Our consolidated financial statements included in this Form 10-Q
are as follows:
These consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial
information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. Operating results for the interim period ended June 30, 2017 are not necessarily
indicative of the results that can be expected for the full year.
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 six months 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 $9,891,255
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 nine months ended June 30, 2017 and 2016 the Company reported revenues
of $388,541 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 June
30, 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 June 30, 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 June 30, 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 $150,049 and $436,529 in cash and cash equivalents
as of June 30, 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 June 30, 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 June 30, 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. On June 9, 2017, the Company implemented an employee stock based compensation
plan but has not yet issued any securities under this 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 2017-11, 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,
|
|
Nine Months ended,
|
June 30, 2016
|
|
June 30, 2016
|
Total revenues
|
|
$
|
3,750
|
|
$
|
1,892,625
|
Net Income (loss)
|
|
|
(644,451)
|
|
|
(3,297,292)
|
Basic net income (loss) per common share
|
|
$
|
(0.02)
|
|
$
|
(0.12)
|
5. FIXED ASSETS
During the nine months ending June 30, 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 nine months ending June 30, 2017.
Fixed assets consist of the following as of
June 30, 2017 and September 30, 2016:
|
|
June 30, 2017
|
|
September 30, 2016
|
Machinery and equipment
|
|
$
|
748,028
|
|
|
$
|
769,276
|
Furniture and fixtures
|
|
|
72,253
|
|
|
|
72,484
|
Total
|
|
|
820,281
|
|
|
|
841,760
|
Less: accumulated depreciation
|
|
|
(133,864
|
)
|
|
|
(58,785)
|
Fixed assets, net
|
|
$
|
686,417
|
|
|
$
|
782,975
|
Depreciation expense for the nine months ended
June 30, 2017 and 2016 was $76,838 and $31,825, 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 were initially 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 June 30, 2017 and September 30, 2016:
|
|
June 30, 2017
|
|
September 30, 2016
|
Camp Pendleton FractalGrid
|
|
$
|
4,630,905
|
|
|
$
|
4,625,339
|
Less: accumulated depreciation
|
|
|
(1,077,411
|
)
|
|
|
(57,501)
|
Fixed assets, net
|
|
$
|
3,553,494
|
|
|
$
|
4,567,838
|
Depreciation expense for the nine months ended
June 30, 2017 and 2016 was $1,019,910 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 interoperate 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 deemed
to be the fair value of the assets at the time of the acquisition.
The FlexPower system consist of the following
as of June 30, 2017 and September 30, 2016:
|
|
June 30, 2017
|
|
September 30, 2016
|
FlexPower System
|
|
$
|
20,078,097
|
|
|
$
|
20,007,624
|
Less: accumulated amortization
|
|
|
(1,328,842
|
)
|
|
|
(331,638)
|
Intangible assets, net
|
|
$
|
18,749,255
|
|
|
$
|
19,675,986
|
Amortization expense for the nine months ended
June 30, 2017 and 2016 was $997,204 and $0, respectively.
8. INTANGIBLE AND OTHER ASSETS
Intangible assets consist of the following
as of June 30, 2017 and September 30, 2016:
|
|
June 30, 2017
|
|
September 30, 2016
|
Patents
|
|
$
|
86,208
|
|
|
$
|
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
|
|
|
(346,455
|
)
|
|
|
(137,546)
|
Intangible assets, net
|
|
$
|
2,282,725
|
|
|
$
|
2,467,930
|
Amortization expense for the nine months ended
June 30, 2017 and 2016 was $208,909 and $1,873, respectively.
9. RELATED PARTY TRANSACTIONS
On October 1, 2014, the Company entered
into a Consulting agreement, as amended 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 $15,000 per month, a taxable insurance stipend,
and a 0.5% bonus on revenues plus reimbursable expenses incurred until cancelled by either party. During the nine months ending
June 30, 2017, $145,157 was recorded as a consulting expense under this agreement. As of June 30, 2017. Mr. Schultz was owed $537
in accrued compensation and unreimbursed expenses in accordance with this agreement.
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, a taxable insurance stipend,
and a 0.5% bonus on revenues plus reimbursable expenses incurred. During the nine months ending June 30, 2017, $145,157 was recorded
as a consulting expenses under this this agreement. As of June 30, 2017. Mr. Bradford was owed $28,314 in accrued compensation
and unreimbursed expenses in accordance with this agreement.
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 provides services to the Company in exchange for $2,000 to $2,250 per week, a taxable insurance stipend, and a 0.5%
bonus on revenues plus reimbursable expenses incurred. During the nine months ending June 30, 2017, $89,794 was recorded as a
consulting expenses under this this agreement. As of June 30, 2017. Mr. Huber was owed $9,083 in accrued compensation and unreimbursed
expenses in accordance with this agreement.
On March 10, 2017, the Company entered
into a Consulting agreement with Adam Maher, its Senior Vice President for management and business development services. In accordance
with this agreement, Mr. Maher provides services to the Company in exchange for $2,308 per week a 0.5% bonus on revenues, 2.0%
on revenue from direct sales plus reimbursable expenses incurred. $40,700 was recorded as a consulting expenses under this this
agreement. As of June 30, 2017. Mr. Maher was owed $939 in accrued compensation and unreimbursed expenses in accordance with this
agreement.
The Company’s line of business requires
high skilled employees who are appropriately compensated for their specialized skills. Employment agreements range from $90,000
to $172,500 per year, include a taxable stipend for healthcare, performance bonuses and are subject to standard payroll taxes.
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 subsequent due diligence, CleanSpark discovered that they had actually assumed $275,586
in liabilities. As a result of the overage in assumed liabilities, Holdings 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 June 30, 2017 and September 30, 2016:
|
|
June 30, 2017
|
|
September 30, 2016
|
Prepaid stock compensation
|
|
$
|
—
|
|
|
$
|
50,130
|
Prepaid compensation
|
|
|
4,250
|
|
|
|
|
Prepaid rents
|
|
|
850
|
|
|
|
850
|
Prepaid dues and subscriptions
|
|
|
8,590
|
|
|
|
—
|
Prepaid insurance and bonds
|
|
|
24,434
|
|
|
|
6,742
|
Total prepaid expenses
|
|
$
|
40,624
|
|
|
$
|
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 nine months ended June 30, 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 nine months ending June 30, 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
June 30, 2017, there were 33,277,221 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 June 30, 2017, the Company received $775,000 from 21 investors pursuant to private placement agreements with the investors
to purchase 968,750 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.
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
April 13, 2017, the Company issued 25,000 shares of common stock to a consultant for services the shares were valued at $2.75
per shares or $68,750, which was the quoted closing price of our Common stock on the date of issuance.
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 warrant
activity during the year ended September 30, 2016 and nine months ended June 30, 2017.
|
|
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, June 30, 2017
|
|
|
8,612,100
|
|
|
$
|
0.85
|
As of June 30, 2017, there are warrants exercisable
to purchase 8,612,100 shares of common stock in the Company.
NOTE 13. STOCK OPTIONS
The Company sponsors
a stock-based incentive compensation plan known as the 2017 Incentive Plan (the “Plan”), which was established by the
Board of Directors of the Company in June 2017. A total of 3,000,000 shares were initially reserved for issuance under the Plan.
No options have been granted at June 30, 2017.
The Plan allows the Company
to grant incentive stock options, non-qualified stock options, stock appreciation right, or restricted stock. The incentive stock
options are exercisable for up to ten years, at an option price per share not less than the fair market value on the date the option
is granted. The incentive stock options are limited to persons who are regular full-time employees of the Company at the date of
the grant of the option. Non-qualified options may be granted to any person, including, but not limited to, employees, independent
agents, consultants and attorneys, who the Company’s Board believes have contributed, or will contribute, to the success
of the Company. Non-qualified options may be issued at option prices of less than fair market value on the date of grant and may
be exercisable for up to ten years from date of grant. The option vesting schedule for options granted is determined by the Board
of Directors at the time of the grant. The Plan provides for accelerated vesting of unvested options if there is a change in control,
as defined in the Plan.
14. 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 June 30, 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 June
30, 2017, are $7,125 and $19,335 for the fiscal years ending September 30, 2017 and 2018, respectively.
15. MAJOR CUSTOMERS AND VENDORS
For the nine months ended June 30, 2017
and 2016, the Company had the following customers that represented more than 10% of sales.
|
|
June 30, 2017
|
|
June 30, 2016
|
Bethel-Webcor JV-1
|
|
|
11.8
|
%
|
|
|
—
|
Jacobs/ HDR a joint venture
|
|
|
15.2
|
%
|
|
|
—
|
Macerich
|
|
|
21.4
|
%
|
|
|
—
|
Firenze
|
|
|
23.4
|
%
|
|
|
—
|
For the nine months ended June 30, 2017 and
2016, the Company had the following
suppliers that represented more than 10% of direct material
costs.
|
|
June 30, 2017
|
|
June 30, 2016
|
CED Greentech
|
|
|
45.7
|
%
|
|
|
—
|
Simpliphi Power
|
|
|
12.3
|
%
|
|
|
—
|
16. SUBSEQUENT EVENTS
During the period commencing July 1, 2017 through
August 10, 2017, the Company received $75,000 from 6 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.