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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
   
For the quarterly period ended March 31, 2021
   
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.)

 

1185 S. 1800 W., Suite 3

Woods Cross, Utah 84087

(Address of principal executive offices)

 

(702) 941-8047
(Registrant’s telephone number, including area code)
 

 

 _______________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

 

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

 

 

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.

[X] Yes [ ] 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 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 “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

☐   Large accelerated filer ☐   Accelerated filer
  Non-accelerated Filer Smaller reporting company
    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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 34,017,796 shares as of May 6, 2021.

  

  1  
Table of Contents 

 

  TABLE OF CONTENTS

 

Page 

 

PART I – FINANCIAL INFORMATION

 

Item 1: Financial Statements 3
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 4
Item 3: Quantitative and Qualitative Disclosures About Market Risk 13
Item 4: Controls and Procedures 13

 

PART II – OTHER INFORMATION

 

Item 1: Legal Proceedings 14
Item 1A: Risk Factors 15
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 15
Item 3: Defaults Upon Senior Securities 16
Item 4: Mine Safety Disclosures 16
Item 5: Other Information 16
Item 6: Exhibits 16

 

 

  2  
Table of Contents 

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Our consolidated financial statements included in this Form 10-Q are as follows:

 

  F-1 Consolidated Balance Sheets as of March 31, 2021 (unaudited) and September 30, 2020;

 

  F-2 Consolidated Statements of Operations for the three and six months ended March 31, 2021 and 2020 (unaudited);

 

  F-3 Consolidated Statements of Stockholders’ Equity for the three and six months ended March 31, 2021 and 2020 (unaudited);

 

  F-4 Consolidated Statements of Cash Flows for the six months ended March 31, 2021 and 2020 (unaudited);

 

  F-5 Notes to Consolidated Financial Statements (unaudited).

 

This report on Form 10-Q for the quarter ended March 31, 2021, should be read in conjunction with the Company's annual report on Form 10-K for the year ended September 30, 2020, filed with the Securities and Exchange Commission (“SEC”) on December 17, 2020.

 

The accompanying consolidated financial statements and footnotes have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended March 31, 2021 are not necessarily indicative of the results that can be expected for the full year.

 

  3  
Table of Contents 

 

CLEANSPARK, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

  March 31, 2021   September 30, 2020
ASSETS              
Current assets              
Cash and cash equivalents   $ 157,274,542     $ 3,126,202
Accounts receivable, net     1,756,112       1,047,353
Contract assets              4,103
Inventory     856,095         
Prepaid expense and other current assets     2,184,863       998,931
Digital currency     5,662,547         
Derivative investment asset     9,495,404       2,115,269
Investment equity security     729,500       460,000
Investment debt security, AFS, at fair value     500,000       500,000
Total current assets   $ 178,459,063       8,251,858
               
Property and equipment, net     14,861,958       117,994
Operating lease right of use asset     713,158       40,711
Capitalized software, net     892,220       976,203
Intangible assets, net     17,332,820       7,049,656
Deposits on mining equipment and related assets     45,488,258         
Other long-term asset     2,830,560         
Goodwill     32,034,559       5,903,641
Total assets   $ 292,612,596     $ 22,340,063
               
LIABILITIES AND STOCKHOLDERS' EQUITY              
Current liabilities              
Accounts payable and accrued liabilities   $ 2,947,099     $ 4,527,037
Contract liabilities     551,977       64,198
Operating lease liability, current portion     611,040       41,294
Finance lease liability, current portion     336,157         
Acquisition liability     300,000         
Contingent consideration, current portion     2,416,667       750,000
Dividends payable     177,505         
Total current liabilities   $ 7,340,445      $ 5,382,529
               
Long-term liabilities              
Loans payable              531,169
Operating lease liability, net of current portion     101,983         
Finance lease liability, net of current portion     616,376         
Contingent consideration, net of current portion     833,333         
Total liabilities   $ 8,892,137     $ 5,913,698
               
Stockholders' equity              
Common stock; $0.001 par value; 50,000,000 shares authorized; 33,874,152 and 17,390,979 shares issued and outstanding as of March 31, 2021 and September 30, 2020, respectively     33,874       17,391
Preferred stock;  $0.001 par value; 10,000,000 shares authorized;  Series A shares; 2,000,000 authorized; 1,750,000  and 1,750,000 issued  and outstanding as of March 31, 2021 and September 30, 2020, respectively     1,750       1,750
Additional paid-in capital     400,032,436       132,809,830
Accumulated deficit     (116,347,601 )     (116,402,606)
Total stockholders' equity     283,720,459       16,426,365
               
Total liabilities and stockholders' equity   $ 292,612,596     $ 22,340,063

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

  F-1  
Table of Contents 

CLEANSPARK, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED) 

                               
    For the Three Months Ended   For the Six Months Ended
    March 31, 2021   March 31, 2020   March 31, 2021   March 31, 2020
                 
Revenues, net                              
Sale of goods revenues   $ 891,965     $ 3,352,098     $ 1,979,999     $ 4,277,494
Service, software and related revenues   $ 511,931      $ 306,185     $ 948,057      $ 357,613
Cryptocurrency mining revenue   $ 6,715,792              $ 7,449,202         
Total revenues, net     8,119,688       3,658,283       10,377,258       4,635,107
                               
Costs and expenses                              
Cost of revenues (exclusive of depreciation and amortization shown below)     1,537,683       2,913,828     2,879,197       3,757,262
Professional fees     2,456,554       1,005,991       4,169,277       2,522,578
Payroll expenses     3,262,097       984,380       6,576,298       1,695,919
General and administrative expenses     1,243,154       311,131       2,193,293       541,792
Depreciation and amortization     2,117,172       715,005       3,226,263       1,381,069
Total costs and expenses     10,616,660       5,930,335       19,044,328       9,898,620
                               
Loss from operations     (2,496,972 )     (2,272,052 )     (8,667,070 )     (5,263,513)
                               
Other income (expense)                              
Other income     541,576                541,576         
Realized gain on sale of digital currency     585,709                635,627         
Unrealized gain/(loss) on equity security     343,000       (210,000 )     269,500       158,868
Unrealized gain on derivative security     8,400,629       (1,441,763 )     7,380,135       824,891
Interest income (expense), net     26,098       (1,891,283 )     72,742       (3,451,598)
Total other income (expense)     9,897,012       (3,543,046 )     8,899,580       (2,467,839)
                               
Net Income/(loss) attributable to the Company   $ 7,400,040     $ (5,815,098 )   $ 232,510     $ (7,731,352)
                               
Preferred stock dividends   $ 177,505     $        $ 177,505     $   
                               
Net Income (loss) attributable to the Company’s common shareholders   $ 7,222,535     $ (5,815,098 )   $ 55,005     $ (7,731,352)
                               
Earnings/(loss) per common share - basic   $ 0.28     $ (1.13 )   $ 0.00     $ (1.56)
                               
Weighted average common shares outstanding - basic     25,925,259       5,135,802       24,025,557       4,957,491
                               
Earnings/(loss) per common share - diluted   $ 0.22     $ (1.13 )   $ 0.00     $ (1.56)
                               
Fully diluted weighted average common shares outstanding     32,697,863       5,135,802       30,798,161       4,957,491

  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

  F-2  
Table of Contents 

CLEANSPARK, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

                                                       
For the Six Months ended March 31, 2021
    Preferred Stock   Common Stock      
    Shares   Amount   Shares   Amount   Additional Paid-in Capital   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                       501,437       501       3,011,133                3,011,634
Options and warrants issued for services                                         1,339,009                1,339,009
Shares issued for business acquisition                       1,618,285       1,618       21,181,733                21,183,351
Exercise of options and warrants                       115,385       116       192,540                192,656
Shares issued under underwritten offering, net of offering costs                       4,444,445       4,445       37,045,160                37,049,605
Net loss                                                  (7,167,530 )     (7,167,530)
Balance, December 31, 2020     1,750,000     $ 1,750       24,070,531     $ 24,071     $ 195,579,405     $ (123,570,136 )   $ 72,035,090
Shares issued for services                       19,429       19       71,478                71,497
Options and warrants issued for services                                         777,517                777,517
Shares issued for business acquisition                       477,703       478       13,246,226                13,246,704
Exercise of options and warrants                       223,650       223       3,153,680                3,153,903
Shares issued under underwritten offering, net of offering costs                       9,090,910       9,091       187,204,122                187,213,213
Shares returned in relation to business acquisition                       (8,072 )     (8 )     8                (0)
Preferred stock dividends accrued                                                  (177,505 )     (177,505)
Net income                                                  7,400,040       7,400,040
Balance, March 31, 2021     1,750,000       1,750       33,874,151       33,874       400,032,436       (116,347,601 )     283,720,459

 

 

 

 

 

For the Six Months Ended March 31, 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       2,000       2       33,348                34,100
Options and warrants issued for services                                         602,169                602,169
Beneficial conversion feature and shares issued with convertible debt                       187,100       187       (187 )                
Rounding shares issued for stock split                       793       1       (1 )                
Net loss                                                  (1,916,254 )     (1,916,254)
Balance, December 31, 2019     1,750,000       1,750       4,868,911       4,869       112,571,454       (94,972,717 )     17,605,356
Shares returned and cancelled                       (30,000 )     (30 )     30                  
Options issued for business acquisition                                         88,935                88,935
Options and warrants issued for services                                         273,931                273,931
Shares issued for business acquisition                       95,699       96       444,904                445,000
Beneficial conversion feature and shares issued with convertible debt                       810,505       810       (810 )                
Net loss                                                  (5,815,098 )     (5,815,098)
Balance, March 31, 2020     1,750,000       1,750       5,745,115       5,745       113,378,444       (100,787,815 )     12,598,124

    

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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CLEANSPARK, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

               
    For the Six Months Ended
    March 31, 2021   March 31, 2020
Cash Flows from Operating Activities              
Net income (loss)   $ 232,510     $ (7,731,352)
Adjustments to reconcile net income (loss) to net cash used in operating activities:              
Stock based compensation     5,199,658       910,200
Unrealized gain on equity security     (269,500 )     (158,868)
Realized gain on sale of digital currency     (635,627 )       
Amortization of operating lease right of use asset     166,460       21,726
Depreciation and amortization     3,226,263       1,381,069
Provision for bad debts     231,932         
Gain on derivative asset     (7,380,135 )     (824,891)
PPP loan forgiveness     (531,169 )       
Amortization of debt discount              3,000,959
Changes in operating assets and liabilities              
(Increase) decrease in prepaid expenses and other current assets     (1,130,741 )     618,614
Decrease in contract assets     4,103       52,795
Increase in contract liabilities     487,779       90,840
Decrease (increase) in accounts receivable     114,285       (588,229)
(Decrease) increase in accounts payable     (2,890,270 )     2,052,295
Increase in digital currency from mining     (7,449,202 )       
Decrease in lease liability     (268,861 )     (21,247)
Increase in inventory     (793,945 )       
Increase (decrease) in due to related parties              (66,966)
Net cash used in operating activities     (11,686,460 )     (1,263,055)
               
Cash Flows from investing              
Increase in deposits on mining equipment and related assets     (45,488,258 )       
Sale of digital currencies     2,422,282         
Investment in infrastructure development     (2,830,560 )       
Purchase of property and equipment     (9,058,011 )     (24,910)
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, net of cash received     (1,000,337 )       
Investment in capitalized software              (84,925)
Investment in debt and equity securities              (750,000)
Net cash used in investing activities     (55,909,101 )     (2,001,825)
               
Cash Flows from Financing Activities              
Payments on promissory notes     (5,865,476 )     (67,467)
Proceeds from exercise of options and warrants     3,346,559         
Proceeds from underwritten offerings     224,262,818         
Net cash received/(provided) by financing activities     221,743,901       (67,467)
               
Net increase (decrease) in cash and cash equivalents     154,148,340       (3,332,347)
               
Cash and cash equivalents, beginning of period     3,126,202       7,838,857
               
Cash and cash equivalents, end of period   $ 157,274,542     $ 4,506,510
               
Supplemental disclosure of cash flow information              
Cash paid for interest   $ 31,846     $ 7,606
Cash paid for tax   $        $   
               
Non-cash investing and financing transactions              
Day one recognition of right of use asset and liability   $        $ 85,280
Shares issued for conversion of debt   $        $ 998
Shares and options issued for business acquisition   $ 34,430,055     $ 533,935
Shares issued as collateral returned to treasury   $        $ 30
Preferred stock dividends accrued   $ 177,505     $   
Cashless exercise of options/warrants   $ 74     $   

  

The accompanying notes are an integral part of these unaudited consolidated financial statements.  

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CLEANSPARK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.   ORGANIZATION AND LINE OF BUSINESS

 

Organization

 

The Company - CleanSpark, Inc.

 

CleanSpark, Inc. (“CleanSpark”, “we”, “our”, the "Company") was incorporated in the state of Nevada on October 15, 1987 under the name, SmartData Corporation. In October 2016, the Company changed its name to CleanSpark, Inc. in order to better reflect the Company’s brand identity.

 

The Company, through itself and its wholly owned subsidiaries, has operated in the alternative energy sector since March 2014, and in the digital currency mining sector since December 2020.

 

Acquisitions Related to Subsidiaries and/or Assets of the Company

 

CleanSpark, LLC

 

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.

 

CleanSpark Critical Power Systems, Inc.

 

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 the Company. On February 1, 2019, Pioneer Critical Power, Inc. was renamed to CleanSpark Critical Power Systems, Inc.

  

p2klabs, Inc.

 

On January 31, 2020, the Company entered into a Stock Purchase Agreement with p2klabs, Inc (“p2k”), and its sole stockholder, whereby the Company purchased all of the issued and outstanding shares of p2k from its sole stockholder. As a result of the transaction, p2k became a wholly owned subsidiary of the Company.

 

GridFabric, LLC

 

On August 31, 2020, the Company entered into a Membership Interest Purchase Agreement with GridFabric, LLC, (“GridFabric”), and its sole member, whereby the Company purchased all of the issued and outstanding membership units of GridFabric from its sole member. As a result of the transaction, GridFabric a wholly owned subsidiary of the Company.

 

ATL Data Centers LLC

 

On December 9, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger”) with ATL Data Centers LLC (“ATL”), and its members whereby the Company purchased all of the issued and outstanding membership units of ATL from its members. As a result of the transaction, ATL became a wholly owned subsidiary of the Company. (See Note 3 for details.) 

 

Solar Watt Solutions, Inc.

 

On February 23, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger”) with Solar Watt Solutions, Inc. (“SWS”), and its owners whereby the Company purchased all of the issued and outstanding shares of SWS from its owners. As a result of the transaction, SWS became a wholly owned subsidiary of the Company. (See Note 3 for details.) 

 

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Lines of Business

 

Energy Business Segment

Through CleanSpark, LLC, we provide 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. The work is generally performed under fixed price bid contracts and negotiated price contracts.

 

Through CleanSpark Critical Power Systems, Inc., we provide custom hardware solutions for distributed energy systems that serve military and commercial residential properties. The equipment is generally sold under negotiated fixed price contracts.

 

Through GridFabric, LLC, we provide Open Automated Demand Response (“OpenADR”) and other middleware communication protocol software solutions to commercial and utility customers.

 

Through Solar Watt Solutions, Inc., which we acquired in February 2021, we provide solar and alternative energy solutions for homeowners and commercial businesses in Southern California.

 

Through ATL Data Centers LLC, we 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.

 

Digital Agency Segment

 

Through p2kLabs, Inc., the Company provides design, software development, and other technology-based consulting services. The services provided are generally an hourly arrangement or fixed-fee project-based arrangements.

 

Digital Currency Mining Segment 

 

Through ATL Data Centers LLC and our recently formed subsidiary, CleanBlok, LLC, we mine Bitcoin. We entered the Bitcoin mining industry through our recent acquisition of ATL Data Centers LLC, and we have recently acquired additional equipment and infrastructure capacity in order to expand our Bitcoin mining operations.

 

2. SUMMARY OF SIGNIFICANT POLICIES

 

Basis of Presentation and Liquidity

The accompanying unaudited interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s most recent annual report on Form 10-K for the year ended September 30, 2020, filed with the SEC on December 17, 2020 (“Form 10-K”). In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim period presented in this quarterly report on Form 10-Q have been reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted.

 

The Company has incurred losses in the past while it developed its infrastructure and software platforms. As shown in the accompanying unaudited consolidated financial statements, the Company incurred operating losses of $8.7 million and produced net income of $232,510 during the six months ended March 31, 2021. The Company has sufficient capital for ongoing operations from raising additional capital through the registered sale of equity securities pursuant to a registration statement on Form S-3. (See Note 11 for additional details.) As of March 31, 2021, the Company had working capital of $171,118,618.

 

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 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, GridFabric, LLC, ATL Data Centers LLC, CleanBlok, LLC, and Solar Watt Solutions, Inc. 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 impairment, intangible assets acquired, impairments and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible accounts, and the valuations of non-cash capital stock issuances. 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.

 

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.

 

Our accounting policy on revenue recognition by type of revenue is provided below. 

 

Engineering, Service & Installation or Construction 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.

 

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.

 

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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.

 

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.

 

Contract assets represent revenue recognized in excess of amounts billed and include unbilled receivables (typically for cost reimbursable contracts) of $0 and contract work in progress (typically for fixed-price contracts) of $0 and $4,103 as of March 31, 2021 and September 30, 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. Advances that are payments on account of contract assets of $0 and $0 as of March 31, 2021 and September 30, 2020, respectively, have been deducted from contract assets. Contract liabilities represent amounts billed to clients in excess of revenue recognized to date. The Company recorded $551,977 and $64,198 in contract liabilities as of March 31, 2021 and September 30, 2020, respectively.

 

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Revenues from software 

 

The Company derives its software revenue from both subscription fees from customers for access to its (i) energy software offerings and software license sales and (ii) 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.

 

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 revenue as each deliverable is signed off by the customer.

 

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.

 

Revenues from digital currency mining

 

The Company has entered into a digital asset mining pool to provide computing power to the mining pool.  Providing computing power is the only performance obligation in the Company’s contracts with pool operators. When the Company successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. 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.  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 at the time of receipt.

 

There is currently no specific 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.

 

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 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

 

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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 six months ended March 31, 2021 and 2020, the Company reported revenues of $10,377,258 and $4,635,107, respectively.

 

Cash and cash equivalents

For purposes of 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 $157,274,542 and $3,126,202 in cash and cash equivalents as of March 31, 2021 and September 30, 2020, respectively.

 

Digital Currency

Digital currencies are included in current assets in the consolidated balance sheets. Digital currencies are recorded at cost less impairment. Digital currencies held are accounted for as intangible assets with indefinite useful lives. 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. 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 testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. 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.

 

Digital currencies awarded to 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. The Company accounts for its gains or losses in accordance with the first in first out (FIFO) method of accounting.  

 

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The following table presents the activities of the digital currencies for the six months ended March 31, 2021:

 

    Amount
Balance at September 30, 2020   $   
Additions of digital currencies     7,449,202
Realized gain on sale of digital currencies     635,627
Sale of digital currencies     (2,422,282)
Balance at March 31, 2021   $ 5,662,547

 

Accounts receivable

Accounts receivable is comprised of uncollateralized customer obligations due under normal trade terms. 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 of an allowance for doubtful accounts of $693,508 and $42,970 at March 31, 2021, and September 30, 2020, respectively.

 

Retention receivable is the amount withheld by a customer until a contract is completed. Retention receivables of $0 and $615 were included in the balance of trade accounts receivable as of March 31, 2021 and September 30, 2020, respectively.

 

Inventories

Inventories are stated at the lower of cost or net realizable value on a first-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 complete. 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.

 

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 Sheet 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.

 

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 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 primarily operates in the alternative energy sector and in the digital currency mining sector, and thus, it is 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.

 

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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.

 

Concentration Risk

At times throughout the year, the Company may maintain cash balances in certain bank accounts in excess of FDIC limits. As of March 31, 2021, the cash balance in excess of the FDIC limits was $157,024,542. 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 had certain customers whose revenue individually represented 10% or more of the Company’s total revenue. (See Note 15 for details.)

 

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’ and 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. Warranty costs and associated liabilities were $0 and $0 at March 31, 2021 and September 30, 2020, respectively.

 

Stock-based compensation

The Company follows the guidelines in FASB Codification Topic ASC 718-10 “Compensation-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 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.

 

Earnings (loss) per share

The Company reports earnings (loss) per share in accordance with Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“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 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 March 31, 2021, there are 1,522,604  shares issuable upon exercise of outstanding options and warrants, the dilutive effect of which is computed using the treasury stock method.

 

The following table sets forth the computation of basic and diluted Net income (loss) attributable to the Company’s common shareholders:

 

                               
    For three months ended   For six months ended
    March 31, 2021   March 31, 2020   March 31, 2021   March 31, 2020
Numerator:                
Net Income (Loss) attributable to the Company   $ 7,400,040     $ (5,815,098 )   $ 232,510     $ (7,731,352)
                               
Numerator for basic and diluted EPS - Income (loss) attributable to the Company's common shareholders   $ 7,222,535     $ (5,815,098 )   $ 55,005     $ (7,731,352)
                               
Denominator:                              
Denominator for basic EPS - Weighted average shares     25,925,259       5,135,802       24,025,557       4,957,491
Dilutive effect of warrants and options     1,522,604                1,522,604         
Dilutive effect of preferred stock conversions     5,250,000                5,250,000         
Denominator for diluted EPS - Adjusted weighted average shares     32,697,863       5,135,802       30,798,161       4,957,491
Basic Income (Loss) per common share   $ 0.28     $ (1.13 )   $ 0.00     $ (1.56)
Diluted Income (Loss) per common share   $ 0.22     $ (1.13 )   $ 0.00     $ (1.56)

 

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:

 

    Useful life
Machinery and equipment     1 - 7 years 
Mining equipment     3 - 15 years
Leasehold improvements     Shorter of estimated lease term or 5 years
Furniture and fixtures     1 - 5 years

 

Long-lived Assets

In accordance with the Financial Accounting Standards Board ("FASB") Accounts Standard Codification (ASC) ASC 360-10, "Property, Plant and Equipment," the carrying value of intangible assets and other long-lived assets is reviewed on a regular

 

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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 flow 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. For the six months ended March 31, 2021 and 2020, the Company did not record an impairment expense.

  

Intangible Assets and Goodwill

The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “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 purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.

 

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 and determined there was no impairment for the six months ended March 31, 2021 and 2020.

 

Software Development Costs

The Company capitalizes software development costs under guidance of ASC 985-20 “Costs of Software to be Sold, Leased or Marketed” for our mPulse platform and under ASC 350-40 “Internal Use Software” for our mVSO, Canvas & Plaid products. 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 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—software 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.

 

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Fair value of financial instruments and derivative asset

The carrying value of cash, accounts payable and accrued expenses, and debt (See Note 8) 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.

  

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 March 31, 2021 and September 30, 2020, respectively:

 

Fair value measured at March 31, 2021:

 

    Amount   Level 1   Level 2   Level 3
Derivative asset   $ 9,495,404     $        $        $ 9,495,404
Investment in equity security     729,500       729,500                
Investment in debt security     500,000                         500,000
Total   $ 10,724,904     $ 729,500     $        $ 9,995,404

 

Fair value measured at 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

 

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The below table presents the change in the fair value of the derivative asset and investment in debt security during the three months ended March 31, 2021:

 

    Amount
Balance at September 30, 2020   $ 2,615,269
Gain/(loss) on derivative asset     7,380,135
Balance at March 31, 2021   $ 9,995,404

 

Reclassifications

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations or net assets of the Company.

 

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. The Company currently has three reportable segments for financial reporting purposes.

 

Recently issued accounting pronouncements

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. 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 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The purpose of the standard is 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 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 in the initial fiscal year of adoption) to the new disclosure requirements for (1) changes in unrealized gains and losses included in other comprehensive income and (2) the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 also requires prospective application to any modifications to disclosures made because of the change to the requirements for the narrative description of measurement uncertainty. The effects of all other amendments made by ASU 2018-13 must be applied retrospectively to all periods presented. The new standard did not have a material impact on the Company’s results of operations or cash flows.

 

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 comparing the fair value of a reporting unit with its carrying amount. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019. The new standard did not have a material impact on the Company’s results of operations or cash flows.

 

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.

 

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.

 

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3. ACQUISITIONS

 

SOLAR WATT SOLUTIONS, INC

 

On February 23, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with SWS (“SWS”) and its owners (the “Sellers”).

 

At the closing on February 24, 2021, SWS became a wholly owned subsidiary of the Company. In exchange, the Company issued (i) 477,703 shares of restricted common stock based on the average closing price of the Company’s common stock (as reflected on Nasdaq.com) for the five trading days including and immediately preceding the closing date of $32.74 per share to the sellers, of which (a) 167,685 shares would be fully earned on closing, and (b) an additional 310,018   shares were issued and held in escrow, 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 prior 30 days for a period of 36 months following the closing, and (ii) up to $3,850,000 in cash was remitted to the Sellers, of which: (c) $1,350,000 was remitted to Sellers on a pro rata basis at closing, less payment of $500,000 in Sellers’ debt at closing, (d) $200,000 in cash was held back by the Company for a period of nine months to satisfy potential damages from indemnification claims and any amounts owed pursuant to post-closing adjustments, (e) an additional $100,000 in cash was held back by the Company for a period of 90 days to satisfy any amounts owed pursuant to post-closing adjustments, and (f) up to $2,500,000 in cash was held back by the Company pending the Sellers’ satisfaction of certain 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:   Fair Value
Cash   $ 1,350,000
Contingent consideration     2,500,000
477,703   shares of common stock     13,246,704
Total Consideration   $ 17,096,704

 

The total purchase price was allocated to identifiable assets deemed acquired, and liabilities assumed, based on their estimated fair values as indicated below. The business combination accounting is not yet final and the amounts assigned to the assets acquired and the liabilities assumed are provisional. Therefore, this may result in future adjustments to the provisional amounts as new information is obtained about the facts and circumstances that existed at the acquisition date.

 

Purchase Price Allocation:    
Customer List   $ 5,122,733
Goodwill   $ 12,051,206
Other assets and liabilities assumed, net   $ (77,235)
Total   $ 17,096,704

 

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ATL DATA CENTERS, LLC

 

On December 9, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger”) with ATL Data Centers LLC (“ATL”) and its members.

 

At the closing, ATL became a wholly owned subsidiary of the Company. In exchange, the Company issued 1,618,285 shares of restricted common stock based on the average closing price of the Company’s common stock (as reflected on Nasdaq.com) for the five trading days including and immediately preceding the closing date of $11.988 per share, to the selling members of ATL, of which: (i) 642,309 shares were fully earned on closing, and (ii) an additional 975,976 shares were issued and held in escrow, 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 the average daily trading value of the prior 30 days.

 

The consideration remitted in connection with the 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 41,708 shares of common stock for an aggregate value of $545,916 to the broker.

 

The Company accounted for the acquisition of ATL as an acquisition of a business under ASC 805.

The Company determined the fair value of the consideration given to the selling members of ATL in connection with the transaction in accordance with ASC 820 was as follows:

 

Consideration:   Fair Value
1,618,285 shares of common stock   $ 21,183,351
Total Consideration   $ 21,183,351

 

The total purchase price was allocated to identifiable assets deemed acquired, and liabilities assumed, based on their estimated fair values as indicated below. The business combination accounting is not yet final and the amounts assigned to the assets acquired and the liabilities assumed are provisional. Therefore, this may result in future adjustments to the provisional amounts as new information is obtained about the facts and circumstances that existed at the acquisition date.

 

Purchase Price Allocation:    
Strategic contract   $ 7,457,970
Goodwill   $ 14,079,712
Other assets and liabilities assumed, net   $ (354,331)
Total   $ 21,183,351

The strategic contract relates to supply of a critical input to our digital currency mining business. The other assets and liabilities assumed includes $5.475 million in digital currency mining equipment and notes payable related to this equipment, which was settled by the Company during the six months ended March 31, 2021.

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.

 

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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) 31,183 restricted shares of the Company’s common stock, valued at $145,000, were issued to the Seller (the “Shares”). The Shares are subject to certain lock-up and leak-out provisions whereby the 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”); 
     
  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; and 
     
  d)

64,516 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. As of March 31, 2021, based on actual revenue milestones achieved, 56,444 restricted shares of the Company’s common stock were released to the Seller and the balance of 8,072 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 $4.65 per share which was the closing price of the Company’s common stock on January 31, 2020.

     
  e) 26,950 common stock options which were deemed to have a fair market value of $88,935 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.

 

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
95,699 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

 

GRIDFABRIC, LLC

 

On August 31, 2020, the Company entered into a Membership Interest Purchase Agreement (the “Agreement”) with GridFabric, and its sole member, Dupont Hale Holdings, LLC (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, became a wholly owned subsidiary of the Company.

 

Pursuant to the terms of the Agreement, the Purchase Price was as follows:

 

  a) $360,000 in cash was paid to the Seller at closing;
  b)   $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;

 

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  c)    26,427 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 $750,000, 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 $9.46 per 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.

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   $ 400,000
26,427 shares of common stock   $ 250,000
Contingent consideration - common stock issuable upon achievement of milestone(s)   $ 750,000
Total Consideration   $ 1,400,000

 

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

 

The following is the unaudited pro forma information assuming the acquisition of GridFabric, p2k Labs, ATL, and SWS occurred on October 1, 2019:

 

                               
    For the Three Months Ended   For the Six Months Ended
    March 31, 2021   March 31, 2020   March 31, 2021   March 31, 2020
Net sales   $ 8,907,200     $ 4,928,256     $ 12,967,229     $ 6,736,346
                               
Net income/ (loss)   $ 7,208,568     $ (5,531,940 )   $ (551,184 )   $ (7,962,293)
                               
Earnings/(loss) per common share - basic   $ 0.27     $ (0.97 )   $ (0.02 )   $ (1.43)
                               
Weighted average common shares outstanding - basic     26,402,962       5,727,560       26,121,545       5,549,249
                               
Earnings/(loss) per common share - diluted
  $ 0.22     $ (0.97 )   $ (0.02 )   $ (1.43)
                               
Weighted average common shares outstanding - diluted     33,175,566       5,727,560       26,121,545       5,549,249

 

 

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.

 

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4. INVESTMENT IN INTERNATIONAL LAND ALLIANCE

 

International Land Alliance, Inc.

 

On November 5, 2019, the Company entered into a binding Memorandum of Understanding (the “MOU”) with International Land Alliance, Inc., 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’s development and construction of certain projects, the Company entered into a Securities Purchase Agreement, dated as of November 6, 2019, with ILAL (the “ILAL SPA”).

 

Pursuant to the terms of the ILAL SPA, ILAL sold, and the Company purchased 1,000 shares of Series B Preferred Stock (the “Preferred Stock”) of ILAL for an aggregate purchase price of US $500,000 (the “Stock Transaction”), less certain expenses and fees. The Company also received 350,000 shares (“commitment shares”) of ILAL’s common stock. The Preferred Stock will accrue cumulative in-kind accruals at a rate of 12% per annum and may increase upon the occurrence of certain events. The Preferred is now convertible into common stock at a variable rate as calculated under the agreement terms.

 

The commitment shares are recorded at fair value as of March 31, 2021 of $729,500.

 

The Preferred Stock is recorded as an AFS debt security and is reported at its estimated fair value as of March 31, 2021. The Company identified a derivative instrument in accordance with ASC Topic No. 815 due to the variable conversion feature. Topic No. 815 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.

  

The Black-Scholes model utilized the following inputs to value the derivative asset at the date in which the derivative asset was determined through March 31, 2021.

 

Fair value assumptions:   March 31, 2021
Risk free interest rate     0.09%
Expected term (months)   1.5
Expected volatility     141.83%
Expected dividends     0%

 

5. CAPITALIZED SOFTWARE

 

Capitalized software consists of the following as of March 31, 2021 and September 30, 2020:

 

    March 31, 2021   September 30, 2020
mVSO software   $ 437,135     $ 437,135
mPulse software     741,846       741,846
Less: accumulated amortization     (286,761 )     (202,778)
Capitalized Software, net   $ 892,220     $ 976,203

 

Capitalized software amortization recorded as cost of revenues and product development expense for the six months ended March 31, 2021 and 2020 was $83,983 and $79,705, respectively.  

 

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6. INTANGIBLE ASSETS

 

The Company amortizes intangible assets with finite lives over their estimated useful lives, which range between two and twenty years as follows:

 

Useful life      
Patents     13-20 years
Websites     3 years
Customer list and non-compete agreement     1.5-4 years
Design assets     2 years
Trademarks     14 years
Engineering trade secrets     1-7 years
Strategic contract     5 years
Software     4 years

 

Intangible assets consist of the following as of March 31, 2021 and September 30, 2020:

 

    March 31, 2021   September 30, 2020
Patents   $ 74,112     $ 74,112
Websites     8,115       8,115
Customer list and non-compete agreement     11,824,757       6,702,024
Design assets     123,000       123,000
Trademarks     5,928       5,928
Trade secrets     4,370,269       4,370,269
Software     1,120,000       1,120,000
Strategic contract     7,457,970          
Intangible assets:     24,984,151       12,403,448
Less: accumulated amortization     (7,651,331 )     (5,353,792)
Intangible assets, net   $ 17,332,820     $ 7,049,656

 

Amortization expense for the six months ended March 31, 2021 and 2020 was $2,225,991 and $1,269,293, respectively.

 

The Company expects to record amortization expense of intangible assets over the next 5 years and thereafter as follows:

 

           
2021 (six months remaining)     $ 3,882,949  
2022       7,072,469  
2023       2,492,479  
2024       2,065,344  
2025       1,495,888  
Thereafter       323,691  
Total     $ 17,332,820  

 

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7. PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consist of the following as of March 31, 2021 and September 30, 2020:

 

    March 31, 2021   September 30, 2020
Machinery and equipment   $ 260,839     $ 193,042
Mining equipment     15,497,826         
Leasehold improvements     17,965       17,965
Furniture and fixtures     105,362       82,547
 Total     15,881,992       293,554
Less: accumulated depreciation     (1,020,034 )     (175,560)
Fixed assets, net   $ 14,861,958     $ 117,994

 

Depreciation expense for the six months ended March 31, 2021 and 2020 was $930,324 and $32,071, respectively.

 

The Company has purchase commitments for approximately $146.5 million related to purchase of miners as of March 31, 2021, and the Company has paid $42.8 million towards these commitments as of the end of this period.   

 

8. LOANS

 

Long term

 

               
Long-term loans payable consists of the following:   March 31, 2021   September 30, 2020
         
Promissory notes   $        $ 531,169
               
Total   $        $ 531,169

  

Promissory Notes

 

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 “PPP Loan”). The PPP Loan, which took the form of a promissory note issued by the Company (the “PPP Note”) matures on May 7, 2022 and bear interest at a rate of 1.0% per annum.

 

The Company applied for and received loan forgiveness from the SBA on March 23, 2021. The entire principal balance and interest charges were forgiven.

 

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9. LEASES

 

Effective October 1, 2019, the Company accounts for its leases under ASC 842, 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 and disclosures have not been adjusted.

 

The Company has operating leases under which it leases its branch offices, corporate headquarters, and data center, one of which is with a related party. As of March 31, 2021, the Company's operating lease right of use asset and operating lease liability totaled $713,158 and $713,023, respectively. A weighted average discount rate of 10% was used in the measurement of the right of use asset and lease liability. 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 operating leases have remaining lease terms between one year to two years, with a weighted average lease term of 1.15 years at March 31, 2021. 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 March 31, 2021. These operating leases also have a weighted average discount rate of 10% at March 31, 2021.

 

The following is a schedule of the Company's operating lease liabilities by contractual maturity as of March 31, 2021:

     
Fiscal year ending September 30, 2021 (six months remaining)   $ 335,094
Fiscal year ending September 30, 2022     420,931
Total Lease Payments     756,025
Less: imputed interest     (43,002)
Total present value of lease liabilities   $ 713,023

 

Total operating lease costs of $ 208,536 and $48,459 for the six months ended March 31, 2021 and 2020, respectively, were included as part of administrative expense.

  

The Company has financing leases in relation to the equipment used at its data center. The following is a schedule of the Company’s financing lease liabilities by contractual maturity as of March 31, 2021:

       
Fiscal year ending September 30, 2021 (six months remaining)   $ 208,818
Fiscal year ending September 30, 2022     417,636
Fiscal year ending September 30, 2023     325,100
Fiscal year ending September 30, 2024     128,089
Fiscal year ending September 30, 2025     12,320
Thereafter     1,854
Total Lease Payments     1,093,817
Less: imputed interest     (141,284)
Total present value of lease liabilities   $ 952,533

 

These financing leases have a weighted average lease term of 3.13 years and a weighted average discount rate of 10.0% at March 31, 2021.

 

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10. RELATED PARTY TRANSACTIONS 

  

Zachary Bradford – Chief Executive Officer and Director

 

During the six months ended March 31, 2021, the Company paid Blue Chip Accounting, LLC (“Blue Chip”) $90,365 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 bookkeeping, accounting, and administrative support assistance. The Company also sub-leases office space from Blue Chip (see Note 15 for additional details). During the six months ended March 31, 2021, $9,150 was paid to Blue Chip for rent.

 

Matthew Schultz - Chairman of the Board

 

The Company 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 $49,500 in fees plus $176,000 in expense reimbursements for the six months ended March 31, 2020. The agreement was terminated in March 2020.

 

11. STOCKHOLDERS EQUITY

  

Overview

 

The Company’s authorized capital stock consists of 50,000,000 shares of common stock and 10,000,000 shares of preferred stock, par value $0.001 per share. As of March 31, 2021, there were 33,874,152 shares of common stock issued and outstanding, and 1,750,000 shares of preferred stock issued and outstanding. 

 

Amendment to Articles of Incorporation

 

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 (1,000,000) shares to two million (2,000,000) shares, par value $0.001.

 

Under the Certificate of Designation, holders of Series A Preferred Stock will be entitled to quarterly dividends on 2% of our earnings before interest, taxes and amortization. The dividends are payable in cash or common stock. The holders will also have a liquidation preference on the state 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 7, 2020, the Company executed that certain first amendment to 2017 Equity Incentive Plan to increase its option pool from 300,000 to 1,500,000 shares of common stock (the “Plan Amendment”).

 

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 50,000,000

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Common Stock issuances during the six months ended March 31, 2021

 

The Company issued 4,444,445 shares of the Company’s common stock in connection with its underwritten equity offering at a price of $9.00 per share for net proceeds of $37.05 million.

 

The Company issued 236,000 shares of common stock as settlement of accrued bonus compensation related to the year ended September 30, 2020. The fair value of these shares is $1.9 million and was fully expensed for in the prior year. The Company issued 222,725 shares of common stock for the current year related to bonus compensation. The fair value of these shares is $1.07 million and $582 thousand has been expensed during the six months ended March 31, 2021.

 

The Company issued 1,618,285 shares of common stock in relation to the acquisition of ATL (See Note 3 for additional details.)

 

The Company issued 43,749 shares of common stock for services rendered for a total fair value of $576 thousand and has been fully expensed during the six months ended March 31, 2021.

 

The Company issued 339,035 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 477,703 shares of common stock in relation to the acquisition of SWS (See Note 3 for additional details.)

 

The Company issued 18,392 restricted stock units for a total fair value of $510,000 of common shares 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 one year and we have expensed $42,500 during the six months ended March 31, 2021.

 

The Company issued 9,090,910 shares of the Company’s common stock in connection with its underwritten public equity offering at a price of $22.00 per share for net proceeds of $187.2 million.

 

Common stock returned during the six months ended March 31, 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.)

 

Common Stock issuances during the six months ended March 31, 2020

 

The Company issued 997,605 shares of common stock in accordance with the terms of the convertible debt agreement due to the decrease in stock price.

 

The Company issued 2,000 shares of common stock for services rendered to an independent consultant.

 

The Company issued 793 shares of common stock as a result of rounding related to the reverse stock split.

  

The Company issued 95,699 shares of common stock in relation to the acquisition of p2k

 

Common stock returned during the six months ended March 31, 2020 

 

As a result of a note payoff on December 5, 2019, 5,000 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, 25,000 shares were returned to treasury and cancelled on February 10, 2020.

 

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Series A Preferred Stock issuances during the six months ended March 31, 2020

 

On October 4, 2019, the Company authorized the issuance of a total of seven hundred and fifty thousand (750,000) shares of its designated Series A Preferred Stock to three members of its board of directors for services rendered.  A fair value of $0.02 per share was determined by the Company. Director fees of $15,000 was recorded as a result of the stock issued.

 

We accrued $177,505 in preferred stock dividends payable for the three months ended March 31, 2021.

 

12. STOCK WARRANTS

 

The following is a summary of stock warrant activity during the six months ended March 31, 2021.

 

    Number of Warrant Shares   Weighted Average Exercise Price
Balance, September 30, 2020     1,299,065     $ 21.78
Warrants granted                
Warrants expired                
Warrants canceled                
Warrants exercised     243,196       11.08
Balance, March 31, 2021     1,055,869     $ 24.16

  

 

During the six months ended March 31, 2021, a total of 166,396 shares of the Company’s common stock were issued in connection with the exercise of 166,396 common stock warrants at exercise prices ranging from $3.36 and $20.00, for a total consideration of $2,774,812.

 

On March 31, 2021, a total of 74,437 shares of the Company’s common stock were issued in connection with the cashless exercise of 76,800 common stock warrants at exercise prices ranging from $0.83 to $3.67.

 

As of March 31, 2021, the outstanding warrants have a weighted average remaining term of was 0.77 years and an intrinsic value of $6,073,392.

 

As of March 31, 2021, there are warrants exercisable to purchase 1,048,012 shares of common stock in the Company and 7,857 unvested warrants outstanding that cannot be exercised until vesting conditions are met. 858,699 of the warrants require a cash investment to exercise as follows, 2,500 require a cash investment of $8.00 per share, 439,865 require a cash investment of $15.00 per share, 103,000 require a cash investment of $25.00 per share, 200,000 require an investment of $35.00 per share, 10,000 require an investment of $40.00 per share, 60,000 require an investment of $50.00 per share, 38,333 require a cash investment of $75.00 per share and 5,000 require a cash investment of $100.00 per share. 197,170 of the outstanding warrants contain provisions allowing a cashless exercise at their respective exercise prices.

 

13. STOCK OPTIONS

 

The Company sponsors 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. On October 7, 2020, the Company executed a first amendment to the Plan to increase its share pool from 300,000 to 1,500,000 shares of common stock. As of March 31, 2021, there were 461,767 shares available for issuance under the Plan.

The Plan allows the Company to grant incentive stock options, non-qualified stock options, stock appreciation right, or restricted stock. 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. 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. 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.

 

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The following is a summary of stock option activity during the six months ended March 31, 2021.

 

    Number of Option Shares   Weighted Average Exercise Price
Balance, September 30, 2020     277,948     $ 6.34
Options granted     298,500       9.03
Options expired     11,511       8.65
Options cancelled                
Options exercised     98,202       5.82
Balance, March 31, 2021     466,735     $ 8.11

 

As of March 31, 2021, there are options exercisable to purchase 338,191 shares of common stock in the Company. As of March 31, 2021, the outstanding options have a weighted average remaining term of was 2.43 years and an intrinsic value of $7,345,720.

 

Option activity for the six months ended March 31, 2021

 

During the six months ended March 31, 2021, a total of 98,202 shares of the Company’s common stock were issued in connection with the exercise of 98,202 common stock options at exercise prices ranging from $4.65 and $24.40, for a total consideration of $571,747.

 

During the six months ended March 31, 2021, the Company issued 298,500 options with a total fair value of $2,696,715 to purchase shares of common stock to employees. The Company offset $953,125 of stock compensation expense against bonuses accrued during the prior year. The shares were granted at quoted market prices ranging from $7.55 to $34.67 and were valued at issuance using the Black Scholes model. 

 

The Black-Scholes model utilized the following inputs to value the options granted during the six months ended March 31, 2021:

 

Fair value assumptions – Options:   March 31, 2021
Risk free interest rate     0.18-0.22%
Expected term (years)     3
Expected volatility     167%-172%
Expected dividends     0%

 

During the six months ended March 31, 2021 and 2020, the Company recognized of $1,163,401and $716,740 of stock compensation expense respectively. As of March 31, 2021, the Company expects to recognize $742,865 of stock-based compensation for the non-vested outstanding options over a weighted-average period of 1.01 years.

 

Option activity for the six months ended March 31, 2020

 

During the six months ended March 31, 2020, the Company issued 233,233 options to purchase shares of common stock to employees, the shares were granted at quoted market prices ranging from $4.50 to $8.50. 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.

 

The Black-Scholes model utilized the following inputs to value the options granted during the six months ended March 31, 2020:

 

Fair value assumptions – Options:   March 31, 2020
Risk free interest rate     0.85-1.73%
Expected term (years)     3-5
Expected volatility     124%-209%
Expected dividends     0%

 

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14. COMMITMENTS AND CONTINGENCIES

 

Office leases

 

Utah Corporate Office

 

On November 22, 2019, the Company entered into a lease to relocate the corporate office to 1185 South 1800 West, Suite 3, Woods Cross, UT 84047. The agreement calls for the Company to make payments of $2,300 in base rent per month through February 28, 2021. The lease renewed and is on an annual basis through February 28, 2022.

 

San Diego Office

 

On May 15, 2018, the Company executed a 37 month 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.  

 

Las Vegas Offices

 

On January 2, 2020, the Company entered into a sublease agreement with Blue Chip 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.

 

Atlanta Offices

 

The Company assumed ATL’s lease agreement entered into on June 6, 2020 at 2380 Godby Road, Atlanta GA 30349. The agreement calls for $52,958 per month in base rent through June 4, 2022.

 

Contingent consideration

On August 31, 2020, the Company acquired GridFabric. Pursuant to the terms of the purchase agreement, additional shares of the Company’s common stock valued at up to $750,000 will be issuable if GridFabric achieves certain revenue and product release milestones.

 

On February 24, 2021, the Company acquired SWS. Pursuant to the terms of the purchase agreement, additional cash consideration of $2,500,000 will be payable if Solar Watt Solutions achieves certain revenue milestones.

 

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.

 

For a description of our material pending legal proceedings, please see Part II, Item I of this Quarterly Report on Form 10Q.

  

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15. MAJOR CUSTOMERS AND VENDORS

 

For the six months ended March 31, 2021 and 2020, the Company had the following customers that represented more than 10% of our sales.

 

    March 31, 2021   March 31, 2020
Customer A     10.3     55.5%
Customer B     —      24.4%

 

For the three months ended March 31, 2021 and 2020, the Company had the following suppliers that represented more than 10% of our direct material costs. Internally developed product costs and labor for services rendered are excluded from the calculation.

 

    March 31, 2021   March 31, 2020
Vendor A     34.62 %     92.27%

 

16. 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 following reportable segments:   

 

Energy Segment – Consisting of our CleanSpark, LLC, CleanSpark Critical Power Systems, Inc., GridFabric, and SWS. lines of business, this segment provides services, equipment, and software to the energy industry.

 

Digital Agency Segment – p2k provides design, software development, and other technology-based consulting services.

 

Digital Currency Mining Segment – Consisting of ATL and CleanBlok, LLC, this segment mines digital currency assets, namely Bitcoin.

 

                                       
    Three Months Ended March 31, 2021
                     
      Energy       Digital Agency       Digital Currency Mining       Inter-segment       Consolidated
                                       
Revenues   $ 1,103,368     $ 425,881     $ 6,715,792     $ (125,353 )   $ 8,119,688
                                       
Total cost and expenses     10,327,198       (197,048 )     611,863       (125,353 )     10,616,660
                                       
Income/(loss) from operations     (9,223,830 )     622,929       6,103,929                (2,496,972)
                                       
                                       
Capital expenditures     12,565       972       9,025,392                9,038,929
                                       
Depreciation and amortization   $ 844,018     $ 285,718     $ 987,436              $ 2,117,172

 

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    Three Months Ended March 31, 2020
                     
      Energy       Digital Agency       Digital Currency Mining       Inter-segment       Consolidated
                                       
Revenues   $ 3,426,424     $ 296,530     $        $ (64,671 )   $ 3,658,283
                                       
Total cost and expenses     5,750,335       244,671                (64,671 )     5,930,335
                                       
Income/(loss) from operations     (2,323,911 )     51,859                         (2,272,052)
                                       
                                       
Capital expenditures     15,463                                  15,463
                                       
Depreciation and amortization   $ 645,484     $ 69,521     $                 $ 715,005

 

 

                                       
    Six Months Ended March 31, 2021
                     
      Energy       Digital Agency       Digital Currency Mining       Inter-segment       Consolidated
                                       
Revenues   $ 2,327,990     $ 807,207     $ 7,449,202     $ (207,141 )   $ 10,377,258
                                       
Total cost and expenses     18,181,086       179,863       890,520       (207,141 )     19,044,328
                                       
Income/(loss) from operations     (15,853,096 )     627,334       6,558,682                (8,667,070)
                                       
                                       
Capital expenditures     27,740       4,879       9,025,392                9,058,011
                                       
Depreciation and amortization   $ 1,592,357     $ 362,126     $ 1,271,780              $ 3,226,263

 

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    Six Months Ended March 31, 2020
                     
    Energy   Digital Agency   Digital Currency Mining   Inter-segment   Consolidated
                     
Revenues   $ 4,403,247     $ 296,530     $        $ (64,670 )   $ 4,635,107
                                       
Total cost and expenses     9,718,619       244,671                (64,470 )     9,898,620
                                       
Income/(loss) from operations     (5,315,372 )     51,859                         (5,263,513)
                                       
                                       
Capital expenditures     24,910       0                         24,910
                                       
Depreciation and amortization   $ 1,311,548     $ 69,521     $                 $ 1,381,069

 

 

                                 
    March 31, 2021
     
    Energy   Digital Agency   Digital Currency Mining   Consolidated
                 
Accounts Receivable   $ 1,436,435     $ 319,687     $        $ 1,756,122  
                                 
Goodwill   $ 16,975,703     $ 939,853     $ 14,119,003     $ 32,034,559  
                                 
Total Assets   $ 232,380,406     $ 2,546,822     $ 57,685,368     $ 292,612,596  

  

 

                               
   

 

September 30, 2020

     
      Energy       Digital Agency       Digital Currency Mining       Consolidated
                               
Accounts Receivable   $ 919,500     $ 127,854     $        $ 1,047,353
                               
Goodwill   $ 4,926,253     $ 977,388     $        $ 5,903,641
                               
Total Assets   $ 20,212,873     $ 2,127,190     $        $ 22,340,063

 

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17. SUBSEQUENT EVENTS

 

On April 1, 2021, the Company issued 7,144 shares of common stock in connection with a Common Stock warrant exercise at an exercise price of $15.00 per share. The Company received $107,160 as a result of the issuance.

 

During April 2021, the Company received approximately 900 S19 pro mining servers against the orders it placed during the months of March and April 2021.

 

On April 2, April 6, April 9, April 14, and April 29, 2021 the  Company entered into agreements with cryptocurrency mining equipment suppliers to purchase an aggregate of approximately 23,900 mining servers for an aggregate purchase price of $192,307,550.   We paid $90,164,750 towards these miner purchases in April 2021.

 

On April 16, 2021, as more specifically described in that certain Current Report on Form 8-K filed by the Company with the SEC on April 16, 2021, at the recommendation of the Company’s Compensation Committee, the Company’s board of directors approved certain executive compensation matters with key executives Zachary Bradford, Lori Love and S. Matthew Schultz (the “Executives”). Specifically, amendments to the employment agreements of the Executives were approved which provided (i) an additional cash bonus incentive for Ms. Love based on the Company achieving certain annual gross revenues plus realized gains/losses for the current fiscal year, (ii) the addition of non-cash components to the base salaries of Mr. Bradford and Mr. Schultz in the form of certain monthly payments of Bitcoin, and (iii) additional cash and equity bonus incentives for Mr. Bradford and Mr. Schultz based on the Company achieving certain annual gross revenues plus realized gains/losses in the current fiscal year as well as certain market capitalization milestone targets for the current fiscal year. Additionally, the Executives received (i) one-time cash incentive bonuses, (ii) one-time grants of fully vested RSUs and (iii) option grants to acquire shares of common stock that vest over 36 months.

Certain of the additional equity incentive grants set forth above will be granted to the extent there are available shares under the Company’s 2017 Equity Incentive Plan (the “Plan”) with any remaining equity grants to be granted when the Company obtains shareholder approval to increase the shares available under the Plan.

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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements 

 

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.

 

Company Overview

 

We are in the business of providing advanced software and controls technology solutions to solve modern energy challenges. We have a suite of software solutions that provide end-to-end 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 are summarized as follows:

 

  mVSO Platform: Energy modeling software for microgrid design and sales

 

  mPulse Platform: Patented, proprietary controls platform that enables integration and optimization of multiple energy sources.

 

  Canvas: Middleware used by Grid Operators and Aggregators to administrate load shifting programs.

 

  Plaid: Middleware used by Controls and IoT Product Companies to participate in load shifting programs

 

In addition, following our acquisition of Solar Watt Solutions, Inc. (“Solar Watt”) in February 2021, we are in the process of developing our mVoult platform, which we expect will be a proprietary platform that would enable integration and optimization of solar, energy storage and back-up generators for residential applications.

 

The Platforms are designed to allow customers to design, build, and operate 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 provides resiliency and economic optimization and/or revenue generation through wholesale market activities.

  

We also own patented gasification technologies. Our technology converts any organic material into SynGas, 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 plan to continue to focus on our other product offerings, as opposed to expending significant efforts on the Gasifier side of the business.

 

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Distributed Energy Management and Microgrid Industry

 

Integral to our business is our Distributed Energy Management (or “DER”) business. The main assets of our DER business include our proprietary software systems (“Systems”) and our engineering and methodology trade secrets. The distributed energy systems and microgrids that utilize our Systems are capable of providing secure, sustainable energy with significant cost savings for energy customers. Through the Systems, customers are able 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 that supply and manage power in a manner that avoids interruptions.

 

Around the world, aging energy grids are becoming unstable and unreliable due to increases in loads and the widespread lack of new large-scale generation facilities. This inherent instability in existing energy grids is compounded by pressure to integrate a growing number and variety of renewable but intermittent energy generation assets and advanced technologies into outdated electrical grid systems. Simultaneously, defense 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 on existing energy grid, reduce utility costs, utilize cleaner power and enhance energy security and surety.

 

The convergence of these factors has created, and is expected to continue to create 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 load, both connected to the utility grid and “islanded,” separate from the utility grid. 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 microgrid 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.

 

mPulse Software Suite

 

mPulse is a modular platform that provides intelligent control of a Microgrid based on a system’s 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 of mPulse 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.

Our mPulse software also serves as 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. As a DER system, mPulse is 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 designed and intended for commercial, industrial, defense, campus and residential users and ranges in capacity from 4 kilowatts to 100 megawatts and beyond.

 

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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.

 

mVoult — Residential Platform

 

mVoult is a smart power system that is under development and is expected to provide a single solution for resilient, reliable and cost-effective energy for residential properties of all sizes. Our systems will be able to be configured to a homeowner’s needs upon installation, with flexibility for future expansion.

 

Our mVoult software will direct microgrid system operations to manage solar, battery, and utility power. It will be capable of providing resilient, sustainable and low-cost energy for a residential microgrid, allowing a home to stay powered during utility outages or during events, such as fires and natural disasters, when a utility may otherwise shut down or be unable to provide service.

 

Microgrid Value Stream Optimizer (mVSO)

Our 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 our customers’ sites 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 the way in which energy 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 customer’s site based on factors, including, among others, the financial and economic results, equipment outlay and utility cost savings, to arrive at payback and internal rate of return values. This ultimately provides our customers with data to design a distributed energy and/or microgrid system that will meet the customers’ performance benchmarks. The mVSO 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

 

Through our 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 our wholly-owned subsidiary, GridFabric, LLC, (“GridFabric”) we offer Open Automated Demand Response (or OpenADR) solutions to commercial and utility customers. We provide middleware software solutions for utilities and IoT products that manage energy loads. OpenADR 2.0b is now the basis for the standard to be developed by the International Electrotechnical Commission, which is an organization that prepares and publishes international standards for all electrical, electronic and related technologies. Our core products in this area of our business are Canvas and Plaid.

Canvas is an OpenADR 2.0b Virtual Top Node (or VTN) built for testing and managing Virtual End Nodes (or VENs) that pilot and run load shifting programs. Canvas is offered to customers in the cloud as a software as a service (SaaS) solution or as a licensed software.

 

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Plaid

 

Plaid is a licensed software solution that allows any internet-connected product that uses energy (i.e., solar, storage & inverters, demand response, electric vehicle charging, lighting, industrial controls and building management systems) to add load shifting capabilities by translating load shifting protocols into their existing application programing interface (or API). Companies that implement Plaid receive a Certified OpenADR 2.0b Virtual End Node upon completion of the implementation process.

 

Bitcoin Mining — ATL Data Centers and CleanBlok

 

Through our wholly-owned subsidiaries, ATL Data Centers LLC (“ATL”) and our recently-formed subsidiary, CleanBlok, LLC, we mine bitcoin.

 

Bitcoin was first introduced in 2008 with the goal of serving as a means of exchanging and storing value. Bitcoin is a new 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 was the first decentralized peer-to-peer payment network powered by those 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. In order 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, which is often called “mining.” For successfully solving the problems and providing computing power to the network, the computer is rewarded with bitcoins, both in the form of newly-created bitcoins and fees in bitcoin.

 

Factors such as access to computer processing capacity, interconnectivity, electricity cost, environmental factors (such as cooling capacity) and location play an important role in mining. Our current facilities are capable of producing an over 300 PH/s in hash rate capacity. In cryptocurrency mining, “hash rate” is a measure of the processing capacity and speed by a mining computer to mine and process transactions on the bitcoin network. Our activities in this area, in addition to generating revenue in the form of bitcoin, creates an advantageous business opportunity for us to operate a full-scale, demonstration facility of our energy-related products and solutions. We plan to deploy our energy technologies and trade secrets in our bitcoin mining operations with the goal of maximizing energy savings, expanding total power capacity, providing resilient electricity, and reducing greenhouse gas emissions. We anticipate that implementing this strategy will involve the design and installation of multiple microgrids at the ATL Data Center facility. We are in the process of actively expanding this aspect of our business and are working toward expanding our hash rate capacity, with the goal of exceeding 1.0 EH/s in hash rate capacity in fiscal year 2021.

 

As a result of our mining operations, we acquire bitcoin, and, while we have to date retained a significant portion of the bitcoin from our mining operations (typically maintaining the bitcoin at a digital asset exchange), we have sold, and may from time to time sell, bitcoin from our inventory. 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 in our inventory are currently determined by individuals analyzing forecasts and monitoring the market in real time.

As with many new and emerging technologies, our bitcoin mining activities present potentially significant risks to our business. Businesses (including ours) that seek to develop, promote, adopt, transact or rely upon blockchain technologies and bitcoin may have a limited track record and operate within novel and developing environments. These risks are not only related to the businesses we are pursuing, but also the industry as a whole and the concept behind blockchain and cryptocurrency as value creation. In addition, our holding and selling of bitcoin may subject us to additional risks, including the possibility that our activities may become subject to additional regulation or regulatory scrutiny.

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Energy system integration and installation — Solar Watt Solutions

 

Following our acquisition of Solar Watt Solutions, Inc. in February 2021, we provide solar and alternative energy solutions for homeowners and commercial businesses in Southern California. These energy solutions include implementation and installation services for solar panels, energy storage and electric vehicle charging station systems. Solar Watt has historically been focused on serving the communities throughout California, and we intend to work to further expand those services to other regions outside of Southern California. Through these efforts, we expect to leverage those services and capacities to further expand our residential and commercial initiatives, including our mVoult product line for residential microgrids and our mPulse product line for commercial microgrids.

 

Digital Agency Products and Services — p2kLabs

 

Through our 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. Such services are provided through “labs,” with each lab containing its own unique offering, including design, marketing/digital content, engineering and SalesForce development, and strategy services.

 

Legacy Gasifier Business

 

We own patented gasification technologies that convert any organic material into synthesis gas (“SynGas”). Our patents protect 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, which can then 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, if processed directly, it generally does not require costly hot-gas cleanup.

 

Our gasification technologies and prototype will require additional testing to further establish their commercial capability of producing large volumes of clean, renewable energy from any carbon compound (municipal solid waste (MSW), coal, sewage sludge) into clean SynGas. Our prototype gasifier is still under development and a commercially viable gasifier is not expected to be viable for sale until we expend additional resources on its testing and development. A third-party consulting firm has independently tested the gasifier’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 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 do not anticipate deploying significant resources on the gasification business at this time. As opportunities arise, we may utilize the gasification assets and intellectual properties through licensing or sales agreements.

 

At this time, we are not engaged in any negotiations to sell or license our gasifier products to any customers.

 

 Government Regulation

As described above, following our acquisition of ATL Data Centers in December 2020, we are engaged in the business of mining and selling bitcoin. As a result, we may become subject to government regulation of blockchain and cryptocurrency, including bitcoin, which has been developing rapidly in the United States federal government through a number of federal agencies and regulatory bodies, as well as in other countries by similar entities. State government regulations also may apply to our current operations and activities as well as other activities in which we participate or may participate in the future. Furthermore, transnational organizations and semi-governmental agencies have shown an interest in regulating or investigating companies engaged in the blockchain or cryptocurrency business. We expect regulation in this space to continue to evolve.

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These and other regulations, including regulations that may become applicable to our business in the future, may substantially change in the future, and it is presently not possible to know how or when any such regulations will apply to our businesses. We may also become subject to new laws and further regulation by the SEC and other agencies. Various bills have been proposed in Congress related to the industries in which we operate, which, if adopted, may have a significant impact on us. For additional discussion regarding our beliefs about the potential risks existing and future regulation as well as other conditions pose to our business, see the “Risk Factors” section below and in the documents incorporated by reference therein. 

 

Results of operations for the three months ended March 31, 2021 and 2020

 

Revenues

 

Revenues increased to $8,119,688 during the three months ended March 31, 2021, as compared with $3,658,283 in revenues for the same period ended 2020 primarily due to revenues from our digital agency and digital currency mining segments. 

 

Loss from Operation

 

Our cost and expenses were $10,616,660 for the three months ended March 31, 2021, resulting in loss from operations of ($2,496,972), as compared with cost and expenses of $5,930,335 for the three months ended March 31, 2020, resulting in loss from operations of $(2,272,052).

 

The decrease in our cost of revenues for the three months ended March 31, 2021 was mainly the result of a decrease in manufacturing and hardware expenses.

  

Professional fees increased to $2,456,554 for the three months ended March 31, 2021, from $1,005,991 for the same period ended March 31, 2020. Our professional fees expenses for the three months ended March 31, 2021 consisted mainly of legal fees of $1,625,715, consulting fees of $469,029, external marketing fees of $206,923, and accounting, audit and review fees of $149,872. Our professional fees expenses for the three months ended March 31, 2020 consisted mainly of officers and directors’ consulting fees of $184,115, consulting fees of $286,903, and accounting, audit and review fees of $77,684 and stock-based compensation of $245,231.

 

Payroll expenses increased to $3,262,097 for the three months ended March 31, 2021, from $984,380 for the same period ended 2020. Our payroll expenses for the three months ended March 31, 2021 consisted mainly of salary and wages expense of $2,428,083 and employee stock-based compensation of $834,014. Our payroll expenses for the three months ended March 31, 2020 consisted mainly of salary and wages expense of $955,680 and employee stock-based compensation of $28,700. 

 

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General and administrative fees increased to $1,243,154 for the three months ended March 31, 2021, from $311,131 for the same period ended 2020. The increase in our general and administrative expenses for the three months ended March 31, 2021 consisted mainly as a result of an increase in our marketing expenses of $87,276, dues and subscriptions of $233,608, insurance expenses of $172,482, and rent expenses of $286,904. Our general and administrative expenses for the three months ended March 31, 2020 consisted mainly of travel expenses of $48,378, rent expenses of $27,141, insurance expenses of $50,785, dues and subscriptions of $117,671 and office expense of $10,755.  

 

Depreciation and amortization expense increased to $2,117,172 for the three months ended March 31, 2021, from $715,005 for the same period ended 2020 mainly due to the depreciation expense related to the equipment used in the data center and digital currency miners.

 

We expect that our professional fees, payroll expenses, and general and administrative fees will increase in future quarters as we further implement our business plan. As we execute on customer contracts we may be required to hire and compensate additional personnel and support increased operational costs.

 

Other income (expenses)

 

Other income/(expenses) increased to $9,897,012 for the three months ended March 31, 2021, from ($3,543,046) for the same period ended March 31, 2020. Our other income for the three months ended March 31, 2021 consisted mainly of income related to the forgiveness of debt of $541,576, realized gain on sales of digital currency of $585,709, an unrealized gain on equity securities of $343,000, derivative gain of $8,400,629, and net interest income of $26,098. Our other (expenses) for the three months ended March 31, 2020 consisted mainly of an unrealized loss on equity securities of ($210,000), derivative loss of ($1,441,763) and interest expense of ($1,891,283). 

 

Net Income/(Loss)

 

We recorded net income of $7,400,040 for the three months ended March 31, 2021, as compared with a net loss of ($5,815,098) for the same period ended March 31, 2020 mainly due to an increase in revenues and unrealized gains on equity and derivative securities.

 

Results of operations for the six months ended March 31, 2021 and 2020

 

Revenues

 

Revenues increased to $10,377,258 during the six months ended March 31, 2020, as compared with $4,635,107 in revenues for the same period ended 2020 primarily due to revenue from our Cryptocurrency mining. 

 

Loss from Operation

 

Our cost and expenses were $19,044,328 for the six months ended March 31, 2021, resulting in loss from operations of ($8,667,070), as compared with cost and expenses of $9,898,620 for the six months ended March 31, 2020, resulting in loss from operations of ($5,263,513).

 

The decrease in our cost of revenues for the six months ended March 31, 2021 was mainly the result of a decrease in manufacturing and hardware expenses.

 

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Professional fees increased to $4,169,277 for the six months ended March 31, 2021, from $2,522,578 for the same period ended March 31, 2020. Our professional fees expenses for the six months ended March 31, 2021 consisted mainly of legal fees of $2,856,077, consulting fees of $620,063, external marketing fees of $327,761, accounting, audit and review fees of $303,882. Our professional fees expenses for the six months ended March 31, 2020 consisted mainly of officers and directors’ consulting fees of $466,154, consulting fees of $755,858, and accounting, audit and review fees of $94,160 and stock-based compensation of $831,412. Professional fees increased in 2021 mainly as a result of increased legal fees.

 

Payroll expenses increased to $6,576,298 for the six months ended March 31, 2021, from $1,695,919 for the same period ended 2020. Our payroll expenses for the six months ended March 31, 2021 consisted mainly of salary and wages expense of $4,810,244 and employee stock-based compensation of $1,766,054. Our payroll expenses for the six months ended March 31, 2020 consisted mainly of salary and wages expense of $1,636,231 and employee stock-based compensation of $59,688.

 

General and administrative fees increased to $2,193,293 for the six months ended March 31, 2021, from $541,792 for the same period ended 2020.  The increase in our general and administrative expenses for the six months ended March 31, 2021 consisted mainly as a result of an increase in our marketing expenses of $688,662, dues and subscriptions of $405,600, insurance expenses of $244,641, rent expenses of $317,297, and bad debt expenses of $231,932. Our general and administrative expenses for the six months ended March 31, 2020 consisted mainly of travel expenses of $79,963, rent expenses of $48,459, insurance expenses of $93,686, dues and subscriptions of $169,038 and office expense of $21,200.

  

Depreciation and amortization expense increased to $3,226,263 for the six months ended March 31, 2021, from $1,381,069 for the same period ended 2020.

 

We expect that our operating expenses will increase in future quarters as we further implement our business plan. As we execute on customer contracts we may be required to hire and compensate additional personnel and support increased operational costs.

 

Other income (Expenses)

 

Other income/(expenses) increased to $8,899,580 for the six months ended March 31, 2021, from ($2,467,839) for the same period ended March 31, 2020. Our other income for the six months ended March 31, 2021 consisted mainly of income related to the forgiveness of debt of $541,576, realized gain on sales of digital currency of $635,627, an unrealized gain on equity securities of $269,500, derivative gain of $7,380,135, and net interest income of $72,742.  Our other (expenses) for the six months ended March 31, 2020 consisted mainly of an unrealized gain on equity securities of $158,868, derivative gain of $824,891 and interest expense of ($3,451,598).

 

Net Income/(Loss)

 

We recorded net income of $232,510 for the six months ended March 31, 2021, as compared with a net loss of ($7,731,352) for the same period ended March 31, 2020.

  

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Liquidity and Capital Resources

 

As of March 31, 2021, we had total current assets of $178,459,063, consisting of cash, digital currency, accounts receivable, and prepaid expenses and other current assets, and total assets in the amount of $292,612,596. Our total current and total liabilities as of March 31, 2021 were $7,340,445 and $8,892,137 respectively. We had working capital of $171,296,123 as of March 31, 2021.

 

Operating Activities

 

Operating activities used $11,686,460 in cash for the six months ended March 31, 2021, as compared with $1,263,055 for the same period ended March 31, 2020. Our use of net cash in operating activities were primarily driven by gain on derivative asset of $7,380,135, realized gain on sale of digital currency of $635,627, and PPA loan forgiveness of $531,169, offset mainly by stock based compensation of $5,199,658, depreciation and amortization of $3,226,263, and bad debt provision of $231,932. Other components of our negative operating cash flow are the changes in operating assets and liabilities including increase in prepaid expenses and other current assets of $(1,130,741), decrease in accounts payable of ($2,890,270), increase in digital currency of ($7,449,202), increase in contract liabilities of $487,779, decrease in accounts receivable of $114,285, and increase in inventory of ($793,945). Our net loss of $7,731,352 was the main component of our negative operating cash flow for the six months ended March 31, 2020, offset mainly by unrealized gain on equity security of ($158,868), gain on derivative asset of ($824,891), depreciation and amortization of $1,381,069, amortization of debt discounts of $3,000,959, stock-based compensation of $910,200, and change in operating and assets and liabilities of $2,138,102.

 

Investing Activities

 

Investing activities used ($55,909,101) during the six months ended March 31, 2021, as compared with ($2,001,825) for the same period ended March 31, 2020. Our increase in deposits on mining equipment of 45,488,258 was the main component of our negative investing cash flow for the six months ended March 31, 2021. Our sale of digital currencies of $2,422,282, acquisition of ATL Data Centers, LLC of $45,783, acquisition of Solar Watt Solutions, Inc. of ($1,000,337), investment in infrastructure development of ($2,830,860), and purchase of property and equipment of ($9,058,011) were the main components of our investing cash flow for the six months ended March 31, 2021. Our acquisition of p2K of ($1,141,990) and investment in debt and equity securities of $(750,000) were the main components of our negative investing cash flow for the six months ended March 31, 2020.

 

Financing Activities

 

Cash flows received from financing activities during the six months ended March 31, 2021 amounted to $221,743,901, as compared with ($67,467) for the six months ended March 31, 2020. Our cash flows from financing activities for the six months ended March 31, 2021 consisted of repayments of ($5,865,476) on promissory notes, proceeds from exercise of warrants of $3,346,559, and proceeds from underwritten offerings of $224,262,818. Our negative cash flows from financing activities for the six months ended March 31, 2020 consisted of repayments of ($67,467) on promissory notes. 

 

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.

 

Management believes that the Company has sufficient liquidity to satisfy its anticipated cash requirements for the next twelve months and beyond. The Company’s management prepares budgets and monitors the financial results of the Company as a tool to align liquidity needs to the recurring business requirements.    

 

Off Balance Sheet Arrangements

 

As of March 31, 2021, there were no off-balance sheet arrangements.

 

Recently Issued Accounting Pronouncements

 

The Company has evaluated all 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.

 

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Critical Accounting Policies

 

In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s 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 our Annual Report on Form 10-K for the year ended September 30, 2020. 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 liability and stock-based compensation.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K.

 

Item 4. Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Limitation on Effectiveness of Controls

 

The design of any control system is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals. The inherent limitations in any control system include the realities that judgments related to decision-making can be faulty, and that reduced effectiveness in controls can occur because of simple errors or mistakes. Due to the inherent limitations in a cost-effective control system, misstatements due to error may occur and may not be detected.

 

Disclosure Controls and Procedures

 

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2021. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2021, our disclosure controls and procedures were not effective due to our recently acquired entity (i.e., ATL Data Centers LLC) in the process of adopting our internal controls and procedures.

 

 Changes in Internal Control over Financial Reporting

 

Other than remediation actions related to a previous material weakness in our internal controls, there has been no change in our internal control over financial reporting during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1. 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 filed a verified complaint (the “Complaint”) in the Supreme Court of the State of New York against an investor (“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 (the “July 2020 SPA”) 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 (the “Prior SPAs”) 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.

 

On April 30, 2021, the Arbitrator granted in part the Company’s motion for partial summary judgment and denied the Investor’s motion for partial summary judgment, and ordered the following:

 

(i)       the July 2020 SPA is a fully merged and integrated agreement and its publicity clause supersedes the publicity clauses of the Prior SPAs between Company and Investor with respect to securities filings relating to the July 2020 SPA transaction;

 

(ii)       the Company had no obligation to allow the Investor to review and approve certain 8-K’s and 10-Q’s concerning the July 2020 SPA transaction and the purported failure to allow the Investor to review and approve such filings was not a breach of the Prior SPAs between the Company and Investor;

 

(iii)       the Company’s obligations under the parties’ prior debenture and note (the “Debenture” and “Note”) were discharged when the Investor fully converted those instruments on or before June 30, 2020;

 

(iv)       the subsequent delivery notices sent by the Investor were void ab initio and the Company no longer has any obligations under the Debenture and Note; and

 

(v)       the Investor’s claim for liquidated damages arising from the Company’s alleged failure to deliver conversion shares under the Debenture and Note was denied on the grounds that (1) the Investor’s right to issue delivery notices had expired, and the Company’s obligations under the Debenture and Note had been discharged prior to June 30, 2020, and (2) all the Investor’s delivery notices rely at least in part on the Company’s alleged breach of the Prior SPAs’ publicity clause with respect to securities filings relating to the July 2020 SPA transaction, a claim to which the Arbitrator ruled in the Company’s favor.

 

In so holding, the Arbitrator also denied, as a matter of law, the Investor’s claims for breach of contract (Counts 1 and 2) and its claim seeking specific performance of delivering additional shares (Count 4).

 

Certain claims remain for trial in the Arbitration and the ultimate outcome of this matter cannot be determined with certainty. As it has stated previously, the Company believes that claims raised by the Investor in and related to the Arbitration are without merit, and the Company intends to continue to both defend itself vigorously and to vigorously prosecute its counterclaims.

 

It is possible that actions related to this dispute with the Investor may yet be filed in the same or other forums. The Company does not intend to file further Current Reports on Form 8-K describing the additional lawsuits, or provide updates, except as required by law. 

 

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 Bishins 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 class action complaint (the “Class Complaint”) in the United States District Court for the Southern District of New 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.

 

Although the ultimate outcome of the 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.

 

Item 1A. Risk Factors

  

Please carefully consider the information set forth in this Quarterly Report on Form 10-Q and the risk factors discussed in Part I, Item 1 A. of our Annual Report on Form 10-K for the year ended September 30, 2020, Part II, Item 1. A of our Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2020, and the risk factors starting on page S-11 of our recent Prospectus Supplement filed on March 18, 2021 (the “Prospectus Supplement”), each of which is incorporated by reference in this Quarterly Report on Form 10-Q, which could materially affect our business, financial condition or future results. In evaluating our business, you should carefully consider the risk factors discussed in our Annual Report on Form 10-K, as updated by our subsequent filings under the Exchange Act and the Prospectus Supplement. The occurrence of any of the risks discussed in such filings, or other events that we do not currently anticipate or that we currently deem immaterial, could harm our business, prospects, financial condition and results of operations. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The information set forth below relates to our issuances of securities without registration under the Securities Act of 1933 during the reporting period which were not previously included in an Annual Report on Form 10-K, Quarterly Report on Form 10-Q, or Current Report on Form 8-K.

  

During the period commencing January 1, 2021 through March 31, 2021, the Company issued 19,429 shares of common stock as in relation to compensation for services.  

 

These securities were issued pursuant to Section 4(a)(2) of the Securities Act and/or Rule 506 promulgated thereunder. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The investors were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising. We directed our transfer agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock.

 

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Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit Number Description of Exhibit
10.1* Non-Fixed Price Sales and Purchase Agreement between CleanSpark, Inc. and Bitmain Technologies Limited, executed April 15, 2021.
10.2* Form of Hardware Purchase & Sales Agreement
10.3* Form of Future Sales and Purchase Agreement
10.4* Form of Agreement for Sale of Equipment
10.5*+ Amendment to Employment Agreement by and between CleanSpark, Inc. and Zachary K. Bradford, dated April 16, 2021.
10.6*+ Amendment to Employment Agreement by and between CleanSpark, Inc. and Lori Love, dated April 16, 2021.
10.7*+ Amendment to Employment Agreement by and between CleanSpark, Inc. and S. Matthew Schultz, dated April 16, 2021.
31.1* Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2* Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1* Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101 INS XBRL Instance Document
101 SCH XBRL Schema Document
101 CAL XBRL Calculation Linkbase Document
101 LAB XBRL Labels Linkbase Document
101 PRE XBRL Presentation Linkbase Document
101 DEF XBRL Definition Linkbase Document

 

* Filed herewith
** 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.

+ Indicates a management contract or compensatory plan or arrangement.

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SIGNATURES

 

Pursuant to the requirements 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.

 

   
Date: May 6, 2021

By: /s/ Zachary K. Bradford

Zachary K. Bradford

Title:    Chief Executive Officer

(Principal Executive Officer)

   
   
   
Date: May 6, 2021

By: /s/Lori L. Love

Lori L. Love

Title:    Chief Financial Officer

(Principal Financial and Accounting Officer)

 

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NON-FIXED PRICE

 

SALES AND PURCHASE AGREEMENT BETWEEN

Bitmain Technologies Limited (“Bitmain”)

 

AND

 

CleanSpark Inc. (“Purchaser”)

 

 

 

 

 

 

 

 

 

 

   
 

 

1.                Definitions and Interpretations 3
2.                Sales of Product(s) 5
3.                Prices and Terms of Payment 6
4.                Product Discount 7
5.                Shipping of Product(s) 7
6.                Customs 9
7.                Warranty 10
8.                Representations and Warranties 11
9.                Indemnification and Limitation of Liability 13
10.            Distribution 13
11.            Intellectual Property Rights 14
12.            Confidentiality and Communications 14
13.            Term of this Agreement 15
14.            Contact Information 15
15.            Compliance with Laws and Regulations 15
16.            Force Majeure 17
17.            Entire Agreement and Amendment 17
18.            Assignment 17
19.            Severability 17
20.            Personal Data 17
21.            Conflict with the Terms and Conditions 18
22.            Governing Law and Dispute Resolution 18
23.            Waiver 18
24.            Counterparts and Electronic Signatures 18
25.            Further Assurance 19
26.            Third Party Rights 19
27.            Liquidated Damages Not Penalty 19

 

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This non-fixed price sales and purchase agreement (this “Agreement”) is made on April 12, 2021 by and between Bitmain Technologies Limited (“Bitmain”) (Company number: 2024301), with its registered office at Unit A1 of Unit A, 11th Floor, Success Commercial Building, 245-251 Hennessy Road, Hong Kong, and CleanSpark Inc. (the “Purchaser”) (Company ID: 87-0449945), with its principal place of business at 1185 South 1800 West, Suite 3 Woods Cross Utah 84087.

 

Bitmain and the Purchaser shall hereinafter collectively be referred to as the “Parties”, and individually as a “Party”.

 

Whereas:

 

1. Purchaser fully understands the market risks, the price-setting principles and the market fluctuations relating to the Products sold under this Agreement.

 

2. Purchaser has purchased the Products through the website of Bitmain (i.e., https://shop.bitmain.com/, similarly hereinafter) for many times, and is familiar with the purchase order processes of Bitmain’s website.

 

3. Based on the above consensus, the Purchaser is willing to purchase and Bitmain is willing to supply cryptocurrency mining hardware and other equipment in accordance with the terms and conditions of this Agreement.

 

The Parties hereto agree as follows:

 

1. Definitions and Interpretations

 

The following terms, as used herein, have the following meanings:

 

“Affiliate” means, with respect to any Person, any other Person directly or indirectly Controlling, Controlled by, or under common Control with such Person; “Person” means any individual, corporation, partnership, limited partnership, proprietorship, association, limited liability company, firm, trust, estate or other enterprise or entity (whether or not having separate legal personality); and “Control” means the power or authority, whether exercised or not, to direct the business, management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, provided that such power or authority shall conclusively be presumed to exist upon possession of beneficial ownership or power to direct the vote of more than fifty percent (50%) of the votes entitled to be cast at a meeting of the members or shareholders of such Person or power to control the composition of a majority of the board of directors of such Person. The terms “Controlled” and “Controlling” have meanings correlative to the foregoing.

 

“Applicable Law” means any treaty, law, decree, order, regulation, decision, statute, ordinance, rule, directive, code or other document that has legal force under any system of law, including, without limitation, local law, law of any other state or part thereof or international law, and which creates or purports to create any requirement or rule that may

 

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affect, restrict, prohibit or expressly allow the terms of this Agreement or any activity contemplated or carried out under this Agreement.

 

“Bank Account” means the bank account information of Bitmain provided in Appendix A of this Agreement.

 

“Force Majeure” means in respect of either Party, any event or occurrence whatsoever beyond the reasonable control of that Party, which delays, prevents or hinders that Party from performing any obligation imposed upon that Party under this Agreement, including to the extent such event or occurrence shall delay, prevent or hinder such Party from performing such obligation, war (declared or undeclared), terrorist activities, acts of sabotage, blockade, fire, lightning, acts of god, national strikes, riots, insurrections, civil commotions, quarantine restrictions, epidemics, earthquakes, landslides, avalanches, floods, hurricanes, explosions and regulatory and administrative or similar action or delays to take actions of any governmental authority.

 

“Intellectual Property Rights” means any and all intellectual property rights, including but not limited to those concerning inventions, patents, utility models, registered designs and models, engineering or production materials, drawings, trademarks, service marks, domain names, applications for any of the foregoing (and the rights to apply for any of the foregoing), proprietary or business sensitive information and/or technical know-how, copyright, authorship, whether registered or not, and any neighbor rights.

 

“Order” means the Purchaser’s request to Bitmain for certain Product(s) in accordance with this Agreement.

 

“Product(s)” means the merchandise that Bitmain will provide to the Purchaser in accordance with this Agreement.

 

“Total Purchase Price” means the aggregate amount payable by the Purchaser as set out in Appendix A of this Agreement.

 

“Warranty Period” means the period of time that the Product(s) are covered by the warranty granted by Bitmain or its Affiliates in accordance with Clause 7 of this Agreement.

 

“Warranty Start Date” means the date on which the Product(s) are delivered to the carrier. Interpretations:

i) Words importing the singular include the plural and vice versa where the context so requires.

 

ii) The headings in this Agreement are for convenience only and shall not be taken into consideration in the interpretation or construction of this Agreement.

 

iii) References to Clauses and Appendix(es) are references to Clauses and Appendix(es) of this Agreement.

 

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iv) Unless specifically stated otherwise, all references to days shall mean calendar days.

 

v) Any reference to a code, law, statute, statutory provision, statutory instrument, order, regulation or other instrument of similar effect shall include any re-enactment or amendment thereof for the time being in force.

 

2. Sales of Product(s)

 

Bitmain will provide the Product(s) set forth in Appendix A (attached hereto as part of this Agreement) to the Purchaser in accordance with provisions of Clause 2, Clause 3, Clause 4, Clause 5 and Appendix A of this Agreement, and the Purchaser shall make payment in accordance with the terms specified in this Agreement.

 

2.1. Both Parties agree that the Product(s) shall be sold in accordance with the following steps:

 

(i) The Purchaser shall place Order through Bitmain’s website or through other methods accepted by Bitmain, and such Order shall constitute an irrevocable offer to purchase specific Product(s) from Bitmain.

 

(ii) After receiving the Order, Bitmain will send an order receipt confirmation email to the Purchaser. The Purchaser’s Order will be valid for a period of twenty-four (24) hours after its placement, and upon expiration of such period, Bitmain will have the right to cancel the Order at its sole discretion if the Purchaser fails to pay the down payment in accordance with Appendix A of this Agreement.

 

(iii) The Purchaser shall pay the Total Purchase Price in accordance with Appendix A of this Agreement.

 

(iv) Upon receipt of the Total Purchase Price, Bitmain will provide a payment receipt to the Purchaser.

 

(v) Bitmain will send a shipping confirmation to the Purchaser after it has delivered the Product(s) to the carrier, and the Order shall be deemed accepted by Bitmain upon Bitmain’s issuance of the shipping confirmation.

 

2.2. Both Parties acknowledge and agree that the order receipt confirmation and the payment receipt shall not constitute nor be construed as Bitmain’s acceptance of the Purchaser’s Order, but mere acknowledgement of the receipt of the Order and the Total Purchase Price.

 

2.3. Both Parties acknowledge and agree that in case of product unavailability, Bitmain shall have the right to cancel the Order after it has issued the order receipt confirmation, the payment receipt or the shipping confirmation without any penalty or liability.

 

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2.4. The Purchaser acknowledges and confirms that the Order is irrevocable and cannot be cancelled by the Purchaser, and that the Product(s) ordered are neither returnable nor refundable. All sums paid by the Purchaser to Bitmain shall not be subject to any abatement, set-off, claim, counterclaim, adjustment, reduction, or defense for any reason. Down payment and payment of Total Purchase Price are not refundable, save as otherwise mutually agreed by the Parties.

 

3. Prices and Terms of Payment

 

3.1 The Total Purchase Price (inclusive of any tax payable) shall be paid in accordance with the payment schedule set forth in Appendix B of this Agreement.

 

3.2 In the event that the Purchaser fails to fully settle the respective percentage of the Total Purchase Price before the prescribed deadlines and fails to make a written request to Bitmain no less than five (5) business days prior to the prescribed deadline and obtain Bitmain’s written consent, Bitmain shall be entitled to terminate this Agreement and the Purchase shall be liable for a reasonable liquidated damage (not a penalty) of 20% of the purchase price of such batch of Products. If there are any remaining balance after deducting the liquidated damage, such remaining balance shall be refunded to the Purchaser free of any interest. If the Purchaser fails to pay the down payment on a timely basis and Bitmain has arranged production or procurement, Bitmain shall be entitled to request the Purchaser to be responsible for the loss related to such production or procurement.

 

3.3 The Total Purchase Price set forth in this Agreement is merely an estimate of the price and not the actual price. The actual price will be determined one month before the current batch is shipped and with reference to the market circumstances, provided that the actual price shall not be higher than the estimated price.

 

3.4 Upon receipt of notification of the actual price provided by Bitmain, the Purchaser shall be entitled to three options:
(i) continue to perform the Order of the current batch of the Product(s) with the original rated hashrate and pay the remaining amount at the actual price; or
(ii) request Bitmain to increase the rated hashrate in equivalent to the difference in price. Under this circumstance, Bitmain shall have the right to negotiate with the Purchaser for the amount of the additional rated hashrate based on its then inventory; or
(iii) partially or wholly cancel the Order of the current batch of Product(s). Under this circumstance, the Purchaser shall not claim any refund from Bitmain. If the Purchaser has made payments and there is remaining balance, such remaining balance shall be credited to the balance of the Purchaser and its affiliates.

Furthermore, the Purchaser shall confirm in writing the result of its exercise of the options under this Clause within two (2) days after Bitmain provides the Purchaser with the actual price, and if it is overdue and no agreement is reached between the

 

  6  
 

 

Parties, the Purchaser shall be deemed to have voluntarily and irrevocably waived its option under this Clause and the Parties shall continue to perform the Order of the current batch of Product(s) with the original rated hashrate and the Purchaser shall pay the remaining amount at the actual price.

 

3.5 The Parties understand and agree that the applicable prices of the Product(s) are inclusive of applicable bank transaction fee, but are exclusive of any and all applicable import duties, taxes and governmental charges. The Purchaser shall pay or reimburse Bitmain for all taxes levied on or assessed against the amounts payable hereunder. If any payment is subject to withholding, the Purchaser shall pay such additional amounts as necessary, to ensure that Bitmain receives the full amount it would have received had payment not been subject to such withholding.

4. Product Discount

 

Based on the sales results and sales strategy, Bitmain is willing to offer the following discount as set forth in clause 4.1:

 

4.1. With respect of the signing of this Agreement, Bitmain offers the following discount to the Purchaser:

 

4.1.1. The Products under this Agreement consists of twelve (12) batches and the discount amount of each batch shall be calculated separately.

 

4.1.2. Bitmain may provide difference discounts to the Purchaser based on the actual amount of the prepayment and the payment time.

 

Discount Amount = Amount of prepayment * 1% * Number of months prepaid. The amount of prepayment shall be calculated at the end of each month. The number of months prepaid shall be calculated from the month of payment without counting the month of delivery. For clarification, the payment date shall be the date as evidenced in the remittance copy of such payment, and the discount term shall be calculated when the respective amounts under this Agreement have been received by Bitmain in full and without further consideration of the remaining amount. Payment schedules may be further adjusted in accordance with the actual situations.

 

4.1.3. If the Purchaser fails to make the payments on time, the discount applicable to such batch shall be cancelled.

4.2.       No discount will be offered by Bitmain to the Purchaser.

 

5. Shipping of Product(s)

 

5.1. Bitmain shall deliver the Products in accordance with the shipping schedule to the first carrier or the carrier designated by the Purchaser.

 

5.2. Subject to the limitations stated in Appendix A, the terms of delivery of the Product(s) shall be CIP (carriage and insurance paid to (named place of destination) according to Incoterms 2010) to the place of delivery designated by the Purchaser. Once the

 

  7  
 

 

Product(s) have been delivered to the carrier, Bitmain shall have fulfilled its obligation to supply the Product(s) to the Purchaser, and the title and risk of loss or damage to the Product(s) shall pass to the Purchaser.

 

5.3. In the event of any discrepancy between this Agreement and Bitmain’s cargo insurance policy regarding the insurance coverage, the then effective Bitmain cargo insurance policy shall prevail, and Bitmain shall be required to provide the then effective insurance coverage to the Purchaser.

 

5.4. If Bitmain fails to deliver the Products after thirty (30) days after the prescribed deadline, the Purchaser shall be entitled to cancel the Order of such batch of Products and request Bitmain to refund the price of such undelivered batch of Products together with an interest at 0.0333% per day for the period from the next day of each payment of the price of such batch of Products to the date immediately prior to the request. In the event that the Purchaser does not cancel the Order of the undelivered batch of Products and requests Bitmain to perform its delivery obligation, Bitmain shall continue to perform its delivery obligation and compensate the Purchaser in accordance with Clause 5.5 of this Agreement.

 

5.5. If Bitmain postpones the shipping schedule of the Products and the Purchaser does not cancel the Order, Bitmain shall make a compensation to the Purchaser on daily basis, the amount of which shall equal to 0.0333% of the price of such undelivered batch of Products, which compensation shall be made in the form of delivery of more rated hashrate. Amount less than one unit of Product shall be credited to the balance of the Purchaser in the user system on Bitmain’s official website, which shall be viewable by the Purchaser.

 

5.6. There are twelve (12) batches of Products under this Agreement and each batch shall constitute independent legal obligations of and shall be performed separately by the Parties. The delay of a particular batch shall not constitute waiver of the payment obligation of the Purchaser in respect of other batches. The Purchaser shall not be entitled to terminate this Agreement solely on the ground of delay of delivery of a single batch of Products.

 

5.7. The purchaser shall choose the following shipping method:

 

Shipping by Bitmain via Fedex/DHL/UPS/other logistics company□Self-pick

 

Note: Logistics costs shall be borne by the Purchaser. Bitmain may collect payments on behalf of the services providers and issue services invoices if the Purchaser requests Bitmain to send the Products.

 

5.8. Bitmain shall not be responsible for any delivery delay caused by the Purchaser or any third party, including but not limited to the carrier, the customs, and the import brokers, nor shall it be liable for damages, whether direct, indirect, incidental, consequential, or otherwise, for any failure, delay or error in delivery of any Product(s) for any reason whatsoever.

 

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5.9. Bitmain shall not be responsible and the Purchaser shall be fully and exclusively responsible for any loss of Product(s), personal injury, property damage, other damage or liability caused by the Product(s) or the transportation of the Product(s) either to the Purchaser or any third party, or theft of the Product(s) during transportation from Bitmain to the Purchaser.

 

5.10. Bitmain has the right to discontinue the sale of the Product(s) and to make changes to its Product(s) at any time, without prior approval from or notice to the Purchaser.

 

5.11. If the Product(s) is rejected and/or returned back to Bitmain because of any reason and regardless of the cause of such delivery failure, the Purchaser shall be solely and exclusively liable for and shall defend, fully indemnify and hold harmless Bitmain against any and all related expenses, fees, charges and costs incurred, arising out of or incidental to such rejection and/or return (the “Return Expense”). Furthermore, if the Purchaser would like to ask for Bitmain’s assistance in redelivering such Product(s) or assist in any other manner, and if Bitmain at its sole discretion decides to provide this assistance, then in addition to the Return Expense, the Purchaser shall also pay Bitmain an administrative fee in accordance with Bitmain’s then applicable internal policy.

 

5.12. If the Purchaser fails to provide Bitmain with the delivery place or the delivery place provided by the Purchaser is a false address or does not exist, or the Purchaser reject to accept the Products, any related costs occurred (including storage costs, warehousing charge and labor costs) shall be borne by the Purchaser. Bitmain may issue the Purchaser a notice of self-pick-up and ask the Purchaser to pick up the Products itself. Bitmain shall be deemed to have completed the delivery obligation under this Agreement after two (2) business days following the issue of the self-pick- up notice. After 30 days of the self-pick-up notice, the Purchaser shall be entitled to deal with the Products in any manner as it deems appropriate.

 

5.13. The Purchaser shall inspect the Products within 2 days (the “Acceptance Time”) after receiving the Products (the date of signature on the carrier’s delivery voucher shall be the date of receipt), if the Purchaser does not raise any written objection within the agreed Acceptance Time, the Products delivered by Bitmain shall be deemed to be in full compliance with the provisions of this Agreement.

 

6. Customs

 

6.1. Bitmain shall obtain in due time and maintain throughout the term of this Agreement (if applicable), any and all approvals, permits, authorizations, licenses and clearances for the export of the Product(s) that are required to be obtained by Bitmain or the carrier under Applicable Laws.

 

6.2. The Purchaser shall obtain in due time and maintain throughout the term of this Agreement (if applicable), any and all approvals, permits, authorizations, licenses and clearances required for the import of the Product(s) to the country of delivery as indicated in the shipping information, that are required to be obtained by the

 

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Purchaser or the carrier under Applicable Laws, and shall be responsible for any and all additional fees, expenses and charges in relation to the import of the Product(s).

 

7. Warranty

 

7.1. The Warranty Period shall start on the Warranty Start Date and end on the 365th day after the Warranty Start Date. During the Warranty Period, the Purchaser’s sole and exclusive remedy, and Bitmain’s entire liability, will be to repair or replace, at Bitmain’s option, the defective part/component of the Product(s) or the defective Product(s) at no charge to the Purchaser. If the Purchaser requires Bitmain to provide any warranty services, the Purchaser shall create a maintenance order on Bitmain’s website during the Warranty Period (the time of creation of the maintenance order shall be determined by the display time of such order on Bitmain’s website) and send the Product to the place designated by Bitmain within the time limit required by Bitmain. Otherwise, Bitmain shall be entitled to refuse to provide the warranty service.

 

7.2. The Parties acknowledge and agree that the warranty provided by Bitmain as stated in the preceding paragraph does not apply to the following:

 

(i) normal wear and tear;

 

(ii) damage resulting from accident, abuse, misuse, neglect, improper handling or improper installation;

 

(iii) damage or loss of the Product(s) caused by undue physical or electrical stress, including but not limited to moisture, corrosive environments, high voltage surges, extreme temperatures, shipping, or abnormal working conditions;

 

(iv) damage or loss of the Product(s) caused by acts of nature including, but not limited to, floods, storms, fires, and earthquakes;

 

(v) damage caused by operator error, or non-compliance with instructions as set out in accompanying documentation;

 

(vi) alterations by persons other than Bitmain, associated partners or authorized service facilities;

 

(vii) Product(s), on which the original software has been replaced or modified by persons other than Bitmain, associated partners or authorized service facilities;

 

(viii) counterfeit products;

 

(ix) damage or loss of data due to interoperability with current and/or future versions of operating system, software and/or hardware;

 

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(x) damage or loss of data caused by improper usage and behavior which is not recommended and/or permitted in the product documentation;

 

(xi) failure of the Product(s) caused by usage of products not supplied by Bitmain; and

 

(xii) hash boards or chips are burnt.

 

In case the warranty is voided, Bitmain may, at its sole discretion, provide repair service to the Purchaser, and the Purchaser shall bear all related expenses and costs.

 

7.3. Notwithstanding anything to the contrary herein, the Purchaser acknowledges and agrees that the Product(s) provided by Bitmain do not guarantee any cryptocurrency mining time and, Bitmain shall not be liable for any cryptocurrency mining time loss or cryptocurrency mining revenue loss that are caused by downtime of any part/component of the Product(s). Bitmain does not warrant that the Product(s) will meet the Purchaser’s requirements or the Product(s) will be uninterrupted or error free. Except as provided in Clause 7.1 of this Agreement, Bitmain makes no warranties to the Purchaser with respect to the Product(s), and no warranties of any kind, whether written, oral, express, implied or statutory, including warranties of merchantability, fitness for a particular purpose or non-infringement or arising from course of dealing or usage in trade shall apply.

 

7.4. In the event of any ambiguity or discrepancy between this Clause 7 of this Agreement and Bitmain’s After-sales Service Policy from time to time, it is intended that the After-sales Service Policy shall prevail and the Parties shall comply with and give effect to the After-sales Service Policy. Please refer to the website of Bitmain for detailed terms of warranty and after-sales maintenance. Bitmain has no obligation to notify the Purchaser of the update or modification of such terms.

 

7.5. During the warranty period, if the hardware product needs to be repaired or replaced, the Purchaser shall bear the logistics costs of shipping the Product to the address designated by Bitmain, and Bitmain shall bear the logistics costs of shipping back the repaired or replaced Product to the address designated by the Purchaser. The Purchaser shall bear all and any additional costs incurred due to incorrect or incomplete delivery information provided by the Purchaser and all and any risks of loss or damage to the Product, or the parts or components of the Products during the transportation period (including the transportation period when the product is sent to Bitmain and returned by Bitmain to the Purchaser).

 

8. Representations and Warranties

 

The Purchaser makes the following representations and warranties to Bitmain:

 

8.1. It has the full power and authority to own its assets and carry on its businesses.

 

8.2. The obligations expressed to be assumed by it under this Agreement are legal, valid, binding and enforceable obligations.

 

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8.3. It has the power to enter into, perform and deliver, and has taken all necessary action to authorize its entry into, performance and delivery of, this Agreement and the transactions contemplated by this Agreement.

 

8.4. The entry into and performance by it of, and the transactions contemplated by, this Agreement do not and will not conflict with:

 

(i) any Applicable Law;

 

(ii) its constitutional documents; or

 

(iii) any agreement or instrument binding upon it or any of its assets.

 

8.5. All authorizations required or desirable:

 

(i) to enable it lawfully to enter into, exercise its rights under and comply with its obligations under this Agreement;

 

(ii) to ensure that those obligations are legal, valid, binding and enforceable; and

 

(iii) to make this Agreement admissible in evidence in its jurisdiction of incorporation,

 

have been or will have been by the time, obtained or effected and are, or will be by the appropriate time, in full force and effect.

 

8.6. It is not aware of any circumstances which are likely to lead to:

 

(i) any authorization obtained or effected not remaining in full force and effect;

 

(ii) any authorization not being obtained, renewed or effected when required or desirable; or

 

(iii) any authorization being subject to a condition or requirement which it does not reasonably expect to satisfy or the compliance with which has or could reasonably be expected to have a material adverse effect.

 

8.7. (a) It is not the target of economic sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury, the U.S. Department of State, the United Nations Security Council, the European Union, Her Majesty’s Treasury or Singapore (“Sanctions”), including by being listed on the Specially Designated Nationals and Blocked Persons (SDN) List maintained by OFAC or any other Sanctions list maintained by one of the foregoing governmental authorities, directly or indirectly owned or controlled by one or more SDNs or other Persons included on any other Sanctions list, or located, organized or resident in a country or territory that is the target of Sanctions, and (b) the purchase of the Product(s) will not violate any Sanctions or import and export control related laws and regulations.

 

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8.8. All information supplied by the Purchaser is and shall be true and correct, and the information does not contain and will not contain any statement that is false or misleading.

 

9. Indemnification and Limitation of Liability

 

9.1. The Purchaser shall, during the term of this Agreement and at any time thereafter, indemnify and save Bitmain and/or its Affiliates harmless from and against any and all damages, suits, claims, judgments, liabilities, losses, fees, costs or expenses of any kind, including legal fees, whatsoever arising out of or incidental to the Products pursuant to this Agreement.

 

9.2. Notwithstanding anything to the contrary herein, Bitmain and its Affiliates shall under no circumstances, be liable to the Purchaser for any consequential loss, or loss of goodwill, business, anticipated profits, revenue, contract, or business opportunity arising out of or in connection with this Agreement, and the Purchaser hereby waives any claim it may at any time have against Bitmain and its Affiliates in respect of any such damages. The foregoing limitation of liability shall apply whether in an action at law, including but not limited to contract, strict liability, negligence, willful misconduct or other tortious action, or an action in equity.

 

9.3. Bitmain and its Affiliates’ cumulative aggregate liability pursuant to this Agreement, whether arising from tort, breach of contract or any other cause of action shall be limited to and not exceed the amount of one hundred percent (100%) of the down payment actually received by Bitmain from the Purchaser for the Product(s).

 

9.4. The Product(s) are not designed, manufactured or intended for use in hazardous or critical environments or in activities requiring emergency or fail-safe operation, such as the operation of nuclear facilities, aircraft navigation or communication systems or in any other applications or activities in which failure of the Product(s) may pose the risk of environmental harm or physical injury or death to humans. Bitmain specifically disclaims any express or implied warranty of fitness for any of the above described application and any such use shall be at the Purchaser’s sole risk.

 

9.5. The above limitations and exclusions shall apply (1) notwithstanding failure of essential purpose of any exclusive or limited remedy; and (2) whether or not Bitmain has been advised of the possibility of such damages. This Clause allocates the risks under this Agreement and Bitmain’s pricing reflects this allocation of risk and the above limitations.

 

10. Distribution

 

10.1. This Agreement does not constitute a distributor agreement between Bitmain and the Purchaser. Therefore, the Purchaser is not an authorized distributor of Bitmain.

 

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10.2. The Purchaser shall in no event claim or imply to a third party that it is an authorized distributor of Bitmain or Bitmain (Antminer) or any similar terms, or perform any act that will cause it to be construed as an authorized distributor of Bitmain or Bitmain (Antminer). As between the Purchaser and Bitmain, the Purchaser shall be exclusively and fully responsible for complying with the Applicable Laws regarding repackaging the Product(s) for the Purchaser’s redistribution needs, and shall be solely liable for any and all liabilities or costs directly incurred or incidental to such redistribution.

 

11. Intellectual Property Rights

 

11.1. The Parties agree that the Intellectual Property Rights in any way contained in the Product(s), made, conceived or developed by Bitmain and/or its Affiliates for the Product(s) under this Agreement and/or, achieved, derived from, related to, connected with the provision of the Product(s) by Bitmain and/or acquired by Bitmain from any other person in performance of this Agreement shall be the exclusive property of Bitmain and/or its Affiliates.

 

11.2. Notwithstanding anything to the contrary herein, all Intellectual Property Rights in the Product(s) shall remain the exclusive property of Bitmain and/or its licensors. Except for licenses explicitly identified in Bitmain’s Shipping Confirmation or in this Clause 11.2, no rights or licenses are expressly granted, or implied, whether by estoppel or otherwise, in respect of any Intellectual Property Rights of Bitmain and/or its Affiliates or any Intellectual Property residing in the Product(s) provided by Bitmain to the Purchaser, including in any documentation or any data furnished by Bitmain. Bitmain grants the Purchaser a non-exclusive, non-transferrable, royalty- free and irrevocable license of Bitmain and/or its Affiliates’ Intellectual Property Rights to solely use the Product(s) delivered by Bitmain to the Purchaser for their ordinary function, and subject to the Clauses set forth herein. The Purchaser shall in no event violate the Intellectual Property Rights of Bitmain and/or its licensors.

 

11.3. If applicable, payment by the Purchaser of non-recurring charges to Bitmain for any special designs, or engineering or production materials required for Bitmain’s performance of Orders for customized Product(s), shall not be construed as payment for the assignment from Bitmain to the Purchaser of title to the design or special materials. Bitmain shall be the sole owner of such special designs, engineering or production materials.

 

12. Confidentiality and Communications

 

12.1. All information concerning this Agreement and matters pertaining to or derived from the provision of Product(s) pursuant to this Agreement between the Parties, whether in oral or written form, or in the form of drawings, computer programs or other, as well as all data derived therefrom (“Confidential Information”), shall be deemed to be confidential and, as such, may not be divulged to any unauthorized person without express written permission by both parties or unless required by law. The Purchaser undertakes and agrees to take all reasonable and practicable steps to ensure and protect the confidentiality of the Confidential Information which cannot be passed, sold, traded, published or disclosed to any unauthorized person.

 

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13. Term of this Agreement

 

13.1. This Agreement will be effective upon Bitmain’s issuance of the shipping confirmation to the Purchaser, provided that if there is more than one shipping confirmation, this Agreement will be effective to the Products contained in each shipping confirmation upon Bitmain’s issuance of the respective shipping confirmation to the Purchaser.

 

13.2. This Agreement shall remain effective up to and until the delivery of the last batch of Products.

 

14. Contact Information

 

All communications in relation to this Agreement shall be made to the following contacts:

 

Purchaser’s business contact:

Name: Zachary Bradford

Phone: _______________

Email: _______________

Bitmain’s business contact:

Name: Qingqing Miao

Phone: _______________

 

Email: _______________

 

15. Compliance with Laws and Regulations

 

15.1. The Purchaser undertakes that it will fully comply with all Applicable Laws in relation to export and import control and Sanctions and shall not take any action that would cause Bitmain or any of its Affiliates to be in violation of any export and import control laws or Sanctions. The Purchaser shall also be fully and exclusively liable for and shall defend, fully indemnify and hold harmless Bitmain and/or its Affiliates from and against any and all claims, demands, actions, costs or proceedings brought or instituted against Bitmain and/or its Affiliates arising out of or in connection with any breach by the Purchaser or the carrier of any Applicable Laws in relation to export and import control or Sanction.

 

15.2. The Purchaser acknowledges and agrees that the Product(s) in this Agreement are subject to the export control laws and regulations of all related countries, including

 

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but not limited to the Export Administration Regulations (“EAR”) of the United States. Without limiting the foregoing, the Purchaser shall not, without receiving the proper licenses or license exceptions from all related governmental authorities, including but not limited to the U.S. Bureau of Industry and Security, distribute, re- distribute, export, re-export, or transfer any Product(s) subject to this Agreement either directly or indirectly, to any national of any country identified in Country Groups D:1 or E:1 as defined in the EARs. In addition, the Product(s) under this Agreement may not be exported, re-exported, or transferred to (a) any person or entity for military purposes; (b) any person or entity listed on the “Entity List”, “Denied Persons List” or the SDN List as such lists are maintained by the U.S. Government, or (c) an end-user engaged in activities related to weapons of mass destruction. Such activities include but are not necessarily limited to activities related to: (1) the design, development, production, or use of nuclear materials, nuclear facilities, or nuclear weapons; (2) the design, development, production, or use of missiles or support of missiles projects; and (3) the design, development, production, or use of chemical or biological weapons. The Purchaser further agrees that it will not do any of the foregoing in violation of any restriction, law, or regulation of the European Union or an individual EU member state that imposes on an exporter a burden equivalent to or greater than that imposed by the U.S. Bureau of Industry and Security.

 

15.3. The Purchaser undertakes that it will not take any action under this Agreement or use the Product(s) in a way that will be a breach of any anti-money laundering laws, any anti-corruption laws, and/or any counter-terrorist financing laws.

 

15.4. The Purchaser warrants that the