SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
We believe that it is important to communicate our future expectations to our
security holders and to the public. This report, therefore, contains statements
about future events and expectations which are "forward-looking statements"
within the meaning of Sections 27A of the Securities Act of 1933 and 21E of the
Securities Exchange Act of 1934, including the statements about our plans,
objectives, expectations and prospects under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations." You
can expect to identify these statements by forward-looking words such as "may,"
"might," "could," "would," "will," "anticipate," "believe," "plan," "estimate,"
"project," "expect," "intend," "seek" and other similar expressions. Any
statement contained in this report that is not a statement of historical fact
may be deemed to be a forward-looking statement. Although we believe that the
plans, objectives, expectations and prospects reflected in or suggested by our
forward-looking statements are reasonable, those statements involve risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements, and we
can give no assurance that our plans, objectives, expectations and prospects
will be achieved.
Important factors that might cause our actual results to differ materially from
the results contemplated by the forward-looking statements are contained in the
"Risk Factors" section of and elsewhere in this Annual Report and in our
subsequent filings with the Securities and Exchange Commission. The following
discussion of our results of operations should be read together with our
financial statements and related notes included elsewhere in this report.
GENERAL
We were incorporated in the State of Nevada on March 22, 2013 under the name
Lightcollar, Inc. On March 22, 2015, we changed our name to EMS Find, Inc., and
in July 2017, we changed our name to Integrated Ventures, Inc. We have
discontinued our prior operations and changed our business focus from our prior
technologies relating to the EMS Find platform to acquiring, launching, and
operating companies in the cryptocurrency sector, mainly in digital currency
mining and sales of branded mining rigs. Our offices are located at 73 Buck
Road, Suite 2, Huntingdon Valley, Pennsylvania 19006.
On November 22, 2017, we successfully launched our cryptocurrency operations,
and revenues commenced from cryptocurrency mining operations and from sales of
cryptocurrency mining equipment. As of June 30, 2021, the Company owned and
operated a total of approximately 914 miners in two locations that mine Bitcoin,
Litecoin, ZCash and Ethereum. In addition, as of June 30, 2021, the Company paid
deposits totaling $7,544,190 for 2,650 additional miners to be placed into
service beginning in September 2021.
The Company will continue to (1) raise capital to purchase new mining equipment,
(2) sell older and no longer profitable models and (3) expand cryptocurrency
mining operations to new locations.
Financial
As of June 30, 2021, we operated our cryptocurrency mining operations in two
hosted facilities located in Carthage, New York and Kearney, Nebraska. The
hosting and power purchase agreements for the two facilities require the Company
to pay monthly a contractual rate per kilowatt hour of electricity consumed in
the Company's cryptocurrency mining operations.
Revenues from our cryptocurrency mining operations were $1,793,316 and $435,740
for the years ended June 30, 2021, respectively. Revenues from the sales of used
equipment and parts were $58,074 and $18,430 for the years ended June 30, 2021
and 2020, respectively.
When funds are available and market conditions allow, we also invest in certain
denominations of cryptocurrencies to complement our mining operations. We
consider these investments similar to marketable securities where we purchase
and hold the cryptocurrencies for sale. We report realized gains and losses on
the sales of cryptocurrencies net of transaction costs. As of June 30, 2021, our
digital currencies at cost totaled $245,320 and were comprised of multiple
denominations, primarily of Bitcoin (BTC), Ethereum (ETH) and Chainlink (LINK).
We have funded our operations primarily from cash generated from our digital
currency mining operations and proceeds from convertible notes payable and
preferred stock. During the year ended June 30, 2021, we received net proceeds
from convertible notes payable of $563,000, Series C preferred stock of
$1,125,000, Series D preferred stock of $3,000,000 and common stock of
$8,135,000.
As of June 30, 2021, our convertible debt lenders had fully converted all debt
to common stock and all derivative liabilities had been extinguished.
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The Digital Asset Market
The Company is focusing on the mining of digital assets, as well as blockchain
applications ("blockchain") and related technologies. A blockchain is a shared
immutable ledger for recording the history of transactions of digital assets-a
business blockchain provides a permissioned network with known identities. A
Bitcoin is the most recognized type of a digital asset that is issued by, and
transmitted through, an open source, math-based protocol platform using
cryptographic security that is known as the "Bitcoin Network." The Bitcoin
Network is an online, peer-to-peer user network that hosts the public
transaction ledger, known as the blockchain, and the source code that comprises
the basis for the cryptography and math-based protocols governing the Bitcoin
Network.
Bitcoins, for example, can be used to pay for goods and services or can be
converted to fiat currencies, such as the US Dollar, at rates determined on
Bitcoin exchanges or in individual end-user-to-end-user transactions under a
barter system. The networks utilized by digital coins are designed to operate
without any company or government in charge, governed by a collaboration of
volunteer programmers and computers that maintain all the records. These
blockchains are typically maintained by a network of participants which run
servers while securing their blockchain. Third party service providers such as
Bitcoin exchanges and bitcoin third party payment processing services may charge
significant fees for processing transactions and for converting, or facilitating
the conversion of, bitcoins to or from fiat currency.
This market is rapidly evolving and there can be no assurances that we will
remain competitive with industry participants that have or may have greater
resources or experience in in this industry than us, nor that the unproven
digital assets that we mine will ever have any significant market value.
The Company, like many cryptocurrency mining operators, is currently operating
at a non-profitable status following record historic runs in market prices of
digital currencies. Market prices of digital currencies have not been high
enough to cover the operating costs of mining companies, including significant
power costs and high levels of equipment depreciation. The Company is addressing
these operational challenges through considering alternative sources of power,
further consolidation of facilities, and potential hosting arrangements. There
can be no assurance that the Company will be successful in these efforts and
attain profitable levels of operations.
Financial Operations Review
We are incurring increased costs because of being a publicly traded company. As
a public company, we incur significant legal, accounting, and other expenses
that we did not incur as a private company. We also have paid compensation
through the issuance of shares of our common stock, Series B preferred stock and
warrants, the valuation of which has resulted in significant stock-based
compensation. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules
subsequently implemented by the Securities and Exchange Commission, have
required changes in corporate governance practices of public companies and will
require us to comply with these rules. These new rules and regulations have will
increase our legal and financial compliance costs and have made some activities
more time-consuming and costlier. In addition, these new rules and regulations
have made it more difficult and more expensive for us to obtain director and
officer liability insurance, which we currently cannot afford to do. As a result
of the new rules, it may become more difficult for us to attract and retain
qualified persons to serve on our Board of Directors or as executive officers.
We cannot predict or estimate the amount of additional costs we may incur as a
result of being a public company or the timing of such costs.
To operate our digital currency mining facilities and to fund future operations,
we will need to raise additional capital. The amount and timing of future
funding requirements will depend on many factors, including the timing and
results of our ongoing development efforts, the potential expansion of our
current development programs, potential new development programs and related
general and administrative support. We anticipate that we will seek to fund our
operations through further liquidation of our marketable securities, public or
private equity or debt financings or other sources, such as potential
collaboration agreements. We cannot be certain that anticipated additional
financing will be available to us on favorable terms, or at all.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 2021 COMPARED TO THE YEAR ENDED JUNE 30, 2020
Revenues
Our cryptocurrency mining revenues increased to $1,793,316 in the year ended
June 30, 2021 from $435,740 in the year ended June 30, 2020. This increase in
revenues resulted primarily from the Company replacing under-performing,
non-serviceable mining equipment during the current fiscal year with new more
efficient mining equipment and increasing the number of miners. Also, we
expanded our cryptocurrency mining operations to a second location in Kearney,
Nebraska near the end of the current fiscal year.
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We also have revenues from the sale of cryptocurrency mining units that have
been assembled or refurbished for resale and the sale of spare parts. Such sales
totaled $58,074 and $18,430 in the years ended June 30, 2021 and 2020,
respectively. The increase in sales of unused equipment and parts was due to the
replacement of under-performing, non-serviceable mining equipment during the
current fiscal year with new more efficient equipment. Sales of equipment and
parts will fluctuate from period to period depending on the current retail
demand for our model of cryptocurrency mining units and parts.
Cost of Revenues
Cost of revenues was $920,376 and $996,409 in the years ended June 30, 2021 and
2020, respectively. The decrease in cost of revenues in the current fiscal year
is due primarily to a decrease in depreciation and amortization expense.
Expenses associated with running our cryptocurrency mining operations, such as
equipment depreciation and amortization, operating supplies, utilities, and
consulting services are recorded as cost of revenues. Also included in cost of
revenues are the costs of purchasing or assembling the cryptocurrency mining
units sold. We reported a gross profit on revenues of $931,014 in the year ended
June 30, 2021 and a gross loss of $542,239 in the year ended June 30, 2020. In
prior year periods, we have reported a gross loss on revenues primarily due to
lower revenues, high utility costs and a conservative, short useful life for
mining equipment depreciation and amortization. Higher cryptocurrency mining
revenues in the current year resulting from the implementation of more efficient
mining equipment and the increase in the number of miners purchased also
contributed to the gross profit on revenues.
Operating Expenses
Our general and administrative expenses increased to $6,061,741 in the year
ended June 30, 2021 from $352,399 in the year ended June 30, 2020. The increases
resulted primarily from higher professional and consulting fees relating to debt
and equity financings and the increase in levels of cryptocurrency mining
operations. Fluctuations in operating expenses from period to period result
primarily from changes in consulting and professional fees and travel expenses.
We reported non-cash, related party stock-based compensation of $16,537,500 in
the year ended June 30, 2021. On February 26, 2021 the Company issued to Steve
Rubakh, our President, 350,000 total shares of Series B convertible preferred
stock valued on an "as converted to common" basis at $16,537,500, using the
closing market price of the Company's common stock on that date. Each share of
Series B preferred stock is convertible into 100 shares of the Company's common
stock. No related party stock-based compensation was incurred in the year ended
June 30, 2020.
Other Income (Expense)
Our other income (expense) was comprised of the following for the years ended
June 30:
2021 2020
Interest expense $ (435,981 ) $ (655,199 )
Realized gain (loss) on digital currencies (22,948 ) 5,884
Change in fair value of derivative liabilities (76,687 ) 782,258
Loss on disposition of property and equipment (238,363 ) (162,451 )
Gain on extinguishment of debt
9,125 -
Loss on conversion of debt - (4,592 )
Digital currency theft loss - (33,037 )
Total other income (expense) $ (764,854 ) $ (67,137 )
Our interest expense includes the amortization of debt discount and original
issue discount for our convertible notes payable. These amounts vary from period
to period depending on the timing of new borrowings and the conversion of the
debt to common stock by the lenders. During the current fiscal year, our lenders
completed the full conversion of our convertible notes payable, resulting in a
decrease in interest expense compared to the prior fiscal year.
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In the current fiscal year, we significantly increased our investing efforts in
digital currencies. In addition to the currencies received as compensation for
our mining services, we purchased various digital currencies totaling $7,374,678
and also converted currencies from one denomination to another based on our
assessment of market conditions for each respective currency. The market values
of individual currency denominations continually fluctuate, and the fluctuations
may be material from day to day. During the year ended June 30, 2021, we
received total proceeds of $9,211,118 from the sale of digital currencies and
incurred transactions fees totaling $233,580, which are deducted from the gain
or loss realized. We realized a loss on sale of digital currencies, after
deducting transaction costs, of $22,948 in the year ended June 30, 2021 and a
gain on sale of digital currencies, after deducting transaction costs, of $5,884
in the year ended June 30, 2020.
During the year ended June 30, 2021, we recognized a loss on change in fair
value of derivative liabilities of $76,687 and during the year ended June 30,
2020, we recognized a gain on change in fair value of derivative liabilities of
$782,258. During the year ended June 30, 2021, all convertible notes payable and
other equity instruments with provisions identified as derivatives were
extinguished through conversion to common shares and all related derivative
liabilities were settled. We estimate the fair value of the derivatives
associated with our convertible debt, options, warrants and other contracts
using, as applicable, either the Black-Scholes pricing model or multinomial
lattice models that value the derivative liability based on a probability
weighted discounted cash flow model using future projections of the various
potential outcomes. We estimate the fair value of the derivative liabilities at
the inception of the financial instruments, and, in the case of our convertible
notes payable, at the date of conversions to equity and at each reporting date,
recording a derivative liability, debt discount, additional paid-in capital and
a gain or loss on change in derivative liabilities as applicable. These
estimates are based on multiple inputs, including the market price of our stock,
interest rates, our stock price volatility, variable conversion prices based on
market prices as defined in the respective agreements and probabilities of
certain outcomes based on management projections. Since these inputs are subject
to significant changes from period to period and to management's judgment, the
estimated fair value of the derivative liabilities will fluctuate from period to
period, and the fluctuation may be material.
During the years ended June 30, 2021 and 2020, we disposed of and wrote off
non-serviceable, defective mining equipment with a net book value of $238,363
and $162,451, respectively. The equipment disposed of was replaced with new,
more efficient mining equipment.
We reported a gain on extinguishment of debt of $9,125 in the year ended June
30, 2021 due to favorable settlement of certain liabilities. We had no gain or
loss on extinguishment of debt in the year ended June 30, 2020.
We reported a loss on conversion of debt of $4,592 in the year ended June 30,
2020. Gains or losses on extinguishment of debt result from conversion of
convertible notes to common stock where the conversion terms were outside the
related agreements. We did not report any gain or loss on extinguishment of debt
during the year ended June 30, 2021.
During the year ended June 30, 2020, we incurred a digital currency theft loss
of $33,037 where a hacker obtained unauthorized access to our online digital
currency processing service and transferred digital currencies out of our
account.
Net Loss
As a result, primarily from the non-cash related party stock-based compensation,
we reported a net loss of $22,433,081 in the year ended June 30, 2021, compared
to a net loss of $1,081,775 in the year ended June 30, 2020.
LIQUIDITY AND CAPITAL RESOURCES
Overview
As of June 30, 2021, we had total current assets of $2,295,157, including cash
of $2,097,537 and prepaid expenses and other current assets of $197,620 and
total current liabilities of $274,083. During the year ended June 30, 2021, our
lenders converted in full their convertible notes payable and the related
derivative liabilities were settled. We had total stockholders' equity of
$8,964,882 as of June 30, 2021 compared to a stockholders' deficit of $109,603
as of June 30, 2020.
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Most recently, in April 2021, we funded our operations and the acquisition of
cryptocurrency mining equipment from the sale of 30,000,000 shares of our common
stock to two institutional investors for total net proceeds of $8,135,000.
Previously, in January and February 2021, we received proceeds totaling
$4,125,000 from the issuance of Series C and D preferred stock, which are
recorded at face value as mezzanine equity due to certain mandatory redemption
features of the stock.
During the year ended June 30, 2021, we received net proceeds from convertible
notes payable of $563,000, which debt was converted in full into shares of our
common stock. We also funded the purchase of cryptocurrency mining equipment
through short-term installment debt totaling $57,822.
On March 30, 2021, the Company entered into securities purchase agreements (the
"Purchase Agreements") with two institutional investors (the "Purchasers"), for
the offering (the "Offering") of (i) 30,000,000 shares of common stock
("Shares"), par value $0.001 per share, of the Company ("Common Stock") and (ii)
common stock purchase warrants ("Warrants") to purchase up to an aggregate of
30,000,000 shares of Common Stock, which are exercisable for a period of five
years after issuance at an initial exercise price of $0.30 per share, subject to
certain adjustments, as provided in the Warrants. Each of the Purchasers
received Warrants in the amount equal to 100% of the number of Shares purchased
by such Purchaser. Each Share and accompanying Warrant were offered at a
combined offering price of $0.30. Pursuant to the Purchase Agreements, the
Purchasers purchased the Shares and accompanying Warrants for an aggregate
purchase price of $9,000,000. The transaction closed on April 1, 2021, with the
Company receiving proceeds of $8,135,000 after payment of expenses.
On January 14, 2021, the Company entered into a Securities Purchase Agreement
(the "Series C Agreement") with BHP Capital NY, Inc. ("BHP"), providing for the
issuance and sale by the Company and the purchase by BHP of newly designated
shares of Series C Convertible preferred stock issued by the Company at a
purchase price per share of $1,000. The first closing under the Series C
Agreement was held on January 22, 2021, at which the Company sold, and BHP
purchased 750 shares of Series C preferred stock for $750,000. The Company
received net proceeds of $740,000 after payment of legal fees. The Company also
on that date issued 2,000,000 shares of its common stock to BHP as equity
incentive shares.
Effective February 5, 2021, BHP purchased a second tranche consisting of 375,000
shares of Series C preferred stock for $375,000. As an equity incentive to this
purchase of Series C preferred stock, the Company issued 1,000,000 shares of the
Company's common stock to BHP.
On February 18, 2021, the Company entered into a Securities Purchase Agreement,
dated as of February 18, 2021 (the "Series D Agreement") with BHP providing for
the issuance and sale by the Company and the purchase by BHP of shares of Series
D preferred stock. At a closing held February 19, 2021, BHP initially purchased
3,000 shares of Series D preferred stock at a price of $1,000 per share for a
total purchase price of $3,000,000. Included in the purchase price was a
five-year warrant granting BHP the right to purchase 5,000,000 warrants,
exercisable into shares of the Company's common stock at a per share $0.60 per
share.
Sources and Uses of Cash
We used net cash in operations of $1,567,715 in the year ended June 30, 2021 as
a result of our net loss of $22,433,081, non-cash gain of $9,125, increases in
prepaid expenses and other current assets of $194,370, digital currencies of
$1,792,451 and decreases in accounts payable of $281,639 and due to related
party of $93,550, partially offset by non-cash expenses totaling $23,217,836 and
increase accrued expenses of $18,665.
We used net cash in operations of $671,101 in the year ended June 30, 2020 as a
result of our net loss of $1,081,775, non-cash gains totaling $788,142, increase
in digital currencies of $451,546, partially offset by non-cash expenses
totaling $1,500,381 and increases in accounts payable of $45,415, accrued
expenses of $51,513 and due to related party of $53,053.
During the year ended June 30, 2021, we used net cash in investing activities of
$9,118,171, comprised of the increase in equipment deposits of $7,663,265,
purchase of digital currencies of $7,374,678, and the purchase of property and
equipment of $3,291,346, partially offset by net proceeds from the sale of
digital currencies of $9,211,118.
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During the year ended June 30, 2020, we had net cash provided by investing
activities of $218,191 comprised of net proceeds from the sale of digital
currencies of $714,126, partially offset by the purchase of property and
equipment of $123,349 and purchase of digital currencies of $372,586.
During the year ended June 30, 2021, we had net cash provided by financing
activities of $12,776,748 comprised of proceeds from convertible notes payable
of $563,000, proceeds from the issuance of Series C preferred stock of
$1,125,000, proceeds from the issuance of Series D preferred stock of
$3,000,000, and proceeds from the issuance of common stock of $8,135,000,
partially offset by repayment of notes payable of $46,252.
During the year ended June 30, 2020, we had net cash provided by financing
activities of $411,275 comprised of proceeds from convertible notes payable of
$534,000, proceeds from notes payable of $7,583, partially offset by repayment
of convertible notes payable of $130,308.
We will have to raise funds to successfully operate our digital currency mining
operations, purchase equipment and expand our operations to multiple facilities.
We will have to borrow money from shareholders or issue debt or equity or enter
a strategic arrangement with a third party. There can be no assurance that
additional capital will be available to us.
Going Concern
The Company has reported recurring net losses since its inception and used net
cash in operating activities of $1,567,715 in the year ended June 30, 2021. As
of June 30, 2021, the Company had an accumulated deficit of $45,076,096. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern.
The accompanying financial statements have been prepared in conformity with U.S.
GAAP, which contemplate continuation of the Company as a going concern and the
realization of assets and satisfaction of liabilities in the normal course of
business. The ability of the Company to reach a successful level of operations
is dependent on the execution of management's plans, which include the raising
of capital through the debt and/or equity markets, until such time that funds
provided by operations are sufficient to fund working capital requirements. If
the Company were not to continue as a going concern, it would likely not be able
to realize its assets at values comparable to the carrying value or the fair
value estimates reflected in the balances set out in the preparation of the
financial statements.
There can be no assurances that the Company will be successful in attaining a
profitable level of operations or in generating additional cash from the
equity/debt markets or other sources fund its operations. The financial
statements do not include any adjustments relating to the recoverability of
assets and classification of assets and liabilities that might be necessary.
Should the Company not be successful in its business plan or in obtaining the
necessary financing to fund its operations, the Company would need to curtail
certain or all operational activities and/or contemplate the sale of its assets,
if necessary.
Current and Future Impact of COVID-19
The COVID-19 pandemic continues to have a material negative impact on capital
markets. While we continue to incur operating losses, we are currently dependent
on debt or equity financing to fund our operations and execute our business
plan. We believe that the impact on capital markets of COVID-19 may make it more
costly and more difficult for us to access these sources of funding.
SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are disclosed in Note 2 to the accompanying
financial statements. The following is a summary of those accounting policies
that involve significant estimates and judgment of management.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Because of the use of estimates inherent in the financial reporting process,
actual results could differ significantly from those estimates.
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Digital Currencies
Digital currencies consist of Bitcoin, Litecoin, ZCash and Ethereum, generally
received for the Company's own account as compensation for cryptocurrency mining
services, and other digital currencies such as Chainlink and Quant purchased for
short-term investment and trading purposes. Given that there is limited
precedent regarding the classification and measurement of cryptocurrencies under
current Generally Accepted Accounting Principles ("GAAP"), the Company has
determined to account for these digital currencies as indefinite-lived
intangible assets in accordance with Accounting Standards Update ("ASU") No.
350, Intangibles - Goodwill and Other, for the period covered by this report and
in future reports unless and until further guidance is issued by the Financial
Accounting Standards Board ("FASB"). 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. In testing for
impairment, the Company has the option to first perform a qualitative assessment
to determine whether it is more likely than not than an impairment exists. If it
is determined that it is 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.
Realized gains or losses on the sale of digital currencies, net of transaction
costs, are included in other income (expense) in the statements of operations.
Property and Equipment
Property and equipment, consisting primarily of computer and other
cryptocurrency mining equipment (transaction verification servers), is stated at
the lower of cost or estimated realizable value and is depreciated when placed
into service using the straight-line method over estimated useful lives. The
Company operates in an emerging industry for which limited data is available to
make estimates of the useful economic lives of specialized equipment. Management
has assessed the basis of depreciation of these assets and believes they should
be depreciated over a three-year period due to technological obsolescence
reflecting rapid development of hardware that has faster processing capacity and
other factors. Maintenance and repairs are expensed as incurred and improvements
are capitalized. Gains or losses on the disposition of property and equipment
are recorded upon disposal.
During the years ended June 30, 2021 and 2020, the Company discontinued the use
of damaged or non-serviceable mining equipment and wrote off its net book value
of $238,363 and $162,451, respectively, to loss on disposition of property and
equipment.
Management has determined that the three-year diminishing value best reflects
the current expected useful life of transaction verification servers. This
assessment takes into consideration the availability of historical data and
management's expectations regarding the direction of the industry including
potential changes in technology. Management will review this estimate annually
and will revise such estimates as and when data becomes available.
To the extent that any of the assumptions underlying management's estimate of
useful life of its transaction verification servers are subject to revision in a
future reporting period, either as a result of changes in circumstances or
through the availability of greater quantities of data, then the estimated
useful life could change and have a prospective impact on depreciation expense
and the carrying amounts of these assets.
Payments to equipment suppliers prior to shipment of the equipment are recorded
as equipment deposits.
Derivatives
The Company evaluates its convertible debt, options, warrants or other contracts
to determine if those contracts or embedded components of those contracts
qualify as derivatives to be separately accounted for. The result of this
accounting treatment is that under certain circumstances the fair value of the
derivative is marked-to-market each balance sheet date and recorded as a
liability. In the event that the fair value is recorded as a liability, the
change in fair value is recorded in the statement of operations as other income
or expense. Upon conversion or exercise of a derivative instrument, the
instrument is marked to fair value at the conversion date and then that fair
value is reclassified to equity. Equity instruments that are initially
classified as equity that become subject to reclassification under this
accounting standard are reclassified to liability at the fair value of the
instrument on the reclassification date.
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Where the number of warrants or common shares to be issued under these
agreements is indeterminate, the Company has concluded that the equity
environment is tainted, and all additional warrants and convertible debt are
included in the value of the derivatives.
We estimate the fair value of the derivatives associated with our convertible
notes payable, common stock issuable pursuant to a Series B preferred stock
Exchange Agreement and a stock subscription payable using, as applicable, either
the Black-Scholes pricing model or multinomial lattice models that value the
derivative liability based on a probability weighted discounted cash flow model
using future projections of the various potential outcomes. We estimate the fair
value of the derivative liabilities at the inception of the financial
instruments, and, in the case of our convertible notes payable, at the date of
conversions to equity and at each reporting date, recording a derivative
liability, debt discount, additional paid-in capital and a gain or loss on
change in derivative liabilities as applicable. These estimates are based on
multiple inputs, including the market price of our stock, interest rates, our
stock price volatility, variable conversion prices based on market prices as
defined in the respective agreements and probabilities of certain outcomes based
on management projections. These inputs are subject to significant changes from
period to period and to management's judgment; therefore, the estimated fair
value of the derivative liabilities will fluctuate from period to period, and
the fluctuation may be material.
Impairment of Long-Lived Assets
All assets, including intangible assets subject to amortization, are reviewed
for impairment when changes in circumstances indicate that the carrying amount
of the asset may not be recoverable in accordance with ASC 350 and ASC 360. If
the carrying amount of the asset exceeds the expected undiscounted cash flows of
the asset, an impairment charge is recognized equal to the amount by which the
carrying amount exceeds fair value or net realizable value. The testing of these
intangibles under established guidelines for impairment requires significant use
of judgment and assumptions. Changes in forecasted operations and other
assumptions could materially affect the estimated fair values. Changes in
business conditions could potentially require adjustments to these asset
valuations. We reported no impairment expense for the years ended June 30, 2021
and 2020.
Fair Value of Financial Instruments
Disclosures about fair value of financial instruments require disclosure of the
fair value information, whether or not recognized in the balance sheet, where it
is practicable to estimate that value. As of June 30, 2021 and 2020, the amounts
reported for cash, prepaid expenses and other current assets, equipment
deposits, accounts payable, accrued preferred stock dividends, accrued expenses,
due to related party and notes payable approximate fair value because of their
short maturities.
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. ASC Topic 820 established a three-tier
fair value hierarchy, which prioritizes the inputs used in measuring fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (level 1measurements) and the lowest
priority to unobservable inputs (level 3 measurements). These tiers include:
· Level 1, defined as observable inputs such as quoted prices for identical
instruments in active markets;
· Level 2, defined as inputs other than quoted prices in active markets that
are either directly or indirectly observable such as quoted prices for
similar instruments in active markets or quoted prices for identical or
similar instruments in markets that are not active; and
· Level 3, defined as unobservable inputs in which little or no market data
exists, therefore requiring an entity to develop its own assumptions, such
as valuations derived from valuation techniques in which one or more
significant inputs or significant value drivers are unobservable.
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Our derivative liabilities are measured at fair value on a recurring basis and
estimated as follows:
Total Level 1 Level 2 Level 3
June 30, 2021:
Derivative liabilities $ - $ - $ - $ -
Total liabilities measured at fair value $ - $ - $ - $ -
June 30, 2020:
Derivative liabilities $ 164,834 $ - $ - $ 164,834
Total liabilities measured at fair value $ 164,834 $ - $ - $ 164,834
Stock-Based Compensation
The Company accounts for all equity-based payments in accordance with ASC Topic
718, Compensation - Stock Compensation. ASC Topic 718 requires companies to
recognize in the statement of operations the grant-date fair value of stock
awards, stock options, warrants and other equity-based compensation issued to
employees. The value of the portion of an award that is ultimately expected to
vest is recognized as an expense over the requisite service periods using the
straight-line attribution method. The fair value of a stock award is recorded at
the fair market value of a share of the Company's stock on the grant date. The
Company estimates the fair value of stock options and warrants at the grant date
by using an appropriate fair value model such as the Black-Scholes option
pricing model or multinomial lattice models.
The Company accounts for non-employee share-based awards based upon ASC 505-50,
Equity-Based Payments to Non-Employees. ASC 505-50 requires the costs of goods
and services received in exchange for an award of equity instruments to be
recognized using the fair value of the goods and services or the fair value of
the equity award, whichever is more reliably measurable. The fair value of the
equity award is determined on the measurement date, which is the earlier of the
date that a performance commitment is reached or the date that performance is
complete. Generally, our awards do not entail performance commitments. When an
award vests over time such that performance occurs over multiple reporting
periods, we estimate the fair value of the award as of the end of each reporting
period and recognize an appropriate portion of the cost based on the fair value
on that date. When the award vests, we adjust the cost previously recognized so
that the cost ultimately recognized is equivalent to the fair value on the date
the performance is complete.
Revenue Recognition
Effective July 1, 2018, we adopted ASC 606, Revenue from Contracts with
Customers, as amended, using the modified retrospective method, which requires
the cumulative effect of adoption to be recognized as an adjustment to opening
retained earnings in the period of adoption. There was no cumulative effect of
adopting the new standard and no impact on our financial statements. The new
standard provides a single comprehensive model to be used in the accounting for
revenue arising from contracts with customers and supersedes current revenue
recognition guidance, including industry-specific guidance. The standard's
stated core principle is that an entity should recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for
those goods or services. To achieve this core principle, ASC 606 includes
provisions within a five-step model that includes identifying the contract with
a customer, identifying the performance obligations in the contract, determining
the transaction price, allocating the transaction price to the performance
obligations, and recognizing revenue when, or as, an entity satisfies a
performance obligation.
Our revenues currently consist of cryptocurrency mining revenues and revenues
from the sale of cryptocurrency mining equipment recognized in accordance with
ASC 606 as discussed above. Amounts collected from customers prior to shipment
of products are recorded as deferred revenue.
The Company earns its cryptocurrency mining revenues by providing transaction
verification services within the digital currency networks of cryptocurrencies,
such as Bitcoin, Litecoin, ZCash and Ethereum. The Company satisfies its
performance obligation at the point in time that the Company is awarded a unit
of digital currency through its participation in the applicable network and
network participants benefit from the Company's verification service. In
consideration for these services, the Company receives digital currencies, net
of applicable network fees, which are recorded as revenue using the closing U.S.
dollar price of the related cryptocurrency on the date of receipt. Expenses
associated with running the cryptocurrency mining operations, such as equipment
depreciation, rent, operating supplies, rent, utilities and monitoring services
are recorded as cost of revenues.
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There is currently no specific definitive guidance in GAAP or alternative
accounting frameworks for the accounting for the production and mining of
digital currencies and management has exercised significant judgment in
determining appropriate accounting treatment for the recognition of revenue for
mining of digital currencies. Management has examined various factors
surrounding the substance of the Company's operations and the guidance in ASC
606, including identifying the transaction price, when performance obligations
are satisfied, and collectability is reasonably assured being the completion and
addition of a block to a blockchain and the award of a unit of digital currency
to the Company. In the event authoritative guidance is enacted by the FASB, the
Company may be required to change its policies which could result in a change in
the Company's financial statements.
OFF BALANCE SHEET ARRANGEMENTS
Operating Leases
As of June 30, 2021, the Company had no obligation for future lease payments
under non-cancelable operating leases. However, the Company has entered into two
agreements described below related to its crypto currency mining operations
pursuant to which the Company's sole obligation is to pay monthly a contractual
rate per kilowatt hour of electricity consumed.
PetaWatt Agreements
Power Supply and Purchase Agreement
In May 2019, the Company consolidated its then cryptocurrency operations in one
facility in Carthage, New York. The Carthage power supply and purchase agreement
with PetaWatt Properties, LLC ("PetaWatt") was entered into on May 10, 2019 for
an initial term of 90 days, with an option to continue the agreement for a
subsequent 36 months, which option the Company has exercised. The Company's sole
obligation under the agreement is to pay monthly a contractual rate per kilowatt
hour of electricity consumed in the Company's cryptocurrency mining operations.
This agreement was superseded on May 7, 2021 with a new Lease, Hosting, and
Energy Services Agreement with PetaWatt.
Lease, Hosting, and Energy Services Agreement
On May 7, 2021, the Company and PetaWatt entered into a Lease, Hosting and
Energy Services Agreement for the Carthage, New York facility for a period of 36
months. The Company's sole obligation under the agreement is to pay monthly a
contractual rate per kilowatt hour of electricity consumed in the Company's
cryptocurrency mining operations. The Company made a prepayment of $300,000
upon signing the agreement, to be drawn down with monthly invoices submitted to
the Company by PetaWatt. As of June 30, 2021, the remaining prepayment balance
was $193,870, which amount was included in prepaid expenses and other current
assets in the accompanying balance sheet.
Compute North Master Agreement
On March 8, 2021, the Company and Compute North LLC ("Compute North") entered
into a Master Agreement for the colocation and management of the Company's
cryptocurrency mining operations. The Company submits Order Forms to Compute
North to determine the location of the hosted facilities, the number of
cryptocurrency miners, the term of the services provided and the contractual
rate per kilowatt hour of electricity consumed in the Company's cryptocurrency
mining operations. The agreement also provides the Company the option to
purchase cryptocurrency mining equipment from Compute North. The initial Order
form was for 425 miners in Kearney, Nebraska for a term of 3 years and 250
miners in Savoy, Texas for a term of 3 years. The parties subsequently
consolidated the cryptocurrency mining operations in the Kearney, Nebraska
facility. Through June 30, 2021, the Company paid set up fees of $37,931 with
its ongoing obligation under the agreement to pay monthly a contractual rate per
kilowatt hour of electricity consumed in the Company's cryptocurrency mining
operations. Our Nebraska operations commenced in September 2021. The Company
has expanded its relationship with Compute North by securing additional capacity
for 1,000 miners, starting in April 2022.
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Equipment Purchase Agreement
On April 12, 2021, we entered into a Non-fixed Price Sales and Purchase
Agreement with Bitmain Technologies Limited ("Bitmain") (the "Bitmain
Agreement") to purchase from Bitmain cryptocurrency mining hardware and other
equipment in accordance with the terms and conditions of the Bitmain Agreement.
Bitmain is scheduled to manufacture and ship miners on monthly basis, in 12
equal batches of 400 units, starting in August 2021 and through July 2022. The
Purchase Agreement remains in effect until the delivery of the last batch of
products. The total purchase price was approximately $34,047,600, subject to
price adjustments and related offsets. The total purchase price is payable as
follows: (i) 25% of the total purchase price is due upon the execution of the
Agreement or no later than April 19, 2021; (ii) 35% of the total purchase price,
is due by May 30, 2021; and (iii) the remaining 40% of the total purchase price,
is payable monthly starting in June 2021.
The Company entered into a separate agreement with Wattum Management, Inc.
("Wattum"), a non-related party, whereby Wattum agreed to share 50% of the
purchase obligation under the Bitmain Agreement, including reimbursing the
Company for 50% of the equipment deposits paid by the Company to Bitmain.
As of June 30, 2021, the Company had paid a total of $7,663,265 in equipment
deposits, including $6,554,190 paid to Bitmain under the Bitmain Agreement (net
of Wattum reimbursements).
RECENTLY ISSUED ACCOUNTING POLICIES
There were no new accounting pronouncements issued or proposed by the FASB
during the year ended June 30, 2021 and through the date of filing this report
which the Company believes will have a material impact on its financial
statements.
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