving or impacting our trading venues,
counterparties and custodians, may impose significant costs or significantly limit our ability to hold and transact in bitcoin.
In addition, private actors that are wary of bitcoin or the
regulatory concerns associated with bitcoin may in the future take further actions that may have an adverse effect on our business or
the market price of our common stock.
Due to the currently unregulated nature and lack of
transparency surrounding the operations of many bitcoin trading venues, bitcoin trading venues may experience greater fraud, security
failures or regulatory or operational problems than trading venues for more established asset classes, which may result in a loss of confidence
in bitcoin trading venues and adversely affect the value of our bitcoin.
Bitcoin trading venues are relatively new and, in many cases,
currently unregulated. Even if regulated, such venues may not be complying with such regulations. Furthermore, there are many bitcoin
trading venues that do not provide the public with significant information regarding their ownership structure, management teams, corporate
practices and regulatory compliance. As a result, the marketplace may lose confidence in bitcoin trading venues, including prominent exchanges
that handle a significant volume of bitcoin trading and/or are subject to regulatory oversight, in the event one or more bitcoin trading
venues cease or pause for a prolonged period the trading of bitcoin or other digital assets, or experience fraud, significant volumes
of withdrawal, security failures or operational problems.
In 2019 there were reports claiming that 80-95% of bitcoin
trading volume on trading venues was false or non-economic in nature, with specific focus on currently unregulated exchanges located outside
of the United States. The SEC also alleged as part of its June 2023, complaint that Binance Holdings Ltd. committed strategic and
targeted “wash trading” through its affiliates to artificially inflate the volume of certain digital assets traded on its
exchange. Such reports and allegations may indicate that the bitcoin market is significantly smaller than expected and that the United
States makes up a significantly larger percentage of the bitcoin market than is commonly understood. Any actual or perceived false trading
in the bitcoin market, and any other fraudulent or manipulative acts and practices, could adversely affect the value of our bitcoin. Negative
perception, a lack of stability in the broader bitcoin markets and the closure, temporary shutdown or operational disruption of bitcoin
trading venues, lending institutions, institutional investors, institutional miners, custodians, or other major participants in the bitcoin
ecosystem, due to fraud, business failure, cybersecurity events, government-mandated regulation, bankruptcy, or for any other reason,
may result in a decline in confidence in bitcoin and the broader bitcoin ecosystem and greater volatility in the price of bitcoin. For
example, in 2022, each of Celsius Network, Voyager Digital, Three Arrows Capital, FTX Trading, and BlockFi filed for bankruptcy, following
which the market prices of bitcoin and other digital assets significantly declined. In addition, in June 2023, the SEC announced
enforcement actions against Coinbase, Inc., and Binance Holdings Ltd., two providers of large trading venues for digital assets,
which similarly was followed by a decrease in the market price of bitcoin and other digital assets. These were followed in November 2023,
by an SEC enforcement action against Kraken, another large trading venue for digital assets. As the price of our common stock is affected
by the value of our bitcoin holdings, the failure of a major participant in the bitcoin ecosystem could have a material adverse effect
on the market price of our common stock.
The concentration of our bitcoin holdings enhances
the risks inherent in our bitcoin treasury strategy.
As of June 6, 2024, we held an aggregate 828 bitcoins,
which we acquired for $57.0 million, inclusive of fees and expenses, and we intend to purchase additional bitcoin and increase our overall
holdings of bitcoin in the future. The concentration of our bitcoin holdings limits the risk mitigation that we could take advantage of
by purchasing a more diversified portfolio of treasury assets, and the absence of diversification enhances the risks inherent in our bitcoin
acquisition strategy. Any future significant declines in the price of bitcoin would have, a more pronounced impact on our financial condition
than if we used our cash to purchase a more diverse portfolio of assets.
The emergence or growth of other digital assets, including
those with significant private or public sector backing, could have a negative impact on the price of bitcoin and adversely affect our
financial condition and results of operations.
As a result of our bitcoin treasury strategy, the majority
of our cash is now concentrated in our bitcoin holdings. Accordingly, the emergence or growth of digital assets other than bitcoin may
have a material adverse effect on our financial condition. While bitcoin is the largest digital asset by market capitalization as of the
date of the current report on Form 8-K to which this supplement is filed as Exhibit, there are numerous alternative digital assets
and many entities, including consortiums and financial institutions, are researching and investing resources into private or permissioned
blockchain platforms or digital assets that do not use proof-of-work mining like the bitcoin network. For example, in late 2022, the ethereum
network transitioned to a “proof-of-stake” mechanism for validating transactions that requires significantly less computing
power than proof-of-work mining. The ethereum network has completed another major upgrade since then and may undertake additional upgrades
in the future. If the mechanisms for validating transactions in ethereum and other alternative digital assets are perceived as superior
to proof-of-work mining, those digital assets could gain market share relative to bitcoin.
Other alternative digital assets that compete with bitcoin
in certain ways include “stablecoins,” which are designed to maintain a constant price because of, for instance, their issuers’
promise to hold high-quality liquid assets (such as U.S. dollar deposits and short-term U.S. treasury securities) equal to the total value
of stablecoins in circulation. Stablecoins have grown rapidly as an alternative to bitcoin and other digital assets as a medium of exchange
and store of value, particularly on digital asset trading platforms. As of the date of the current report on Form 8-K to which this
supplement is filed as Exhibit, two of the seven largest digital assets by market capitalization are U.S. dollar-backed stablecoins.
Additionally, central banks in some countries have started
to introduce digital forms of legal tender. For example, China’s CBDC project was made available to consumers in January 2022,
and governments including the United States, the European Union, and Israel have been discussing the potential creation of new CBDCs.
Whether or not they incorporate blockchain or similar technology, CBDCs, as legal tender in the issuing jurisdiction, could also compete
with, or replace, bitcoin and other digital assets as a medium of exchange or store of value. As a result, the emergence or growth of
these or other digital assets could cause the market price of bitcoin to decrease, which could have a material adverse effect on our financial
condition, and operating results.
Our bitcoin holdings are less liquid than our existing
cash and cash equivalents and may not be able to serve as a source of liquidity for us to the same extent as cash and cash equivalents.
Historically, the bitcoin markets have been characterized
by significant volatility in price, limited liquidity and trading volumes compared to sovereign currencies markets, relative anonymity,
a developing regulatory landscape, potential susceptibility to market abuse and manipulation, compliance and internal control failures
at exchanges, and various other risks inherent in its entirely electronic, virtual form and decentralized network. During times of market
instability, we may not be able to sell our bitcoin at favorable prices or at all. For example, a number of bitcoin trading venues temporarily
halted deposits and withdrawals in 2022. As a result, our bitcoin holdings may not be able to serve as a source of liquidity for us to
the same extent as cash and cash equivalents. Further, bitcoin we hold with our custodians and transact with our trade execution partners
does not enjoy the same protections as are available to cash or securities deposited with or transacted by institutions subject to regulation
by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation. Additionally, we may be unable to enter
into term loans or other capital raising transactions collateralized by our unencumbered bitcoin or otherwise generate funds using our
bitcoin holdings, including in particular during times of market instability or when the price of bitcoin has declined significantly.
If we are unable to sell our bitcoin, enter into additional capital raising transactions using bitcoin as collateral, or otherwise generate
funds using our bitcoin holdings, or if we are forced to sell our bitcoin at a significant loss, in order to meet our working capital
requirements, our business and financial condition could be negatively impacted.
If we or our third-party service providers experience
a security breach or cyberattack and unauthorized parties obtain access to our bitcoin, or if our private keys are lost or destroyed,
or other similar circumstances or events occur, we may lose some or all of our bitcoin and our financial condition and results of operations
could be materially adversely affected.
Substantially all of the bitcoin we own is held in custody
accounts at U.S.-based institutional-grade digital asset custodians. Security breaches and cyberattacks are of particular concern with
respect to our bitcoin. Bitcoin and other blockchain-based cryptocurrencies and the entities that provide services to participants in
the bitcoin ecosystem have been, and may in the future be, subject to security breaches, cyberattacks, or other malicious activities.
For example, in October 2021 it was reported that hackers exploited a flaw in the account recovery process and stole from the accounts
of at least 6,000 customers of the Coinbase exchange, although the flaw was subsequently fixed and Coinbase reimbursed affected customers.
Similarly, in November 2022, hackers exploited weaknesses in the security architecture of the FTX Trading digital asset exchange
and reportedly stole over $400 million in digital assets from customers. A successful security breach or cyberattack could result in:
| · | a partial or total loss of our bitcoin in a manner that may not be covered by insurance or the liability provisions of the custody
agreements with the custodians who hold our bitcoin; |
| · | harm to our reputation and brand; |
| · | improper disclosure of data and violations of applicable data privacy and other laws; or |
| · | significant regulatory scrutiny, investigations, fines, penalties, and other legal, regulatory, contractual and financial exposure. |
Further, any actual or perceived data security breach or
cybersecurity attack directed at other companies with digital assets or companies that operate digital asset networks, regardless of whether
we are directly impacted, could lead to a general loss of confidence in the broader bitcoin blockchain ecosystem or in the use of the
bitcoin network to conduct financial transactions, which could negatively impact us.
Attacks upon systems across a variety of industries, including
industries related to bitcoin, are increasing in frequency, persistence, and sophistication, and, in many cases, are being conducted by
sophisticated, well-funded and organized groups and individuals, including state actors. The techniques used to obtain unauthorized, improper
or illegal access to systems and information (including personal data and digital assets), disable or degrade services, or sabotage systems
are constantly evolving, may be difficult to detect quickly, and often are not recognized or detected until after they have been launched
against a target. These attacks may occur on our systems or those of our third-party service providers or partners. We may experience
breaches of our security measures due to human error, malfeasance, insider threats, system errors or vulnerabilities or other irregularities.
In particular, we expect that unauthorized parties will attempt, to gain access to our systems and facilities, as well as those of our
partners and third-party service providers, through various means, such as hacking, social engineering, phishing and fraud. Threats can
come from a variety of sources, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, and insiders.
In addition, certain types of attacks could harm us even if our systems are left undisturbed. For example, certain threats are designed
to remain dormant or undetectable, sometimes for extended periods of time, or until launched against a target and we may not be able to
implement adequate preventative measures. Further, there has been an increase in such activities due to the increase in work-from-home
arrangements. The risk of cyberattacks could also be increased by cyberwarfare in connection with the ongoing Russia-Ukraine and Israel-Hamas
conflicts, or other future conflicts, including potential proliferation of malware into systems unrelated to such conflicts. Any future
breach of our operations or those of others in the bitcoin industry, including third-party services on which we rely, could materially
and adversely affect our financial condition and results of operations.
We face risks relating to the custody of our bitcoin,
including the loss or destruction of private keys required to access our bitcoin and cyberattacks or other data loss relating to our bitcoin
We hold our bitcoin with regulated custodians that have duties
to safeguard our private keys. Our custodial services contracts do not restrict our ability to reallocate our bitcoin among our custodians,
and our bitcoin holdings may be concentrated with a single custodian from time to time. In light of the significant amount of bitcoin
we hold, we continually seek to engage additional custodians to achieve a greater degree of diversification in the custody of our bitcoin
as the extent of potential risk of loss is dependent, in part, on the degree of diversification. If there is a decrease in the availability
of digital asset custodians that we believe can safely custody our bitcoin, for example, due to regulatory developments or enforcement
actions that cause custodians to discontinue or limit their services in the United States, we may need to enter into agreements that are
less favorable than our current agreements or take other measures to custody our bitcoin, and our ability to seek a greater degree of
diversification in the use of custodial services would be materially adversely affected. In addition, holding our bitcoin with regulated
custodians could affect the availability of receiving digital assets that may result from “forks” of the bitcoin blockchain
if our custodians are unable to support or otherwise provide us with such digital assets, thereby reducing the amount of digital assets
we may hold as a result. While our custodians carry insurance policies to cover losses for commercial crimes, cyber and cold storage,
the policy limits vary per provider and would be shared among all of their customers, and subject to various limitations and exclusions
(such as if a loss arises due to our failure to protect our login credentials and devices). The insurance that covers losses of our bitcoin
holdings may cover only a small fraction of the value of the entirety of our bitcoin holdings, and there can be no guarantee that such
insurance will be maintained as part of the custodial services we have or that such coverage will cover losses with respect to our bitcoin.
Moreover, our use of custodians exposes us to the risk that the bitcoin our custodians hold on our behalf could be subject to insolvency
proceedings and we could be treated as a general unsecured creditor of the custodian, inhibiting our ability to exercise ownership rights
with respect to such bitcoin. Any loss associated with such insolvency proceedings is unlikely to be covered by any insurance coverage
we maintain related to our bitcoin.
Bitcoin is controllable only by the possessor of both the
unique public key and private key(s) relating to the local or online digital wallet in which the bitcoin is held. While the bitcoin
blockchain ledger requires a public key relating to a digital wallet to be published when used in a transaction, private keys must be
safeguarded and kept private in order to prevent a third party from accessing the bitcoin held in such wallet. To the extent the private
key(s) for a digital wallet are lost, destroyed, or otherwise compromised and no backup of the private key(s) is accessible,
neither we nor our custodians will be able to access the bitcoin held in the related digital wallet. Furthermore, we cannot provide assurance
that our digital wallets, nor the digital wallets of our custodians held on our behalf, will not be compromised as a result of a cyberattack.
The bitcoin and blockchain ledger, as well as other digital assets and blockchain technologies, have been, and may in the future be, subject
to security breaches, cyberattacks, or other malicious activities.
Regulatory change reclassifying bitcoin as a security
could lead to our classification as an “investment company” under the Investment Company Act of 1940, as amended, or the 1940
Act, and could adversely affect the market price of bitcoin and the market price of our common stock.
Under Sections 3(a)(1)(A) and (C) of the 1940 Act,
a company generally will be deemed to be an “investment company” for purposes of the 1940 Act if (1) it is, or holds
itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities
or (2) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and
it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S.
government securities and cash items) on an unconsolidated basis. We do not believe that we are an “investment company,” as
such term is defined in the 1940 Act, and are not registered as an “investment company” under the 1940 Act as of the current
report on Form 8-K to which this supplement is filed as an Exhibit.
While senior SEC officials have stated their view that bitcoin
is not a “security” for purposes of the federal securities laws, a contrary determination by the SEC could lead to our classification
as an “investment company” under the 1940 Act, if the portion of our assets consists of investments in bitcoins exceeds
40% safe harbor limits prescribed in the 1940 Act, which would subject us to significant additional regulatory controls that could have
a material adverse effect on our business and operations and may also require us to change the manner in which we conduct our business.
We monitor our assets and income for compliance under the
1940 Act and seek to conduct our business activities in a manner such that we do not fall within its definitions of “investment
company” or that we qualify under one of the exemptions or exclusions provided by the 1940 Act and corresponding SEC regulations.
If bitcoin is determined to constitute a security for purposes of the federal securities laws, we would take steps to reduce the percentage
of bitcoins that constitute investment assets under the 1940 Act. These steps may include, among others, selling bitcoins that we might
otherwise hold for the long term and deploying our cash in non-investment assets, and we may be forced to sell our bitcoins at unattractive
prices. We may also seek to acquire additional non-investment assets to maintain compliance with the 1940 Act, and we may need to incur
debt, issue additional equity or enter into other financing arrangements that are not otherwise attractive to our business. Any of these
actions could have a material adverse effect on our results of operations and financial condition. Moreover, we can make no assurance
that we would successfully be able to take the necessary steps to avoid being deemed to be an investment company in accordance with the
safe harbor. If we were unsuccessful, and if bitcoin is determined to constitute a security for purposes of the federal securities laws,
then we would have to register as an investment company, and the additional regulatory restrictions imposed by 1940 Act could adversely
affect the market price of bitcoin and in turn adversely affect the market price of our common stock.
We may be subject to regulatory developments related
to crypto assets and crypto asset markets, which could adversely affect our business, financial condition, and results of operations.
As bitcoin and other digital assets are relatively novel
and the application of state and federal securities laws and other laws and regulations to digital assets is unclear in certain respects,
and it is possible that regulators in the United States or foreign countries may interpret or apply existing laws and regulations in a
manner that adversely affects the price of bitcoin. The U.S. federal government, states, regulatory agencies, and foreign countries may
also enact new laws and regulations, or pursue regulatory, legislative, enforcement or judicial actions, that could materially impact
the price of bitcoin or the ability of individuals or institutions such as us to own or transfer bitcoin. For examples, see “Supplemental
Risk Factors—Risks Related to Our Bitcoin Treasury Strategy and Holdings—Bitcoin and other digital assets are novel assets,
and are subject to significant legal, commercial, regulatory and technical uncertainty” elsewhere in this supplement.
If bitcoin is determined to constitute a security for purposes
of the federal securities laws, the additional regulatory restrictions imposed by such a determination could adversely affect the market
price of bitcoin and in turn adversely affect the market price of our common stock. See “Supplemental Risk Factors—Regulatory
change reclassifying bitcoin as a security could lead to our classification as an “investment company” under the Investment
Company Act of 1940, as amended, or the 1940 Act, and could adversely affect the market price of bitcoin and the market price of our common
stock” above. Moreover, the risks of us engaging in a bitcoin treasury strategy have created, and could continue to create, complications
due to the lack of experience that third parties have with companies engaging in such a strategy, such as increased costs of director
and officer liability insurance or the potential inability to obtain such coverage on acceptable terms in the future.
Our bitcoin treasury strategy exposes us to risk of
non-performance by counterparties
Our bitcoin treasury strategy exposes us to the risk of non-performance
by counterparties, whether contractual or otherwise. Risk of non-performance includes inability or refusal of a counterparty to perform
because of a deterioration in the counterparty’s financial condition and liquidity or for any other reason. For example, our execution
partners, custodians, or other counterparties might fail to perform in accordance with the terms of our agreements with them, which could
result in a loss of bitcoin, a loss of the opportunity to generate funds, or other losses.
Our primary counterparty risk with respect to our bitcoin
is custodian performance obligations under the various custody arrangements we have entered into. A series of recent high-profile bankruptcies,
closures, liquidations, regulatory enforcement actions and other events relating to companies operating in the digital asset industry,
the closure or liquidation of certain financial institutions that provided lending and other services to the digital assets industry,
SEC enforcement actions against other providers, or placement into receivership or civil fraud lawsuit against digital asset industry
participants have highlighted the perceived and actual counterparty risk applicable to digital asset ownership and trading. Although these
bankruptcies, closures and liquidations have not adversely impacted our bitcoin (which was only recently acquired), legal precedent created
in these bankruptcy and other proceedings may increase the risk of future rulings adverse to our interests in the event one or more of
our custodians becomes a debtor in a bankruptcy case or is the subject of other liquidation, insolvency or similar proceedings.
While our custodians are subject to regulatory regimes intended
to protect customers in the event of a custodial bankruptcy, receivership or similar insolvency proceeding, no assurance can be provided
that our custodially-held bitcoin will not become part of the custodian’s insolvency estate if one or more of our custodians enters
bankruptcy, receivership or similar insolvency proceedings. Additionally, if we pursue any strategies to create income streams or otherwise
generate funds using our bitcoin holdings, we would become subject to additional counterparty risks. Although no such strategies are contemplated
at this time, we will need to carefully evaluate market conditions, including price volatility as well as service provider terms and market
reputations and performance, among others, prior to implementing any such strategy, all of which could effect our ability to successfully
implement and execute on any such future strategy. These risks, along with any significant non-performance by counterparties, including
in particular the custodians with which we custody substantially all of our bitcoin, could have a material adverse effect on our business,
prospects, financial condition, and operating results.
Our custodially-held bitcoin may become part of the
custodian’s insolvency estate if one or more of our custodians enters bankruptcy, receivership or similar insolvency proceedings.
If our custodially-held bitcoin are considered to be the
property of our custodians’ estates in the event that any such custodians were to enter bankruptcy, receivership or similar insolvency
proceedings, we could be treated as a general unsecured creditor of such custodians, inhibiting our ability to exercise ownership rights
with respect to such bitcoin and this may ultimately result in the loss of the value related to some or all of such bitcoin. A series
of recent high-profile bankruptcies, closures, liquidations, regulatory enforcement actions and other events relating to companies operating
in the digital asset industry, including the filings for bankruptcy protection by Three Arrows Capital, Celsius Network, Voyager Digital,
FTX Trading and Genesis Global Capital, the closure or liquidation of certain financial institutions that provided lending and other services
to the digital assets industry, including Signature Bank and Silvergate Bank, SEC enforcement actions against Coinbase, Inc. and
Binance Holdings Ltd., the placement of Prime Trust, LLC into receivership following a cease-and-desist order issued by Nevada’s
Department of Business and Industry, and the filing and subsequent settlement of a civil fraud lawsuit by the New York Attorney General
against Genesis Global Capital, its parent company Digital Currency Group, Inc., and former partner Gemini Trust Company, have highlighted
the counterparty risks applicable to owning and transacting in digital assets. Although these bankruptcies, closures, liquidations and
other events have not resulted in any loss or misappropriation of our bitcoin, nor have such events adversely impacted our access to our
bitcoin, they have, in the short-term, likely negatively impacted the adoption rate and use of bitcoin. Additional bankruptcies, closures,
liquidations, regulatory enforcement actions or other events involving participants in the digital assets industry in the future may further
negatively impact the adoption rate, price, and use of bitcoin, limit the availability to us of financing collateralized by bitcoin, or
create or expose additional counterparty risks. Any loss associated with such insolvency proceedings is unlikely to be covered by any
insurance coverage we maintain related to our bitcoin. Even if we are able to prevent our bitcoin from being considered the property of
a custodian’s bankruptcy estate as part of an insolvency proceeding, it is possible that we would still be delayed or may otherwise
experience difficulty in accessing our bitcoin held by the affected custodian during the pendency of the insolvency proceedings. Any such
outcome could have a material adverse effect on our financial condition and the market price of our common stock.
A temporary or permanent blockchain “fork”
to bitcoin or other crypto assets could adversely affect our business.
Blockchain protocols, including bitcoin, are open source.
Any user can download the software, modify it, and then propose that bitcoin or other blockchain protocols users and miners adopt the
modification. When a modification is introduced and a substantial majority of users and miners consent to the modification, the change
is implemented and the bitcoin or other blockchain protocol networks, as applicable, remain uninterrupted. However, if less than a substantial
majority of users and miners consent to the proposed modification, and the modification is not compatible with the software prior to its
modification, the consequence would be what is known as a “fork”, i.e., “split” of the impacted blockchain
protocol network and respective blockchain, with one prong running the pre-modified software and the other running the modified software.
The effect of such a fork would be the existence of two parallel versions of the bitcoin or other blockchain protocol network, as applicable,
running simultaneously, but with each split network’s crypto asset lacking interchangeability. A“hard fork” –
where there is disagreement among the users about the rules of the network – can have a significant negative impact on value
of the crypto asset.
The bitcoin has been subject to “forks” that
resulted in the creation of new networks, including bitcoin cash ABC, bitcoin cash SV, bitcoin diamond, bitcoin gold and others. Some
of these forks have caused fragmentation among platforms as to the correct naming convention for forked crypto assets. Due to the lack
of a central registry or rulemaking body, no single entity has the ability to dictate the nomenclature of forked crypto assets, causing
disagreements and a lack of uniformity among platforms on the nomenclature of forked crypto assets, and which results in further confusion
to customers as to the nature of assets they hold on platforms, and which can negatively impact the value of the crypto assets. In addition,
several of these forks were contentious and as a result, participants in certain communities may harbor ill will towards other communities.
As a result, certain community members may take actions that adversely impact the use, adoption, and price of bitcoin, or any of their
forked alternatives.
Furthermore, hard forks can lead to new security concerns.
For instance, when the Ethereum and Ethereum Classic networks split in July 2016, replay attacks, in which transactions from one
network were rebroadcast on the other network to achieve “double-spending,” plagued platforms that traded Ethereum through
at least October 2016, resulting in significant losses to some crypto asset platforms. Similar replay attacks occurred in connection
with the bitcoin cash and bitcoin cash SV network split in November 2018. Another possible result of a hard fork is an inherent decrease
in the level of security due to the splitting of some mining power across networks, making it easier for a malicious actor to exceed 50%
of the mining power of that network, thereby making crypto assets that rely on proof-of-work more susceptible to attack, as has occurred
with Ethereum Classic.
We intend to recognize forked and airdropped
assets consistent with our custodians. We may not immediately or ever have the ability to withdraw a forked or airdropped bitcoin by virtue
of bitcoins that we hold with our custodians. Future forks may occur at any time. A fork can lead to a disruption of networks and our
information technology systems, cybersecurity attacks, replay attacks, or security weaknesses, any of which can further lead to temporary
or even permanent loss of our and our assets.
The due diligence procedures conducted
by us and our liquidity providers to mitigate transaction risk may fail to prevent transactions with a sanctioned entity.
We execute trades through our U.S.-based liquidity providers,
and rely on these third parties to implement controls and procedures to mitigate the risk of transacting with sanctioned entities. While
we expect our third party service providers to conduct their business in compliance with applicable laws and regulations and in accordance
with our contractual arrangements, there is no guarantee that they will do so. Accordingly, we are exposed to risk that our due diligence
procedures may fail. If we are found to have transacted in bitcoin with bad actors that have used bitcoin to launder money or with persons
subject to sanctions, we may be subject to regulatory proceedings and any further transactions or dealings in bitcoin by us may be restricted
or prohibited.
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