CLEANSPARK, INC. 10-Q

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. Recent Corporate Developments Mining Equipment – 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 21,500 mining servers for an aggregate purchase price of $156,554,450. The Company paid $89,355,675 towards these miner purchases through June 2021. 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. Mining Equipment – May 2021 On May 10, 2021, the Company purchased 2,400 S19 pro mining rigs from a premier cryptocurrency mining equipment supplier. As consideration for the servers, the Company agreed to pay the supplier an aggregate of $30,201,600. The servers were received in June and were put into service at the Company’s data center facilities in Georgia and are being used for digital currency mining activities. Purchase of Real Property – May 2021 On May 20, 2021, the Company, through its wholly owned subsidiary, ATL, purchased certain real property, together with all easements, covenants and other rights related thereto, from its landlord, Arkhos Property Group Holdings, LLC, for a purchase price of $4,711,799. The purchase of such property was consummated pursuant to that certain lease agreement entered into by and between ATL and the landlord on June 5, 2020, which gave ATL the exclusive option and right to purchase the property during the term of the lease agreement, subject to certain conditions. Prior to the purchase, ATL leased the property. Upon closing of the purchase, the Company paid the landlord the full purchase price, the landlord conveyed fee simple title to the property to ATL by limited warranty deed, and the lease agreement terminated pursuant to its terms. 4 Table of Contents The property is located at 2380 Godby Road, College Park, Georgia, and consists of three adjacent parcels of land. The property consists of approximately six acres and includes an approximately 41,387 square foot office and data center space. ATL utilizes, and intends to continue to utilize, this office data center space to conduct its cryptocurrency mining activities and traditional data center services . Amendments to Employment Agreements April 16, 2021 amendments 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 noncash 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 M r. 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 Plan with any remaining equity grants to be granted when the Company obtains shareholder approval to increase the shares available under the Plan. June 9, 2021 amendment On June 9, 2021, as more specifically described in that certain Current Report on Form 8-K filed by the Company with the SEC on June 15, 2021, the Company and Amer Tadayon entered into an amendment to Mr. Tadayon’s Amended and Restated Employment Agreement, dated October 26, 2020, pursuant to which (i) Mr. Tadayon was appointed as President of the Energy Division, in addition to his current role as Chief Revenue Officer of the Company;(ii) Mr. Tadayon’s base salary was increased by $100,000 per year; and (iii) the bonus percentage relevant to the calculation of Mr. Tadayon’s annual cash bonus, if paid pursuant to the terms of his employment agreement, was increased from 20% to not less than 70% of his base salary. In connection with the foregoing, on June 10, 2021, the Company granted Mr. Tadayon stock options to purchase an aggregate of 100,000 shares of the Company’s common stock at an exercise price of $18.88 per share, which options vest in equal monthly installments over 36 months from the grant date. Shares Issued Under At The Market Offering Agreement On June 3, 2021, the Company entered into an At The Market Offering Agreement with H.C. Wainwright & Co., LLC, to create an at-the-market equity program under which the Company may, from time to time, offer and sell shares of its common stock having an aggregate gross offering price of up to $500,000,000 to or through H.C. Wainwright & Co., LLC. During the nine months ended June 30, 2021, the Company issued 731,190 shares of the Company’s common stock under the At The Market Offering Agreement for net proceeds of $11,860,566. The shares were sold pursuant to a prospectus dated March 15, 2021 and a prospectus supplement dated June 3, 2021 filed with the SEC. Settlement Agreement to Securities Purchase Agreements On June 14, 2021, the Company entered into a mutual settlement agreement with an investor, pursuant to which the parties agreed, among other things, (i) to settle and dismiss, with prejudice, all pending actions related to the parties’ dispute (collectively, the “Actions”); (ii) to mutually release all claims, whether known or unknown, that either party may have now or in the future related thereto; and (iii) to terminate all of the agreements previously entered into by and between the parties, including all rights and obligations set forth therein, including (a) the Securities Purchase Agreement, dated July 20, 2020, by and between the Company and the investor; (b) the Purchase Agreement, dated April 17, 2019, by and between the Company and the investor; (c) the Senior Secured Redeemable Convertible Promissory Note, dated April 17, 2019, by and between the Company and the investor; (d) the IP Security Agreement, dated April 17, 2019, by and between the Company and the investor; (e) the Securities Purchase Agreement, dated December 31, 2018, by and between the Company and the investor; (f) the Senior Secured Redeemable Convertible Debenture, dated December 31, 2018, by and between the Company and the investor; and (g) the IP Security Agreement, dated December 31, 2018, by and between the Company and the investor (collectively, the “Prior Agreements”), provided, however, that (x) any and all warrants previously issued to the investor pursuant to the Securities Purchase Agreement, dated December 31, 2018, and the Purchase Agreement, dated April 17, 2019, (the “Prior SPAs”) (collectively, the “Warrants”) shall remain in force and effect, and (y) that within a commercially reasonable amount of time after execution of the settlement agreement, the investor shall irrevocably assign the Warrants to an otherwise unaffiliated third party. Each party agreed to bear its own fees and costs for the Actions. The settlement agreement contained no admission or concession of fault, or of the truth of or validity or sufficiency of any allegation, contention or claim of either the Company or the investor. 5 Table of Contents Company Overview We are an energy technology and clean Bitcoin mining Company that is focused on solving modern energy challenges. Bitcoin Mining — ATL Data Centers and CleanBlok Through our wholly-owned subsidiaries, ATL Data Centers LLC (“ATL”) and CleanBlok, Inc., 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 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. As of the date of this filing, our mining units are currently capable of producing over 820 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 implementing our energy technology and solutions at mining sites owned and operated by the Company. 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 reaching 2.0 EH/s in hash rate capacity prior to the end of the December 31, 2021. We expect to exceed 3 EH/s in capacity by mid-to-late 2022. 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. 6 Table of Contents Energy Solutions We have a suite of energy technologies that enable turn-key solutions for microgrids. Our offerings consist of smart energy monitoring and controls, advanced microgrid design software, energy engineering and consulting services, middleware communications protocols for the energy industry, and system integration and installation 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. 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 use of these Systems, the Company and its 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 and keep energy costs predictable over time. The overall goal is to transform energy consumers into intelligent energy producers that supply and manage power in a resilient manner. 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 can be leveraged to capture a significant share of this emerging global industry. 7 Table of Contents 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 capable of interoperating with the local utility grid providing users with the ability to choose how and when they utilize utility power and how they interact with 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. 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. A 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 platform will direct microgrid system operations to manage solar, battery, and utility power. It will be capable of enabling 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 the Company and its 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. 8 Table of Contents 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 provide and distribute products in connection with our partnership with Pioneer Power Solutions, Inc. which manages manufacturing of the parallel switchgear, automatic transfer switches and related control and circuit protective equipment offered by the Company. OpenADR and communication protocol software solutions — GridFabric Through our wholly-owned subsidiary, GridFabric, LLC, we offer Open Automated Demand Response (“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 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. Plaid Plaid is a licensed software solution that allows internet-connected products that use 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. Energy system integration and installation — Solar Watt Solutions Following our acquisition of Solar Watt Solutions, Inc. in February 2021, we provide solar, energy storage, and alternative microgrid 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 in the future. 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. Other Products and Services — p2kLabs & ATL Data Centers 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. 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. 9 Table of Contents Legacy Gasifier Business We own patented gasification technologies that is designed to convert organic material into synthesis gas (“SynGas”). We have multiple patents to protect our gasification technology and process for using feedstock to generate 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 SynGas from carbon compounds such as municipal solid waste (MSW), coal and sewage sludge. 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 LLC in December 2020, and through CleanBlok, Inc., 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. 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 June 30, 2021 and 2020 Revenues Revenues increased to $11,916,065 during the three months ended June 30, 2021, as compared with $3,438,674 in revenues for the same period ended 2020 primarily due to revenues from our digital currency mining segment. 10 Table of Contents Loss from Operations Our cost and expenses were $26,534,244 for the three months ended June 30, 2021, resulting in loss from operations of ($14,618,179), as compared with cost and expenses of $5,582,273 for the three months ended June 30, 2020, resulting in loss from operations of ($2,143,599). The increase in our cost of revenues for the three months ended June 30, 2021, was mainly the result of an increase in inventory expenses, direct labor related to energy project installations and increased energy costs as a result of additional miners being deployed. Professional fees increased to $2,047,654 for the three months ended June 30, 2021, from $709,367 for the same period ended June 30, 2020. Our professional fees expenses for the three months ended June 30, 2021 consisted mainly of legal fees of $1,338,092, which was largely related to our efforts to resolve outstanding litigation, consulting fees of $313,366, external marketing fees of $271,362, and accounting, audit and review fees of $89,708. Our professional fees expenses for the three months ended June 30, 2020 consisted mainly of officers and directors’ consulting fees of $105,500, consulting fees of $434,236, and accounting, audit and review fees of $25,900 and stock-based compensation of $143,731. Payroll expenses increased to $11,830,196 for the three months ended June 30, 2021, from $996,555 for the same period ended 2020. Our payroll expenses for the three months ended June 30, 2021 consisted mainly of salary and wages expense of $8,640,807 which included non-recurring executive compensation of $4,700,000 and employee stock-based compensation of $3,189,389. Our payroll expenses for the three months ended June 30, 2020 consisted mainly of salary and wages expense of $967,355 and employee stock-based compensation of $26,200. General and administrative expenses increased to $1,430,339 for the three months ended June 30, 2021, from $279,045 for the same period ended 2020. The increase in our general and administrative expenses for the three months ended June 30, 2021 was mainly a result of marketing expenses of $568 ,150, dues and subscriptions of $283,300 , insurance expenses of $209,673 , and rent expenses of $87,425. Our general and administrative expenses for the three months ended June 30, 2020 consisted mainly of marketing expenses of $32,322, rent expenses of $34,445, insurance expenses of $65,833, dues and subscriptions of $61,675, and office expense of $6,267. Depreciation and amortization expense increased to $3,656,757 for the three months ended June 30, 2021, from $745,244 for the same period ended 2020 mainly due to the depreciation expense related to the increase in equipment used in the data center and digital currency miners as compared to the prior period. We incurred certain expenses that were considered non-recurring expenses in the current quarter totaling 7,883,939. After accounting for these non-recurring expenses we expect that the remaining underlying 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 also be required to hire and compensate additional personnel and support increased operational costs. Other expenses Other expenses decreased to ($2,058,948) for the three months ended June 30, 2021, from ($6,407,702) for the same period ended June 30, 2020. Our other income/(expense) for the three months ended June 30, 2021 consisted mainly of realized gain on sales of digital currency of $36,438, a realized gain on sale of equity securities of $105,908, an unrealized loss on equity securities of ($170,586), derivative loss of ($2,060,774), and net interest income of $28,625. Our other income/(expenses) for the three months ended June 30, 2020 consisted mainly of an unrealized loss on equity securities of ($80,500), derivative gain of $719,294 and interest expense of ($7,066,496). Net Loss We recorded a net loss of $16,677,127 for the three months ended June 30, 2021, as compared with a net loss of $8,551,301 for the same period ended June 30, 2020 mainly due to an increase in payroll expenses, impairment losses and unrealized losses on equity and derivative securities. 11 Table of Contents Results of operations for the nine months ended June 30, 2021 and 2020 Revenues Revenues increased to $22,293,321 during the nine months ended June 30, 2020, as compared with $8,073,781 in revenues for the same period ended 2020 primarily due to revenue from our Cryptocurrency mining. Loss from Operations Our cost and expenses were $45,578,572 for the nine months ended June 30, 2021, resulting in loss from operations of ($23,285,251), as compared with cost and expenses of $15,480,893 for the nine months ended June 30, 2020, resulting in loss from operations of ($7,407,112). Professional fees increased to $6,216,931 for the nine months ended June 30, 2021, from $3,231,945 for the same period ended June 30, 2020. Our professional fees expenses for the nine months ended June 30, 2021 consisted mainly of legal fees of $4,194,169 largely related with litigation expenses that were resolved in the current quarter (see legal proceedings) , consulting fees of $933,429, external marketing fees of $599,123, accounting, audit and review fees of $393,590. Our professional fees expenses for the nine months ended June 30, 2020 consisted mainly of officers and directors’ consulting fees of $571,654, consulting fees of $1,233,008, legal fees of $332,080 and accounting, audit and review fees of $120,060 and stock-based compensation of $975,143. Professional fees increased in 2021 mainly as a result of increased legal fees as discussed above. Payroll expenses increased to $18,406,494 for the nine months ended June 30, 2021, from $2,692,474 for the same period ended 2020. Our payroll expenses for the nine months ended June 30, 2021 consisted mainly of salary and wages expense of $13,451,051 which included non-recurring executive compensation of $4,700,000 and employee stock-based compensation of $4,955,443. Our payroll expenses for the nine months ended June 30, 2020 consisted mainly of salary and wages expense of $2,606,586 and employee stock-based compensation of $85,888. General and administrative fees increased to $3,623,632 for the nine months ended June 30, 2021, from $820,837 for the same period ended 2020. The increase in our general and administrative expenses for the nine months ended June 30, 2021 was mainly a result of marketing expenses of $1,256,812 , dues and subscriptions of $689,400, insurance expenses of $454,314, rent expenses of $404,722, and bad debt expenses of $234,112. Our general and administrative expenses for the nine months ended June 30, 2020 consisted mainly of marketing expenses of $108,869, travel expenses of $80,648, rent expenses of $82,904, insurance expenses of $159,519, dues and subscriptions of $230,713 and office expense of $27,467. Depreciation and amortization expense increased to $6,883,020 for the nine months ended June 30, 2021, from $2,126,313 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 $6,840,632 for the nine months ended June 30, 2021, from ($8,875,541) for the same period ended June 30, 2020. Our other income/(expense) for the nine months ended June 30, 2021 consisted mainly of income related to the forgiveness of debt of $531,169, realized gain on sales of digital currency of $672,065, an unrealized gain on equity securities of $98,914, derivative gain of $5,319,361, and net interest income of $101,367. Our other income/(expenses) for the nine months ended June 30, 2020 consisted mainly of an unrealized gain on equity securities of $78,368, derivative gain of $1,544,185 and interest expense of ($10,518,094). Net Loss We recorded a net loss of $16,444,619 for the nine months ended June 30, 2021, as compared with a net loss of $16,282,653 for the same period ended June 30, 2020. 12 Table of Contents Liquidity and Capital Resources As of June 30, 2021, we had total current assets of $51,850,309 , consisting of cash, digital currency, accounts receivable, and prepaid expenses and other current assets, and total assets in the amount of $297,488,821. Our current and total liabilities as of June 30, 2021 were $11,910,017 and $15,693,207 respectively. We had working capital of $39,940,292 as of June 30, 2021. During the three-month periods ending June 30, 2021 and March 31, 2021, the Company mined approximately 191 and 144 bitcoin, respectively, an increase of 47 bitcoin, or 32%, over the prior quarter. The average price of bitcoin increased from $45,265 to $46,445, or 2.6%, during the three-month period ending March 31, 2021 and June 30, 2021, respectively. Our sources of liquidity and cash flows are used to fund ongoing operations, research and development projects for new products and technologies and provide ongoing support services for our customers. Over the next year, we anticipate that we will use our liquidity and cash flows from our operations to fund our growth. In addition, as part of our business strategy, we occasionally evaluate potential acquisitions of businesses and products and technologies. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products, services, or businesses. Such potential transactions may require substantial capital resources, which may require us to seek additional debt or equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot provide assurances that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all. Given the Company’s potential sources of liquidity and cash flows, management believes that the Company has sufficient liquidity to satisfy its anticipated working capital requirements for its ongoing operations and obligations for at least the next twelve months given that 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. However, the Company shall continue to evaluate its capital expenditure needs based upon factors including but not limited to the Company’s revenues from operations and mining, growth rate, the timing and extent of spending to support development efforts, the expansion of the Company’s sales and marketing, the timing of new product introductions, and the continuing market acceptance of the Company’s products and services and bitcoin prices. If cash generated from operations is insufficient to satisfy the Company’s capital requirements, the Company may open a revolving line of credit with a bank, or it may have to sell additional equity or debt securities or obtain expanded credit facilities to fund its operating expenses, pay its obligations, diversify its geographical reach, and grow the Company. In the event such financing is needed in the future, there can be no assurance that such financing will be available to the Company, or, if available, that it will be in amounts and on terms acceptable to the Company. If the Company cannot raise additional funds when it needs or wants them, the Company’s operations and prospects could be negatively affected. However, if cash flows from operations become insufficient to continue operations at the current level, and if no additional financing were obtained, then management would restructure the Company in a way to preserve its business while maintaining expenses within operating cash flows. Operating Activities Operating activities used $23,627,889 in cash for the nine months ended June 30, 2021, as compared with $3,679,081 for the same period ended June 30, 2020. Our use of net cash in operating activities were primarily driven by gain on derivative asset of $5,319,361, realized gain on sale of digital currency of $672,065, and PPP loan forgiveness of $531,169, offset mainly by stock based compensation of $8,599,029, impairment expense of $3,720,481, depreciation and amortization of $6,883,020, and bad debt provision of $234,112. Other components of our negative operating cash flow are the changes in operating assets and liabilities including increase in prepaid expenses of ($2,914,993), increase in accounts payable of $3,699,298, increase in digital currency of $16,098,643, increase in contract liabilities of $532,675, increase in accounts receivable of $1,298,308, increase in digital currency issued for services of $162,038, amortization of operating lease of $271,715, decrease in contract asset of $4,103, and increase in inventory of $3,978,257. This is partially offset by a decrease in lease liabilities of $272,123, a realized gain on equity security of $105,908, and an unrealized gain on equity security of $98,914. Our net loss of $16,282,653 was the main component of our negative operating cash flow for the nine months ended June 30, 2020, offset mainly by unrealized gain on equity security of ($78,368), gain on derivative asset of ($1,544,185), depreciation and amortization of $2,126,313, amortization of debt discounts of $9,022,759, increase in accounts payable of $2,347,566, and stock-based compensation of $1,171,632. 13 Table of Contents Investing Activities Investing activities used ($191,096,439) during the nine months ended June 30, 2021, as compared with ($2,667,702) for the same period ended June 30, 2020. Our increase in deposits on mining equipment of 125,855,501 was the main component of our negative investing cash flow for the nine months ended June 30, 2021. Our sale of digital currencies of $2,499,757, acquisition of ATL Data Centers, LLC of $45,783, acquisition of Solar Watt Solutions, Inc. of ($1,000,337), investment in infrastructure development of ($6,431,664), purchase of property and equipment of ($60,536,521), and proceeds from the sale of equity securities $182,044 were the main components of our investing cash flow for the nine months ended June 30, 2021. Our acquisition of p2kLabs, Inc. of $1,141,990, investment in International Land Alliance and other equity securities of $750,000, investment in Contractual Joint Venture of $660,000, and purchase of fixed assets of $30,787 were the main components of our negative investing cash flow for the nine months ended June 30, 2020. Financing Activities Cash flows received from financing activities during the nine months ended June 30, 2021 amounted to $233,807,996, as compared with $463,702 for the nine months ended June 30, 2020. Our cash flows from financing activities for the nine months ended June 30, 2021 consisted of repayments of ($5,865,476) on promissory notes, proceeds from exercise of warrants of $3,731,563, proceeds from underwritten offerings of $236,123,384, and payments on finance leases of ($181,475). Our cash flows from financing activities for the nine months ended June 30, 2020 consisted of repayments of ($67,467) on promissory note and proceeds from promissory notes of $531,169. Inflation We have not been affected materially by inflation during the periods presented, and no material effect is expected in the near future. Known Trends or Uncertainties We have seen some consolidation in our industry during economic downturns. These consolidations have not had a significant negative effect on our total sales; however, should consolidations and downsizing in the industry continue to occur, those events could adversely impact our revenues and earnings going forward. Although there are signs that COVID-19 may begin to taper off, COVID-19 still has an impact on worldwide economic activity, and the ongoing effects of the COVID-19 pandemic may adversely impact our business. In response to the COVID-19 pandemic, many state, local, and foreign governments have put in place restrictions in order to control the spread of the disease. Such restrictions, or the perception that further restrictions could occur, have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions, and cancellation or postponement of events, among other effects that impacted productivity and disrupted our operations and those of our partners, suppliers, contractors, and customers. 14 Table of Contents During the pandemic, as state, local, and foreign governments implemented (and may continue to implement) preventative measures to contain or mitigate the outbreak of COVID-19, the usage of our products and services fluctuated following such implementation, and we cannot predict how usage levels will continue to be impacted by these preventative measures. There is no assurance that customers will continue to use our products and services, or to the same extent, as the COVID-19 pandemic begins to taper off or when it has ended. As a result, it has been difficult to accurately forecast our revenues or financial results, especially given that the near and long term impact of the pandemic remains uncertain. In addition, while the potential impact and duration of the COVID-19 pandemic on the economy and our business in particular may be difficult to assess or predict, the pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, and may reduce our ability to access additional capital, which could negatively affect our liquidity in the future. Our results of operations could be materially below our forecasts as well, which could adversely affect our results of operations, disappoint analysts and investors, or cause our stock price to decline. Furthermore, a decrease in orders of our products and services in a given period could negatively affect our revenues in future periods. The COVID-19 pandemic may also have the effect of heightening many of the other risks described in the “Risk Factors” section of our September 30, 2020 Annual Report on Form 10-K filed December 17, 2020. We may take further actions that alter our operations as may be required by federal, state, or local authorities, or which we determine are in our best interests. While much of our operations can be performed remotely, certain activities often require personnel to be on-site, and our ability to carry out these activities have been, and may continue to be negatively impacted if our employees or local personnel are not able to travel. In addition, for activities that may be conducted remotely, there is no guarantee that we will be as effective while working remotely because our team is dispersed and many employees and their families have been negatively affected, mentally or physically, by the COVID-19 pandemic. Decreased effectiveness and availability of our team could harm our business. In addition, we may decide to postpone or cancel planned investments in our business in response to changes in our business as a result of the spread of COVID-19, which may impact our ability to attract and retain customers and our rate of innovation, either of which could harm our business. We do not yet know the full extent of potential delays or impacts on our business, operations, or the global economy as a whole. While there have recently been vaccines developed and administered, and certain government orders and restrictions in particular cities, counties, and states have been lifted as the spread of COVID-19 starts to get contained and mitigated, we cannot predict the timing of the vaccine roll-out globally or the efficacy of such vaccines, and we do not yet know how businesses, customers, contractors, suppliers, or our partners will operate in a post COVID-19 environment, especially if additional or supplemental governmental orders, limitations, and restrictions are reinstated. There may be additional costs or impacts to our business and operations, including when we are able to resume in person activities, travel, and events. In addition, there is no guarantee that a future outbreak of this or any other widespread epidemics will not occur, or that the global economy will recover, either of which could harm our business. Off Balance Sheet Arrangements As of June 30, 2021, there were no off-balance sheet arrangements. 15 Table of Contents 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. 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.