ATTACHMENT 1

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BERKOWITZ OLIVER WILLIAMS SHAW & EISENBRANDLce

Shazzie Naseem snaseem@berkowitzoliver.com DD: (816) 627-0264

December 6, 2013

Kate Mahoney Assistant United States Attorney United States Attorney's Office, WDMO Charles Evans Whittaker Courthouse Room 5510 400 East 9th Street Kansas City, MO 64106 Courtney Pierce United States Probation Officer Probation & Pretrial Services Office Charles Evans Whittaker Courthouse 400 East 9th Street Kansas City, MO 64106

Re: Butterfly Labs Production of Requested Information

Dear Kate and Courtney: The following information is submitted on behalf of Sonny Vleisides in response to your inquiry regarding various documents and information related to Butterfly Labs and Sonny Vleisides.

QUESTIONS FOR SONNY VLEISIDES

1.

What is the reason Mr. Vleisides makes only $12,000 per year?

In the early days of the company's formation, there was doubt as to whether an Application Specific Integrated Circuit ("ASIC") manufacturing business would succeed. As is the case with any entrepreneurial venture, taking money out of the company in its beginning stages of development could have harmed its growth. As a result, Mr. Vleisides took a greatly reduced salary. $12,000 was reported on the W-2, as payroll was not started until mid-2012. $14,000

2600 Grand Boulevard Suite 1200 /Kansas City, MO 64108

816J561 /7007

816#561/1888

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Kate Mahoney December 6, 2013 Page 2 was reported as 1099 income to total $26,000 for 2012 wages. This equates to approximately $500 per week, which Mr. Vleisides felt was a necessary to enable company future growth. This salary continued until June 2, 2013. Based on tremendous growth, Mr. Vleisides received an increase in his salary. On June 3, 2013 this salary increased to $1,120 per week.

2.

Who is the Vice President that signs the Butterfly Labs 2012 tax return?

Mr. Vleisides is the Vice President of product development and has worked with local accounting firms to ensure the accuracy of the BFL's tax returns. He is authorized to sign the returns ofthe company.

3.

Did Nasser Ghoseiri loan Butterfly Labs $150,000? If so, what was the purpose of the loan, the date of the loan, and terms of the loan?

The $150,000 in question was a shareholder loan made by Butterfly Labs to Nasser Ghoseiri based on expected future profitability. Mr. Ghoseiri has not loaned the company any money. Mr. Ghoseiri is also on the Butterfly Labs Board of Directors and serves as the chief engineer for the wafer and ASIC chip design. The loan note still needs to be drafted by company counsel. Butterfly Labs has retained the services of the Polsinelli law firm to assist with such matters. The purpose of the loan was to compensate Mr. Ghoseiri for his design and engineering skills in advance of the expected future profitability of Butterfly Labs based on those efforts.

4.

What is Eclipse Mining Equipment?

Eclipse Mining Consortium was a website that Butterfly Labs purchased from Josh Zerlan in 2012. The website was a Bitcoin mining pool website that allowed multiple users to work together to mine Bitcoins that would be shared among the group. Pooled mining allows a user to receive smaller, but more frequent Bitcoins that are divided by the number of shares that an individual earns relative to the processing power that they contributed to mining a block of Bitcoins. Butterfly Labs acquired the IP address and website from Mr. Zerlan for $100,000. Eclipse Mining Consortium still operates as a Bitcoin mining pool website. The business purpose was to offer customers a place to combine their BitCoin mining power. Butterfly Labs earns mining income from their bum testing of machines as well as service fees charged to Eclipse customers.

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BERKOWITZ OLIVER WILLIAMS SHAW & EISENBRANDTcce

Kate Mahoney December 6, 2013 Page 3 These service fees occur when customers convert their BitCoins to cash. Eclipse advances the funds while the conversion is underway. This conversion typically takes a few days. Exchanges are made through Dwolla, an independent BitCoin intermediary. Mr. Zerlan is not an equity stakeholder in the company, but remains with the company as an employee because of knowledge regarding the Bitcoin mining process and the customer base. Additionally, Mr. Zerlan serves as the company's online security manager.

5.

Does Butterfly Labs have any liability other than the $8.5 million in deferred revenue mentioned above?

No additional liabilities as 12/13/12. All payables were paid as received. This continues to be the case in 2013.

6.

Which shareholder received a $242,000 loan from Butterfly Labs?

The intent with shareholder receivables is for shareholders to pay back the money borrowed from the company and to charge interest on monies loaned. Marks Nelson calculated interest based on the IRS 2012 blended annual rate of 0.22% (see pdf contained in Folder "18"). Jeff Ownby Nasser Ghoseiri Sonny Vleisides TOTAL: $ 26,420.73 $150,453.85 $ 65,977.19 $242,851.77

REQUESTED DOCUMENTS FROM SONNY VLEISIDES 1. 2. 2011 & 2012 personal tax return Butterfly Labs (BFL) current Financial Statement a. b. 2012 Financials- Included 2013 Financials- Quarter 1 included. Full financials not yet completed since data is incomplete to this point.

3.

BFL bank statements

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BERKOWITZ OliVER WILLIAMS SHAW & EISENBRANDTue

Kate Mahoney December 6, 2013 Page 4 4. 5. 6. Sonny Vleisides personal bank statements BFL PayPal Statements and account information BFL Payroll tax returns + preparer contact information a. Payroll is prepared by CBIZ 1. 540-345-6600, option 3. Ask for Tameka or anyone in the payroll tax dept. or email to tbailey@cbiz.com or cbizpayrolltax@cbiz.com.

7.

Information documenting BFL $1.6 million cost of goods sold a. BFL accepts pre-orders for each new generation of equipment it sells. Customers prepay at the time of their order. The prepayments are recorded as deposits on the Company's Balance Sheet, under the Current Liabilities section. When the equipment is shipped to the customer, the revenue and related cost of goods is recognized on the Income Statement. The prepayment is removed from the Balance Sheet as a Current Liability, the Sale is recognized, and the related cost is removed from Inventory and recognized as Cost of Goods Sold. In 2012, BF Labs recognized income and related cost of goods sold on their 1st and 2nd generations of FPGA equipment. The 1st and 2nd generations were shipped to customers between February and November 2012. The next generation of ASIC equipment was being manufactured at the end of2012. All related costs for that equipment were recorded as inventory on the Company's Balance Sheet, under the Current Assets section. No shipments of this generation of equipment were made during 2012, the completion of this line and shipments are anticipated during 2013.

8.

Schedule ofBFL 5 year property purchased for $735,000 last year a. See 13 -Fixed Asset Schedule

9.

Information documenting BFL $124,000 gain on Bitcoin currency exchange, including when it occurred and how it was calculated a. See general ledger detail for detail of occurrence. Gains and losses on currency exchange were calculated at various times.

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BERKOWITZ OLIVER WILLIAMS SHAW & EISENBRANDTcce

Kate Mahoney December 6, 20 13 Page 5

b.

A gain/loss was calculated on BitCoin wallet transfers, in which the currency value changed while the transaction was pending. A gain/loss was calculated on BitCoin wallets and the BitPay BTC accounts at year-end. MN took the number of BitCoins BFL held in those accounts times the exchange rate per Mt. Gox at 12/31112. See "BitCoin Chart".

c.

10. 11.

BFL Property tax statements for 2012 Supporting documentation on BFL building improvements and travel expenses a. b. Building improvements - See 13 - Fixed Asset Schedule Invoices

12.

BFL deferred revenue schedule of $8.5 million, including terms of contracts with buyers a. Because of the volume of information related to this category, any specific contracts with buyers will have to be selected on a sample basis for BFL to pull supporting documents. The relevant commercial terms available to customers are clearly available in two ways: 1. Products That Are Currently In Stock: The product page for each product clearly states: "Order Terms: All sales are final." An example of that page is attached hereto as Exhibit 12.A. Products That Require a Pre-Order: The product page for pre-order products clearly states: "Pre-Order Terms: This is a preorder. 28nm ASIC Bitcoin mining products are shipped according to placement in the order queue, and delivery may take 3 months or more after order. All sales are final." An example of that page is attached hereto as Exhibit 12.B. 2. Frequently Asked Questions: BF Lab's "FAQ" page specifies clearly that "pre-ordered products are non-refundable as

b.

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BERKOWITZ OLIVER WILLIAMS SHAW & EISENBRANDTcce

Kate Mahoney December 6, 2013 Page 6 is clearly stated at the time of purchase". This page further explains "The reason for this is that the pre-order funds are used in the build process which makes it impractical to reverse. It's also been observed that some small number of customers have placed orders as part of a Bitcoin price hedging strategy which involves multiple requests to cancel and then re-instate their orders as market conditions change. This has created an enormous customer service burden which is resolved by enforcing the all sales final policy". An example of that page is also attached hereto as Exhibit 12.C. 13. 14. BFL fixed asset schedule Documents regarding purchase of home by BFL, including HUB 1 settlement statement and closing documents.

Also included: 15. 16. Audi Vehicle Purchase Documents BFL Articles of Incorporation Filing

Shazzie Naseem

SN:sn Enclosure(s) cc: Jeff D. Morris Courtney Pierce, USPO Sonny Vleisides

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