Item 1. Business
Overview
Evergreen Sustainable Enterprises, Inc. (formerly
Generation Hemp, Inc.) (the “Company” or “Evergreen Sustainable”), was incorporated on August 21, 2021 in the
State of Delaware. The Company was originally incorporated on July 28, 2008 in the State of Colorado. On November 27, 2019, Home Treasure
Finders, Inc. (“HTF”) acquired approximately 94% of the common stock of Energy Hunter Resources, Inc. (“EHR”)
in a series of transactions accounted for as a reverse merger (the “Transaction”). Upon closing of the Transaction, HTF changed
its name to Generation Hemp, Inc. In March 2023, the Company changed its name to Evergreen Sustainable Enterprises, Inc.
On January 11, 2021, we completed the acquisition
of certain assets of Halcyon Thruput, LLC (“Halcyon”). With this acquisition, we commenced providing post-harvest and midstream
services to growers by drying, processing, cleaning and stripping harvested hemp directly from the field and wetbaled at our 48,000 square
foot leased facility located in Hopkinsville, Kentucky. Additionally, the Company offers safe storage services for processed hemp, which
enables farmers to maximize strategic market timing. In September 2021, the Company launched its small animal bedding consumer goods product
line (“Rowdy Rooster”) made from the hemp hurd byproduct that is produced from its hemp processing operations. In September
of 2022, the Company launched its industrial absorbent consumer goods product line (Gas Monkey Spill-Jack), also made from the
hemp hurd byproduct produced from its hemp processing operations. This second product line is marketed under a branding agreement with
Gas Monkey Garage, a well-known brand in the automotive and entertainment sector.
We also generate revenue from rental of
our “Cannabis Zoned” (Hemp) warehouse property located in Denver, Colorado currently leased to an unaffiliated hemp seed company.
As of December 31, 2022, EHR held an approximate
8% working interest in an oil & gas property located in Cochran County, Texas within the Slaughter-Levelland Field of the San Andres
formation in the Northwest Shelf of West Texas. EHR’s oil & gas activities are currently held for sale and are presented in
these consolidated financial statements as discontinued operations for each of the periods presented.
Our management team has been and continues to
actively review acquisition candidates involved in the hemp industry that operate within a number of vertical businesses, predominantly
within the midstream sector that are attractive to us and are within the hemp supply chain.
To fund our business activities, we have historically
completed a number of private placements of equity and debt. We continue to seek additional public or private placements of our stock
and debt. Our common shares are quoted on the OTCQB Markets under the symbol “EGSE.”
Subsequent Events
In January
2023, the Company announced a new strategic direction into sustainable energy projects, starting with bitcoin mining. The Company’s
name was changed to Evergreen Sustainable Enterprises, Inc. (“EGSE”) in March 2023. The Company’s existing hemp operations
will continue to be maintained as a fully operating wholly-owned subsidiary.
On January 9, 2023, the Company purchased 80%
of Toro Energía Sociedad Anonima (“Toro”), a Costa Rican corporation with ownership of a hydroelectric dam in Costa
Rica. The source of approximately one megawatt of power produced from the hydroelectric dam (six generators) will be used to power new
Bitcoin mining machines at an extremely low cost. The transaction was completed based on a total enterprise value for Toro of $2,750,000,
including seller-financed debt of $985,000. The seller-financed debt has a term of 10 years and a 9.5% per annum variable interest rate
(based on the prime rate) with straight line amortization.
The purchase price for 80% of Toro’s equity
was $1,412,000. These amounts were paid in cash from proceeds of a Secured Promissory Note (“Secured Note”) with Gary
C. Evans, CEO of the Company (‘Evans”). Under the terms of the Secured Note, (a) the Company and Evans restructured (i) the
Subordinated Promissory Note, dated November 20, 2020 and (ii) Convertible Promissory Note, dated July 20, 2021, such that all accrued
and unpaid interest on each note were rolled into a new Secured Note, (b) Evans lent the Company $500,000 on January 9, 2023 and $969,000
on January 10, 2023. The Secured Note has a maturity date of July 15, 2023 and bears interest at the rate of 10.00% per annum. The Secured
Note has a conversion feature which permits Evans to convert at the Maturity Date then outstanding principal and interest at a conversion
price of $0.275 (the closing price of the Company’s stock on January 9, 2023).
The Toro Dam is located approximately 25 miles
from San Jose between two volcano craters. The site generates all its energy from green resources with a proven 98% run time over the
many years it has been in operation and has a full-time staff in place under a new Operating & Maintenance Agreement.
Hydroelectric power is a clean and renewable energy
source that is used to generate electricity by harnessing the energy of falling water and can provide a reliable and a very cost-effective
source of energy for bitcoin mining operations. Hydroelectric power can help reduce the carbon footprint of cryptocurrency mining, as
many cryptocurrencies are produced using fossil fuels, which continues to contribute to greenhouse gas emissions and climate change. By
using hydroelectric power, bitcoin mining can be made more environmentally friendly and sustainable and can help improve the stability
and reliability of cryptocurrency networks. Hydroelectric power is a relatively stable and reliable source of energy, compared to other
sources such as coal or fossil fuels, which can be prone to price fluctuations and supply disruptions. The Company has committed to acquire
and made financial payments for the purchase of 240 new Bitmain S19J Pro+ ASIC miners that will be deployed at the Toro Dam sometime in
the first quarter of 2023.
Corporate Structure
The Company’s business operations are
conducted through several operating subsidiaries with its core operational and business activities directed through Evergreen
Sustainable. These subsidiaries are listed below:
| ● | GENH Halcyon Acquisition, LLC– Hemp midstream processing
operations and hemp consumer goods products |
| ● | CryptoRica, LLC –Bitcoin mining operations located
in Costa Rica |
| ● | Razorback I, LLC –Bitcoin mining operations located
in Arkansas |
| ● | Bluegrass I, LLC– Bitcoin mining operations located
in Kentucky |
| ● | Energy Hunter Resources, Inc.– Energy operations |
Principal Services and their Markets
The Company has diversified itself to take advantage
of the two developing industries of industrial hemp and bitcoin mining. Within both industries, there are vast opportunities to embody
and drive environmental, social, and corporate governance (“ESG”) advancements. Within its hemp operations and product lines,
the Company continues to be a leader in building out the infrastructure to support the fiber and hurd hemp supply chain for industrial
applications. Within its bitcoin mining operations and developing bitcoin mining operations, the Company is primarily utilizing diversified
green energy sources to power modular bitcoin mining arrays and targeting rural or remote areas that benefit both residents and local
utilities.
In addition to our hydroelectric powered bitcoin
operations in Costa Rica, the Company is in development on several bitcoin mining arrays in several rural or remote U.S. locations. We
have two bitcoin mining arrays in development in Arkansas, an eight (8) megawatt array in south central Arkansas. We also have three bitcoin
mining arrays located in Kentucky, a five (5) megawatt array in Carter County and two additional sites in various stages of development
in Greenup County and again in Carter County that will potentially be a total of an additional eighteen (18) megawatts, including a site
that is in-part powered with hydroelectricity.
Our hemp processing operations provide post-harvest
and midstream services to growers by drying, processing, cleaning, stripping harvested hemp directly from the field and wetbaled at our
leased 48,000 square foot facility located in Hopkinsville, Kentucky. The drying services technology greatly increases efficiency and
capacity during harvest for farmers who need to quickly move harvested hemp while preserving the cannabinoid potency by providing scalable
infrastructure essential to receive and process hemp with high moisture content (“wet”) quickly. Additionally, the Company
offers safe storage services for processed hemp, which enables farmers to maximize strategic market timing. The midstream business is
fee income oriented, based upon a price per pound of material handled, and therefore is more protected from significant commodity price
variations. The facility is able to process approximately 10,000 wet pounds per hour and the potential to scale up to 20,000 wet pounds
per hour in order to meet market demands as licensed and harvested hemp acreage continues to increase across Kentucky, Tennessee, Ohio,
Alabama and other states.
We also own one industrial warehouse located in
Denver, Colorado and lease 100% of this space within that project to aid a licensed hemp seed grower. We exercise appropriate and reasonable
care to screen our tenants, require and verify that our tenants maintain proper licenses and operate in compliance with all applicable
rules and regulations at the federal, state, and local level.
We may own properties for our own investment account
and as such are solely at financial risk in connection with our investments. In the event we utilize funds loaned to us by third party
groups, they may in some circumstances share certain risks.
We do not grow, distribute or sell any form of
cannabis. We have no present plan to engage in such activities or obtain a license to do so, now, or in the future. We currently plan
to only operate in the hemp space. We are in the process of expanding our operations into other states, predominantly Kentucky and North
Carolina.
Marketing of our Services
The market, clients, customers and distribution
methods for hemp services and hemp-based products are large and diverse. These markets range from hemp mid-stream services for hemp growers/farmers,
to hemp derived products like bioplastics, textiles, building materials, food additives, and dietary supplements. Awareness
and demand continue to grow for “green,” environmentally-friendly products derived from hemp, and the consumer market has
already begun to integrate hemp products and products that contain hemp derivatives to existing product lines. The distribution
system is constantly evolving as small retailers, retail chains, and big box stores become increasingly educated on and familiar/comfortable
with hemp and its derivatives. The current market is focused on one of the cannabinoids derived from hemp called cannabidiol (“CBD”)
and consumer goods that contain CBD. Additionally, consumer awareness followed by increased demand continues to drive and even force companies
to make room on their shelves for hemp and products with hemp derivatives. For products with hemp derivatives like CBD, direct to
consumer Ecommerce through online store sales remains the main source of revenue for consumer goods companies, accounting for reported
percentages of approximately 70-80% of sales.
The Company continues to implement a plan to become
more diversified within the midstream market. Our marketing efforts began with a grass roots approach in order to meet with farmers,
growers, and seed operations that would benefit from midstream services. To supplement the grass roots outreach, we built our online
web presence to reflect our desire to educate, to become a contributor and part of the hemp community, and also to act as a pioneer company
to connect investors in the U.S. public markets to a hemp education and platform that is dually informed.
We maintain and update our website and engage
on social media platforms to market our ongoing hemp sector efforts. We use globally distributed YouTube video ad campaigns to increase
our brand awareness and encourage markets and the investment community to learn more about the hemp space. These videos have been played
on several business sites such as CNBC, MSNBC, Fox News, Fox Business, Yahoo Finance, among others. We have also begun to market
a version of “Fireside Chats” from our Chairman and CEO to talk about various topics of interest in the hemp space.
These video segments will post on our social media platforms and they will also be used to create awareness campaigns that should have
a global outreach. In order to reach region specific growers/farmers in hemp, we have teed up direct mail marketing materials which
prove effective for service markets within a specified radius. These materials will serve as invitations to the farmers and growers
in areas that the midstream services which we are acquiring will reach. These are designed to add an identity to the midstream facility
and provide an offer of help and partnership. As we continue to become involved with additional verticals in the hemp supply chain,
we will expand and tailor these marketing and advertising efforts to the specific needs of each segment. To-date all marketing, ad creation,
ad campaigns, and creative work has been done internally and with a minimal budget. The Company has consistently presented at, and/or
exhibited in a number of industry tradeshows, and conferences and small cap investor conferences.
In 2021, we increased our marketing efforts by
engaging several industry and investor media platforms by providing or collaborating on sponsored content in the form of articles, interviews,
and podcasts in order to continue to educate the public and investors on the hemp industry and our company’s various products, services,
and business plan. We have been featured on USA Today, Small Caps Daily, Benzinga, Reddit, and Cannabis Wealth Magazine. Gary C. Evans
has also been a guest on KRLD News Radio Dallas to discuss the Company, along with several podcasts and webinars. We have also continued
to build out our social media presence on Instagram, TikTok, Facebook (Meta), Twitter, LinkedIn, and YouTube. We are attempting to post
video and/or static posts at least twice per week and designing content based on statistical data of engagement metrics – what content
is trending, what users are most responsive to, and what times receive the most user reach and engagement. For reference, when comparing
social media engagement from October 18, 2021 – December 28, 2021 to the same period for 2020, reach increased by 4,912% and engagement
increased by 420% due to these efforts by management and the social media team.
On February 17, 2022, we executed a merchandise
licensing agreement with world-renowned brand, Gas Monkey Garage. The Company will manufacture a USA grown hemp hurd spill absorbent and
market this new product under the Gas Monkey brand name to consumers, retailers, and distributors as an environmentally sustainable, USA
made, ultra-absorbent spill clean-up material. This will be our second environmentally sustainable consumer goods product line made from
U.S. grown hemp hurd. Spill absorbents are typically used in garages, factories, or industrial settings to quickly contain spills of oil
and other liquids. Spill absorbents are also used at the site of auto accidents to quickly contain leaks of oil and other fluids due to
collisions.
Richard Rawlings, owner and founder of Gas Monkey
Garage, is the star of the international hit series’ “Fast N’ Loud” & “Garage Rehab” spanning
17+ seasons and 200+ episodes. Mr. Rawlings and Gas Monkey have migrated the show to an online platform and consistently produce new episodes
that premiere every week on YouTube and Facebook. With his experience of owning and running a garage for over 18 years, Richard Rawlings
found the sustainable spill absorbent to be of great significance.
There are several types of spill absorbents with
varying characteristics. These are in three general categories – mineral based, animal or vegetable based, and synthetic or organic
polymers. The challenge in choosing an absorbent is finding an effective absorbent that does not pose a threat to health or the environment,
whether that threat is posed when that material is procured or used. For example, a widely used spill absorbent material in products is
Bentonite Clay. This is often a very dusty material and has warnings of containing unsafe levels of lead (FDA) and is associated with
a number of health complaints in humans.
The Company tested its U.S. grown and milled hemp
hurd against currently used absorbents on the market and the findings showed it to have as effective or more effective absorbency and
ability to contain spills.
In February of 2023, the Company began working
with iHeart Media, one of the most influential media companies with several different marketing and advertising channels (radio, television,
digital, etc.). iHeart Media agreed to drastically reduce their typical budget requirements in order to foster a growth relationship with
the Company. The first campaigns, called OTT (Over-The-Top), are targeting specific consumers, and will air before streaming television
and film content played on various internet streaming digital platforms. Initially, these campaigns are advertising the Company’s
consumer goods products.
Competition
The hemp industry and hemp-based consumer product
industry is highly competitive and fragmented in its nascency with numerous companies, consisting of publicly (mostly Canadian) and privately-owned
companies. There are also large, well-funded companies beginning to emerge in the U.S. with a similar intention as the Company; to consolidate
and vertically integrate along the hemp supply chain through acquisitions. These companies have indicated their intention to compete in
the hemp industry and hemp-based product category. However, certain holding companies such as Acreage Holdings (domiciled in British Columbia)
also include cannabis companies in their portfolio, whereas the Company is currently hemp only. We routinely evaluate internal and external
opportunities to optimize value for shareholders through market research, strategic relationships and/or partnerships, and by asset acquisitions.
Based upon our management team experience, we believe we are well-positioned to capitalize in the growing hemp industry and hemp-based
product industry.
There are several companies developing hemp-based
products and materials that will potentially displace existing products and materials sourced from less sustainable or less environmentally
friendly sources. These hemp-based products are developing in the markets of textiles, building materials, biofuels, as food additives,
skin care topicals and other therapeutics, and dietary supplements. Also, it is thought that cannabinoids derived from hemp can be used
as therapeutics for a range of medical indications. The hemp-derived cannabinoid therapeutic market currently includes extracts of the
hemp plant in several formulations, including proprietary formulations from several companies. These formulations include CBD and other
cannabinoid such as,” CBG”, “CBC”, and “CBN” or a combination of several cannabinoids as the active
ingredients. There are over one hundred different cannabinoids, therefore the market potential is only beginning to be realized. The therapeutics
and supplement market are flooded with competition for hemp-based cannabinoid therapeutics. There are also companies that are using hemp-based
cannabinoids as active ingredients in pharmaceutical formulations.
Bitcoin mining is an increasingly competitive
industry comprised of companies and organizations of varying scale and sophistication. There has been a significant increase in the number
of commercial bitcoin miners attempting to expand and scale their mining operations, which in turn has contributed to increasing the global
network’s total hash power. As more hashing capability is added to the bitcoin network, the revenue generating potential of the
Company’s miners could be negatively affected. Additionally, as more bitcoin miners enter the industry, The Company may experience
additional pressure on profitability and ability to scale operations, due to greater competition for access to miners, mining locations,
and infrastructure components.
Our Competitive Strengths
We believe that we have the following competitive
strengths:
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Experienced and Committed Management Team. Gary C. Evans, our CEO, and other anticipated members of our senior management team have substantial experience in all aspects of growing a public company in a highly competitive sector, including acquisitions, dispositions, construction, development, management, finance and capital markets. Mr. Evans has previously been the Chairman and CEO of three different public companies that obtained financial success on the New York Stock Exchange. Additionally, he previously served as Chairman, CEO, and Lead Director of a NASDAQ listed company in the biopharmaceutical space for 24 years, having just resigned in 2021. |
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Focus on Consolidating Atomized Industry. Our focus on revenue generating and positive cash flow businesses is a key part of our growth strategy. Moreover, we believe the beginning of an entire new industry creates numerous opportunities to evaluate and consolidate very fragmented businesses. Our ultimate goal of being a more fully integrated enterprise within the midstream sector will eventually give us control of very profitable values chain and separate us from most of our competition. |
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Demonstrated Investment and Capital Raising Acumen. We will continue to utilize rigorous underwriting standards for evaluating acquisitions and potential tenants to ensure that they meet our strategic and financial criteria. Our management team’s extensive experience and relationships established in mergers and acquisitions over the past 40 years and over 100 separate transactions should enable us to identify, negotiate and close on acquisitions cost effectively, efficiently, and with shareholder interest first in mind. |
Intellectual Property
As a company within the hemp industry, our current
effort is to protect and distinguish our company and brand identity amidst other entities currently operating within and entering the
space.
The Company uses specific hardware and software
for its bitcoin mining operations. In certain cases, source code and other software assets may be subject to an open-source license due
to the fact that the majority of the technology in the blockchain and cryptocurrency sectors is open source For these works, we adhere
to the terms of any license agreements that may be in place. The Company does not currently own, and does not have any current plans to
seek, any patents in connection with its existing and planned blockchain and cryptocurrency related operations. The Company expects to
rely upon trade secrets, trademarks, service marks, trade names, copyrights and other intellectual property rights and to license the
use of intellectual property rights owned and controlled by others.
Governmental Regulation
Hemp Industry
We are subject to local and federal laws in our
operating jurisdictions. We will hold required licenses for product production and distribution to the extent that our business requires
and will monitor changes in laws, regulations, treaties and agreements.
The Agriculture Improvement Act of 2018 known
as the “2018 Farm Bill,” is United States federal legislation signed into law on December 20, 2018, which provides much of
the legal framework for the hemp-based CBD product category. The 2018 Farm Bill permanently removed “hemp” from the purview
of the Controlled Substances Act, and accordingly, the Drug Enforcement Administration (“DEA”) no longer has any claim to
interfere with the interstate commerce of hemp products. Some of the immediate impact from this legislation includes the ability for farmers
to access crop insurance and U.S. Department of Agriculture programs for certification and competitive grants. While the DEA is now officially
not involved in hemp regulation, the FDA retains its authority to regulate ingestible and topical products, including those that contain
hemp and hemp extracts such as CBD.
A range of federal regulations govern any potential
product development, manufacturing, distribution, sales and marketing, including the Dietary Supplement Health and Education Act of 1994
(the “DSHEA”). Under DSHEA, supplements are effectively regulated by the FDA for Good Manufacturing Practices under 21 CFR
Part 111. DSHEA defines a “dietary supplement” as a product intended to supplement the diet that contains one or more of the
following: (a) a vitamin; (b) a mineral; (c) an herb or other botanical; (d) an amino acid; (e) a dietary substance for use by man to
supplement the diet by increasing the total dietary intake; or (f) a concentrate, metabolite, constituent, extract, or combination of
any ingredient described in clause (a) through (e). Thus, the law permits a wide range of dietary ingredients in dietary supplements,
including CBD which is an extract of a botanical (Cannabis sativa L. plant). CBD also falls under clause (e) as it is a dietary substance
for use by man to supplement the diet by increasing the total dietary intake.
Blockchain and Cryptomining
Government regulation of blockchain and cryptocurrency mining industries
is being actively considered by the United States federal government via several agencies and regulatory bodies as well as similar entities
in other countries. State government regulations also may apply to the Company’s activities and other activities in which the Company
participates or may participate in the future. Other regulatory bodies are governmental or semi-governmental and have shown an interest
in regulating or investigating companies engaged in the blockchain or cryptocurrency mining business.
Businesses that are engaged in the transmission and custody of bitcoin
and other digital assets, including brokers and custodians, can be subject to the regulations of the U.S. Department of the Treasury (the
“Treasury”) as money services businesses as well as state money transmitter licensing requirements. Bitcoin and other digital
assets are subject to anti-fraud regulations under federal and state commodity laws, and digital asset derivative instruments are substantively
regulated by the Commodity Futures Trading Commission. Certain jurisdictions, including, among others, the State of New York and a number
of countries outside the United States, have developed regulatory requirements specifically for digital assets and companies that transact
in them.
Regulations may change substantially in the future, and it is presently
not possible to know how regulations will apply to the Company’s business or when they will become effective. As the regulatory
and legal environments evolve, The Company may become subject to new laws and further regulation by the SEC and other agencies, which
may affect its mining and other activities. For instance, various bills have been proposed in the U.S. Congress related to The Company’s
business, which may be adopted and have an impact on the Company. See “Risk Factors” for additional discussion regarding the
Company’s belief about the potential risks that existing and future regulations pose to its business.
On March 2, 2022, the United States announced plans to establish a
unified federal regulatory regime for cryptocurrency, and a group of United States Senators sent a letter to the United States Treasury
Department asking Treasury Secretary Yellen to investigate Treasury’s ability to monitor and restrict the use of cryptocurrencies
to evade sanctions imposed by the United States.
In September 2022, the White House issued a report regarding the Climate
and Energy Implications of Crypto-Assets in the United States. The report states that the Department of Energy and Environmental Protection
Agency should initiate a process to solicit data and develop environmental performance and energy conservation standards for crypto-asset
technologies, including mining equipment. Should such measures prove ineffective at achieving the Administration’s environmental
goals, the report calls for the Administration to explore executive actions and legislation to limit or eliminate the use of high energy
intensity consensus mechanisms for crypto-asset mining.
We are unable to predict the impact that any new standards, legislation,
or regulations may have on our business at the time of filing this Annual Report. We continue to monitor and proactively engage in dialogue
on regulatory and legislative matters related to our industry.
Further, in December 2022 the SEC’s Division of Corporation Finance
issued guidance advising companies to disclose exposure and risk to the cryptocurrency market. While the focus is on digital asset managers
and exchanges, and not bitcoin miners, the failure of such large asset managers and exchanges may create increased price volatility of
bitcoin. the Company does not store our bitcoin on such exchanges; however, we may be impacted by such failures.
In January 2023, the Federal Reserve, Office of the Comptroller of
the Currency, and Federal Deposit Insurance Corporation issued a joint statement discouraging banks from doing business with clients in
crypto-asset industries. In January 2023, the Federal Reserve also issued a policy statement broadening its authority to cover state-chartered
banks.
Also in January 2023, the House of Representatives
announced its first ever Financial Services Subcommittee on Digital Assets and the intention to develop a regulatory framework for the
digital asset industry. The bipartisan leadership of the Senate Banking Committee announced that goal as well.
As the regulatory and legal environment evolves,
we may become subject to new laws, such as further regulation by the SEC and other agencies, which may affect our mining and other activities.
For additional discussion regarding our belief about the potential risks existing and future regulation pose to our business, see Part
I, Item 1A. “Risk Factors” of this Annual Report.
Additionally, we are subject to numerous federal,
state and local environmental laws and regulations. Numerous governmental agencies, such as the U.S. Environmental Protection Agency and
analogous state and provincial agencies issue regulations to implement and enforce these laws, which often require stringent and costly
compliance measures. These laws and regulations may, among other things, require the acquisition of permits; govern the amounts and types
of substances that may be released into the environment in connection with our operations; restrict the way we handle or dispose of our
materials and wastes; or require investigatory and remedial actions. Failure to comply with these laws and regulations may result in the
assessment of substantial administrative, civil and criminal penalties, the imposition of investigatory, remedial or corrective action
obligations, or the possible issuance of injunctions limiting or prohibiting our activities. In addition, some laws and regulations relating
to the protection of the environment may, in certain circumstances, impose liability for environmental damages and cleanup costs without
regard to negligence or fault. Complying with these regulatory requirements may increase our cost of doing business and consequently affect
our profitability. Moreover, environmental laws and regulations have been subject to frequent changes over the years, and the imposition
of more stringent requirements could have a material adverse effect upon our capital expenditures, earnings or our competitive position.
We believe that our existing environmental control procedures are adequate and we have no current plans for substantial capital expenditures
in this area that would materially and adversely affect our business, financial condition or results of operations.
Environmental Matters
Compliance with federal, state and local requirements
regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, have not had,
nor are they expected to have, any material effect on the capital expenditures, earnings or competitive position of the Company.
Employees
We had 11 employees as of December 31, 2022,
including our named executive officers. None of our employees are covered by collective bargaining agreements, and we have not experienced
any strikes or work stoppages related to labor relation issues. We believe we have good relations with our employees. We also utilize
seasonal part-time employees during peak hemp processing season and contractors to provide certain specialized skills and expertise that
may be required from time to time.
Where You Can Find More Information
We file annual, quarterly and current reports,
proxy statements and other information required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with
the Securities and Exchange Commission (the “SEC”). You may read and copy any document we file with the SEC at the SEC’s
public reference room located at 100 F Street, N.E., Washington, D.C. 20549, U.S.A. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room. Our SEC filings are also available to the public from the SEC’s internet site at http://www.sec.gov.
On our Internet website, http://www.genhempinc.com,
we post the following recent filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC:
our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act.
Item 1A. Risk Factors
Our business involves certain risks and uncertainties.
The following is a description of significant risks that might cause our future financial condition or results of operations to differ
materially from those expected. In addition to the risks and uncertainties described below, we may face other risks and uncertainties,
some of which may be unknown to us and some of which we may deem immaterial. If one or more of these risks or uncertainties occur, our
business, financial condition or results of operations may be materially and adversely affected.
Risks Related to Our Business
There is substantial doubt that we will be able to continue as
a going concern.
Our independent registered public accounting firm’s
auditors’ report includes an explanatory paragraph stating that there is substantial doubt about our ability to continue as a going
concern. We have had substantial losses since inception and as of December 31, 2022, and the date of this report we have minimal cash
reserves. While we are beginning to generate increasing revenue and a positive cash flow, our ability to build significant cash reserves
and continue as a going concern over the long term remains unproven. In the event that we are forced to reduce operations or seriously
curtail our business, an investor will lose all money invested.
We have a history of significant losses, which we expect to continue,
and we may never achieve nor maintain profitability.
We have incurred significant net losses since
our formation and may continue to incur net losses for the foreseeable future as we complete our acquisition efforts. We incurred net
losses of $7.0 million and $9.8 million for the years ended December 31, 2022 and 2021, respectively. To date, we have not generated any
significant revenues from the hemp business. If we are unsuccessful in implementing our strategic plan we may never become profitable.
Business interruptions resulting from the coronavirus disease
(COVID-19) outbreak or similar public health crises could cause a disruption of the development of our product candidates and adversely
impact our business.
In March 2020, the World Health Organization declared
the novel coronavirus disease (COVID-19) outbreak a global pandemic. To limit the spread of COVID-19, governments have taken various actions
including the issuance of stay-at-home orders and physical distancing guidelines. Accordingly, businesses have adjusted, reduced or suspended
operating activities. We may experience disruptions as a result of COVID-19 that could severely impact our business and planned acquisition
strategy, including:
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challenges related to ongoing and increased operational expenses related to the COVID-19 pandemic; |
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delays, difficulties or increased costs to comply with COVID-19 protocols; |
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limitations in resources that would otherwise be focused on the conduct of our business, including because of sickness or the desire to avoid contact with large groups of people or as a result of government-imposed “Stay-at-Home” orders or similar working restrictions; |
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delays in receiving the supplies and materials needed to operate our business; |
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interruption in global shipping that may affect the transport of materials or our supply chain; |
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changes in regulations as part of a response to the COVID-19 pandemic which may require us to change the ways in which our business may be conducted, or which may result in unexpected costs; |
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delays in necessary interactions with regulators and other important governmental agencies and contractors due to limitations in employee resources or forced furlough of personnel; and |
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increased competition for suppliers and vendors. |
We will continue to assess the impact that COVID-19
may have on our ability to effectively conduct our business operations as planned and there can be no assurance that we will be able to
avoid a material impact on our business from the spread of COVID-19 or its consequences, including disruption to our business and downturns
in business sentiment generally or in our industry. Should COVID-19 cases in USA increase, the country or states may institute stricter
social distancing protocols.
The global outbreak of COVID-19 continues to rapidly
evolve. The extent to which the COVID-19 pandemic impacts our business will depend on future developments such as the rate of the spread
of the disease, travel restrictions and social distancing in the United States and other countries, business closures or business disruptions
and the effectiveness of actions taken in the United States and other countries to contain and treat the disease and to address its impact,
including on financial markets or otherwise. Further, a lack of coordinated response on risk mitigation and vaccination deployment with
respect to the COVID-19 pandemic on a local or federal level could result in significant increases to the duration and severity of the
pandemic in the United States as compared to the rest of the world and could have a corresponding negative impact on our business. While
the extent of the impact of the current COVID-19 pandemic on our business and financial results is uncertain, a continued and prolonged
public health crisis such as the COVID-19 pandemic could have a material negative impact on our business, financial condition and operating
results.
To the extent the COVID-19 pandemic adversely
affects our business, financial condition and operating results, it may also have the effect of heightening many of the risks described
in this “Risk Factors” section.
Unfavorable global economic or political conditions could adversely
affect our business, financial condition or results of operations.
Our results of operations could be adversely affected
by general conditions in the global economy and in the global financial markets. A global financial crisis or a global or regional political
disruption could cause extreme volatility in the capital and credit markets. For example, outbreaks of epidemic, pandemic, or contagious
diseases, such as the recent COVID-19 outbreak, could disrupt our business. Business disruptions could include disruptions to the productivity
of our employees working remotely and restrictions on their travel may hinder their ability to meet with potential customers and close
transactions, as well as temporary closures of the facilities of suppliers or contract growers as we try to develop our supply chain.
In addition, the COVID-19 outbreak may result in a severe economic downturn and has already significantly affected the financial markets
of many countries. A severe or prolonged economic downturn or political disruption could result in a variety of risks to our business,
including our ability to raise capital when needed on acceptable terms, if at all. A weak or declining economy or political disruption
could also strain our operations, possibly resulting in a future supply disruption, or cause our future customers to delay making payments
for our services. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the political or economic
climate and financial market conditions could adversely impact our business.
We have a limited operating history and operate under the professional
guidance of our Chairman and CEO.
Our ability to achieve consistent cash flow and
profitability depends upon the continued service of Gary C. Evans. Mr. Evans is our Chairman and CEO, largest shareholder, and the primary
management level executive.
Our business plan provides that we will grow the
Company’s asset base and revenues rapidly and ultimately deliver a positive cash flow generating company.
We may not be able to generate predictable and
continuous revenue in the future. Further, there is no assurance that we will ever grow operations in the manner contemplated.
We may incur significant operating losses in the
future, due to the expansion of our operations or other factors. There is no assurance that we can expand under terms that permit profitable
operations over the long term. Failure to generate sufficient revenue to pay expenses as they come due may make us unable to continue
as a going concern and result in the failure of our company and the complete loss of any money invested to purchase our shares.
We may be unable to manage our growth or implement our expansion
strategy, especially in the bitcoin industry.
As a public company, our expenses include, but
are not limited to, annual audits, legal costs, SEC reporting costs, costs of a transfer agent and the costs associated with fees and
compliance. Further, our management will need to invest significant time and energy to stay current with the public company responsibilities
of our business and may from time to time have diminished time available to apply to other tasks necessary to our survival and growth.
It is therefore possible that the financial and
time burdens of operating as a public company will cause us to fail to achieve profitability. If we exhaust our funds, our business will
fail and our investors will lose all money invested in our stock.
If we fail to pay public company costs, as such
costs are incurred; we could become delinquent in our reporting obligations and face the delisting of our shares.
It is essential that we grow our overall business,
achieve significant profits and maintain adequate cash flow in order to pay the cost of remaining a public entity which includes but is
not limited the costs of remaining current with SEC reporting obligations.
The issuance of additional shares of our common stock may be
necessary for the implementation of our growth strategy.
Limited private placement of restricted shares
of our common stock has been completed from time to time when deemed necessary. Cash generated in prior years was used to acquire cannabis
zoned real property, finance our office space and provide working capital. Issuance of any additional securities pursuant to future
fundraising activities undertaken may significantly dilute the ownership of existing shareholders and may reduce the price of our common
stock.
We acquired, improved and leased our Denver warehouse
to a licensed third party hemp seed grower. Rental payments are current and the warehouse is presently reflecting positive cash flow.
While we have been able to acquire a warehouse
in Denver, Colorado with owner financing, future acquisitions may require financial resources well in excess of our present balance sheet.
Failure to successfully obtain additional funding would likely jeopardize our ability to expand our hemp business and related operations.
The loss of our chief executive officer or key management personnel
or inability to attract and retain the necessary personnel could have a material adverse effect upon our business, financial condition
or results of operations.
Our success is heavily dependent on the continued
active participation of our chief executive officer, largest shareholder, and sole director listed under “Management.” Loss
of the services of Mr. Evans, would have a material adverse effect upon our business, financial condition or results of operations. Further,
our success and achievement of our growth plans depend on our ability to recruit, hire, train and retain other highly qualified technical,
professional, clerical, administrative and managerial personnel. Inability to attract and retain the necessary personnel, consultants
and advisors could have a material adverse effect on our business, financial condition or results of operations.
Our Chief Executive Officer has significant influence over us.
Our Chief Executive Officer has the ability to
influence all of our business affairs.
It is likely that conflicts of interest may arise in the day-to-
day operations of our business. Such conflicts, if not properly resolved, could have a material negative impact on our business.
In the past, the Company has issued shares for
cash and services at prices which were solely determined by prior management. At that time, management made a determination of both the
value of the exchange for our shares, and, as well, the price per share used in the capital raising effort. Transactions of this
nature were not made at arm’s length and were made without input from a knowledgeable and non-interested third party. Future
transactions of a like nature could dilute the percentage ownership of the company owned by a given investor. While the company believes
its past transactions were appropriate, and plans to act in good faith in the future, an investor in our shares will have no ability to
alter such transactions as they may occur in the future and, further, will not be consulted by the company in advance of any such transactions.
An investor who is unwilling to endure such potential dilution should not purchase our shares.
Adverse outcomes in any future legal proceedings could subject
us to substantial damages and adversely affect our results of operations and profitability.
We may become party to legal proceedings, including
matters involving personnel and employment issues, personal injury, environmental matters, and other proceedings. Some of these potential
proceedings could result in substantial damages or payment awards that exceed our insurance coverage. We will estimate our exposure to
any future legal proceedings and establish provisions for the estimated liabilities where it is reasonably possible to estimate and where
an adverse outcome is probable. Assessing and predicting the outcome of these matters will involve substantial uncertainties. Furthermore,
even if the outcome is ultimately in our favor, our costs associated with such litigation may be material. Adverse outcomes in future
legal proceedings or the costs and expenses associated therewith could have an adverse effect on our results of operations.
We will seek to expand through acquisitions of and investments
in various brands, businesses, and assets in the Hemp sector. These acquisition activities may be unsuccessful or divert management’s
attention.
We will consider strategic and complementary acquisitions
of and investments in other brands, businesses or other assets in the hemp sector, and such acquisitions or investments are subject to
risks that could affect our business, including risks related to:
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integrating acquired manufacturing and production facilities, technology and products; |
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unanticipated expenses related to integration, including technical and operational integration; |
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increased costs and unanticipated liabilities, including with respect to registration, environmental, health and safety matters, that may affect sales and operating results; |
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installing effective internal controls and audit procedures; |
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issuing common stock that could dilute the interests of our existing stockholders; |
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We may not be able to identify opportunities or
complete transactions on commercially reasonable terms, or at all, or actually realize any anticipated benefits from such acquisitions
or investments. Similarly, we may not be able to obtain financing for acquisitions or investments on attractive terms. In addition, the
success of any acquisitions or investments also will depend, in part, on our ability to integrate the acquisition or investment with our
then existing operations.
We risk insolvency if revenues decline sharply and we are unable
pay our bills and unable to timely locate and negotiate a suitable business combination or capital injection.
Management is always concerned over potentially
unfavorable events and related sharp reductions in revenues. If such problems occur, we will first reduce expenses, conserve cash and
endeavor to replace lost revenue. In anticipation of possible problems of this nature, and alternatively to grow our business when opportunity
presents, management has continued its negotiations in connection with potential business combinations and continues to explore other
means of raising cash. Our goal is to develop cash reserves, either for expansion, or to cover shortfalls in revenue. Management believes
that ultimately, consummation of one or more such transactions would serve the best interests of shareholders; however, there is no assurance
that we can locate or consummate a suitable business combination or otherwise provide for liquidity, expanded working capital and a stronger
balance sheet.
We are subject to corporate governance and internal control reporting
requirements, and our costs related to compliance with, or our failure to comply with existing and future requirements, could adversely
affect our business.
We face corporate governance requirements under
the Sarbanes-Oxley Act of 2002, as well as new rules and regulations subsequently adopted by the SEC and the Public Company Accounting
Oversight Board. These laws, rules and regulations continue to evolve and may become increasingly stringent in the future. In particular,
under new SEC rules we will be required to include management’s report on internal controls as part of our annual report pursuant
to Section 404 of the Sarbanes-Oxley Act. Furthermore, under the proposed rules, an attestation report on our internal controls from our
independent registered public accounting firm will be required as part of our annual report. We are in the process of evaluating our control
structure to help ensure that we will be able to comply with Section 404 of the Sarbanes-Oxley Act. The financial cost of compliance with
these laws, rules and regulations is expected to be substantial. We cannot assure you that we will be able to fully comply with these
laws, rules and regulations that address corporate governance, internal control reporting and similar matters. Failure to comply with
these laws, rules and regulations could materially adversely affect our reputation, financial condition and the value of our securities.
Management
identified a material weakness in our internal control over financial reporting related to the accounting for complex transactions. The
Company has begun the process of designing and implementing measures to improve its internal controls over financial reporting and remediate
this material weakness. The Company’s efforts include implementing additional reviews of business combination transactions and modifying
the Company’s instructions to valuation specialists and reviews of their workproduct. This will include staffing additions as appropriate.
We will consider the material weakness remediated after the applicable controls operate for a sufficient period of time, and management
has concluded, through testing, that the controls are operating effectively. However, our remedial actions may not prevent this or similar
weaknesses from occurring in the future.
Natural and other disasters, information technology system failures
and network disruptions and cybersecurity breaches and attacks could adversely affect our business.
Our business and results of operations could be
negatively affected by certain factors beyond our control, such as natural disasters and/or climate change-related events (such as hurricanes,
earthquakes, fires, and floods); civil unrest; negative geopolitical conditions and developments; war, terrorism, or other man-made disasters;
and information technology system failures, network disruptions and cybersecurity breaches and attacks. Any of these events could result
in, among other things, damage to or the temporary closure of our facilities; a temporary lack of an adequate work force in one or more
markets; an interruption in power supply; a temporary or long-term disruption in our supply chain; and short- or long-term damage to our
prospective customers’ businesses (which would adversely impact demand for our products and services). ∙ We rely
on our own information systems, as well as those of our third-party business partners and suppliers. Despite the introduction of system
backup measures and engage in information system redundancy planning and processes, such measures, planning and processes may be ineffective
or inadequate to address all eventualities.
Further, our information systems and our business
partners’ and suppliers’ information systems may be vulnerable to attacks by hackers and other security breaches, including
computer viruses and malware, through the internet (including via devices and applications connected to the internet), email attachments
and persons with access to these information systems, such as our employees or third parties with whom we do business. As information
systems and the use of software and related applications by us, our business partners, suppliers, and customers become more cloud-based
and connected to the internet, there has been an increase in global cybersecurity vulnerabilities and threats, including more sophisticated
and targeted cyber-related attacks that pose a risk to the security of our information systems and networks and the confidentiality, availability
and integrity of data and information. Any such attack or breach could compromise our networks and the information stored thereon could
be accessed, publicly disclosed, lost, or stolen.
If we or our business partners or suppliers were
to experience a system disruption, attack or security breach that impacts any of our critical functions, or our customers were to experience
a system disruption, attack or security breach via any of our connected products and services, it could result in a period of shutdown
of information systems during which we may not be able to operate, the loss of sales and customers, financial misstatement, potential
liability for damages to our customers, reputational damage and significant incremental costs, which could adversely affect our business,
results of operations and profitability. Furthermore, any access to, public disclosure of, or other loss of data or information (including
any of our confidential or proprietary information or personal data or information) as a result of an attack or security breach could
result in governmental actions or private claims or proceedings, which could damage our reputation, cause a loss of confidence in our
products and services, damage our ability to develop (and protect our rights to) our proprietary technologies and adversely affect our
business.
Failure to comply with U.S. federal, state and international
laws and regulations relating to privacy or data protection, or the expansion of current or the enactment of new laws or regulations relating
to privacy or data protection, could adversely affect our business and our financial condition.
Failure to comply with U.S. federal, state and
international laws and regulations relating to privacy or data protection, or the expansion of current or the enactment of new laws or
regulations relating to privacy or data protection, could adversely affect our business and our financial condition. A variety of U.S.
federal, state and international laws and regulations govern the collection, use, retention, sharing and security of data. Laws and regulations
relating to privacy and data protection are evolving and subject to potentially differing interpretations. These requirements may be interpreted
and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other rules or our practices. As a
result, our practices may not have complied or may not comply in the future with all such laws, regulations, requirements and obligations.
Any failure, or perceived failure, by us to comply with our posted privacy policies or with any federal, state or international privacy
or data protection related laws, regulations, industry self-regulatory principles, industry standards or codes of conduct, regulatory
guidance, orders to which we may be subject or other legal obligations relating to privacy or data protection could adversely affect our
reputation and business, and may result in claims, proceedings or actions against us by governmental entities or others or other liabilities
or require us to change our operations and/or cease using certain data sets. Any such claim, proceeding or action could hurt our reputation
and business, force us to incur significant expenses in defense of such proceedings, distract our management, increase our costs of doing
business, result in a loss of customers.
Uncertain Economic, Social and Political Environment.
Consumer, corporate and financial confidence may
be adversely affected by current or future tensions around the world, fear of terrorist activity and/or military conflicts, localized
or global financial crises or other sources of political, social or economic unrest. Such erosion of confidence may lead to or extend
a localized or global economic downturn. A climate of uncertainty may reduce the availability of potential investment opportunities, and
increases the difficulty of modeling market conditions, potentially reducing the accuracy of financial projections. In addition, limited
availability of credit for consumers, homeowners and businesses, including credit used to acquire businesses, in an uncertain environment
or economic downturn may have an adverse effect on the economy generally and on our ability to make acquisitions. This may slow or halt
our rate of growth and materially and adversely affect our business and/or stock price.
The Company will incur expenses in connection with its SEC filing
requirements and may not be able to meet such costs, which could jeopardize its filing status with the SEC.
As a public reporting company, the Company is
required to meet the filing requirements of the SEC. The Company may see an increase in its legal, accounting, auditing and fees and expenses
as a result of such requirements. Our costs will increase significantly as the Company expands operations. Our filings are subject to
comment from the SEC on its filings and/or it is required to file supplemental filings for transactions and activities. If the Company
is not compliant in meeting the filing requirements of the SEC, it could lose its status as a 1934 Act Company, which could compromise
its ability to raise funds.
Risks Related to our Activities in the Legal
Hemp Industry
We will be subject to a myriad of different laws and regulations
governing hemp and bitcoin. Our inability to comply with such laws in a cost-effective manner may have an adverse effect on our business
and result of operations.
Laws and regulations governing the use of hemp
in the United States are broad in scope; subject to evolving interpretations; and subject to enforcement by a myriad of regulatory agencies
and law enforcement entities. Under the Agriculture Improvement Act of 2018, also known as the 2018 Farm Bill, a state or Indian tribe
that desires to have primary regulatory authority over the production of hemp in the state or territory of the Indian tribe must submit
a plan to monitor and regulate hemp production to the Secretary of the USDA. The Secretary must then approve the state or tribal plan
after determining if the plan complies with the requirements set forth in the Agriculture Improvement Act of 2018. The Secretary may also
audit the state or Indian tribe’s compliance with the federally-approved plan. If the Secretary does not approve the state or Indian
tribe’s plan, then the production of hemp in that state or territory of that Indian tribe will be subject to a plan established
by USDA. USDA has not yet established such a plan. We anticipate that many states will seek to have primary regulatory authority over
the production of hemp. States that seek such authority may create new laws and regulations that limit or restrict the use of hemp.
Federal and state laws and regulations on hemp
may address production, monitoring, manufacturing, distribution, and laboratory testing to ensure that that the hemp has a delta-9 tetrahydrocannabinol
concentration of not more than 0.3% on a dry weight basis. Federal laws and regulations may also address the transportation or shipment
of hemp or hemp products, as the Agriculture Improvement Act of 2018 prohibits states and Indian tribes from prohibiting the transportation
or shipment of hemp or hemp products produced in accordance with that law through the state or territory of the Indian tribe, as applicable.
We may be subject to many different state-based regulatory regimens for hemp, all of which could require us to incur substantial costs
associated with compliance requirements. Our operations will be restricted to only where such operations are legal on the local, state
and federal levels.
In addition, it is possible that additional regulations
may be enacted in the future in the United States and globally that will be directly applicable to research and development operations.
We cannot predict the nature of any future laws,
regulations, interpretations, or applications, nor can we determine what effect additional governmental regulations or administrative
policies and procedures, when and if promulgated, could have on our business.
We have a limited operating history in the legal hemp industry,
which makes it difficult to accurately assess our future growth prospects.
The legal hemp and cannabis industry is an evolving
industry that may not develop as expected. Furthermore, our operations will continue to evolve as we continually assess new strategic
opportunities for our business within this industry. Assessing the future prospects of this industry is challenging in light of both known
and unknown risks and difficulties we may encounter.
Growth prospects in the legal hemp and cannabis
industry can be affected by a wide variety of factors including:
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Competition from other similar companies; |
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We may not be able to successfully address the
above factors, which could negatively impact our intended business plans.
Negative press from being in the hemp/cannabis space could have
a material adverse effect on our business, financial condition, and results of operations.
The hemp plant and the cannabis/marijuana plant
are both part of the same cannabis sativa genus/species of plant, except that hemp, by definition, has less than 0.3% THC content, but
the same plant with a higher THC content is cannabis/marijuana, which is legal under certain state laws, but which is not legal under
federal law. The similarities between these plants can cause confusion, and our activities with legal hemp may be incorrectly perceived
as us being involved in federally illegal cannabis. Also, despite growing support for the cannabis industry and legalization of cannabis
in certain U.S. states, many individuals and businesses remain opposed to the cannabis industry. Any negative press resulting from any
incorrect perception that we have entered into the cannabis space could result in a loss of current or future business. It could also
adversely affect the public’s perception of us and lead to reluctance by new parties to do business with us or to own our common
stock. We cannot assure you that additional business partners, including but not limited to financial institutions and customers, will
not attempt to end or curtail their relationships with us. Any such negative press or cessation of business could have a material adverse
effect on our business, financial condition, and results of operations.
Risks Relating to Digital
Asset Networks and Digital Assets
Digital assets, such as bitcoin, may become regulated as securities
or investment securities.
Bitcoin is the oldest and most well-known form
of digital asset. Bitcoin and other forms of digital assets / cryptocurrencies have been the source of much regulatory scrutiny, which
has resulted in differing definitional outcomes without a single unifying statement. In the context of the offer and sale of the Initial
Coin Offering (“ICO”) tokens, the SEC has determined certain digital tokens are securities under the Howey test as stated
by the U.S. Supreme Court. ICO offerings of securities would require registration under the Securities Act or an available exemption therefrom
for offers or sales in the United States to be lawful. Section 5(a) of the Securities Act provides that, unless a registration statement
is in effect as to a security, it is unlawful for any person, directly or indirectly, to engage in the offer or sale of securities in
interstate commerce. Furthermore, Section 5(c) of the Securities Act provides a similar prohibition against offers to sell, or offers
to buy, unless a registration statement has been filed. Although the Company does not believe its mining activities require registration
for it to conduct such activities and accumulate digital assets, the SEC, the Commodity Futures Trading Commission (the “CFTC”),
Nasdaq or other governmental or quasi- governmental agency or organization may conclude that the Company’s activities involve the
offer or sale of “securities,” or ownership of “investment securities,” and the Company may face regulation under
the Securities Act or the Investment Company Act of 1940, as amended (the “Investment Company Act”). Such regulation or the
inability to meet the requirements to continue operations would have a material adverse effect on the Company’s business, financial
condition and results of operations.
The further development and acceptance of digital asset networks
and other digital assets, which represent a new and rapidly changing industry, are subject to a variety of factors that are difficult
to evaluate, and the slowing or stopping of the development or acceptance of digital asset systems may adversely affect the Company’s
business, financial condition and results of operations.
Digital assets such as bitcoins, which may be
used, among other things, to buy and sell goods and services are a new and rapidly evolving industry of which the digital asset networks
are prominent, but not unique, parts. The growth of the digital asset industry in general, and the digital asset networks of bitcoin in
particular, are subject to a high degree of uncertainty. The factors affecting the further development of the digital asset industry,
as well as the digital asset networks, include, among others:
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digital assets and their use, or restrictions on or regulation of access to and operation of the digital asset network or similar digital
assets systems; |
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protocol of the bitcoin network; |
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buying and selling goods and services, including new means of using fiat currencies; |
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A decline in the popularity or acceptance of the
digital asset networks of bitcoin, or similar digital asset systems, could adversely affect the Company’s business, financial condition
and results of operations.
If demand for transactions in bitcoin declines and is replaced
by new demand for other cryptocurrencies, the Company’s business, financial condition and results of operations could be adversely
affected.
The Company’s business will be highly dependent on strong bitcoin
demand relative to other cryptocurrencies in the market. As such, in addition to the factors impacting the broader crypto economy described
elsewhere in this section, the Company’s business may be adversely affected, and growth in the Company’s, and therefore the
Company’s, revenues may slow or decline, if market demand for bitcoin deteriorates and is supplanted by other cryptocurrencies such
as ethereum and dogecoin. In addition, negative perceptions surrounding bitcoin relative to other cryptocurrencies may cause bitcoin to
fall out of favor. If other cryptocurrencies, such as ethereum and dogecoin, surpass bitcoin in market demand over a sustained period
of time, such a trend could harm the Company’s business. Competition from public and central bank backed digital currencies could
undercut the need for other cryptocurrencies such as bitcoin. Competition from stablecoins (commodity-backed or fiat-backed) could undercut
demand for other cryptocurrencies such as bitcoin.
Significant contributors to all or any digital asset network
could propose amendments to the respective network’s protocols and software that, if accepted and authorized by such network, could
adversely affect the Company’s business, financial condition and results of operations.
Digital asset networks are open-source projects and, although there
is an influential group of leaders in, for example, the bitcoin network community known as the “Core Developers,” there is
no official developer or group of developers that formally controls the bitcoin network. Any individual can download the bitcoin network
software and make any desired modifications, which are proposed to users and miners on the bitcoin network through software downloads
and upgrades, typically posted to the bitcoin development forum on GitHub.com. Proposals for upgrades and discussions relating thereto
take place on online forums. For example, there is an ongoing debate regarding altering the blockchain by increasing the size of blocks
to accommodate a larger volume of transactions. Although some proponents support an increase, other market participants oppose an increase
to the block size as it may deter miners from confirming transactions and concentrate power into a smaller group of miners. To the extent
that a significant majority of the users and miners on the bitcoin network install such software upgrade, the bitcoin network would be
subject to new protocols and software that may adversely affect the Company’s business, financial condition and results of operations.
In the event a developer or group of developers proposes a modification
to the bitcoin network that is not accepted by a majority of miners and users, but that is nonetheless accepted by a substantial plurality
of miners and users, two or more competing and incompatible blockchain implementations could result. This is known as a “hard fork.”
We may not be able to realize the economic benefit of such a “hard fork”, either immediately or ever, which could adversely
affect an investment in our securities. If we hold a cryptocurrency at the time of a hard fork, industry standards would dictate that
we would be expected to hold an equivalent amount of the old and new assets following the fork. However, we may not be able, or it may
not be practical, to secure or realize the economic benefit of the new asset for various reasons. For instance, we may determine that
there is no safe or practical way to custody the new asset, that trying to do so may pose an unacceptable risk to our holdings in the
old asset, or that the costs of taking possession and/or maintaining ownership of the new cryptocurrency exceed the benefits of owning
the new cryptocurrency. Additionally, laws, regulation or other factors may prevent us from benefitting from the new asset even if there
is a safe and practical way to custody and secure the new asset. In such case, the “hard fork” in the blockchain could materially
and adversely affect the perceived value of digital assets as reflected on one or both incompatible blockchains, which may adversely affect
the Company’s business, financial condition and results of operations and, in the worst-case scenario, harm the sustainability of
the bitcoin network’s economy.
The open-source structure of the bitcoin network protocol means
that the contributors to the protocol are generally not directly compensated for their contributions in maintaining and developing the
bitcoin network protocol, and a failure to properly monitor and upgrade the protocol could damage the bitcoin network and adversely affect
the Company’s business, financial condition and results of operations.
The bitcoin network operates based on an open-source protocol, not
represented by an official organization or authority. Instead, it is maintained by a group of core contributors, largely on the Bitcoin
Core project on GitHub. As an open-source project, bitcoin is not represented by an official organization or authority. As the bitcoin
network protocol is not sold and its use does not generate revenues for contributors, contributors are generally not directly compensated
for maintaining and developing the bitcoin network protocol. Although the Media Lab’s Digital Currency Initiative of the Massachusetts
Institute of Technology funds the current maintainer Wladimir J. van der Laan, among others, this type of financial incentive is not typical.
The lack of guaranteed financial incentive for contributors to maintain or develop the bitcoin network and the lack of guaranteed resources
to adequately address emerging issues with the bitcoin network may reduce incentives to address the issues adequately or in a timely manner.
Changes to a digital asset network which the Company is mining on may
adversely affect the Company’s business, financial condition and results of operations.
If a malicious actor or botnet obtains control in excess of 50%
of the processing power active on any digital asset network, including the bitcoin network, it is possible that such actor or botnet could
manipulate the blockchain in a manner that may adversely affect the Company’s business, financial condition and results of operations.
If a malicious actor or botnet (a volunteer or hacked collection of
computers controlled by networked software coordinating the actions of the computers) obtains a majority of the processing power dedicated
to mining on any digital asset network, including the bitcoin network, it may be able to alter the blockchain by constructing alternate
blocks if it is able to solve for such blocks faster than the remainder of the miners on the blockchain can add valid blocks. In such
alternate blocks, the malicious actor or botnet could control, exclude or modify the ordering of transactions, though it could not generate
new digital assets or transactions using such control. Using alternate blocks, the malicious actor could “double-spend” its
own digital assets (i.e., spend the same digital assets in more than one transaction) and prevent the confirmation of other users’
transactions for so long as it maintains control. To the extent that such malicious actor or botnet does not yield its majority control
of the processing power or the digital asset community does not reject the fraudulent blocks as malicious, reversing any changes made
to the blockchain may not be possible, which may adversely affect the Company’s business, financial condition and results of operations.
The approach towards and possible crossing of the 50% threshold indicates
a greater risk that a single mining pool could exert authority over the validation of digital asset transactions. To the extent that the
digital assets ecosystems do not act to ensure greater decentralization of digital asset mining processing power, the feasibility of a
malicious actor obtaining in excess of 50% of the processing power on any digital asset network (e.g., through control of a large mining
pool or through hacking such a mining pool) will increase, which may adversely affect the Company’s business, financial condition
and results of operations.
If the award of digital assets for solving blocks and transaction
fees for recording transactions are not sufficiently high to cover expenses related to running data center operations, it may adversely
affect the Company’s business, financial condition and results of operations.
Bitcoin miners record transactions when they solve for and add blocks
of information to the blockchain. When a miner solves for a block, it creates such block, which includes data relating to (i) the solution
to the block, (ii) a reference to the prior block in the blockchain to which the new block is being added and (iii) all transactions that
have occurred but have not yet been added to the blockchain. The miner becomes aware of outstanding, unrecorded transactions through data
packet transmission and propagation. Typically, bitcoin transactions will be recorded in the next chronological block if the spending
party has an internet connection and at least one minute has passed between the transaction’s data packet transmission and the solution
of the next block. If a transaction is not recorded in the next chronological block, it is usually recorded in the next block thereafter.
As the award of new digital assets for solving blocks declines, and
if transaction fees are not sufficiently high, miners may not have an adequate incentive to continue mining and may cease their mining
operations. For example, the current fixed reward on the bitcoin network for solving a new block is six and a quarter (6.25) bitcoins
per block. The reward decreased from twelve and a half (12.5) bitcoins in May 2020. It is estimated that it will halve again in approximately
May 2024. This reduction may result in a reduction in the aggregate hashrate of the bitcoin network as the incentive for miners will decrease.
Moreover, miners ceasing operations would reduce the aggregate hashrate on the bitcoin network, which would adversely affect the confirmation
process for transactions (i.e., temporarily decreasing the speed at which blocks are added to the blockchain until the next scheduled
adjustment in difficulty for block solutions) and make the bitcoin network more vulnerable to a malicious actor obtaining control in excess
of 50% of the aggregate hashrate on the bitcoin network. Periodically, the bitcoin network has adjusted the difficulty for block solutions
so that solution speeds remain in the vicinity of the expected ten-minute confirmation time targeted by the bitcoin network protocol.
The Company believes that from time to time there will be further considerations
and adjustments to the bitcoin network and others regarding the difficulty for block solutions. More significant reductions in aggregate
hashrate on digital asset networks could result in material, though temporary, delays in block solution confirmation time. Any reduction
in confidence in the confirmation process or aggregate hashrate of any digital asset network may negatively impact the value of digital
assets, which may adversely affect the Company’s business, financial condition and results of operations.
To the extent that the profit margins of digital asset mining
operations are not high, operators of digital asset mining operations are more likely to immediately sell their digital assets earned
by mining in the digital asset exchange market, resulting in a reduction in the price of digital assets that may adversely affect the
Company’s business, financial condition and results of operations.
Over the past ten years, digital asset mining operations have evolved
from individual users mining with computer processors, graphics processing units and first-generation servers. Currently, new processing
power brought onto the digital asset networks is predominantly added by incorporated and unincorporated “professionalized”
mining operations. Professionalized mining operations may use proprietary hardware or sophisticated machines. They require the investment
of significant capital for the acquisition of this hardware, the leasing of operating space (often in data centers or warehousing facilities),
incurrence of electricity costs and the employment of technicians to operate the mining farms. As a result, professionalized mining operations
are of a greater scale than prior miners and have more defined, regular expenses and liabilities. These regular expenses and liabilities
require professionalized mining operations to more immediately sell digital assets earned from mining operations on the digital asset
exchange market, whereas it is believed that individual miners in past years were more likely to hold newly mined digital assets for more
extended periods. The immediate selling of newly mined digital assets greatly increases the supply of digital assets on the digital asset
exchange market, creating downward pressure on the price of each digital asset.
The extent to which the value of digital assets mined by a professionalized
mining operation exceeds the allocable capital and operating costs determines the profit margin of such operation. A professionalized
mining operation may be more likely to sell a higher percentage of its newly mined digital assets rapidly if it is operating at a low
profit margin and it may partially or completely cease operations if its profit margin is negative. This could create a network effect
that may further reduce the price of digital assets until mining operations with higher operating costs become unprofitable and remove
mining power from the respective digital asset network. The network effect of reduced profit margins resulting in greater sales of newly
mined digital assets could result in a reduction in the price of digital assets that may adversely affect the Company’s business,
financial condition and results of operations.
To the extent that any miners cease to record transactions in
solved blocks, transactions that do not include the payment of a transaction fee will not be recorded on the blockchain until a block
is solved by a miner who does not require the payment of transaction fees, and any widespread delays in the recording of transactions
could result in a loss of confidence in that digital asset network, which may adversely affect the Company’s business, financial
condition and results of operations.
To the extent that any miners cease to record transactions in solved
blocks, such transactions will not be recorded on the blockchain. Currently, there are no known incentives for miners to elect to exclude
the recording of transactions in solved blocks. However, to the extent that any such incentives arise (e.g., a collective movement among
miners or one or more mining pools forcing bitcoin users to pay transaction fees as a substitute for or in addition to the award of new
bitcoins upon the solving of a block), actions of miners solving a significant number of blocks could delay the recording and confirmation
of transactions on the blockchain. Any systemic delays in the recording and confirmation of transactions on the blockchain could result
in greater exposure to double-spending transactions, or transactions that consist of bad actors simultaneously sending two or more bitcoin
to different addresses, and a loss of confidence in certain or all digital asset networks, which may adversely affect the Company’s
business, financial condition and results of operations.
Intellectual property rights claims may adversely affect the
operation of some or all digital asset networks.
Third parties may assert intellectual property claims relating to the
holding and transfer of digital assets and their source code. Regardless of the merit of any intellectual property or other legal action,
any threatened action that reduces confidence in some or all digital asset networks’ long-term viability or the ability of end-users
to hold and transfer digital assets may adversely affect the Company’s business, financial condition and results of operations.
In addition, a meritorious intellectual property claim could prevent the Company and other end-users from accessing some or all digital
asset networks or holding or transferring their digital assets. As a result, an intellectual property claim against the Company or other
large digital asset network participants may adversely affect the Company’s business, financial condition and results of operations.
To the extent that the digital asset exchanges representing a
substantial portion of the volume in digital asset trading are involved in fraud or experience security failures or other operational
issues, such digital asset exchanges’ failures may result in a reduction in the price of some or all digital assets and may adversely
affect the Company’s business, financial condition and results of operations.
The digital asset exchanges on which the digital assets trade are new
and, in most cases, largely unregulated. Furthermore, many digital asset exchanges (including several of the most prominent U.S. dollar
denominated digital asset exchanges) do not provide the public with significant information regarding their ownership structure, management
teams, corporate practices or regulatory compliance. As a result, the marketplace may lose confidence in, or may experience problems relating
to, digital asset exchanges, including prominent exchanges handling a significant portion of the volume of digital asset trading. A lack
of stability in the digital asset exchange market and the closure or temporary shutdown of digital asset exchanges due to fraud, business
failure, hackers or malware or government-mandated regulation may reduce confidence in the digital asset networks and result in greater
volatility in digital asset values. These potential consequences of a digital asset exchange’s failure may adversely affect the
Company’s business, financial condition and results of operations.
Political or economic crises may motivate large-scale sales of
digital assets, which could result in a reduction in some or all digital assets’ values and adversely affect the Company’s
business, financial condition and results of operations.
As an alternative to fiat currencies that are backed by central governments,
digital assets such as bitcoins, which are relatively new, are subject to supply and demand forces based upon the desirability of an alternative,
decentralized means of buying and selling goods and services, and it is unclear how such supply and demand will be impacted by geopolitical
events. Nevertheless, political or economic crises, including current or anticipated military conflicts such as the war between Russia
and Ukraine, terrorism, sanctions or other geopolitical events globally, may motivate large-scale acquisitions or sales of digital assets
either globally or locally. Large-scale sales of digital assets would result in a reduction in some or all digital assets’ values
and may adversely affect the Company’s business, financial condition and results of operations.
The Company’s ability to adopt technology in response to
changing security needs or trends poses a challenge to the safekeeping of the Company’s digital assets.
The history of digital asset exchanges has shown that exchanges and
large holders of digital assets must adapt to technological change in order to secure and safeguard their digital assets. The Company
will rely on enterprise cold storage solutions from third parties to safeguard the Company’s digital assets from theft, loss, destruction
or other issues relating to hackers and technological attack. The Company’s digital assets may also be moved to various exchanges
in order to exchange them for fiat currency during which time the Company will be relying on the security of such exchanges to safeguard
the Company’s digital assets.
The Company believes that it may become a more appealing target of
security threats as the size of the Company’s bitcoin holdings grow. To the extent that either custody providers or the Company
are unable to identify and mitigate or stop new security threats, the Company’s digital assets may be subject to theft, loss, destruction
or other attack, which may adversely affect the Company’s business, financial condition and results of operations.
Digital asset transactions are irrevocable, and stolen or incorrectly
transferred digital assets may be irretrievable and, as a result, any incorrectly executed digital asset transactions may adversely affect
the Company’s business, financial condition and results of operations.
Digital asset transactions are not, from an administrative perspective,
reversible without the consent and active participation of the recipient of the transaction or, in theory, control or consent of a majority
of the processing power on the respective digital asset network. Once a transaction has been verified and recorded in a block that is
added to the blockchain, an incorrect transfer of digital assets or a theft of digital assets generally will not be reversible, and the
Company may not be capable of seeking compensation for any such transfer or theft. Although the Company’s transfers of digital assets
will regularly be made to or from various parties, it is possible that, through computer or human error, or through theft or criminal
action, the Company’s digital assets could be transferred in incorrect amounts or to unauthorized third parties. To the extent that
the Company is unable to seek a corrective transaction with such third party or is incapable of identifying the third party which has
received the Company’s digital assets through error or theft, the Company will be unable to revert or otherwise recover incorrectly
transferred digital assets. To the extent that the Company is unable to seek redress for such error or theft, such loss may adversely
affect the Company’s business, financial condition and results of operations.
The limited rights of legal recourse against the Company, and
the Company’s lack of insurance protection, expose the Company and its stockholders to the risk of loss of its digital assets for
which no person is liable.
The digital assets held by the Company may not be insured. Therefore,
a loss may be suffered with respect to the Company’s digital assets which is not covered by insurance and for which no person is
liable in damages, which may adversely affect the Company’s business, financial condition and results of operations.
The Company may not have adequate sources of recovery if its
digital assets are lost, stolen or destroyed.
If the Company’s digital assets are lost, stolen or destroyed
under circumstances rendering a party liable to the Company, the responsible party may not have the financial resources sufficient to
satisfy its claim. For example, as to a particular event of loss, the only source of recovery for the Company might be limited, to the
extent identifiable, other responsible third parties (e.g., a thief or terrorist), any of which may not have the financial resources (including
liability insurance coverage) to satisfy a valid claim by the Company.
Digital assets held by the Company are not subject to FDIC or
SIPC protections.
The Company will not hold its digital assets with a banking institution
or a member of the Federal Deposit Insurance Corporation (“FDIC”) or the Securities Investor Protection Corporation (“SIPC”)
and, therefore, its digital assets will not be subject to the protections enjoyed by depositors with FDIC or SIPC member institutions.
The loss or destruction of a private key required to access a
digital asset may be irreversible and, as a result, the Company’s loss of access to its private keys or its experience of a data
loss relating to its digital assets may adversely affect the Company’s business, financial condition and results of operations.
Digital assets are controllable only by the possessor of both the unique
public key and private key relating to the local or online digital wallet in which the digital assets are held. The Company is required
by the operation of digital asset networks to publish the public key relating to a digital wallet in use when it first verifies a spending
transaction from that digital wallet and disseminates such information into the respective network. The Company safeguards and keeps private
the private keys relating to its digital assets by using enterprise cold storage custody solutions from third parties. To the extent a
private key is lost, destroyed or otherwise compromised and no backup of the private key is accessible, the Company will be unable to
access the digital assets held by it and the private key will not be capable of being restored by the respective digital asset network.
Any loss of private keys relating to digital wallets used to store the Company’s digital assets may adversely affect the Company’s
business, financial condition and results of operations.
Because the Company’s future digital assets may be held
by digital asset exchanges, it faces heightened risks from cybersecurity attacks and financial stability of digital asset exchanges.
The Company may transfer digital assets from its wallet to digital
asset exchanges prior to selling them. Digital assets not held in the Company’s wallet are subject to the risks encountered by digital
asset exchanges including a denial-of-service attack or other malicious hacking, a sale of the digital asset exchange, loss of the digital
assets by the digital asset exchange and other risks similar to those described herein. The Company may not maintain a custodian agreement
with any of the digital asset exchanges that hold the Company’s digital assets. These digital asset exchanges may or may not provide
insurance and may lack the resources to protect against hacking and theft. If this were to occur, the Company’s business, financial
condition and results of operations may be adversely affected.
As the number of digital assets awarded for solving a block in
the blockchain decreases, the incentive for miners to continue to contribute processing power to the respective digital asset network
will transition from a set reward to transaction fees.
In order to incentivize miners to continue to contribute processing
power to any digital asset network, such network may either formally or informally transition from a set reward to transaction fees earned
upon solving for a block. This transition could be accomplished either by miners independently electing to record in the blocks they solve
only those transactions that include payment of a transaction fee or by the digital asset network adopting software upgrades that require
the payment of a minimum transaction fee for all transactions. If transaction fees paid for digital asset transactions become too high,
the marketplace may be reluctant to accept digital assets as a means of payment and existing users may be motivated to switch from one
digital asset to another digital asset or back to fiat currency. Decreased use and demand for bitcoins may adversely affect the value
of the Company’s bitcoins and may adversely affect the Company’s business, financial condition and results of operations.
The price of bitcoin may be influenced by regulatory, commercial
and technical factors that are highly uncertain resulting in the price of bitcoin being extremely volatile, which may significantly influence
the market price of the Company’s common stock.
To the extent investors view the value of the Company’s common
stock as linked to the value or change in the value of bitcoin, fluctuations in the price of bitcoin may significantly influence the market
price of the Company’s common stock. In addition, the Company’s business operations are no longer economical below the bitcoin
breakeven point, or the point at which the total cost of mining operations exceeds the total revenues generated.
The price of bitcoin has historically been subject to dramatic fluctuations
and is highly volatile. Bitcoin has only recently become accepted as a means of payment for goods and services and has recently trended
toward becoming a more actively traded instrument, however the acceptance and use of bitcoin remains limited and far from mainstream.
Conversely, a significant portion of demand for bitcoin may be generated by speculators and investors seeking to profit from the short-
or long-term holding of bitcoin.
In addition, some blockchain industry participants have reported that
a significant percentage of bitcoin trading activity is artificial or non-economic in nature and may represent attempts to manipulate
the price of bitcoin. As a result, trading platforms may seek to inflate demand for bitcoin, which could increase the volatility of the
price of bitcoin and may significantly influence the market price of the Company’s common stock.
The development and acceptance of competing blockchain platforms
or technologies may cause consumers to use alternative distributed ledgers or other alternatives.
The development and acceptance of competing blockchain platforms or
technologies, including competing cryptocurrencies which our miners may not be able to mine, such as cryptocurrencies being developed
by popular social media platforms, online retailers, or government sponsored cryptocurrencies, may cause consumers to use alternative
distributed ledgers or an alternative to distributed ledgers altogether. Our business currently intends to utilize presently existent
digital ledgers and blockchains and we could face difficulty adapting to emergent digital ledgers, blockchains, or alternatives thereto.
This may adversely affect us and our exposure to various blockchain technologies and prevent us from realizing the anticipated profits
from our investments. Such circumstances could have a material adverse effect on our business, prospects or operations and potentially
the value of any bitcoin or other cryptocurrencies we mine or otherwise acquire or hold for our own account, which could materially and
adversely affect investors’ investments in our securities.
The decentralized nature of cryptocurrency systems may lead to slow
or inadequate responses to crises, which may negatively affect our business.
The decentralized nature of the governance of cryptocurrency systems
may lead to ineffective decision making that slows development or prevents a network from overcoming emergent obstacles. Governance of
many cryptocurrency systems is by voluntary consensus and open competition with no clear leadership structure or authority. To the extent
lack of clarity in corporate governance of cryptocurrency systems leads to ineffective decision making that slows development and growth
of such cryptocurrencies, the value of our common stock may be adversely affected.
Risks Relating to Regulatory Matters
We are subject to a highly-evolving regulatory landscape and
any adverse changes to, or our failure to comply with, any laws and regulations could adversely affect our business, reputation, prospects
or operations.
Until recently, relatively little regulatory attention has been directed
toward bitcoin and the bitcoin network by U.S. federal and state governments, foreign governments and self-regulatory agencies. We currently
only operate in the United States, and do not currently have any plans to expand our operations beyond the United States. As bitcoin has
grown in popularity and in market size, the U.S. regulatory regime - namely the Federal Reserve Board, U.S. Congress and certain U.S.
agencies (e.g., the SEC, the CFTC, FinCEN and the Federal Bureau of Investigation) have begun to examine the operations of the bitcoin
network, bitcoin users and the bitcoin exchange market. The complexity and evolving nature of our business and the significant uncertainty
surrounding the regulation of the cryptocurrency industry requires us to exercise our judgment as to whether certain laws, rules, and
regulations apply to us, and it is possible that governmental bodies and regulators may disagree with our conclusions. To the extent we
have not complied with such laws, rules, and regulations, we could be subject to significant fines, revocation of licenses, limitations
on our products and services, reputational harm, and other regulatory consequences, each of which may be significant and could adversely
affect our business, operating results, and financial condition.
Additionally, the recent bankruptcy filings of FTX, the third largest
digital asset exchange by volume at the time of its filing, and its affiliated hedge fund Alameda Research LLC, in addition to other bankruptcy
filings of crypto companies throughout calendar year 2022 and the first quarter of 2023, together with the recent closures of Silicon
Valley Bank, SBNY and Silvergate Bank, will likely attract heightened regulatory scrutiny from U.S. regulatory agencies such as the SEC
and CFTC. Increasing regulation and regulatory scrutiny may result in new costs for the Company and Company’s management having
to devote increased time and attention to regulatory matters, change aspects of the Company’s business or result in limits on the
utility of bitcoin. In addition, regulatory developments and/or the Company’s business activities may require the Company to comply
with certain regulatory regimes. Increasingly strict legal and regulatory requirements and any regulatory investigations and enforcement
may result in changes to our business, as well as increased costs, and supervision and examination for ourselves and our service providers.
Moreover, new laws, regulations, or interpretations may result in additional litigation, regulatory investigations, and enforcement or
other actions. Adverse hanges to, or our failure to comply with, any laws and regulations may have an adverse effect on our reputation
and brand and our business, operating results, and financial condition.
Additionally, although we are not directly connected to the recent
cryptocurrency market events, we may still suffer reputational harm due to our association with the cryptocurrency industry in light of
the recent disruption in the crypto asset markets. Ongoing and future regulation and regulatory actions could significantly restrict or
eliminate the market for or uses of bitcoin and/or may adversely affect the Company’s business, reputation, financial condition
and results of operations.
TeraWulf may be at a higher risk of litigation and other legal proceedings
due to heightened regulatory scrutiny of the cryptocurrency industry, which could ultimately be resolved against TeraWulf, requiring material
future cash payments or charges, which could impair TeraWulf’s financial condition and results of operations.
The size, nature and complexity of the Company’s business could
make it susceptible to various claims, both in litigation and binding arbitration proceedings, legal proceedings, and government investigations,
due to the heightened regulatory scrutiny following the recent disruptions in the crypto asset markets. The Company believes that since
cryptocurrency mining, and the digital asset industry generally, is a relatively new business sector, it is more likely subject to government
investigation and regulatory determination, particularly following the recent cryptocurrency market participant bankruptcies described
elsewhere herein. Any claims, regulatory proceedings or litigation that could arise in the course of the Company’s business could
have a material adverse effect on the Company, its business or operations, or the industry as a whole.
The Company may be classified as an inadvertent investment company.
The Company is not engaged in the business of investing, reinvesting
or trading in securities and does not hold itself out as being engaged in those activities. Under the Investment Company Act, however,
a company may be deemed an investment company under Section 3(a)(1)(C) if the value of its investment securities is more than 40% of its
total assets (exclusive of government securities and cash items) on a consolidated basis.
The Company will be engaging in digital asset mining, the outputs of
which are cryptocurrencies, which may be deemed a security. In the event that the digital assets held by the Company exceed 40% of its
total assets, exclusive of cash, the Company may inadvertently become an investment company. An inadvertent investment company can avoid
being classified as an investment company if it can rely on one of the exclusions under the Investment Company Act. One such exclusion,
namely Rule 3a-2 under the Investment Company Act, allows an inadvertent investment company a grace period of one year from the earlier
of (i) the date on which an issuer owns securities and/or cash having a value exceeding 50% of the issuer’s total assets on either
a consolidated or unconsolidated basis and (ii) the date on which an issuer owns or proposes to acquire investment securities having a
value exceeding 40% of the value of such issuer’s total assets (exclusive of government securities and cash items) on an unconsolidated
basis. The Company is putting in place policies that it expects will work to keep the digital assets held by the Company at less than
40% of its total assets, liquidating its digital assets or seeking a no-action letter from the SEC if the Company is unable to maintain
sufficient total assets or liquidate sufficient digital assets in a timely manner.
As Rule 3a-2 is available to a company no more than once every three
years, and assuming no other exclusions are available to the Company, the Company would have to keep within the 40% limit for at least
three years after it ceases being an inadvertent investment company. This may limit the Company’s ability to make certain investments
or enter into joint ventures that could otherwise have a positive impact on the Company’s earnings. In any event, the Company does
not intend to become an investment company engaged in the business of investing and trading securities.
Classification as an investment company under the Investment Company
Act requires registration with the SEC. If an investment company fails to register, it would have to stop doing almost all business, and
its contracts would become voidable. Registration is time consuming and restrictive and would require a restructuring of the Company’s
operations, and the Company would be very constrained in the kind of business it could do as a registered investment company. Furthermore,
the Company would become subject to substantial regulation concerning management, operations, transactions with affiliated persons and
portfolio composition, and would need to file reports under the Investment Company Act regime. The cost of such compliance would result
in the Company incurring substantial additional expenses, and the failure to register if required may adversely affect the Company’s
business, financial condition and results of operations.
It may be illegal now, or in the future, to acquire, own, hold,
sell or use digital assets in one or more countries, and ownership of, holding or trading in the Company’s securities may also be
considered illegal and subject to sanction.
Although digital assets are not currently regulated or are lightly
regulated in most countries, including the United States, one or more countries, such as China and Russia, may take regulatory actions
in the future that severely restricts the right to acquire, own, hold, sell or use digital assets or to exchange digital assets for fiat
currency. Such an action may also result in the restriction of ownership, holding or trading in the Company’s securities and may
adversely affect the Company’s business, financial condition and results of operations.
If regulatory changes or interpretations of the Company’s
activities require its registration as a money services business under the regulations promulgated by FinCEN under the authority of the
U.S. Bank Secrecy Act of 1970, as amended, the Company may be required to register and comply with such regulations.
To the extent that the activities of the Company cause it to be deemed
a money service business under the regulations promulgated by FinCEN under the authority of the U.S. Bank Secrecy Act of 1970, as amended,
the Company may be required to comply with FinCEN regulations, including those that would mandate the Company to implement anti-money
laundering programs, make certain reports to FinCEN and maintain certain records.
To the extent that the activities of the Company cause it to be deemed
a “money transmitter” or equivalent designation under state law of any state in which the Company operates, the Company may
be required to seek a license or otherwise register with a state regulator and comply with state regulations that may include the implementation
of anti-money laundering programs, maintenance of certain records and other operational requirements. Currently, the New York State Department
of Financial Services has finalized its “BitLicense” framework for businesses that conduct “virtual currency business
activity,” the Conference of State Bank Supervisors has proposed a model form of state level “virtual currency” regulation
and additional state regulators, including those from the States of California, Idaho, Virginia, Kansas, Texas, South Dakota and Washington,
have made public statements indicating that virtual currency businesses may be required to seek licenses as money transmitters. In July
2016, the State of North Carolina updated the law to define “virtual currency” and the activities that trigger licensure in
a business-friendly approach that encourages companies to use virtual currency and blockchain technology. Specifically, the North Carolina
law does not require miners or software providers to obtain a license for multi-signature software, smart contract platforms, smart property,
colored coins and non-hosted, non-custodial wallets. Starting on January 1, 2016, the State of New Hampshire requires anyone who exchanges
a digital currency for another currency must become a licensed and bonded money transmitter. In numerous other states, including the States
of Connecticut and New Jersey, legislation is being proposed or has been introduced regarding the treatment of bitcoin and other digital
assets. The Company will continue to monitor for developments in such legislation, guidance or regulations.
Such additional federal or state regulatory obligations may cause the
Company to incur extraordinary expenses, possibly affecting an investment in the shares of the Company’s common stock in a material
and adverse manner. Furthermore, the Company and its service providers may not be capable of complying with certain federal or state regulatory
obligations applicable to money services business and money transmitters. If the Company is deemed to be subject to and is determined
not to comply with such additional regulatory and registration requirements, the Company may act to dissolve and liquidate the Company.
Blockchain technology may expose the Company to specially designated
nationals or blocked persons or cause it to violate provisions of law.
The Company is subject to the rules enforced by The Office of Financial
Assets Control of the U.S. Department of Treasury (“OFAC”), including regarding sanctions and requirements not to conduct
business with persons named on its specially designated nationals list. However, because of the pseudonymous nature of blockchain transactions,
the Company may inadvertently and without its knowledge engage in transactions with persons named on OFAC’s specially designated
nationals list, which may expose the Company to regulatory sanctions and adversely affect the Company’s business, financial condition
and results of operations.
The Company may be required to register and comply with bitcoin
regulations and, to the extent that the Company decides to continue operations, the required registrations and regulatory compliance steps
may result in extraordinary expenses to the Company.
Current and future legislation, and other regulatory developments,
including interpretations released by a regulatory authority, may impact the manner in which bitcoins are treated for classification and
clearing purposes. In particular, bitcoin derivatives are not excluded from the definition of “commodity future” by the CFTC.
The Company cannot be certain as to how future regulatory developments will impact the treatment of bitcoins under the law.
Bitcoins have been deemed to fall within the definition of a commodity,
and the Company may be required to register and comply with additional regulation under the Commodity Exchange Act of 1936, as amended,
including additional periodic report and disclosure standards and requirements. Moreover, the Company may be required to register as a
commodity pool operator and to register us as a commodity pool with the CFTC through the National Futures Association. Such additional
registrations may result in extraordinary expenses, thereby materially and adversely affecting the Company’s business, financial
condition and results of operations. If the Company determines it will not comply with such additional regulatory and registration requirements,
it may seek to cease certain of its operations. Any such action may adversely affect the Company’s business, financial condition
and results of operations. As of the date of this Annual Report, the Company is not aware of any rules that have been proposed to regulate
bitcoins as securities. However, the Company cannot be certain as to how future regulatory developments will impact the treatment of bitcoins
under the law.
If federal or state legislatures or agencies initiate or release
tax determinations that change the classification of bitcoins as property for tax purposes (in the context of when such bitcoins are held
as an investment), such determination could have a negative tax consequence on the Company or its shareholders.
Current guidance from the Internal Revenue Service indicates that digital
assets such as bitcoin should be treated and taxed as property and that transactions involving the payment of bitcoin for goods and services
should be treated as barter transactions. While this treatment creates a potential tax reporting requirement for any circumstance where
the ownership of a bitcoin passes from one person to another, usually by means of bitcoin transactions (including off-blockchain transactions),
it would also apply capital gains treatment to those transactions which may adversely affect the Company’s business, financial condition
and results of operations.
Under certain recently proposed legislation, substantial tax
compliance burdens may be imposed on the Company relating to the tax reporting of bitcoin and bitcoin-related transactions.
Legislation recently passed in the Senate would impose substantial
tax compliance obligations on the Company relating to the reporting of bitcoin and bitcoin-related transactions. Under this legislation,
it is possible that the Company would be treated as a digital assets broker and required to deliver certain tax forms in connection with
the validation of blockchain transactions. Were this legislation to be passed in the House and enacted unchanged, the Company could face
tax reporting and compliance mandates that it may not have the information or resources to fully comply with. Although the current legislation
may not be enacted in its current form, future legislation may impose similar tax compliance responsibilities on the Company, which may
be expensive and burdensome to comply with, and which could, as a result, adversely impact the Company’s operations. The Company
will continue to monitor for developments in such legislation, guidance or regulations.
The Company’s bitcoin holdings could subject it to regulatory
scrutiny.
As digital assets, including bitcoin, have grown in popularity and
market size, there has been increasing focus on the extent to which digital assets can be used to launder the proceeds of illegal activities
or fund criminal or terrorist activities or entities subject to sanctions regimes. While the Company intends to institute risk-based procedures
reasonably designed to promote compliance with applicable anti-money laundering and sanctions laws and regulations and takes care to only
acquire bitcoin through entities subject to anti money laundering regulation and related compliance rules in the United States, if it
is found to have purchased any bitcoin from bad actors that have used bitcoin to launder money or persons subject to sanctions, the Company
is and may continue to be subject to regulatory proceedings and further transactions or dealings in bitcoin may be restricted or prohibited.
Due to the unregulated nature and lack of transparency surrounding
the operations of many bitcoin trading venues, they may experience fraud, security failures or operational problems, which may adversely
affect the value of the Company’s future bitcoin holdings.
Bitcoin trading venues are relatively new and, in some cases, unregulated.
Furthermore, there are many bitcoin trading venues which do not provide the public with significant information regarding their ownership
structure, management teams, corporate practices and regulatory compliance. As a result, the marketplace may lose confidence in bitcoin
trading venues, including prominent exchanges that handle a significant volume of bitcoin trading.
Negative perception, a lack of stability in the broader bitcoin markets
and the closure or temporary shutdown of bitcoin trading venues due to fraud, business failure, hackers or malware or government- mandated
regulation may reduce confidence in bitcoin and result in greater volatility in the prices of bitcoin.
To the extent investors view the Company’s common stock as linked
to the value of the Company’s future bitcoin holdings, these potential consequences of a bitcoin trading venue’s failure could
have a material adverse effect on the market value of the Company’s common stock.
Risks Related to Ownership of Our Common Stock
Our stock price has been and may continue to be volatile, and
you could lose all or part of your investment.
The market price of our common stock is subject
to wide fluctuations in response to various risk factors, some of which are beyond our control and may not be related to our operating
performance, including:
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addition or loss of significant customers, suppliers, or distributors; |
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changes in laws or regulations applicable to our industry ; |
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additions or departures of key personnel; |
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the failure of securities analysts to cover our common stock after an offering; |
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actual or anticipated changes in expectations regarding our performance by investors or securities analysts; |
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price and volume fluctuations in the overall stock market; |
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volatility in the market price and trading volume of companies in our industry or companies that investors consider comparable; |
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share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; |
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our ability to protect our intellectual property and other proprietary rights; |
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sales of our common stock by us or our stockholders; |
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the expiration of contractual lock-up agreements; |
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litigation involving us, our industry, or both; |
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major catastrophic events; and |
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general economic and market conditions and trends. |
Further, the stock markets have experienced extreme
price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These
fluctuations often have been unrelated or disproportionate to the operating performance of those companies. In addition, the stock prices
of many cannabis-related companies have experienced wide fluctuations that have often been unrelated to the operating performance of those
companies. These broad market and industry fluctuations, as well as general economic, political, and market conditions such as recessions,
interest rate changes, or international currency fluctuations, may cause the market price of our common stock to decline. If the market
price of our common stock fluctuates or declines, you may not realize any return on your investment and may lose some or all of your investment.
Our operating results are subject to fluctuations and our stock
price may decline significantly.
Our quarterly revenue and operating results are
difficult to predict from quarter to quarter. We derive revenue from our hemp processing business which is dependent upon volumes produced
by farmers and is seasonal. Prices for products derived from hemp have declined significantly over the past few years resulting in many
farmers exiting the industry. We derive relatively stable revenue from our property leased industrial warehouse. Nonetheless, it is possible
that our net operating results in some quarters will fall below our expectations. Our quarterly operating results will be affected by
a number of factors, including:
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Timing, availability and changes in government incentive programs; |
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Unplanned additional expenses and/or shortfalls in anticipated rental income at our warehouse property; |
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Logistical costs; |
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The timing of new technology announcements or introductions by our competitors and other developments in the competitive environment; |
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Increases or decreases in real estate appreciation rates due to changes in economic growth; |
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Travel costs and other factors; and |
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If revenue for a particular quarter is lower than
we expect, we may not be unable to proportionately reduce our operating expenses for that quarter, which would harm our operating results
for that quarter. If we fail to meet investor expectations or our own future guidance, even by a small amount, our stock price could decline,
perhaps substantially.
There are restrictions on the transferability of certain of our
securities.
Until registered for resale, investors must bear
the economic risk of an investment in the Shares for an indefinite period of time. Rule 144 promulgated under the Securities Act (“Rule
144”), which provides for an exemption from the registration requirements under the Securities Act under certain conditions, requires,
among other conditions, a six-month holding period prior to the resale (in limited amounts) of securities acquired in a non-public offering
without having to satisfy the registration requirements under the Securities Act. There can be no assurance that we will fulfill any reporting
requirements in the future under the Exchange Act or disseminate to the public any current financial or other information concerning us.
If the Company uses its stock in acquisitions of other entities,
there may be substantial dilution at the time of a transaction.
The offering price of the common stock we sold
as a private placement of restricted shares of our common stock to raise working capital, was arbitrarily set. The price did not bear
any relationship to our assets, book value, earnings or net worth and it is not an indication of actual value. You may also suffer additional
dilution in the future from the sale of additional shares of common stock or other securities or if the Company’s shares are issued
to purchase other assets or to raise additional working capital.
Trading on the OTC Markets can be volatile and sporadic, which
could depress the market price of our common stock and make it difficult for our stockholders to resell their shares.
Our common shares are quoted on OTCQB. There is
no cost of such quotation and related services from OTC Markets, Inc. Trading in stock quoted on the OTCQB Markets is often thin and characterized
by wide fluctuations in trading prices due to many factors that may have little to do with our operations or business prospects. This
volatility could depress the market price of our common stock for reasons unrelated to operating performance. Moreover, the OTC Markets
is not a stock exchange, and trading of securities on the OTCQB Markets is often more sporadic than the trading of securities listed on
a quotation system like Nasdaq or a stock exchange like the New York Stock Exchange. Accordingly, our stockholders may have difficulty
reselling any of their shares. A number of brokerage houses will not trade our securities for customers because we are in the hemp business
and/or because we trade on the OTC.
The Company currently plans to move to a more advantageous trading
market via a potential uplisting, to a national exchange, and a formal application has been made. However, there is no assurance that
we will be able to successfully move trading markets or uplist to a national exchange.
Because we do not expect to pay any dividends for the foreseeable
future, investors may be forced to sell their stock to realize a return on their investment.
We do not anticipate that we will pay any dividends
to holders of our common stock for the foreseeable future. Any payment of cash dividends will be at the discretion of our board of directors
and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions including
compliance with covenants under our debt agreements, and other factors that our board of directors may deem relevant. Our ability to pay
dividends might be restricted by the terms of any indebtedness that we incur in the future. In addition, certain of our current outstanding
debt agreements prohibit us from paying cash dividends on our common stock. Consequently, you should not rely on dividends to receive
a return on your investment.
Our common stock is presently subject to the “Penny Stock”
rules of the SEC.
We are subject now to the “Penny Stock”
rules since our shares of common stock sell below $5.00 per share. Penny stocks generally are equity securities with a price of less than
$5.00. The penny stock rules require broker-dealers to deliver a standardized risk disclosure document prepared by the SEC which provides
information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer must also provide the customer
with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson, and monthly account
statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer
and salesperson compensation information must be given to the customer orally or in writing prior to completing the transaction and must
be given to the customer in writing before or with the customer’s confirmation. ∙ In addition, the penny stock rules require
that prior to a transaction, the broker dealer must make a special written determination that the penny stock is a suitable investment
for the purchaser and receive the purchaser’s written agreement to the transaction. The penny stock rules are burdensome and may
reduce the trading activity for shares of our common stock. As long as our shares of common stock are subject to the penny stock rules,
the holders of such shares of common stock may find it more difficult to sell their securities.
If we fail to remain current on our reporting requirements, we
could be removed from the OTCQB which would limit the ability of broker-dealers to sell our securities in the secondary market.
Companies trading on the OTCQB must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in
order to maintain price quotation privileges on the OTCQB. As a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in
the secondary market. In addition, we may be unable to get relisted on the OTCQB, which may have an adverse material effect on the Company.
If we decide to implement a reverse stock split, a reverse stock
split may decrease the liquidity of the shares of our common stock.
The liquidity of the shares of our common stock
may be affected adversely by a reverse stock split given the reduced number of shares that will be outstanding following a reverse stock
split, especially if the market price of our common stock does not increase as a result of the reverse stock split.