UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to ________ | |
Commission file number: 001-39187 |
CleanSpark, Inc. |
(Exact name of registrant as specified in its charter) |
Nevada | 87-0449945 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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(Address of principal executive offices) | (Zip Code) |
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.001 per share | CLSK | The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: N/A
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ]No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§ 232.405(232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “largelarge accelerated filer,” “accelerated accelerated filer,” “smaller smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
☐ Accelerated Filer | |
☐ 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. [ ]
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of
the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [ ]☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The aggregate market value of the common stock held by non-affiliates as of March 31, 20202021 (the last business day of the registrant’sregistrants most recently completed second fiscal quarter)quarter), was approximately$702,832,610 $6,779,235 based on the per share closing price as of March 31, 20202021 quoted on the Nasdaq Capital Market for the registrant’s common stock, which was .
As of December 14, 2020,2021, there were.were share sharess of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None Certain portions of the registrant’s definitive proxy statement to be delivered to its shareholders in connection with the registrant’s 2022 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K. Such definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
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CLEANSPARK, INC.
TABLE OF CONTENTS
Form 10-K for the Fiscal Year Ended
September 30, 20202021
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain statements that are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements (suchmay include terminology such as when we describe what “will,“aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” or “should” occur, what we“objective,” “plan,” “intend,“predict,” “estimate,“potential,” “believe,“positioned,” “expect” or “anticipate” will occur,“seek,” “should,” “target,” “will,” “would,” and other similar statements)expressions that are predictions of or indicate future events and future trends, or the negative of these terms or comparable terminations. These forward-looking statements include, but are not limited to, statements regarding future operating results, potential risks pertaining to these future operating results, future plans or prospects, anticipated benefits of proposed (or future) acquisitions, dispositions and new facilities, growth, the capabilities and capacities of business operations, any financial or other guidance, expected capital expenditures and all statements that are not based on historical fact, but rather reflect our current expectations concerning future results and events. We make certain assumptions when makingThese forward-looking statements anyare based on management’s current expectations, estimates, forecasts, and projections about our business and the industry in which we operate, as well as the economy, trends and other future conditions, and are subject to significant risks and uncertainties, and are subject to changes based on various factors, some of which could prove inaccurate, including assumptions aboutare beyond our future operating results and business plans.control. Therefore, we can give no assurance that the results implied by these forward-looking statements will be realized. Furthermore, the inclusion of forward-looking information should not be regarded as a representation by the Company or any other person that future events, plans or expectations contemplated by the Company will be achieved. The following important factors, among others, could affect future results and events, causing those results and events to differ materially from those expressed or implied in our forward-looking statements:
· | our ability to achieve profitability, and to maintain profitability, in the future; | |
· | high volatility in the value attributable to our business; | |
· | the rapidly changing regulatory and legal environment in which we operate, may lead to unknown future challenges to operating our business or which may subject our business to added costs and/or uncertainty regarding the ability to operate; | |
· | our ability to keep pace with technology changes and competitive conditions; | |
· | our ability to execute on our business strategy; and | |
· | other risks and uncertainties related to our business plan and business strategy. |
For a further list and description of various risks, factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the “Risk Factors”Risk Factors and “Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations”Operations sections contained in this document, and any subsequent reports on Form 10-Q and Form 8-K, and other filings we make with the Securities and Exchange Commission (“SEC”). Given these risks and uncertainties, the reader should not place undue reliance on these forward-looking statements.
All forward-looking statements included in this Annual Report on Form 10-K are made only as of the date of this Annual Report on Form 10-K, and we do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur, or of which we hereafter become aware. You should read this document completely and with the understanding that our actual future results or events may be materially different from what we expect. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
Information regarding market and industry statistics contained in this report is included based on information available to us that we believe is accurate. It is generally based on industry and other publications that are not produced for purposes of securities filings or economic analysis. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. We do not undertake any obligation to publicly update any forward-looking statements. As a result, investors should not place undue reliance on these forward-looking statements.
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PART I
Item 1. Business
As used in this Annual Report on Form 10-K, the terms “we”, “us”, “our”,“we,” “us,” “our,” the “Company”,“Company,” “CleanSpark, Inc.” and “CleanSpark” mean CleanSpark, Inc. and its consolidated subsidiaries, unless otherwise indicated.
Overview
CleanSpark, Inc. is a leading bitcoin mining and diversified energy company incorporated in Nevada, corporation.whose common stock is listed on the Nasdaq Capital Market. We are in the business of providingsustainably mine bitcoin; we also provide advanced software and controlsenergy technology solutions to commercial and residential customers to solve modern energy challenges. The Company, through itself and its wholly owned subsidiaries, has operated in the digital currency mining sector since December 2020, and in the alternative energy sector since March 2014.
We are currently working with industry leaders and other advisors in developing a long-term sustainability and clean energy plan. We are also using all available clean and renewable energy resources that we currently have reasonable access to in all of our bitcoin mining locations in order to further support our sustainability efforts.
Lines of Business
Digital Currency Mining Segment
Through our wholly owned subsidiaries, ATL Data Centers LLC (“ATL”) and CleanBlok, Inc. (“CleanBlok”), we mine bitcoin. We entered the bitcoin mining industry through our acquisition of ATL in December 2020. We acquired a second data center in August 2021 and have had a co-location agreement with New York-based Coinmint in place since July 2021. Bitcoin mining has now become our principal revenue generating business activity. We currently intend to continue to acquire additional facilities, equipment and infrastructure capacity to continue to expand our bitcoin mining operations.
Bitcoin was introduced in 2008 with the goal of serving as a digital means of exchanging and storing value. Bitcoin is a form of digital currency that depends upon a consensus-based network and a public ledger called a “blockchain,” which contains a record of every bitcoin transaction ever processed. The bitcoin network is the first decentralized peer-to-peer payment network, powered by users participating in the consensus protocol, with no central authority or middlemen, that has wide network participation. The authenticity of each bitcoin transaction is protected through digital signatures that correspond with addresses of users that send and receive bitcoin. Users have full control over remitting bitcoin from their own sending addresses. All transactions on the bitcoin blockchain are transparent, allowing those running the appropriate software to confirm the validity of each transaction. To be recorded on the blockchain, each bitcoin transaction is validated through a proof-of-work consensus method, which entails solving complex mathematical problems to validate transactions and post them on the blockchain. This process is called mining. Miners are rewarded with bitcoins, both in the form of newly-created bitcoins and fees in bitcoin, for successfully solving the mathematical problems and providing computing power to the network.
Factors such as access to computer processing capacity, interconnectivity, electricity cost, environmental factors (such as cooling capacity) and location play important roles in mining. As of the date of this filing, our mining units are currently capable of producing over 1.3 exahash/s (“EH”) in hash rate capacity. In cryptocurrency mining, “hash rate” is a measure of the processing capacity and speed by which a mining computer mines and processes transactions on the bitcoin network. Our activities in this area are complemented by our energy background and planning is underway to deploy our portfolio of energy technologies to advance our bitcoin mining business, with the goal of maximizing energy savings, increasing total power capacity, providing resilient electricity, and reducing greenhouse gas emissions. We are expanding our bitcoin mining business with the goal of reaching 2.0 EH/s in hashrate capacity at or near the end of December 31, 2021. We expect to exceed 3 EH/s in capacity by mid-to-late 2022. Hash rate capacity is one of the most important metrics for evaluating bitcoin mining companies.
We obtain bitcoin as a result of our mining operations; while we retain a significant portion of the bitcoin, we have sold, and intend to sell bitcoin from time to time, to support our operations and strategic growth. We do not currently plan to engage in regular trading of bitcoin (other than as necessary to convert our bitcoin to U.S. dollars) or to engage in hedging activities related to our holding of bitcoin; however, our decisions to hold or sell bitcoin at any given time may be impacted by the bitcoin market, which has been historically characterized by significant volatility. Currently, we do not use a formula or specific methodology to determine whether or when we will sell bitcoin that we hold, or the number of bitcoins we will sell. Rather, decisions to hold or sell bitcoins are currently determined by analyzing forecasts and monitoring the market in real time.
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Through our recently formed wholly owned subsidiaries, CSRE Properties, LLC, CSRE Property Management Company LLC, and CSRE Properties Norcross, LLC, we maintain real property holdings for ATL and CleanBlok.
Energy Segment
We provide energy solutions through our wholly-owned subsidiaries CleanSpark, LLC, CleanSpark Critical Power Systems, Inc., GridFabric, LLC, and Solar Watt Solutions, Inc. These solutions consist of engineering, design and software solutions, custom hardware solutions, Open Automated Demand response (“OpenADR”), solar, energy storage for microgrid and distributed energy systems to military, commercial and residential customers in Southern California and through the world.
Our solutions are supported by our proprietary suite of software solutionsplatforms (collectively, the “Platforms”) that provide end-to-endinclude microgrid energy modeling, energy market communications and energy management solutions. Our offerings consist of intelligent energy monitoring and controls, intelligent microgrid design software, middleware communications protocols for the energy industry, energy system engineering and software consulting services.
The software platforms (the “Platforms”) which are integral to our business aresolutions as summarized as follows:below:
· | mPulse |
· | Canvas: Middleware used by |
· | Plaid: Middleware used by |
· | mVSO: Energy modeling software for internal microgrid design . |
The Platforms are designedwere developed to allow customers to design, build,enable the designing, building, and operateoperating of distributed energy systems and microgrids which efficiently manage energy generation assets, energy storage assets, and energy consumption assets. Our software products enable users to implement software solutions to execute on these strategies. These strategies are generally targeted to operate distributed energy assets in a manner that providesachieve resiliency and economic optimization and/or revenue generation through wholesale market activities.
We also offer digital agency services through p2kLabs, Inc. including creative design, marketing/digital content, technical development, and engineering.optimization.
We also own patented gasification energy technologies. Our technology converts any organic material into SynGassynthesis gas, which can be used as fuel for a variety of applications and as feedstock for the generation of DME (Di-Methyl Ether). As previously disclosed, we currently plan to continue to focus on our other product offerings, as opposed to expending significant efforts on the Gasifier side of the business.offerings.
Lines of Business
Energy Business SegmentOther business activities
Through CleanSpark, LLC, the Company provides microgrid engineering, design and software solutions to military, commercial and residential customers. Our services consist of distributed energy microgrid system engineering and design, and project consulting services.
Through CleanSpark Critical Power Systems, Inc., the Company provides custom hardware solutions for distributed energy systems that serve military and commercial residential properties.
Through GridFabric, LLC the Company provides Open Automated Demand response (“OpenADR”) and other middleware communication protocol software solutions to commercial and utility customers.
Digital Agency Segment
Through p2kLabs, Inc., the Company provideswe provide design, software development, and other technology-based consulting services. The services provided are generally hourly or fixed-fee project-based arrangements.
Through ATL, we also provide traditional data center services, such as providing customers with rack space, power and equipment, and offer several cloud services including virtual services, virtual storage, and data backup services.
Distributed Energy ManagementMarkets, Geography and Microgrid IndustryMajor Customers
IntegralDigital Currency Mining Segment
Bitcoin is a global store and exchange of value used by people across the world as an asset and to conduct daily transactions. Mining bitcoin supports the global bitcoin blockchain and the millions of people that depend on it for economic security and other benefits. Strictly speaking, there is no customer market for mining bitcoin but we consider our business ismining pool operators as customers because they compensate us for providing processing power to the mining pool (see Item 1A. Risk Factors for more information on our Distributed Energy Management Business (the “DER Business”)mining pool operators). The main assetsWe own and operate our own facilities and do not lease mining space to other mining companies or private individuals that mine. Our wholly-owned mining operations are located in the State of Georgia in the United States. We also have a relationship with a facility located in New York State that hosts a portion of our DER Business include our propriety software systems (“Systems”) and also our engineering and methodology trade secrets. The Distributed miners.
Energy systems and Microgrids that utilize our Systems are capable of providing secure, sustainable energy with significant cost savings for its energy customers. The Systems allows customers to design, engineer, and then efficiently communicate with and manage renewable energy generation, storage and consumption. By having autonomous control over the multiple facets of energy usage and storage, customers are able to reduce their dependency on utilities, thereby keeping energy costs relatively constant over time. The overall aim is to transform energy consumers into intelligent energy producers by supplying and managing power in a manner that anticipates their routine instead of interrupting it.Segment
Around the world, thean aging gridenergy infrastructure is becoming unstable and unreliable due to increases in loads and lack oflimited new, large-scale generation facilities. This inherent instability is compounded by the push to integrate a growing number and variety of renewable but intermittent energy generation assets and advanced technologies into outdated electrical grid systems. Simultaneously, defenseDefense installations, industrial complexes, communities, campuses and other aggregators across the world are turning to virtual power plants and microgrids as a means to decrease their reliance fromon the grid, reduce utility costs, utilize cleaner power, and enhance energy security and surety.
The convergence of these factors is creating significant opportunities in the power supply optimization and energy management industry. Efficiently operating and managing the distributed energy management systems and microgrids of tomorrow, while maximizing the use of sustainable energy to produce affordable, stable, predictable and reliable power on a large scale, is a significant opportunity that early-movers can leverage to capture a large share of this emerging global industry.
A microgrid is comprised of any number of energy generation, energy storage, and smart distribution assets that serve a single or multiple loads, both connected to the utility grid and separate from the utility grid “islanded”. In the past, distributed energy management systems and microgrids have consisted of off-grid generators organized with controls to provide power where utility lines cannot run. Today, modern distributed energy management systems and microgrids integrate renewable energy generation systems (REGS) with advanced energy storage devices and interoperate with the local utility grid. Advanced autonomous cyber-secure microgrids controls relay information between intelligent hardware and servers to make decisions in real-time that deliver optimum power where it is needed, when it is needed.
Our mPulse software is an integrated distributed energy management control platform that seamlessly integrates and controls all forms of energy generation with energy storage devices to provide energy security in real time free of cyber threats to service facility loads. DER systems are able to interoperate with the local utility grid, and bring users the ability to choose when to buy or sell power to and from the utility grid. mPulse is ideal DER systems for commercial, industrial, defense, campus and residential users and ranges in size from 4KW to 100MW and beyond.
mPulse Software Suite
mPulse is a modular platform that provides intelligent control of a Microgrid based on a systems operational goals, energy assets and forecasted energy load and generation. mPulse performs high-frequency calculations, threshold-based alarming, execution of domain-specific business rules, internal and external health monitoring, historical data persistence, and system-to-operator notifications. The modular design increases system flexibility and extensibility. In addition, the deployment of the mPulse system follows a security-conscious posture by deploying hardware-based firewalls as well as encryption across communication channels. mPulse allows configuration for site-specific equipment and operation and provides a clean, informative user interface to allow customers to monitor and analyze the data streams that describe how their microgrid is operating.
mPulse supports our innovative fractal approach to microgrid design, which enables multiple microgrids on a single site to interact in a number of different ways, including as peers, in a parent-child relationship, and in parallel or completely disconnected. Each grid can have different operational objectives, and those operational objectives can change over time. Any microgrid can be islanded from the rest of the microgrid as well as the larger utility grid. The mPulse software can control the workflow required in both the islanding steps as well as the reconnecting steps of this maneuver and coordinate connected equipment such that connections are only made when it is safe to do so.security.
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Microgrid Value Stream Optimizer (mVSO)
The Microgrid Value Stream Optimizer (mVSO) software platform provides a robust distributed energy and microgrid system modeling solution. mVSO takes utility rate data and load data for a customer site and helps automate the sizing and analysis of potential microgrid solutions as well as providing a financial analysis around each grid configuration. mVSO uses historical data to generate projected energy performance of generation assets and models how storage responds to varying operational modes and command logics based upon predicted generation and load curves. mVSO analyzes multiple equipment combinations and operational situations to determine the optimal configuration for a site based on the financial and economic results, equipment outlay, utility cost savings, etc., to arrive at payback and IRR values. This ultimately provides the user with data to design a distributed energy and/or microgrid system that will meet the customers’ performance benchmarks. The system also provides users with business development and proposal generation tools to more efficiently present the results to end-customers.
Critical power switchgear and hardware solutions – CleanSpark Critical Power Systems, Inc.
Through the Company’s wholly owned subsidiary, CleanSpark Critical Power Systems, Inc. we provide parallel switchgear, automatic transfer switches and related control and circuit protective equipment solutions for commercial, industrial, defense, campus and residential users. We utilize Pioneer Power Solutions, Inc. for contract manufacturing, of our parallel switchgear, automatic transfer switches and related control and circuit protective equipment.
OpenADR and communication protocol software solutions – GridFabric
Through the Company’s wholly owned subsidiary, GridFabric, LLC we offer Open ADR solutions to commercial and utility customers. GridFabric provides middleware software solutions for utilities and IoT (Internet of Things) products that manage energy loads. OpenADR 2.0b is now the basis for the standard to be developed by the International Electrotechnical Commission. GridFabric's core products are Canvas and Plaid.
Canvas
Canvas is an OpenADR 2.0b Virtual Top Node ('VTN') built for testing and managing Virtual End Nodes ('VENs') that are piloting and running load shifting programs. Canvas is offered to customers in the Cloud as a SaaS solution or as a licensed software.
Plaid
Plaid is a licensed software solution that allows any internet connected product that uses energy (i.e. Solar, Storage & Inverters, Demand Response, EV Charging, Lighting, Industrial controls, Building Management Systems, etc.) to add load shifting capabilities by translating load shifting protocols into their existing APIs. Companies that implement Plaid through GridFabric get a Certified OpenADR 2.0b Virtual End Node (VEN) upon completion of the implementation process.
Digital Agency Segment – p2kLabs
Through the Company’s wholly owned subsidiary, p2kLabs, Inc. we provide a suite of digital services from creative design to technical development for products and services through the entire product/service lifecycle. P2k is made up of “labs” whereas each lab contains its own unique offering including design, marketing/digital content, engineering & SalesForce development, and strategy services.
Legacy Gasifier Business
Our Gasification technologies and prototype will need to undergo further additional testing to further establish its commercial capability of producing large volumes of clean, renewable energy from any carbon compound (Municipal Solid Waste (MSW), Coal, Sewage Sludge) into clean Synthesis Gas(“SynGas”). Our prototype Gasifier is still under development and a commercially viable Gasifier is not expected to be sellable until we expend additional resources on its testing and development. A third-party consulting firm has independently tested the Gasifer's performance and certified the results of its performance. Upon completion of the testing, an initial white paper was published outlining the results and suggested improvements for commercialization. We anticipate that the investment to complete these improvements would be between approximately $500,000. Upon completion of the improvements, we would be required to conduct an extended test run with an independent third party to verify the results needed to prove its commercial viability, at which time we could begin to actively market our Gasifier units.
We own Patent Nos. 9,890,340B2, 9,359,567, 8,518,133 8,105,401 and 8,347,829 protecting our gasification technology and process for using feedstock comprising gaseous fuel Our patented process involves the grinding, drying, separating, mixing, and then pelletizing of solid waste. These pellets constitute the feedstock for the Gasifier. Gasifying feedstock using our technology converts waste and organic material into SynGas. SynGas can be converted into multiple forms of fuel for power plants, motor vehicles, jets, duel-fuel diesel engines, gas turbines, and steam boilers and as feedstock for the generation of DME (Di-Methyl Ether). The SynGas produced is mostly hydrogen and carbon monoxide which are primary building blocks for many fuels and chemicals. Syngas is sufficiently clean that it if processed directly it generally does not require costly hot-gas cleanup.
As discussed above, we do not anticipate deploying significant resources on the gasification business at this time. As opportunities arise, we intend to utilize the gasification assets and intellectual properties through licensing or sales agreements.
We have not engaged in any significant negotiations to sell or license our Gasifier products to any major customers.
Markets, Geography and Major Customers
The Company’s products and services predominantly serve the North American and Latin American energy markets and primarilythroughout the Americas in the residential, commercial, and industrial space. Based onsectors. Federal, state and local governmental bodies provide incentives to owners and system integrators of solar energy systems to promote renewable energy in the form of rebates, tax credits, and other similar incentives. These incentives help to catalyze customer acceptance of renewable energy systems as an alternative to utility-provided power. Over the most recent market experience, it appears there may be some seasonality with deliveries decreasingyear, our energy business operated extensively in November and December each year, likely as a result ofCalifornia’s residential energy markets by participating in the US holiday season and as a result of varied customer appropriation cycles; however, we believe these market factors will continue to evolve and the Company’s insight to these trends will improve with continued commercial success and time.
state’s Self-Generation Incentive Program (“SGIP”).
For the yearyears ended September 30, 2021 and 2020, respectively, 61.2% and 2019, respectively 58.3% and 34.8%64.8% of our total consolidatedenergy revenues were associated primarily with one customer.three customers. A loss or decline in business with this customer,these customers could have an adverse impact on our business, financial condition, and results of operations.
We provide our hardware products under contract manufacturing and distribution agreements. weWe provide our software and services at customer locations and from our officesoffice located in Utah, Nevada andCarlsbad, California.
Working Capital Items
Digital Currency Mining Segment
The bitcoin mining industry is highly competitive and dependent on specialized mining machines that have few manufacturers. Machine purchases require large down payments and miner deliveries often arrive many months after initial orders are placed.
At the time the Company acquired ATL in December 2020, the Company had approximately 3,471 bitcoin mining units with application-specific integrated circuits (“ASICs”) in operation, which produced approximately 190 petahash/s. Since acquiring ATL, the Company has expanded its operations and purchased additional ASICs. The Company now has 12,900 ASICs(as of the date of this filing)in daily operation, which are producing approximately 1.3 EH/s. In addition to the ASICs in operation, the Company has also entered into futures contracts, pursuant to which it has pre-paid significant down payments to acquire additional mining machines. The majority of miners we operate and expect to operate once received are the latest generation Antminers manufactured by Bitmain, including the S19, S19-Pro, and S19j-Pro. We do not maintainbelieve that Bitmain’s miners are the most efficient and productive miners currently on the market, though that may change as new manufacturers enter the market.
In addition to our currently deployed fleet of approximately 12,900 latest-generation miners (as of the date of this filing), we have purchased an additional 26,830 miners that are slated for delivery over the next 12 months. With the full deployment of these miners, our total fleet will consist of approximately 38,610 miners.
Energy Segment
We currently possess a significant inventory. Ouramount of inventory, levels are currently adequate forhowever, our short-term needs based upon present levels of demand.demand currently exceeds our current inventory levels. We consider the component parts ofare actively working with our different products to be generally available and current suppliers to be reliablesatisfy our short-term and capable of satisfying anticipated long-term needs. Due to current supply chain dynamics worldwide constraining our ability to secure certain inventory, these constraints have resulting in a significant customer backlog.
Distribution, Marketing and Strategic Relationships
Digital Currency Mining Segment
We have developed strategic relationships with well-established companies in key areas including traditional and renewable energy, infrastructure, and bitcoin mining equipment procurement.
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Coinmint
In addition to operating our own mining facilities, we may engage with third-parties to operate mining equipment on behalf of the Company. On July 8, 2021, CleanBlok entered into a services agreement with Coinmint, LLC (“Coinmint”). Pursuant to the agreement, Coinmint has agreed to house and power certain of our cryptocurrency mining equipment in its facilities, and to use commercially reasonable efforts to mine bitcoin on our behalf. All bitcoin mining services performed by Coinmint are conducted using mining equipment owned by the Company. As of the date of this filing, we have received and deployed approximately 6,700 total miners pursuant to the co-location mining services agreement at Coinmint’s facility in New York.
Pursuant to the agreement, as consideration for the services, we pay Coinmint certain services fees, which are based on the operating costs incurred by Coinmint in performing the services, and a variable fee calculated based on the profitability of the bitcoin mined during the relevant payment period, subject to uptime performance commitments. The agreement has an initial term of one year, after which it will renew automatically for three-month periods until terminated in accordance with the terms of the agreement.
Energy Segment
We have developed strategic relationships with well-established companies in key areas including distribution and manufacturing. We sell our products worldwide, with a primary focus on North AmericaSouthern California and Latin America,the Americas, through our direct product sales force, and partner networks.
Materials and Suppliers
Digital Currency Mining Segment
We engage in high efficiency bitcoin mining by using ASICs. These specialized computers, often called mining rigs, have few manufacturers. A majority of the machines we purchased this year were manufactured by Bitmain, a Chinese company and the preeminent manufacturer of bitcoin mining rigs.
In addition to ASICS, mining equipment includes networking equipment, power cords, racking, other specialized storage, transformers, and energy. We rely on utility providers for our power needs. These utilities buy into local energy mixes to source power. We make every effort to establish our facilities in locations serviced by utilities that generate a substantial portion of their energy from clean and renewable sources. We supplement the energy mix provided by our partners with the purchase of renewable energy credits because the precise ratio of renewable energy in local energy mixes is not within our control. We also intend to generate a portion of our own power through renewable solar energy by installing our microgrid solutions at our mining centers.
Historically, we have been able to manage our supply chains effectively, but global supply chains are highly constrained, and we are experiencing substantial increases in shipping costs and unprecedented logistical delays as we make efforts to ensure timely delivery of equipment. There can be no certainty that we will not be affected in the future, and we believe that there is significant risk that equipment supply chains will be affected in 2022. Inflationary pressures may also impact our fiscal year 2022.
Energy Segment
Although most components essential to our energy business are generally available from multiple sources. Wesources, we believe there are component suppliers and manufacturing vendors whose loss to us could have a materialan adverse effect uponon our business and financial condition. The Company also currently engages a contract manufacturer, whereby they exclusively manufacture parallel switchgear, automatic transfer switches and related control and circuit protective equipment for us.
Historically, The Company sources energy storage devices (batteries) from a variety of vendors based on availability, cost, and quality. If we have not experienced significant delaysfail to maintain or expand our relationships with our suppliers and manufacturers, or if one or more that we rely upon to meet anticipated demand reduces or ceases production, it may be difficult to quickly identify and qualify alternatives on acceptable terms. In addition, equipment prices may increase in the supplycoming years, or availability of our key materialsnot decrease at the rates we historically have experienced, due to tariffs or components provided by our suppliers, nor have we experienced a significant price increase for materials or components. We do not anticipate any such delays or significant price increases in our fiscal year 2021.other factors.
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In 2021, we experienced periodic supply chain constraints around certain inventory items, most notably battery energy supply systems. Global supply chains are highly constrained, and unprecedented logistical delays have the potential to impact our abilities timely delivery of equipment. There can be no certainty that we will not be affected in the future, and we believe that there is significant risk that equipment supply chains will be affected in 2022. Inflationary pressures may also impact our fiscal year 2022.
Environmental Issues
Digital Currency Mining and Energy Segments
No significant pollution or other types of hazardous emission result from the Company’s direct operations and it is not anticipated that our operations will be materially affected by federal, state or local provisions concerning environmental controls. Our costs of complying with environmental, health and safety requirements have not been material. Starting in the fourth calendar quarter of 2021, we began to voluntarily purchase renewable energy credits to offset a significant portion of our energy usage that is derived from non-renewable sources. The Company has also engaged market professionals to enhance and build a comprehensive environmental, social and governance (“ESG”) strategy.
We do not believe that existing or pending climate change legislation, regulation, or international treaties or accords are reasonably likely to have a material effect in the foreseeable future on our business or markets that we serve, nor on our results of operations, capital expenditures or financial position. We will continue to monitor emerging developments in this area.
Competition
Digital Currency Mining Segment
Bitcoin mining is a global activity. During our most recent fiscal year, a majority of bitcoin mining occurred in China. After China banned bitcoin mining in May 2021, the center of mining moved to North America. Although bitcoin mining by its nature is not a directly competitive business, all miners compete for bitcoin rewards; based on this, we define competitors as other bitcoin miners. Our competitors include large, publicly-listed mining companies, large private mining companies, and, in some cases, independent, individual miners who pool resources. We experiencebelieve our principal competitive factors include our energy technology background, a combination of owned, operated, and co-located miners and facilities, our strategic use of the bitcoin we mine to fund growth, and our commitment to sustainable business practices, including sourcing renewable energy. Within North America, our major competitors include:
1) | Marathon Digital Holdings |
2) | Riot Blockchain, Inc. |
3) | Greenidge Generation Holdings |
4) | Bit Digital, Inc. |
5) | Hut 8 Mining Corp. |
6) | Hive Blockchain Technologies |
7) | Compute North |
8) | Core Scientific |
9) | Bitfarms LTD. |
In addition to the foregoing, we compete with other companies that focus all or a portion of their activities on mining activities at scale. We face significant competition in all areascertain operational aspects of our business. business, including, but not limited to, the acquisition of new miners, obtaining the lowest cost of electricity, obtaining clean energy sources, obtaining access to energy sites with reliable sources of power, and evaluating new technology developments in the industry.
Energy Segment
The markets we address for alternativein our energy and microgrid markets, energy controls and communications systemsoperations are characterized by the presence of both new start-ups and well-established product providers. We believe the principal competitive factors in the markets in which we operate includeThis industry is capital intensive and highly competitive. The ability to compete effectively is determined by product features, including scalability, relative price, and performance, lifetime operating cost, including any maintenance and support, product quality durability and reliability, safety, ease of use, rapid integration, with new and existing distributed energy assets, customer support, design innovation, marketing and distribution capability, service and support and corporate reputation.
Some of our competitors have substantially larger financial and other resources. Factors that could affect our ability increase sales of our System may include resource limitations, available information and our standards established for projected return on investment.
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Distributed Energy Management Business Competition
Our DER Business and software platforms are set up to compete against larger companies. We offer an end-to-end suiteturnkey energy solutions which include system design, installation and grid integration. Our Platforms are capable of software solution that enables microgrids from design through operations and communication .Our integrated microgrid control platform seamlessly integrates energy generationwithenergy storage devices and controls facility loads to provide energy security in real time. The platforms are able to interoperate interoperating with the local utility grid to help and allows users the ability to obtain the most cost-effectiveoptimize power for atheir homes or facility.businesses. The systems Our solutions are vendor agnostictechnology agnostic. and can incorporate into multiple vendors and manufacturers products and legacy systems. The systems Our solutions are ideal for commercial, industrial, mining, defense, campus and community users, ranging from 4 kwboth small and large, with an aim to 100 MWdeliver and beyond and can deliver power at or below the current customers cost of utility power. All of theseThese attributes contribute to our ability to compete with the larger, more established competitors. Our major competitors that have rely on their own manufactured products and hardware solutions.include:
The principal advantages of our Platforms are:
Distributed Energy and Microgrid control technologies are fairly new to the market and can be deployed in various formats. Eight technologies that are predominantly used in commercial applications and/or have been extensively studied are:
Schneider Electric |
Siemens |
3) | Spirae |
Ageto Energy |
PowerSecure |
ABB |
Energy Modeling Business Competition
Homer |
8) | Tesla |
Gasifier Business Competition
Our Gasifier system is expected to compete against larger gasification projects. Our modular concept allows for parallel processing so a facility could be easily expanded or reduced without risk or changing the basic structure by simply adding or removing module units; it also allows for multiple end product processing, producing electricity, ethanol, and fuels simultaneously, and for universal parts which reduces maintenance costs. We expect all of these attributes contribute to our ability to compete with the larger, more established competitors that have large systems that require significant downtime for maintenance and repair. As previously disclosed, we plan to continue to focus on our other product offerings, as opposed to expending significant efforts on the Gasifier side of the business.
Intellectual Property
Digital Currency Mining Segment
We do not currently own any patents in connection with our existing and planned digital currency mining related operations. We do rely, and expect to continue relying, upon trade secrets, trademarks, service marks, trade names, copyrights and other intellectual property rights.
Energy Segment
In relation to our microgrid business, we own the following patents:patent: Patent No. 9,941,696 B2 “"Establishing Communication and Power Sharing Links Between Components of a Distributed Energy System,” awarded April 10, 2018, is a revolutionary patent that specifically which addresses CleanSpark'sour engineering and data-analytics technologies, processes and procedures. The patent covers CleanSpark'sour ability to receive data from a plurality of sources within a microgrid, which is then analyzed to forecast power needs across the microgrid, or a combination of multiple 'fractal' microgrids, and then determining whether or when to share power with the requesting module.
In relation to our legacy gasifier business, we own the following patents: Patent No. 9,359,567 ‘Gasification“Gasification Method Using Feedstock Comprising Gaseous Fuels’;Fuels;” Patent No. 8,518,133 ‘Parallel“Parallel Path, Downdraft Gasifier Apparatus and Method’; andMethod;” Patent No. 8,105,401 ‘Parallel“Parallel Path, Downdraft Gasifier Apparatus and Method.’ ;Method;” Patent No. 8,347,829 Electrolytic“Electrolytic Reactor and Related Methods for Supplementing the Air Intake of an Internal Combustion Engine. The second Patent,” Another patent, "Parallel Path Downdraft Gasifier Apparatus and Method, US 9,890, 340 B2",B2," awarded February 13, 2018, further enhances CleanSpark'senhanced our patent portfolio surrounding itsour proprietary gasification and waste-to-energy technologies. Our patents begin to expire between 2028 and 2035.
Government Regulation
Digital Currency Mining and Energy Segments
We are subject to federal, state and local laws and regulations governing environmental quality and pollution control. It is anticipated that, absent the occurrence of an extraordinary event, compliance with existing federal, state and local laws, rules and regulations concerning the protection of the environment and human health will not have a material effect upon us, our capital expenditures, or earnings. We cannot predict whatthe effecteffects of any additional regulation or legislation, enforcement policies thereunder and claims for damages for injuries to property, employees, other persons and the environment resulting from our
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operations. Our operations are subject to environmental regulation by state and federal authorities including the Environmental Protection Agency (“EPA”EPA”). This regulation has not increased the cost of planning, designing and operating to date. Although we believe that compliance with environmental regulations will not have a material adverse effect on our operations or results of these operations, there can be no assurance that significant costs and liabilities, including criminal or civil penalties, will not be incurred. Moreover, it is possible that other developments, including stricter environmental laws and regulations, and claims for damages for injuries to property or persons resulting from our activities could result in substantial costs and liabilities.
In the conduct of our activities, our operations will be subject to the requirements of the federal Occupational Safety and Health Act (“OSHA”(“OSHA”) and comparable state statutes. The OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act and similar state statutes require us to organize information about hazardous materials used, released or produced in itsour operations. Certain of this information must be provided to employees, state and local governmental authorities and local citizens. We are also subject to the requirements and reporting set forth in OSHA workplace standards.
Blockchain technologies and digital currencies, including bitcoin, are increasingly becoming subject to governmental regulation, both in the U.S. and internationally. Blockchain technologies and cryptocurrency are under review with a number of U.S. governmental agencies, including, without limitation, the SEC, the Commodity Futures Trading Commission, the Federal Trade Commission and the Financial Crimes Enforcement Network of the U.S. Department of the Treasury.State and local regulations also may apply to our digital currency mining. Other governmental or quasi-governmental regulatory bodies have shown an interest in regulating or investigating companies engaged in digital currency related business. For instance, the Cyber-Digital Task Force of the U.S. Department of Justice (the “DOJ”) published a report entitled “Cryptocurrency: An Enforcement Framework” in October 2020. This report provides a comprehensive overview of the possible threats and enforcement challenges the DOJ views as associated with the use and prevalence of digital currencies, amongst other things. Further, in early March 2021, the SEC chairperson nominee expressed an intent to focus on investor protection issues raised by cryptocurrencies.
Presently, we do not believe any U.S. or State regulatory body has taken any action or position adverse to our digital currency mining activities; however, future changes to existing regulations or entirely new regulations may affect our business in ways it is not presently possible for us to predict with any reasonable degree of reliability.
In addition, regulators and the media have expressed concerns related to the potential environmental impacts of bitcoin mining, and its energy-intensive nature in particular. We are not materially impacted by any current regulations targeted toward the digital currency mining industry.
Other than the above regulations and maintaining our good standing in the State of Nevada,states in which we operate, complying with applicable local business licensing requirements, complying with all state and federal tax requirements, preparing our periodic reports under the Securities Exchange Act of 1934, as amended, and complying with other applicable securities laws, rules, and regulations, and our discussion related to our newly acquired ATL Data Centers LLC subsidiary regarding bitcoin mining operations, we do not believe that existing or probably governmental regulations will have a material effect on our operations. Certain governmental and quasi-governmental bodies are considering additional regulations in the bitcoin mining and energy industries; it is not currently known whether any such regulations would have a material impact on our businesses. We do not currently require the approval of any governmental agency or affiliated program for our operations.
In the future we may become subject to new laws and/or regulations, such as further regulation by the SEC and other agencies, which may affect our digital currency mining and other activities. For additional discussion regarding our belief about the potential risks existing and future regulation pose to our business, see the Section entitled “Risk Factors,” below.
Product Development
Digital Currency Mining and Energy Segments
Because the distributed energy and related software industry is still in ana relatively early state of adoption, our ability to compete successfully is heavily dependent upon our ability to ensure a continual and timely flow of competitive products, services, and technologies to the marketplace. We continue to develop new products and technologies and to enhance our existing products in order to drive further commercialization. We may also expand the range of our product offerings and intellectual property through licensing and/or acquisition of third-party business and technology.
Bitcoin mining by its nature has no products.
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Human Capital Resources; Employees; Personnel
Digital Currency Mining and Energy Segments
We believe that our future success will depend,depends, in part, on our ability to continue to attract, hire, and retain qualified personnel. As of December 14, 2020,1, 2021, we had 6287 staff members, with 5686 of which were full time salaried employees.time. Employees participate in equity incentive plans and receive generous compensation in the form of salary and benefits. We continuecontinually seek to seek additions to our staff,hire and retain talented professionals, although the competition for such personnel in our segments is significant. None of our employees are represented by a labor union, and we have never experienced a work stoppage. We believe that our relations with our employees are good.
Company Websites
We maintain a corporate Internet website at: www.cleanspark.com and informational websites for our subsidiaries at www.p2klabs.comwww.cleanblok.com, www.gridfabric.io, and www.gridfabric.io.www.p2klabs.com.
The contents of these websites are not incorporated in, or otherwise to be regarded as part of, this Annual Report.
We file reports with the SEC, which are available on our website free of charge. These reports include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, “Section 16”Section 16 filings on Form 3, Form 4, and Form 5, and other related filings, each of which is provided on our website as soon as reasonably practical after we electronically file such materials with or furnish them to the SEC. In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including the Company.
Item 1A. Risk Factors
We are subject to various risks that may materially harm our business, prospects, financial condition and results of operations. An investment in our common stock is speculative and involves a high degree of risk. In evaluating an investment in shares of our common stock, you should carefully consider the risks described below, together with the other information included in this report.Annual Report.
The risks described below are not the only risks we face. If any of the events described in the following risk factors actually occurs, or if additional risks and uncertainties later materialize, that are not presently known to us or that we currently deem immaterial, then our business, prospects, results of operations and financial condition could be materially adversely affected. In that event, the trading price of our common stock could decline, and you may lose all or part of your investment in our shares. The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.
Risk Factors Summary
Below is a summary of the principal factors that make an investment in our common stock speculative or risky. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below and should be carefully considered, together with other information included in this Annual Report.
· | risks arising from pandemics, epidemics or an outbreak of diseases, such as the recent outbreak of the COVID-19 pandemic; |
· | supply chain and shipping disruptions have resulted in shipping delays, a significant increase in lead times and shipping costs, and could increase product costs and result in lost sales and bitcoin production; |
· | our limited operating history and history of operating losses and negative cash flow; |
· | volatile and unpredictable cycles in the emerging and evolving industries in which we operate; |
· | competition in the markets in which we operate; |
· | our reliance on intellectual property rights to protect our technology; |
· | our ability to manage our suppliers and contract manufacturers; |
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· | our relationships with certain key customers; |
· | our limited experience selling our distributed energy focus products and solutions for use in residential markets; |
· | the concentration of our solar energy business in Southern California; |
· | potential product defect or liability suits, or any recall of our products; |
· | our reliance on our management team, and any failure by management to properly manage growth; |
· | future strategic acquisitions and other arrangements that we engage in, which could disrupt our business, cause dilution to our stockholders, reduce our financial resources and harm our operating results; |
· | our substantial dependency on utility rate structures and government incentive programs that encourage the use of alternative energy sources; |
· | our need for financing in the future to sustain and expand our operations and any inability to obtain such financing on acceptable terms, or at all; |
· | potential changes in laws and regulations applicable to digital currencies, or interpretations thereof, including, without limitation, banking regulations and securities regulations and regulations governing mining activities, both in the U.S. and in other countries; |
· | the uncertain impact of geopolitical and economic events on the demand for bitcoin; |
· | our exposure to pricing risk and volatility associated with the value of bitcoin because we do not hedge our investment in bitcoin; |
· | the development and acceptance of competing blockchain platforms or technologies; |
· | challenges of scaling bitcoin, which, if not overcome, may lead to high fees or slow transaction settlement times; |
· | the reward for successfully solving a block will halve in the future and its value may not adjust to compensate us for the reduction in the rewards we receive from our mining efforts; |
· | potential actions of malicious actors or botnets; |
· | our reliance on a third-party mining pool service provider for our mining revenue payouts; |
· | loss, theft or restriction on access to bitcoins and other digital assets we hold; |
· | the loss or destruction of private keys required to access our bitcoins and potential data loss relating to our bitcoins; |
· | the irreversibility of incorrect or fraudulent bitcoin transactions; |
· | forks in the bitcoin network; |
· | the open-source structure of the bitcoin network protocol and any failure to properly monitor and upgrade the protocol; |
· | the possibility that banks and financial institutions may not provide services to businesses that engage in cryptocurrency-related activities; |
· | potential exposure to specifically designated nationals or blocked persons as a result of our interactions with the bitcoin network; |
· | the relative novelty and lack of regulation of the digital asset exchanges on which cryptocurrencies, including bitcoin, trade; |
· | inadequate sources of recovery if our digital assets are lost, stolen or destroyed; |
· | the lack of limitations of FDIC or SIPC protections for the assets we hold; | |
· | the possible failure to comply with internal control over financial reporting requirements under Section 404 of the Sarbanes-Oxley Act of 2002; |
· | the limited rights of legal recourse available to us following any loss of our bitcoins; |
· | the possibility that a cryptocurrency other than bitcoin could be more desirable to the digital asset user base; |
· | the possibility that our mining costs may exceed our mining revenues; |
· | damage of the properties included in our mining operation and inability to get adequate insurance coverage for same; |
· | our need for significant electrical power to support our mining operations; |
· | competition from other methods of investing in cryptocurrencies; |
· | the possibility that operators of bitcoins mining operations may immediately sell bitcoin rewards earned by mining in the market, thereby constraining the growth of the price of bitcoin; |
· | risks related to technological obsolescence, the vulnerability of the global supply chain for cryptocurrency hardware disruption, and difficulty in obtaining new hardware; |
· | the possible transition of bitcoin mining algorithms to proof of stake validation; |
· | potential Internet disruptions; |
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· | the limited precedent for financial accounting of digital assets, and the possibility of future accounting requirements for transactions involving digital assets; |
· | future developments regarding the treatment of digital assets for U.S. federal income and applicable state, local and non-U.S. tax purposes; |
· | the price of our common stock may be volatile and could fluctuate widely in price; |
· | any future issuance of preferred stock may adversely affect holders of our common stock, as shares of preferred stock may have additional rights, preferences and privileges as compared to the common stock; |
· | we have not, and do not intend to, pay dividends on shares of our common stock; |
· | if securities or industry analysts do not publish or do not continue to publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline; and |
· | Provisions in the Nevada Revised Statutes and our Bylaws could make it very difficult for an investor to bring any legal actions against our directors or officers for violations of their fiduciary duties or could require us to pay any amounts incurred by our directors or officers in any such actions. |
Risks Related to Our Business
Our business has been, and in the future may be, subject to risks arising from pandemic, epidemic, or an outbreak of diseases, such as the recent outbreak of the COVID-19 illness.pandemic.
The recent outbreak of the novel strain of coronavirus, or COVID-19, which has been declared byOn March 11, 2020, the World Health Organization declared the COVID-19 outbreak to be a “public health emergency of international concern,”pandemic. Since then, COVID-19 has spread across the globe and is impacting worldwide economic activity. A public health pandemic,activity, including through quarantines, travel bans and restrictions, shelter-in-place orders, shutdowns of businesses, reductions in business activity, supply chain interruptions and overall economic and financial market instability. These measures have impacted, and may further impact, our workforce and operations, as well as the operations of our customers, our partners and our vendors and suppliers. Our critical business operations, including our headquarters, and many of our key suppliers, are located in regions which have been and continue to be impacted by COVID-19. Our customers and suppliers worldwide have also been affected by COVID-19 posesand may continue to experience material impacts well beyond the risk that we or our employees,end of the pandemic.
Specifically, the manufacture of components of our products, the final assembly of our products, and other critical operations are concentrated in certain geographic locations that have been impacted by COVID-19 and in which local governments continue to take measures to try to contain the pandemic. There is considerable uncertainty regarding the impact of such measures and potential future measures, including restrictions on manufacturing facilities, on our support operations or workforce, or on our customers, partners, vendors and suppliers. Such measures, as well as restrictions on or disruptions of transportation, such as reduced availability or increased cost of air transport, port closures, and increased border controls or closures, could limit our capacity to meet customer demand and have a material adverse effect on our financial condition and results of operations.
The COVID-19 pandemic and other factors have adversely affected our supply chain, consistent with its effect across many industries, including creating shipping and logistics challenges and placing significant limits on component supplies. These effects on our supply chain have resulted in delayed product availability in our energy business, especially when combined with the demand for our products, and have adversely impacted, and may continue to adversely impact, our ability to meet our energy product demand, result in additional costs, or may otherwise adversely impact our business and results of operations. They have also significantly increased the costs of shipping miners, related components and infrastructure. We expect these impacts, including delayed product availability, to continue for as long as the global supply chain is experiencing these challenges.
The spread of COVID-19 has also caused us to modify our business practices as we comply with state-mandated requirements for safety in the workplace to ensure the health, safety, and welling-being of our employees. While the company has implemented a Vaccination and Testing Policy, we still maintain other measures including personal protective equipment, social distancing, cleanliness of our facilities, and daily monitoring of the health of employees in our facilities, as well as modifying our policies on employee travel and the cancellation of physical participation in meetings,
contractors, suppliers,events, and other partnersconferences. We may take further actions in response to the pandemic as may be prevented from conducting business activities for an indefinite periodrequired by government authorities or that we may determine are in the best interests of time, including dueour employees, customers, partners, and suppliers. However, we have not developed a specific and comprehensive contingency plan designed to shutdowns that may be requested or mandated by governmental authorities. While it is not possible at this time to estimateaddress the impact that COVID-19 could have on our business, the continued spread of COVID-19challenges and the measures takenrisks presented by the governments of countries affected could disruptCOVID-19 pandemic and, even if and when we do develop such a plan, there can be no assurance that such plan will be effective in mitigating the supply chain and adversely impactpotential adverse effects on our business, financial condition, orand results of operations. The
In addition, while the extent and duration of the COVID-19 outbreakpandemic on the global economy and mitigation measuresour business in particular are difficult to assess or predict, the pandemic has resulted in, and may also have an adverse impact oncontinue to result in, significant disruption of global economic conditionsfinancial markets, which may reduce our ability to access capital or our customers’ ability to pay us for past or future purchases, which could have an adverse effect onnegatively affect our working capital and liquidity. A recession or financial market correction resulting from the lack of containment and spread of COVID-19 could impact overall spending, adversely affecting demand for our products and services, our business, and financial condition.the value of our common stock.
The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. The extent to whichof the impact of the COVID-19 outbreak impactspandemic on our resultsoperational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, thatincluding, but not limited to, the duration and continued spread of the pandemic, its severity, further related restrictions on travel, any reopening plans, the effectiveness of actions taken in the United States and other countries to contain and treat the disease, including, without limitation, the effectiveness and timing of vaccination initiatives in the United States and worldwide and the duration, timing, and severity of the impact on customer spending, including any recession resulting from the pandemic, all of which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severitypredicted. An extended period of global supply chain and economic disruption as a result of the virusCOVID-19 pandemic, even after the pandemic subsides, could have a materially adverse impact on our business, results of operations, access to sources of capital and financial condition, though the actions to contain its impact.full extent and duration of any such impact is also uncertain.
We lack an established Supply chain and shipping disruptions have resulted in shipping delays, a significant increase in shipping costs, and could increase product costs and result in lost sales, which may have a material adverse effect on our business, operating historyresults and financial condition.
Supply chain disruptions, resulting from factors such as the COVID-19 pandemic, labor supply and shipping container shortages, have incurred lossesimpacted, and may continue to impact, us and our third-party manufacturers and suppliers. These disruptions have resulted in prior periods, expectlonger lead times and increased product costs and shipping expenses, including with respect to incur lossesthe delivery of miners that we have purchased. While we have taken steps to minimize the impact of these increased costs by working closely with our suppliers and customers, there can be no assurances that unforeseen events impacting the supply chain will not have a material adverse effect on us in the futurefuture. Additionally, the impacts supply chain disruptions have on our third-party manufacturers and suppliers are not within our control. It is not currently possible to predict how long it will take for these supply chain disruptions to cease. Prolonged supply chain disruptions impacting us and our third-party manufacturers and suppliers could interrupt product manufacturing, increased lead times, increased product costs and result in lost sales and bitcoin production, result in a delay in the delivery of miners that we can give no assurance thathave purchased, and continue to increase shipping costs associated with the delivery of our operations will result in profits.purchased miners, which may have a material adverse effect on our business, operating results and financial condition.
We have a limited operating history thatand a history of operating losses and negative cash flow, and we may never achieve consistent profitability.
Our limited operating history, including our recent entry into the digital currency mining business, makes it difficult to evaluate our business. Historical sales pertainingbusiness and predict our future results of operations. Although we have achieved profitable quarters in the past, to our productsdate, we have been in insufficientnot maintained consistent profitability from period to create positive cashflows or profitability,period, and we cannot say with certainty whenno assurances can be made that we will begin to achieve profitability.
Sinceconsistent profitability in the near future, if ever. From the Company’s inception through September 30, 2021, we have sustained $116,402,606$138,392,118 in cumulative net losses, and we had a net loss for the fiscal year ended September 30, 20202021 of $23,346,143.$21,812,010. We expect to have operatinggenerated these losses at least until such time as we have developed a substantialattempt to implement our business plan, including expanding our existing products and stable revenuecustomer base. We cannot assure you thatwill not achieve consistent profitability unless and until we can develop a substantial and stable revenue base or achieve or sustain profitability on a quarterly or annual basis in the future.base.
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Our future success is difficult to predict because we operate in emerging and evolving markets, and the industries in which we competethat are subject to volatile and unpredictable cycles.
The renewable energy, bitcoin mining, microgrid and related industries are emerging and evolving, markets which may lead to period-to-period variability in our operating results and may make it difficult to evaluate our future prospects and which may lead to period to period variability in our operating results.prospects. Our energy products and services are based on unique technology whichthat we believe offers significant advantages to our customers, but the markets we serve are in a relatively early stage of development and it is uncertain how rapidly they will develop. It is also uncertain whether our energy products will achieve high levels of demand and acceptance as these markets grow. If companies and customers in the industries we serve do not perceive or value the benefits of our technologies and products, or if they are unwilling to adopt our products as alternatives to traditional power solutions, the market for our products and services may not develop or may develop more slowly than we expect, which could significantly and adversely impact our operating results.
As a supplier to the renewable energy, microgrid and related industries, we may be subject to business cycles. Thecycles, the timing, length, and volatility of these business cycleswhich may be difficult to predict. These industriesThe cyclical nature of our business may be cyclical due todriven by sudden changes in customers’ manufacturing capacity requirements and spending, which depend in part on capacity utilization, demand for customers’ products, inventory levels relative to demand and access to affordable capital. These changes may affect the timing and amounts of customers’ purchases and investments in technology, and affect our orders, net sales, operating expenses, and net income. In addition, we may not be able to respond adequately or quickly to theany declines in demand by reducing our costs.
To meet rapidly changing demand in each of the industries we serve, we must effectively manage our resources and production capacity. During periods of decreasing demand for our products, we must be able to appropriately align our cost structure with prevailing market conditions, effectively manage our supply chain, and motivate and retain key employees. During periods of increasing demand for our products, we must have sufficient inventory to fulfill customer orders, effectively manage our supply chain, and attract, retain, and motivate a sufficient number of qualified individuals. If we are not able to timely and appropriately adapt to changes in our business environment or to accurately assess where we are positioned within a business cycle, our business, financial condition, or results of operations may be materially and adversely affected.
The industriesmarkets in which we competeparticipate are highly competitive, and we may be unable to successfully compete to survive.compete.
We compete in the highly competitive market for renewable energy products and microgrid technology and associated services that is intensely competitive., as well as in certain operational aspects of our digital currency mining business, including, but not limited to, the acquisition of new miners, obtaining the lowest cost of electricity, obtaining clean energy sources, obtaining access to energy sites with reliable sources of power, and evaluating new technology developments in the industry. Evolving industry standards, rapid price changes and product obsolescence also impact the market.market and its various participants, including us. Our competitors include many domestic and foreign companies, mostmany of which have substantially greater financial, marketing, personnel and other resources than we do.do, which may cause us to be at a competitive disadvantage. Our current competitors or new market entrants could introduce new or enhanced technologies, products or services with features that render our technologies, products or services obsolete, less competitive or less marketable. Our The success of our energy business will be dependent upon our ability to develop products that are superior to existing products and products introduced in the future, and which are cost effective. In addition, we may be required to continually enhance any products that are developed as well as introduce new products that keep pace with technological change and address the increasingly sophisticated needs of the marketplace. Even if our current technologies prove to be commercially feasible, there is extensive research and development being conducted on alternative energy sources that may render our technologies and protocols obsolete or otherwise non-competitive. The success of our digital currency mining business will be further dependent upon our ability to purchase additional miners, adapt to changes in technology in the industry, and to obtain sufficient energy at reasonable prices, amongst other things.
There canWe may also be no assurance that we will be ableunable to keep pace with the technological demands of the marketplace or successfully develop products that will succeed in the marketplace. As a small company, we will be at a competitive disadvantage to mostSince many of our competitors which includeare larger, establishedwell-established companies that have substantially greater financial, technical, manufacturing, marketing, distribution and other resources than us. There can be no assurance thatus, we willare at an inherent competitive disadvantage. We may not have the capital resources available to undertake the research that may be necessary to upgrade our equipment or develop new devices to meet the efficiencies of changing technologies. Our inability to adapt to technological change could have a materially adverse effect on our results of operations.
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We rely on patents and proprietarya variety of intellectual property rights to protect our technology, and enforcing those rights could disrupt our business operation and divert precious resources that could ultimately harm our future prospects.
We rely on a combination of trade secrets, confidentiality agreements and procedures and patents to protect our proprietary technologies.
Our business primarily relies upon trade secret laws and contractual restrictions, such as confidentiality agreements and work-for-hire provisions, to protect our technology, know-how and other proprietary information. It may be cost prohibitive for us to seek to enforce such rights through the legal-enforcement mechanisms available to us, and, in any case, such laws and contractual restrictions may not provide meaningful protection to us against the possible unauthorized use, misappropriation or disclosure of such trade secrets.
In relation to our microgrid business, we also own the following patents: Patent No. 9,941,696 B2 and patent number 10,658,839 "Establishing Communication and Power Sharing Links Between Components of a Distributed Energy System, awarded April 10, 2018, The patent covers CleanSpark'spatents that protect our ability to receive data from a plurality of sources within a microgrid, which is then analyzed to forecast power needs across the microgrid, or a combination of multiple 'fractal'‘fractal’ microgrids, and then determiningdetermine whether or when to share power with the requesting module.
We also own patent numbers 8,518,133 and 8,105,401 ‘Parallel Path, Downdraft Gasifier Apparatus and Method'’ and patent number 9,359,567 ‘Gasification Method Using Feedstock Comprising Gaseous Fuel’– which covers our Gasifier technology. We also own patent number 8,342,829 entitled ‘Electrolytic Reactor and Related Methods for Supplementing the Air Intake of an Internal Combustion Engine.’
The claims contained in those and any patentother patents we own may not provide adequate protection for our products and technology. In the absence of patent protection, weour competitors may be vulnerable to competitors who attempt to copy our products or gain access to our trade secrets and know-how. In addition, the laws of foreign countries may not protect our proprietary rights to thisour technology to the same extent as the laws of the U.S.
In addition, our ongoing expansion of our business, including, in particular, through the development of products, may result in claims of intellectual property infringement, regardless of merit. If aan infringement claim or other dispute arises concerning our technology, we could become involved in litigation that might involve substantial cost. Litigation could divert substantial management attention away from our operations and into efforts to enforce our patents, protect our trade secrets or know-how or determine the scope of the proprietary rights of others. If a proceeding resulted in adverse findings, we could be subject to significant liabilities to third parties. Weparties, and we might also be required to seek licenses from third parties to manufacture or sell our products. Our ability to manufacture and sell our products may also be adversely affected by other unforeseen factors relating to theany such proceeding or its outcome.
As we continue to grow and to develop our intellectual property, we could attract threats from patent monetization firms or competitors alleging infringement of intellectual property rights.
Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. If we do not prevail in this type of litigation, we may be required to: pay monetary
damages; stop commercial activities relating to our product; obtain one or more licenses in order to secure the rights to continue manufacturing or marketing certain products; or attempt to compete in the market with substantially similar products. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue some of our operations.
A materialsignificant part of our success will depend on our ability to manage our suppliers and contract manufacturers. Ourmanufacturers, and any failure to manage our suppliers and contract manufacturersdo so could materially and adversely affect our results of operations and relations with our customers.
We rely upon a limited number of suppliers to provide the components necessary to build our energy products and on contract manufacturers to procure components and assemble our products. In addition, we rely on a limited number of suppliers for the purchase and delivery of our miners to support our digital currency mining operations. There can be no assurance that such key suppliers and contract manufacturers will provide components, products or products miners in a timely and cost efficientcost-efficient manner or otherwise meet our needs and expectations. Any disruption in such key suppliers’ or contract manufacturers could delay our ability to provide our products to our customers or to expand our digital currency mining operations. Our ability to manage such relationships and timely replace suppliers and contract manufacturers, if necessary, is critical to our success. Our failure to timely replace our contract manufacturers and suppliers, should that become necessary, could materially and adversely affect our results of operations and relations with our customers. For example, we depend on Bitmain for the majority of our mining rigs and Pioneer Custom Electrical Products Corp. as a sole source contract manufacturer of our switchgear product lines, and any change in their ability to manufacture and deliver these products could have a significant impact on our results of operations.
Our success is dependent upon our relationships with certain key customers.
In the past, we have derived a significant portion of our revenues from a relatively limited number of customers. Our dependence on a limited number of customers may continue in the future. The loss of any one of our major customers or decrease in demand by those customers could have a material adverse effect on our business, our results of operations and our cash flows.
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We have limited experience selling our distributed energy focused products and solutions for use in residential markets, and our increased efforts in this regard may not be as successful as we expect or at all.
As a result of our recent acquisition of Solar Watt, we now are providing solar and alternative energy solutions for homeowners, as well as commercial businesses, and have developed a proprietary platform to enable integration and optimization of solar, energy storage and back-up solutions for residential applications. Historically, however, our products and solutions have been primarily sold into commercial and governmental markets. We have limited experience pursuing the residential markets, and there are unique challenges associated with sales to homeowners and others in the residential market. There can be no assurance that we will be successful in growing profitably (or at all) sales of our residential market focused products and solutions or otherwise achieving success in our efforts in this regard. Further, the success of these efforts will depend on part on expansion of homeowner use of solar energy. To date, solar energy has only achieved limited market acceptance (particularly in regions outside of Southern California, in which regions we intend to expand our services and capabilities), and its continued market acceptance and growth may depend on continued support in the form of performance-based incentives, rebates, tax credits and other incentives from federal, state, local and foreign governments. Additionally, there can be no assurance that we will be able to successfully develop our planned proprietary platform to enable integration and optimization of solar, energy storage and back-up generators for residential applications.
Our solar energy business is concentrated in Southern California, putting us at risk of region-specific disruptions.
Our solar energy customer base is currently concentrated in Southern California, and we expect many of our future solar energy installations to be in California, which could further concentrate our solar energy customer base and operational infrastructure. Accordingly, our business and results of operations are particularly susceptible to adverse economic, regulatory, political, weather and other conditions in California, including the impacts of the COVID-19 pandemic and any legislative changes related to grid operations.
If we are the subject of future product defect or liability suits, or our products are subject to a recall, our business will likely fail.and our reputation could be adversely affected.
In the course of our planned operations, we may become subject to legal actions based on a claim that our energy products are defective in workmanship or have caused personal or other injuries. We currently maintain liability insurance but there canmay also be no guarantee that such coverage may not be adequate to cover all potential claims. Moreover, even if we are able to maintain sufficient insurance coverage in the future, any successful claim could significantly harm our business, financial condition and results of operations.
We may be exposedsubject to lawsuits and other claims in the future if our products malfunction, which could increase our expenses, harm our reputation and prevent us from growing our business.
Any liabilityincluding, for damages resulting from malfunctionsexample, if any of our solar service offerings (such as our racking systems, photovoltaic modules, batteries, inverters, or other products) causes injuries. Because solar energy systems and many of our other current and anticipated products are electricity-producing devices, it is possible that customers or their property could be substantial, increase our expenses and prevent us from growinginjured or continuing our business. Potential customers may rely ondamaged by our products, for critical needs and a malfunction of our products could result in warranty claimswhether due to product malfunctions, defects, improper installation or other product liability. In addition, a well-publicized actual or perceived problem could adversely affect the market’s perception of our products. This could result in a decline in demand for our products, which would reduce revenue and harm our business.causes. Further, since our products are used in systems that are made up onof components made by othersourced from third party manufacturers, we may be subject to product liability claims even if our products do not malfunction. Additionally, any of our products could be subject to recalls due to product malfunctions or defects.
The successful assertion of product liability claims against us could result in potentially significant monetary damages that could require us to make significant payments, as well as subject us to adverse publicity, damage our reputation and competitive position and adversely affect sales of our systems and other products. We rely on third-party manufacturing warranties, warranties provided by our manufacturing partners and our general liability insurance to cover product liability claims and have not obtained separate product liability insurance. Such warranties and insurance coverage may not be adequate to cover all potential claims. Moreover, even if such warranties and insurance coverage are sufficient, any successful claim could significantly harm our business, reputation, financial condition and results of operations. In addition, product liability claims, injuries, defects or other problems experienced by other companies in the industries in which we operate could lead to unfavorable market conditions for the industry as a whole, and may have an adverse effect on our ability to attract customers and thereby have an adverse effect our growth and financial performance.
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We rely heavily on our management team, whose continued service and performance is critical to our future success. Any failure by management to properly manage growth, including hiring and retaining competent and skilled management and other personnel, could have a material adverse effect on our business, operating results, and financial condition.
IfWe currently have four executive officers — our Chief Executive Officer and President, Zachary Bradford, our Chief Financial Officer, Lori Love, our Chief Revenue Officer, Amer Tadayon, and S. Matthew Schulz, our Executive Chairman — who are responsible for our management functions and are responsible for strategic development, financing and other critical functions. Some of the members of our management team and our board of directors may not have prior experience in the energy or cryptocurrency mining industries. This lack of experience may impair our management teams’ and directors’ ability to evaluate and make well-informed decisions involving our current operations and any future projects we may undertake in the industries in which we operate. Such impairment and lack of experience could adversely affect our business, develops as expected, we anticipate that we will grow rapidly infinancial condition and future operations.
Our future success depends significantly on the near future. Our failure to properly managecontinued service and performance of our expected rapidexisting management team. The departure, death, disability or other extended loss of services of any member of our management team, particularly with little or no notice, could cause delays on projects, frustrate our growth prospects and could have an adverse impact on our client and industry relationships, our project exploration and development programs, other aspects of our business and our financial condition, results of operations, cash flow and prospects.
Our success, growth prospects, and ability to capitalize on market opportunities also depend to a material adverse effectsignificant extent on our ability to identify, hire, motivate and retain key personnel. qualified managerial personnel, including additional senior members of management. Our growth may be constrained by resource limitations as competitors and customers compete for increasingly scarce human capital resources. The demand for trained software engineers, electrical engineers, professionals familiar with cryptocurrency mining and other skilled workers is currently high. Our competitors may be able to offer a work environment with higher compensation or more opportunities than we can. Any new personnel we hire may not be or become as productive as we expect, as we may face challenges in adequately or appropriately integrating them into our workforce and culture. If we are unable to attract and retain a sufficient number of skilled personnel, our ability to successfully implement our business plan, grow our company and maintain or expand our product offerings may be adversely affected, and the costs of doing so may increase, which may adversely impact our business, financial condition and results of operations.
Our expansion could also place significant demands on our management, operations, systems, accounting, internal controls and financial resources. If we experience difficulties in any of these areas, we may not be able to expand our business successfully or effectively manage our growth. Any failure by management to manage growth and to respond to changes in our business could have a material adverse effect on our business, financial condition and results of operations.
The lack of management experience in the renewable energy and microgrid industries could adversely affect our company.
Some members of management and the board of directors may not have prior experience in the energy industry. Some members do, however, have extensive work experience in the reclamation, environmental industries, energy industries, financial/accounting industries, and business management. The lack of experience in the alternative energy industry may impair our managements’ and directors’ ability to evaluate and make decisions involving our current operations and any future projects we may undertake in the alternative energy industry. Such impairment and lack of experience could adversely affect our business, financial condition and future operations.
If we are unable to attract and retain a sufficient number of skilled experts and workers our ability to pursue projects may be adversely affected and our costs may increase.
Our rate of growth will be confined by resource limitations as competitors and customers compete for increasingly scarce resources. We believe that our success depends upon our ability to attract, develop and retain a sufficient number of affordable trained experts that can execute our operational strategy. The demand for trained software engineers, electrical engineers and other skilled workers is currently high. If we are unable to attract and retain a sufficient number of skilled personnel, our ability to pursue projects may be adversely affected and the costs of performing our existing and future projects may increase, which may adversely impact our margins.
We have engaged in, and in the future may engage in, strategic acquisitions and other arrangements that could disrupt our business, cause dilution to our stockholders, reduce our financial resources and harm our operating results.
We have been involvedpreviously engaged in significantstrategic transactions, including acquisitions of companies, product lines, technologies and personnel, such as our recent acquisitions of ATL in December 2020 and Solar Watt in February 2021, and, as part of our lifespan. Ingrowth strategy, in the future, we may seek additional opportunities to expand our product offerings or the markets we serve by acquiring other companies, product lines, technologiespursuing strategic transactions. Our ability to grow through future acquisitions will depend on the availability of, and personnel.
Acquisitions involve numerous risks, includingour ability to identify, suitable acquisition and investment opportunities at an acceptable cost, our ability to compete effectively to attract those opportunities and the following:
availability of financing to complete acquisitions. Future acquisitions may require us to issue common stock that would dilute our current stockholders’ percentage ownership, assume or otherwise be subject to liabilities of |
Mergers and acquisitions are inherently risky. No assurance can be given that our acquisitions will be successful. Further, no assurance can be given that an acquisition will not adversely affect our business, operating results, or financial condition. Failure to manage and successfully integrate an acquisition could harm our business and operating results in a material way. Even when an acquired company, has already developedrecord goodwill and marketed products, there can be no assurancenon-amortizable intangible assets that enhancements to those products will be madesubject to impairment testing on a regular basis and potential periodic impairment charges,
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incur amortization expenses related to certain intangible assets, incur large acquisition and integration costs, immediate write-offs, and restructuring and other related expenses, and become subject to litigation. The benefits of an acquisition may also take considerable time to develop, and we cannot be certain that any particular acquisition will produce the intended benefits in a timely manner or that pre–to the extent anticipated or at all. We may experience difficulties integrating the operations, technologies, products, and personnel of an acquired company or be subjected to liability for the target’s pre-acquisition activities or operations as a successor in interest. Such integration may divert management’s attention from normal daily operations of our business. Future acquisitions may also expose us to potential risks, including risks associated with entering markets in which we have no or limited prior experience (such as our acquisition due diligence will identify all possible issues that might ariseof our ATL subsidiary, in light of its cryptocurrency mining operations), especially when competitors in such markets have stronger market positions, the possibility of insufficient revenues to offset the expenses we incur in connection with respectan acquisition and potential loss of, or harm to, such products or the acquired business.our relationships with employees, customers, consumers and suppliers as a result of integration of new businesses.
Our energy business is substantially dependent on utility rate structures and government incentive programs that encourage the use of alternative energy sources. The reduction or elimination of government subsidies and economic incentives for energy-related technologies would harm our business.
We believe that near-term growth of energy-related technologies, including power conversion and solar energy technology, relies partly on the availability and size of government and economic incentives and grants (including, but not limited to, the U.S. Investment Tax Credit and various state and local incentive programs). These incentive programs could be challenged by utility companies, or for other reasons found to be unconstitutional, and/or could be reduced or discontinued for other reasons.reasons, all of which are outside of our control. The reduction, elimination, or expiration of government subsidies and economic incentives could harm our business.
A combination of utility rate structures and government subsidies that encourage the use of alternative energy sources is a primary driver of demand for our energy products. For example, public utilities are often allowed to collect demand charges on commercial and industrial customers in addition to traditional usage charges. In addition, the federal government and many states encourage the use of alternative energy sources through a combination of direct subsidies and tariff incentives such as net metering for users that use alternative energy sources such as solar power. California also encourages alternative energy technology through its Self-Generation Incentive Program, or SGIP, which offers rebates for businesses and consumers who adopt certain new technologies. Other states have similar incentives and mandates which encourage the adoption of alternative energy sources. Notwithstanding the adoption of other incentive programs, we expect that California will be the most significant market for the sale of our energy products in the near term. Should California or another state in which we derive a substantial portion of our product revenues in the future change its utility rate structure or eliminate or significantly reduce its incentive programs, demand for our products could be substantially affected, which would adversely affect our business prospects, financial condition and operating results.
Although we have obtained sufficient funding for In the foreseeable future,if we do not obtain increased revenues in 2021 and beyond, we may require additional financing to sustain and expand our operations, and we may not be able to obtain financing on acceptable terms, or at all, which would have a material adverse effect on our business, financial condition, results of operations, cash flow and prospects.
Our ability to seekoperate profitably and to grow our business is dependent upon, among other things, generating sufficient revenue from our operations and, when and if needed, obtaining financing. If we are unable to generate sufficient revenues to operate and/or expand our business, we will be required to raise additional financingcapital to fund operating deficits (if applicable) and growth of our business, pursue our business plans and to finance our operating activities, including through equity or scale backdebt financings, which may not be available to us on favorable terms, or ceaseat all.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, stockholder ownership interest in the Company may be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect rights as a stockholder. Debt and equity financings, if available, may involve agreements that include covenants limiting or restricting our activities, which may significantly harmability to take specific actions, such as redeeming our chancesshares of common stock, making investments, incurring additional debt, making capital expenditures or declaring dividends.
success.
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We maintain our cash at financial institutions, which at times, exceed federally insured limits.
The majority of our cash is held in accounts at U.S. banking institutions that we believe are of high quality. Cash held in non-interest-bearing and interest-bearing operating accounts may exceed the Federal Deposit Insurance Corporation insurance limits. If such banking institutions were to fail, we could lose all or a portion of those amounts held in excess of such insurance limitations.
If we fail to comply with Section 404 of the Sarbanes-Oxley Act of 2002, the market may have reduced confidence in our
reported financial information.
We must continue to document, test, monitor and enhance our internal control over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We will continue to perform the documentation and evaluations needed to comply with Section 404. If during this process our management identifies one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective, which may cause market participants to have reduced confidence in our reported financial condition.
Risks Related to Our Cryptocurrency Mining Operations
Through our acquisition of ATL in December 2020, we expanded our business to include bitcoin mining, and we are actively trying to grow our bitcoin mining infrastructure, equipment and capacity. Bitcoin mining is a significant portion of our business and revenues and is expected to continue to be the source of a majority of our revenues in the future. Our bitcoin mining activities, both now and in the future, may subject us to inherent risks, including the risks described below and elsewhere in this Annual Report.
If regulatory changes or interpretations of our activities require our registration as a money services business (an “MSB”) under the regulations promulgated by the Financial Crimes Enforcement Network (“FinCEN”) under the authority of the U.S. Bank Secrecy Act (the “BSA”), or otherwise under state laws, we may incur significant compliance costs, which could be substantial or cost-prohibitive. If we become subject to these regulations, our costs in complying with them may have a material adverse effect on our business and the results of our operations.
To the extent our bitcoin mining activities cause us to be deemed an MSB under the regulations promulgated by FinCEN under the authority of the BSA, we may be required to comply with FinCEN regulations, including those that would mandate us to implement anti-money laundering programs, make certain reports to FinCEN and maintain certain records.
To the extent that our cryptocurrency activities cause us to be deemed a “money transmitter” (an “MT”) or be given an equivalent designation, under state law in any state in which we operate, we may be required to seek a license or otherwise register with a state regulator and comply with state regulations that may include the implementation of anti-money laundering programs, maintenance of certain records and other operational requirements. Currently, the New York State Department of Financial Services maintains a comprehensive “BitLicense” framework for businesses that conduct “virtual currency business activity.” In July 2020, Louisiana enacted the Virtual Currency Businesses Act, becoming the second state after New York to enact a stand-alone virtual currency law. We will continue to monitor for developments in state-level legislation, guidance or regulations applicable to us.
Such additional federal or state regulatory obligations in the United States or obligations that could arise under the regulatory frameworks of other countries may cause us to incur significant expenses, possibly affecting its business and financial condition in a material and adverse manner. Furthermore, we and our service providers may not be capable of complying with certain federal or state regulatory obligations applicable to MSBs and MTs or similar obligations in other countries. If we are deemed to be subject to such additional regulatory and registration or licensing requirements, we may be required to substantially alter our bitcoin mining activities and possibly cease engaging in such activities. Any such action may adversely affect our business operations and financial condition and an investment in our company.
Current regulation regarding the exchange of bitcoins under the CEA by the CFTC is unclear; to the extent we become subject to regulation by the CFTC in connection with our exchange of bitcoin, we may incur additional compliance costs, which may be significant.
The Commodity Exchange Act, as amended (the “CEA”), does not currently impose any direct obligations on us related to the mining or exchange of bitcoins. Generally, the Commodity Futures Trading Commission (“CFTC”), the federal agency that administers the CEA, regards bitcoin and other cryptocurrencies as commodities. This position has been supported by decisions of federal courts.
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However, the CEA imposes requirements relative to certain transactions involving bitcoin and other digital assets that constitute a contract of sale of a commodity for future delivery (or an option on such a contract), a swap, or a transaction involving margin, financing or leverage that does not result in actual delivery of the commodity within 28 days to persons not defined as “eligible contract participants” or “eligible commercial entities” under the CEA (e.g., retail persons). Changes in the CEA or the regulations promulgated by the CFTC thereunder, as well as interpretations thereof and official promulgations by the CFTC, may impact the classification of bitcoins and, therefore, may subject them to additional regulatory oversight by the agency. Although to date the CFTC has not enacted regulations governing non-derivative or non-financed, margined or leveraged transactions in bitcoin, it has authority to commence enforcement actions against persons who violate certain prohibitions under the CEA related to transactions in any contract of sale of any commodity, including bitcoin, in interstate commerce (e.g., manipulation and engaging in certain deceptive practices).
We cannot be certain as to how future regulatory developments will impact the treatment of bitcoins under the law. Any requirements imposed by the CFTC related to our mining activities or our transactions in bitcoin could cause us to incur additional extraordinary, non-recurring expenses, thereby materially and adversely impacting an investment in the Company. In addition, changes in the classification of bitcoins could subject us, as a result of our bitcoin mining operations, to additional regulatory oversight by the agency. Although to date the CFTC has not enacted regulations governing non-derivative or non-financed, margined or leveraged transactions in bitcoin, it has authority to commence enforcement actions against persons who violate certain prohibitions under the CEA related to transactions in any contract of sale of any commodity, including bitcoin, in interstate commerce (e.g., manipulation and engaging in certain deceptive practices).
Moreover, if our mining activities or transactions in bitcoin were deemed by the CFTC to constitute a collective investment in derivatives for our shareholders, we may be required to register as a commodity pool operator with the CFTC through the National Futures Association. Such additional registrations may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting an investment in the Company. If we determine not to comply with such additional regulatory and registration requirements, we may seek to cease certain of our operations. Any such action may adversely affect an investment in the Company.
While no provision of the CEA, or CFTC rules, orders or rulings (except as noted herein) appears to be currently applicable to our business, this is subject to change.
If the SEC or another regulatory body considers bitcoin or any other cryptocurrency that we may mine in the future to be a security under U.S. securities laws, we may be required to comply with significant SEC registration and/or other requirements.
In general, novel or unique assets such as bitcoin and other digital assets may be classified as securities if they meet the definition of investment contracts under U.S. law. In recent years, the offer and sale of digital assets other than bitcoin, most notably Kik Interactive Inc.’s Kin tokens and Telegram Group Inc.’s TON tokens, have been deemed to be investment contracts by the SEC. While we believe that bitcoin is unlikely to be considered an investment contract, and thus a security under the investment contract definition, we cannot provide any assurances that digital assets that we mine or otherwise acquire or hold for our own account, including bitcoin, will never be classified as securities under U.S. law.
To the extent that any digital asset we have already mined or will mine is deemed a security, we may be obligated to comply with registration and/or other requirements by the SEC. This would cause us to incur significant, non-recurring expenses, thereby materially and adversely impacting an investment in the Company.
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If regulations or interpretations change and regulation of bitcoin under the U.S. securities laws or otherwise is promulgated, we may be classified as an investment company.
Current and future legislation and the SEC’s rulemaking and other regulatory developments, including interpretations released by a regulatory authority, may impact the manner in which bitcoin is treated for classification and clearing purposes. The SEC’s July 25, 2017 Report expressed its view that digital assets may be securities depending on the facts and circumstances. As of the date of this Annual Report, we are not aware of any rules that have been proposed to regulate bitcoin as a security, and SEC staff have publicly suggested that bitcoin is not a security for purposes of the Investment Company Act of 1940, as amended (the “1940 Act”), because current purchasers of bitcoin are not relying on the essential managerial and entrepreneurial efforts of others to produce a profit. We cannot be certain, however, as to how future regulatory developments will impact the treatment of bitcoin under the law.
For example, in the event that the bitcoin (or, in the future, any digital assets) held by us, whether as a result of our cryptocurrency mining business or otherwise (including by acquisition), are determined to constitute securities under the U.S. securities laws and such assets exceed 40% of our total assets, exclusive of cash, we would inadvertently become an investment company under the 1940 Act. Classification as an investment company under the 1940 Act requires registration with the SEC. If an investment company fails to register, it would have to stop doing almost all business, and its contracts would become voidable. Registration is time-consuming and restrictive and may require a restructuring of our operations, and we would be very constrained in the kind of business we could engage in as a registered investment company. Further, we would become subject to substantial regulation concerning management, operations, transactions with affiliated persons and portfolio composition, and would need to file reports under the 1940 Act. The cost of compliance with the 1940 Act and any other regulations applicable to our crypto mining business would result in our incurring substantial additional expenses, and the failure to properly register with the SEC or otherwise if required would have a materially adverse impact to conduct our operations.
It may be illegal now, or in the future, to mine, acquire, own, hold, sell or use bitcoin or other cryptocurrencies, participate in blockchains or utilize similar cryptocurrency assets in one or more countries, the ruling of which could adversely affect us.
Although currently cryptocurrencies generally are not regulated or are lightly regulated in most countries, several countries, such as China, India and Russia, may continue taking regulatory actions in the future that could severely restrict the right to mine, acquire, own, hold, sell or use these cryptocurrency assets or to exchange for local currency. For example, in China and Russia (India is currently proposing new legislation), it is illegal to accept payment in bitcoin and other cryptocurrencies for consumer transactions and banking institutions are barred from accepting deposits of cryptocurrencies. In addition, in March 2021, the governmental authorities for the Chinese province of Inner Mongolia banned bitcoin mining in the province due to the industry’s intense electrical power demands and its negative environmental impacts. If other countries, including the U.S., implement similar restrictions, such restrictions may adversely affect us. Such circumstances could have a material adverse effect on us, which could have a material adverse effect on our business, prospects or operations and potentially the value of any bitcoin or other cryptocurrencies we mine or otherwise acquire or hold for our own account, and thus harm investors.
There are several new and existing competitors in our industry that are purchasing mining equipment at scale, which may cause delays or difficulty in us obtaining new miners.
Many of the competitors in our industry have also been purchasing mining equipment at scale, which has caused a world-wide shortage of mining equipment and extended the corresponding delivery schedules for new miner purchases. There are no assurances that Bitmain, or any other manufacturers, will be able to keep pace with the surge in demand for mining equipment. It is uncertain how manufacturers will respond to this increased global demand and whether they can deliver on the schedules promised to all of their customers. In the event Bitmain or other manufacturers, are not able to keep pace with demand, we may not be able to purchase additional miners in sufficient quantities, on the delivery schedules that meet our business needs, or at favorable prices.
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The impact of geopolitical and economic events on the demand for bitcoin is uncertain.
Geopolitical crises may trigger large-scale purchases of bitcoin, which could rapidly increase their prices. This may, however, also increase the likelihood of a subsequent price swing in the opposite direction as crisis-driven purchasing behavior dissipates, ultimately decreasing the value of bitcoins or any other digital asset in our possession. Such risks are similar to the risks of purchasing commodities in generally uncertain times, such as the risk of purchasing, holding or selling gold.
Alternatively, global crises and economic downturns may discourage investment in bitcoin and digital assets in general as investors shift their investments towards less volatile asset classes. Such events could have a material adverse effect on our business, prospects or operations and potentially the value of bitcoin we mine or otherwise acquire or hold for our own account.
The value of bitcoin may be subject to pricing risk and has historically been subject to wide swings. Because we do not currently operatehedge our investment in bitcoin and do not intend to for the foreseeable future, we may be directly exposed to bitcoin’s price volatility and surrounding risks.
While bitcoin prices are determined primarily using data from various exchanges, over-the-counter markets and derivative platforms, they have historically been volatile and are impacted by a variety of factors. Such factors include, but are not limited to, the worldwide growth in the adoption and use of bitcoins, the maintenance and development of the software protocol of the bitcoin network, changes in consumer demographics and public tastes, fraudulent or illegitimate actors, real or perceived scarcity, and political, economic, regulatory or other conditions. Furthermore, pricing may be the result of, and may continue to result in, speculation regarding future appreciation in the value of bitcoin, or our share price, making prices more volatile or creating “bubble” type risks.
Currently, we do not use a formula or specific methodology to determine whether or when we will sell bitcoin that we hold, or the number of bitcoins we will sell. Rather, decisions to hold or sell bitcoins are currently determined by analyzing forecasts and monitoring the market in real time. Such decisions, however well-informed, may result in untimely sales and even losses, adversely affecting an investment in us. At this time, we do not anticipate engaging in any hedging activities related to our holding of bitcoin; this could expose us to substantial decreases in the price of bitcoin.
The development and acceptance of competing blockchain platforms or technologies may cause consumers to use alternative distributed ledgers or other alternatives.
The development and acceptance of competing blockchain platforms or technologies may cause consumers to abandon bitcoin. As we exclusively mine, and expect to exclusively mine bitcoin, we could face difficulty adapting to emergent digital ledgers, blockchains, or alternatives thereto. This could prevent us from realizing the anticipated profits from our investments. Such circumstances could have a material adverse effect on our business, prospects or operations and potentially the value of any bitcoin we mine or otherwise acquire or hold for our own account and harm investors.
Bitcoin faces significant challenges with scaling which, if not overcome, may lead to high fees or slow transaction settlement times.
Bitcoin is presently limited with respect to how many transactions can occur per second. Developers and contributors in the bitcoin ecosystem debate potential solutions to increasing the average number of transactions per second that networks can handle. Some have implemented mechanisms or are researching ways to increase scale, such as increasing the allowable sizes of blocks, and therefore the number of transactions per block, which would increase the number of transactions that could occur per second. However, it is uncertain how long those mechanisms being explored to increase the scale of settlement of bitcoin transactions will take to become effective, if at all. Any failure to improve bitcoin settlement times could materially affect the price of bitcoin and, as a loss,result, adversely affect an investment in us.
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Bitcoin is subject to halving; the reward for successfully solving a block will halve several times in the future and its value may not adjust to compensate us for the reduction in the rewards we receive from our mining efforts.
Halving is a process designed to control the overall supply and reduce the risk of inflation in cryptocurrencies using a Proof-of-Work consensus algorithm. In an event referred to as bitcoin “halving,” the bitcoin reward for mining any block is cut in half. For example, the mining reward for bitcoin declined from 12.5 to 6.25 bitcoin on May 11, 2020. This process is scheduled to occur once every 210,000 blocks, or roughly four years, until the total amount of bitcoin rewards issued reaches 21 million, which is expected to occur around 2140. Once 21 million bitcoin are generated, the network will stop producing more. Currently, there are more than 18 million bitcoin in circulation. While bitcoin prices have had a history of price fluctuations around halving events, there is no guarantee that the price change will be favorable or would compensate for the reduction in mining reward. If a corresponding and proportionate increase in the price of bitcoin does not follow these anticipated halving events, the revenue from our mining operations would decrease, and we may not have an adequate incentive to continue mining and may cease mining operations altogether, which may adversely affect an investment in us.
Furthermore, such reductions in bitcoin rewards for uncovering blocks may result in a reduction in the aggregate hash rate of the bitcoin network as the incentive for miners decreases. Miners ceasing operations would reduce the collective processing power on the network, which would adversely affect the confirmation process for transactions and make the bitcoin network more vulnerable to malicious actors or botnets obtaining control in excess of 50 % of the processing power active on the blockchain. Such events may adversely affect our activities and an investment in us.
If a malicious actor or botnet obtains control of more than 50% of the processing power on the bitcoin network, such actor or botnet could manipulate the network to adversely affect us, which would adversely affect an investment in us.
If a malicious actor or botnet, a collection of computers controlled by networked software coordinating the actions of the computers, obtains over 50% of the processing power dedicated to mining bitcoin, such actor may be able to construct fraudulent blocks or prevent certain transactions from completing in a timely manner, or at all. The malicious actor or botnet could control, exclude or modify the order of transactions, though it could not generate new units or transactions using such control. The malicious actor could also “double-spend,” or spend the same bitcoin in more than one transaction, or it could prevent transactions from being validated. In certain instances, reversing any fraudulent or malicious changes made to the bitcoin blockchain may not be possible.
Although there are no known reports of malicious activity or control of blockchains achieved through controlling over 50% of the processing power on the bitcoin network, it is believed that certain mining pools may have exceeded, and could exceed, the 50% threshold on the bitcoin network. This possibility creates a greater risk that a single mining pool could exert authority over the validation of bitcoin transactions. To the extent that the bitcoin ecosystem, and the administrators of mining pools, do not have adequate controls and responses in place, the risk of a malicious actor obtaining control of the processing power may increase. If such an event were to occur, it could have a material adverse effect on our business, prospects or operations and potentially the value of any bitcoin we mine or otherwise acquire or hold for our own account and harm investors.
Our reliance on a third-party mining pool service provider for our mining revenue payouts may adversely affect an investment in us.
We currently rely on Foundry Digital and Antpool (“pools” or “Cryptocurrency Customers”), open access mining pools that support cryptocurrencies including bitcoin, to receive our mining rewards and fees from the network. Our pools have the sole discretion to modify the terms of our agreement at any time, and, therefore, our future rights and relationship with our pools may change. In general, mining pools allow miners to combine their computing and processing power, increasing their chances of solving a block and getting paid by the bitcoin network. The rewards, distributed proportionally to our contribution to the pool’s overall mining power, are distributed by the pool operator. Should our pools’ operator systems suffer downtime due to a cyber-attack, software malfunction or other similar issues, it will negatively impact our ability to mine and receive revenue. Furthermore, while we receive daily reports from our pools detailing the total processing power provided to the pools and the proportion of that total processing power, we provided to determine the distribution of
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rewards to us, we are dependent on generating additional revenue. Thethe accuracy of our pool’s record keeping. Therefore, we have little means of recourse against our pools’ operators if we determine the proportion of the reward paid out to us by the mining pool operator is incorrect, other than leaving the pools. If we are unable to consistently obtain accurate proportionate rewards from our pools, we may experience reduced rewards for our efforts, which would have an adverse effect on our business and operations.
Bitcoins and other digital assets we mine or hold for our own account may be subject to loss, theft or restriction on access.
There is a risk that some or all of our bitcoins could be lost or stolen. Bitcoins are stored in and accessed by cryptocurrency sites commonly referred to as “wallets.” A hot wallet refers to any cryptocurrency wallet that is connected to the Internet. Generally, hot wallets are easier to set up and access than wallets in cold storage, but they are also more susceptible to hackers and other technical vulnerabilities. Cold storage refers to any cryptocurrency wallet that is not connected to the Internet. Cold storage is generally more secure than hot storage, but is not ideal for quick or regular transactions. When we keep our bitcoin in cold storage, we may experience lag time in our ability to respond to market fluctuations in the price of our cryptocurrency assets.
We currently mine bitcoin by contributing to and benefiting from our pools’ processing power. Our share of bitcoins mined from our pools are initially received by us in wallets we control, which are maintained by Coinbase Inc., a U.S. based digital assets exchange. We maintain the majority of our financingbitcoin in 2020 was fromcold storage with a minority allocation kept in hot wallets for working capital purposes. Bitcoins we mine or hold for our own account may be subject to loss, theft or restriction on access. Hackers or malicious actors may launch attacks to steal, compromise or secure bitcoins, such as by attacking the salebitcoin network source code, exchange miners, third-party platforms (including Coinbase), cold and hot storage locations or software, or by other means. We may be in control and possession of substantial holdings of bitcoin, and as we increase in size, we may become a more appealing target of hackers, malware, cyber-attacks or other security threats. Any of these events may adversely affect our common stock. Subsequently, on October 9, 2020 we obtained approximately $40,000,000 before underwritingoperations and, offering expenses in connection with an underwritten public offering. While this financing is expectedconsequently, our investments and profitability.
The loss or destruction of private keys required to carry us through 2021 and beyond, we need to generate cashflows from revenues. As explained in this annual report, these cashflows are needed to increaseaccess our sales and marketing efforts, for continued upgradesbitcoins may be irreversible. Our loss of access to our software,private keys or our experience of a data loss relating to our bitcoins could adversely affect an investment in us.
Bitcoins may only be controlled by the possessor of both the unique public and private keys relating to the local or online digital wallet in which they are held. We publish the public key relating to digital wallets in use when we verify the receipt or transfers of bitcoins to and from our wallets and disseminate such information into the network on an anonymous basis, but we safeguard the private keys relating to such digital wallets. Digital asset exchanges, such as Coinbase, where we hold our bitcoin, engage in similar practices. To the extent such private keys are lost, destroyed or otherwise compromised, we will be unable to access our bitcoins and such private keys may not be capable of being restored by any network. Any loss of private keys relating to digital wallets used to store our bitcoins whether by us or digital asset exchanges where we hold our bitcoin, could have a material adverse effect on our business, prospects or operations and potentially the value of any bitcoin we mine or otherwise acquire or hold for working capital.our own account.
Incorrect or fraudulent bitcoin transactions may be irreversible.
We believeBitcoin transactions are irreversible and stolen or incorrectly transferred bitcoins may thus be irretrievable. While we exchange our bitcoins directly for U.S. dollars on Coinbase and do not presently use, or expect to use, our bitcoins for any other transactions, any incorrectly executed or fraudulent cryptocurrency transactions may still adversely affect our investments and assets.
Forks in the bitcoin network may occur in the future, which may affect the value of bitcoins held by us.
A small group of contributors can propose refinements or improvements to the bitcoin network’s source code that near-term growthalter the protocols and software that govern the bitcoin network and the properties of energy-related technologies,bitcoin, including power conversion technology, relies partlythe irreversibility of transactions and limitations on the availabilitymining of new bitcoin. This is known as a “fork.” In the event a developer or group of developers proposes modifications to the bitcoin network that are not accepted by a majority of miners and sizeusers, but that is nonetheless accepted by a substantial plurality of governmentminers and economic incentivesusers, two or more competing and grants (including,incompatible blockchain implementations could result. This is known as a “hard fork.”
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The value of bitcoin after the creation of a fork is subject to many factors, including, but not limited to, the value of the fork product, market reaction to the creation of the fork product, and the occurrence of forks in the future. As such, existing forks, such as Bitcoin Cash and Bitcoin Gold, and future forks may have a negative effect on bitcoin’s value and may adversely affect an investment in us.
The open-source structure of the bitcoin network protocol means that the contributors to the protocol are generally not directly compensated for their contributions in maintaining and developing the protocol. A failure to properly monitor and upgrade the protocol could damage the bitcoin network and an investment in us.
As an open-source project, bitcoin does not generate revenues for its contributors, and contributors are generally not compensated for maintaining and updating the bitcoin network protocol. The lack of guaranteed financial incentives for contributors to maintain or develop the bitcoin network and the lack of guaranteed resources to adequately address emerging issues with the bitcoin network may reduce incentives to address the issues adequately or in a timely manner. To the extent that contributors may fail to adequately update and maintain the bitcoin network protocol, it could have a material adverse effect on our business, prospects, or operations and potentially the value of any bitcoin or other cryptocurrencies we mine or otherwise acquire or hold for our own account.
Banks and financial institutions may not provide banking services, or may cut off services, to businesses that engage in cryptocurrency-related activities.
A number of companies that engage in bitcoin and/or other cryptocurrency-related activities have been unable to find banks or financial institutions that are willing to provide them with bank accounts and other services. Similarly, a number of companies and individuals or businesses associated with cryptocurrencies may have had and may continue to have their existing bank accounts closed or services discontinued with financial institutions. To the extent that such events may happen to us, they could have a material adverse effect on our business, prospects or operations and potentially the value of any bitcoin or other cryptocurrencies we mine or otherwise acquire or hold for our own account.
Our interactions with the bitcoin network may expose us to SDN or blocked persons or cause us to violate provisions of law that did not contemplate distributed ledger technology.
The Office of Financial Assets Control (“OFAC”) of the US Department of Treasury requires us to comply with its sanction program and not conduct business with persons named on its specially designated nationals (“SDN”) list. However, because of the pseudonymous nature of blockchain transactions, we may inadvertently and without our knowledge engage in transactions with persons named on OFAC’s SDN list. We also may not be adequately capable of determining the ultimate identity of the persons with whom we transact.
The digital asset exchanges on which cryptocurrencies, including bitcoin, trade are relatively new and largely unregulated, and thus may be exposed to fraud and failure. Such failures may result in a reduction in the price of bitcoin and other cryptocurrencies and can adversely affect an investment in us.
Digital asset exchanges on which cryptocurrencies trade are relatively new and, in most cases, largely unregulated. Many digital exchanges do not provide the public with significant information regarding their ownership structure, management teams, corporate practices or regulatory compliance. As a result, the marketplace may lose confidence in, or may experience problems relating to, cryptocurrency exchanges, including prominent exchanges handling a significant portion of the volume of digital asset trading.
A lack of stability in the digital asset exchange market and the closure or temporary shutdown of digital asset exchanges due to fraud, business failure, hackers or malware, or government-mandated regulation may reduce confidence in digital asset networks and result in greater volatility in cryptocurrency values. These potential consequences of a digital asset exchange’s failure could adversely affect an investment in us.
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We may not have adequate sources of recovery if our digital assets are lost, stolen or destroyed.
We rely on Coinbase to facilitate the custody of our bitcoins. If our bitcoins are lost, stolen or destroyed under circumstances rendering a party, including Coinbase, liable to us, the responsible party may not have the financial resources sufficient to satisfy our claim. For example, as to a particular event of loss, the only source of recovery for us might be limited, to the extent identifiable, to other responsible third parties (e.g., a thief or terrorist), any of which may not have the financial resources (including liability insurance coverage) to satisfy a valid claim of ours.
Bitcoins held by us are not subject to FDIC or SIPC protections.
We do not hold our bitcoins with a banking institution or a member of the Federal Deposit Insurance Corporation (“FDIC”) or the Securities Investor Protection Corporation (“SIPC”), and, therefore, our bitcoins are not subject to the protections enjoyed by depositors with FDIC or SIPC member institutions. As a result, we may suffer a loss with respect to our bitcoins that is not covered by insurance, and we may not be able to recover any of our carried value in these bitcoins if they are lost or stolen or suffer significant and sustained reduction in conversion spot price. If we are not otherwise able to recover damages from a malicious actor in connection with these losses, our business and results of operations may suffer, which may have a material negative impact on our stock price.
The limited rights of legal recourse available to us expose us and our investors to the risk of loss of our bitcoins for which no person is liable.
At this time, there is no specifically enumerated U.S. Investment Tax Creditor foreign governmental, regulatory, investigative or prosecutorial authority or mechanism through which to bring an action or complaint regarding missing or stolen cryptocurrency. To the extent that we are unable to recover our losses from such action, error or theft, such events could have a material adverse effect on our business, prospects or operations of and various statepotentially the value of any bitcoin we mine or otherwise acquire or hold for our own account.
The sale of our bitcoins to pay for expenses at a time of low bitcoin prices could adversely affect an investment in us.
We may sell our bitcoins to pay for expenses on an as-needed basis, irrespective of then-current prices. Consequently, we may sell our bitcoins at a time when bitcoin prices are low, which could adversely affect an investment in us. At this time, we do not mitigate against the potential for decreasing price by engaging in hedging activities related to our bitcoin holdings. See the above risk factor entitled, “The value of bitcoin may be subject to pricing risk and local incentive programs)has historically been subject to wide swings. Because we do not currently hedge our investment in bitcoin and do not intend to for the foreseeable future, we may be directly exposed to bitcoin’s price volatility and surrounding risks”. These incentive programs
Demand for bitcoin is driven, in part, by its status as a prominent and secure cryptocurrency. It is possible that a cryptocurrency other than bitcoin could have features that make it more desirable to a material portion of the digital asset user base, resulting in a reduction in demand for bitcoins.
Bitcoin holds a “first-to-market” advantage over other cryptocurrencies. This first-to-market advantage is driven in large part by having the largest user base and, more importantly, the largest combined mining power in use. Nonetheless, another form of cryptocurrency could become materially popular due to either a perceived or exposed shortcoming of the bitcoin network or a perceived advantage of another form of digital currency. If another form of digital currency obtains significant market share, this could reduce the interest in, and value of, bitcoin and the profitability of our bitcoin operations.
Our mining costs may be in excess of our mining revenues, which could seriously harm our business and adversely impact an investment in us.
Mining operations are costly and our expenses may increase in the future. Increases in mining expenses may not be offset by corresponding increases in revenue. Our expenses may become greater than we anticipate, and our investments to make our business more cost-efficient may not succeed. Increases in our costs without corresponding increases in our revenue would adversely affect our profitability and could seriously harm our business and an investment in us.
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The properties included in our mining operation may experience damages, including damages that are not covered by insurance.
Our current mining locations and any future sites we establish will be subject to a variety of risks relating to physical condition and operation, including but not limited to:
· | construction or repair defects or other structural or building damage; any noncompliance with or liabilities under applicable environmental, health or safety regulations or requirements or building permit requirements; |
· | any damage resulting from natural disasters, such as hurricanes, earthquakes, fires, floods and windstorms; and |
· | claims by employees and others for injuries sustained at our properties. |
Although our mining sites are equipped with standard security measures normally associated with a traditional data center, our mining sites could still be rendered inoperable, temporarily or permanently, as a result of a fire or other natural disaster or by a terrorist or other events outside of our control. The measures we take to prevent and insure against these risks may not be sufficient or effective.
We are subject to risks associated with our need for significant electrical power.
The operation of a bitcoin mining facility can require massive amounts of electrical power. Any mining site we currently operate or establish in the future can only be successful if we can continue to obtain sufficient electrical power for that site on a cost-effective basis. To the extent that we establish multiple sites, there may be significant competition for suitable locations, and government regulators may potentially restrict the ability of electricity suppliers to provide electricity to mining operations in times of electricity shortage or may otherwise potentially restrict or prohibit the provision or electricity to mining operations.
Additionally, our facilities could be challengedadversely affected by utilitya power outage. Although we maintain limited backup power at certain sites, it would not be feasible to run miners on back-up power generators in the event of a government restriction on electricity or a power outage. To the extent we are unable to receive adequate power supply and are forced to reduce or cease our operations due to the availability or cost of electrical power, our business would be adversely affected.
Our operations and profitability may be adversely affected by competition from other methods of investing in cryptocurrencies.
We compete with other users and/or companies that are mining cryptocurrencies and other potential financial vehicles, including securities backed by or linked to cryptocurrencies. Market and financial conditions, and other conditions beyond our control, may make it more attractive to invest in other financial vehicles, or to invest in cryptocurrencies directly, which could limit the market for our shares and reduce their liquidity. The emergence of other reasons foundfinancial vehicles and exchange-traded funds have increased scrutiny on cryptocurrencies, and such scrutiny could be applicable to us and impact our ability to successfully establish or maintain a public market for our securities. Such circumstances could have a material adverse effect on our business, prospects or operations and potentially the value of any bitcoin we mine or otherwise acquire or hold for our own account, and harm investors.
To the extent that the profit margins of bitcoin mining operations are not high, operators of bitcoin mining operations are more likely to immediately sell bitcoin rewards earned by mining in the market, thereby constraining the growth of the price of bitcoin.
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Bitcoin mining operations have evolved from individual users mining with computer processors, graphics processing units and first-generation ASIC servers. Currently, new processing power is predominantly added by incorporated and unincorporated professionalized mining operations. Professionalized mining operations may use proprietary hardware or sophisticated ASIC machines acquired from ASIC manufacturers. They require the investment of significant capital for the acquisition of this specialized hardware, the leasing of operating space (often in data centers or warehousing facilities), incurring of electricity costs and the employment of technicians to operate the mining farms. As a result, professionalized mining operations are of a greater scale than those prior and have more defined and regular expenses and liabilities. These regular expenses and liabilities require professionalized mining operations to maintain profit margins on the sale of bitcoin. To the extent the price of bitcoin declines and such profit margin decreases, professionalized miners will be pressured to immediately sell bitcoin earned from mining operations, whereas it is believed that smaller, individual operations in past years were more likely to hold newly mined bitcoin for lengthier periods. The immediate selling of newly mined bitcoin greatly increases the trading volume of bitcoin, creating downward pressure on the market price of bitcoin.
There are risks related to technological obsolescence, the vulnerability of the global supply chain for cryptocurrency hardware disruption, and difficulty in obtaining new hardware which may have a negative effect on our business.
Our mining operations can only be successful and ultimately profitable if the costs, including hardware and electricity costs, associated with mining bitcoin are lower than the price of a single bitcoin. As our mining facility operates, our miners experience ordinary wear and tear, and may also face more significant malfunctions caused by a number of extraneous factors beyond our control. The degradation of our miners will require us to, over time, replace those miners which are no longer functional. Additionally, as the technology evolves, we may be required to acquire newer models of miners to remain competitive in the market. This upgrading process requires substantial capital investment, and we may face challenges in doing so on a timely and cost-effective basis.
Further, the global supply of miners is unpredictable and presently heavily dependent on manufacturers based in China, which was severely affected by the emergence of the COVID-19 coronavirus global pandemic. We currently utilize several types of ASIC miners as part of our mining operation, including Bitmain Antminers, Avalon miners and MicroBT WhatsMiners, which are all produced in China, Malaysia, and Indonesia. Geopolitical matters, including the U.S. relationship with China, may impact our ability to import ASIC miners. As a result, we may not be able to obtain adequate replacement parts for our existing miners or obtain additional miners from manufacturers on a timely basis. Such events could have a material adverse effect on our business, prospects or operations and potentially the value of any bitcoin we mine or otherwise acquire or hold for our own account, and harm investors.
There is a possibility of bitcoin mining algorithms transitioning to proof of stake validation and other mining related risks, which could make us less competitive and ultimately adversely affect our business and an investment in us.
Proof of stake is an alternative method in validating cryptocurrency transactions. Should the bitcoin mining algorithm shift from a proof of work validation method to a proof of stake method, mining would require less energy and may render any company that maintains advantages in the current climate (for example, from lower priced electricity, processing, real estate, or hosting) less competitive. As a result of our efforts to optimize and improve the efficiency of our bitcoin mining operations, we may be exposed to the risk in the future of losing the benefit of our capital investments and the competitive advantage we hope to gain and may be negatively impacted if a switch to proof of stake validation were to occur. Such events could have a material adverse effect on our business, prospects or operations and potentially the value of any bitcoin we mine or otherwise acquire or hold for our own account.
We may face risks of Internet disruptions, which could have an adverse effect on not only the price of bitcoin but our ability to mine bitcoin.
A disruption of the Internet may adversely affect the mining and use of cryptocurrencies, including bitcoin. Generally, cryptocurrencies and our business of mining bitcoin is dependent upon the Internet. A significant disruption in Internet connectivity could disrupt bitcoin’s network operations until the disruption is resolved and have an adverse effect on the price of bitcoin and our ability to mine bitcoin.
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Since there has been limited precedent set for financial accounting of digital assets, including bitcoin, it is unclear how we will be required to account for transactions involving digital assets.
Because there has been limited precedent set for the financial accounting of cryptocurrencies and related revenue recognition and no official guidance has yet been provided by the Financial Accounting Standards Board or the SEC, it is unclear how companies may in the future be required to account for cryptocurrency transactions and assets and related revenue recognition. A change in regulatory or financial accounting standards or interpretation by the SEC could result in changes in our accounting treatment and the necessity to restate our financial statements. Such a restatement could adversely impact the accounting for the bitcoins we hold and bitcoin transactions and, more generally, negatively impact our business, prospects, financial condition and results of operations.
Future developments regarding the treatment of digital assets for U.S. federal income and applicable state, local and non-U.S. tax purposes could adversely impact our business.
Due to the new and evolving nature of digital assets and the absence of comprehensive legal guidance with respect to digital assets and related transactions, many significant aspects of the U.S. federal income and applicable state, local and non-U.S. tax treatment of transactions involving digital assets, such as the purchase and sale of bitcoin and the receipt of staking rewards and other digital asset incentives and rewards products, are uncertain, and it is unclear what guidance may be issued in the future with respect to the tax treatment of digital assets and related transactions.
Current IRS guidance indicates that for U.S. federal income tax purposes digital assets such as bitcoins should be treated and taxed as property, and that transactions involving the payment of bitcoins for goods and services should be treated in effect as barter transactions. The IRS has also released guidance to the effect that, under certain circumstances, hard forks of digital currencies are taxable events giving rise to taxable income and guidance with respect to the determination of the tax basis of digital currency. However, current IRS guidance does not address other significant aspects of the U.S. federal income tax treatment of digital assets and related transactions. Moreover, although current IRS guidance addresses the treatment of certain forks, there continues to be unconstitutional, and/uncertainty with respect to the timing and amount of income inclusions for various crypto asset transactions, including, but not limited to, staking rewards and other crypto asset incentives and rewards products. While current IRS guidance creates a potential tax reporting requirement for any circumstance where the ownership of a bitcoin passes from one person to another, it preserves the right to apply capital gains treatment to those transactions, which is generally favorable for investors in bitcoin.
There can be no assurance that the IRS will not alter its existing position with respect to digital assets in the future or could be reducedthat other state, local and non-U.S. taxing authorities or discontinuedcourts will follow the approach of the IRS with respect to the treatment of digital assets such as bitcoins for other reasons. The reduction, elimination,income tax and sales tax purposes. Any such alteration of existing guidance or expirationissuance of government subsidiesnew or different guidance may have negative consequences including the imposition of a greater tax burden on investors in bitcoin or imposing a greater cost on the acquisition and economic incentives could harmdisposition of bitcoin, generally; in either case potentially having a negative effect on the trading price of bitcoin or otherwise negatively impacting our business. In addition, future technological and operational developments that may arise with respect to digital currencies may increase the uncertainty with respect to the treatment of digital currencies for U.S. federal income and applicable state, local and non-U.S. tax purposes.
Risks Related to Our Securities
OurThe price of our common stock price may be volatile and could fluctuate widely, in price, which could result in substantial losses for investors.
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The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including:including, without limitation:
technological innovations or new products and services by us or our competitors; |
government regulation of our products and services; |
the establishment of partnerships with other technology companies; |
intellectual property disputes; |
additions or departures of key personnel; |
sales of our common |
our ability to integrate operations, technology, products and services; |
our ability to execute our business plan; |
operating results below expectations; |
loss of any strategic relationship; |
industry developments; |
economic and other external factors; and |
period-to-period fluctuations in our financial results. |
Because we have limited revenues to date, you should consider any one of these factors to be material. Our stock price may fluctuate widely as a result of any of the above.
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
We have the right to designate and issue additional shares of preferred stock. If we were to designate and/or issue additional preferred stock, it is likely to have rights, preferences and privileges that may adversely affect the common stock.
We are authorized to issue 10,000,000 shares of “blank blank-check” preferredcheck Preferred stock,Stock, with such rights, preferences and privileges as may be determined from time-to-timetime to time by our boardBoard of directors.Directors. Our boardBoard of directorsDirectors is empowered, without stockholder approval, to issue preferred stockPreferred Stock in one or more series, and to fix for any series the dividend rights, dissolution or liquidation preferences, redemption prices, conversion rights, voting rights, and other rights, preferences and privileges for the preferredPreferred stock.Stock. WeCurrently, 2,000,000 shares are designated as Series A currently havePreferred Stock, of which 1,750,000 shares of our series A preferred stockare outstanding, the features of which are containeddiscussed elsewhere in this annual Annual Rreport.eport.
The issuance of shares of preferredPreferred stock,Stock, depending on the rights, preferences and privileges attributable to the preferredPreferred stock,Stock, could reduce the voting rights and powers of the common stock and the portion of our assets allocated for distribution to common stockholders in a liquidation event, and could also result in dilution in the book value per share of the common stock. The preferred stock could also be utilized, under certain circumstances, as a method for raising additional capital or discouraging, delaying or preventing a change in control of the Company, to the detriment of the investors in the common stock offered hereby. We cannot assure you that we will not, under certain circumstances, issue shares of our preferredPreferred stock.Stock.
We have not paid dividends on shares of our common stock in the past and have no immediate plans to pay dividends.do so in the future.
We have not paid, and do not plan to pay, any cash dividends with respect to our common stock in the immediate future. We plan to reinvest all of our earnings, to the extent we have earnings, in order to market our products and to cover operating costs and to otherwise become and remain competitive. We do not plan to pay any cash dividends with respect to our securities in the foreseeable future. We cannot assure stockholders you that we would, at any time, generate sufficient surplus cash that would be available for distribution to the holders of our common stock as a dividend. Therefore, you stockholders should not expect to receive cash dividends on our common stock.
If securities or industry analysts do not publish or do not continue to publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.
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The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us now or in the future issue an adverse opinion regarding our stock, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Provisions in the Nevada Revised Statutes and our Bylaws could make it very difficult for an investor to bring any legal actions against our directors or officers for violations of their fiduciary duties or could require us to pay any amounts incurred by our directors or officers in any such actions.
Members of our boardBoard of directorsDirectors and our officers will have no liability for breaches of their fiduciary duty of care as a director or officer, except in limited circumstances, pursuant to provisions in the Nevada Revised Statutes and our Bylaws as authorized by the Nevada Revised Statutes. Specifically, Section 78.138 of the Nevada Revised Statutes provides that a director or officer is not individually liable to the company or its shareholders or creditors for any damages as a result of any act or failure to act in his or her capacity as a director or officer unless it is proven that (1) the director’sdirectors or officer’sofficers act or failure to act constituted a breach of his or her fiduciary duties as a director or officer and (2) his or her breach of those duties involved intentional misconduct, fraud or a knowing violation of law. This provision is intended to afford directors and officers protection against and to limit their potential liability for monetary damages resulting from suits alleging a breach of the duty of care by a director or officer.
Accordingly, youstockholders may be unable to prevail in a legal action against our directors or officers even if they have breached their fiduciary duty of care. In addition, our Bylaws allow us to indemnify our directors and officers from and against any and all costs, charges and expenses resulting from their acting in such capacities with us. This means that if youone were able to enforce an action against our directors or officers, in all likelihood, we would be required to pay any expenses they incurred in defending the lawsuit and any judgment or settlement they otherwise would be required to pay. Accordingly, our indemnification obligations could divert needed financial resources and may adversely affect our business, financial condition, results of operations and cash flows, and adversely affect prevailing market prices for our common stock.
Item 1B. Unresolved Staff Comments
Risks Related to Our ATL Data Centers Subsidiary
None.
Item 2. Properties
On December 9, 2020, we acquiredAugust 6, 2021, the Company, through its wholly owned subsidiary CSRE Properties Norcross, LLC, closed on the purchase of real property located at 5295 Brook Hollow Parkway, Norcross, Georgia, 30071 (the “Norcross Property”). The total purchase price was $6,550,000 and the seller conveyed fee simple title by limited warranty deed. The Norcross Property consists of an office building of approximately 86,000 square feet on approximately 7 acres of land. The Norcross Property is utilized by CleanBlok to conduct cryptocurrency mining activities.
On May 20, 2021, the Company, through its wholly owned subsidiary ATL, Data Centers LLC (“ATL”) that, in addition to being a traditional data center operation, operates, currently, 3,471 bitcoin mining units (“ASICs”closed on the purchase of real property located at 2380 Godby Road, College Park, Georgia, 30349 (the “Godby Road Property”), with the Company’s intent to significantly increase that number. Government regulation of blockchain and cryptocurrency is being actively considered by the United States federal government via its agencies and regulatory bodies, as well as similar entities in other countries and transnational organizations, such as the European Union. State and local regulations also may apply to our activities and other activities in which we may participate in the future. Other governmental or semi-governmental regulatory bodies have shown an interest in regulating or investigating companies engaged in the blockchain or cryptocurrency business. For instance, the SEC has taken an active role in regulating the use of public offerings of proprietary coins (so-called “Initial Coin Offerings”) and has made statements and official promulgations asit had been leasing prior to the status of certain cryptocurrencies as “securities” subject to regulation by the SEC.
Presently, we do not believe any U.S. or State regulatory body has taken any action or position adverse to our main cryptocurrency, bitcoin, with respect to its production, sale, and use as a medium of exchange; however, future changes to existing regulations or entirely new regulations may affect our business in ways it is not presently possible for us to predict with any reasonable degree of reliability. As the regulatory and legal environment evolves, we may become subject to new laws, such as further regulation by the SEC and other agencies, which may affect our mining and other activities.
If regulatory changes or interpretations of our activities require our registration as a money services business (“MSB”) under the regulations promulgated by FinCEN under the authority of the U.S. Bank Secrecy Act, or otherwise under state laws, we may incur significant compliance costs, which could be substantial or cost-prohibitive. If we become subject to these regulations, our costs in complying with them may have a material negative effect on our businesspurchase. The total purchase price was $4,711,799 and the resultsseller conveyed fee simple title by limited warranty deed. The Godby Road Property consists of our operations.
To the extent that the activitiesan office/warehouse building of ATL cause it to be deemed an MSB under the regulations promulgatedapproximately 41,387 square feet on approximately 6 acres of land. The Godby Road Property is utilized by FinCEN under the authority of the U.S. Bank Secrecy Act, we may be required to comply with FinCEN regulations, including those that would mandate us to implement anti-money laundering programs, make certain reports to FinCEN and maintain certain records.
To the extent that the activities of ATL cause it to be deemed a “money transmitter” (“MT”) or equivalent designation, under state law in any state in which ATL operates, ATL may be required to seek a license or otherwise register with a state regulator and comply with state regulations that may include the implementation of anti-money laundering programs, maintenance of certain records and other operational requirements. Currently, the NYSDFS has finalized its “BitLicense” framework for businesses that conduct “virtual currency business. ATL will continue to monitor for developments in such legislation, guidance or regulations applicable to ATL.
Such additional federal or state regulatory obligations may cause ATL to incur extraordinary expenses, possibly affecting its business and financial condition in a material and adverse manner. Furthermore, ATL and its service providers may not be capable of complying with certain federal or state regulatory obligations applicableCleanBlok to MSBs and MTs. If ATL is deemed to be subject to and determines not to comply with such additional regulatory and registration requirements, we may act to dissolve and liquidate ATL. Any such action may adversely affect business operations and financial condition.
Current regulation of the exchange of bitcoins under the CEA by the CFTC is unclear; to the extent we become subject to regulation under the CFTC in connection with our exchange of bitcoin, we may incur additional compliance costs, which may be significant.
Current legislation, including the Commodities Exchange Act of 1936, as amended (the “CEA”) is unclear with respect to the exchange of bitcoins. Changes in the CEA or the regulations promulgated thereunder, as well as interpretations thereof and official promulgations by the Commodities Futures Tradition Commission (“CFTC”), which oversees the CEA much like the SEC oversees the Securities Act and the Exchange Act, may impact the classification of bitcoins and therefore may subject them to additional regulatory oversight by the CFTC.
Presently, bitcoin derivatives are not excluded from the definition of a “commodity future” by the CFTC. We cannot be certain as to how future regulatory developments will impact the treatment of bitcoins under the law. Bitcoins have been deemed to fall within the definition of a commodity and, we may be required to register and comply with additional regulation under the CEA, including additional periodic report and disclosure standards and requirements. Moreover, we may be required to register as a commodity pool operator or as a commodity pool with the CFTC through the National Futures Association. Such additional registrations may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting an investment in us. If we determine not to comply with such additional regulatory and registration requirements, we may seek to cease certain of our operations. Any such action may adversely affect an investment in us. As of the date of this annual report, no CFTC orders or rulings are applicable to our business.
If we acquire digital securities, even unintentionally, we may violate the Investment Company Act of 1940 and incur potential third-party liabilities.conduct cryptocurrency mining activities.
On June 15, 2021, the Company entered into a lease for warehouse and office space at 2042 Corte Del Nogal, Suite C, Carlsbad, California, 92011. The Company intends to comply with the 1940 Act in all respects. To that end, if holdings of cryptocurrencies are determined to constitute investment securities5-year lease is for an approximately 12,704 square foot industrial unit and part of a kind that subject the Company to registrationlarger 47,744 square foot multi-tenant industrial flex building and reporting under the 1940 Act, the Company will limit its holdings to less than 40%requires monthly base rent payments of its assets. Section 3(a)(1)(C) of the 1940 Act defines “investment company” to mean any issuer that$11,307. The leased property is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40% of the value of such issuer’s total assets (exclusive of Government securities and cash items) on an unconsolidated basis. Section 3(a)(2) of the 1940 Act defines “investment securities” to include all securities except (A) Government securities, (B) securities issuedutilized by employees’ securities companies, and (C) securities issued by majority-owned subsidiaries which (i) are not investment companies and (ii) are not relying on the exception from the definition of investment company in section 3(c)(1) or 3(c)(7) of the 1940 Act. As noted above, the SEC has not stated whether bitcoin and cryptocurrency is an investment security, as defined in the 1940 Act.
The further development and acceptance of digital asset networks and other digital assets, which represent a new and rapidly changing industry, are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of digital asset systems may adversely affect an investment in us.
Digital assets such as bitcoins, that may be used, among other things, to buy and sell goods and services are a new and rapidly evolving industry of which the digital asset networks are prominent, but not unique, parts. The growth of the digital asset industry in general, and the digital asset networks of bitcoin in particular, are subject to a high degree of uncertainty. The factors affecting the further development of the digital asset industry, as well as the digital asset networks, include:
our energy segment.
A decline inOn August 26, 2021, the popularity or acceptanceCompany entered into a lease for office space at 2370 Corporate Circle, Suite 160, Henderson, Nevada, 89074. The 65-month lease is for 4,552 rentable square feet an initial base rent of the digital asset networks of bitcoin or ether, or similar digital asset systems, could adversely affect an investment in us.
Since there has been limited precedent set for financial accounting or taxation of digital assets other than digital securities, it is unclear how we$10,925 and increases 3% each year. The Corporate Circle space will be requiredutilized as the CleanSpark corporate and executive headquarters. Until the Corporate Circle location is move-in ready, we sublease offices located at 8475 S. Eastern Ave., Suite 200, Las Vegas, Nevada. We are currently on a year-to-year lease agreement that calls for us to account for digital asset transactions and the taxationmake payments of our businesses.
There is currently no authoritative literature under accounting principles generally accepted in the United States which specifically addresses the accounting for digital assets, including digital currencies. Therefore, by analogy, we intend to record digital assets similar to financial instruments under ASC 825, Financial Instruments, because the economic nature of these digital assets is most closely related to a financial instrument such as an investment in a foreign currency.$1,525 per month.
We believe that the Company will recognize revenue when it is realized or realizable and earned. Our material revenue stream is expected to be related to the mining of digital currencies. We will derive revenue by providing transaction verification services within the digital currency networks of crypto-currencies, such as bitcoin commonly termed “crypto-currency mining.” In consideration for these services, ee expect to receive digital currency (also known as “Coins”). Coins are generally recorded as revenue, using the average spot price on the date of receipt. The Coins are recorded on the balance sheet at their fair value. Gains or losses on sale of Coins are recorded in the statement of operations. Expenses associated with running the crypto-currency mining business, such as equipment deprecation, and electricity cost are recorded as cost of revenues.
In 2014, the IRS issued guidance in Notice 2014-21 that classified cryptocurrency as property, not currency, for federal income tax purposes. But according to the requirements of FATCA, which requires foreign financial institutions to provide the IRS with information about accounts held by U.S. taxpayers or foreign entities controlled by U.S. taxpayers, cryptocurrency exchanges, in the ordinary course of doing business, are considered financial institutions.
On November 30, 2016, a federal judge in the Northern District of California grantedalso have an IRS application to serve a “John Doe” summons on Coinbase Inc., which operates a cryptocurrency wallet and exchange business. The summons asked Coinbase to identify all U.S. customers who transferred convertible cryptocurrency from 2013 to 2015. The IRS is trying to get cryptocurrency owners to report the value of their wallets to the federal government and the IRS is treating cryptocurrency as both property and currency.
The American Institute of Certified Public Accountants recommended in a June 2016 letter to the IRS that cryptocurrency accounts be reported in the summary information section of Form 8938, Statement of Specified Foreign Financial Assets, which breaks with the IRS’s 2014 guidance that cryptocurrency be treated as property.
Property is divided into certain sections within the Internal Revenue Code (“IRC”) that determine everything from how the property is treated at sale, to how the property is depreciated, to the nature and character of the gain on sale of the asset. For instance, IRC §1231 property (real or depreciable business property held for more than one year) is treated as capital in nature when sold for a profit, but it is treated as ordinary when the property is sold for a loss. IRC §1245 property, on the other hand, is treated as ordinary in nature. IRC §1245 property encompasses most types of property. IRC §1250 property covers everything else. IRC §1250 states that a gain from selling real property that has been depreciated should be taxed as ordinary income, to the extent that the accumulated depreciation exceeds the depreciation calculated using the straight-line method, which is the most basic depreciation method used on an income statement. IRC §1250 bases the amount of tax due on the type of property, such as residential or nonresidential property, and on how many months the property was owned.
IRS guidance is silent on which section of the tax code cryptocurrency falls into. For instance, IRC §1031 allows for the like-kind exchange of certain property. IRC §1031 exchanges typically are done with real estate or business assets. However, with the classification of cryptocurrency as property by the IRS, many tax professionals will argue that cryptocurrency can be exchanged using IRC §1031.
We believe that all of our digital asset mining activities will be accounted for on the same basis regardless of the form of digital asset. A change in regulatory or financial accounting standards or interpretation by the IRS or accounting standards or the SEC could result in changes in our accounting treatment, taxation and the necessity to restate our financial statements. Such a restatement could negatively impact our business, prospects, financial condition and results of operations.
Digital assets held by us are not subject to FDIC or SIPC protections.
We do not hold our digital assets with a banking institution or a member of the Federal Deposit Insurance Corporation (“FDIC”) or the Securities Investor Protection Corporation (“SIPC”) and, therefore, our digital assets are not subject to the protections enjoyed by depositors with FDIC or SIPC member institutions.
Because many of our digital assets are held by digital asset exchanges, we face heightened risks from cybersecurity attacks and financial stability of digital asset exchanges.
ATL may transfer their digital asset from its wallet to digital asset exchanges prior to selling them. Digital assets not held in ATL ‘s wallet are subject to the risks encountered by digital asset exchanges including a DDoS Attack or other malicious hacking, a sale of the digital asset exchange, loss of the digital assets by the digital asset exchange and other risks similar to those described herein. ATL does not maintain a custodian agreement with any of the digital asset exchanges that hold the ATL digital assets. These digital asset exchanges do not provide insurance and may lack the resources to protect against hacking and theft. If this were to occur, ATL may be materially and adversely affected.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Currently, we do not own any real estate. Our corporate offices areoffice located at 1185 S. 1800 W, Suite 3, Woods Cross Utah 84087. We are currently on a year-to-year lease agreement that calls for us to make payments of $2,300 per month. This property is utilized by corporate employees.
We sublease offices located at 8475 S. Eastern Ave., Suite 200, Las Vegas, NV. We are currently on a year-to-year lease agreement that calls for us to make payments of $1,525 per month.
We operate our California operations out of leased office space located at 4360 Viewridge Avenue, Suite C, San Diego, California 92123. On May 15, 2018, we executed a 37-month lease agreement, which commenced on July 1, 2018. The agreement calls for us to make payments of $4,057 in base rent per month through July 31, 2021 subject to an annual 3% rent escalation. Future minimum lease payments under the operating leases for the facilities as of September 30, 2020, are as follows:
The Company believes its existing facilities and equipment are in good operating condition and are suitable for the conduct of its business.
Item 3. Legal Proceedings
We are subject to litigation, claims, investigations and audits arising from time to time in the ordinary course of our business.
CleanSpark, Inc. v. Discover Growth Fund, LLC
On August 5, 2020, the Company filedFor a verified complaint (the “Complaint”)description of our material pending legal proceedings, please see footnote 15 pertaining to commitments and contingencies included elsewhere in the Supreme Court of the State of New York against Discover Growth Fund, LLC (“Investor”). Among other things, the Complaint seeks: declaratory relief against Investor in response to Investor’s claim that a Form 8-K filed by the Company in relation to a July 20, 2020 securities purchase agreement needed pre-approval by Investor prior to filing, and injunctive relief in response to conversion notices sent by Investor claiming trigger events and defaults arising out of the failure to obtain the Form 8-K pre-approval.
The case was subsequently removed to the United States District Court for the Southern District of New York, which then determined that the parties’ agreements required a JAMS arbitrator sitting in the U.S. Virgin Islands to resolve the parties’ dispute over which of their agreements’ competing forum selection clauses was controlling, and that therefore the Court’s personal jurisdiction over Investor had not been established.
While the New York action was pending, Investor filed a demand for arbitration with JAMS in the U.S. Virgin Islands, alleging breach of the Securities Purchase Agreement dated December 31, 2018, and the Purchase Agreement dated April 17, 2019 between Investor and the Company (the “Arbitration”) and seeking issuance of additional shares of the Company. The Company then filed a response to Investor’s claims, denying Investor’s claims and asserting counterclaims against Investor, and also filed for emergency injunctive relief in the Arbitration seeking, among other things, an order enjoining Investor from continuing to pursue certain remedies based on the allegations in the Arbitration between Investor and the Company.
On September 21, 2020, the arbitrator granted the Company’s motion for emergency interim relief in the Arbitration. The arbitrator issued his interim award on September 22, 2020, (the “Interim Award”), which restrains Investor from: (i) proceeding with an asset sale or taking any actions in furtherance of the asset sale; (ii) pursuing any remedies in connection with the purported trigger events, conversion notices, notices of default, or sale notices that Investor issued; (iii) claiming or issuing any additional trigger events, conversion notices, delivery notices, notices of default, or sale notices pursuant to the debenture, note, or prior securities purchase agreements between the parties that relate to or arise out of the facts and allegations at issue in the Arbitration; and (iv) pursuing any other remedies that relate to or arise out of the facts and allegations at issue in the Arbitration.
Following the Interim Award, the Company completed an underwritten public offering with HC Wainwright (the “Offering”). In connection with the Offering, the Company provided notice to Investor of the Offering in compliance with a right of first refusal provision (the “ROFR”) in the parties’ agreements with the Company. Investor responded to the notice claiming that the notice was not sufficient and the ROFR was not satisfied by the notice and, as a result, proceeding with the Offering constituted a trigger event under the parties’ prior securities purchase agreements. Investor included the preceding allegations regarding the ROFR in its statement of claim in the Arbitration, and they are now at issue in that proceeding. The Company forcefully denies those claims.
Although the ultimate outcome of this matter cannot be determined with certainty, the Company believes that the claims raised by Investor in and related to the Arbitration are completely without merit, and the Company intends to both defend itself vigorously and to vigorously prosecute its counterclaims. Additionally, the Company believes that it has fully complied with its obligations under the right of first refusal and public disclosure review provisions of the parties’ prior securities purchase agreements.
Notwithstanding the merits of Investor’s claims, however, the Arbitration may distract the Company and cost the Company’s management time, effort and expense to defend against the claims and threats made by Investor. Notwithstanding the Company’s belief that it has complied with all of its obligations under the parties’ agreements, no assurance can be given as to the outcome of the Arbitration, and in the event the Company does not prevail in such action, the Company, its business, financial condition and results of operations would be materially and adversely affected.
Annual Report.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’sRegistrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock, par value $0.001 per share, is listed on The Nasdaq Capital Market under the ticker symbol “CLSK.”
Holders of Our Common Stock
As of December 14, 2020,2021, we had 223185 registered holders of record of our common stock, with others in street name.
The holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of theour common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to theour common stock.
Dividends
There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from declaring dividends where after giving effect to the distribution of the dividend:
1. | we would not be able to pay our debts as they become due in the usual course of business, or; |
2. | our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution. |
We have notnever declared any dividends on shares of our common stock, and we do not plan to declare any dividends in the foreseeable future.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
None.As of December 10, 2021, we issued an aggregate of 8,404 unregistered shares of our common stock to the Sellers of Gridfabric in accordance with the Membership Interest Purchase Agreement entered into on August 31, 2020, based upon the achievement of certain milestones. The shares had an aggregate value of $150,000.
The shares of common stock were issued in a transaction not involving a public offering in reliance upon an exemption from registration provided by Section 4(a)(2) of the Securities Act, and/or Regulation D promulgated thereunder.
During the fiscal year ended September 30, 2021, there were no other unregistered sales of our securities that were not reported in a Current Report on Form 8-K or our Quarterly Reports on Form 10-Q.
Repurchases
The Company has not made any repurchases of shares or other units of any class of the Company’s equity securities during the fourth quarter of the fiscal year covered by this Annual Report.
Item 6. Selected Financial Data[Reserved]
As a smaller reporting company, we are not required to provide the information required by this Item.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following discussion of our financial condition and results of operations for the years ended September 30, 20202021 and 20192020 should be read in conjunction with our consolidated financial statements and the notes to those statements that are included elsewhere in this Annual Report on Form 10-K. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. We use words such as “anticipate”, “estimate”, “plan”, “project”, “continuing”, “ongoing”, “expect”, “believe”, “intend”, “may”, “will”, “should”, “could”,anticipate, estimate, plan, project, continuing, ongoing, expect, believe, intend, may, will, should, could, and similar expressions to identify forward-looking statements.
Results of Operations for the Year Ended September 30, 20202021 and 20192020
Revenues
We earned $10,028,701$49,438,115 in revenues during the year ended September 30, 2020,2021, as compared with $4,532,782$10,028,701 in revenues for the year ended September 30, 2019.2020.
For the year ended September 30, 2020 and 20192021, our revenue was derived from ofcryptocurrency mining revenues, the sale of equipment, solar panels, batteries, design, engineering, and services revenue. This incomeIncome from our mining segment is a result of bitcoin mining activities in the United States. Income from our Energy segment is the result of contracts to sell switchgear equipment, perform engineering design, and provide software for distributed energy and microgrid systems. For the year ended September 30, 2020,2021, we also generated services revenue from our January 2020 acquisition of p2kLabs, Inc.p2kLabs. We hope to generate more significant revenue from customers through the sale and licensing of our Software platforms and services in the future. However, we are unable to estimate with any degree of certainty the amount of future revenues, from existing or future software contracts. Also, we do not anticipate earning significant revenues from our Gasifier business until such time that we have fully developed our technology and are able to market our products.
Gross ProfitCosts and Expenses
We had costs and expenses of $78,015,168 for the year ended September 30, 2021, as compared with $25,171,817 for the year ended September 30, 2020.
Our cost of revenues were $13,964,711 for the year ended September 30, 2021, as compared with cost of revenues of $7,907,849 for the year ended September 30, 2020 resulting in gross profit of $2,120,852, as compared with2020.
Our cost of revenues in 2021 was mainly the result of $3,861,086 for the year ended September 30, 2019 resulting in gross profits of $671,696.
mining energy costs, hosting fees, contract manufacturing expenses, and hardware materials. Our cost of revenues in 2020 was mainly the result of contract manufacturing expense,expenses and hardware materials, subcontractors and direct labor expense.materials.
Mining expenses incurred during the year ended September 30, 2021 is $4,889,996. It consisted mainly of energy costs and hosting fees paid to Coinmint.
Contract manufacturing expense increasedexpenses decreased to $6,704,075 $3,926,060for the year ended September 30, 2020,2021, from $3,220,480 $6,704,075for the year ended 2019.2020. Our manufacturing expense consisted of the cost of contract manufacturing of switchgear equipment.
Hardware material expenses increased to $824,665 for the year ended September 30, 2020, from $125,782 for the year ended 2019. Our materials expense for the years ended September 30, 2020 and 2019 consisted mainly of the cost of energy storage.
Direct labor decreased to $4,029 for the year ended September 30, 2020, from $86,125 for the year ended 2019. Our direct labor expenses for the year ended September 30, 2020 consisted mainly of allocated payroll costs of employees and consultants.
Subcontractor expenses decreased to $325,232 for the year ended September 30, 2020, from $366,523 for the year ended 2019. Our subcontractor expenses for the year ended September 30, 2019 consisted mainly of fees charged by subcontractors for services delivery and installation of energy assets.
Operating Expenses
We had operating expenses of $17,263,968Hardware material purchases increased to $3,205,547 for the year ended September 30, 2021, from $824,665in hardware expenses forthe year ended September 30, 2020. Our materials expense for the years ended September 30, 2021 and 2020 as compared with $17,285,541consisted mainly of the cost of energy storage and solar panels.
Professional fees increased to $8,272,966 for the year ended September 30, 2019.
Professional fees increased to2021 from $6,521,016 for the year ended September 30, 2020 from $4,829,038 for the same period ended September 30, 2019. 2020. Our professional fees expenses for the year ended September 30, 2021 consisted mainly of legal fees of $4,570,216, accounting and tax fees of $1,070,174 consulting fees of $818,741, investor relations and external marketing consulting fees of $959,717, director fees of $177,084, recruitment and conference fees of $251,183, subcontract fees of $185,980 and audit and review fees of $214,100.
Our professional fees expenses for the year ended September 30, 2020 consisted mainly of consulting fees of $607,392 paid to management of the Company, stock-based compensation for consulting of $2,265,194, sales consulting of $278,547, legal fees of $1,472,421, investor relations and external marketing consulting of $725,347, director fees of $442,000, consulting for software and engineering of $82,031, accounting and tax fees of $186,969 and audit and review fees of $135,060.
Payroll expenses increased to $25,355,684 for the year ended September 30, 2021 from $6,813,641 for the same period ended September 30, 2020. Our professional feespayroll expenses for the year ended September 30, 20192021 consisted mainly of consulting feessalary and wages expense of $1,032,076 paid to management of the Company,$17,624,078 and employee and officer stock-based compensation for consultingand related bonuses of $1,735,693, sales consulting of $202,963, legal fees of $220,163, investor relations consulting of $1,253,903, consulting for public relations of $52,740, consulting for software and engineering of $15,680 and audit and review fees of $141,349.
Payroll expenses increased to $6,813,641 for the year ended September 30, 2020 from $1,267,403 for the same period ended September 30, 2019.$7,731,605. Our payroll expenses for the year ended September 30, 2020 consisted mainly of salary and wages expense of $4,293,558 and employee and officer stock-based compensation and related bonuses of $2,520,083. Our payroll expenses for the year ended September 30, 2019 consisted mainly of salary and wages expense of $1,010,054$4,293,559 and employee and officer stock-based compensation of $257,349.$2,520,083.
General and administrative fees increased to $1,093,062 $5,291,652 for the year ended September 30, 20202021 from $917,298$1,093,062 for the same period ended September 30, 2019.2020. Our general and administrative expenses for the year ended September 30, 2021 consisted mainly of marketing related expenses of $1,488,933, travel expenses of $367,632, rent expenses of $445,944, insurance expenses of $720,053, dues and subscriptions of $1,129,963, repairs and maintenance of $174,192, supplies of $134,163, utilities of $184,232 and bad debt expense of $246,453. Our general and administrative expenses for the year ended September 30, 2020 consisted mainly of travel expenses of $82,407, rent expenses of $117,223, insurance expenses of $232,043, dues and subscriptions of $362,887, marketing related expenses of $153,091, and bad debt expense of $36,924. Our general and administrative expenses for the year ended September 30, 2019 consisted mainly of travel expenses of $95,151, rent expenses of $76,220 insurance expenses of $123,499, dues and subscriptions of $184,402, marketing related expenses of $95,690, and bad debt expense of $258,255.
Product development expense decreased to $163,918 for the year ended September 30, 2020 from $1,453,635 for the same period ended September 30, 2019. Our product development expenses for the year ended September 30, 2020 consisted of amortization of capitalized software of $163,918. Our product development expenses for the year ended September 30, 2019 consisted of amortization of capitalized software of $1,453,635.
Depreciation and amortization expense increased to $2,672,331$12,244,368 for the year ended September 30, 20202021, from $1,902,981$2,836,249 for the same period ended September 30, 2019.2020.
No impairmentImpairment expenses were recorded for the year ended September 30, 20202021 for $12,885,776, and $6,915,186no impairment expenses were recorded for the same period ended September 30, 2019.2020. Impairment expense for the year ended September 30, 2021 consisted primarily of bitcoin impairment of $6,608,076, goodwill impairment of $5,723,388 and software impairment of $554,322, which represents a write down of our GridFabric product line of $250,000 and our mVSO platform of $304,322.
Other Income/Expenses
We had net other income of $6,765,043 for the year ended September 30, 2021, compared with other expenses of $8,203,027 for the year ended September 30, 2020, compared with other expenses of $9,503,0872020. Other income for the year ended September 30, 2019.2021 consisted mainly of other income of $544,778, change in fair value of contingent consideration of $84,198, gains on derivative assets of $2,790,387, realized gains on the sale of digital currency of $3,104,378, realized gains on the sale of equity securities of $179,046, interest income of $221,488 and interest expense of $154,079. Our other income/expenses for the year ended September 30, 2020 consisted mainly of other income of 20,000,$20,000, unrealized gains on equity security and derivative security of $116,868 and $2,115,269 respectively, interest income of $308,804, and interest expense of $10,449,946. Our other expenses for the year ended September 30, 2019 consisted mainly of loss on settlement of debts of $19,425, and interest expense of $9,483,662.$10,758,750.
Net Loss
Net loss for the year ended September 30, 20202021 was $23,346,143$21,812,010 compared to net loss of $26,116,932$23,346,143 for the year ended September 30, 2019.2020.
Non-GAAP Measures
Adjusted EBITDA and Adjusted EPS is not a measurement of financial performance under generally accepted accounting principles in the United States, or GAAP. Because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that can impact a company's non-cash operating expenses, CleanSpark management believes that providing a non-GAAP financial measure that excludes non-cash and non-recurring expenses allows for meaningful comparisons between the Company's core business operating results and those of other companies, as well as providing the Company with an important tool for financial and operational decision making and for evaluating its own core business operating results over different periods of time.
The Company's adjusted EBITDA measure may not provide information that is directly comparable to that provided by other companies in its industry, as other companies in its industry may calculate non-GAAP financial results differently, particularly related to non-recurring, unusual items. The Company's adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to operating income or as an indication of operating performance or any other measure of performance derived in accordance with GAAP. Our management does not consider adjusted EBITDA to be a substitute for, or superior to, the information provided by GAAP financial results.
We are providing supplemental financial measures for (i) non-GAAP adjusted earnings before interest, taxes, depreciation and amortization, or (“adjusted EBITDA”) that excludes the impact of interest, taxes, depreciation, amortization, our share-based compensation expense, and impairment of assets, unrealized gains/losses on securities, certain financing costs, other non-cash items, certain non-recurring expenses, and impacts related to discontinued operations; and (ii) non-GAAP adjusted EBITDA and non-GAAP earnings per share that excludes the impact of interest, taxes, depreciation, amortization, our share-based compensation expense, and impairment of assets, unrealized gains/losses on securities, certain financing costs, other non-cash items, and impacts related to discontinued operations. These supplemental financial measures are not measurements of financial performance under generally accepted accounting principles in the United States (“GAAP”) and, as a result, these supplemental financial measures may not be comparable to similarly titled measures of other companies. Management uses these non-GAAP financial measures internally to help understand, manage, and evaluate our business performance and to help make operating decisions.
We believe that these non-GAAP financial measures are also useful to investors and analysts in comparing our performance across reporting periods on a consistent basis. The first supplemental financial measure excludes (i) impacts of interest, taxes, and depreciation; (ii) significant non-cash expenses such as our share-based compensation expense, unrealized gains/losses on securities, certain financing costs, other non-cash items that we believe are not reflective of our general business performance, and for which the accounting requires management judgment, and the resulting expenses could vary significantly in comparison to other companies; (iii) significant impairment losses related to long-lived and digital assets, which include our bitcoin for which the accounting requires significant estimates and judgment, and the resulting expenses could vary significantly in comparison to other companies; and (iv) and impacts related to discontinued operations that would not be applicable to our future business activities.
Non-GAAP financial measures are subject to material limitations as they are not in accordance with, or a substitute for, measurements prepared in accordance with GAAP. For example, we expect that share-based compensation expense, which is excluded from the first two non-GAAP financial measures, will continue to be a significant recurring expense over the coming years and is an important part of the compensation provided to certain employees, officers, and directors.
We have also excluded impairment losses on assets, including impairments of our digital currency our non-GAAP financial measures, which may continue to occur in future periods as a result of our continued holdings of significant amounts of bitcoin. Our non-GAAP financial measures are not meant to be considered in isolation and should be read only in conjunction with our Consolidated Financial Statements, which have been prepared in accordance with GAAP. We rely primarily on such Consolidated Financial Statements to understand, manage, and evaluate our business performance and use the non-GAAP financial measures only supplementally.
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The following is a reconciliation of our non-GAAP adjusted EBITDA to the most directly comparable financial measure stated in accordance with GAAP, which excludes the impact of (i) interest, taxes, depreciation, amortization; (ii) our share-based compensation expense; (iii) impairment expense; (iv) unrealized gains/losses on securities; (v) and (vi) impacts related to discontinued operations, to its most directly comparable GAAP measures for the periods indicated:
Years Ended September 30, | |||||||
2021 | 2020 | ||||||
Reconciliation of non-GAAP adjusted EBITDA | |||||||
Net Loss: | $ | (21,812,010 | ) | $ | (23,346,143) | ||
Interest and taxes | (67,409 | ) | 10,449,946 | ||||
Depreciation and amortization | 12,244,368 | 2,836,249 | |||||
Share-based compensation expense | 8,546,712 | 2,053,232 | |||||
Digital asset impairment losses | 6,608,076 | — | |||||
Energy & other goodwill impairment losses | 6,277,710 | — | |||||
Unrealized (gains)/losses of securities and derivatives | (2,785,234 | ) | (2,232,137) | ||||
Discontinued operations | — | — | |||||
non-GAAP adjusted EBITDA | 9,012,213 | (10,238,853) |
The following is a reconciliation of our non-GAAP adjusted EBITDA earnings per share, in each case excluding the impact of (i) interest, taxes, depreciation, amortization; (ii) our share-based compensation expense; (iii) impairment expense; (iv) unrealized gains/losses on securities; (v) certain financing costs and other non-cash items; (vi) certain non-recurring expenses; and (vii) impacts related to discontinued operations:
Reconciliation of non-GAAP adjusted EBITDA per share: | |||||||
Non-GAAP adjusted EBITDA | $ | 9,012,213 | $ | (10,238,853) | |||
Interest and taxes (per diluted share) | — | 1.09 | |||||
Depreciation and amortization (per share) | 0.42 | 0.30 | |||||
Share-based compensation expense | 0.29 | 0.21 | |||||
Digital asset impairment losses (per share) | 0.22 | — | |||||
Energy & other goodwill impairment losses | 0.21 | — | |||||
Unrealized (gains)/losses of securities and derivatives (per share) | (0.09 | ) | (0.23) | ||||
Discontinued operations | — | — | |||||
Non-GAAP EBITDA per share | $ | 0.31 | $ | (1.07) |
38 |
The following is a reconciliation of fair market value of our digital currency holdings to the current carrying value at September 30, 2021. We did not hold any digital currency as of September 30, 2020:
Carrying Value (1) | Fair Market Value (2) | ||||||
Number of Bitcoins held | $ | 627 | $ | 627 | |||
Value per coin (1) (2) | 37,645 | 43,929 | |||||
Total | $ | 23,603,415 | $ | 27,543,483 |
(1) Value per coin is the average book value per coin determined by the number of coins held as of the balance sheet date divided by the carrying value.
(2) Value per coin is the quoted market price as of the balance sheet date.
Liquidity and Capital Resources
For the year ended September 30, 2020,2021, our primary sources of liquidity came from existing cash and proceeds from a securities purchase agreement.share offerings. On October 6, 2020,March 18, 2021, the Company completedconsummated a sharefully underwritten public offering of shares of its common stock, which resulted in net cashproceeds to the Company of approximately $187,200,000. On June 3, 2021, the Company entered into an At the Market Offering Agreement (the “ATM”) with H.C. Wainwright & Co., LLC (“HCW”), pursuant to which it may, from time to time, offer and sell up to an aggregate of $500,000,000 of shares of its common stock to or through HCW. During the fiscal year ended September 30, 2021, the Company issued an aggregate of 3,443,379 shares of the Company’s common stock under the ATM for net proceeds of approximately $37,000,000.$46.4 million. The shares were sold pursuant to a prospectus dated March 15, 2021 and a prospectus supplement dated June 3, 2021 filed with the SEC. Based on our current plans and business conditions, we believe that existing cash, and cash generated from operations and our ATM will be sufficient to satisfy our anticipated cash requirements until the Company reacheswe reach profitability, and we are not aware of any trends or demands, commitments, events or uncertainties that are reasonably likely to result in a decrease in liquidity of our assets. However, our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of our sales and marketing, the timing of new product introductions and the continuing market acceptance of our products and services. If cash generated from operations is insufficient to satisfy our capital requirements, we may open a revolving line of credit with a bank, or we may have to sell additional equity or debt securities or obtain credit facilities. In the event such financing is needed in the future, there can be no assurance that such financing will be available to us, or, if available, that it will be in amounts and on terms acceptable to us. If cash flows from operations became insufficient to continue operations at the current level, and if no additional financing was obtained, our business, operating results and financial condition would be adversely affected.
As of September 30, 2020,2021, we had total current assets of $8,251,858,$57,726,321, consisting of cash, accounts receivable, contract assets andinventory, digital currency, investments, prepaid expenses and other current assets, and total assets in the amount of $22,340,063.$317,473,121. Our total current liabilities as of September 30, 20192021 were $5,382,529.$10,063,022. We had a working capital surplus of $2,869,329$47,663,299 as of September 30, 2020.2021.
Operating activities used $6,642,734$35,429,342 in cash for the year ended September 30, 2019,2021, as compared with $5,697,989$6,642,734 for the same period ended September 30, 2019.2020. Our net loss of $21,812,010 was the main component of our negative operating cash flow for the year ended September 30, 2021, offset mainly by stock-based compensation of $8,546,712, impairment expense of $12,885,786 and depreciation and amortization of $12,244,368. Our net loss of $23,346,143 was the main component of our negative operating cash flow for the year ended September 30, 2020, offset mainly by amortization of debt discount of $9,010,547, depreciation and amortization of $2,672,331, shares issued as interest of $2,050,000, amortization of capitalized software of $163,918 and stock-based compensation of $2,053,232. Our net loss of $26,116,932 was the main component of our negative operating cash flow for the year ended September 30, 2019, offset mainly by impairment expense of $6,915,186, depreciation and amortization of $1,902,981, shares issued as interest of $1,400,000, amortization of capitalized software of $1,453,635 and stock-based compensation of $1,993,043.
Cash flows used by investing activities during the year ended September 30, 20202021 was $2,383,623,$217,714,926, as compared with $673,953$2,383,623 for the year ended September 30, 2019.2020. Our acquisitions of p2kLabs & GridFabric of $1,513,802, investments in the capitalized software of $84,924,Solar watt Solutions for$1,000,136, purchase of fixed assets of $34,897$139,234,948, and the investment in debt and equity securitiesdeposits on mining equipment of $750,000$87,959,910 were the main components of our negative investing cash flow for the year ended September 30, 2020. Our2021. The negative cash flow from investing activities is offset by sale of digital currencies of $11,443,132, acquisition of ATLData Center, net of cash received of $45,783 and sale of equity securities of $373,121.
For the year ended September 30, 2020, our investment in the capitalized software of $569,042,$84,924, acquisition of P2K Labs of $1,141,990, acquisition of Grid Fabric of $371,812, purchase of fixed assets of $102,761$34,897, and the purchaseinvestment in equity and debt security of intangible assets of $2,150$750,000 were the main components of our negative investing cash flow for the year ended September 30, 2019.flow.
Cash flows provided by financing activities during the year ended September 30, 20202021 amounted to $4,313,702,$268,058,393, as compared with $13,798,022$4,313,702 for the year ended September 30, 2019.2020. Our positive cash flows from financing activities for the year ended September 30, 2021 consisted of $270,656,118 in proceeds from offerings, $3,750,932 in proceeds from the exercise of warrants and options offset by repayments of $5,882,553 on promissory notes and $288,602 in finance leases. Our positive cash flows from financing activities for the year ended September 30, 2020 consisted of $4,000,000 in proceeds from the sale of common stock, $531,169 in proceeds from promissory notes off-setoffset by repayments of $217,467 on promissory notes. Our positive cash flows from financing activities
39 |
Contractual Obligations
The Company has purchase commitments for the year endedapproximately $203.6 million related to purchase of miners as of September 30, 2019 consisted2021, and the Company has paid $144.7 million towards these commitments as of $361,800 in proceeds from the saleend of this period.
The Company has purchase commitments for infrastructure assets and other mining equipment of approximately $6,512,000 as of September 30, 2021 and the Company has paid $4,576,000 towards these commitments duringthis period.
The following table sets forth certain information concerning our obligations to make contractual future payments towards our agreements as of September 30, 2021:
2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | |
Recorded contractual obligations: | |||||||
Operating lease obligations | $316,908 | $324,948 | $333,234 | $341,767 | $299,039 | $50,659 | $1,666,555 |
Finance Lease obligations | 449,431 | 321,887 | 142,428 | 12,320 | 1,853 | — | 927,919 |
Miner equipment | 58,930,880 | 58,930,880 | |||||
Infrastructure assets | 1,936,000 | 1,936,000 | |||||
Total | $61,633,219 | $646,835 | $475,662 | $354,087 | $300,892 | $50,659 | $63,461,354 |
Contingent consideration
GridFabric: On August 31, 2020, the Company acquired GridFabric, LLC. Pursuant to the terms of the purchase agreement, additional shares of the Company’s common stock 14,995,000valued at up to $750,000 were issuable if GridFabric achieves certain revenue and product release milestones. On September 30, 2021, the contingent consideration was re-measured to $500,000.
Subsequent to September 30, 2021, the Company settled all contingent consideration due to GridFabric resulting in proceeds from convertible notesthe issuance of 8,404 shares of Company common stock valued at $150,000.
Solar Watt Solutions: On February 24, 2021, the Company acquired Solar Watt Solutions, Inc. Pursuant to the terms of the purchase agreement, additional cash consideration of up to $2,500,000 and $75,030 from related party debts off-set by repaymentsup to 310,018 shares of $625,344 on promissory notes repaymentsthe Company’s common stock may be payable if Solar Watt Solutions achieves certain revenue milestones. As of $457,820 on related party debt, and repaymentsSeptember 30 2021, none of $555,000 on convertible debts.the contingent consideration had been earned.
Known Trends or Uncertainties
Although we have not seen any significant reduction in revenues to date, we have seen some consolidation in our industry during economic downturns. These consolidations have not had a negative effect on our total sales; however, should consolidations and downsizing in the industry continue to occur, those events could adversely impact our revenues and earnings going forward.
As discussed in the Risk Factors section of this Annual Report on Form 10-K, the world has been affected due to the COVID-19 pandemic. Until the pandemic has passed, there remains uncertainty as to the effect of COVID-19 on our business in both the short and long-term.
We believe that the need for improved productivity in the research and development activities directed toward developing new products and/or software will continue to result in increasing adoption of energy solution tools such as those we produce. New product and/or software developments in the energy business segment could result in increased revenues and earnings if they are accepted by our markets; however, there can be no assurances that new products and/or software will result in significant improvements to revenues or earnings. For competitive reasons, we do not disclose all of our new product development activities.
Our continued quest for acquisitions could result in a significant change to revenues and earnings if one or more such acquisitions are completed.
The potential for growth in new markets is uncertain. We will continue to explore these opportunities until such time as we either generate sales or determine that resources would be more efficiently used elsewhere.
40 |
Inflation
We have not been affected materially by inflation during the periods presented, and no material effect is expected in the near future.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements
In June 2018,October 2021, the FASB issued ASU 2018-07, "Compensation-Stock Compensation2021-08, Business Combinations (Topic 718)805): ImprovementsAccounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to Nonemployee Share-Based Payment Accounting," which modifiesbe recognized and measured by the accounting for share-based payment awards issued to nonemployees to largely alignacquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers, as if it withhad originated the accounting for share-based payment awards issued to employees. ASU 2018-07contracts. Under the current business combinations guidance, such assets and liabilities are recognized by the acquirer at fair value on the acquisition date. This new guidance is effective for usthe Company for annualits fiscal year beginning February 1, 2023 and interim periods beginning October 1, 2019.within that fiscal year, and early adoption is permitted. The Company is evaluating its potential impact but does not expect the new standard did not have a material impact on the Company’s results of operations or cash flows.
In August 2018, the FASB issued ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which allows for the capitalization of certain implementation costs incurred in a hosting arrangement that is a service contract. ASU 2018-15 allows for either retrospective adoption or prospective adoption to all implementation costs incurred after the date of adoption. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.
In February 2016, the FASB issued ASU 2016-02, "Leases" ("ASC 842"). The guidance requires lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. Existing sale-leaseback guidance, including guidance for real estate, is replaced with a new model applicable to both lessees and lessors. ASC 842 is effective for fiscal years beginning after December 15, 2018. Upon adoption of this guidance, on October 1, 2019, the Company recorded a Right of use asset and corresponding lease liability of $85,280 and $85,280, respectively, on the Consolidated Balance Sheet. No cumulative effect adjustment to retained earnings resulted from adoption of this guidance. The new standard did not have a material impact on the Company's results of operations or cash flows.flows.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and issued subsequent amendments to the initial guidance (collectively, “Topic 848”). Topic 848 became effective immediately and expires on December 21, 2022. Topic 848 allows eligible contracts that are modified to be accounted for as a continuation of those contracts, permits companies to preserve their hedging accounting during the transition period and enables companies to make a one-time election to transfer or sell held-to-maturity debt securities that are affected by rate reform. Topic 848 provides optional expedients and exceptions for contracts, hedging relationships and other transactions that reference the London Inter-Bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform if certain criteria are met. The adoption of ASU 2020-04 is not expected to have a material impact on the Company’s financial statements or disclosures.
The Company adopted ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on October 1, 2020 (“ASU 2016-13”). ASU 2016-13 requires entities to use a new forward-looking “expected loss” model that reflects expected credit losses, including credit losses related to trade receivables, and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates, which generally will result in the earlier recognition of allowances for losses. As the Company was a Smaller Reporting Company at the time of issuance of the ASU, the Company expects to adopt the ASU effective October 1, 2023, including the interim periods within the fiscal year. In August 2020, the FASB issued ASU2020-06, “Debt - Debt with Conversion and Other Options (subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (subtopic 815-40),” which reduces the number of accounting models in ASC 470-20 that require separate accounting for embedded conversion features. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost as long as no other features require bifurcation and recognition as derivatives. By removing those separation models, the effective interest rate of convertible debt instruments will be closer to the coupon interest rate. Further, the diluted net income per share calculation for convertible instruments will require the Company to use the if-converted method. The treasury stock method should no longer be used to calculate diluted net income per share for convertible instruments. The amendment will be effective for the Company with annual periods beginning January 1, 2022 and early adoption is permitted. The adoption of ASU 2020-06 is not expected to have a material impact on the Company’s financial statements or disclosures.
In August 2020, the FASB issued Account Standard Update (“ASU”) 2020-06, “Debt - Debt with Conversion and Other Options (subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (subtopic 815-40),” which reduces the number of accounting models in ASC 470-20 that require separate accounting for embedded conversion features. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost as long as no other features require bifurcation and recognition as derivatives. By removing those separation models, the effective interest rate of convertible debt instruments will be closer to the coupon interest rate. Further, the diluted net income per share calculation for convertible instruments will require the Company to use the if-converted method. The treasury stock method should no longer be used to calculate diluted net income per share for convertible instruments. The amendment will be effective for the Company with annual periods beginning January 1, 2022 and early adoption is permitted. The adoption of ASU 2020-06 is not expected to have a material impact on the Company’s financial statements or disclosures.
The Company has evaluated all other recent accounting pronouncements and believes that none of them will have a material effect on the Company's financial position, results of operations or cash flows.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants list their most “criticalcritical accounting polices”policies in the Management Discussion and Analysis. The SEC indicated that a “criticalcritical accounting policy”policy is one which is both important to the portrayal of a company’sCompany’s financial condition and results, and requires management’smanagements most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Our accounting policies are discussed in detail in the footnotes to our financial statements included in this Annual Report on Form 10-K for the year ended September 30, 2019,2021 however we consider our critical accounting policies to be those related to revenue recognition, long-lived assets, accounts receivable, fair value of financial instruments, cash and cash equivalents, accounts receivable, warranty liabilitydigital currency and stock-based compensation.
Off Balance Sheet Arrangements
As of September 30, 2020, there were no off balance sheet arrangements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements Required by Article 8 of Regulation S-X:
Audited Consolidated Financial Statements:
To the Shareholders and Board of Directors of
CleanSpark, Inc.
Woods Cross, Utah
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CleanSpark, Inc. and its subsidiaries (collectively, the “Company”) as of September 30, 2020 and 2019, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ MaloneBailey, LLP
www.malonebailey.com
We have served as the Company's auditor since 2018.
Houston, Texas
December 16, 2020
CLEANSPARK, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2020 | September 30, 2019 | ||||||
ASSETS | |||||||
Current assets | |||||||
Cash | $ | 3,126,202 | $ | 7,838,857 | |||
Accounts receivable, net | 1,047,353 | 777,716 | |||||
Contract assets | 4,103 | 57,077 | |||||
Prepaid expense and other current assets | 998,931 | 1,210,395 | |||||
Derivative investment asset | 2,115,269 | — | |||||
Investment in equity securities | 460,000 | — | |||||
Investment in debt security, AFS, at fair value | 500,000 | — | |||||
Total current assets | 8,251,858 | 9,884,045 | |||||
Fixed assets, net | 117,994 | 145,070 | |||||
Operating lease right of use asset | 40,711 | — | |||||
Capitalized software, net | 976,203 | 1,055,197 | |||||
Intangible assets, net | 7,049,656 | 7,430,082 | |||||
Goodwill | 5,903,641 | 4,919,858 | |||||
Total assets | $ | 22,340,063 | $ | 23,434,252 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Current liabilities | |||||||
Accounts payable and accrued liabilities | $ | 4,527,037 | $ | 848,756 | |||
Contract liabilities | 64,198 | 499,401 | |||||
Lease liability | 41,294 | — | |||||
Due to related parties | — | 86,966 | |||||
Contingent consideration | 750,000 | — | |||||
Loans payable, net of unamortized discounts | — | 67,467 | |||||
Total current liabilities | 5,382,529 | 1,502,590 | |||||
Long- term liabilities | |||||||
Convertible notes, net of unamortized discounts | — | 2,896,321 | |||||
Loans payable | 531,169 | 150,000 | |||||
Total liabilities | 5,913,698 | 4,548,911 | |||||
Stockholders' equity | |||||||
Common stock; $ | par value; shares authorized; and shares issued and outstanding as of September 30, 2020 and September 30, 2019, respectively17,391 | 4,679 | |||||
Preferred stock; $ and issued and outstanding as of September 30, 2020 and September 30, 2019, respectively | par value; shares authorized; Series A shares; authorized;1,750 | 1,000 | |||||
Additional paid-in capital | 132,809,830 | 111,936,125 | |||||
Accumulated deficit | (116,402,606 | ) | (93,056,463 | ||||
Total stockholders' equity | 16,426,365 | 18,885,341 | |||||
Total liabilities and stockholders' equity | $ | 22,340,063 | $ | 23,434,252 |
The accompanying notes are an integral part of these consolidated financial statements.
CLEANSPARK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
September 30, 2020 | September 30, 2019 | ||||||
Revenues, net | |||||||
Sale of goods revenues | $ | 8,620,574 | $ | 3,752,987 | |||
Service, software and related revenues | 1,408,127 | 779,795 | |||||
Total revenues, net | 10,028,701 | 4,532,782 | |||||
Cost of revenues | |||||||
Product sale revenues | 7,558,075 | 3,231,704 | |||||
Service, software and related revenues | 349,774 | 629,382 | |||||
Total cost of revenues | 7,907,849 | 3,861,086 | |||||
Gross profit | 2,120,852 | 671,696 | |||||
Operating expenses | |||||||
Professional fees | 6,521,016 | 4,829,038 | |||||
Payroll expenses | 6,813,641 | 1,267,403 | |||||
Product development | 163,918 | 1,453,635 | |||||
General and administrative expenses | 1,093,062 | 917,298 | |||||
Impairment expense | — | 6,915,186 | |||||
Depreciation and amortization | 2,672,331 | 1,902,981 | |||||
Total operating expenses | 17,263,968 | 17,285,541 | |||||
Loss from operations | (15,143,116 | ) | (16,613,845) | ||||
Other income (expense) | |||||||
Other income | 20,000 | — | |||||
Loss on settlement of debt | — | (19,425) | |||||
Unrealized gain/(loss) on equity security | 116,868 | — | |||||
Unrealized gain on derivative security | 2,115,269 | — | |||||
Loss on disposal of assets | (5,218 | ) | — | ||||
Interest expense (net) | (10,449,946 | ) | (9,483,662) | ||||
Total other income (expense) | (8,203,027 | ) | (9,503,087) | ||||
Net loss | $ | (23,346,143 | ) | $ | (26,116,932) | ||
Loss per common share - basic and diluted | $ | (2.44 | ) | $ | (6.25) | ||
Weighted average common shares outstanding - basic and diluted | $ | 9,550,626 | $ | 4,177,402 |
The accompanying notes are an integral part of these consolidated financial statements.
CLEANSPARK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Year ended September 30, 2020 | |||||||||||||||||||||||||||
Preferred Stock | Common Stock | ||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Equity | |||||||||||||||||||||
Balance, September 30, 2019 | 1,000,000 | $ | 1,000 | 4,679,018 | $ | 4,679 | $ | 111,936,125 | $ | (93,056,463 | ) | $ | 18,885,341 | ||||||||||||||
Shares issued for services | 750,000 | 750 | 50,381 | 50 | 139,800 | — | 140,600 | ||||||||||||||||||||
Options and warrants issued for services | — | — | — | — | 1,912,632 | — | 1,912,632 | ||||||||||||||||||||
Shares issued upon conversion of debt and accrued interest | — | — | 11,330,978 | 11,331 | 14,038,669 | — | 14,050,000 | ||||||||||||||||||||
Rounding shares issued for stock split | — | — | 793 | 1 | (1 | ) | — | — | |||||||||||||||||||
Shares returned and cancelled | — | — | (30,000 | ) | (30 | ) | 30 | — | — | ||||||||||||||||||
Options issued for business acquisition | — | — | — | — | 88,935 | — | 88,935 | ||||||||||||||||||||
Shares issued for business acquisition | — | — | 122,126 | 122 | 694,878 | — | 695,000 | ||||||||||||||||||||
Shares issued upon exercise of warrants | — | — | 6,913 | 7 | (7 | ) | — | — | |||||||||||||||||||
Shares issued under registered direct offering | — | — | 1,230,770 | 1,231 | 3,998,769 | — | 4,000,000 | ||||||||||||||||||||
Net loss | — | — | — | — | — | (23,346,143 | ) | (23,346,143) | |||||||||||||||||||
Balance, September 30, 2020 | 1,750,000 | $ | 1,750 | 17,390,979 | $ | 17,391 | $ | 132,809,830 | $ | (116,402,606 | ) | $ | 16,426,365 |
For the Year Ended September 30, 2019 | |||||||||||||||||||||||||||
Preferred Stock | Common Stock | ||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Equity | |||||||||||||||||||||
Balance, September 30, 2018 | 1,000,000 | $ | 1,000 | 3,611,645 | $ | 3,612 | $ | 82,990,994 | $ | (66,939,531 | ) | $ | 16,056,075 | ||||||||||||||
Shares issued for services | — | — | 64,000 | 64 | 966,624 | — | 966,688 | ||||||||||||||||||||
Options and warrants issued for services | — | — | — | — | 1,095,105 | — | 1,095,105 | ||||||||||||||||||||
Shares issued upon exercise of warrants | — | — | 219,096 | 219 | 4,137 | — | 4,356 | ||||||||||||||||||||
Beneficial conversion feature and shares and warrants issued with convertible debt | — | — | 135,000 | 135 | 14,994,865 | — | 14,995,000 | ||||||||||||||||||||
Shares issued for direct investment | — | — | 45,225 | 45 | 361,755 | — | 361,800 | ||||||||||||||||||||
Shares issued for settlement of debt | — | — | 2,500 | 3 | 51,222 | — | 51,225 | ||||||||||||||||||||
Commitment shares returned and cancelled | — | — | (37,500 | ) | (38 | ) | 38 | — | — | ||||||||||||||||||
Shares issued upon conversion of debt and accrued interest | — | — | 464,052 | 464 | 5,399,536 | — | 5,400,000 | ||||||||||||||||||||
Shares and warrants issued under asset purchase agreement | — | — | 175,000 | 175 | 6,071,849 | — | 6,072,024 | ||||||||||||||||||||
Net loss | — | — | — | — | — | (26,116,932 | ) | (26,116,932) | |||||||||||||||||||
Balance, September 30, 2019 | 1,000,000 | $ | 1,000 | 4,679,018 | $ | 4,679 | $ | 111,936,125 | $ | (93,056,463 | ) | $ | 18,885,341 |
The accompanying notes are an integral part of these consolidated financial statements.
CLEANSPARK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended | |||||||
September 30, 2020 | September 30, 2019 | ||||||
Cash Flows from Operating Activities | |||||||
Net loss | $ | (23,346,143 | ) | $ | (26,116,932) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Stock based compensation | 2,053,232 | 1,993,043 | |||||
Impairment expense | — | 6,915,186 | |||||
Unrealized gain on equity security | (116,868 | ) | — | ||||
Amortization of operating lease right of use asset | 44,569 | — | |||||
Depreciation and amortization | 2,672,331 | 1,902,981 | |||||
Amortization of capitalized software | 163,918 | 1,453,635 | |||||
Loss on settlement of debt | — | 19,425 | |||||
Provision for bad debts | 27,456 | 258,255 | |||||
Gain on derivative asset | (2,115,269 | ) | — | ||||
Amortization of debt discount | 9,010,547 | 7,563,829 | |||||
Shares issued as interest | 2,050,000 | 1,400,000 | |||||
Loss on asset disposal | 5,218 | — | |||||
Changes in operating assets and liabilities | |||||||
Decrease (increase) in prepaid expenses and other current assets | 215,514 | (1,082,769) | |||||
Decrease (increase) in contract assets | 52,974 | (4,638) | |||||
(Increase) decrease in contract liabilities, net | (435,203 | ) | 499,401 | ||||
Increase in accounts receivable | (209,226 | ) | (1,001,830) | ||||
Increase in accounts payable and accrued liabilities | 3,415,168 | 723,832 | |||||
Decrease in lease liability | (43,986 | ) | — | ||||
Decrease in due to related parties | (86,966 | ) | (221,407) | ||||
Net cash used in operating activities | (6,642,734 | ) | (5,697,989) | ||||
Cash Flows from investing | |||||||
Purchase of intangible assets | — | (2,150) | |||||
Purchase of fixed assets | (34,897 | ) | (102,761) | ||||
Cash consideration for acquisition of p2kLabs, net of cash acquired | (1,141,990 | ) | — | ||||
Cash consideration for acquisition of GridFabric, net of cash acquired | (371,812 | ) | — | ||||
Investment in capitalized software | (84,924 | ) | (569,042) | ||||
Investment in debt and equity securities | (750,000 | ) | — | ||||
Net cash used in investing activities | (2,383,623 | ) | (673,953) | ||||
Cash Flows from Financing Activities | |||||||
Payments on promissory notes | (217,467 | ) | (625,344) | ||||
Proceeds from promissory notes | 531,169 | — | |||||
Proceeds from related party debts | — | 75,030 | |||||
Payments on related party debts | — | (457,820) | |||||
Proceeds from convertible debt, net of issuance costs | — | 14,995,000 | |||||
Payments on convertible debts | — | (555,000) | |||||
Proceeds from exercise of warrants | — | 4,356 | |||||
Proceeds from issuance of common stock | 4,000,000 | 361,800 | |||||
Net cash provided by financing activities | 4,313,702 | 13,798,022 | |||||
Net increase (decrease) in Cash | (4,712,655 | ) | 7,426,080 | ||||
Cash, beginning of period | 7,838,857 | 412,777 | |||||
Cash, end of period | $ | 3,126,202 | $ | 7,838,857 | |||
Supplemental disclosure of cash flow information | |||||||
Cash paid for interest | $ | 14,162 | $ | 55,493 | |||
Cash paid for tax | $ | — | $ | — | |||
Non-cash investing and financing transactions | |||||||
Day one recognition of right of use asset and liability | $ | 85,280 | $ | — | |||
Shares and options issued for business acquisition | $ | 783,935 | $ | — | |||
Shares issued as collateral returned to treasury | $ | 30 | $ | 38 | |||
Stock issued to promissory notes | $ | — | $ | 51,225 | |||
Debt discount on convertible debt | $ | — | $ | 14,995,000 | |||
Shares and warrants issued for asset acquisition | $ | — | $ | 6,072,024 | |||
Shares issued for conversion of debt and accrued interest | $ | 14,050,000 | $ | 5,400,000 | |||
Financing of prepaid insurance | $ | — | $ | 78,603 | |||
Cashless exercise of options/warrants | $ | 7 | $ | 218 | |||
Option expense capitalized as software development costs | $ | — | $ | 68,750 |
The accompanying notes are an integral part of these consolidated financial statements.
CLEANSPARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND LINE OF BUSINESS
Organization
CleanSpark, Inc. (“CleanSpark”, “we”, “our”, the "Company") was incorporated in the state of Nevada on October 15, 1987 as SmartData Corporation. SmartData conducted a 504-public offering in the State of Nevada in December 1987 and began trading publicly in January 1988. Due to a series of unfortunate events, including the untimely death of the founding CEO, SmartData discontinued active business operations in 1992.
On March 25, 2014, we began operations in the alternative energy sector.
In December 2014, the Company changed its name to Stratean Inc. through a short-form merger in order to better reflect the new business plan.
On July 1, 2016, the Company entered into an Asset Purchase Agreement, as amended (the “Purchase Agreement”), with CleanSpark Holdings LLC, CleanSpark LLC, CleanSpark Technologies LLC and Specialized Energy Solutions, Inc. (together, the “Seller”). Pursuant to the Purchase Agreement, the Company acquired CleanSpark, LLC and all the assets related to the Seller and its line of business.
In October 2016, the Company changed its name to CleanSpark, Inc. through a short-form merger in order to better reflect the brand identity.
On January 22, 2019, CleanSpark entered into an Agreement with Pioneer Critical Power, Inc., whereby it acquired certain intellectual property assets and client lists. As a result of the transaction Pioneer Critical Power Inc. became a wholly owned subsidiary of CleanSpark Inc. On February 1, 2019, Pioneer Critical Power, Inc. was renamed CleanSpark Critical Power Systems, Inc.
On December 5, 2019, the Board of Directors approved a reverse stock split of the Company’s common stock, par value $ per share. On December 10, 2019, the Financial Industry Regulatory Authority (“FINRA”) approved the Company’s 1:10 reverse stock split of the Company’s common stock. The reverse stock split took effect on December 11, 2019. Unless otherwise noted, impacted amounts and share information in the consolidated financial statements and notes thereto as of and for the fiscal years ended September 30, 2020 and 2019, have been adjusted for the stock split as if such stock split occurred on the first day of the first period presented.
On January 31, 2020, the Company entered into a Stock Purchase Agreement with p2klabs, Inc (“p2k”), and its sole stockholder, (“Seller”), whereby the Company purchased all of the issued and outstanding shares of p2k from the Seller. As a result of the transaction, p2k, is now a wholly-owned subsidiary of the Company. (See note 5 for details.)
On August 31, 2020, the Company entered into a Membership Interest Purchase Agreement with GridFabric, LLC, (“GridFabric”), and its sole member (“Seller”), whereby the Company purchased all of the issued and outstanding membership units of GridFabric from the Seller. As a result of the transaction, GridFabric, is now a wholly-owned subsidiary of the Company. (See note 3 for details.)
Lines of Business
Energy business Segment
Through CleanSpark, LLC, the Company provides microgrid engineering, design and software solutions to military, commercial and residential customers. Our services consist of distributed energy microgrid system engineering and design, and project consulting services.
Through CleanSpark Critical Power Systems, Inc., the Company provides custom hardware solutions for distributed energy systems that serve military and commercial residential properties.
Through GridFabric, LLC the Company provides Open Automated Demand response (“OpenADR”) and other middleware communication protocol software solutions to commercial and utility customers.
Digital Agency Segment
Through p2kLabs, Inc., the Company provides design, software development and other technology-based consulting services.
2. SUMMARY OF SIGNIFICANT POLICIES
This summary of significant accounting policies of CleanSpark is presented to assist in understanding the Company’s consolidated financial statements. The consolidated financial statements and notes are representations of the Company’s management, who are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the consolidated financial statements.
Liquidity
The Company has incurred losses for the past several years while developing infrastructure and its software platforms.As shown in the accompanying consolidated financial statements, the Company incurred net losses of $23,346,143 and $26,116,932 during the years ended September 30, 2020 and September 30, 2019, respectively. In response to these conditions and to ensure the Company has sufficient capital for ongoing operations for a minimum of 12 months we have raised additional capital through the sale of debt and equity securities pursuant to a registration statement on Form S-3. As of September 30, 2020, the Company had working capital of approximately $2,869,329.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of CleanSpark, Inc., and its wholly owned operating subsidiaries, CleanSpark, LLC, CleanSpark, II, LLC, CleanSpark Critical Power Systems Inc, p2kLabs, Inc, and GridFabric, LLC. All material intercompany transactions have been eliminated upon consolidation of these entities.
Use of estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review the Company’s goodwill and digital currency impairment, intangible assets acquired, impairments and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, revenue recognition from digital currency mining, valuation of derivative assets and liabilities, available-for-sale investments, allowances for uncollectible accounts, valuation of digital currencies, valuation of contingent consideration, warranty, and the valuations of non-cash capital stock issuances.share based awards. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions including, but not limited to, the ultimate impact that COVID-10COVID-19 may have on the Company’s operations.
Off Balance Sheet Arrangements
As of September 30, 2021, there were no off-balance sheet arrangements.
41 |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a first time large accelerated filer, we are not required to provide the information required by this Item until the first quarter after the fiscal year in which it is first determined that we have become a large accelerated filer.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements Required by Article 8 of Regulation S-X:
Audited Consolidated Financial Statements:
F-1 | Reports of Independent Registered Public Accounting Firm |
F-5 | Consolidated Balance Sheets as of September 30, 2021 and 2020; |
F-6 | Consolidated Statements of Operations and Comprehensive Loss for the years ended September 30, 2021 and 2020; |
F-7 | Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2021 and 2020 |
F-8 | Consolidated Statements of Cash Flows for the years ended September 30, 2021 and 2020; |
F-9 | Notes to Consolidated Financial Statements |
42 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
CleanSpark, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CleanSpark, Inc. and its subsidiaries (collectively, the “Company”) as of September 30, 2021 and 2020, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended September 30, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021 and 2020, and the results of their operations and their cash flows for each of the two years in the period ended September 30, 2021, in conformity with accounting principles generally accepted in the United States of America.
We also have audited the Company’s internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated December 14, 2021 expressed an adverse opinion.
Basis for Opinion
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that responds to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
F-1 |
Evaluation of the Accounting for and Disclosure of Digital Currency Held
As disclosed in Note 2 to the consolidated financial statements, the Company’s digital currency held as of September 30, 2021, which mainly consist of Bitcoin, are accounted for as indefinite-lived intangible assets, and have been included in current assets on the consolidated balance sheet. The Company’s digital currency as of September 30, 2021 amounted to approximately $23,603,000. We identified the accounting for and disclosure of the digital currency held as a critical audit matter because, currently, no specific definitive guidance exists for the accounting for and disclosure of digital currencies held in accordance with accounting principles generally accepted in the United States (“GAAP”). The Company’s management has exercised significant judgment in their determination of how existing GAAP should be applied to the accounting for its digital currency held, the associated financial statement presentation and accompanying footnote disclosures.
The primary procedures we performed to address this critical audit matter included the following:
· | Evaluated management’s rationale for the application of Accounting Standards Codification (“ASC”) 350 to account for its digital currency held and examined management’s processes for determining the amount of impairment expense recognized; |
· | Evaluated management’s rationale for the inclusion of digital currency as a current asset on the balance sheet; |
· | Independently and directly confirmed the balance and ownership of digital currency that is in the custody of a third party; |
· | Evaluated management’s disclosures of its digital currency activities in the financial statement footnotes; and |
· | Examined supporting sale and cash receipt evidence for digital currency sales, including management’s processes for calculating any gains or losses on sales of its digital currency. |
Evaluation of the Accounting for and Disclosure of Digital Currency Mining Revenue Recognized
As disclosed in Note 2, the Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. The Company provides computing power to the mining pools and in exchange for providing such computing power, the Company is entitled to a fractional share of the fixed cryptocurrency award the pool operator receives for successfully adding a block to the blockchain, plus a fractional share of the transaction fees attached to that block. The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm. During the year ended September 30, 2021, the Company recognized net digital currency mining revenue of approximately $38,846,000. We identified the accounting for and disclosure of digital currency mining revenue recognized as a critical audit matter because, currently, no specific definitive guidance exists for the accounting for and disclosure of digital currency mining revenue recognized in accordance with GAAP. The Company’s management has exercised significant judgment in their determination of how existing GAAP should be applied to the accounting for and disclosure of digital currency mining revenue recognized.
The primary procedures we performed to address this critical audit matter included the following:
· | Performed a site visitation of the facility where the Company’s mining hardware is located. The visitation included an observation of the physical and environmental controls and mining equipment inventory observation procedures; |
· | Evaluated management’s rationale for the application of ASC 606 to account for digital currency awards earned; |
· | Evaluated management’s disclosures of its digital currency activities in the financial statement footnotes; |
· | Evaluated and tested management’s rationale and supporting documentation associated with the valuation of digital currency awards earned; |
· | Independently confirmed certain financial data and wallet records directly with the mining pools; |
· | Compared the Company’s wallet records of digital currency mining compensation received to publicly available blockchain records; and |
· | Undertook an analytical review of total digital currency mining revenue expected to be recognized by the Company by assessing the total hash power contributed onto the network by the Company against total block rewards and transaction fees issued over the year. |
/s/ MaloneBailey, LLP
www.malonebailey.com
We have served as the Company's auditor since 2018.
Houston, Texas
December 14, 2021
F-2 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
CleanSpark, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited the internal control over financial reporting of CleanSpark, Inc. and its subsidiaries (collectively, the “Company”) as of September 30, 2021 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, because of the effect of the material weaknesses described below on the achievement of the objectives of the control criteria, the Company did not maintain effective internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of September 30, 2021 and 2020 and for the years then ended and our report dated December 14, 2021 expressed an unqualified opinion on those financial statements.
The Company acquired ATL Data Centers LLC and Solar Watt Solutions, Inc. (collectively, the “Acquired Businesses”) during the year ended September 30, 2021, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of September 30, 2021, the Acquired Businesses’ internal control over financial reporting associated with total assets of $267.3 million (of which $27.3 million represents goodwill and intangibles included within the scope of the assessment), and total revenues of $43.2 million included in the consolidated financial statements of the Company as of and for the year ended September 30, 2021. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of the Acquired Businesses.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the Management’s Report on Internal Control over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
F-3 |
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment: (1) the Company did not adequately implement or properly maintain controls over its financial close and reporting process, its process over the recording of energy and other services revenue and its process over the accounting and valuation of certain aspects of business combinations involving significant estimates and (2) the Company did not adequately design and maintain effective general information technology controls over third-party information systems and applications that are relevant to the preparation of the Company’s financial statements. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2021 consolidated financial statements, and this report does not affect our report on those financial statements.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ MaloneBailey, LLP
www.malonebailey.com
We have served as the Company's auditor since 2018.
Houston, Texas
December 14, 2021
F-4 |
CLEANSPARK, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2021 | September 30, 2020 | ||||||
ASSETS | |||||||
Current assets | |||||||
Cash and cash equivalents, including restricted cash | $ | 18,040,327 | $ | 3,126,202 | |||
Accounts receivable, net | 2,619,957 | 859,791 | |||||
Contract assets | — | 4,103 | |||||
Inventory | 2,672,744 | 247,500 | |||||
Prepaid expense and other current assets | 5,129,047 | 938,993 | |||||
Digital currency | 23,603,210 | — | |||||
Derivative investment asset | 4,905,656 | 2,115,269 | |||||
Investment equity security | 260,772 | 460,000 | |||||
Investment debt security, AFS, at fair value | 494,608 | 500,000 | |||||
Total current assets | 57,726,321 | 8,251,858 | |||||
Property and equipment, net | 137,592,871 | 117,994 | |||||
Operating lease right of use asset | 1,488,240 | 40,711 | |||||
Capitalized software, net | 503,685 | 976,203 | |||||
Intangible assets, net | 12,277,360 | 7,049,656 | |||||
Deposits on mining equipment | 87,959,910 | — | |||||
Other long-term asset | 875,536 | — | |||||
Goodwill | 19,049,198 | 5,903,641 | |||||
Total assets | 317,473,121 | 22,340,063 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Current liabilities | |||||||
Accounts payable and accrued liabilities | 7,975,263 | 4,527,037 | |||||
Contract liabilities | 296,964 | 64,198 | |||||
Operating lease liability | 256,195 | 41,294 | |||||
Finance lease liability | 413,798 | — | |||||
Acquisition liability | 300,000 | — | |||||
Contingent consideration | 820,802 | 750,000 | |||||
Total current liabilities | 10,063,022 | 5,382,529 | |||||
Long-term liabilities | |||||||
Loans payable | — | 531,169 | |||||
Operating lease liability, net of current portion | 1,235,325 | — | |||||
Finance lease liability, net of current portion | 458,308 | — | |||||
Total liabilities | 11,756,655 | 5,913,698 | |||||
Stockholders' equity | |||||||
Common stock; par value; shares authorized; and shares issued and outstanding as of September 30, 2021 and September 30, 2020, respectively | 37,394 | 17,391 | |||||
Preferred stock; par value; shares authorized; Series A shares; authorized; and issued and outstanding as of September 30, 2021 and September 30, 2020 respectively | 1,750 | 1,750 | |||||
Additional paid-in capital | 444,074,832 | 132,809,830 | |||||
Accumulated other comprehensive loss | (5,392 | ) | — | ||||
Accumulated deficit | (138,392,118 | ) | (116,402,606) | ||||
Total stockholders' equity | 305,716,466 | 16,426,365 | |||||
Total liabilities and stockholders' equity | 317,473,121 | 22,340,063 |
The accompanying notes are an integral part of these consolidated financial statements.
F-5 |
CLEANSPARK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
September 30, 2021 | September 30, 2020 | ||||||
Revenues, net | |||||||
Digital currency mining revenue, net | 38,846,633 | 0 | |||||
Energy hardware, software and services revenue | 9,002,636 | 9,018,023 | |||||
Other services revenue | 1,588,846 | 1,010,678 | |||||
Total revenues, net | 49,438,115 | 10,028,701 | |||||
Costs and expenses | |||||||
Cost of revenues (exclusive of depreciation and amortization shown below) | 13,964,711 | 7,907,849 | |||||
Professional fees | 8,272,967 | 6,521,016 | |||||
Payroll expenses | 25,355,684 | 6,813,641 | |||||
General and administrative expenses | 5,291,652 | 1,093,062 | |||||
Impairment of goodwill | 5,723,388 | — | |||||
Other impairment expense (related to Intangible Assets) | 7,162,398 | — | |||||
Depreciation and amortization | 12,244,368 | 2,836,249 | |||||
Total costs and expenses | 78,015,168 | 25,171,817 | |||||
Loss from operations | (28,577,053 | ) | (15,143,116) | ||||
Other income/(expense) | |||||||
Other income | 544,778 | 20,000 | |||||
Change in fair value of contingent consideration | 84,198 | — | |||||
Realized gain on sale of digital currency | 3,104,378 | — | |||||
Realized gain on sale of equity securities | 179,046 | — | |||||
Unrealized gain (loss) on equity security | (5,153 | ) | 116,868 | ||||
Unrealized gain on derivative security | 2,790,387 | 2,115,269 | |||||
Interest income | 221,488 | 308,804 | |||||
Interest expense | (154,079 | ) | (10,758,750) | ||||
Loss on disposal of assets | — | (5,218) | |||||
Total other income (expense) | 6,765,043 | (8,203,027) | |||||
Loss before income tax (expense) or benefit | (21,812,010 | ) | (23,346,143) | ||||
Income tax (expense) or benefit | — | — | |||||
Net loss | (21,812,010 | ) | (23,346,143) | ||||
Other comprehensive loss | (5,392 | ) | — | ||||
Total comprehensive loss | (21,817,402 | ) | (23,346,143) | ||||
Preferred stock dividends | 177,502 | — | |||||
Total comprehensive loss attributable to common shareholders | (21,994,904 | ) | (23,346,143) | ||||
Loss per common share - basic and diluted | (0.75 | ) | (2.44) | ||||
Weighted average common shares outstanding - basic and diluted | 29,441,364 | 9,550,626 |
The accompanying notes are an integral part of these consolidated financial statements.
F-6 |
CLEANSPARK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Year Ended September 30, 2021 | |||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Stockholders' Equity | ||||||||||||||||||||||||
Balance, September 30, 2020 | 1,750,000 | 1,750 | 17,390,979 | 17,391 | 132,809,830 | — | (116,402,606 | ) | 16,426,365 | ||||||||||||||||||||||
Shares issued for services | — | — | 631,765 | 631 | 5,923,300 | — | — | 5,923,931 | |||||||||||||||||||||||
Exercise of options and warrants | — | — | 389,745 | 389 | 3,750,542 | — | — | 3,750,931 | |||||||||||||||||||||||
Shares returned for settlement of debt | — | — | (15,000 | ) | (15 | ) | 15 | — | — | — | |||||||||||||||||||||
Shares issued for business acquisition | — | — | 976,828 | 996 | 15,783,376 | — | — | 15,784,372 | |||||||||||||||||||||||
Shares in Escrow for business acquisition | — | — | 1,119,160 | 1,100 | 10,580,786 | — | — | 10,581,886 | |||||||||||||||||||||||
Options and warrants issued for services | — | — | — | — | 5,480,426 | — | — | 5,480,426 | |||||||||||||||||||||||
Shares issued under underwritten offering, net of offering costs | — | — | 16,978,734 | 16,978 | 270,639,140 | — | — | 270,656,118 | |||||||||||||||||||||||
Shares returned in relation to business acquisition | — | — | (76,266 | ) | (76 | ) | (892,583 | ) | — | — | (892,659) | ||||||||||||||||||||
Preferred stock dividends | — | — | — | — | — | — | (177,502 | ) | (177,502) | ||||||||||||||||||||||
Net loss | — | — | — | — | — | (21,812,010 | ) | (21,812,010) | |||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | (5,392 | ) | (5,392) | |||||||||||||||||||||||
Balance, September 30, 2021 | 1,750,000 | 1,750 | 37,395,945 | 37,394 | 444,074,832 | (5,392 | ) | (138,392,118 | ) | 305,716,466 |
For the Year Ended September 30, 2020 | |||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders' Equity | ||||||||||||||||||||||||
Balance, September 30, 2019 | 1,000,000 | $ | 1,000 | 4,679,018 | $ | 4,679 | $ | 111,936,125 | $ | — | $ | (93,056,463 | ) | $ | 18,885,341 | ||||||||||||||||
Shares issued for services | 750,000 | 750 | 50,381 | 50 | 139,800 | — | — | 140,600 | |||||||||||||||||||||||
Options and warrants issued for services | — | — | — | — | 1,912,632 | — | — | 1,912,632 | |||||||||||||||||||||||
Shares issued upon conversion of debt and accrued interest | — | — | 11,330,978 | 11,331 | 14,038,669 | — | — | 14,050,000 | |||||||||||||||||||||||
Rounding shares issued for stock split | — | — | 793 | 1 | (1 | ) | — | — | — | ||||||||||||||||||||||
Shares returned and cancelled | — | — | (30,000 | ) | (30 | ) | 30 | — | — | — | |||||||||||||||||||||
Options issued for business acquisition | — | — | — | — | 88,935 | — | — | 88,935 | |||||||||||||||||||||||
Shares issued for business acquisition | — | — | 122,126 | 122 | 694,878 | — | — | 695,000 | |||||||||||||||||||||||
Shares issued upon exercise of warrants | — | — | 6,913 | 7 | (7 | ) | — | — | — | ||||||||||||||||||||||
Shares issued under registered direct offering | — | — | 1,230,770 | 1,231 | 3,998,769 | — | — | 4,000,000 | |||||||||||||||||||||||
Net loss | — | — | — | — | — | — | (23,346,143 | ) | (23,346,143) | ||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | — | — | |||||||||||||||||||||||
Balance, September 30, 2020 | 1,750,000 | 1,750 | 17,390,979 | 17,391 | 132,809,830 | — | (116,402,606 | ) | 16,426,365 |
The accompanying notes are an integral part of these consolidated financial statements.
F-7 |
CLEANSPARK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended | |||||||
September 30, 2021 | September 30, 2020 | ||||||
Cash Flows from Operating Activities | |||||||
Net loss | (21,812,010 | ) | (23,346,143) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Stock based compensation including expenses in lieu of commission to brokers | 8,546,712 | 2,053,232 | |||||
Impairment expense on digital currency | 6,608,076 | — | |||||
Unrealized gain on equity security | 5,153 | (116,868) | |||||
Digital currency issued for services | 296,592 | — | |||||
Realized gain on sale of equity security | (179,046 | ) | — | ||||
Realized gain on digital currency | (3,104,378 | ) | — | ||||
Depreciation and amortization | 12,244,368 | 2,836,249 | |||||
Provision for bad debts | 246,453 | 27,456 | |||||
Gain on derivative asset | (2,790,387 | ) | (2,115,269) | ||||
Gain on forgiveness of debt | (531,169 | ) | — | ||||
Change in fair value of contingent consideration | (84,198 | ) | |||||
Amortization of debt discount | — | 9,010,547 | |||||
Shares issued as interest | — | 2,050,000 | |||||
Loss on asset disposal | — | (5,218) | |||||
Impairment expense on capitalized software | 554,322 | — | |||||
Impairment of Goodwill | 5,723,388 | — | |||||
Noncash lease expense | 321,758 | 44,569 | |||||
Changes in operating assets and liabilities | |||||||
Decrease (increase) in prepaid expenses and other current assets | (3,216,288 | ) | 275,452 | ||||
Decrease in contract assets | 4,103 | 52,974 | |||||
Decrease in contract liabilities, net | 146,128 | (435,203) | |||||
(Increase) in accounts receivable | (2,011,250 | ) | (21,664) | ||||
Increase in accounts payable and accrued liabilities | 5,006,403 | 3,415,168 | |||||
(Increase) in digital currency | (38,846,633 | ) | — | ||||
(Decrease) in lease liability | (319,061 | ) | (43,986) | ||||
Increase in inventory | (2,238,378 | ) | (247,500) | ||||
(Decrease) in due to related parties | — | (86,966) | |||||
Net cash used in operating activities | (35,429,342 | ) | (6,642,734) | ||||
Cash Flows from investing | |||||||
Increase in deposits on mining equipment | (89,260,010 | ) | — | ||||
Proceeds from sale of digital currencies | 11,443,132 | — | |||||
Proceeds from sale of equity securities | 373,121 | — | |||||
Investment in infrastructure development | (81,868) | — | |||||
Purchase of property and equipment | (139,234,948 | ) | (34,897) | ||||
Acquisition of ATL Data Center, net of cash received | 45,783 | — | |||||
Acquisition of p2KLabs, net of cash received | — | (1,141,990) | |||||
Acquisition of Solar Watt Solutions | (1,000,136 | ) | — | ||||
Cash consideration for acquisition of GridFabric, net of cash acquired | — | (371,812) | |||||
Investment in capitalized software | — | (84,924) | |||||
Investment in debt and equity securities | — | (750,000) | |||||
Net cash used in investing activities | (217,714,926 | ) | (2,383,623) | ||||
Cash Flows from Financing Activities | |||||||
Payments on promissory notes | (5,882,553 | ) | (217,467) | ||||
Proceeds from promissory notes | — | 531,169 | |||||
Payments on finance leases | (288,602 | ) | — | ||||
Proceeds from exercise of options and warrants | 3,750,932 | — | |||||
Proceeds from offerings, net | 270,656,118 | 4,000,000 | |||||
Dividend paid | (177,502 | ) | — | ||||
Net cash provided by financing activities | 268,058,393 | 4,313,702 | |||||
Net increase (decrease) in Cash | 14,914,125 | (4,712,655) | |||||
Cash and cash equivalents, including restricted cash, beginning of period | 3,126,202 | 7,838,857 | |||||
Cash and cash equivalents, including restricted cash, end of period | 18,040,327 | 3,126,202 | |||||
Supplemental disclosure of cash flow information | |||||||
Cash paid for interest | 156,204 | 14,162 | |||||
Cash paid for tax | — | — | |||||
Non-cash investing and financing transactions | |||||||
Day one recognition of right of use asset and liability | 1,543,719 | 85,280 | |||||
Remeasurement of right of use asset and liability due to lease modification | 695,551 | — | |||||
Shares and options issued for business acquisition | 25,473,675 | 783,935 | |||||
Options issued for services | 953,125 | 1,912,632 | |||||
Shares issued for services | 1,904,521 | 139,850 | |||||
Shares issued for conversion of debt and accrued interest | — | 14,050,000 | |||||
Cashless exercise of warrants | 74 | 7 | |||||
Shares issued as collateral returned to treasury | 15 | 30 |
The accompanying notes are an integral part of these consolidated financial statements.
F-8 |
CLEANSPARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND LINE OF BUSINESS
Organization
The Company – CleanSpark, Inc. (“CleanSpark,” “we,” “our,” "Company") was incorporated in the state of Nevada on October 15, 1987as SmartData Corporation. In October 2016, the Company changed its name to CleanSpark, Inc.
CleanSpark, Inc. is a bitcoin mining and diversified energy company incorporated in Nevada. The Company sustainably mines bitcoin and provides advanced energy technology solutions to commercial and residential customers to solve modern energy challenges. The Company, through itself and its wholly owned subsidiaries, has operated in the digital currency mining sector since December 2020, and in the alternative energy sector since March 2014.
CleanSpark, Inc. aims to develop a long-term sustainability and clean energy plan to support its bitcoin mining operations.
Lines of Business
Digital Currency Mining Segment
Through our wholly owned subsidiaries, ATL Data Centers LLC (“ATL”) and CleanBlok, Inc. (“CleanBlok”), the Company mines bitcoin. The Company entered the bitcoin mining industry through our acquisition of ATL in December 2020. It acquired a second data center in August 2021 and have had a co-location agreement with New York-based Coinmint in place since July 2021. Bitcoin mining has now become the Company’s principal revenue generating business activity. We currently intend to acquire additional facilities, equipment and infrastructure capacity to continue to expand our bitcoin mining operations.
Through our subsidiaries CSRE Properties Norcross, LLC and CSRE Property Management Company, LLC and CSRE Properties, LLC, we maintain real property holdings for ATL Data Centers LLC and CleanBlok Inc.
Energy Segment
The Company provides energy solutions throughour wholly owned subsidiaries CleanSpark, LLC, CleanSpark Critical Power Systems, Inc., GridFabric, LLC, and Solar Watt Solutions, Inc. These solutions consist of engineering, design and software solutions, custom hardware solutions, Open Automated Demand response (“OpenADR”), solar, energy storage for microgrid and distributed energy systems to military, commercial and residential customers in Southern California and throughout the world.
The Company’s solutions are supported by a proprietary suite of software solutions that include microgrid energy modeling, energy market communications and energy management solutions.
Other business activities
Through our wholly owned subsidiary p2kLabs, Inc., we provide design, software development, and other technology-based consulting services. The services provided are generally hourly or fixed-fee project-based arrangements.
Through ATL, we also provide traditional data center services, such as providing customers with rack space, power and equipment, and offer several cloud services including virtual services, virtual storage, and data backup services.
F-9 |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Liquidity
The accompanying audited financial statements of the Company have been prepared by the Management in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission and have been filed with the SEC on December 14, 2021 (“Form 10-K”).
As shown in the accompanying audited consolidated financial statements, the Company incurred a net loss of $21,812,010 and $23,346,143 during the years ended September 30, 2021 and September 30, 2020, respectively. While the Company has experienced negative cash flows from operations, the Company has sufficient capital to support its ongoing operations from cash flows provided from operational activities, including potential sale of digital currency, and has access to additional capital through the registered sale of equity securities pursuant to a registration statement on Form S-3. In addition, the Company is continuing to grow its business segments through which it expects to grow its working capital base. As of September 30, 2021 and September 30, 2020, the Company had working capital of $47,663,299and $2,869,329, respectively.
Principles of Consolidation
The accompanying audited consolidated financial statements include the accounts of CleanSpark, Inc., and its wholly owned operating subsidiaries, CleanSpark, LLC, CleanSpark II, LLC, CleanSpark Critical Power Systems Inc., p2kLabs, Inc, GridFabric, LLC, ATL Data Centers LLC, CleanBlok, Inc., CSRE Properties, LLC, Solar Watt Solutions, Inc, CSRE Properties Norcross, LLC and CSRE Property Management Company, LLC. All intercompany transactions have been eliminated upon consolidation of these entities.
Going Concern
The accompanying consolidated financial statements of the Company have been prepared assuming the Company will continue as a going concern. The going concern basis of presentation assumes that the Company will continue in operation one year after the date these financial statements are issued and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. The evaluation of going concern under the accounting guidance requires significant judgment which involves the Company to consider that it has historically incurred losses in recent years as it has prepared to grow its business through acquisition opportunities. The Company must also consider its current liquidity as well as future market and economic conditions that may be deemed outside the control of the Company as it relates to obtaining financing and generating future profits. As of September 30, 2021, the Company had approximately $18 millionof available cash on-hand and Bitcoin with a fair market value of $27.5 million. In determining whether there is substantial doubt about the Company’s ability to continue as a going concern, the Company may consider the effects of any mitigating plans for additional sources of financing. The Company identified additional financing sources it believes are currently available to fund its operations and drive future growth that include (i) the ability to access capital using the at-the-market (“ATM”) equity offering program available to the Company whereby the Company may sell additional shares of its common stock (discussed in Note 11 – Stockholders’ Equity), and (ii) the ability to raise additional financing from other sources. (Refer to Note 11 for further details)
Use of estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates include estimates used to review the Company’s goodwill and digital currency impairment, intangible assets acquired, impairments and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, revenue recognition from digital currency mining, valuation of derivative assets and liabilities, available-for-sale investments, allowances for uncollectible accounts, valuation of digital currencies, valuation of contingent consideration, warranty, and the valuations of share based awards. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions including, but not limited to, the ultimate impact that COVID-19 may have on the Company’s operations.
F-10 |
Revenue Recognition
We recognize revenue in accordance with generally accepted accounting principles as outlined in the Financial Accounting Standard Board's (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue From Contracts with Customers, which requires that five steps be followed in evaluating revenue recognition: (i) identify the contract with the customer; (ii) identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price; and (v) recognize revenue when or as the entity satisfied a performance obligation.
We did not have a cumulative impact as of October 1, 2019 due to the adoption of Topic 606.
Our accounting policy on revenue recognition by type of revenue is provided below.
Revenues from digital currency mining
The Company has entered in digital asset mining pools to provide computing power to the mining pools. The contracts are terminable at any time by either party and the Company’s enforceable right to compensation only begins when the Company starts providing computing power to the mining pool operator. In exchange for providing computing power, the Company is entitled to a fractional share of the fixed cryptocurrency award the mining pool operator receives (less net digital asset transaction fees to the mining pool operator), for successfully adding a block to the blockchain, , plus a fractional share of the transaction fees attached to that block.. The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm. The transaction consideration the Company receives is noncash consideration, in the form of digital currency, which the Company measures at fair value on the date received which is not materially different than the fair value at contract inception or time the Company has earned the award from the mining pools. The consideration is dependent on the number of digital assets mined on any given day. Fair value of the digital currency award received is determined using the spot price of the related digital currency on the date earned.
There is currently no definitive guidance under GAAP or alternative accounting framework for the accounting for digital currencies recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the FASB, the Company may be required to change its policies, which could have an effect on the Company’s consolidated financial position and results from operations. The total revenue recognized from digital currency mining for the years ended September 30, 2021 and September 30, 2020 is $38,846,633 and $0, respectively.
Engineering & Construction Contracts and Service Contracts
The Company recognizes engineering and construction contract revenue over time, as performance obligations are satisfied, due to the continuous transfer of control to the customer. Engineering and construction contracts are generally accounted for as a single unit of account (a single performance obligation) and are not segmented between types of services. The Company recognizes revenue based primarily on contract cost incurred to date compared to total estimated contract cost (an input method). The input method is the most faithful depiction of the Company’s performance because it directly measures the value of the services transferred to the customer. Customer-furnished materials, labor and equipment and, in certain cases, subcontractor materials, labor and equipment, are included in revenue and cost of revenue when management believes that the company is acting as a principal rather than as an agent (i.e., the company integrates the materials, labor and equipment into the deliverables promised to the customer). Customer-furnished materials are only included in revenue and cost when the contract includes construction activity and the Company has visibility into the amount the customer is paying for the materials or there is a reasonable basis for estimating the amount. The Company recognizes revenue, but not profit, on certain uninstalled materials that are not specifically produced, fabricated, or constructed for a project. Revenue on these uninstalled materials is recognized when the cost is incurred (when control is transferred). Changes to total estimated contract cost or losses, if any, are recognized in the period in which they are determined as assessed at the contract level. Pre-contract costs are expensed as incurred unless they are expected to be recovered from the client. Project mobilization costs are generally charged to project costs as incurred when they are an integrated part of the performance obligation being transferred to the client. Customer payments on engineering and construction contracts are typically due within 30 to 45 days of billing, depending on the contract.
The Company recognizes energy (solar panel and battery) installation contract revenue for residential customers at a point in time upon completion of the installation. The revenues associated with energy installations for commercial customers are recognized over a period of time as noted in the engineering and construction contract revenue disclosure above.
F-11 |
For service contracts (including maintenance contracts) in which the Company has the right to consideration from the customer in an amount that corresponds directly with the value to the customer of the Company’s performance completed to date, revenue is recognized when services are performed and contractually billable. Service contracts that include multiple performance obligations are segmented between types of services.
For contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation using an estimate of the stand-alone selling price of each distinct service in the contract. Revenue recognized on service contracts that have not been billed to clients is classified as a current asset under contract assets on the Consolidated Balance Sheets. Amounts billed to clients in excess of revenue recognized on service contracts to date are classified as a current liability under contract liabilities. Customer payments on service contracts are typically due within 30 days of billing, depending on the contract.
The total revenue recognized from sale of residential battery, residential solar and commercial solar for the years ended September 30, 2021 and September 30, 2020 is $3,727,335 and $0, respectively.
Revenues from Sale of Equipment
Performance Obligations Satisfied at a point in time.
We recognize revenue on agreements for non-customized equipment we sell on a standardized basis to the market at a point in time. We recognize revenue at the point in time that the customer obtains control of the good, which is generally upon shipment or when the customer has physical possession of the product depending on contract terms. We use proof of delivery for certain large equipment with more complex logistics, whereas the delivery of other equipment is estimated based on historical averages of in-transit periods (i.e., time between shipment and delivery). Generally, shipping costs are included in the price of equipment unless the customer requests a non-standard shipment. In situations where an alternative shipment arrangement has been made, the Company recognizes the shipping revenue upon customer receipt of the shipment.
In situations where arrangements include customer acceptance provisions based on seller or customer-specified objective criteria, we recognize revenue when we have concluded that the customer has control of the goods and that acceptance is likely to occur. We generally do not provide for anticipated losses on point in time transactions prior to transferring control of the equipment to the customer.
Our billing terms for these point in time equipment contracts vary and generally coincide with shipment to the customer; however, within certain businesses, we receive progress payments from customers for large equipment purchases, which is generally to reserve production slots with our manufacturing partners, which are recorded as contract liabilities.
Due to the customized nature of the equipment, the Company does not allow for customer returns.
Service Performance obligations satisfied over time.
We enter into long-term product service agreements with our customers primarily within our microgrid segment. These agreements require us to provide preventative maintenance, and standby support services that include certain levels of assurance regarding system performance throughout the contract periods, these contracts will generally range from 1 to 10 years. We account for items that are integral to the maintenance of the equipment as part of our service-related performance obligation, unless the customer has a substantive right to make a separate purchasing decision (e.g., equipment upgrade). Contract modifications that extend or revise contract terms are not uncommon and generally result in our recognizing the impact of the revised terms prospectively over the remaining life of the modified contract (i.e., effectively like a new contract). Revenues are recognized for these arrangements on a straight-line basis consistent with the nature, timing and extent of our services, which primarily relate to routine maintenance and as needed product repairs. Our billing terms for these contracts vary, but we generally invoice periodically as services are provided.
F-12 |
Contract assets represent revenue recognized in excess of amounts billed and include unbilled receivables (typically for cost reimbursable contracts) of $0and contract work in progress (typically for fixed-price contracts) of $4,1030 and $57,0774,103 as of September 30, 20202021 and September 30, 2019,2020, respectively. Unbilled receivables, which represent an unconditional right to payment subject only to the passage of time, are reclassified to accounts receivable when they are billed under the terms of the contract. AdvancesThere are no advances that are payments on account of contract assets of $0 and $0 as of September 30, 2020 and September 30, 2019, respectively,that have been deducted from contract assets.assets as of September 30, 2021 and September 30, 2020. Contract liabilities mostly represent amounts billed to clients in excess of revenue recognized to date.customer deposits. The Company recorded $64,198296,964 and $499,40164,198 in contract liabilities as of September 30, 20202021 and September 30, 2019,2020, respectively.
The total revenue recognized from sale of switchgear for the years ended September 30, 2021 and September 30, 2020 is $4,448,726 and $7,505,761 respectively.
Revenues from software
The Company derives its software revenue from both subscription fees from customers for access to its energy software offerings and software license sales and support services. Revenues from software licenses are generally recognized upfront when the software is made available to the customer and revenues from the related support is generally recognized ratably over the contract term. The Company’s policy is to exclude sales and other indirect taxes when measuring the transaction price of its subscription agreements.
The Company’s subscription agreements generally have monthly or annual contractual terms. Revenue is recognized ratably over the related contractual term beginning on the date that the platform is made available to a customer. Access to the platform represents a series of distinct services as the Company continually provides access to, and fulfills its obligation to the end customer over the subscription term. The series of distinct services represents a single performance obligation that is satisfied over time.
The total revenue recognized from design, software development and other technology-based consulting services for the years ended September 30, 2021 and September 30, 2020 is $1,676,505 and $2,431,419, respectively.
Revenues from design, software development and other technology-based consulting services
For service contracts performed under Master Services Agreements (“MSA”) and accompanying Statement(s) of Work (“SOW”), revenue is recognized based on the performance obligation(s) outlined in the SOW which is typically hours worked or specific deliverable milestones. In the case of a milestone-based SOW, the Company recognizes revenues as each deliverable is signed off by the customer.
The total revenue recognized from design, software development and other technology-based consulting services for the years ended September 30, 2021 and September 30, 2020 is $1,676,505 and $2,431,419, respectively.
Revenues from data center services
The Company provides data services such as providing its customers with rack space, power and equipment, and cloud services such as virtual services, virtual storage, and data backup services, generally based on monthly services provided at a defined price included in the contracts. The performance obligations are the services provided to a customer for the month based on the contract. The transaction price is the price agreed with the customer for the monthly services provided and the revenues are recognized monthly based on the services rendered for the month.
The total revenue recognized from data center services for the years ended September 30, 2021 and September 30, 2020 is $554,345 and $0, respectively.
Variable Consideration
The nature of the Company’s contracts gives rise to several types of variable consideration, including claims and unpriced change orders; awards and incentive fees; and liquidated damages and penalties. The Company recognizes revenue for
F-13 |
variable consideration when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The Company estimates the amount of revenue to be recognized on variable consideration using the expected value (i.e., the sum of a probability-weighted amount) or the most likely amount method, whichever is expected to better predict the amount. Factors considered in determining whether revenue associated with claims (including change orders in dispute and unapproved change orders in regard to both scope and price) should be recognized include the following: (a) the contract or other evidence provides a legal basis for the claim, (b) additional costs were caused by circumstances that were unforeseen at the contract date and not the result of deficiencies in the company’s performance, (c) claim-related costs are identifiable and
considered reasonable in view of the work performed, and (d) evidence supporting the claim is objective and verifiable. If the requirements for recognizing revenue for claims or unapproved change orders are met, revenue is recorded only when the costs associated with the claims or unapproved change orders have been incurred. Back charges to suppliers or subcontractors are recognized as a reduction of cost when it is determined that recovery of such cost is probable and the amounts can be reliably estimated. Disputed back charges are recognized when the same requirements described above for claims accounting have been satisfied.
The Company generally provides limited warranties for work performed under its engineering and construction contracts. The warranty periods typically extend for a limited duration following substantial completion of the Company’s work on a project. Historically, warranty claims have not resulted in material costs incurred.
Practical Expedients
If the Company has a right to consideration from a customer in an amount that corresponds directly with the value of the Company’s performance completed to date (a service contract in which the company bills a fixed amount for each hour of service provided), the Company recognizes revenue in the amount to which it has a right to invoice for services performed.
The Company does not adjust the contract price for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the company transfers a service to a customer and when the customer pays for that service will be one year or less.
The Company has made an accounting policy election to exclude from the measurement of the transaction price all taxes assessed by governmental authorities that are collected by the Company from its customers (use taxes, value added taxes, some excise taxes).
For the year ended September 30, 20202021 and 2019,2020, the Company reported revenues of $10,028,70149,438,115 and $4,532,78210,028,701, respectively.
Cost of Revenues
The Company includes the following in cost of revenues: energy costs, materials costs, manufacturing and logistics costs, freight costs, inventory write-downs, hosting services costs. The recognition of cost of revenue for our energy segment is dependent upon the revenue stream that it pertains to, refer below:
1. | Products Delivered at a Point in Time. Cost of revenue from these products is recognized when the Company transfers control of the product to the customer, which is generally upon shipment. |
2. | Products Delivered Over Time. Cost of revenue from these products is recognized over the related service period. |
Cash and cash equivalents including restricted cash
For purposes
Cash and cash equivalents include cash and amounts due from banks and restricted cash. The Company’s restricted cash represents amounts held in trust for certain construction projects. The following table sets forth a reconciliation of cash, cash equivalents, and restricted cash reported in the consolidated balance sheets that agrees to the total of those amounts as presented in the consolidated statements of cash flows, the Company considers all highly liquid investments and short-term debt instruments with original maturities of three months or less to be cash equivalents. There was $3,126,202flows. and $7,838,857 in cash and no cash equivalents as of September 30, 2020 and September 30, 2019, respectively.
September 30, 2021 | September 30, 2020 | ||||||
Cash and cash equivalents, excluding restricted cash | $ | 14,571,198 | $ | 3,126,202 | |||
Restricted cash – construction escrow account | 3,469,129 | — | |||||
Cash and cash equivalents per consolidated Balance Sheet | $ | 18,040,327 | $ | 3,126,202 |
F-14 |
Accounts receivable
Accounts receivable
Is is comprised of uncollateralized customer obligations due under normal trade terms. They are initially recorded at the invoiced amount upon the sale of goods or services to customers, and do not bear interest. The Company performs ongoing credit evaluation of its customers and management closely monitors outstanding receivables based on factors surrounding the credit risk of specific customers, historical trends, and other information. The carrying amount of accounts receivable is reviewed periodically for collectability. If management determines that collection is unlikely, an allowance that reflects management’s best estimate of the amounts that will not be collected is recorded.
Accounts receivable, are presented net consists of an allowance for doubtful accounts of the following:
$42,970 and $254,570 at September 30, 2020, and September 30, 2019, respectively.
September 30, 2021 | September 30, 2020 | ||||||
Accounts Receivable, gross | $ | 2,891,784 | $ | 902,146 | |||
Other receivables | 421,681 | — | |||||
Retainage receivable | — | 615 | |||||
Provision for doubtful allowances | (693,508 | ) | (42,970) | ||||
Total Accounts Receivable, net | $ | 2,619,957 | $ | 859,791 |
Retention receivable
Inventory
Inventory is stated at the amount withheld bylower cost or net realizable value with cost being measured on a customer until a contractfirst-in, first-out basis. For solar panel and battery installations, the Company transfers component parts from inventories to cost of goods sold once installation is completed. Retention receivablescomplete. The Company periodically reviews inventories for unusable and obsolete items based on assumptions about future demand and market conditions. Based on this evaluation, provisions are made to write inventories down to their net realizable value. There were no write-downs of $615 and $159,989 were included in the balance of trade accounts receivableinventory as of September 30, 2021 and 2020, andrespectively. The composition of inventory for the years ended as of September 30, 2019, respectively.2021 and 2020 are as follows:
September 30, 2021 | September 30, 2020 | ||||||
Batteries and solar panels | $ | 1,819,398 | $ | — | |||
Supplies and other | 853,346 | 247,500 | |||||
Total inventory | $ | 2,672,744 | $ | 247,500 |
The Company has presented inventory amounting to $247,500separate from Prepaid and other current assets to Inventory as of September 30, 2020.
Prepaid expense and other current assets
The Company records a prepaid expense for costs paid but not yet incurred. Those expected to be incurred within one year are recognized and shown as a short-term pre-paid expense. Any costs expected to be incurred outside of one year would be considered other long term assets.
Other current assets are assets that consist of deposits and interest receivable. Deposits and interest we expect to receive within one year are shown as short-term. Those we expect to receive outside of one year are shown as other long term assets.
Investment securities
Investment securities include debt securities and equity securities. Debt securities are classified as available for sale (“AFS”) and are reported as an asset in the Consolidated Balance SheetSheets at their estimated fair value. As the fair values of AFS debt securities change, the changes are reported net of income tax as an element of OCI, except for other-than-temporarily-impaired securities. When AFS debt securities are sold, the unrealized gains or losses are reclassified from OCI to non-interest income. Securities classified as AFS are securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as AFS would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, decline in credit quality, and regulatory capital considerations.
Interest income is recognized based on the coupon rate and increased by accretion of discounts earned or decreased by the amortization of premiums paid over the contractual life of the security.
F-15 |
For individual debt securities where the Company either intends to sell the security or more likely than not will not recover all of its amortized cost, the OTTI (other than temporary impairment) is recognized in earnings equal to the entire difference between the security's cost basis and its fair value at the balance sheet date. For individual debt securities for which a credit loss has been recognized in earnings, interest accruals and amortization and accretion of premiums and discounts are suspended when the credit loss is recognized. Interest received after accruals have been suspended is recognized in income on a cash basis.
The Company holds investments in both publicly held and privately held equity securities. However, as described in Note 1, the Company is primarily doing business of in the digital currency mining sector and alternative energy sector, and not in the business of investing in securities.
Privately held equity securities are recorded at cost and adjusted for observable transactions for same or similar investments of the issuer (referred to as the measurement alternative) or impairment. All gains and losses on privately held equity securities, realized or unrealized, are recorded through gains or losses on equity securities on the consolidated statement of operations.operations and comprehensive loss.
Publicly held equity securities are based on fair value accounting with unrealized gains or losses resulting from changes in fair value reflected as unrealized gains or losses on equity securities in our consolidated statements of operations.operations and comprehensive loss.
Concentration Risk
At times throughout the year, the Company may maintain cash balances in certain bank accounts in excess of FDIC limits. As of September 30, 2020, theThe cash balance, in excess of the FDIC limits was $17,790,327 and $2,876,202.for periods ended September 30, 2021 and September 30, 2020, respectively. The accounts offered by custodians of the Company’s bitcoin are not insured by the FDIC. The fair market value of bitcoin held in accounts covered by FDIC limits was $27,554,031 and $0 for the periods ended September 30, 2021 and 2020, respectively. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk in these accounts.
The Company hadhas certain customers whose revenueand vendors who individually represented 10% or more of the Company’s total revenue. (Seerevenue or capital expenditures. (see Note 1816 for details.)details)
Leases
In accordance with ASC 842, the Company assesses whether an arrangement contains a lease at contract inception. When an arrangement contains a lease, the Company categorize leases with contractual terms longer than twelve months as either operating or finance. Finance leases are generally those leases that allow us to substantially utilize or pay for the entire asset over its estimated life. Assets acquired under finance leases are recorded in “Fixed Assets, net.” All other leases are categorized as operating leases.
The Company records right-of use ("ROU") assets and lease obligations for its finance and operating leases, which are initially recognized based on the discounted future lease payments over the term of the lease. As the rate implicit in the Company's leases is not easily determinable, the Company’s applicable incremental borrowing rate is used in calculating the present value of the sum of the lease payments.
Lease term is defined as the non-cancelable period of the lease plus any options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option. The Company has elected not to recognize ROU asset and lease obligations for its short-term leases, which are defined as leases with an initial term of 12 months or less.
Some leases include multiple year renewal options. The Company’s decision to exercise these renewal options is based on an assessment of its current business needs and market factors at the time of the renewal. Currently, the Company has no leases for which the option to renew is reasonably certain and therefore, options to renew were not factored into the calculation of its right of use asset and lease liability as of September 30, 2021.
For all classes of underlying assets, the Company has elected to not separate lease from non-lease components.
F-16 |
Warranty Liability
The Company establishes warranty liability reserves to provide for estimated future expenses as a result of installation and product defects, product recalls and litigation incidental to the Company’s business. Liability estimates are
determined based on management’s judgment, considering such factors as historical experience, the likely current cost of corrective action, manufacturers’manufacturers and subcontractors’subcontractors participation in sharing the cost of corrective action, consultations with third party experts such as engineers, and discussions with the Company’s general counsel and outside counsel retained to handle specific product liability cases. The Company’s manufacturers and service providers currently provide substantial warranties between ten to twenty-five years with full reimbursement to replace and install replacement parts. WarrantyWhile it is probable that the Company will incur costs associated with future warranty claims, the Company cannot reasonably estimate the loss of future warranty claims. Thus, the loss on warranty claims will be charged to the income of the period in which the loss can be reasonably estimated and shall not be charged retroactively to an earlier period, in accordance with the provisions of ASC 450. There were 0warranty costs and associated liabilities for the years endedas of September 30, 20202021 and 2019 were $0September 30, 2020. and $0, respectively.
The Company follows the guidelines in FASB Codification Topic ASC 718-10 “Compensation-StockCompensation-Stock Compensation,” which requires companies to measure the cost of employee and non-employee services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. Stock-based compensation expense for stock options is recognized on a straight-line basis over the requisite service period. The Company may issue compensatory shares for services including, but not limited to, executive, management, accounting, operations, corporate communication, financial and administrative consulting services. The Company determines the grant date fair value of the options using the Black-Scholes option-pricing model. For discussion of accounting for RSUs, please refer Note 13 – Stock-Based Compensation.
The Company reports earnings (loss) per share in accordance with Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”)FASB ASC 260-10 “Earnings Per Share,” which provides for calculation of “basic” and “diluted” earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income or loss available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. The calculation of diluted net loss per share gives effect to common stock equivalents; however, potential common shares are excluded if their effect is anti-dilutive. As of September 30, 2021 and 2020, there arewere shares and shares, respectively, issuable upon exercise of outstanding options warrants and warrants whichrestricted stock units, as well as shares issuable upon preferred stock conversions, that were excluded from the current and prior period calculations of diluted net loss per share as their inclusion would have been excluded as anti-dilutive.anti-dilutive to the Company’s net loss.
Property and equipment
Property and equipment are stated at cost. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows:
Long-lived Assets
In accordance with the Financial Accounting Standards Board ("FASB") Accounts Standard Codification (ASC) ASC 360-10, "Property, Plant and Equipment,"Equipment” the carrying value of intangible assetsproperty and equipment, and other long-lived assets is reviewed on a regular basis for the existence of facts or circumstances that may suggest impairment. The Company recognizes impairment when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses, if any, are measured as the excess of the carrying amount of the asset over its estimated fair value. During the year ended September 30, 2021 and September 30, 2020 the Company did not record an impairment expenseexpense. Property and duringequipment are stated at cost less accumulated depreciation. Construction in progress is the year ended September 30, 2019construction or development of assets that has not yet been placed in service for its intended use. Depreciation for machinery and equipment, mining equipment, buildings, furniture and fixtures and leasehold improvements commences once they are ready for its intended use. Land is not depreciated.
Depreciation is calculated on a straight-line basis over the Company recorded an impairment expenseestimated useful life of $6,915,186 related to software acquired in 2016 which the Company does not anticipate utilizing in future periods.
asset as follows:
Useful life (years) | ||
Building | 30 | |
Machinery and equipment | 1 - 10 | |
Mining equipment | 3 – 15 | |
Leasehold improvements | Shorter of estimated lease term or 5 years | |
Furniture and fixtures | 1 - 5 |
F-17 |
Business combinations, Intangible Assets and Goodwill
The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,”Business Combinations, where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates. The difference between the purchase price, in excess ofincluding any contingent consideration, and the fair value of the tangible and identified intangiblenet assets acquired less liabilities assumed is recognizedrecorded as goodwill. Contingent consideration transferred is initially recognized at fair value. Contingent consideration classified as a liability or an asset is remeasured to fair value each period until settlement, with changes recognized in profit or loss. Contingent consideration classified as equity is not remeasured. Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred.
The Company reviews its indefinite lived intangibles and goodwill for impairment annually or whenever events or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. In accordance with its policies, the Company performed an assessment of indefinite lived intangibles and goodwill as of the year end September 30, 2021. (See Note 6 for impairment related to indefinite lived intangibles and determined theregoodwill).
2021 Goodwill Impairment analysis
In completing the 2021 annual goodwill impairment analysis, the Company elected to perform both qualitative and quantitative assessments for our goodwill. The assessments involve comparing the carrying value of the entity, including goodwill, to its estimated fair value. In accordance with ASU 2017-04, a goodwill impairment charge is recorded for the amount by which the carrying value unit exceeds the fair value of the reporting unit. In determining the fair value for which the quantitative assessment was performed, the Company obtained an independent evaluation of goodwill. The independent evaluation agency has utilized the income approach to test for goodwill impairment. The income approach is a valuation technique under which we estimate future cash flows using the financial forecast from the perspective of an unrelated market participant. Using historical trending and internal forecasting techniques, revenue is projected and applied to fixed and variable cost experience rates to arrive at the future cash flows. A terminal value was then applied to the projected cash flow stream. Future estimated cash flows were discounted to their present value to calculate the estimated fair value. The discount rate used was the value-weighted average of our estimated cost of capital derived using both known and estimated customary market metrics. In determining the estimated fair value, several factors were estimated, including projected operating results, growth rates, economic conditions, anticipated future cash flows and the discount rate.
The assessment indicated that impairment of goodwill was necessary. Based on the assessment for impairment, the Company reported an impairment expense of goodwill of $5,723,388 for the year ended September 30, 2021. There was no impairment expense for the year ended September 30, 2020.
The following table reflects segment wise goodwill activity for the years ended September 30, 2021 and 2020, and 2019.respectively: 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Segment Wise Goodwill Activity (Details)
Digital | Energy | Others | Total | ||||||||||||
Goodwill- October 1, 2019 | $ | — | $ | 4,919,858 | $ | — | $ | 4,919,858 | |||||||
New Acquisitions | — | 6,395 | 977,388 | 983,783 | |||||||||||
Impairment | — | — | — | — | |||||||||||
Goodwill- September 30, 2020 | — | 4,926,253 | 977,388 | 5,903,641 | |||||||||||
New Acquisitions | 12,048,419 | 6,820,526 | — | 18,868,945 | |||||||||||
Impairment | — | (4,746,000 | ) | (977,388 | ) | (5,723,388) | |||||||||
Goodwill- September 30, 2021 | $ | 12,048,419 | $ | 7,000,779 | $ | — | $ | 19,049,198 |
F-18 |
The Company amortizes intangible assets with finite lives over their estimated useful lives, which range between two and twenty years as follows:
Useful life (years) | |||
Patents | 13-20 | ||
Websites | 3 | ||
Customer list and non-compete agreement | 2-4 | ||
Design assets | 2 | ||
Trademarks | 14 | ||
Engineering trade secrets | 1-7 | ||
Software | 4-7 | ||
Strategic contract | 5 | ||
Infrastructure asset | 15 | ||
Capitalized software | 7 |
Digital Currency
Digital currencies are included in current assets in the consolidated balance sheets. Digital currencies are classified as indefinite-lived intangible assets in accordance with ASC 350, Intangibles — Goodwill and Other, and are accounted for in connection with the Company’s revenue recognition policy detailed above and in Footnote 2 – Significant Accounting Policies. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Quantitative impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the digital currency at the time its fair value is being measured in accordance with ASC 820, Fair Value Measurement. Quoted prices are obtained from the principal market. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted as per ASC 350, Intangibles – Goodwill and Other.
Digital currencies earned by the Company through its mining activities are included within operating activities on the accompanying consolidated statements of cash flows. The sales of digital currencies are included within investing activities in the accompanying consolidated statements of cash flows and any realized gains or losses from such sales are included in other income (expense) in the consolidated statements of operations and comprehensive loss. The Company accounts for its gains or losses in accordance with the first in first out (“FIFO”) method of accounting.
The following table presents the activities of the digital currencies for the year ended September 30, 2021:
Amount ($) | |||
Balance as on September 30, 2019 | — | ||
Additions to digital currencies | — | ||
Sale of digital currencies | — | ||
Balance as on September 30, 2020 | — | ||
Additions of digital currencies | 38,846,633 | ||
Sale of digital currencies | (11,443,132) | ||
Realized gain on sale of digital currencies | 3,104,378 | ||
Digital currencies issued for services | (296,593) | ||
Impairment loss | (6,608,076) | ||
Balance as on September 30, 2021 | 23,603,210 |
Software Development Costs
The Company capitalizes software development costs under guidance of ASC 985-20 “CostsCosts of Software to be Sold, Leased or Marketed”Marketed for our mPulse, platformCanvas & Plaid platforms and under ASC 350-40 “InternalInternal Use Software” for our mVSO, Canvas & Plaid products.Software. Software development costs include payments made to independent software developers under development agreements, as well as direct costs incurred for internally developed products. Software development costs are capitalized once the technological feasibility of a product is established and such costs are determined to be recoverable. Technological feasibility of a product requires both technical design documentation and infrastructure design documentation, or the completed and
design documentation and infrastructure design documentation, or the completed and tested product design and a working model. Significant management judgments and estimates are utilized in the assessment of when technological feasibility is established, and the evaluation is performed on a product-by-product basis. For products where proven technology exists, this may occur early in the development cycle. Prior to a product's release, if and when we believe capitalized costs are not recoverable, we expense the amounts as part of "Product development." Capitalized costs for products that are cancelled or are expected to be abandoned are charged to "Product development" in the period of cancellation. Amounts related to software development, such as product enhancements to existing features, which are not capitalized are charged immediately to "Product development."
Commencing upon a product's release, capitalized software development costs are amortized to "Cost of revenues—revenues software amortization "amortization" based on the ratio of current revenues to total projected revenues for the specific product, generally resulting in an amortization period of seven years for our current product offerings. In recognition of the uncertainties involved in estimating future revenue, amortization will never be less than straight-line amortization of the products remaining estimated economic life.
We evaluate the future recoverability of capitalized software development costs on a quarterly basis. For products that have been released in prior periods, the primary evaluation criterion is the actual performance of the software platform to which the costs relate. For products that are scheduled to be released in future periods, recoverability is evaluated based on the expected performance of the specific products to which the costs relate. Criteria used to evaluate expected product performance include: historical performance of comparable products developed with comparable technology; market performance of comparable software; orders for the product prior to its release; pending contracts and general market conditions.
Significant management judgments and estimates are utilized in assessing the recoverability of capitalized costs. In evaluating the recoverability of capitalized costs, the assessment of expected product performance utilizes forecasted sales amounts and estimates of additional costs to be incurred. If revised forecasted or actual product sales are less than the originally forecasted amounts utilized in the initial recoverability analysis, the net realizable value may be lower than originally estimated in any given quarter, which could result in an impairment charge. Material differences may result in the amount and timing of expenses for any period if matters resolve in a manner that is inconsistent with management's expectations. If an impairment occurs the reduced amount of the capitalized software costs that have been written down to the net realizable value at the close of each annual fiscal period will be considered the cost for subsequent accounting purposes.
Fair Value Measurement of financial instruments, and derivative asset and contingent consideration
The carrying value of cash, accounts payable and accrued expenses, and debt (See Notes 9 & 10) approximate their fair values because of the short-term nature of these instruments. Management believes the Company is not exposed to significant interest or credit risks arising from these financial instruments. The carrying amount of the Company’s long-term convertible debt is also stated at fair value since the stated rate of interest approximates market rates.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable.
Level 1 | Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets. |
Level 2 | Quoted prices for similar assets and liabilities in active markets; quoted prices included for identical or similar assets and liabilities that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. These are typically obtained from readily-available pricing sources for comparable instruments. | ||
Level 3 | Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own beliefs about the assumptions that market participants would use in pricing the asset or liability, based on the best information available in the circumstances. |
The following table presents the Company’s financial instruments that are measured and recorded at fair value on the Company’s balance sheets on a recurring basis, and their level within the fair value hierarchy as of September 30, 2020:
Amount | Level 1 | Level 2 | Level 3 | ||||||||||||
Derivative asset | $ | 2,115,269 | $ | — | $ | — | $ | 2,115,269 | |||||||
Investment in equity security | 210,000 | 210,000 | — | $ | — | ||||||||||
Investment in debt security | 500,000 | — | — | 500,000 | |||||||||||
Total | $ | 2,825,269 | $ | 210,000 | $ | — | $ | 2,615,269 |
The below table presents the change in the fair value of the derivative asset2021 and investment in debt security during the year ended September 30, 2020:
Amount | |||
Balance at September 30, 2019 | $ | — | |
Fair value at issuance, net of premium | 500,000 | ||
Gain on derivative asset | 2,115,269 | ||
Balance at September 30, 2020 | $ | 2,615,269 |
September 30, 2021:
Amount ($) | Level 1 | Level 2 | Level 3 | |
Derivative asset | 4,905,656 | — | — | 4,905,656 |
Investment in equity security | 10,772 | 10,772 | — | — |
Investment in debt security | 494,608 | — | — | 494,608 |
Contingent cash consideration | 820,802 | — | — | 820,802 |
Total | 6,231,838 | 10,772 | — | 6,221,066 |
September 30, 2020:
Amount ($) | Level 1 | Level 2 | Level 3 | |
Derivative asset | 2,115,269 | — | — | 2,115,269 |
Investment in equity security | 210,000 | 210,000 | — | — |
Investment in debt security | 500,000 | — | — | 500,000 |
Contingent cash consideration | 750,000 | — | — | 750,000 |
Total | 3,575,269 | 210,000 | — | 3,365,269 |
Income taxes
The Company’s calculation of its tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. The Company recognizes tax liabilities for uncertain tax positions based on management’s estimate of whether it is more likely than not that additional taxes will be required. The Company had no uncertain tax positions as of September 30, 20202021 and 2019.2020.
Deferred income taxes are recognized in the consolidated financial statements for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates. Temporary differences arise from net operating losses, differences in depreciation methods of archived images, and property and equipment, stock-based and other compensation, and other accrued expenses. A valuation allowance is established when it is determined that it is more likely than not that some or all of the deferred tax assets will not be realized.
The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability for U.S., or the various state jurisdictions, may be materially different from management’smanagements estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities. Interest and penalties are included in tax expense.
The Company includes interest and penalties arising from the underpayment of income taxes in the statements of operation in the provision for income taxes. As of September 30, 2020,2021 and 2019,2020, the Company had no accrued interest or penalties related to uncertain tax positions.
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations or net assets of the Company.Company and are as follows:
• | The Company has reclassified interest receivable on investment in debt securities from Accounts Receivable to Prepaid expense and other current assets amounting to $399,863 and $187,562 as of September 30, 2021 and 2020, respectively. |
• | The revenue presentation is updated to remain consistent with the business segments of the Company. In 2020, revenues were categorized into hardware and software related sales. In 2021, the Company has realigned its focus and accordingly revenue is reported based upon business segments of digital currency mining, energy and others. |
• | Product development expense for the year ended September 30, 2020 has been reclassified to be included in depreciation and amortization expense. |
F-21 |
Commitments and contingencies
The Company is subject to the possibility of various loss contingencies and loss recoveries, such as legal proceedings and claims arising out of its business. The Company considers the likelihood of loss or impairment of an asset, or the incurrence of a liability, as well as the Company’s ability to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. The Company regularly evaluates current information available with its external and internal counsel to determine whether an accrual is required, an accrual should be adjusted or a range of possible loss should be disclosed.
Segment Reporting
Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding the method to allocate resources and assess performance. TheTo better align with the Company’s strategic objectives, the Company currently has twooptimized its reportable segments for financial reporting purposes.down to two, (1) Digital Currency Mining Segment and (2) Energy Segment; by eliminating the digital agency segment. Results associated with that component are now being reported under other revenue and eliminations.
Recently issued accounting pronouncements
In June 2018,October 2021, the FASB issued ASU 2018-07, "Compensation-Stock Compensation2021-08, Business Combinations (Topic 718)805): ImprovementsAccounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to Nonemployee Share-Based Payment Accounting," which modifiesbe recognized and measured by the accounting for share-based payment awards issued to nonemployees to largely alignacquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers, as if it withhad originated the accounting for share-based payment awards issued to employees. ASU 2018-07contracts. Under the current business combinations guidance, such assets and liabilities are recognized by the acquirer at fair value on the acquisition date. This new guidance is effective for usthe Company for annualits fiscal year beginning February 1, 2023 and interim periods beginning October 1, 2019. within that fiscal year, and early adoption is permitted. The Company is evaluating its potential impact but does not expect the new standard didto have a material impact on the Company's results of operations or cash flows.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and issued subsequent amendments to the initial guidance (collectively, “Topic 848”). Topic 848 became effective immediately and expires on December 21, 2022. Topic 848 allows eligible contracts that are modified to be accounted for as a continuation of those contracts, permits companies to preserve their hedging accounting during the transition period and enables companies to make a one-time election to transfer or sell held-to-maturity debt securities that are affected by rate reform. Topic 848 provides optional expedients and exceptions for contracts, hedging relationships and other transactions that reference the London Inter-Bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform if certain criteria are met. The adoption of ASU 2020-04 is not expected to have a material impact on the Company’s resultsfinancial statements or disclosures.
The Company adopted ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of operationsCredit Losses on Financial Instruments on October 1, 2020 (“ASU 2016-13”). ASU 2016-13 requires entities to use a new forward-looking “expected loss” model that reflects expected credit losses, including credit losses related to trade receivables, and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates, which generally will result in the earlier recognition of allowances for losses. As the Company was a Smaller Reporting Company at the time of issuance of the ASU, the Company expects to adopt the ASU effective October 1, 2023, including the interim periods within the fiscal year. In August 2020, the FASB issued ASU2020-06, “Debt - Debt with Conversion and Other Options (subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (subtopic 815-40),” which reduces the number of accounting models in ASC 470-20 that require separate accounting for embedded conversion features. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost as long as no other features require bifurcation and recognition as derivatives. By removing those separation models, the effective interest rate of convertible debt instruments will be closer to the coupon interest rate. Further, the diluted net income per share calculation for convertible instruments will require the Company to use the if-converted method. The treasury stock method should no longer be used to calculate diluted net income per share for convertible instruments. The amendment will be effective for the Company with annual periods beginning January 1, 2022 and early adoption is permitted. The adoption of ASU 2020-06 is not expected to have a material impact on the Company’s financial statements or cash flows.disclosures.
In August 2018,2020, the FASB issued ASU 2018-15, "Intangibles-GoodwillAccount Standard Update (“ASU”) 2020-06, “Debt - Debt with Conversion and Other-Internal-Use Software (Subtopic 350-40): Customer’s AccountingOther Options (subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (subtopic 815-40),” which reduces the number of accounting models in ASC 470-20 that require separate accounting for Implementation Costs Incurred inembedded conversion features. As a Cloud Computing Arrangement That Isresult, a Service Contract," which allowsconvertible debt instrument will be accounted for as a single liability measured at its amortized cost as long as no other features require bifurcation and recognition as derivatives. By removing those separation models, the effective interest rate of convertible debt instruments will be closer to the coupon interest rate. Further, the diluted net income per share calculation for convertible instruments will require the Company to use the if-converted method. The treasury stock method should no longer be used to calculate diluted net income per share for convertible instruments. The amendment will be effective for the capitalization of certain implementation costs incurred in a hosting arrangement thatCompany with annual periods beginning January 1, 2022 and early adoption is a service contract. ASU 2018-15 allows for either retrospective adoption or prospective adoption to all implementation costs incurred after the date of adoption. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019. We are currently evaluating the impact thepermitted. The adoption of this new standard will have on our financial position and results of operations.
In February 2016, the FASB issued guidance within ASU 2016-02, Leases. The amendments in ASU 2016-022020-06 is not expected to Topic 842, Leases, require lessees to recognize the lease assets and lease liabilities arising from operating leases in the statement of financial position. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. The Company adopted the amendments to Topic 842 on October 1, 2019 using the modified retrospective approach. The Company elected the transition option issued under ASU 2018-11, Leases (Topic 842) Targeted Improvements, which allows entities to continue to apply the legacy guidance in ASC 840, Leases, to prior periods, including disclosure requirements. Accordingly, prior period financial results and disclosures have not been adjusted. The Company also elected to apply the package of practical expedients permitting entities to forgo reassessment of: 1) expired or existing contracts that may contain leases; 2) lease classification of expired or existing leases; and 3) initial direct costs for any existing leases. The Company has also elected to apply the short term lease measurement and recognition exemption to leases with an initial term of 12 months or less. The most significant impact of the new standard on the Company’s Consolidated Financial Statements was the recognition of a right of use asset and lease liability for operating leases for which the Company is the lessee. Upon adoption of this guidance, on October 1, 2019, the Company recorded a Right of use asset and corresponding lease liability of $85,280 and $85,280, respectively, on the Consolidated Balance Sheet. No cumulative effect adjustment to retained earnings resulted from adoption of this guidance. The new standard did not have a material impact on the Company’s resultsfinancial statements or disclosures.
3. ACQUISITIONS
SOLAR WATT SOLUTIONS, INC.
On February 23, 2021, the Company entered into an Agreement and Plan of operations or cash flows.Merger (the “SWS Merger Agreement”) with Solar Watt Solutions, Inc. (“SWS”) and its owners (the “Sellers”). The Company accounted for the acquisition of SWS as an acquisition of a business under ASC 805 – Business Combination.
At the closing on February 24, 2021, SWS became a wholly owned subsidiary of the Company. In August 2018,exchange, the FASBCompany issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes(i) shares of restricted common stock with a deemed value of Disclosure Requirements for Fair Value Measurement. The purposeSellers, of which (a) shares with a deemed value of $5,490,000 would be fully earned on closing, and (b) an additional shares with a deemed fair value of $10,150,000 were issued to an escrow agent and only earned by Sellers, subject to holdback pending Sellers’ satisfaction of certain future milestones with all such shares subject to a lock up of no less than 180 days and a leak out of no more than 10% of average daily trading value of the standard isprior 30 days for a period of 36 months following the closing, and (ii) up to improve the overall usefulness of fair value disclosures to financial statement users and reduce unnecessary costs to companies when preparing the disclosures. ASU 2018-13 is effective for for fiscal years beginning after December 15, 2019 and requires the application of the prospective method of transition (for only the most recent interim or annual period presented$3,850,000 in the initial fiscal year of adoption)cash to the new disclosure requirements for (1)Sellers, minus the Sellers’ debt, minus the difference between the Actual Amount and Expected Amount consisting of: (A) $1,350,000 (no changes post acquisition date) in unrealized gainscash payable on a pro rata basis to Sellers at closing, less payment of $500,000 (no changes post acquisition date) to settle Sellers’ debt at closing, which includes (I) $200,000 (no changes post acquisition date) in cash was held back by the Company to satisfy potential damages from indemnification claims and losses includedany amounts owed pursuant to post-closing adjustments, (II) an additional $100,000 (no changes post acquisition date) in other comprehensive incomecash was held back by the Company to satisfy any amounts owed pursuant to post-closing adjustments, and (2)(B) up to $2,500,000 (fair valued at $155,000 at acquisition date) in cash held back by the rangeCompany and weighted average usedonly payable pro rata to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 also requires prospective applicationSellers upon meeting certain future milestones and subject to satisfaction of any modifications to disclosures made because of the changeamounts owing rom SWS to the requirements forCompany resulting from damages required to be indemnified under the narrative description of measurement uncertainty. SWS Merger Agreement. calculated based on the five-day average price to the
The effects of all other amendments made by ASU 2018-13 must be applied retrospectively to all periods presented. We are currently in the process of evaluating the impact of adoption on our Consolidated Financial Statements.
In January 2017, the FASB issued guidance within ASU 2017-04, Intangibles-Goodwill and Other. The amendments in ASU 2017-04 simplify the subsequent measurement of goodwill by comparingCompany determined the fair value of a reporting unitthe consideration given to the sellers of SWS in connection with its carrying amount. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.transaction in accordance with ASC 820 was as follows:
In June 2016, the FASB issued guidance within ASU 2016-13, Financial Instruments – Credit Losses. The amendments in ASU 2016-13 require assets measured at amortized cost and establishes an allowance of credit losses for available for sale debt securities. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.
Consideration: | Fair Value | ||
Cash | $ | 1,350,000 | |
Contingent consideration | |||
shares of common stock as contingent equity consideration | $ | 533,002 | |
shares of common stock | |||
Total Consideration | $ | 6,687,907 |
The Company has evaluated all other recent accounting pronouncements and believes that none of them will have a material effect on the Company's financial position, results of operations or cash flows.
Purchase Price Allocation | Preliminary Allocation at Acquisition Date | Adjustments to Fair Value | Final Allocation at Acquisition Date | ||||||||
Customer List | $ | 5,122,733 | $ | (4,932,733 | ) | $ | 190,000 | ||||
Goodwill | 1,642,409 | 5,178,126 | 6,820,535 | ||||||||
Other Assets and Liabilities assumed, net | (77,235 | ) | (245,393 | ) | (322,628) | ||||||
Total | $ | 6,687,907 | $ | — | $ | 6,687,907 |
The goodwill recorded as result of the acquisition represents the strategic benefits of growing the Company’s service portfolio and the expected revenue growth from increased market penetration. Acquired goodwill is not deductible for income tax purposes. The total purchase price was allocated to identifiable assets deemed acquired, and liabilities assumed, based on their estimated fair values.
3. ACQUISITION OF GRIDFABRIC, LLC.
In connection with the preparation of our financial statements, the Company determined that the accounting treatment of the contingent consideration as reported in the March 31, 2021 and June 30, 2021 consolidated financial statements needed to be revised. Specifically, the contingent cash consideration liability recorded at acquisition date of $2,500,000should be adjusted to $155,000 due to probability of non-satisfaction of future milestones. As a result, the contingent cash consideration liability recorded at acquisition date of $2,500,000 was adjusted to $155,000 due to probability of non-satisfaction of future milestones. The Company also estimated that based upon the milestones, only 19,221 contingent shares will be earned out of the 310,018 total contingent shares, and as a result, the Company adjusted the contingent stock consideration to $533,002. The Company assessed the materiality of these adjustments and determined that these were not material to previously issued financial statements for the quarters ended March 31, 2021 and June 30, 2021.
The immaterial impacts of these adjustments for the quarters ended March 31, 2021 and June 30, 2021 are as follows:
Condensed Consolidated Balance Sheet (unaudited)
March 31, 2021 | June 30, 2021 | |||||
As Reported ($) | Change ($) | As Revised ($) | As Reported ($) | Change ($) | As Revised ($) | |
Goodwill | 32,034,559 | (10,408,798) | 21,625,761 | 31,797,564 | (10,408,798) | 21,388,766 |
Total assets | 292,612,596 | (10,408,798) | 282,203,798 | 297,488,821 | (10,408,798) | 287,080,023 |
Contingent consideration - Current | 2,416,667 | (1,319,751) | 1,096,916 | 650,000 | (855) | 649,145 |
Total current liabilities | 7,340,445 | (1,319,751) | 6,020,694 | 11,910,017 | (855) | 11,909,162 |
Contingent consideration - Non Current | 833,333 | (833,333) | - | 2,600,000 | (2,000,000) | 600,000 |
Total Liabilities | 8,892,137 | (2,153,084) | 6,739,053 | 15,693,207 | (2,000,855) | 13,692,352 |
Additional paid-in capital | 400,032,436 | (8,063,798) | 391,968,638 | 414,783,896 | (8,063,798) | 406,720,098 |
Total Stockholders' equity | 283,720,459 | (8,255,714) | 275,464,745 | 281,795,614 | (8,407,943) | 273,387,671 |
Total Liabilities and Stockholders' equity | 292,612,596 | (10,408,798) | 282,203,798 | 297,488,821 | (10,408,798) | 287,080,023 |
Condensed Consolidated Statement of operations (unaudited)
For the Three Months Ended March 31, 2021 | For the Three Months Ended June 30, 2021 | |||||
As Reported ($) | Change ($) | As Revised ($) | As Reported ($) | Change ($) | As Revised ($) | |
Change in fair value of contingent consideration | — | (191,916) | (191,916) | — | (152,229) | (152,229) |
Total other income (expense) | 9,897,012 | (191,916) | 9,705,096 | (2,058,948) | (152,229) | (2,211,177) |
Net Income/(loss) | 7,400,040 | (191,916) | 7,208,124 | (16,677,127) | (152,229) | (16,829,356) |
Net Income (loss) attributable to the Company’s common shareholders | 7,222,535 | (191,916) | 7,030,619 | (16,677,127) | (152,229) | (16,829,356) |
The amortization period for customer list is estimated to be 1.5 years. The Company estimated the fair value of the identified customer list using a discounted cash flow model. These fair value measurements were based on significant inputs not observable in the market and thus represent a Level 3 measurement. Key assumptions include the level and timing of expected incremental future cash flows over its remaining useful life, and discount rates the Company believe to be consistent with the inherent risks associated with customer list, which is 14%. The Company believes the level and timing of expected future cash flows appropriately reflects market participant assumptions.
The contingent cash consideration was re-measured to $320,802 at September 30, 2021. The company estimates the total contingent cash consideration to be between $320,000 and $550,000 based on the range of possible outcomes. In addition, the Company estimates the total stock consideration to be between $1,100,000 and $1,900,000 based on the range of possible outcomes.
Net sales and net loss of this business included in the Company’s consolidated results of operations in fiscal year 2021 were approximately $3,806,007 and $811,727, respectively.
ATL DATA CENTERS, LLC
On December 9, 2020, the Company entered into an Agreement and Plan of Merger (the “ATL Merger”) with ATL Data Centers LLC (“ATL”) and its members. The Company accounted for the acquisition of ATL as an acquisition
of a business under ASC 805 – Business Combination.
At the closing, ATL became a wholly owned subsidiary of the Company. In exchange, the Company issued with all such shares subject to a lock up of no less than 180 days and a leak out of no more than 10% of the average daily trading value of the prior 30 days.
shares of restricted common stock to the selling members of ATL, of which: (i) shares were fully earned on closing, and (ii) an additional shares were issued and held in escrow, subject to holdback pending satisfaction of certain indemnification claims and future milestones,The Company determined the fair value of the consideration given to the sellers of SWS in connection with the transaction in accordance with ASC 820 was as follows:
Consideration | Preliminary Allocation at Acquisition Date | Adjustments to Fair Value | Final Allocation at Acquisition Date | |||||
shares of common stock | $ | 8,407,826 | — | $ | 8,407,826 | |||
shares of common stock – held in escrow | ||||||||
Total Consideration | $ | 21,183,351 | — | $ | 21,183,351 |
Of the
shares held in escrow, shares were released to the selling members of ATL and shares were returned to the Company and canceled due to nonsatisfaction of certain indemnification claims during the year ended September 30, 2021. The remaining shares held in escrow consist of shares subject to holdback pending satisfaction of further indemnification claims and shares subject to satisfaction of future milestones.In connection with the return of the $892,659 during the year ended September 30, 2021.
shares held in escrow that were cancelled due to the non-satisfaction of certain indemnification claims, total consideration and the related goodwill, decreased byF-24 |
The consideration remitted in connection with the ATL Merger is subject to adjustment based on post-closing adjustments to closing cash, indebtedness, and transaction expenses of ATL within 90 days of closing. The Company also assumed approximately $6.9 million in debts of ATL at closing. As part of the transaction costs, the Company issued shares of common stock for an aggregate value of $545,916 to the broker which were expensed upon issuance of the shares.
Purchase Price Allocation | Preliminary Allocation at Acquisition Date | Adjustments to Fair Value | Final Allocation at Acquisition Date | ||||||||
Strategic Contract | $ | 7,457,970 | $ | 2,342,000 | $ | 9,799,970 | |||||
Goodwill | 14,205,245 | (1,264,167 | ) | 12,941,078 | |||||||
Other Assets and Liabilities assumed, net | (479,864 | ) | (1,077,833 | ) | (1,557,697) | ||||||
Total | $ | 21,183,351 | $ | — | $ | 21,183,351 |
The Company made measurement period adjustments, primarily to strategic contract and goodwill, to better reflect the facts and circumstances that existed at the acquisition date.
The goodwill recorded as a result of the acquisition represents the strategic benefits of growing the Company’s service portfolio and the expected revenue growth from increased mcarket penetration. Acquired goodwill is not deductible for income tax purposes. The total purchase price was allocated to identifiable assets deemed acquired, and liabilities assumed, based on their estimated fair values.
The strategic contract relates to supply of a critical input to our digital currency mining business. The other assets and liabilities assumed include $5.67 million of digital currency mining equipment and $5.475 million of notes payable related to this equipment, which was settled by the Company during the year ended September 30, 2021. In connection with the acquisition, the Company had acquired an operating lease related to a rental building, which had a purchase option associated with the lease agreement. The Company exercised the purchase option to buy the property in May 2021 and, as a result, terminated the lease.
The amortization period for strategic contracts is estimated to be 5 years. The Company estimated the fair value of the identified strategic contract using a discounted cash flow model. These fair value measurements were based on significant inputs not observable in the market and thus represent a Level 3 measurement. Key assumptions include the level and timing of expected future cash flows, conditions and demands over its remaining useful life, and discount rates the Company believe to be consistent with the inherent risks associated with strategic contract, which is 6.4%. The Company believe the level and timing of expected future cash flows appropriately reflects market participant assumptions.
Net sales and net income of this business included in CleanSpark’s consolidated results of operations in fiscal year 2021 were approximately $30,234,683 and $14,449,160, respectively.
P2K LABS, INC.
On January 31, 2020, the Company, entered into an Agreement with p2k, and its sole stockholder, Amer Tadayon (the “Seller”), whereby the Company purchased all of the issued and outstanding shares of p2k in exchange for an aggregate adjusted purchase price of cash and equity of $1,688,935. The transaction closed simultaneously upon the execution of the Agreement by the parties on January 31, 2020.
As a result of the transaction, p2k became a wholly owned subsidiary of the Company. Pursuant to the terms of the Agreement, the purchase price was as follows:
a) $1,039,500 in cash was paid to the Seller;
b) Seller may sell an amount of Shares equal to ten percent (10%) of the daily dollar trading volume of the Company’s common stock on its principal market for the prior 30 days (the “Leak-Out Terms”); restricted shares of the Company’s common stock, valued at , were issued to the Seller (the “Shares”). The Shares are subject to certain lock-up and leakout provisions whereby the
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c) $115,500 in cash was paid to an independent third-party escrow where such cash is subject to offset for adjustments to the purchase price and indemnification purposes;
d) restricted shares of the Company’s common stock, valued at $300,000, were issued to an independent third-party escrow agent (the “Holdback Shares”) and will be released to the Seller upon achievement of certain revenue milestones. During the year ended September 30, 2021, restricted shares of the Company’s common stock were released to the Seller and the balance of shares of the Company’s common stock were returned and cancelled. The Holdback Shares are subject to the Leak-Out Terms.
The Shares and Holdback Shares were deemed to have a fair market value of
per share, which was the closing price of the Company’s common stock on January 31, 2020; ande) 26,950 common stock options that were deemed to have a fair market value of on the date of the closing of the transaction.
The Company accounted for the acquisition of p2k as an acquisition of a business under ASC 805 – Business Combinations.
The Company determined the fair value of the consideration given to the Seller in connection with the transaction in accordance with ASC 820 – Fair Value Measurement was as follows:
Cash Consideration ($): | |||
Cash | 1,155,000 | ||
shares of common stock | 445,000 | ||
26,950 common stock options | |||
Total Consideration | 1,688,935 |
The total purchase price of the Company’s acquisition of p2k was allocated to identifiable assets deemed acquired, and liabilities assumed, based on their estimated fair values as indicated below.
Purchase Price Allocation ($): | |||
Customer list | 710,000 | ||
Design and other assets | 123,000 | ||
Goodwill | 977,388 | ||
Other assets and liabilities assumed, net | (121,453) | ||
Total | 1,688,935 |
Net sales and net loss of this business included in the Company’s consolidated results of operations in fiscal year 2021 were approximately $1,241,641 and $1,201,753, respectively.
GRIDFABRIC, LLC
On August 31, 2020, the Company entered into a Membership Interest Purchase Agreement (the “Agreement”) with GridFabric, LLC, (“GridFabric”), and its sole member, Dupont Hale Holdings, LLC (“Seller”(the “Seller”), whereby the Company purchased all of the issued and outstanding membership units of GridFabric from the Seller (the “Transaction”) in exchange for an aggregate purchase price of cash and stock of up to $1,400,000 (the “Purchase Price”). The Transaction closed simultaneously with execution on August 31, 2020. As a result of the Transaction, GridFabric, an OpenADR software solutions provider, is nowbecame a wholly-ownedwholly owned subsidiary of the Company.
Pursuant to the terms of the Agreement, the Purchase Price was as follows:
$360,000 in cash was paid to the Seller at closing; |
2. | $400,000 in cash was delivered to an independent third-party escrow agent where such cash is subject to offset for adjustments to the Purchase Price and indemnification purposes for a period of 12 months; |
b) $400,000 in cash was delivered to an independent third-party escrow where such cash is subject to offset for adjustments to the Purchase Price and indemnification purposes for a period of 12 months;
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c) restricted shares of the Company’s common stock, valued at $250,000, were issued to the Seller (the “Shares”). The Shares are subject to certain leak-out provisions whereby the Seller may sell an amount of Shares equal to no more than ten percent (10%) of the daily dollar trading volume of the Company’s common stock on its principal market for the prior 30 days (the “Leak-Out Terms”); and
d)additional shares of the Company’s common stock, valued at up to , will be issuable to Seller if GridFabric achieves certain revenue and product release milestones related to the future performance of GridFabric (the “Earn-out Shares”). The Earn-Out Shares are also subject to the Leak-Out Terms.
3. | restricted shares of the Company’s common stock, valued at , were issued to the Seller. The shares issued are subject to certain leak-out provisions whereby |
4. | additional shares of the Company’s common stock, valued at up to , will be issuable to Seller if GridFabric achieves certain revenue and product release milestones related to the future performance of GridFabric (the “Earn-out Shares”). The Earn-Out Shares are also subject to the Leak-Out Terms. |
The Shares were issued at a fair market value of .share. The Earn-Out Shares are accounted for as contingent consideration and the number of shares to be issued will be determined based on the closing price of the Company’s common stock on the date such milestone event occurs.
The Agreement contains standard representations, warranties, covenants, indemnification and other terms customary in similar transactions.
In connection with the transaction, the Company also entered into employment relationships and non-compete agreements with GridFabric’s key employees for a period of 36 months and plans to issue future equity compensation to said employees, subject to approval of the Company’s board of directors.
The Company accounted for the acquisition of GridFabric as an acquisition of a business under ASC 805.805 – Business Combinations.
The Company determined the fair value of the consideration given to the Seller in connection with the Transaction in accordance with ASC 820 – Fair Value Measurement was as follows:
Consideration: | Fair Value ($) | ||
Cash | 400,000 | ||
shares of common stock | |||
Contingent consideration - common stock issuable upon achievement of milestone(s) | |||
Total Consideration | 1,400,000 |
During the year ended September 30, 2021, the Company reassessed the contingent consideration due to GridFabric to
.
Consideration: | Fair Value | ||
Cash | $ | 400,000 | |
shares of common stock | $ | 250,000 | |
Contingent consideration - common stock issuable upon achievement of milestone(s) | $ | 750,000 | |
Total Consideration | $ | 1,400,000 |
A change in the fair value of the contingent consideration of $250,000 is included in change in fair value of contingent consideration in Consolidated Statement of Consolidated Operations and Comprehensive Loss.
The total purchase price of the Company’s acquisition of GridFabric was allocated to identifiable assets deemed acquired, and liabilities assumed, based on their estimated fair values as indicated below.
Purchase Price Allocation: | |||
Software | $ | 1,120,000 | |
Customer list | $ | 60,000 | |
Non-compete | $ | 190,000 | |
Goodwill | $ | 26,395 | |
Net Assets | $ | 3,605 | |
Total | $ | 1,400,000 |
Purchase Price Allocation: | |||
Software | $ | 1,120,000 | |
Customer list | 60,000 | ||
Non-compete | 190,000 | ||
Goodwill | 26,395 | ||
Net Assets | 3,605 | ||
Total | $ | 1,400,000 |
Net sales and operating loss of this business included in the Company’s consolidated results of operations in fiscal year 2021 were approximately $299,606 and $794,805, respectively.
The following is the unaudited pro forma information assuming the acquisition of GridFabric, p2k Labs, ATL, and SWS occurred on October 1, 2018:2019:
For the Year Ended | |||||||
September 30, 2020 | September 30, 2019 | ||||||
Net sales | $ | 10,220,286 | $ | 4,532,782 | |||
Net loss | (23,272,538) | $ | (26,116,932 | ||||
Loss per common share - basic and diluted | $ | (2.43 | ) | $ | (6.21) | ||
Weighted average common shares outstanding - basic and diluted | 9,577,053 | 4,203,829 |
September 30, 2021 | September 30, 2020 | ||||||
Net sales | $ | 35,581,937 | $ | 25,627,704 | |||
Net income (loss) | 12,848,264 | (47,333,110) | |||||
Net profit / (loss) per common share – basic and diluted | $ | 0.43 | $ | (4.04) | |||
Weighted average common shares outstanding – basic and diluted | $ | 29,939,290 | $ | 11,701,937 |
The unaudited pro forma consolidated financial results have been prepared for illustrative purposes only and do not purport to be indicative of the results of operations that actually would have actually resulted had the acquisition occurred on the first day of the earliest period presented, or of future results of the consolidated entities. The unaudited pro forma consolidated financial information does not reflect any operating efficiencies and cost savings that may be realized from the integration of the acquisition. All transitionstransactions that would be considered inter-company transactions for proforma purposes have been eliminated.
4. ACQUISITION OF P2KLABS, INC.INVESTMENTS
On January 31,As of September 30, 2021 and September 30, 2020, the Company entered into an agreement with p2k, had total investments of $5,661,036 and its sole stockholder, Amer Tadayon, whereby the Company purchased all$3,075,269 that comprise of the issued and outstanding shares of p2k in exchange for an aggregate purchase price of cash and equity of $1,688,935following:. The transaction closed simultaneously upon the execution of the agreement by the parties on January 31, 2020.
As a result of the transaction, p2k is now a wholly-owned subsidiary of the Company.
Pursuant to the terms of the Agreement, the purchase price was as follows:
The Company accounted for the acquisition of p2k as an acquisition of a business under ASC 805.
The Company determined the fair value of the consideration given to the Seller in connection with the transaction in accordance with ASC 820 was as follows:
Consideration: | Fair Value | ||
Cash | $ | 1,155,000 | |
shares of common stock | $ | 445,000 | |
26,950 common stock options | $ | 88,935 | |
Total Consideration | $ | 1,688,935 |
The total purchase price of the Company’s acquisition of p2k was allocated to identifiable assets deemed acquired, and liabilities assumed, based on their estimated fair values as indicated below.
Purchase Price Allocation: | |||
Customer list | $ | 730,000 | |
Design and other assets | $ | 123,000 | |
Goodwill | $ | 957,388 | |
Other assets and liabilities assumed, net | $ | (121,453) | |
Total | $ | 1,688,935 |
The following is the unaudited pro forma information assuming the acquisition of p2k occurred on October 1, 2018:
For the Year Ended | |||||||
September 30, 2020 | September 30, 2019 | ||||||
Net sales | $ | 10,296,510 | $ | 5,454,972 | |||
Net loss | (23,353,924) | (26,003,965) | |||||
Loss per common share - basic and diluted | $ | (2.42 | ) | $ | (6.08) | ||
Weighted average common shares outstanding - basic and diluted | 9,646,325 | 4,273,101 |
The unaudited pro forma consolidated financial results have been prepared for illustrative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the first day of the earliest period presented, or of future results of the consolidated entities. The unaudited pro forma consolidated financial information does not reflect any operating efficiencies and cost savings that may be realized from the integration of the acquisition. All transitions that would be considered inter-company transactions for proforma purposes have been eliminated.
5. INVESTMENT IN INTERNATIONAL LAND ALLIANCE
International Land Alliance, Inc.
On November 5, 2019, the Company entered intoin a binding Memorandum of Understanding (the “MOU”) with International Land Alliance, Inc. (“ILAL”), a Wyoming corporation, (“ILAL”), in order to lay a foundational framework where the Company will deploy its energy solutions products and services to ILAL, its energy projects, and its customers.
In connection with the MOU, and in order to support the power and energy needs of ILAL’sILALs development and construction of certain projects, the Company entered into a Securities Purchase Agreement (“SPA”), dated as of November 6, 2019, with ILAL (the “SPA”).ILAL.
• | Investment in Debt Securities (Preferred Stock) and related Embedded Derivative Asset |
Pursuant to the terms of the SPA with ILAL, sold, and the Company purchased shares of Series B Preferred Stock of ILAL (the “Preferred Stock”) for an aggregate purchase price of US $500,000 (the “Stock Transaction”), less certain expenses and fees. The Company also received shares (“commitment shares”) of ILAL’s common stock. The Series B Preferred Stock will accrue cumulative in-kind accruals at a rate of 12% per annum and may increase upon the occurrence of certain events.were redeemable on August 6, 2020. The Preferred Stock is now convertiblecan be converted into common stock at a variable rate as calculated under(refer the agreement terms.
The commitment sharesdiscussion on embedded derivative assets below). This variable conversion ratio will increase by 10% with the occurrence of certain events. Since the investments were not redeemed on August 6, 2020, they are recordednow redeemable at fair value as of September 30, 2020 of .
the Company`s option in cash or into common stock, based on the conversion ratio. The Preferred Stock is recorded as an AFS debt security and is reported at its estimated fair value as of September 30, 2020. As2021. Any change in the fair values of AFS debt securities are reported net of income tax as an element of Other Comprehensive income.
The Company accrued interest on our available-for-sale debt securities totaling $399,863 and $187,562, as of September 30, 2021 and 2020, respectively, presented as prepaid expense and other current assets on the Consolidated Balance Sheets. The fair value of investment in Debt Securities is $494,608 and $500,000 as of September 30, 2021 and 2020. The Company has identified apresented loss on fair value of preferred stock amounting to $5,392 for the year ended September 30, 2021 as part of other comprehensive loss in the Consolidated Statement of Operations and Comprehensive Loss. There was an immaterial loss or gain on the fair value of preferred stock for the year ended September 30, 2020.
The Company has deemed this variable conversion feature of ILAL preferred stock as an embedded derivative instrument in accordance with ASC Topic No. 815 due to the variable conversion feature. Topic No. 815815. This topic requires the Company to account for the conversion feature on its balance sheet at fair value and account for changes in fair value as a derivative gain or loss. Unrealized gain or loss on fair valuation of this embedded feature is recognized as an income in Consolidated statements of Operations and Comprehensive Loss.
The Black-Scholes model utilized the following inputs to value the derivative asset at the date in which the derivative asset was determined through September 30, 2020.
Total fair value of investment in Derivative assets as of September 30, 2021 and 2020 is $4,905,656 and $2,115,269. The Company fair values the debt security as a straight debt instrument based on liquidation value and accrued interest to date. The fair value of the derivative asset is based on the difference in the fair value of the debt security determined as a straight debt instrument and the fair value of the debt security if converted as of the reporting date.
• | Commitment shares - Common stock of ILAL |
Pursuant to the terms of the SPA with ILAL, the Company also received shares (commitment shares) of ILALs common stock. The commitment shares were fully earned at the time of execution of the agreement. During the year ended September 30, 2021, out of commitment shares, the Company sold shares at various prices and fair valued the remaining shares at the closing stock price of ILAL as of September 30, 2021. Realized gain on sale of shares and the unrealized loss on fair value of the remaining shares amounted to and , respectively
Total fair value of investment in equity securities as on September 30, 2021 and 2020 is $10,772 and $210,000, respectively.
• | Investment in Equity Securities- LawClerk |
In February 2020, the Company made a $250,000 strategic relationship investment in LawClerk for 0 Series A Preferred Shares of LawClerk. This investment is recorded on a cost basis and adjusted for observable transactions for same or similar investments of the issuer (referred to as the measurement alternative) or impairment. The Company annually performs impairment analysis on this investment and there were impairments required for the years ended September 30, 2021 and 2020.
Total value of this investment as of September 30, 2021 and 2020 is $250,000, respectively.
Refer the table below for a reconciliation of carrying value of all investments for the year ended September 30, 2021 and 2020:
ILAL Debt Securities | ILAL Derivative asset | ILAL Equity Securities | Law Clerk Equity Securities | |||||
Balance as of October 1, 2019 | $ | - | $ | - | $ | - | $ | - |
Purchased during the year | 500,000 | - | 93,132 | 250,000 | ||||
Unrealized gain on fair value recognized in income | - | 2,115,269 | 116,868 | - | ||||
Balance as of September 30, 2020 | 500,000 | 2,115,269 | 210,000 | 250,000 | ||||
Shares sold during the year | - | - | (373,121) | - | ||||
Realized gain on fair value recognized income | - | - | 179,046 | - | ||||
Unrealized gain (loss) recognized in net income | - | 2,790,387 | (5,153) | - | ||||
Unrealized loss on fair value recognized in other comprehensive loss | (5,392) | - | - | - | ||||
Balance as of September 30, 2021 | $ | 494,608 | $ | 4,905,656 | $ | 10,772 | $ | 250,000 |
F-29 |
6. CAPITALIZED SOFTWARE
Capitalized software consists of the following as of September 30, 2020 and September 30, 2019:
September 30, 2020 | September 30, 2019 | ||||||
mVSO software | $ | 437,135 | $ | 352,211 | |||
MPulse software | 741,846 | 741,846 | |||||
Less: accumulated amortization | (202,778 | ) | (38,860) | ||||
Capitalized Software, net | $ | 976,203 | $ | 1,055,197 |
The Company capitalized $84,924 in enhancements to its mVSO software during the year ended September 30, 2020.
Capitalized software amortization recorded as product development expense for the years ended September 30, 2020 and 2019 was $163,918 and $1,453,635, respectively.
During the year ended September 30, 2019, the Company recorded an impairment of $6,915,186 related directly to components of our original software that was replaced.
7.5. INTANGIBLE ASSETS
The Company amortizes intangible assets with finite lives over their estimated useful lives, which range between two and twenty years as follows:
Intangible assets consist of the following as of September 30, 20202021 and September 30, 2019:2020:
September 30, 2021 | September 30, 2021 | |||||||||||||||||
September 30, 2020 | September 30, 2019 | Intangible assets | Accumulated amortization | Total | ||||||||||||||
Patents | $ | 74,112 | $ | 74,112 | $ | 74,112 | $ | 28,329 | $ | 45,783 | ||||||||
Websites | 8,115 | 16,482 | 8,115 | 8,115 | — | |||||||||||||
Customer list and non-compete agreement | 6,702,024 | 5,722,024 | 6,892,024 | 4,940,456 | 1,951,568 | |||||||||||||
Design assets | 123,000 | — | 123,000 | 123,000 | — | |||||||||||||
Trademarks | 5,928 | 5,928 | 5,928 | 2,236 | 3,692 | |||||||||||||
Engineering trade secrets | 4,370,269 | 4,370,269 | 4,370,269 | 2,943,173 | 1,427,096 | |||||||||||||
Software | 1,120,000 | — | 870,000 | 325,519 | 544,481 | |||||||||||||
Intangible assets: | 12,403,448 | 10,188,815 | ||||||||||||||||
Less: accumulated amortization | (5,353,792 | ) | (2,758,733) | |||||||||||||||
Intangible assets, net | $ | 7,049,656 | $ | 7,430,082 | ||||||||||||||
Strategic Contract | 9,799,970 | 1,577,098 | 8,222,872 | |||||||||||||||
Infrastructure asset | 81,868 | — | 81,868 | |||||||||||||||
mPulse software | 741,846 | 238,161 | 503,685 | |||||||||||||||
Total | $ | 22,967,132 | $ | 10,186,087 | $ | 12,781,045 |
September 30, 2020 | |||||||||||
Intangible assets | Accumulated amortization | Total | |||||||||
Patents | $ | 74,112 | $ | 24,471 | $ | 49,641 | |||||
Websites | 8,115 | 8,115 | — | ||||||||
Customer list and non-compete agreement | 6,702,024 | 2,923,592 | 3,778,432 | ||||||||
Design assets | 123,000 | 41,000 | 82,000 | ||||||||
Trademarks | 5,928 | 1,805 | 4,123 | ||||||||
Engineering trade secrets | 4,370,269 | 2,331,858 | 2,038,411 | ||||||||
Software | 1,120,000 | 22,951 | 1,097,049 | ||||||||
mVSO software | 437,135 | 132,813 | 304,322 | ||||||||
mPulse software | 741,846 | 69,965 | 671,881 | ||||||||
Total | $ | 13,582,429 | $ | 5,556,570 | $ | 8,025,859 |
Amortization expense for the years ended September 30, 20202021 and 20192020 was $2,603,4274,848,179 and $1,858,5592,767,345, respectively., respectively.
During the year ended September 30, 2021, the Company recorded an impairment of $554,322 related to write-off of software. There was no impairment during the year ended September 30, 2020.
The strategic contract relates to supply of a critical input to our digital currency mining business at significantly low prices compared to market. During the year September 30, 2021, the initial allocation of $7,457,970 was adjusted by $2,342,000. The strategic contract is now carried at $9,799,970net of accumulated amortization of $1,577,098.
The Company expects to record amortization expense of intangible assets over the next 5 years and thereafter as follows:
Year | September 30, 2021 | |||
2022 | $ | 4,494,533 | ||
2023 | 2,884,225 | |||
2024 | 2,471,413 | |||
2025 | 1,975,742 | |||
2026 | 398,644 | |||
Thereafter | 556,488 | |||
In | $ | 12,781,045 |
F-30 |
6. IMPAIRMENT
During the year ended September 30, 2021, the Company has incurred the following impairment loss on goodwill, digital currency and software. The Company did not incur any impairment loss for the year ended September 30, 2020.
Amount ($) | ||||
Impairment of digital currency | 6,608,076 | |||
Impairment of goodwill | 5,723,388 | |||
Impairment of software | 554,322 | |||
Total impairment loss | 12,885,786 |
2021 | $ | 2,909,648 | |||
2022 | 2,526,034 | ||||
2023 | 1,010,126 | ||||
2024 | 567,260 | ||||
2025 | 4,294 | ||||
Thereafter | 32,294 | ||||
Total | $ | 7,049,656 |
For impairment relating to digital currency and goodwill, refer to Digital Currency and Business combinations, Intangible Assets and Goodwill. (See Note 2)
8. FIXED ASSETS
7. PROPERTY AND EQUIPMENT
Fixed assets
Property and equipment consist of the following as of September 30, 20202021 and September 30, 2019:2020:
September 30, 2020 | September 30, 2019 | September 30, 2021 | September 30, 2020 | ||||||||||
Mining equipment | $ | 123,147,843 | — | ||||||||||
Land and building | 11,048,299 | — | |||||||||||
Machinery and equipment | $ | 193,042 | $212,082 | 376,163 | 193,042 | ||||||||
Leasehold improvements | 17,965 | — | 72,577 | 17,965 | |||||||||
Furniture and fixtures | 82,547 | 75,121 | 107,660 | 82,547 | |||||||||
Construction in progress | 10,498,311 | — | |||||||||||
Total | 293,554 | 287,203 | 145,250,853 | 293,554 | |||||||||
Less: accumulated depreciation | (175,560 | ) | (142,133) | (7,657,982 | ) | (175,560) | |||||||
Fixed assets, net | $ | 117,994 | $145,070 | ||||||||||
Property and equipment, net | $ | 137,592,871 | $ | 117,994 |
Depreciation expense for the years ended September 30, 20202021 and 20192020 was $68,9047,396,189 and $44,42268,904, respectively. During the year ended September 30, 2020, the Company disposed of $48,898of fixed assetsproperty and equipment resulting in a loss on disposal of $5,218. There was no disposal made during the year ended September 30, 2021.
The Company has purchased mining equipment for approximately $123.15 million during the year ended September 30, 2021. This primarily consisted of miners of $120.4 million with the remaining consisting of ancillary mining equipment.
College Park Data Center: On May 19, 2021, the Company exercised its purchase option on the ATL lease agreement to purchase property for $4.4 million in College Park, Georgia. The property contains approximately six acres of land and includes approximately 41,000 square feet of office and warehouse space. ATL utilizes, and intends to continue utilizing, this space for cryptocurrency mining activities.
Construction in progress: The Company is expanding its facility in Atlanta, a build out adjacent to the ATL data center mentioned above.
Norcross Data Center: On August 6, 2021, CSRE Properties Norcross, LLC, the Company’s wholly owned subsidiary, purchased certain real property located in Norcross, Georgia for $6,550,000 plus transaction and settlement costs. The property consists of approximately seven acres of land and includes an approximately 87,000 square foot office building. The Company intends to utilize this office space to conduct certain of its cryptocurrency mining activities.
The Company has purchase commitments for approximately $144.04 million related to purchase of miners as of September 30, 2021, and the Company has paid $85.11 million towards these commitments as of the end of this period. As of September 30, 2021, the remaining commitment for future payments was $58.93 million.
As of September 30, 2021, the Company has outstanding deposits worth $87.9 million to premier suppliers and manufacturers for securing our purchases of mining equipment.
9. LOANS
Long term
September 30, 2020 | September 30, 2019 | ||||||
Long-term loans payable consist of the following: | |||||||
Promissory notes | $ | 531,169 | $ | 150,000 | |||
Total | $ | 531,169 | $ | 150,000 |
Current 8. LOANS
September 30, 2020 | September 30, 2019 | ||||||
Current loans payable consist of the following: | |||||||
Promissory notes | $ | — | $ | 50,000 | |||
Insurance financing loans | — | 17,467 | |||||
Current loans payable | — | 67,467 | |||||
Unamortized debt discount | — | — | |||||
Total, net of unamortized discount | $ | — | $ | 67,467 |
Promissory Notes
On September 5, 2017, the Company executed a 9% secured promissory note with a face value of $150,000 with an investor. Under the terms of the promissory note, the Company received $150,000 and agreed to make monthly interest payments and repay the note principal 24 months from the date of issuance. On September 5, 2019, the investor extended the maturity date to September 5, 2021 and the modification was not deemed substantial. The note is secured by shares which are held in escrow and would be issued to the note holder only in the case of an uncured default. AsLong-term loans as of September 30, 2021 and 2020 the Company owed $0 in principal and $0 in accrued interest under the termsconsist of the agreement and recorded interest expense of $12,426 and $10,096 during the years ended September 30, 2020 and 2019, respectively.following:
September 30, 2021 | September 30, 2020 | ||||||
Promissory notes | $ | — | $ | 531,169 | |||
Total | $ | — | $ | 531,169 |
On December 5, 2017, the Company executed a 9%Promissory Notes secured promissory note with a face value of $50,000 with an investor. Under the terms of the promissory note the Company received $50,000 and agreed to make monthly interest payments and repay the note principal 24 months from the date of issuance. The note was secured by shares which would be issued to the note holder only in the case of an uncured default. The Company repaid all principal and outstanding interest on December 5, 2019 and the shares of common stock held as collateral were returned to treasury and cancelled on January 13, 2020. The Company recorded interest expense of $802 and $3,367 for the years ended September 30, 2020 and 2019, respectively.
On May 7, 2020, the Company applied for a loan from Celtic Bank Corporation, as lender, pursuant to the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), as administered by the U.S. Small Business Administration (the "SBA"). On May 15, 2020, the loan was approved, and the Company received the proceeds from the loan in the amount of $531,169 (the(the “PPP Loan”). The PPP Loan tookCompany applied for and received loan forgiveness from the form of a promissory note issued by the Company that maturesSBA on May 7, 2022 and bears interest at a rate of 1.0% per annum. MonthlyMarch 23, 2021. The entire principal balance and interest payments, less the amount of any potential forgiveness (discussed below), will commencecharges were forgiven. The gain on December 7, 2020. The PPP Loan provides for customary events of default, including, among others, those relating to failure to make payments thereunder. Borrower may prepay the principal of the PPP Loan at any time without incurring any prepayment penalties. The PPP Loan is non-recourse against any individual shareholder, except to the extent that such party uses the loan proceeds for an unauthorized purpose.
All or a portion of the PPP Loan may be forgiven by the SBA and lender upon application by the Company and upon documentation of expenditures in accordance with the SBA requirements. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, and covered utilities during the applicable period beginning on the date of loan approval. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee in excess of $100,000, prorated annually. Not more than 25% of the forgiven amount may be for non-payroll costs. Forgiveness is reduced if full-time headcount declines, or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25%. In the event the PPP Loan, or any portion thereof, is forgiven pursuant to the PPP, the amount forgiven is applied to outstanding principal. The Company recorded interest expense of $2,125531,169 and $0 for the years ended September 30, 2020 and 2019, respectively.
Insurance financing loans
On February 11, 2019, the Company executed an unsecured 5.6% installment loan with a total face value of $78,603 with a financial institutional to finance its insurance policies. Under the terms of the installment notes the Company received $76,800 and agreed to make equal payments and repay the note 10 months from the date of issuance. As of September 30, 2019, $17,467is included in principal remained outstanding. The Company repaid all principal and outstanding interest on November 4, 2019.
10. CONVERTIBLE NOTES PAYABLE
Securities Purchase Agreement – December 31, 2018
On December 31, 2018, the Company entered into a Securities Purchase Agreement (the “SPA”) with an otherwise unaffiliated third-party institutional investor (the “Investor”), pursuant to which the Company issued to the Investor a Senior Secured Redeemable Convertible Debenture (the “Debenture”)other income in the aggregate face valueconsolidated statements of $5,250,000. The note is secured by all assets of the Company. The Debenture has a maturity date of two years from the issuance dateoperations and the Company has agreed to pay compounded interest on the unpaid principal balance of the Debenture at the rate equal 7.5% per annum. Interest is payable on the date the applicable principal is converted or on maturity. The interest must be paid in cash and, in certain circumstances, may be paid in shares of common stock.
The transactions described above closed on December 31, 2018. In connection with the issuance of the Debenture and pursuant to the terms of the SPA, the Company issued to the Investor shares of common stock and a Common Stock Purchase Warrant to acquire up to 308,333 shares of common stockcomprehensive loss for a term of three years (the “Warrant”) on a cash-only basis at an exercise price of per share with respect to Warrant Shares, with respect to Warrant Shares, with respect to Warrant Shares and with respect to Warrant Shares. The warrants and shares issued were fair valued and a debt discount of $4,995,000 was recorded as a result of the issuance of the warrants and shares and the recognition of a beneficial conversion feature on the Debenture. The Company also paid a $5,000 due diligence fee prior to receiving the funding which was also recorded as a debt discount.
Pursuant to the terms of the SPA, the Investor agreed to tender to the Company the sum of $5,000,000, of which the Company received the full amount as of the closing.
Prior to the maturity date, provided that no trigger event has occurred, the Company will have the right at any time upon 30 trading days’ prior written notice, in its sole and absolute discretion, to redeem all or any portion of the Debenture then outstanding by paying to the Investor an amount equal to 140% of the of the portion of the Debenture being redeemed.
The Investor may convert the Debenture into shares of the Company’s common stock at a conversion price equal to 95% of the mathematical average of the 5 lowest individual daily volume weighted average prices of the common stock, less $0.50 per share, during the period beginning on the issuance date and ending on the maturity date subject to certain floor price restrictions. In the event certain equity conditions exist, the Company may require that the Investor convert the Debenture. In no event shall the Debenture be allowed to affect a conversion if such conversion, along with all other shares of Company common stock beneficially owned by the Investor and its affiliates would exceed 4.99% of the outstanding shares of the common stock of the Company.
While the note is outstanding if Triggering Events occur the conversion rate may be decreased by 10% and the interest rate increased by 10% for each Triggering Event which may result in the issuance of additional shares.
On March 4, March 13, and May 1, 2020 the Company entered into amendments (the “Amendments”) with the Investor.
The Amendments amended the SPA and Debenture, as follows:
On January 7, 2019, the Investor converted $2,500,000 in principal and $875,000in interest as a conversion premium, for shares of the Company common stock at an effective conversion price of $18.90, due to a trigger event for the Company not filing its annual report on Form 10-K for the fiscal year ended September 30, 2018 on or before December 31, 2018.
On March 6, 2019, the Investor converted $1,000,000 in principal and $350,000 in interest as a conversion premium, for shares of the Company common stock at an effective conversion price of $18.90, due to a trigger event for the Company not filing its annual report on Form 10-K for the fiscal year ended September 30, 2018 on or before December 31, 2018.
On July 9, 2019, in accordance with the terms of the agreement the Investor was issued an additional shares of common stock due to the decrease in stock price resulting in an effective conversion price of $15.06.
On July 16, 2019, in accordance with the terms of the agreement the Investor was issued an additional 18,246 shares of common stock due to the decrease in stock price resulting in an effective conversion price of $15.06.
On July 19, 2019, the Investor converted $500,000 in principal and $175,000 in interest as a conversion premium, for shares of the Company common stock at an effective conversion price of $15.00 due to a trigger event for the Company not filing its annual report on Form 10-K for the fiscal year ended September 30, 2018 on or before December 31, 2018.
On August 23, 2019, in accordance with the terms of the agreement the Investor was issued an additional shares of common stock due to the decrease in stock price resulting in an effective conversion price of $7.60.
On September 16, 2019, in accordance with the terms of the agreement the Investor was issued an additional shares of common stock due to the decrease in stock price resulting in an effective conversion price of $7.30.
On October 17, 2019, in accordance with the terms of the agreement the Investor was issued an additional shares of common stock due to the decrease in stock price resulting in an effective conversion price of $3.74.
On December 5, 2019, in accordance with the terms of the agreement the Investor was issued an additional shares of common stock due to the decrease in stock price resulting in an effective conversion price of $3.15.
On February 10, 2020, in accordance with the terms of the agreement the Investor was issued an additional shares of common stock due to the decrease in stock price resulting in an effective conversion price of $3.15.
On February 21, 2020, in accordance with the terms of the agreement the Investor was issued an additional shares of common stock due to the decrease in stock price resulting in an effective conversion price of 2.69.
On March 2, 2020, in accordance with the terms of the agreement the Investor was issued an additional shares of common stock due to the decrease in stock price resulting in an effective conversion price of $1.87.
On March 5, 2020, in accordance with the terms of the agreement the Investor was issued an additional shares of common stock due to the decrease in stock price resulting in an effective conversion price of $1.83.
On March 13, 2020, in accordance with the terms of the agreement the Investor was issued an additional shares of common stock due to the decrease in stock price resulting in an effective conversion price of $1.50.
On March 20, 2020, in accordance with the terms of the agreement the Investor was issued an additional shares of common stock due to the decrease in stock price resulting in an effective conversion price of $1.50.
On April 7, 2020, in accordance with the terms of the agreement the Investor was issued an additional shares of common stock due to the decrease in stock price resulting in an effective conversion price of $1.50.
On April 9, 2020, in accordance with the terms of the agreement the Investor was issued an additional shares of common stock due to the decrease in stock price resulting in an effective conversion price of $1.50.
On April 15, 2020, the Investor converted $1,250,000 in principal and $437,500 in interest, for shares of the Company common stock at an effective conversion price of $1.50 due to a trigger event for the Company not filing its annual report on Form 10-K for the fiscal year ended September 30, 2018 on or before December 31, 2018. As of September 30, 2020, the Debenture was fully converted into shares of the Company’s common stock.
The aggregate debt discount has been accreted and charged to interest expenses as a financing expense in the amount of $783,474 and $4,466,526 during the year ended September 30, 2020 and 2019, respectively.
Securities Purchase Agreement – April 17, 20192021.
On April 17, 2019, the Company entered into a Securities Purchase Agreement (the “Agreement”) with an otherwise unaffiliated third-party institutional investor (the “Investor”), pursuant to which the Company agreed to issue to the Investor a $10,750,000 face value Senior Secured Redeemable Convertible Promissory Note (the “Note”) with a 7.5% original issue discount, shares of our Series B Preferred Stock with a original issue discount, a Common Stock Purchase Warrant (the “Warrant”) on a cash-only basis to acquire up to 230,000 shares (the “Warrant Shares”) of our common stock and shares of our Common Stock. The aggregate purchase price for the Note, the Series B Preferred Stock the Warrant and the Common Stock is $20,000,000. (See Notes 13 and 14 for additional details.) The Note was secured by all assets of the Company.
Pursuant to the first closing of the Agreement, which occurred on April 18, 2019, the Investor agreed to tender to the Company the sum of $10,000,000, for the Note, the Common Stock and the Warrant. No additional closings to sell the preferred stock have occurred and the Series B preferred stock was removed under the amendments to the Agreement discussed below.
The Note has a maturity date of two years from the issuance date and the Company has agreed to pay compounded interest on the unpaid principal balance of the Note at the rate equal 7.5% per annum. Interest is payable on the date the applicable principal is converted or on maturity. The interest must be paid in cash and, in certain circumstances, may be paid in shares of common stock.
Prior to the maturity date, provided that no trigger event has occurred, the Company will have the right at any time upon 30 trading days’ prior written notice, in its sole and absolute discretion, to redeem all or any portion of the Note then outstanding by paying to the Investor an amount equal to 145% of the of the portion of the Note being redeemed.9. LEASES
The Investor may convert the Note into shares of the Company’s common stock at a conversion price equal to 90% of the mathematical average of the 5 lowest individual daily volume weighted average prices of the common stock, less $0.75 per share, during the period beginning on the issuance date and ending on the maturity date subject to certain floor price restrictions. In the event certain equity conditions exist, the Company may require that the Investor convert the Note. In no event shall the Note be allowed to effect a conversion if such conversion, along with all other shares of Company common stock beneficially owned by the Investor and its affiliates would exceed 4.99% of the outstanding shares of the common stock of the Company.
While the Note is outstanding if Triggering Events occur the conversion rate may be decreased by 10% and the interest rate increased by 10% for each Triggering Event which may result in the issuance of additional shares.
On March 4, March 13, and May 1, 2020 the Company entered into amendments (the “Amendments”) with the Investor.
The Amendments amended the Agreement and Note, as follows:
During the year ended September 30, 2020, the Investor converted $10,750,000 in principal and $1,612,500 in interest, for shares of the Company common stock at an effective conversion price of $1.50.
As of September 30, 2020, the Note was fully converted into shares of the Company’s common stock.
The aggregate debt discount has been accreted and charged to interest expenses as a financing expense in the amount of $8,320,205 and $2,429,795 during the year ended September 30, 2020 and 2019, respectively.
11. LEASES
On October 1, 2019, the Company adopted the amendments to ASC 842, Leases, which requires lessees to recognize lease assets and liabilities arising from operating leases on the balance sheet. The Company adopted the new lease guidance using the modified retrospective approach and elected the transition option issued under ASU 2018-11, Leases (Topic 842) Targeted Improvements, allowing entities to continue to apply the legacy guidance in ASC 840, Leases, to prior periods, including disclosure requirements. Accordingly, prior period financial results
The Company’s operating leases are office spaces and disclosures have not been adjusted.finance leases primarily in relation to the equipment used at its data center.
The Company's lease costs recognized in the Consolidated Statements of Income and Comprehensive Loss consist of the following:
2021 | 2020 | ||||||
Operating lease cost (1) | $ | 340,440 | $ | 117,223 | |||
Finance lease cost: | |||||||
Amortization of right-of-use assets | 303,292 | — | |||||
Interest on lease obligations | $ | 42,992 | $ | — |
(1) Included in general and administrative expenses
Other lease information is as follows:
Fiscal Years Ended September 30, | |||||||
2021 | 2020 | ||||||
Cash paid for amounts included in measurement of lease obligations: | |||||||
Operating cash flows from operating leases | $ | 319,061 | $ | 43,986 | |||
Financing cash flows from finance leases | 288,602 | — |
Operating cash flows from finance leases is $42,992 for the year ended September 30, 2021.
2021 | 2020 | |||
Weighted-average remaining lease term -operating leases | 5 years | 0.4 years | ||
Weighted-average remaining lease term - finance leases | 3.2 years | — | ||
Weighted-average discount rate - operating leases | 4.5% | 10% | ||
Weighted-average discount rate - finance leases | 5.5% | — |
The Company has operating leases under which it leases its branch offices and corporate headquarters, one of which is with a related party. Upon adoption of the new lease guidance, on October 1, 2019, the Company recorded a right of use asset and corresponding lease liability of $85,280 and $85,280, respectively, on the consolidated balance sheet. As of September 30, 2020, the Company's operating lease right of use asset and operating lease liability totaled $40,711 and $41,294, respectively. A weighted average discount rate of 10% was used in the measurement of the right of use asset and lease liability as of October 1, 2019. As the rate implicit in the lease is not readily determinable, the Company's incremental collateralized borrowing rate is used to determine the present value of lease payments. This rate gives consideration to the applicable Company collateralized borrowing rates and is based on the information available at the commencement date. The Company has elected to apply the short-term lease measurement and recognition exemption to leases with an initial term of 12 months or less; therefore, these leases are not recorded on the Company’s Consolidated Balance Sheet, but rather, lease expense is recognized over the lease term on a straight-line basis.
The Company's leases have remaining lease terms between one year to two years, with a weighted average lease term of 0.4 years at September 30, 2020. Some leases include multiple year renewal options. The Company’s decision to exercise these renewal options is based on an assessment of its current business needs and market factors at the time of the renewal. Currently, the Company has no leases for which the option to renew is reasonably certain and therefore, options to renew were not factored into the calculation of its right of use asset and lease liability as of October 1, 2019.
The following is a schedule of the Company's operating lease liabilities by contractual maturity as of September 30, 2020:2021:
Fiscal year ending September 30, 2021 | 43,170 | |||
Total Lease Payments | 43,170 | |||
Less: imputed interest | (1,876) | |||
Total present value of lease liabilities | $ | 41,294 |
Fiscal Year | Operating Leases | Finance Leases | ||||||
2022 | $ | 316,908 | $ | 449,431 | ||||
2023 | 324,948 | 321,887 | ||||||
2024 | 333,234 | 142,428 | ||||||
2025 | 341,767 | 12,320 | ||||||
2026 | 299,039 | 1,853 | ||||||
Thereafter | 50,659 | — | ||||||
Total undiscounted lease obligations | 1,666,555 | 927,919 | ||||||
Less imputed interest | (175,035 | ) | (55,813) | |||||
Total presnet value of lease liabilities | $ | 1,491,520 | $ | 872,106 | ||||
Less: Current portion of lease obligations | $ | 256,195 | $ | 413,798 | ||||
Total lease obligations, net of current portion | $ | 1,235,325 | $ | 458,308 |
Total operating lease costs of $117,223 and $76,220 the years ended September 30, 2020 and 2019, respectively, were included as part of administrative expense.
12.
10. RELATED PARTY TRANSACTIONS
Zachary Bradford – Chief Executive Officer, Director and Former Chief Financial Officer
Fiscal year ending September 30, 2019 Agreement - During the yearyears ended September 30, 2019, the Company had a consulting agreement with ZRB Holdings, Inc., an entity wholly owned by Zachary Bradford, our Chief Executive Officer2021 and director, for management services. In accordance with this agreement, as amended, Mr. Bradford earned $430,437 during the year ended September 30, 2019. The agreement was terminated in at the end of the fiscal year ending September 30, 2019 when Mr. Bradford took the position of CEO and accepted the associated employment agreement.
During the year ended September 30, 2020, the Company paid Blue Chip Accounting, LLC (“Blue Chip”) $183,075 and $131,248, respectively, for accounting, tax, administrative services and reimbursement for office supplies. Blue Chip is 50%beneficially owned by Mr. Bradford. None of the services were associated with work performed by Mr. Bradford. The services consisted of preparing and filing tax returns, bookkeeping, accounting and administrative support assistance. The Company also sub-leases office space from Blue Chip (see note 11 for additional details).Chip. During the yearyears ended September 30, 2021 and 2020, $18,300 and $14,725, respectively, was paid to Blue Chip for rent.
Bryan Huber – Former Officer and Director
On August 28, 2018, the Company executed an agreement with Zero Positive, LLC an entity controlled by Mr. Huber. In accordance with the agreement with Zero Positive, LLC, Mr. Huber earned $125,154 and $171,202, during the year ended September 30, 2020 and 2019.2020.
On March 12, 2020, the Agreement was terminated upon the execution of a separation agreement. All amounts owed from all agreements totaling, $90,000,were paid in full.
On September 28, 2018, in connection with the consulting agreement executed with Zero Positive, LLC, the Company issued warrants to purchase 90,000shares of common stock at an exercise price of $8.00per share to Zero Positive. The warrants were valued at $2,607,096using the Black Scholes option pricing model based upon the following assumptions: term of 10 years, risk free interest rate of , a dividend yield of and volatility rate of . . As of September 30, 2020, warrants had vested, and the Company recorded an expense of $1,158,709 and 496,590during the year ended September 30, 2020 and 2019, respectively.2020.
There were no transactions during the year ended September 30, 2021.
Matthew Schultz- Executive Chairman of the Board and Former Chief Executive Officer
The Company had a consulting agreement with Matthew Schultz, our former Chief Executive Officer, for management services. In accordance with this agreement, as amended, Mr. Schultz, earned $0 and $445,437, respectively during years ended September 30, 2020 and 2019. The agreement was terminated on October 7, 2019 when Mr. Schultz stepped down as the CEO and took the position of Chairman of the Board.for management services. Mr. Schultz received $1,086,200as compensation for his services as chairman of the board during the year ended September 30, 2020. The agreement was terminated at the conclusion of fiscal year ending September 30, 2020 when Mr. Schultz’s position was changed from Chairman to Executive Chairman and he accepted the associated employment agreement.
The Company additionally entered into an agreement on November 15, 2019 with an organization to provide general investor relations and consulting services that Mr. Schultz is affiliated with. The Company paid the organization $49,500in fees plus $176,000in expense reimbursements for the year ended September 30, 2020. The agreement was terminated in March 2020.
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13.
11. STOCKHOLDERS’ EQUITY
Overview
Overview
The Company’s authorized capital stock consists of 2020,2021, there were shares of common stock issued and outstanding and shares of preferred stock issued and outstanding. shares of common stock and shares of preferred stock, par value per share. As of September 30,
As of September 30, 2020, there were
shares of common stock issued and outstanding and shares of preferred stock issued and outstanding.Amendment(s)
On December 5, 2019, the Board of Directors approved a reverse stock split of the Company’s common stock, par value 1:10 reverse stock split of the Company’s common stock. The reverse stock split took effect on December 11, 2019. Unless otherwise noted, impacted amounts and share information in the consolidated financial statements and notes thereto as of and for the fiscal year ended September 30, 2020, have been adjusted for the stock split as if such stock split occurred on the first day of the first period presented. There is no impact of this transaction in the year ended September 30, 2021. per share. On December 10, 2019, Financial Industry Regulatory Authority (“FINRA”) approved the
Amendment to Articles of Incorporation
On August 9, 2019, the Company filed a Certificate of Amendment to its Articles of Incorporation to increase its authorized shares of common stock from 100,000,000 to . The amendment was previously approved by written consent of the Company’s Board and more than a majority of the voting power of its stockholders and delivered to stockholders of record as of the close of business July 2, 2019 pursuant to a Definitive Information Statement on Schedule 14C. As a result of the reverse split mentioned above, the effect of the filed amendment reduced the authorized shares to .
On October 4, 2019, pursuant to Article IV of our Articles of Incorporation, our Board of Directors voted to increase the number of shares of preferred stock designated as Series A Preferred Stock from one million (. per share.
Under the Certificate of Designation for the Series A Preferred Stock, holders of shares of Series A Preferred Stock will beare entitled to quarterly dividends on 2% of our earnings before interest, taxes and amortization. The dividends are payable in cash or common stock. The company paid $177,502 in preferred stock dividends during the year ended September 30, 2021. The holders will also have a liquidation preference on the statestated value of $0.02 per share plus any accumulated but unpaid dividends. The holders are further entitled to have us redeem their Series A Preferred Stock for three shares of common stock in the event of a change of control and they are entitled to vote together with the holders of our common stock on all matters submitted to shareholders at a rate of forty-five (45) votes for each share held.
The rights of the holders of Series A Preferred Stock are defined in the relevant Amendment to the Certificate of Designation filed with the Nevada Secretary of State on October 9, 2019.
On October 2, 2020, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Nevada Secretary of State to increase its authorized shares of common stock to
.On March 16, 2021, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Nevada Secretary of State to increase its authorized shares of common stock to .
On September 17, 2021, the Company filed its First Amended and Restated Articles of Incorporation (the “Amended and Restated Articles”) with the Secretary of State of the State of Nevada, which Amended and Restated Articles became effective upon filing. The Amended and Restated Articles were previously approved by the Company’s Board, subject to stockholder approval, on July 16, 2021, and were approved by the Company’s stockholders at the Company’s Annual Meeting and, among other things, increased the Company’s authorized shares of common stock to
.
Certificate
Common Stock issuances for the year ended September 30, 2021
The Company issued Preferred Stock Designationthe Company’s common stock in connection with its underwritten equity offering at a price of per share for net proceeds of approximately $37.05 million. shares of
The Company issued $187.2 million. shares of the Company’s common stock in connection with its underwritten public equity offering at a price of per share for net proceeds of approximately
The Company issued $1.9 million and was fully expensed for in the prior year. The Company issued shares of common stock for the current year related to bonus compensation. The fair value of these shares is approximately $3.07 million. shares of common stock as settlement of accrued bonus compensation related to the year ended September 30, 2020. The fair value of these shares was approximately
The Company issued shares of common stock in relation to the acquisition of ATL, which includes shares held in escrow. The Company issued shares of common stock in relation to the acquisition of SWS, which includes shares held in escrow. (See Note 3 for additional details)
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The Company issued $815,000 which has been fully expensed during the year ended September 30, 2021. shares of common stock for services rendered for a total fair value of approximately
The Company issued shares of common stock in relation to the exercise of stock options and warrants. (See Notes 12 and 13 for additional details)
The Company issued 4,582 of the restricted stock units had been forfeited. (See Note 13 for additional details) restricted stock units to certain SWS employees as part of the transaction to incentivize the employees for retention purposes. These restricted stock units vest over a period of . As of September 30, 2021,
On April 16, 2019,June 3, 2021, the Company entered into an At The Market Offering Agreement (“ATM”) with H.C. Wainwright & Co., LLC, to create an at-the-market equity program under which the Company may, from time to time, offer and sell shares of its common stock having an aggregate gross offering price of up to $500,000,000 to or through H.C. Wainwright & Co., LLC. During the year ended September 30, 2021, the Company issued shares of the Company’s common stock under the ATM for net proceeds of $46.4 million. The shares were sold pursuant to a prospectus dated March 15, 2021 and a prospectus supplement dated June 3, 2021 filed with the SEC.
Common stock returned during the year ended September 30, 2021
As a result of an adjustment of holdback shares to actual milestones earned in relation to the p2k acquisition, 8,072 shares were returned and cancelled. (See Note 3 for additional details)
As a result of an adjustment of holdback shares pursuant to Article IVII and Schedule A of our Articlesthat certain Agreement and Plan of Incorporation,ATL Merger in connection with the Company’s Boardacquisition of Directors voted to designateATL, shares were returned and cancelled. (See Note 3 for additional details)
class of preferred stock entitled Series B Preferred Stock, consisting of up to one hundred thousand () shares, par value . Shares of the Series B Preferred Stock were never issued andlender on March 6, 2020, the Company withdrew the Certificate of Designation for the Series B Preferred Stock. At the time of withdrawal, no shares of Series B Preferred Stock were issued and outstanding.September 30, 2021. shares, held in escrow as collateral, were returned from a
Common Stock issuances during the year ended September 30, 2020
The Company issued 1,964,313 shares of common stock in accordance with the terms of the convertible debt agreement due to the decrease in stock price. (See Note 10 for additional details.)
The Company issued $54,000. shares of common stock for services rendered to independent consultants at a fair value of
The Company issued shares of common stock as a result of rounding related to the reverse stock split.
The Company issued p2k (See Note 5 for additional details.)p2k. shares of common stock in relation to the acquisition of
In relation to the Securities Purchase Agreement dated December 31, 2018, the Company issued $1,250,000 in principal and $437,500 in interest at an effective conversion price of $1.50. (See Note 10 for additional details) per share. shares of common stock for the conversion of
In relation to the Securities Purchase Agreement dated April 17, 2019, the Company issued $10,750,000 in principal and $1,612,500 in interest as a conversion premium at an effective conversion price of $1.50. (See Note 10 for additional details) per share. shares of common stock for the conversion of
The Company issued shares of common stock as board and executive compensation at a fair value of .
The Company issued $4,000,000. shares of common stock as a result of a registered direct offering resulting in total consideration of
The Company issued 15,000 common stock warrants. shares of common stock as a result of a cashless exercise of
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The Company issued 26,427 shares of common stock in relation to the acquisition of GridFabric (See Note 3 for additional details.)
Common stock returned during the year ended September 30, 2020
As a result of a note payoff on December 5, 2019, shares common stock were returned to treasury and cancelled on January 13, 2020.
As a result of the cancellation of an investor relations services contract, shares were returned to treasury and cancelled on February 10, 2020.
Series A Preferred Stock issuances during the year ended September 30, 2020
On October 4, 2019, the Company authorized the issuance of a total of seven hundred and fifty thousand ($15,000 was recorded as a result of the stock issued. ) shares of its designated Series A Preferred Stock to members of its board of directors for services rendered. A fair value of per share was determined by the Company. Director fees of
Common Stock issuances during the year ended September 30, 2019
During the period commencing October 1, 2018 through December 31, 2018, the Company received $361,800 from 14 investors pursuant to private placement agreements with the investors to purchase shares of the Company’s par value common stock at a purchase price equal to for each share of common stock.
On September 11, 2018, the Company entered into an agreement with Regal Consulting, LLC for investor relations services. Under this agreement the Company agreed to issue shares of the Company’s common stock per month as compensation for services plus additional cash compensation. During the year ended September 30, 2019, the Company issued a total of shares of its common stock in accordance with the agreement. Stock compensation of was recorded as a result of the stock issued under the agreement.
On October 15, 2018, the Company entered into an agreement with a consultant for services. Under this agreement the Company agreed to issue shares of the Company’s common stock which vest evenly over a period from the agreement date. During the year ended September 30, 2019, the Company recorded stock compensation of was recorded as a result of the stock issued under the agreement.
On October 2, 2018, an investor exercised warrants to purchase 300 shares of the Company’s par value common stock at a purchase price equal to $3.63 for each share of Common stock. The Company receive $1,088 as a result of this exercise.
The Company issued shares in relation to a Securities purchase agreement executed on December 31, 2018. (See Note 10 for additional details.)
On December 31, 2018, the Company settled $25,000 of a promissory note through the issuance of shares of the Company’s common stock. The shares were valued at $51,225 and a $26,225 loss on settlement of debt was recorded as a result of the issuance.
During the year ended September 30, 2019, the Company issued shares of common stock to three investors in connection with the cashless exercise of 225,000 common stock warrants at an exercise price of $0.83.
On January 7, 2019, an investor converted $2,500,000 in principal and $875,000 in interest as a conversion premium, for shares of the Company common stock at an effective conversion price of $18.90.
On January 22, 2019, in accordance with a merger agreement the Company issued shares of the Company’s common stock.
On March 6, 2019, an investor converted $1,000,000 in principal and $350,000 in interest as a conversion premium, for shares of the Company common stock at an effective conversion price of $18.90. (See Note 10 for additional details.)
On April 9, 2019, an investor exercised warrants to purchase 900 shares of the Company’s par value common stock at a purchase price equal to $3.63 for each share of Common stock. The Company received $3,268 as a result of this exercise.
The Company issued shares in relation to a Securities purchase agreement executed on April 17, 2019. (See Note 10 for additional details.)
On June 12, 2019, the Company entered into an agreement with SylvaCap Media for investor relations services. Under this agreement the Company agreed to issue shares of the Company’s common stock as compensation for services for a six month period plus additional cash compensation. The 25,000 shares vest upon issuance but if the agreement is terminated within 90 days of execution the shares are to be returned and cancelled. On September 10, 2019, the Company terminated the agreement and as a result the shares are required to be returned and cancelled. No stock compensation expense has been recognized as the shares did not vest as a result of the termination. As of September 30, 2019, the shares had not yet been returned.
On July 9, 2019, in accordance with the terms of the agreement the investor was issued an additional shares of common stock due to the decrease in stock price resulting in an effective conversion price of $15.06. (See Note 10 for additional details.)
On July 16, 2019, in accordance with the terms of the agreement the investor was issued an additional shares of common stock due to the decrease in stock price resulting in an effective conversion price of $15.06. (See Note 10 for additional details.)
On July 19, 2019, an investor converted $500,000 in principal and $175,000 in interest as a conversion premium, for shares of the Company common stock at an effective conversion price of $14.96. (See Note 10 for additional details.)
On August 23, 2019, in accordance with the terms of the agreement the investor was issued an additional shares of common stock due to the decrease in stock price resulting in an effective conversion price of $7.60. (See Note 10 for additional details.)
On September 16, 2019, in accordance with the terms of the agreement the investor was issued an additional shares of common stock due to the decrease in stock price resulting in an effective conversion price of $7.30. (See Note 10 for additional details.)12. STOCK WARRANTS
Common stock returned during the year ended September 30, 2019
As a result of a conversion of a note on September 21, 2018, shares common stock which were previously issued as a commitment fee were returned to treasury and cancelled on December 21, 2018.
As a result of note payoffs, shares of common stock which were previously issued as a commitment fee returned to treasury and cancelled.
14. STOCK WARRANTS
The following is a summary of stock warrant activity during the years ended September 30, 20202021 and September 30, 2019.2020.
Number of Warrant Shares | Weighted Average Exercise Price | Number of Warrant Shares | Weighted Average Exercise Price ($) | |||||||||||
Balance, September 30, 2018 | $ | 8.90 | ||||||||||||
Warrants granted | ||||||||||||||
Warrants expired | ||||||||||||||
Warrants canceled | ||||||||||||||
Warrants exercised | ( | ) | ||||||||||||
Balance, September 30, 2019 | $ | 21.70 | $ | 21.70 | ||||||||||
Warrants granted | $ | |||||||||||||
Warrants expired | ||||||||||||||
Warrants canceled | ||||||||||||||
Warrants exercised | ( | ) | ( | ) | ||||||||||
Balance, September 30, 2020 | $ | 21.78 | 21.78 | |||||||||||
Warrants granted | ||||||||||||||
Warrants expired | ( | ) | ||||||||||||
Warrants canceled | — | |||||||||||||
Warrants exercised | ( | ) | ||||||||||||
Balance, September 30, 2021 | 30.72 |
As of September 30, 2020,2021, the outstanding warrants have a weighted average remaining term of was years and an intrinsic value of $1,702,464389,243.
During the year ended September 30, 2021, a total of $3.36 and $20.00, for total consideration of $2,883,623. shares of the Company’s common stock were issued in connection with the exercise of common stock warrants at exercise prices ranging from
On September 30, 2021, a total of 76,800 common stock warrants at exercise prices ranging from $0.83 to $3.67. shares of the Company’s common stock were issued in connection with the cashless exercise of
As of September 30, 2020,2021, there are warrants exercisable to purchase shares of common stock in the Company and 5,714 unvested warrants outstanding that cannot be exercised until vesting conditions are met. 996,198418,834 of the warrants require a cash investment to exercise as followsfollows: , required a cash investment of per share,share. require a cash investment of $15.00 per share, require a cash investment of per share, require a cash investment of per share, require ana cash investment of per share, require ana cash investment of per share, require ana cash investment of per share, require a cash investment of per share and require a cash investment of per share. 302,867196,720 of the outstanding warrants contain provisions allowing a cashless exercise at their respective exercise prices.
During the year ended September 30, 2020, the Company recognized in stock-based compensation for the outstanding warrants.
As of September 30, 2020, there was no remaining unamortized stock-based compensation related to outstanding warrants.
Warrant activity for the year ended September 30, 2020
On September 25, 2020, a total of 15,000 common stock warrants at an exercise price of $8.00. shares of the Company’s common stock were issued in connection with the cashless exercise of
Warrant activity for the year ended September 30, 2019
On October 15, 2018, the Company entered into an agreement with a consultant for services. Under this agreement the Company agreed to issue warrants to purchase shares of the Company’s common stock at an exercise price of for a period of five years which vest evenly over a six-month period from the agreement date. During the year ended September 30, 2019, the Company recorded stock compensation of as a result of the stock issued under the agreement. The warrants were valued using the Black-Scholes valuation model.
On December 31, 2018, in connection with a Securities purchase agreement (see Note 10 for additional details) the Company issued Common Stock Purchase Warrants to acquire up to shares of common stock for a term of three years on a cash-only basis at an exercise price of per share with respect to Warrant Shares, with respect to Warrant Shares, with respect to Warrant Shares and with respect to Warrant Shares.
On January 22, 2019, in accordance with a merger agreement, CleanSpark issued; a five year warrant to purchase shares of CleanSpark common stock at an exercise price of per share, and a five year warrant to purchase shares of CleanSpark common stock at an exercise price of per share. The warrants were valued at $1,102,417 and $1,102,107, respectively.
On April 18, 2019, in connection with a Securities purchase agreement (see Note 10 for additional details) the Company issued Common Stock Purchase Warrants to acquire up to 230,000 shares of common stock for a term of three years on a cash-only basis at an exercise price of per share with respect to Warrant Shares, with respect to Warrant Shares, with respect to Warrant Shares, with respect to Warrant Shares and with respect to 5,000 Warrant Shares.
The Black-Scholes model utilized the following inputs to value the warrants granted during the year ended September 30, 2019:
During the year ended September 30, 2019, the Company issued shares of common stock in connection with the cashless exercise of 225,000 common stock warrants at an exercise price of $0.83.
The Company adoptedsponsors a stock-based incentive compensation plan known as the 2017 Incentive Plan (the “Plan”), which was established by the Board of Directors of the Company on June 19, 2017. A total of shares were initially reserved for issuance under the Plan. As of September 30, 2020, there were shares available for issuance under the plan.
Amendment to 2017 Incentive Plan
On October 7, 2020, the Company executed that certaina first amendment to the 2017 Equity Incentive Plan to increase its optionshare pool from to shares of common stock. (See Note 20 for additional details)
On September 15, 2021, the shareholders approved and the Company executed a second amendment to (i) increase the number of shares of common stock authorized for issuance under the Plan by an additional shares, resulting in an aggregate of shares of common stock authorized for issuance under the Plan, and (ii) revise Section 19 of the Plan to more closely align with the provisions of Section 422 of the Internal Revenue Code of 1986, as amended, and Section 17.2 of the Plan.
As of September 30, 2021, there were shares available for issuance under the Plan.
The Plan allows the Company to grant incentive stock options, non-qualified stock options, stock appreciation right,rights, or restricted stock.stock units. The incentive stock options are exercisable for up to ten years, at an option price per share not less than the fair market value on the date the option is granted. The incentive stock options are limited to persons who are regular full-time employees of the Company at the date of the grant of the option. The option vesting schedule for options granted is determined by the Board of Directors at the time of the grant. The Plan provides for accelerated vesting of unvested options if there is a change in control, as defined in the Plan.
Non-qualified options may be granted to any person, including, but not limited to, employees, independent agents, consultants and attorneys, who the Company’s Board believes have contributed, or will contribute, to the success of the Company. Non-qualified options may be issued at option prices of less than fair market value on the date of grant and may be exercisable for up to ten years from date of grant. As of September 30, 2021, no non-qualified options were granted to any person.
The option vesting scheduleCompany recognized and for options granted is determined by the Board of Directors atyears ended September 30, 2021 and September 30, 2020, respectively, in stock-based compensation under the time of the grant. The Plan provides for accelerated vesting of unvested options if there is a change in control, as defined in the Plan.stock-based incentive compensation plan.
STOCK OPTIONS
The following is a summary of stock option activity during the years ended September 30, 2020 and year ended September 30, 2019.2021:
Number of Option Shares | Weighted Average Exercise Price | Number of Option Shares | Weighted Average Exercise Price ($) | |||||||||||
Balance, September 30, 2018 | $ | |||||||||||||
Options granted | $ | |||||||||||||
Options expired | ||||||||||||||
Options canceled | ||||||||||||||
Options exercised | ||||||||||||||
Balance, September 30, 2019 | $ | |||||||||||||
Options granted | $ | |||||||||||||
Options expired | ( | ) | ||||||||||||
Options canceled | ( | ) | ||||||||||||
Options exercised | ||||||||||||||
Balance, September 30, 2020 | $ | |||||||||||||
Options granted | ||||||||||||||
Options expired | ( | ) | ||||||||||||
Options canceled | ( | ) | ||||||||||||
Options exercised | ( | ) | ||||||||||||
Balance, September 30, 2021 |
As of September 30, 2020,2021, there are options exercisable to purchase shares of common stock in the Company and unvested options outstanding that cannot be exercised until vesting conditions are met. As of September 30, 2020,2021, the outstanding options have a weighted average remaining term of years and an intrinsic value of .
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Option activity for the year ended September 30, 2021
During the year ended September 30, 2020,2021, a total of shares of the Company’s common stock were issued in connection with the exercise of common stock options at exercise prices ranging from , for a total consideration of $867,308.
During the year ended September 30, 2021, the Company granted options with a total fair value of $21,582,485 to purchase shares of common stock to employees. The Company offset $953,125 of stock compensation expense against bonuses accrued during the prior year and recognized $7,731,606 during the year. The shares were granted at quoted market prices ranging from into and were valued at issuance using the Black Scholes model.
The Black-Scholes model utilized the following inputs to value the options granted during year ended September 30, 2021:
Fair value assumptions Options: | September 30, 2021 | ||
Risk free interest rate | - | ||
Expected term (years) | - | ||
Expected volatility | to | ||
Expected dividends |
As of September 30, 2021, the Company expects to recognize of stock-based compensation for the non-vested outstanding stock options.options over a weighted-average period of years.
Option activity for the year ended September 30, 2020
During the year ended September 30, 2020, the Company issued sharesoptions were granted atwith exercise prices equal to the then current quoted market prices ranging from to . The options were valued at issuance using the Black Scholes model and stock compensation expense of $716,740 was recorded as a result of the issuances. options to purchase shares of common stock to employees, the
The Black-Scholes model utilized the following inputs to value the options granted during year ended September 30, 2020:
Fair value assumptions | September 30, 2020 | ||||
Risk free interest rate | |||||
Expected term (years) | - | ||||
Expected volatility | |||||
Expected dividends |
AsRESTRICTED STOCK UNITS
The Company grants RSUs that contain either a) service conditions, or b) performance conditions, or c) market performance conditions. RSUs containing service conditions vest monthly or annually. RSUs containing performance conditions generally vest over 1 year, and the number of shares earned depends on the achievement of predetermined Company metrics.
When the criteria for vesting is met, the Company recognizes the expense equal to the total fair value of the common stock price on the grant date. All of the RSUs issued prior to September 30, 2020, the Company expects to recognize of stock-based compensation for the non-2021 were either vested outstanding options over a weighted-average period of years.
Option activity for the year ended September 30, 2019
During the year ended September 30, 2019, the Company issued options to purchase shares of common stock to employees, the shares were granted at quoted market prices ranging from to . The options were valued at issuance using the Black Scholes model and stock compensation expense of $326,100 was recorded as a result of the issuances.
The Black-Scholes model utilizedfollowing table summarizes the following inputs to valueperformance-based restricted stock units at the options granted duringmaximum award amounts based upon the year ended September 30, 2019:respective performance share agreements. Actual shares that will vest depend on the attainment of the performance-based criteria.
Number of Shares | Weighted Average Grant- Date Fair Value Per Share | Aggregate Intrinsic Value | ||||||||||
Outstanding at September 30, 2020 | — | |||||||||||
Granted | $ | $ | ||||||||||
Vested | (558,475 | ) | $ | $ | ||||||||
Forfeited | ( | ) | $ | $ | ||||||||
Outstanding at September 30, 2021 | $ | 27.73 |
16. INCOME TAXES
As of September 30, 2021, the Company had unrecognized compensation cost related to restricted stock unit awards that will be recognized over a weighted average period of years.
The Company recognized stock-based compensation expenses related to restricted stock units, of for fiscal 2021. The Company recognized in stock-based compensation expense for restricted stock units issued in 2021 related to 2020 bonuses.
14. INCOME TAXES
The Company provides for income taxes under FASB ASC 740, Accounting for Income Taxes. FASB ASC 740 requires the use of an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect currently.
FASB ASC 740 requires the reduction of deferred tax assets by a valuation allowance, if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In the Company’s opinion, it is uncertain whether they will generate sufficient taxable income in the future to fully utilize the net deferred tax asset. Accordingly, a valuation allowance equal to the deferred tax asset has been recorded. The total deferred tax asset is approximately $11.038.8 million as of September 30, 20202021 which is calculated by multiplying a 21% estimated tax rate by the cumulative net operating loss (NOL)(“NOL”) of approximately $52.5184.6 million.
Due to the enactment of the Tax Reform Act of 2017, we have calculated our deferred tax assets using an estimated corporate tax rate of 21%. USU.S. Tax codes and laws may be subject to further reform or adjustment which may have a material impact to the Company’s deferred tax assets and liabilities.
The significant components of the Company's deferred tax assets and liabilities as of September 30, 20202021 and 20192020 are as follows:
As of September 30, | 2021 | 2020 | ||||||
Cumulative tax net operating losses (in millions) | $ | 184.6 | $ | 52.5 | ||||
Deferred tax asset (in millions) | $ | 38.8 | $ | 11.0 | ||||
Valuation allowance (in millions) | (38.8 | ) | (11.0) | |||||
Current taxes payable | — | — | ||||||
Income tax expense | $ | — | $ | — |
As of September 30, | 2020 | 2019 | |||||
Cumulative tax net operating losses (in millions) | $ | 52.5 | $ | 42.3 | |||
Deferred tax asset (in millions) | $ | 11.0 | $ | 8.7 | |||
Valuation allowance (in millions) | (11.0 | ) | (8.7) | ||||
Current taxes payable | — | — | |||||
Income tax expense | $ | — | $ | — |
As of September 30, 2020,2021, and 2019,2020, the Company had gross federal net operating loss carryforwards of approximately $52.5184.6 million and $42.352.5 million, respectively.
The Company plans to file its U.S. federal return for the year ended September 30, 20202021 upon the issuance of this filing. Upon filing of the tax return for the year ended September 30, 20202021 the actual deferred tax asset and associated valuation allowance available to the Company may differ from management’smanagements estimates. The tax years 2015-2019 remained open to examination for federal income tax purposes by the major tax jurisdictions to which the Company is subject. No tax returns are currently under examination by any tax authorities.
17.15. COMMITMENTS AND CONTINGENCIES
Office leases
Utah Corporate Office
The Company has purchase commitments that are cancellable of approximately $144.04
On November 22, 2019, the company entered into a lease million related to relocate the corporate office to 1185 South 1800 West, Suite 3, Woods Cross, UT 84047. The agreement calls forpurchase of miners as of September 30, 2021, and the Company to makehas paid $85.11 million towards these commitments as of the end of this period. As of September 30, 2021, the remaining commitment for future payments ofwas $2,30058.93 in base rent per month through February 28, 2021. The lease term is on an annual basis beginning on March 1, 2020.million.
San Diego Office
On May 15, 2018, theThe Company executed ahas purchase commitments for infrastructure assets and other mining equipment of approximately 37 month$6,512,000 lease agreement, which commenced on July 1, 2018 at 4360 Viewridge Avenue, Suite C, San Diego, California. The agreement calls for the Company to make payments of $4,057 in base rent per month through July 31, 2021 subject to an annual 3% rent escalation. Future minimum lease payments under the operating leases for the facilities as of September 30, 2020, are2021 and the Company has paid $4,576,000 towards these commitments as follows:of end of this period.
The following table sets forth certain information concerning our obligations to make contractual future payments towards our agreements as of September 30, 2021:
2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | |
Recorded contractual obligations: | |||||||
Operating lease obligations | $316,908 | $324,948 | $333,234 | $341,767 | $299,039 | $50,659 | $1,666,555 |
Finance Lease obligations | 449,431 | 321,887 | 142,428 | 12,320 | 1,853 | — | 927,919 |
Miner equipment | 58,930,880 | 58,930,880 | |||||
Infrastructure assets | 1,936,000 | 1,936,000 | |||||
Total | $61,633,219 | $646,835 | $475,662 | $354,087 | $300,892 | $50,659 | $63,461,354 |
Fiscal year ending September 30, 2021 $43,170
Las Vegas Offices
On January 2, 2020, the Company entered into a sublease agreement for office space at 8475 S. Eastern Ave., Suite 200, Las Vegas, NV 89123. The agreement calls for the Company to make monthly payments of $1,575 in base rent through January 1, 2021. The lease term is on an annual basis beginning January 2, 2020.
The Company assumed p2k’s lease agreement entered into on October 17, 2017 at 7955 W. Badura Ave., Suite 1040, Las Vegas, NV 89113. The agreement calls for $1,801 in base rent through October 31, 2020. The lease expired on October 31, 2020. The Company did not renew this lease.
Contractual contingencies
On April 6, 2020, the Company entered into a joint venture agreement with a third party to procure, distribute, and supply Personal Protective Equipment (PPE) for hospitals and frontline medical personnel. The agreement is effective until December 31, 2020.
The Company contributed capital in the amount of $660,000 to assist with the procurement of these products. The agreement resulted in income of $20,000 for the year ended September 30, 2020 and the return of all capital contributed. The income is reported as other income, net of all other costs.
Contingent consideration
GridFabric: On August 31, 2020, the Company acquired GridFabric, LLC. Pursuant to the terms of the purchase agreement, additional shares of the Company’s common stock valued at up to $750,000 will bewere issuable if GridFabric achieves certain revenue and product release milestones. (See note 3 forOn September 30, 2021, the contingent consideration was re-measured to $500,000.
Subsequent to September 30, 2021, the Company settled all contingent consideration due to GridFabric resulting in a payment of $150,000. shares of common stock valued at
Solar Watt Solutions: On February 24, 2021, the Company acquired Solar Watt Solutions, Inc. Pursuant to the terms of the purchase agreement, additional details.)cash consideration of up to $2,500,000 (fair valued at $155,000 at acquisition date) in cash held back by the Company and only payable pro rata to Sellers upon meeting certain future milestones and subject to satisfaction of any amounts owing from SWS to the Company resulting from damages required to be indemnified under the SWS Merger Agreement. The contingent cash consideration was re-measured to $320,802 at September 30, 2021.
F-40 |
Legal contingencies
From time to time we may be subject to litigation. Risks associated with legal liability are difficult to assess and quantify, and their existence and magnitude can remain unknown for significant periods of time. We have acquired liability insurance to reduce such risk exposure to the Company. Despite the measures taken, such policies may not cover future litigation, or the damages claimed may exceed our coverage which could result in contingent liabilities.
ForBishins v. CleanSpark, Inc. et al.
On January 20, 2021, Scott Bishins (“Bishins”), individually, and on behalf of all others similarly situated (together, the “Class”), filed a descriptionclass action complaint (the “Class Complaint”) in the United States District Court for the Southern District of our materialNew York against the Company, its Chief Executive Officer, Zachary Bradford (“Bradford”), and its Chief Financial Officer, Lori Love (“Love”) (the “Class Action”). The Class Complaint alleges that, between December 31, 2020 and January 14, 2021, the Company, Bradford, and Love “failed to disclose to investors: (1) that the Company had overstated its customer and contract figures; (2) that several of the Company’s recent acquisitions involved undisclosed related party transactions; and (3) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis.” (the “Class Allegations”). The Class Complaint seeks: (a) certification of the Class, (b) an award of compensatory damages to the Class, and (c) an award of reasonable costs and expenses incurred by the Class in the litigation. To date, no class has been certified in the Class Action. Currently, there is a pending legal proceedings, please see Part I, Item IIImotion to appoint lead class plaintiff, at which point dispositive motions may be filed.
Although the ultimate outcome of this Annual Reportthe Class Action cannot be determined with certainty, the Company stands behind all of its prior statements and disclosures and believes that the claims raised in the Class Complaint are entirely without merit. The Company intends to both defend itself vigorously against these claims and to vigorously prosecute any counterclaims.
Notwithstanding the Class Allegations’ lack of merit, however, the Class Action may distract the Company and cost the Company’s management time, effort and expense to defend against the claims made in the Class Complaint. Notwithstanding the Company’s belief that the Company and its management have complied with all of their obligations under applicable securities regulations, no assurance can be given as to the outcome of the Class Action, and in the event the Company does not prevail in such action, the Company, its business, financial condition and results of operations would be materially and adversely affected.
Ciceri, derivatively on Form 10-K.behalf of CleanSpark, Inc., v. Bradford, Love, Schultz, Beynon, McNeill, and Wood (consolidated with Perna, derivatively on behalf of CleanSpark, Inc., v. Bradford, Love, Schultz, Beynon, McNeill, and Wood)
On May 26, 2021, Andrea Ciceri (“Ciceri”), derivatively on behalf of CleanSpark, Inc., filed a verified shareholder derivative action (the “Ciceri Derivative Action”) in the United States District Court in the District of Nevada against Chief Executive Officer, Zachary Bradford (“Bradford”), Chief Financial Officer, Lori Love (“Love”) and Directors Matthew Schultz, Roger Beynon, Larry McNeill and Tom Wood (Bradford, Love and Directors collectively referred to as “Defendants.”) On June 22, 2021, Mark Perna (“Perna”) filed a verified shareholder derivative action (the “Perna Derivative Action”) in the same Court against the same Defendants making substantially similar allegations. On June 29, 2021, the court consolidated the Ciceri Derivative Action with the Perna Derivative Action in accordance with a stipulation among the parties (the consolidated case referred to as the “Derivative Action”). The Derivative Action alleges that Defendants: (1) made materially false and misleading public statements about the Company’s business and prospects; (2) did not maintain adequate internal controls; and (3) did not disclose several related party transactions benefitting insiders, questionable uses of corporate assets, and excessive compensation. The claims asserted against all Defendants include breach of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. A claim for contribution under Sections 10(b) and 21D of the Securities and Exchange Act is asserted against only Bradford and Love. The Derivative Action seeks declaratory relief, monetary damages, and imposition of adequate corporate governance and internal controls. Plaintiffs were given the opportunity to submit an Amended Complaint by November 25, 2021, but elected not to. Defendants’ Motion to Dismiss will be due by January 20, 2022.
18.Although the ultimate outcome of the Derivative Action cannot be determined with certainty, the Company stands behind all of its prior statements and disclosures, and believes that the claims raised in that case are entirely without merit. The Company intends to both defend itself vigorously against these claims and to vigorously prosecute any counterclaims.
Notwithstanding the Derivative Action’s lack of merit, however, it may distract the Company and cost the Company’s management time, effort and expense to defend against the claims. Notwithstanding the Company’s belief that the Company and its management have complied with all of their obligations under applicable securities regulations, no assurance can be given as to the outcome of the Derivative Action, and in the event the Company does not prevail in such action, the Company, its business, financial condition and results of operations would be materially and adversely affected.
16. MAJOR CUSTOMERS AND VENDORS
Digital Currency Mining Segment
For the yearsyear ended September 30, 2020 and 2019,2021, the Companydigital currency mining business had the following customers that represented more than 10% of sales.revenue. For these purposes customers are defined as the Company’s mining pool operators.
September 30, 2020 | September 30, 2019 | |||||||
Customer A | 58.31 | % | 34.78 | % | ||||
Customer B | 11.56 | % | 27.79 | % | ||||
Customer C | 0.03 | % | 10.74 | % | ||||
Customer D | — | 10.42 | % |
September 30, 2021 | |||
Mining Pool Operator A | 55.72% | ||
Mining Pool Operator B | 44.28% |
For the year ended September 30, 2021, the Company had the following significant suppliers of mining equipment.
September 30, 2021 | ||
Vendor A | 49.9% | |
Vendor B | 37.4% | |
Vendor C | 2.8% |
Energy Segment
For the years ended September 30, 2021 and September 2020, the energy business had the following customers that represented more than 10% of revenue.
September 30, 2021 | September 30, 2020 | |||||
Customer A | 48.88% | 58.31% | ||||
Customer B | 12.36% | 0% | ||||
Customer C | 0% | 11.56% |
For the years ended September 30, 2021 and 2019,2020, the Company had the following suppliers that represented more than 10% of direct material costs.
September 30, 2020 | September 30, 2019 | ||||||
Vendor A | 85.55 | % | 84.06% |
September 30, 2021 | September 30, 2020 | ||||
Vendor A | 32.2% | 85.55% | |||
Vendor B | 23.4% | 0% |
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19.
17. SEGMENT REPORTING
We disclose segment information that is consistent with the way in which management operates and views the business. Our operating structure contains the followingtwo reportable segments: Digital Currency and Energy. The Company measures the results of its segments using, among other measures, each segment's sales and operating income, which includes certain corporate overhead allocations.
Energy SegmentDigital Currency. – ConsistingThis segment consists of our CleanSpark,operation related to Bitcoin mining. The Company provides computing power through ATL Data Centers LLC and CleanBlok Inc. to the mining pools. This segment also includes operation related to maintenance of real property holdings for company purposes through CSRE properties Norcross LLC and CSRE properties LLC., CleanSpark Critical Power Systems, Inc. and GridFabric, LLC lines This segment revenue represents fractional share of business, thisthe fixed cryptocurrency award received from the mining pool operator in exchange of computing power.
Energy. This segment provides services, equipment, and software to the energy industry. This segment includes revenue from providing engineering and construction services, selling equipment such as residential battery, residential solar, commercial solar and non-customized equipment and providing access to its energy software offerings and software license sales and support services.
Digital Agency SegmentCorporate and Other. – p2kLabs, Inc. providesThis includes revenue from providing design, software development, and other technology-based consulting services.services through p2k Labs and data center services through ATL Data Center.
SEGMENT REPORTING - Segmnent Reporting Assets | |||||||||||||||
For the Year Ended September 30, 2020 | |||||||||||||||
Energy | p2kLabs, Inc | Inter-segment | Consolidated | ||||||||||||
Revenues | $ | 9,018,023 | $ | 1,130,233 | $ | (119,555 | ) | $ | 10,028,701 | ||||||
Cost of revenues | 7,643,136 | 264,713 | — | 7,907,849 | |||||||||||
Gross profit | 1,374,887 | 865,520 | (119,555 | ) | 2,120,852 | ||||||||||
Operating expenses | 16,750,467 | 633,056 | (119,555 | ) | 17,263,968 | ||||||||||
Segment Income/(loss) from operations | (15,375,581 | ) | 232,465 | — | (15,143,116) | ||||||||||
Capital expenditures | 30,990 | 3,907 | — | 34,897 | |||||||||||
Depreciation and amortization | $ | 2,465,877 | $ | 206,454 | $ | — | $ | 2,672,331 |
We allocate expenses related to corporate activities to the segments, and corporate overhead to CleanSpark Inc. Corporate Items and eliminations consist of corporate overhead and other items not allocated to any of the Company's segments as in the table below. Intersegment transactions, which were at market price, are included in the “Other revenue and eliminations” and “Corporate items and eliminations” in the table below.
17. SEGMENT REPORTING - Segment Information
September 30, 2021 | September 30, 2020 | ||||||
Revenue | |||||||
Energy | $ | 9,002,636 | $ | 9,018,023 | |||
Digital Currency Mining | 38,846,633 | — | |||||
Total segment revenues | 47,849,269 | 9,018,023 | |||||
Other revenue and eliminations | 1,588,846 | 1,010,678 | |||||
Consolidated Revenues | 49,438,115 | 10,028,701 | |||||
Profit | |||||||
Energy | (8,111,138 | ) | (13,554,515) | ||||
Digital Currency Mining | 23,198,270 | — | |||||
Total segment profit/(loss) | 15,087,132 | (13,554,515) | |||||
Corporate items and eliminations (including depreciation and amortization) | (36,899,142 | ) | (9,791,628) | ||||
Net loss | $ | (21,812,010 | ) | $ | (23,346,143) |
For details on major customers of Digital currency and Energy segment, see Note 16.
As of September 30, 2020 | |||||||||||
Energy | p2kLabs, Inc | Consolidated | |||||||||
Accounts Receivable | $ | 919,499 | $ | 127,854 | $ | 1,047,353 | |||||
Goodwill | $ | 4,946,253 | $ | 957,388 | $ | 5,903,641 | |||||
Total assets | $ | 20,212,873 | $ | 2,127,190 | $ | 22,340,063 |
20.A summary of segment assets is as follows:
September 30, 2021 | September 30, 2020 | ||||||
Digital Currency Mining | $ | 270,995,942 | $ | — | |||
Energy | $ | 17,507,314 | $ | 13,621,190 | |||
Other and Corporate assets | $ | 28,969,865 | $ | 8,718,873 | |||
Total | $ | 317,473,121 | $ | 22,340,063 |
The Company has its geographic operations only in United States.
Total additions in long-lived assets during the years ended September 30, 2021 and 2020:
September 30,2021 | September 30,2020 | ||||||||||||||||||||||
Digital Currency | Energy | Corporate | Digital Currency | Energy | Corporate | ||||||||||||||||||
Property Plant and Equipment | $ | 144,743,498 | $ | 212,178 | $ | 972 | $ | — | $ | 28,937 | $ | 18,108 | |||||||||||
Intangibles | 9,881,838 | 190,000 | — | — | 1,381,633 | 833,000 | |||||||||||||||||
Capitalized software | — | — | — | — | 84,924 | — | |||||||||||||||||
Total | $ | 154,625,336 | $ | 402,178 | $ | 972 | $ | — | $ | 1,495,494 | $ | 851,108 |
18. SUBSEQUENT EVENTS
On
We have evaluated events occurring between the end of the most recent fiscal year and the date the financial statements were issued through December 14, 2021. There were no material subsequent events except as disclosed below:
Georgia Power Agreement
Effective October 2, 2020,1, 2021, the Company filed a Certificate of Amendment to its Articles of Incorporationentered into certain agreements with the Nevada Secretary of State to increase its authorized shares of common stock to .
On October 7, 2020, theGeorgia Power Company executed a first amendment to its 2017 Equity Incentive Plan to increase its option pool from to shares of common stock. On November 9, 2020, we filed a registration statement on Form S-8 to register the additional shares under the first amendment(“Georgia Power”), for electrical services to the 2017 Equity Incentive Plan.
On October 6, 2020,Company’s facilities in Norcross, Georgia. The agreements have an initial term of five years, during which time the Company, issued shares of the Company’s common stock in connection with a firm commitment underwritten public offering at a price to the public of per share. The Company received net proceeds from the sale of the shares, after deducting underwriting discounts and commissions and other offering expenses payablepower utilized by the Company will be billed under the Georgia Power Real Time Pricing (“RTP”) rate, where a portion of $37.2the usage is priced hourly and another portion is billed at a conventional rate. million. The offering closed on October 9, 2020.
On October 26, 2020, the Company issued shares to employees, officers and directors with a fair value of $1,904,520 and fully vested options with a fair value of $987,675for performance during the 2020 fiscal year. The options have exercise prices ranging from $8.07 to $9.00 and terms of .
In addition, the Company granted 222,250 sharesagreed to pay Georgia Power a one-time fee of approximately $2.0 million to install additional power equipment on the property.
Mining Equipment Purchase Agreements
On October 6 and 84,000 optionsOctober 14, 2021, the Company entered into agreements that are cancellable with a mining equipment supplier to purchase common stockan aggregate of 6,750 mining servers. As compensation for the mining equipment, the Company agreed to officerspay the supplier up to an aggregate amount of approximately $49.5 million, of which, are subjectapproximately $28.6was paid upon execution of the agreements, with the remainder to future vesting conditionsbe paid in accordance withmonthly installments through June 2022. The Company goalscurrently expects to receive the mining equipment in nine equal monthly shipments from November 2021 through July 2022 and milestones.
plans to use the mining equipment to expand its digital currency mining activities through its wholly owned subsidiaries.
In November 2021, the Company entered into a new purchase agreement that is cancellable for a total of 2,597 mining machines with an aggregate purchase price of approximately $26.5 million.
Immersion Cooling System Purchase
On December 9, 2020,1, 2021, the Company entered into an Agreementagreement to purchase an immersion cooling system and Planrelated equipment with a purchase price of Merger with ATL Data Centers LLC, (“ATL”), CLSK Merger Sub, LLC, a wholly-owned subsidiary of theapproximately $9.6 million.
The Company (“Merger Sub”), and Sellers. The Merger closed on December 10, 2020.issued 4,017,652 shares under its At the closing, Merger Sub merged with and into ATL, and ATL survived the Merger, continuing its existence as a wholly-owned subsidiaryMarket financing instrument resulting in proceeds of the Company. In exchange, at closing, the Company issued shares of restricted common stock of the Company valued at $19.4 million based on the average closing price of the common stock for the five trading days including and immediately preceding the closing date of $11.988 per share, to the Sellers, of which: (i) 642,309 Shares valued at $7.7 million would be fully earned on closing, and (ii) an additional 975,976 Shares valued at $11.7 million being issued to escrow and subject to holdback pending satisfaction of certain future milestones, with all such shares subject to a lock up of no less than 180 days and a leak out of no more than 10% of average daily trading value of the prior 30 days. The Company also assumed approximately $6.9 million in existing debt of ATL at closing. $68 million.In connection with the acquisition, the Company issued 41,708 shares to the broker of the transaction and has agreed to issue an additional shares upon achievement of certain revenue milestones.
The Company issued 25,775 shares as a result of stock option exercises resulting in proceeds of $189,677.
On November 23, 2021, the Company settled all contingent consideration due to GridFabric resulting in the issuance of 8,404 shares of Company common stock valued at $150,000.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our
In connection with the preparation of this Annual Report on Form 10-K, our management conducted an assessment of the effectiveness of our internal controls over financial reporting as of the end of the period covered by this report (under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Based on that assessment, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange ActAct) were not effective due to material weaknesses in internal control over financial reporting, as described below. Management’s assessment of 1934, as amended) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. The Chief Executive Officer (CEO) and Chief Financial Officer (CFO), with assistance from other members of management, has reviewed the effectiveness of our disclosure controls and procedures asis expressed at a level of September 30, 2020 and, based on his evaluation, has concludedreasonable assurance because management recognizes that the disclosureany controls and procedures, were not effective asno matter how well designed and operated, can provide only reasonable assurance of such date due to a material weakness in internal control over financial reporting, described below.achieving their objectives.
MANAGEMENT’SMANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) underand 15d-15(f) of the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that:that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets;transactions; (2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Under the supervision of and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting as of September 30, 2020,2021, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). We excluded from our assessment the internal control over financial reporting of ATL Data Centers LLC and Solar Watt Solutions, Inc. with total assets of $267.3 million (of which $27.3 million represents goodwill and intangibles included within the scope of the assessment), and total revenues of $43.2 million included in the consolidated financial statements of the Company as of and for the year ended September 30, 2021.As part of our assessment of the effectiveness of our internal control over financial reporting as of September 30, 2021, management identified the following material weaknesses: (1) the Company did not adequately implement or properly maintain controls over its financial close and reporting process, its process over the recording of energy and other services revenue and its process over the accounting and valuation of certain aspects of business combinations involving significant estimates and (2) the Company did not adequately design and maintain effective general information technology controls over third-party information systems and applications that are relevant to the preparation of the Company’s financial statements:
· | Financial Close and Reporting: Controls over financial statement reviews, specific to the appropriate reconciliation of certain balance sheet accounts, were not operating effectively. |
o | Recording of Revenues for certain non-principal revenue generating subsidiaries: Controls over the recording and processing of revenue for certain non-principal revenue generating entities, specifically, p2kLabs, Inc, GridFabric, LLC and CleanSpark, LLC, lack the level of precision necessary to ensure the completeness and accuracy of revenue recorded. |
o | Business Combinations: Controls designed to properly consider and evaluate certain aspects of our business combinations and related reporting units did not operate effectively to identify all necessary adjustments made to the purchase price during the valuation process and the related goodwill balances recorded. This includes controls around business combination accounting, specifically as it relates to the valuation of contingent consideration as part of the purchase price underlying the business combinations, as well as the identification of reporting units. |
43 |
· | Information and Technology Controls: Certain individual control deficiencies related to information technology (“IT”) general controls and report reviews aggregate into a material weakness, as follows: |
o | Certain process-level and IT-dependent controls over user access to IT programs and applications, specifically utilized for hosting services and file storage, were not effective. |
o | Controls relating to the evaluation of service organization controls reports were not performed over certain third-party service providers to cover the entire fiscal year. |
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.basis
We identified aThese material weakness in the design of internal control related to the following areas: (i) Inadequate controls over information technology.
This material weakness weaknesses did not result in any identified material misstatements to the financial statements, and there were no changes to previously released financial results. Based on thisthese material weakness,weaknesses, management concluded that at September 30, 2020,2021, internal control over financial reporting was not effective.
Our independent registered public accounting firm, MaloneBailey, LLP has issued an adverse audit report on the effectiveness of internal control over financial reporting as of September 30, 2021, which appears on page F-2.
Following identification of the material weaknessweaknesses and prior to filing this Annual Report on Form 10-K, we completed substantive procedures for the year ended September 30, 2020.2021. Based on these procedures, management believes that our consolidated financial statements included in this Form 10-K have been prepared in accordance with U.S. GAAP. Our CEO and CFO has certified that, based on their knowledge, the financial statements, and other financial information included in this Form 10-K, fairly present in all material respects the financial condition, results of operations and cash flows of CleanSpark as of, and for, the periods presented in this Form 10-K. MaloneBailey, LLP has issued an unqualified opinion on our financial statements, which appears on page F-1.
REMEDIATION
Management has implementedbeen implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions include: adopting a different financial reporting software that has increased controls built intoinclude the system functionality which began on the first day of fiscal 2021.following:
· | additional qualified staff were appointed during the year-ended September 30, 2021 and subsequent to year-end to ensure appropriate reviews occur |
· | the implementation of additional monitoring of controls to improve documentation of internal control procedures |
· | expanding the management and governance over IT system controls; and |
· | implementing enhanced process controls around internal user access management including provisioning, removal, and periodic review |
We believe that this actionthese actions will remediate the material weakness,weaknesses, once management has performed its assessment of our internal controls over financial reporting including the remedial measures described above. The weaknesses will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of these material weaknesses will be completed prior to the end of fiscal year 2022.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Except for the material weaknessweaknesses identified during the quarter, as of September 30, 2020,2021, and except for the remedial measures described above, there have been no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the fourth quarter of fiscal 2020year 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
44 |
INHERENT LIMITATIONS ON INTERNAL CONTROLS
Notwithstanding the foregoing, management does not expect that our disclosure controls and procedures or ourBecause of its inherent limitations, internal control over financial reporting willmay not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurancemisstatements. Projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the objectivesdegree of compliance with the control system will be met. Limitations inherent in any control system include the following:
Because of the inherent limitations in all control systems, nopolicies or procedures may deteriorate. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
ATTESTATION REPORT OF THE REGISTERED PUBLIC ACCOUNTING FIRM
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm on the Company’s internal controls as the Company is a non-accelerated filer and is thus not required to provide such a report.
Item 9B. Other Information
None.
PART III
Item 10 – Directors, Executive Officers, and Corporate Governance
Information required by Item 10 is incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report.
Item 11 – Executive Compensation
The information required by Item 11 is incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report.
Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 is incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report.
Item 13 – Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 is incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report.
Item 14 – Principal Accounting Fees and Services
The information required by Item 14 is incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth the names, ages and positions of our current directors and executive officers.
Set forth below is a brief description of the background and business experience of our executive officers and directors.
Zachary K. Bradford, Chief Executive Officer, is a licensed Certified Public Accountant in Nevada and a member of the American Institute of Certified Public Accountants. He served as the Company’s Chief Financial Officer from 2014 through October 2019. He has also served as a partner in a public accounting and consulting firm in Henderson, Nevada since June 2013. Mr. Bradford holds a B.S. in Accounting and a Masters of Accountancy from Southern Utah University. From March of 2015 to July 31, 2016, Mr. Bradford served as a member of the board of directors and Chief Financial Officer of Epic Stores Corp.
Aside from that provided above, Mr. Bradford does not hold and has not held over the past five years any other directorships in any company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of the Exchange Act or any company registered as an investment company under the Investment Company Act of 1940.
Mr. Bradford is qualified to serve on our Board of Directors because of his experience and knowledge in public company reporting and accounting.
Lori Love, Chief Financial Officer, is a licensed CPA and an experienced finance professional serving in roles in accounting, finance and risk management. Since July 2015, Ms. Love served as CFO of P2K Labs, a design, technology, and marketing agency based in Las Vegas, Nevada. Prior to 2015, Ms. Love served in the role of Senior Vice President of Finance at Provident Trust Group for over two years and as Vice President of Finance and Operations at WorldDoc, Inc. where she also served as a director. Ms. Love obtained her Bachelor of Business Administration (BBA) in Accounting from University of Nevada, Las Vegas and carries the CPA designation.
Aside from that provided above, Ms. Love does not hold and has not held over the past five years any other directorships in any company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of the Exchange Act or any company registered as an investment company under the Investment Company Act of 1940.
Amanda Kabak, Chief Technology Officer is an experienced technology professional. Before joining us, Ms. Kabak was a managing consultant for 10th Magnitude and she worked there from July 2016 to July 2017. From April to June of 2016, she worked as Sr. Software Engineer for Uptake and from 2013 to February 2016 she worked as Sr. Software Architect for OptiRTC, Inc.
Aside from that provided above, Ms. Kabak does not hold and has not held over the past five years any other directorships in any company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of the Exchange Act or any company registered as an investment company under the Investment Company Act of 1940.
Amer Tadayon, Chief Revenue Officer is an experienced executive and entrepreneur. Mr. Tadayon joined us as part of the acquisition of p2kLabs where he was the founder and CEO. Mr. Tadayon has held various leadership positions at Fortune 500 companies including IBM, Cognizant, and frog design. In addition, he has worked with major global grants such as Nike, MTV, and Mattel.
Aside from that provided above, Mr. Tadayon does not hold and has not held over the past five years any other directorships in any company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of the Exchange Act or any company registered as an investment company under the Investment Company Act of 1940.
S. Matthew Schultz, Executive Chairman, Chairman of the Board and Director, served as the Company’s Chief Executive Officer from 2014 through October 2019 and has been involved in many capacities with several publicly traded companies. He served as the President and CEO of Amerigo Energy, Inc., creating multiple syndicated offerings, as well as overseeing the operations from permitting through production. Since 1999, he has assisted numerous development and early stage companies to secure financing and experience significant growth. As the President of Wexford Capital Ventures, Inc., he was instrumental in funding companies both domestically and abroad. While serving as the Chairman of Pali Financial Group, Inc., he assisted in market development of dozens of public corporations. He was a founding member and the Vice President of the Utah Consumer Lending Association.
Aside from that provided above, Mr. Schultz does not hold and has not held over the past five years any other directorships in any company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of the Exchange Act or any company registered as an investment company under the Investment Company Act of 1940.
Mr. Schultz is qualified to serve on our Board of Directors because of his experience and knowledge in public company reporting and financing and work in the energy sector.
Larry McNeill, Director, has a master’s degree in Business Administration from Armstrong University, a BA in Business Administration, Economics, and Russian language from Minnesota State University, and has completed the course work towards his PhD in Business Management.
Larry has a diverse business background that includes a range of broad business skills gained from his many roles in Real Estate, Finance, Research, Legal, Management, and Business Strategies. These roles include serving as the Director of Safeway Grocery Stores, Inc's Consumer, Sales, and Store Location research departments where he was responsible for the expansion of Safeway in Europe, Australia and Canada. The Director of Market Research for A&P where he was responsible for the Company's expansion into Saudi Arabia. An Executive Officer of Smiths Food and Drug Centers for 17 years; most recently as the Senior Vice President of Corporate Development overseeing the Research, Real Estate, and Legal Departments. Mr. McNeill retired from Smith’s Food & Drug Stores in 1996 after the Fred Meyer merger was completed.
Aside from that provided above, Mr. McNeill does not hold and has not held over the past five years any other directorships in any company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of the Exchange Act or any company registered as an investment company under the Investment Company Act of 1940.
Mr. McNeill is qualified to serve on our Board of Directors because of his experience and knowledge in business management and financing.
Dr. Thomas L. Wood, has over 33 years of highly successful experience in positions of increasing responsibility in planning and operations, policy development/implementation, construction management, defense acquisition, budgeting and programming, and managing large projects and programs. Dr. Wood previously served in the U.S. Navy rising to the role of
Deputy Operations for the Navy’s Pacific Engineering Command in which he was responsible for ensuring the successful execution through nine field offices of nearly $1 billion annually in construction and services contracts. After leaving the U.S. Navy, Dr. Wood served as a Subject Matter Expert (SME) supporting the U.S. Pacific Command (USPACOM) Joint Interagency Coordination Group (JIACG) as a Sr. Military Analyst and continued as a civil servant in senior roles thereafter. Dr. Wood graduated from Union College with a bachelor’s degree in Civil Engineering and master’s degree in Civil Engineering from University of Maryland, College Park. Dr. Wood then obtained a Doctor of Business Administration degree from Argosy University, Honolulu.. Dr. Wood will serve as a member of the Board until his successor is elected and qualified, or until his earlier death, resignation, or removal.
Mr. Wood is qualified to serve on our Board of Directors because of his experience and knowledge in business management and financing.
Roger P. Beynon, is an experienced CPA and owner of Beynon & Associates, a public accounting firm that has been in operation for over 34 years. Mr. Beynon has provided accounting and tax services to businesses since 1984. Mr. Beynon is a Certified Public Accountant (CPA) and Certified Fraud Examiner (CFE) and is a past president of the Utah Association of CPA's. Mr. Beynon is currently the chairman of the board of directors of Transwest Credit Union. Mr. Beynon is a graduate from Weber State College in 1972 with a bachelor’s degree in accounting and a minor in banking and finance. Mr. Beynon will serve as a member of the Board until his successor is elected and qualified, or until his earlier death, resignation, or removal.
Mr. Beynon is qualified to serve on our Board of Directors because of his experience and knowledge in public company reporting and accounting.
Term of Office
Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board.
Family Relationships
There are no family relationships between or among the directors, executive officers or persons nominated or chosen by us to become directors or executive officers.
Involvement in Certain Legal Proceedings
To the best of our knowledge, during the past ten years, none of the following occurred with respect to a present or former director, executive officer, or employee: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; and (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
Committees of the Board
The board of directors of the Company (the “Board”) has the authority to appoint committees to perform certain management and administrative functions. On January 24, 2020, and in connection with the Nasdaq listing, the Board created the following committees: (i) an Audit Committee, (ii) a Compensation Committee, and (iii) a Nominations and Governance Committee. The composition and responsibilities of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by the Board.
Audit Committee
The Audit Committee oversees the integrity of the Company’s accounting and financial reporting process and the audits of its financial statements. The Audit Committee is directly responsible for, among other matters:
The Audit Committee shall have the authority, in its sole discretion, to select, employ, and retain the advice of experts and professionals as the Audit Committee shall deem appropriate from time to time to assist with the execution of its duties and responsibilities as set forth in its charter.
The current members of the Audit Committee are: (i) Roger P. Beynon, who is the Chairman of the Audit Committee, (ii) Dr. Thomas L. Wood, and (iii) Larry McNeill. Each member of the Audit Committee meets the requirements for independence and can read and understand fundamental financial statements in accordance with the applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) and the listing requirements and rules of Nasdaq (“Nasdaq Rules”). In arriving at this determination, the Board has examined each Audit Committee member's professional experience and the nature of their employment in the corporate finance sector. The Board has also determined that Mr. Beynon qualifies as an “audit committee financial expert,” as defined under applicable SEC and Nasdaq Rules.
Compensation Committee
The Compensation Committee evaluates, recommends, and approves policy relating to compensation and benefits of the Company’s officers and employees. The Compensation Committee is directly responsible for, among other matters:
The Compensation Committee shall have the authority, in its sole discretion, to select, employ, and retain the advice of experts and professionals as the Compensation Committee shall deem appropriate from time to time to assist with the execution of its duties and responsibilities as set forth in its charter. The Compensation Committee consists of entirely “independent directors” (as defined below), and no executive officers have a role in determining or recommending the amount or form of executive and director compensation.
The current members of the Compensation Committee are: (i) Larry McNeill, who is the Chairman of the Compensation Committee, and (ii) Dr. Thomas L. Wood. Each member of the Compensation Committee is an “independent director” under the applicable rules and regulations of the SEC and Nasdaq Rules. Furthermore, each member of the Compensation Committee is a “non-employee director” within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934, and an “outside director”, as that term is defined under Section 162(m) of the Internal Revenue Code of 1986.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company’s directors and executive officers and persons who beneficially own more than ten percent of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent beneficial shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. To the best of the Company’s knowledge based solely on a review of Forms 3, 4, and 5 (and any amendments thereof) received by us during or with respect to the year ended September 30, 2020, the following persons have not filed on a timely basis, the identified reports required by Section 16(a) of the Exchange Act during fiscal year ended September 30, 2020:
Name and principal position |
Number of late reports | Transactions not timely reported | Known failures to file a required form |
S. Matthew Schultz, Chairman and Director | 0 | 0 | 0 |
Zachary Bradford, Chief Executive Officer | 0 | 0 | 0 |
Larry McNeill, Director | 0 | 1 | 0 |
Amanda Kabak, Chief Technology Officer | 0 | 0 | 0 |
Amer Tadayon, Chief Revenue Officer | 0 | 1 | 0 |
Dr. Thomas L. Wood, Director | 0 | 0 | 0 |
Roger P. Beynon, Director | 0 | 0 | 0 |
Lori Love, Chief Financial Officer | 0 | 0 | 0 |
Code of Ethics
We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller. We will provide, at no cost, a copy of the Code of Ethics to any shareholder upon receiving a written request sent to the Company’s address shown on Page 1 of this report.
Item 11. Executive Compensation
The table below summarizes all compensation awarded to, earned by, or paid to our former or current executive officers for the fiscal years ended September 30, 2020 and 2019.
SUMMARY COMPENSATION TABLE | |||||||||
Name and principal position | Year | Salary ($) | Non-Equity | Nonqualified | |||||
Stock | Option | Incentive Plan | Deferred | All Other | |||||
Bonus | Awards | Awards | Compensation | Compensation | Compensation | Total | |||
($) | ($) | ($) | ($) | Earnings ($) | ($) | ($) | |||
Zachary Bradford | 2019 | - | 193,437 | - | - | - | - | 237,000 | 430,437 |
CEO | 2020 | 335,000 | 360,000 | 615,250 | 274,000 | - | - | - | 1,584,250 |
Amanda Kabak | 2019 | 183,437 | 25,000 | - | 100,000 | - | - | - | 308,437 |
CTO | 2020 | 190,000 | 110,000 | 104,910 | 134,550 | - | - | - | 539,460 |
Lori Love | 2019 | - | - | - | - | - | - | - | - |
CFO | 2020 | 200,000 | 190,000 | 316,660 | 250,958 | - | - | - | 957,618 |
Amer Tadayon | 2019 | - | - | - | - | - | - | - | - |
CRO | 2020 | 166,667 | - | - | 99,000 | - | - | 33,333 | 299,000 |
S. Matthew Schultz | 2019 | - | 193,437 | - | - | - | - | 237,000 | 430,437 |
Former CEO | 2020 | - | 350,000 | 484,200 | 239,450 | - | - | 252,000 | 1,325,650 |
Bryan Huber | 2019 | - | 2,432 | - | 496,590 | - | - | 168,769 | 667,791 |
Former CIO | 2020 | - | 273 | - | 1,158,709 | - | - | 167,731 | 1,326,713 |
Anthony Vastola | 2019 | 161,506 | 17,208 | - | 170,000 | - | - | - | 348,714 |
Former COO | 2020 | 72,000 | 273 | - | - | - | - | 80,000 | 152,273 |
Narrative Disclosure to the Summary Compensation Table
Zachary Bradford –Chief Executive Officer and Director and former Chief Financial Officer
On October, 1, 2019, the Company entered into an employment agreement whereas Mr. Bradford accepted the position of Chief Executive Officer. Under this agreement, Mr. Bradford is compensated by a base salary of $335,000 per year. During the year ended September 30, 2020, Mr. Bradford earned $335,000 in annual compensation plus bonuses of $360,000, stock awards of $615,250, and option awards of $274,000.
During the fiscal year ending September 30, 2019, the Company had a consulting agreement with ZRB Holdings, Inc, an entity wholly owned by Zachary Bradford, our Chief Executive Officer, director and former Chief Financial Officer, for management services. In accordance with this agreement, as amended, Mr. Bradford provided services to us in exchange for $20,000 in compensation for services plus a $1,000 medical insurance stipend, each month plus a bonus of 0.5% of gross revenue and additional bonuses as the board authorizes. The Company has also agreed to reimburse Mr. Bradford for expenses incurred. During the year ended September 30, 2019, Mr. Bradford earned $237,000 in base compensation plus bonuses of $193,437 in accordance with this agreement. The agreement was terminated in October of 2019 when Mr. Bradford accepted the position of Chief Executive Officer and accepted the associated employment agreement.
Amanda Kabak – Chief Technology Officer
On February 8, 2019 the Company entered into an employment agreement whereas Ms. Kabak was promoted to Chief Technology Officer. Under this agreement, Ms. Kabak is compensated by a base salary of $190,000 per year and $100,000 shares of our stock for each annual period she is with the company. A portion of the options vest each month and are exercisable at market price. During the year ended September 30, 2019, Ms. Kabak earned $183,437 in annual compensation plus bonuses of $25,000, and option awards of $100,00. During the year ended September 30, 2020, Ms. Kabak earned $190,000 in annual compensation plus bonuses of $110,000, stock awards of $104,910 and option awards of $100,000.
Lori Love- Chief Financial Officer
On October 1, 2019 the Company entered into an employment agreement whereas Ms. Love accepted the position of Chief Financial Officer. Under this agreement, Ms. Love is compensated by a base salary of $200,000 per year, 20% bonus and 25,000 stock options. During the year ended September 30, 2020, Ms. Love earned $200,000 in annual compensation plus bonuses of $190,000, stock awards of $316,660 and option awards of $250,958.
Amer Tadayon- Chief Revenue Officer
On February 1, 2020 the Company entered into an employment agreement whereas Mr. Tadayon accepted the position of Chief Revenue Officer. Under this agreement, Mr. Tadayon is compensated by a base salary of $250,000 per year plus $50,000 non-recoverable draw against commission, and 30,000 stock options. During the year ended September 30, 2020, Mr. Tadayon earned $166,667 in annual compensation plus option awards of $99,000 and other compensation of $33,333.
Matthew Schultz- Executive Chairman, Chairman of the Board and Director and former Chief Executive Officer
The Company had a consulting agreement with Matthew Schultz, our former Chief Executive Officer, for management services. Mr. Schultz provides services to us in exchange for $20,000 in compensation for services plus a $1,000 medical insurance stipend, each month plus a bonus of 0.5% of gross revenue and additional bonuses as the board authorizes. The Company also agreed to reimburse Mr. Schultz for expenses incurred. The agreement was terminated in October of 2019 when Mr. Schultz accepted the position of Chairman of the board. During the year ended September 30, 2020, Mr. Schultz earned $252,000 in base compensation, bonus grants of $350,000, stock awards of $484,200, and option awards of 239,450.During the year ended September 30, 2019, Mr Schultz $237,000 in base compensation plus bonuses of $193,437.
Bryan Huber – Former Chief Innovation Officer and former Director
The Company had a consulting agreement with Zero Positive, LLC., an entity owned by Bryan Huber for management services. On March 12, 2020, the Company terminated the agreement. During the year ended September 30, 2020, Mr. Huber and Zero positive earned $167,731 in compensation and a $273 bonus, During the year ended September 30, 2020, Mr. Huber and Zero Positive earned $171,202 in compensation, respectively, in accordance with the agreement.
On September 28, 2018, in connection with the Consulting agreement executed with Zero Positive, LLC Company issued warrants to purchase 90,000 shares of common stock at an exercise price of $8.00 per share to Zero Positive. The warrants were valued at $2,607,096 using the Black Scholes option pricing model based upon the following assumptions: term of 10 years, risk free interest rate of 3.05%, a dividend yield of 0% and volatility rate of 191%. The warrants vest as follows: 30,000 vested immediately, the balance vest evenly on the last day of each month over the forty-two months beginning August 31, 2018. As of September 30, 2020, 67,143 warrants had vested due to the passage of time, and the Company recorded an expense of $1,158,709 during the year ended September 30, 2020.
Anthony Vastola – Former Chief Operations Officer
On March 12, 2020, the Company terminated the employment of Anthony Vastola. During the year ended September 30, 2020, Mr. Vastola earned $72,000 in compensation a bonus of $273 and other compensation of $80,000. During the year ended September 30, 2020, Mr. Vastola earned $161,506 in compensation, a bonus of $17,206, and option awards of $170,000, respectively.
Outstanding Equity Awards at Fiscal Year-End
On June 9, 2017, our Board of Directors adopted the 2017 Equity Incentive Plan (the “Plan”). The purpose of the Plan is to attract and retain the best available personnel for positions of substantial responsibility with us, to provide additional incentive to employees, directors and consultants, and to promote our success. Under the Plan, we are able to issue up to an aggregate total of 1,500,000 incentive or non-qualified options to purchase our common stock, or stock awards.
The table below summarizes all unexercised options, stock that has not vested, and equity incentive plan awards for each named executive officer as of September 30, 2020.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END | |||||||||
OPTION AWARDS | STOCK AWARDS | ||||||||
Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested (#) |
S. Matthew Schultz | 25,000 | - | - | $5.60 | 12/20/2022 | - | - | - | - |
Zachary Bradford | 25,000 | - | - | $5.60 | 12/20/2022 | - | - | - | - |
Amanda Kabak | 36,912 | 0 | Varies | Varies | - | - | - | - | |
Lori Love | 33,333 | 16,667 | Varies | Varies | - | - | - | - | |
Amer Tadayon | 20,000 | 10,000 | $4.65 | 01/31/2023 | - | - | - | - |
Director Compensation
The table below summarizes all compensation of our directors for the year ended September 30, 2020.
DIRECTOR COMPENSATION | |||||||
Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Non-Qualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) |
Larry McNeill | $30,000 | - | $101,250 | - | - | - | $131,250 |
Roger Beynon | - | $30,000 | - | - | - | - | $30,000 |
Dr. Thomas Wood | $7,500 | $22,500 | - | - | - | - | $30,000 |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth, as of December 16, 2020, the number and percentage of the 23,964,093 shares of outstanding common stock which, according to the information supplied to the Company, were beneficially owned by (i) each person who is currently a director of the Company, (ii) each executive officer, (iii) all current directors and executive officers of the Company as a group, and (iv) each person who, to the knowledge of the Company, is the beneficial owner of more than 5% of the outstanding common stock. Except as otherwise indicated, the persons named in the table have sole voting and dispositive power with respect to all shares beneficially owned, subject to community property laws where applicable.
Except as otherwise indicated, the address of each of the persons named in the table below is c/o CleanSpark, Inc., 1185 S. 1800 W. Suite 3, Woods Cross, Utah 84087.
Number of Shares of Par | |||||
Value $0.001 Common Stock | Percentage | ||||
Name of Beneficial Owner | Beneficially Owned | of Class | |||
Directors and named executive officers | |||||
S. Matthew Schultz | 734,796 | (1) | 3.06% | ||
Zachary Bradford | 595,695 | (2) | 2.48% | ||
Larry McNeill | 189,836 | (3) | 0.79% | ||
Amer Tadayon | 138,199 | (4) | 0.58% | ||
Amanda Kabak | 75,824 | (5) | 0.32% | ||
Lori Love | 114,387 | (6) | 0.48% | ||
Dr. Thomas L. Wood | 53,960 | (7) | 0.23% | ||
Roger P. Beynon | 9,955 | (8) | 0.04% | ||
All Officers and Directors as a Group | 1,912,652 | (9) | 7.87% |
(1) Includes 480,000 shares of common stock held in the S M Schultz IRRV TR to which Mr. Schultz is the beneficial owner, 85,000 shares of common stock held in his name, 79,000 shares of common stock held in his name subject to future vesting in accordance with company milestones, 40,996 shares of common stock held by his spouse, 49,800 vested options to purchase common stock.
(2) Includes 79,831 shares of common stock held in his name, 99,000 shares of common stock held in his name subject to future vesting in accordance with company milestones, 323,863 shares of common stock held in ZRB Holdings Inc. in which Mr. Bradford is the beneficial owner, 12,000 shares of common stock held in BlueChip Advisors LLC in which Mr. Bradford shares beneficial ownership, warrants to purchase 25,000 shares of common stock, and 56,000 vested options to purchase common stock.
(3) Includes 42,000 shares of common stock held in his name, 71,636 shares of common stock held in his Roth IRA, 25,000 options to purchase common stock and warrants to purchase 51,200 shares of common stock.
(4) Includes 31,183 shares of common stock held in his name, 64,516 shares of restricted stock subject to company milestones and 42,500 vested options to purchase common stock.
(5) Includes 13,000 shares of common stock held in her name, 22,250 shares of common stock subject to future vesting in accordance with company milestones 40,824 vested options to purchase common stock.
(6) Includes 42,831 shares of common stock held in her name, 22,250 shares of common stock subject to future vesting in accordance with company milestones, and 49,306 vested options to purchase common stock.
(7) Includes 8,764 shares of common stock held in his name and 45,196 shares of common stock held in the name of his spouse.
(8) Includes 9,955 shares of common stock held in his name.
(9) Includes, 1,573,002 shares of common stock, 76,200 warrants and 263,430 options held by officers and directors
The following table sets forth, as of December 13, 2020, the number and percentage of the 1,750,000 shares of outstanding Series A Preferred Stock which, according to the information supplied to the Company, were beneficially owned by (i) each person who is currently a director of the Company, (ii) each executive officer, (iii) all current directors and executive officers of the Company as a group, and (iv) each person who, to the knowledge of the Company, is the beneficial owner of more than 5% of the outstanding shares of Series A Preferred Stock. Except as otherwise indicated, the persons named in the table have sole voting and dispositive power with respect to all shares beneficially owned, subject to community property laws where applicable.
Except as otherwise indicated, the address of each of the persons named in the table below is c/o CleanSpark, Inc., 1185 S. 1800 W. Suite 3, Woods Cross, Utah 84087.
Number of Shares of Par | ||||
Value $0.001 Series A Preferred Stock | Percentage | |||
Name of Beneficial Owner | Beneficially Owned | of Class | ||
Directors and named executive officers | ||||
S. Matthew Schultz | 500,000 | 28.57% | ||
Zachary Bradford | 500,000 | 28.57% | ||
Larry McNeill | 500,000 | 28.57% | ||
All Officers and Directors as a Group | 1,500,000 | 85.71% |
Securities Authorized for Issuance under Equity Compensation Plans
In June of 2017, our Board of Directors adopted the 2017 Equity Incentive Plan (the “Plan”). The purpose of the Plan is to attract and retain the best available personnel for positions of substantial responsibility with us, to provide additional incentive to employees, directors and consultants, and to promote our success. As of the date of this filing, under the Plan (as amended), we are able to issue up to an aggregate total of 1,500,000 incentive or non-qualified options to purchase our common stock, or stock awards.
Equity Compensation Plans Not Approved by the Shareholders | Number of Securities to be issued upon exercise of outstanding options | Weighted-average exercise price of outstanding options | Number of Securities remaining available for future issuance under equity compensation plans |
(a) | (b) | (c) | |
Equity compensation plans approved by security holders | — | — | — |
Equity compensation plans not approved by security holders | |||
The Plan | 277,948 | $6.34 | 1,222,052 |
Total | 277,948 | $6.34 | 1,222,052 |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Except as provided in “Executive Compensation” set forth above, or listed in Note 12 to the financial statements, for the past two fiscal years there have not been, and there is not currently proposed, any transaction or series of similar transactions to which we were or will be a participant in which the amount involved exceeded or will exceed the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years ($228,670), and in which any director, executive officer, holder of 5% or more of any class of our capital stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest.
Item 14. Principal Accounting Fees and Services
Below is the table of Audit and audit-related Fees billed by MaloneBailey, LLP in connection with the audits of the Company’s annual financial statements for the years ended:
Financial Statements for the Year Ended September 30 | Audit Services | Audit Related Fees | Tax Fees | Other Fees | |||||||||||||
2020 | $ | 145,160 | $ | 0 | $ | 0 | $ | 0 | |||||||||
2019 | $ | 101,099 | $ | 0 | $ | 0 | $ | 0 |
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) |
1.Financial Statements. The consolidated financial statements are included in Part II, Item 8 of this Annual Report on Form 10-K beginning on page F-2.
2.Financial Statement Schedules. Schedules are not submitted because they are not applicable or not required under Regulation S-X or because the required information is included in the financial statements or notes thereto.
3.Exhibits required to be filed by Item 601 of Regulation S-K. The information called for by this Item is incorporated by reference from the Index to Exhibits included in this Annual Report on Form 10-K.
49 |
50 |
* These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section
1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the Registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
** The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
+ Indicates management contract or compensatory plan.
†Portions of this exhibit have been redacted in compliance with Item 16. Form 10-K Summary601(b)(10) of Regulation S-K.
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CLEANSPARK, INC.
By: | /s/ Zachary Bradford |
Zachary Bradford Chief Executive Officer, Principal Executive Officer and Director | |
December |
By: | /s/ Lori Love |
Lori Love Chief Financial Officer, Principal Financial Officer, Principal Accounting Officer | |
December |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
By: | /s/ Zachary Bradford | |||
Zachary Bradford Chief Executive Officer, Principal Executive Officer and Director | ||||
December 14, 2021 | ||||
| ||||
By: | /s/ Lori Love | |||
Lori Love Chief Financial Officer, Principal Financial Officer, Principal Accounting Officer | ||||
December |
By: | /s/ S. Matthew Schultz |
S. Matthew Schultz Executive Chairman and Chairman of the Board | |
December |
By: | /s/ Larry McNeill |
Larry McNeill Director | |
December |
By: | /s/ Roger Beynon |
Roger Beynon Director | |
December |
By: | /s/ Dr. Thomas Wood |
Dr. Thomas Wood Director | |
December |