NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND LINE OF BUSINESS
Organization
CleanSpark,
Inc. (the "Company") was incorporated in the state of Nevada on October 15, 1987 as SmartData Corporation. SmartData
conducted a 504 public offering in the State of Nevada in December 1987 and began trading publicly in January 1988. Due to a series
of unfortunate events, including the untimely death of the founding CEO, SmartData discontinued active business operations in
1992.
On
March 25, 2014, the Company entered into an Asset and Intellectual Property Purchase Agreement pursuant to which the Company acquired:
(i) all Intellectual Property rights, title and interest in Patent # 8,105,401 'Parallel Path, Downdraft Gasifier Apparatus and
Method' and Patent # 8,518,133 'Parallel Path, Downdraft Gasifier Apparatus and Method' and (ii) all of the Property rights,
title and interest in a 32 inch Downdraft Gasifier ("Gasifier”) and (iii) assumed of $156,900 in liabilities.
In
December 2014, the Company changed its name to Stratean Inc. through a short-form merger in order to better reflect the new business
plan.
On
July 1, 2016, the Company entered into an Asset Purchase Agreement, as amended (the “Purchase Agreement”), with CleanSpark
Holdings LLC, CleanSpark LLC, CleanSpark Technologies LLC and Specialized Energy Solutions, Inc. (together, the “Seller”).
Pursuant to the Purchase Agreement, the Company acquired CleanSpark, LLC and all the assets related to Seller and its line of
business and assumed $200,000 in liabilities.
In
October 2016, the Company changed its name to CleanSpark, Inc. through a short-form merger in order to better reflect the brand
identity.
Line
of Business
Through
the acquisition of CleanSpark, LLC, the Company provides microgrid solutions to military, commercial and residential properties.
The
services offered consist of turn-key microgrid implementation services, microgrid design and engineering, project development
consulting services and solar photovoltaic installation and consulting. The work is performed under fixed price bid contracts,
and negotiated price contracts. The Company performed all of its work in California during 2016 and the first quarter of 2017.
The
Company also continues to pursue the development of its gasification technologies for commercial deployment. The Company has been
granted multiple patents protecting what it believes to be a breakthrough design for the next generation in waste-to-energy technology.
The increased efficiency compared to existing solutions results in a significantly lower cost per watt of electricity produced.
The Company has completed a commercial prototype and has completed preliminary testing and it is currently working with its manufacturing
partners to improve durability and efficiency. Upon completion of product development, The Company intends to deploy its gasification
solutions to the Company’s pipeline of commercial microgrid customers in order maximize the conversion of its customer waste
streams into electricity.
2.
BASIS OF PRESENTATION AND GOING CONCERN
The
accompanying unaudited interim financial statements of the Company have been prepared in accordance with accounting principles
generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read
in conjunction with the audited financial statements and notes thereto contained in the Company’s most recent Annual Financial
Statements filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of financial position and the results of operations for the interim period presented have been
reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected
for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited
financial statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted.
Going
concern
– The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates
the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred cumulative
net losses of $8,441,678 since its inception and requires capital for its contemplated operational and marketing activities to
take place. The Company’s ability to raise additional capital through future issuances of common stock is unknown. The obtainment
of additional financing, the successful development of the Company’s contemplated plan of operations, and its transition,
ultimately, to the attainment of profitable operations are necessary for the Company to continue operations. The ability to successfully
resolve these factors raises substantial doubt about the Company’s ability to continue as a going concern. The consolidated
financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.
3.
SUMMARY OF SIGNIFICANT POLICIES
This
summary of significant accounting policies of CleanSpark Inc. is presented to assist in understanding the Company’s consolidated
financial statements. The consolidated financial statements and notes are representations of the Company’s management, who
are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted
in the United States of America, and have been consistently applied in the preparation of the consolidated financial statements.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of CleanSpark, Inc., and its wholly owned operating subsidiaries,
CleanSpark, LLC, and CleanSpark, II, LLC. All material intercompany transactions have been eliminated upon consolidation of these
entities.
Use
of estimates
–
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Significant estimates include estimates used to review the Company’s goodwill, impairments
and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible
accounts, inventory valuation, and the valuations of non-cash capital stock issuances. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of
which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions or conditions.
Revenue
Recognition
– The Company recognizes revenue on arrangements in accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” and No. 104, “Revenue Recognition”.
In all cases, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists,
the service is performed and collectability is reasonably assured. For the six months ended March 31, 2017 and 2016 the Company
reported revenues of $284,633 and $0, respectively.
Revenues
and related costs on construction contracts are recognized using the “percentage of completion method” of accounting
in accordance with ASC 605-35, Accounting for Performance of Construction-Type and Certain Production Type Contracts (“ASC
605-35”). Under this method, contract revenues and related expenses are recognized over the performance period of the contract
in direct proportion to the costs incurred as a percentage of total estimated costs for the entirety of the contract. Costs include
direct material, direct labor, subcontract labor and any allocable indirect costs. All un-allocable indirect costs and corporate
general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen,
the Company will recognize the loss as it is determined.
Revisions
in cost and profit estimates during the course of the contract are reflected in the accounting period in which the facts, which
require the revision, become known. Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including
those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
The
Asset, “Costs in excess of billings”, represents revenues recognized in excess of amounts billed on contracts in progress.
The Liability, “Billings in excess of costs”, represents billings in excess of revenues recognized on contracts in
progress. At March 31, 2017 and September 30, 2016, the costs in excess of billings balance were $0 and $0, and the billings in
excess of costs balance were $0 and $0, respectively.
Accounts
receivables are recorded on contracts for amounts currently due based upon progress billings, as well as retention, which are
collectible upon completion of the contracts. Accounts payable to material suppliers and subcontractors are recorded for
amounts currently due based upon work completed or materials received, as are retention due subcontractors, which are payable
upon completion of the contract. General and administrative expenses are charged to operations as incurred and are
not allocated to contract costs. Retention receivable is the amount withheld by a customer until a contract is completed.
Retention receivables of $0 and $0 were included in the balance of trade accounts receivable as of March 31, 2017 and September
30, 2016, respectively.
Accounts
Receivable
– Accounts receivable is comprised of uncollateralized customer obligations due under normal trade terms.
The Company performs ongoing credit evaluation of its customers and management closely monitors outstanding receivables based
on factors surrounding the credit risk of specific customers, historical trends, and other information. The carrying amount of
accounts receivable is reviewed periodically for collectability. If management determines that collection is unlikely, an allowance
that reflects management’s best estimate of the amounts that will not be collected is recorded. Accounts receivable are
presented net of an allowance for doubtful accounts of $9,000 and $0 at March 31, 2017, and September 30, 2016, respectively.
Cash
and cash equivalents
– For purposes of the statement of cash flows, the Company considers all highly liquid investments
and short-term debt instruments with original maturities of three months or less to be cash equivalents. There was $238,406 and
$436,529 in cash and cash equivalents as of March 31, 2017 and September 30, 2016, respectively.
Concentration
Risk
At
times throughout the year, the Company may maintain cash balances in certain bank accounts in excess of FDIC limits. As of March
31, 2017, the cash balance in excess of the FDIC limits was $0. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk in these accounts.
Fair
Value of Financial Instruments
– The carrying amounts reflected in the balance sheets for cash, accounts payable and
accrued expenses approximate the respective fair values due to the short maturities of these items. The Company does not hold
any investments that are available-for-sale.
As
required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair
value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted
prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly
or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity
to develop its own assumptions.
The
three levels of the fair value hierarchy are described below:
Level
1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or
liabilities;
Level
2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially
the full term of the asset or liability;
Level
3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable
(supported by little or no market activity).
Warranty
Liability
– The Company establishes warranty liability reserves to provide for estimated future expenses as a result
of installation and product defects, product recalls and litigation incidental to the Company’s business. Liability
estimates are determined based on management’s judgment, considering such factors as historical experience, the likely current
cost of corrective action, manufacturers’ and subcontractors’ participation in sharing the cost of corrective action,
consultations with third party experts such as engineers, and discussions with the Company’s general counsel and outside
counsel retained to handle specific product liability cases. The Company’s manufacturers and service providers
currently provide substantial warranties between ten to twenty-five years with full reimbursement to replace and install replacement
parts. Warranty costs and associated liabilities for the periods ended March 31, 2017 and September 30, 2016 were $0 and
$0, respectively.
Stock-based
compensation
– The Company follows the guidelines in FASB Codification Topic ASC 718-10 “
Compensation-Stock
Compensation,
” which provides investors and other users of financial statements with more complete and neutral financial
information, by requiring that the compensation cost relating to share-based payment transactions be recognized in the financial
statements. That cost will be measured based on the fair value of the equity or liability instruments issued. ASC 718-10 covers
a wide range of share-based compensation arrangements, including share options, restricted share plans, performance-based awards,
share appreciation rights and employee share purchase plans. As of March 31, 2017, the Company has not implemented an employee
stock based compensation plan.
Non-Employee
Stock Based Compensation
– The Company accounts for stock based compensation awards issued to non-employees for services,
as prescribed by ASC 718-10, at either the fair value of the services rendered or the instruments issued in exchange for such
services, whichever is more readily determinable, using the measurement date guidelines enumerated in ASC 505-50. The Company
may issue compensatory shares for services including, but not limited to, executive, management, accounting, operations, corporate
communication, financial and administrative consulting services.
Earnings
(loss) per share
– The Company reports earnings (loss) per share in accordance with Financial Accounting Standards Board’s
(“FASB”) Accounting Standards Codification (“ASC”) 260-10 “
Earnings Per Share,
” which
provides for calculation of “basic” and “diluted” earnings per share. Basic earnings per share includes
no dilution and is computed by dividing net income or loss available to common stockholders by the weighted average common shares
outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings
of an entity. The calculation of diluted net loss per share gives effect to common stock equivalents; however, potential common
shares are excluded if their effect is anti-dilutive.
Long-lived
Assets
– In accordance with the Financial Accounting Standards Board ("FASB") Accounts Standard Codification
(ASC) ASC 360-10, "Property, Plant and Equipment," the carrying value of intangible assets and other long-lived assets
is reviewed on a regular basis for the existence of facts or circumstances that may suggest impairment. The Company recognizes
impairment when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment
losses, if any, are measured as the excess of the carrying amount of the asset over its estimated fair value.
Indefinite
Lived Intangibles and Goodwill Assets
The
Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business
Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and
liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available,
and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset
valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the
tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.
The
Company tests for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events
or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. In accordance
with its policies, the Company performed a qualitative assessment of indefinite lived intangibles and goodwill at September 30,
2016, and determined there was no impairment of indefinite lived intangibles and goodwill.
Business
Combinations
The
Company allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible
assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values
of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates
and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include,
but are not limited to, future expected cash flows from acquired customer lists, acquired technology, and trade names from a market
participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions
believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from
estimates. During the measurement period, which is one year from the acquisition date, the Company may record adjustments to the
assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period,
any subsequent adjustments are recorded to earnings.
Income
taxes
– The Company accounts for its income taxes in accordance with FASB Codification Topic ASC 740-10, “
Income
Taxes
”, which requires recognition of deferred tax assets and liabilities for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases
and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Segment
Reporting
– Operating segments are defined as components of an enterprise for which separate financial information
is available and evaluated regularly by the chief operating decision maker, or decision making group, in deciding the method to
allocate resources and assess performance. The Company currently has one reportable segment for financial reporting purposes,
which represents the Company's core business.
Recently
Issued Accounting Pronouncements
–The Company has evaluated the all recent accounting pronouncements through ASU
2017-08, and believes that none of them will have a material effect on the Company's financial position, results of operations
or cash flows.
4.
BUSINESS ACQUISITION
On
July 1, 2016, the Company entered into the Purchase Agreement with Seller. Pursuant to the Purchase Agreement, the Company acquired
all the assets related to Seller and its line of business and assumed certain liabilities.
The
Assets the Company purchased from Seller include:
-
Equipment
and other tangible assets;
-
Domain
names, websites and intellectual property;
-
All
rights to causes of action, lawsuits, judgments, claims and demands of any nature available to or being pursued by the Seller;
-
Contracts
to which Seller is bound;
-
Current
and future customer accounts, including accounts receivable;
-
The
holdings that CleanSpark Holdings LLC has in CleanSpark LLC, and any investments it has as well; and
-
Any
other assets of any nature whatsoever that are related to or used in connection with the business of Seller and its goodwill.
On
July 20, 2016, the parties to the Purchase Agreement entered into an amendment (the “Amendment”) that revised the
assets to be acquired under the Purchase Agreement. Specifically, the parties decided on the following:
-
Specialized
Energy Solutions, Inc. would transfer and assign the ability to use its name and all of its Intellectual Property to CleanSpark
II, LLC, and thereafter Specialized Energy Solutions, Inc. will not be included in the Assets acquired; and
-
Clean
Spark Technologies, LLC agrees to transfer and assign all of its Intellectual Property to CleanSpark II, LLC, and thereafter Clean
Spark Technologies, LLC will not be included in the Assets acquired.
The
Amendment also included an option to acquire Specialized Energy Solutions, Inc. and Clean Spark Technologies, LLC, which the parties
agreed upon as follows:
-
CleanSpark
II, LLC is hereby granted a 3-year exclusive option to purchase Specialized Energy Solutions, Inc. for 1,000 shares of CleanSpark
Inc. Common Stock; and
-
CleanSpark
II, LLC is hereby granted a 3-year exclusive option to purchase Clean Spark Technologies, LLC for 1,000 shares of CleanSpark Inc.
Common Stock.
On
August 19, 2016, the parties to the Purchase Agreement entered into a second amendment that revised the Closing Date of the transaction.
The
Assumed Liabilities, consisted of certain accounts payable amounting to approximately $262,873 arising out of the Assets. Per
the agreement the liabilities were to be limited to $200,000 therefore $62,873 must be reimbursed by CleanSpark Holdings, LLC.
Subsequently the balance due was fully settled. See Note 9 for additional details.
As
consideration, the Company issued to Seller six million (6,000,000) shares of common stock with a fair value of $18,420,000 and
five-year warrants to purchase four million five hundred thousand (4,500,000) shares of common stock at an exercise price of $1.50
per share. The warrants were valued at $13,675,500 using the Black Scholes option pricing model based upon the following assumptions:
term of 5 years, risk free interest rate of 1.0%, a dividend yield of 0% and volatility rate of 218%. The warrants were fully
earned and vested on July 1, 2016.
Simultaneously
with the Purchase Agreement, the Company entered into certain ancillary agreements (the “Ancillary Agreements”) with
Seller, consisting of a bill of sale, intellectual property assignment and lock-up agreement. The lock-up agreement prevents Seller
from selling the Company’s securities in the public market for a year.
The
Purchase Agreement contained customary representations, warranties and covenants. In addition, the Company and Seller agreed to
appoint one (1) candidate chosen by Seller to the board of directors of the Company. As a result, Bryan Huber was appointed as
a member of the board of directors. The term of the appointment of shall be in accordance with the Company’s bylaws.
CleanSpark
provides microgrid, design, engineering, installation and consulting services to military, commercial and residential customers.
The acquisition is designed to enhance the Company’s services for renewable technology and provide a pipeline for deployment
of its gasification technology. As a result of the Purchase Agreement, CleanSpark, LLC became a wholly-owned subsidiary of the
Company.
The
acquisition was accounted for under ASC 805 and the transaction was valued for accounting purposes at $32,095,500, which was the
fair value of the Assets acquired at time of acquisition. The assets and liabilities of the Seller were recorded at their respective
fair values as of the date of acquisition. Since the Company determined there were no other separately identifiable intangible
assets, any difference between the cost of the acquired entity and the fair value of the assets acquired and liabilities assumed
is recorded as goodwill. The acquisition date estimated fair value of the consideration transferred consisted of the following:
Shares of Common Stock
|
|
$
|
18,420,000
|
Stock
warrants
|
|
|
13,675,500
|
Total purchase price
|
|
$
|
32,095,500
|
|
|
|
|
Tangible assets acquired
|
|
$
|
4,911,367
|
Liabilities
assumed
|
|
|
(262,573)
|
Net tangible assets
|
|
|
4,648,794
|
Intangible assets acquired
|
|
|
22,526,847
|
Goodwill
|
|
|
4,919,859
|
Total purchase price
|
|
$
|
32,095,500
|
Key
factors that make up the goodwill created by the transaction include knowledge and experience of the acquired team and infrastructure.
Pro
forma results
The
following tables set forth the unaudited pro forma results of the Company as if the acquisition of Seller had taken place on the
first day of the periods presented. These combined results are not necessarily indicative of the results that may have been achieved
had the companies been combined as of the first day of the periods presented.
|
|
Three Months ended,
|
|
Six Months ended,
|
March 31, 2016
|
|
March 31,
2016
|
Total revenues
|
|
$
|
25,148
|
|
$
|
1,888,875
|
Net Income (loss)
|
|
|
(1,710,257)
|
|
|
(2,667,416)
|
Basic net income (loss) per common share
|
|
$
|
(0.06)
|
|
$
|
(0.10)
|
5.
FIXED ASSETS
During
the six months ending March 31, 2017, the Company disposed of fixed assets with a net book value of $19,817 in exchange for consideration
of $7,000. As a result, the company reported a $12,817 loss on disposal of assets for the six months ending March 31, 2017.
Fixed
assets consist of the following as of March 31, 2017 and September 30, 2016:
|
March
31, 2017
|
|
September
30, 2016
|
Machinery and equipment
|
$
|
747,931
|
|
|
$
|
769,276
|
Furniture and fixtures
|
|
72,253
|
|
|
|
72,484
|
Total
|
|
820,184
|
|
|
|
841,760
|
Less: accumulated depreciation
|
|
(108,490
|
)
|
|
|
(58,785)
|
Fixed assets, net
|
$
|
711,791
|
|
|
$
|
782,975
|
Depreciation
expense for the six months ended March 31, 2017 and 2016 was $51,464 and $19,126, respectively.
6.
MICROGRID ASSETS
Microgrid
assets consist of the combined assets at CleanSpark’s FractalGrid Demonstration Facility located at Camp Pendleton Marine
Corps Base. The California Energy Commission awarded a grant to Harper Construction Company, Inc. in July 2013 to support a microgrid
technology demonstration project. CleanSpark was subcontracted to provided design, development, integration, and installation
services for the FractalGrid at the School of Infantry in the 52 Area of Marine Corps Base Camp Pendleton. The Microgrid control
infrastructure and related components of the Project was subsequently transferred to CleanSpark for consideration and an agreement
to indemnify Harper Construction for all future responsibilities of maintenance, operations and warranty.
The
project included integration of CleanSpark’s proprietary software and controls platform with a variety of energy storage
technologies. The system utilizes solar energy generated by the Marine Corps fixed-tilt solar photovoltaic panels and fifteen
dual axis tracking concentrated photovoltaic units. CleanSpark’s distributed controls combine the generation with energy
storage technologies to create four separate microgrids that self-align together to create a larger microgrid that ties directly
into the larger utility grid at the 12kV level, allowing the base to consume energy from the most reliable, affordable source
at any given time. The system provides a 100% renewable and sustainable solution to energy security.
In
the event of an outage or other energy surety threat, the software can autonomously separate the microgrids from the utility and
the controls operate them independently in “island” mode, without interrupting service to critical circuits. Once
energy from the grid is stabilized, CleanSpark’s platform reconnects the microgrid to the utility. Each individual fractal
microgrid can work independently or in concert as the larger 1.1MW FractalGrid, sharing data and energy throughout the group
to improve efficiency, protect critical circuits, manage supply and demand, and allow for maintenance or repairs, as needed. The
entire installation provides the Marine Corps and Department of the Navy with reliable energy security with built in cyber defense.
The
microgrid assets were acquired as part of the CleanSpark acquisition and have been capitalized at $4,625,339, which was deemed
to be the fair value of the assets at the time of the acquisition.
The
microgrid assets consist of the following as of March 31, 2017 and September 30, 2016:
|
March
31, 2017
|
|
September
30, 2016
|
Camp Pendleton FractalGrid
|
$
|
4,625,339
|
|
|
$
|
4,625,339
|
Less: accumulated depreciation
|
|
(501,711
|
)
|
|
|
(57,501)
|
Fixed assets, net
|
$
|
4,123,628
|
|
|
$
|
4,567,838
|
Depreciation
expense for the six months ended March 31, 2017 and 2016 was $444,210 and $0, respectively.
7.
FLEXPOWER SYSTEM
A
microgrid is comprised of any number of generation, energy storage, and smart distribution assets that serve single or multiple
loads, both connected to the grid and islanded. The FlexPower system is an integrated microgrid control platform that seamlessly
integrates energy generation with energy storage devices and controls facility loads to provide energy security in real time.
The system is able to interoperated with the local utility grid and allows users the ability to obtain the most cost effective
power for a facility. The FlexPower system is ideal for commercial, industrial, mining, defense, campus and community users ranging
from 4 kw to 100 MW and beyond and can deliver power at or below the current cost of utility power.
The
FlexPower System proprietary software and methodology was acquired as part of the CleanSpark acquisition and the project was capitalized
at $20,007,624, which was the fair value of the assets at the time of the acquisition.
The
FlexPower system consist of the following as of March 31, 2017 and September 30, 2016:
|
March
31, 2017
|
|
September
30, 2016
|
FlexPower System
|
$
|
20,057,997
|
|
|
$
|
20,007,624
|
Less: accumulated amortization
|
|
(996,036
|
)
|
|
|
(331,638)
|
Intangible assets, net
|
$
|
19,061,961
|
|
|
$
|
19,675,986
|
Amortization
expense for the six months ended March 31, 2017 and 2016 was $664,398 and $0, respectively.
8.
INTANGIBLE AND OTHER ASSETS
Intangible
assets consist of the following as of March 31, 2017 and September 30, 2016:
|
March
31, 2017
|
|
September
30, 2016
|
Patents
|
$
|
84,991
|
|
|
$
|
82,641
|
Websites
|
|
12,582
|
|
|
|
9,777
|
Brand and Client lists
|
|
2,497,472
|
|
|
|
2,497,472
|
Trademarks
|
|
5,928
|
|
|
|
4,858
|
Software
|
|
26,990
|
|
|
|
10,728
|
Less: accumulated amortization
|
|
(276,018
|
)
|
|
|
(137,546)
|
Intangible assets, net
|
$
|
2,351,945
|
|
|
$
|
2,467,930
|
Amortization
expense for the six months ended March 31, 2017 and 2016 was $138,472 and $1,359, respectively.
9.
RELATED PARTY TRANSACTIONS
On
October 1, 2014, the Company entered into a Consulting agreement with Matthew Schultz, its Chief Executive Officer for management
services. In accordance with this agreement, Mr. Schultz provides services to the Company in exchange for $7,500 to $15,000 per
month plus additional reimbursable expenses incurred. The term of the agreement was one month and automatically renewed each month
until cancelled by either party. During the six months ending March 31, 2017, Mr. Schultz was paid $71,954 in accordance with
this agreement and is owed $38,546 in accrued compensation as of March 31, 2017.
On
July 1, 2016, the Company entered into a Consulting agreement with Zachary Bradford, its President and Chief Financial Officer
for management services. In accordance with this agreement, Mr. Bradford provides services to the Company in exchange for $15,000
per month plus reimbursable expenses incurred. During the six months ending March 31, 2017, Mr. Bradford was paid $65,971 under
this this agreement and was owed $59,829 in accrued compensation as of March 31, 2017.
On
July 1, 2016, the Company entered into a Consulting agreement with Bryan Huber, its Chief Operating Officer for management services.
In accordance with this agreement, Mr. Huber provided services to the Company in exchange for $2,000 to $2,250 per week plus reimbursable
expenses incurred. During the six months ending March 31, 2017, Mr. Huber was paid $68,344 under this this agreement and was owed
$2,000 in accrued compensation and $4,020 as a reimbursement for expense incurred as of March 31, 2017.
On
February 6, 2017, the Company and CleanSpark Holdings, LLC (“Holdings”) entered into an Assumption of Debt Agreement
to settle Debts Holdings owed the Company related to the June, 30, 2016 Purchase Agreement. Pursuant to the Purchase Agreement,
the Company agreed to assume up to $200,000 in liabilities arising out of the assets. In the course of due diligence, CleanSpark
discovered that they had actually assumed $275,586 in liabilities. As a result of the overage in assumed liabilities, Holdings
had paid the Company $25,000 and remained indebted to CleanSpark for the overage amount of $50,586. Holdings agreed to reassume
$44,919 in settlement of the full amount of the debt overage and the Company agreed to accept the assumption of $44,919 in settlement
of the full amount of the Debt overage. A loss on settlement of debt of $5,667 was recorded by the Company as a result of the
agreement.
10.
PREPAID EXPENSES
Prepaid
expenses consist of the following as of March 31, 2017 and September 30, 2016:
|
March
31, 2017
|
|
September
30, 2016
|
Prepaid stock compensation
|
$
|
-
|
|
|
$
|
50,130
|
Prepaid rents
|
|
1,700
|
|
|
|
850
|
Prepaid dues and subscriptions
|
|
12,443
|
|
|
|
-
|
Prepaid insurance and bonds
|
|
30,798
|
|
|
|
6,742
|
Total prepaid expenses
|
$
|
44,941
|
|
|
$
|
57,722
|
On
January 22, 2016, the Company appointed Mr. Greg Gohlinghorst as a member of the Company’s board of advisors. He was issued
35,000 shares of common stock for his appointment. The shares were valued at $105,000 or $3.00 per share. The amount was
capitalized as a prepaid expense and amortized over a twelve-month term; during the six months ended March 31, 2017, the Company
recorded an expense of $32,705.
On
January 15, 2016, the Company entered into an Investor Relations Consulting Agreement with Hayden IR (“HIR”) to serve
as our investor relations firm for a period of twelve months. Under the Agreement, HIR’s responsibilities include: implementing
and maintaining an ongoing market support system to expand awareness of the Company in the investment community; arranging conference
calls and interviews; providing feedback on expectations of results and company value; assisting with the presentation of periodic
results of operations; monitoring newswires and industry publications; drafting and coordinating press releases, among other services.
As
compensation for the services under the Agreement, the Company agreed to pay HIR a cash monthly fee of $3,500 for the first six
months of the agreement. The monthly fee increased to $6,500 starting in the seventh month. The Company also agreed to issue to
HIR 20,000 shares of restricted common stock within 30 days of execution. The shares were valued at $60,000 or $3.00 per share.
The Stock compensation has been recorded as a prepaid expense and is being amortized evenly over the twelve-month service period.
During the six months ending March 31, 2017, the Company recorded $17,425 in stock based compensation associated with this agreement.
11.
STOCKHOLDERS’ EQUITY (DEFICIT)
Overview
The
Company’s authorized capital stock consists of 100,000,000 shares of common stock and 10,000,000 shares of preferred stock,
par value $0.001 per share. As of March 31, 2017, there were 32,969,721 shares of common stock issued and outstanding and 1,000,000
shares of preferred stock issued and outstanding.
Description
of Common Stock
The
Company’s common stock is entitled to one vote per share on all matters submitted to a vote of the stockholders, including
the election of directors. Except as otherwise required by law or provided in any resolution adopted by the Company’s board
of directors with respect to any series of preferred stock, the holders of common stock will possess all voting power. Generally,
all matters to be voted on by stockholders must be approved by a majority (or, in the case of election of directors, by a plurality)
of the votes entitled to be cast by all shares of common stock that are present in person or represented by proxy, subject to
any voting rights granted to holders of any preferred stock. Holders of the Company’s common stock representing fifty percent
(50%) of the Company’s capital stock issued, outstanding and entitled to vote, represented in person or by proxy, are necessary
to constitute a quorum at any meeting of stockholders. A vote by the holders of a majority of the Company’s outstanding
shares is required to effectuate certain fundamental corporate changes such as a liquidation, merger or an amendment to the Company’s
articles of incorporation.
Subject
to any preferential rights of any outstanding series of preferred stock created by the Company’s board of directors from
time to time, the holders of shares of common stock will be entitled to such cash dividends as may be declared from time to time
by the Company’s board of directors from funds available therefor.
Subject
to any preferential rights of any outstanding series of preferred stock created from time to time by the Company’s board
of directors, upon liquidation, dissolution or winding up, the holders of shares of common stock will be entitled to receive pro
rata all assets available for distribution to such holders.
In
the event of any merger or consolidation of the Company with or into another company in connection with which shares of the Company’s
common stock are converted into or exchangeable for shares of stock, other securities or property (including cash), all holders
of the Company’s common stock will be entitled to receive the same kind and amount of shares of stock and other securities
and property (including cash). Holders of the Company’s common stock have no pre-emptive rights, no conversion rights and
there are no redemption provisions applicable to the Company’s common stock.
Description
of Preferred Stock
The
Company’s board of directors is authorized to divide the authorized shares of the Company’s preferred stock into one
or more series, each of which must be so designated as to distinguish the shares of each series of preferred stock from the shares
of all other series and classes. The Company’s board of directors is authorized, within any limitations prescribed by law
and the Company’s articles of incorporation, to fix and determine the designations, rights, qualifications, preferences,
limitations and terms of the shares of any series of preferred stock, including, but not limited to, the following:
|
•
|
the rate of dividend,
the time of payment of dividends, whether dividends are cumulative, and the date from which any dividends accrue;
|
|
•
|
whether shares may
be redeemed, and, if so, the redemption price and the terms and conditions of redemption;
|
|
•
|
the amount payable
upon shares in the event of voluntary or involuntary liquidation;
|
|
•
|
sinking fund or
other provisions, if any, for the redemption or purchase of shares;
|
|
•
|
the terms and conditions
on which shares may be converted, if the shares of any series are issued with the privilege of conversion;
|
|
•
|
voting powers, if
any, provided that if any of the preferred stock or series thereof have voting rights, such preferred stock or series shall
vote only on a share for share basis with the common stock on any matter, including, but not limited to, the election of directors,
for which such preferred stock or series has such rights; and,
|
|
•
|
subject to the foregoing,
such other terms, qualifications, privileges, limitations, options, restrictions, and special or relative rights and preferences,
if any, of shares or such series as the board of directors may, at the time so acting, lawfully fix and determine under the
laws of the State of Nevada.
|
On
April 15, 2015, the Company filed a Certificate of Amendment to the Company’s Articles of Incorporation (the “Certificate
of Amendment”) with the Nevada Secretary of State. The Certificate of Amendment authorized ten million (10,000,000) shares
of preferred stock. The Company’s Board of Directors and a majority of its shareholders approved the Certificate of Amendment.
On
April 15, 2015, pursuant to Article IV of our Articles of Incorporation, the Company’s Board of Directors voted to designate
a class of preferred stock entitled Series A Preferred Stock, consisting of up to one million (1,000,000) shares, par value $0.001.
Under the Certificate of Designation, holders of Series A Preferred Stock will be entitled to quarterly dividends on 2% of our
earnings before interest, taxes and amortization. The dividends are payable in cash or common stock. The holders will also have
a liquidation preference on the state value of $0.02 per share plus any accumulated but unpaid dividends. The holders are further
entitled to have the Company redeem their Series A Preferred Stock for three shares of common stock in the event of a change of
control and they are entitled to vote together with the holders of the Company’s common stock on all matters submitted to
shareholders at a rate of forty-five (45) votes for each share held.
Common
Stock issuances
During
the period commencing October 1, 2016 through March 31, 2017, the Company received $549,000 from 19 investors pursuant to private
placement agreements with the investors to purchase 686,250 shares of the Company’s $0.001 par value common stock at a purchase
price equal to $0.80 for each share of Common stock.
In
November of 2016, the Company issued 2,932,704 shares of common stock to two officers for the cashless exercise of 3,000,000 options.
In
December of 2016, the Company issued 1,466,352 shares of common stock to a director for the cashless exercise of 1,500,000 options.
On
February 9, 2017, the Company entered into a Debt Settlement Agreement with Webcor Construction LP (“Webcor”) to settle
$158,753 in debt owed to Webcor. The Company agreed to pay Webcor $58,000 on or before February 28, 2017 and to issue 50,000 shares
of the Company’s common stock within 4 days of execution. Upon receipt of payment, Webcor agreed to release the full amount
of the debt. The shares issued were deemed to have a fair value of $212,500 on the date of the transaction and a loss on settlement
of debt of $111,747 was recorded as a result of the Debt Settlement Agreement. The cash payment was made per the agreement on
February 28, 2017.
12.
STOCK WARRANTS
The
following is a summary of stock warrants activity during the year ended September 30, 2016 and 2015.
|
|
Number
of Shares
|
|
|
|
Weighted
Average Exercise Price
|
Balance, September
30, 2015
|
|
8,097,600
|
|
|
$
|
0.10
|
Warrants granted
and assumed
|
|
5,014,500
|
|
|
$
|
1.38
|
Warrants expired
|
|
—
|
|
|
|
—
|
Warrants canceled
|
|
—
|
|
|
|
—
|
Warrants exercised
|
|
—
|
|
|
|
—
|
Balance, September
30, 2016
|
|
13,112,100
|
|
|
$
|
0.59
|
Warrants granted
and assumed
|
|
—
|
|
|
$
|
—
|
Warrants expired
|
|
—
|
|
|
|
—
|
Warrants canceled
|
|
—
|
|
|
|
—
|
Warrants exercised
|
|
4,500,000
|
|
|
|
0.083
|
Balance, March 31,
2017
|
|
8,612,100
|
|
|
$
|
0.85
|
As
of March 31, 2017, there are warrants exercisable to purchase 8,612,100 shares of common stock in the Company.
13.
COMMITMENTS AND CONTINGENCIES
On
January 22, 2016, the Company relocated its corporate office to 70 North Main Street, Suite 105, Bountiful, Utah 84010. The Company
executed a one-year lease agreement that calls for the Company to make payments of $850 per month. The Company has prepaid rent
for January 2017. Future minimum lease payments under the operating leases for the facilities as of March 31, 2017, are $0. The
Company continues to occupy the leased space on a month to month basis at a rate of $850 per month.
CleanSpark,
LLC has agreed to warranty and maintain the microgrid assets located on the Fractalgrid Demonstration Facility to Camp Pendleton
Marine Corp Base. In exchange, the Company has been granted the permission to locate its system on the base and the access to
conduct guided tours of the Fractalgrid Demonstration Facility for the Company’s potential customers.
On
December 16, 2016, the Company executed an 18-month lease agreement at 6365 Nancy Ridge Drive, 2
nd
Floor, San Diego
California. The Company executed a one-year lease agreement that calls for the Company to make payments of $2,375 per month through
December 31, 2017 and $2,446 per month from January 1, 2018 through May 31, 2018. Future minimum lease payments under the operating
leases for the facilities as of March 31, 2017, are $21,375 and $12,230 for the fiscal years ending December 31, 2017 and 2018,
respectively.
14.
MAJOR CUSTOMERS AND VENDORS
For
the six months ended March 31, 2017 and 2016, the Company had the following customers that represented more than 10% of sales.
|
|
March 31, 2017
|
|
March 31, 2016
|
Bethel-Webcor JV-1
|
|
|
12.3
|
%
|
|
|
—
|
|
Jacobs/ HDR a joint venture
|
|
|
18.7
|
%
|
|
|
—
|
|
Macerich
|
|
|
11.2
|
%
|
|
|
—
|
|
Cintas
|
|
|
11.3
|
%
|
|
|
—
|
|
Firenze
|
|
|
25.3
|
%
|
|
|
—
|
|
For
the six months ended March 31, 2017 and 2016, the Company had the following
suppliers that
represented more than 10% of direct material costs.
|
|
March 31, 2017
|
|
March 31, 2016
|
CED Greentech
|
|
|
62.1
|
%
|
|
|
—
|
|
Simpliphi Power
|
|
|
32.1
|
%
|
|
|
—
|
|
15.
SUBSEQUENT EVENTS
During
the period commencing April 1, 2017 through May 5, 2017, the Company received $75,000 from 2 investors pursuant to private placement
agreements with the investors to purchase 93,750 shares of the Company’s $0.001 par value common stock at a purchase price
equal to $0.80 for each share of Common stock.