[Havelock][KCIM] Korb Investments – Establishing my Investment Firm, part 1

[Korbman]

Hello Everyone,

As we reach the end of August, I’ve felt it’s time for a serious update on where we stand and what to expect going forward. For those of you that follow mining news as carefully as I do, I trust you’ll understand where this is coming from, and that you’ll understand what comes next.

As it stands in this very moment, KCIM Notes are no longer a sustainable asset based on the current interest rate and repurchasing schedule. Starting September 1st, 2013, Note Interest will be decreased to 0.5%. As there have been a number of extraordinary and unforeseen circumstances (thanks to a certain Third Party), Note repurchasing will begin the moment I have ASIC equipment in hand, regardless of vendor. The new repurchasing is currently set to 1.005x the Note’s Par Value, but is no longer set to a structured schedule and will instead happen as dependent on mining revenue.

For those of you who are surprised by this announcement, I’ll do what I can to explain our current situation and the circumstances leading up to it:

-------------------------------------------------

What I’ve always wanted to do was to run a small investment portfolio; something like a mix between the securities we know now as ‘Sandstorm’ and ‘Smidge’, but vastly more open and structured. Plans for this have always been in development, and have been tweaked as time goes on. After quite a bit of consideration, in September 2012 I decided I didn’t want to launch just another sketchy asset on GLBSE. With this in my mind, I purchased preordered 2 BFL 60GH/s Single SCs with the intent of mining to establish a revenue stream for the Company. It seemed like a good plan at the time; acquire assets and a revenue stream, build up a small portfolio, and then begin trading.

But that plan seemed too small. With the massive funding many organizations received on GLBSE, I determined I could structure something that would completely outshine other securities and receive the funding needed to expand my small operation to the next level. To an extent, this is exactly what happened.

When this Note was conceived last August, there were really only a small handful of companies looking to develop ASIC mining hardware. Butterfly Labs was the leader, bASIC was next, and ASICMiner and Avalon had just started forming their plans. When it came to potential chip efficiency and speed, BFL seemed to be ahead of the curve. All eyes were on them to deliver.

With the funding raised by the Notes throughout November and December, the object became to buy as much equipment as was manageable by the Company. Of course, this was when BFL was “shipping” in January. When this date was pushed back, scheduling adjustments were made, and then they were made again.

To make matters worse, since January we’ve been swarmed with new chip development companies. So many, in fact, that most people receiving equipment now are beginning to doubt their return on investment. We've not only got Butterfly Labs, Avalon, and ASICMiner, but also BitFury, KnCMiner, HashFast, BitMine, Cointerra, IceDrill, Labcoin, and a number of others. As the number of companies grows, so does the hashrate, or at least the guesstimates of where we’ll be in the next 6 months.

Now here I sit; continually paying for equipment 8+ months overdue, with no prospect of sticking with my original plan. What am I left to do?

I’ve pondered over a number of options these past few weeks, specifically regarding how to move forward.
--- I could try getting a refund from BFL (unlikely given the orders were paid for through BitPay, but could be worth a shot), and then use the money towards KnC or Cointerra (best $/GH/s).
--- I could declare insolvency, which would mean either getting a refund, or waiting until the equipment arrives, selling off the assets to the highest bidder, and distributing the proceeds among all Investors.
--- I could push forth and receive the equipment, start mining and pay Investors as if this was a group buy (obviously no management fee or other nonsense).

There might be another option, but I haven’t come up with anything feasible enough to work. In the end, I’ve settled on pushing forward. The reason for this is twofold; 1) I won’t have to try and fight a losing battle with BFL to get a refund, and 2) it’s a better option for Investors since they’ll get much more of their investment back than if we moved to liquidate instead.

I’ve already subsidized my personal equipment to help increase the Company’s total hashrate, but even at 1TH/s the outlook seems bleak.

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So that’s where we’re at, and that’s how we got here. Undoubtedly, there will be a number of you who are shocked, appalled, and/or genuinely upset. Given I am also an investor in my Notes, I understand your resentment.

My goal at this point is to pay the accumulated debt, no matter what. Investors have had enough faith in me to help get this venture started. The least I can do is help them get some sort of return, even if it means squandering and distributing any mining net income over the next few years.

As always, comments, questions, and criticisms are welcome, and let’s try to keep them civil as best we can. If anyone has spotted a scenario I haven’t taken into account, please let me know.

[creativex]

Sorry for your troubles. I've always enjoyed your insightful posts and continue to be impressed with your integrity and transparency in the face of hardships that have been largely beyond your control.

Best of luck moving forward, it's a minefield out there just now.

[freedomno1]

Korbman you have my respect for being honest about the situation.
I appreciate your analysis of other assets and it is very obvious that the source of your issues are BFL as they have been for many other investors. While I am not as confident on the other mining companies coming out except AM I watch the competitors such as Labcoin announcing hash coming onto the network and a significant mining block in the unknown attributed to bitfury.
(Not the company just the chips; This is not Bitfury, this is 100TH which is a project using hardware from Bitfury and that still hasn't delivered.) https://ghash.io/ and do see a trend that is not favorable for long term waiting. That said I do wish you the best of luck on your mining.

(As for BFL refunds that is a losing battle, I hope they do deliver before the units become worthless due to difficulty increases)
https://bitcointalk.org/index.php?topic=99497.msg3026517#msg3026517

[acorcos]

Korbman,

Can you be more specific about how you intend to make your investors whole. For example, are you going to pay back the longest bond holders first are you going to buy back shares on the exchange from individuals willing to sell at a loss. Also, how long do you anticipate it will take you to pay us all back?

[Korbman]

@Creativex, Freedomno1 – Thank you for your understanding and your comments. It means more to me than you may think.

Can you be more specific about how you intend to make your investors whole. For example, are you going to pay back the longest bond holders first are you going to buy back shares on the exchange from individuals willing to sell at a loss. Also, how long do you anticipate it will take you to pay us all back?

Hi Acorcos,

My current repurchasing plan is to focus on Investors who have been with the fund the longest (excluding myself of course). Buybacks happen from the Management interface I work in, so there won’t be anything listed on the Exchange for people to sell at a loss to. The tricky part, in this case anyway, is determining how to distribute the mining revenue, since each Note repurchased will cost BTC1.005. That’s something I’m still working to figure out.

Regarding the repurchasing timeframe, at this point it’s hard to say for sure which route I’ll take, since it largely depends on how quickly I can get the equipment up and running, and from there map out projected revenues based on network growth and difficulty. After everything I’ve seen and tried to work out so far, my best guess is that I’ll never be able to fully repurchase all outstanding Notes. I responded to someone recently with a similar question, and here’s how I framed it:

My assumption so far has been an October delivery for my personal BFL order (from August 2012) and the Company-ordered KnC Jupiter. With that in mind, we'd have about 460GH/s online if all went well in October, which would mean about 47BTC in revenue since we wouldn’t be able to mine the entire month.

If we manage to get the rest of the equipment by December:
Month (total hashrate) -- projected revenue for the month  ---  source

October (460GH/s) -- 47      --------  http://mining.thegenesisblock.com/a/ed893004c2
November (520GH/s) -- 53   --------  http://mining.thegenesisblock.com/a/419523d9ee
December (1000GH/s) -- 72   ---------  http://mining.thegenesisblock.com/a/66c25768c2
January (1000GH/s) -- 50
February (1000GH/s) -- 35
[....]
September (1000GH/s) -- 1
Total: 322 BTC

Obviously there's a lot to take into consideration in all this, the most prominent item being that the established 40%+ monthly network increase used in the calculations isn't likely to be sustained. There will be a point when network speed will plateau until newer tech comes along. 12,000 TH/s of mining equipment has been predicted through the next 6-8 months thus far, which is a difficulty of about 1.5 billion. At that rate, we'd still be earning around BTC10 per month, though over time this will decrease.

To fully repurchase all outstanding units, I’d need to mine BTC912, or nearly 3x the amount mined in a year. If the changes we’ve seen over the past 12 months continue for the next 12, it’s a safe assumption that making Investors completely whole will never happen. When it’s apparent that this is starting to happen (e.g. mining no longer generates a profit), the equipment will be sold to the highest bidder, and those funds will be distributed to Investors as well.

[acorcos]

Thanks Korbman, so if I've been with the fund since Feburary 2013, all of my shares will be bought back before any shares bought in March?

[Korbman]

Thanks Korbman, so if I've been with the fund since Feburary 2013, all of my shares will be bought back before any shares bought in March?

Not that drilled down, no.
I can only break down unit holders based on their email addresses and the amount held, not any specific dates unfortunately. I've got an older list of unit holders, and on top of that I recognize quite a number of original holders (November/December time period) since I look at their addresses regularly.

I suppose saying the "longest holders" is a bit misleading, so I'll try to clarify:
I won't be paying out to one person at a time based on how long they've been with the fund. It's not only quite difficult to do this, but it's also only fair to a select few people, which I'm uncomfortable with.

Instead, I need to figure out a way to distribute, say, BTC20 (if that was what the equipment generated in a week) among not only the largest holders, but the longest as well. Trouble is, the top 10 people (out of quite a few) own 80%+ of the Notes...so obviously my focus will be on them regardless of how long they've been invested.

In short, it gets complicated quite quickly when you try to break down the numbers and figure out how to properly repay people at the right rate.
One idea I had was to do sort of a lottery (obviously ignoring the longevity aspect for now). Each holder has 'xx' number of entries (based on how vested they are), and if I generated BTC20 in the first week, I'd pick out (or generate) 19 "winners" (BTC20 / BTC1.005) to have Notes repurchased that week.

And to bring in the crowdsourcing aspect (with fake numbers by the way):
Imagine you have 500 units that need to be bought back. Randomly spread those units out over 25 people, but make sure that 5 people own 80% of the total. Try not to focus around repayment based on percentage owned

[acorcos]

the top 10 people (out of quite a few) own 80%+ of the Notes...so obviously my focus will be on them regardless of how long they've been invested.

I own 11% of the notes and I've had them since 2/13, can I assume I'm one of your top 10?

Buybacks happen from the Management interface I work in, so there won’t be anything listed on the Exchange for people to sell at a loss to.

I've noticed some activity on Havelock, purchases of shares at an extreme discount; .2 -.3 per share. The only person I can imagine this would make sense for is you. That's what I meant by asking if you were going to be buying back shares on the exchange from individuals willing to take a loss. Could you comment please?

[Korbman]

the top 10 people (out of quite a few) own 80%+ of the Notes...so obviously my focus will be on them regardless of how long they've been invested.

I own 11% of the notes and I've had them since 2/13, can I assume I'm one of your top 10?

You are, but my goal with the previous post was to sort of imply that my sights for repayment are set on you (among other large investors), without the need to divulge who owns what.

Buybacks happen from the Management interface I work in, so there won’t be anything listed on the Exchange for people to sell at a loss to.

I've noticed some activity on Havelock, purchases of shares at an extreme discount; .2 -.3 per share. The only person I can imagine this would make sense for is you. That's what I meant by asking if you were going to be buying back shares on the exchange from individuals willing to take a loss. Could you comment please?

Actually, the opposite. I've sold 2 of my shares at an extreme discount (.259 I believe it was) to cover another personal investment, and other people seem to be buying and selling at whatever prices they see fit. If I had the money to spend, I could certainly see the value in buying shares at a lower price, but that's not my focus. The vast bulk of everything I've made (from prior investments to fiat conversions) has been tied up in paying monthly interest, and I don't plan on moving it.

[acorcos]

Thanks Korbman. Let's hope for the best.

[enygma]

I feel lucky that I've managed to sell a number of my units when I did at the prices I did (about 25% of my holdings). Even then, I'm still sure that I probably am your largest note holder (if not, close to it). Having said that, I do wish to see a fair and equitable way to see revenues distributed, but I did probably take the biggest risk of most by investing most of my BTC in your fund day 1 as well as investing some of my own money in the BFL debacle (at least I'll see miners come in the next week probably).

I am guessing that based on what I'm reading, I would be hard pressed to see a break even based on my remaining notes?

[Korbman]

I feel lucky that I've managed to sell a number of my units when I did at the prices I did (about 25% of my holdings). Even then, I'm still sure that I probably am your largest note holder (if not, close to it). Having said that, I do wish to see a fair and equitable way to see revenues distributed, but I did probably take the biggest risk of most by investing most of my BTC in your fund day 1 as well as investing some of my own money in the BFL debacle (at least I'll see miners come in the next week probably).

I can't say for sure, but if you want to know where you are on the list PM me the email you used on Havelock. I can trace it back from there.

In regards to distributing revenues, I'm still leaning towards the lottery idea I posted before, but with additional weighting added to long term investors. I'll need to play around with the numbers a bit more though.

I am guessing that based on what I'm reading, I would be hard pressed to see a break even based on my remaining notes?

I see no need to sugarcoat it at this point; you're precisely correct. Between the consistent equipment delays and the newer, vastly more efficient, hardware coming to market, it is impossible to break even (when calculated in Bitcoin) with our *current* orders.

[Korbman]

I’ve got a bit of good news…or at least better news by comparison to my recent updates.
If there’s one thing I’ve learned in all this, it’s that diversification is almost a necessary aspect of any equipment portfolio. Achieving this was a lot harder months ago, but not so much anymore.

As it stands right now, I’ve sold one of the Company’s January orders (#16100) for BTC41, which came out to BTC40.59 after escrow fees. With this funding, I’ve placed an order for a Cointerra 2TH/s TerraMiner IV [order #1234], scheduled for early January shipping, costing BTC51.1706.

This was done primarily to help give us an edge against the coming wave of more efficient and more powerful mining devices, as compared to ASICs developed by Butterfly Labs.
At this point, equipment owned by the Company is as follows:
--- 4 x BFL Single SCs – 240GH/s
--- 1 x KnCMiner Jupiter – 400GH/s
--- 1 x Cointerra TerraMiner IV – 2000GH/s
Totaling: 2,640GH/s [2.64TH/s]

This is quite a step up from the previous 880GH/s, and we should be in a better position over the course of the next 6 months.

I’m expecting our second batch of BFL Singles [#16252] to be arriving soon, given BFL has managed to ship four months of orders in the past two weeks. Let’s hope they can maintain the pace for just a bit longer.

As always, if you have any questions don’t hesitate to ask.

[enygma]

What is your sense on the ability of Cointerra to be able to deliver in January?

[Korbman]

What is your sense on the ability of Cointerra to be able to deliver in January?

Fairly high, but even though I do my own due diligence I still take everything with a grain of salt. Cointerra has a solid team behind them, and so far as I can tell they're legitimately working on developing an ASIC. The position they're in now is sort of the same as where KnC was a couple months ago.

[acorcos]

How does this affect your buy back time frame?

[Korbman]

How does this affect your buy back time frame?

It won't, simply because the repurchasing time frame has been extended for the useful life of the equipment (meaning buying back on a weekly basis based on how much the ASICs generate, instead of staying to a fixed schedule). If anything, I suppose the time frame is proportional to our hashing speed. The faster we go, the more I can buy back. That's not to say we'll ever reach BTC912, but I do know every bit counts.

[Korbman]

Bit of an update today, stemming from a *very* busy week, but overall things are looking better than before.

Our first order of 4 x BFL Singles arrived at the beginning of October, but unfortunately only 3 were working correctly. One was a defective unit that powered itself down randomly, and the provided power brick didn't work. I RMA'ed the unit, shipped it back the next day (at my expense by the way, BFL doesn't cover it), and I received a working unit back as of yesterday (about 4 business days after they received the unit). Unfortunately, BFL sent me a standard 120v power cord (the ones used for anything PSU related) instead of the small 3-prong ones that are supposed to come with the brick. Suffice to say, they recognized their mistake and are sending the proper cabling. Other than that, the replacement unit and power brick are working fine as I was able to test using cabling from working Singles.

The three fully working units are the first to be moved into my local data center. Keeping the units there won't be terribly expensive at the beginning since I'm not utilizing my own rack space (I'm renting 3U from my workplace), but the time will come when renting 1/4-1/2 rack will be necessary.

Our KnCMiner Jupiter arrived late last night, and I ran into a few power and hashing issues as I tried to set it up. I gave it a rest and updated to the latest firmware this morning, made some changes to my setup, and we're happily hashing away now at 535GH/s (+/- 10%) on BitMinter.
Here's the unboxing: - http://imgur.com/a/W39S7

As it stands right now, here's what's running:
2 x BFL Singles (Personal) -- 117GH/s -- @ BTC Guild ***
3 x BFL Singles -- 175GH/s (roughly) -- @ BitMinter -> Gigavps' pool
1 x KnC Jupiter -- 535GH/s (roughly) -- @ BitMinter -> Gigavps' pool
Total: 827GH/s

Missing:
1 x BFL Single -- 60GH/s -- Awaiting power brick cabling since I don't have a spare PSU on hand.

Expected:
CoinTerra IV -- 2,000GH/s -- January order

*** Revenue generated from my equipment has helped to cover initial data center and power costs, and I intend to keep it that way for as long as I can. When the time comes, as I'm sure it will, revenue generated by the company equipment will also encounter these expenses. We'll cross that bridge when we come to it.

As today marks the first official week of mining on company equipment, a few of you may have noticed some buybacks occurring. These buybacks are the result of a random repurchasing based on the 'lottery' idea I had last month (and is noted above).
At this point, a repurchasing will be scheduled every two weeks on a Saturday...meaning the next repurchasing will occur on October 26th.

I'm sure there are a number of questions people have, and I'm 99% sure I'm forgetting to make note of a few things I thought of before. Once I remember, I'll make another post.

As always, comments, questions, and concerns are welcome.

[Vagnavs]

As it stands right now, here's what's running:
2 x BFL Singles (Personal) -- 117GH/s -- @ BTC Guild ***
3 x BFL Singles -- 175GH/s (roughly) -- @ BitMinter
1 x KnC Jupiter -- 535GH/s (roughly) -- @ BitMinter
Total: 827GH/s

your total resources are 827GH/s?

[Korbman]

your total resources are 827GH/s?

Total resources 'running', yes. Soon to be 880GH/s, and eventually 2.8TH/s.