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, 2019 are not necessarily indicative
of the results that can be expected for the full year.
The accompanying notes are an integral
part of these unaudited consolidated financial statements.
The accompanying notes are an integral
part of these unaudited consolidated financial statements.
The accompanying notes are an integral
part of these unaudited consolidated financial statements.
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND LINE OF BUSINESS
Organization
CleanSpark,
Inc. (“CleanSpark”, “we”, “our”, 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, we began operations in the alternative
energy sector.
In December 2014, the Company changed its name to
Stratean Inc. through a short-form merger in order to better reflect its 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 the 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.
On January 22, 2019, CleanSpark entered into
an Agreement with Pioneer Critical Power, Inc., whereby it acquired certain intellectual property assets and clients lists. As
consideration the Company issued to its sole shareholder (i) 1,750,000 of the common stock of CleanSpark, (ii) a five-year warrant
to purchase 500,000 shares of CleanSpark common stock at an exercise price of $1.60 per share, and (iii) a five-year warrant to
purchase 500,000 shares of CleanSpark common stock at an exercise price of $2.00 per share. As a result of the transaction Pioneer
Critical Power Inc. became a wholly owned subsidiary of CleanSpark Inc. On February 1, 2019, Pioneer Critical Power, Inc. was
renamed CleanSpark Critical Power Systems, Inc.
Line of Business
Through 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 the nine months ended June 30, 2019.
Through CleanSpark Critical Power Systems, Inc.,
the Company provides customer hardware solutions for distributed energy systems that serve military and commercial residential
properties. The equipment is generally sold under negotiated price contracts.
2. SUMMARY OF SIGNIFICANT POLICIES
Basis of Presentation and Liquidity
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.
The Company has incurred losses
for the past several years while developing infrastructure and its software platforms. As shown in the accompanying unaudited consolidated
financial statements, the Company incurred net losses of $14,020,002 during the nine months ended June 30, 2019. In response to
these conditions and to ensure the Company has sufficient capital for ongoing operations for a
minimum
of 12 months
we
have raised additional capital through the sale of debt and equity
securities pursuant to a registration statement on Form S-3. (See Note 7 for additional details.) As of June 30, 2019, the Company
had working capital of approximately $10,101,314.
Principles of Consolidation
The accompanying consolidated
financial statements include the accounts of CleanSpark, Inc., and its wholly owned operating subsidiaries, CleanSpark, LLC, CleanSpark,
II, LLC and CleanSpark Critical Power Systems Inc. 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 impairment, impairments and estimations of long-lived assets, revenue recognition
on percentage of completion type contracts, allowances for uncollectible accounts, 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
– Upon adoption of ASC Topic 606, the Company revised its accounting policy on revenue recognition from the policy provided
in the Notes to Consolidated Financial Statements included in our September 30, 2018 10-K. The revised accounting policy on revenue
recognition is provided below.
Engineering & Construction Contracts
and Service Contracts
The company recognizes engineering
and construction contract revenue over time, as performance obligations are satisfied, due to the continuous transfer of control
to the customer. Engineering and construction contracts are generally accounted for as a single unit of account (a single performance
obligation) and are not segmented between types of services. The company recognizes revenue based primarily on contract cost incurred
to date compared to total estimated contract cost (an input method). The input method is the most faithful depiction of the company’s
performance because it directly measures the value of the services transferred to the customer. Customer-furnished materials, labor
and equipment and, in certain cases, subcontractor materials, labor and equipment, are included in revenue and cost of revenue
when management believes that the company is acting as a principal rather than as an agent (i.e., the company integrates the materials,
labor and equipment into the deliverables promised to the customer). Customer-furnished materials are only included in revenue
and cost when the contract includes construction activity and the company has visibility into the amount the customer is paying
for the materials or there is a reasonable basis for estimating the amount. The company recognizes revenue, but not profit, on
certain uninstalled materials that are not specifically produced, fabricated, or constructed for a project. Revenue on these uninstalled
materials is recognized when the cost is incurred (when control is transferred). Changes to total estimated contract cost or losses,
if any, are recognized in the period in which they are determined as assessed at the contract level. Pre-contract costs are expensed
as incurred unless they are expected to be recovered from the client. Project mobilization costs are generally charged to project
costs as incurred when they are an integrated part of the performance obligation being transferred to the client. Customer payments
on engineering and construction contracts are typically due within 30 to 45 days of billing, depending on the contract.
For service contracts
(including maintenance contracts) in which the company has the right to consideration from the customer in an amount that corresponds
directly with the value to the customer of the company’s performance completed to date, revenue is recognized when services
are performed and contractually billable. Service contracts that include multiple performance obligations are segmented between
types of services. For contracts with multiple performance obligations, the company allocates the transaction price to each performance
obligation using an estimate of the stand-alone selling price of each distinct service in the contract. Revenue recognized on service
contracts that have not been billed to clients is classified as a current asset under contract assets on the Consolidated Balance
Sheet. Amounts billed to clients in excess of revenue recognized on service contracts to date are classified as a current liability
under contract liabilities. Customer payments on service contracts are typically due within 30 days of billing, depending on the
contract.
Contract assets represent
revenue recognized in excess of amounts billed and include unbilled receivables (typically for cost reimbursable contracts) of
$0 and contract work in progress (typically for fixed-price contracts) of $4,282 as of June 30, 2019. Unbilled receivables, which
represent an unconditional right to payment subject only to the passage of time, are reclassified to accounts receivable when they
are billed under the terms of the contract. Advances that are payments on account of contract assets of $0 and $0 as of June 30,
2019 and September 30, 2018, respectively, have been deducted from contract assets. Contract liabilities represent amounts billed
to clients in excess of revenue recognized to date. The Company recorded $0 and $0 in contract liabilities as of June 30, 2019
and September 30, 2018, respectively.
Revenues from Sale of Equipment
Performance Obligations Satisfied at a point in
time.
We recognize revenue on
agreements for non-customized equipment
we
sell on a standardized basis to the market
at a point in time. We recognize revenue at the point in time that the customer obtains control of the good, which is generally
no earlier than when the customer has physical possession of the product. We use proof of delivery for certain large equipment
with more complex logistics, whereas the delivery of other equipment is estimated based on historical averages of in-transit periods
(i.e., time between shipment and delivery).
In situations where
arrangements include customer acceptance provisions based on seller or customer-specified objective criteria, we recognize revenue
when we have concluded that the customer has control of the goods and that acceptance is likely to occur. We generally do not provide
for anticipated losses on point in time transactions prior to transferring control of the equipment to the customer.
Our billing terms for these point in time
equipment contracts vary and generally coincide with delivery to the customer; however, within certain businesses, we receive
progress payments from customers for large equipment purchases, which is generally to reserve production slots with our
manufacturing partners, which are recorded as liabilities. The Company recorded $428,042 and $0 in contract liabilities as of
June 30, 2019 and September 30, 2018, respectively.
Service Performance obligations
satisfied over time.
We enter into long-term
product service agreements with our customers primarily within our microgrid segment. These agreements require us to provide preventative
maintenance, and standby support services that include certain levels of assurance regarding system performance throughout the
contract periods, these contracts will generally range from 5 to 10 years. We account for items that are integral to the maintenance
of the equipment as part of our service related performance obligation, unless the customer has a substantive right to make a separate
purchasing decision (e.g., equipment upgrade). Contract modifications that extend or revise contract terms are not uncommon and
generally result in our recognizing the impact of the revised terms prospectively over the remaining life of the modified contract
(i.e., effectively like a new contract). Revenues are recognized for these arrangements on a straight line basis consistent with
the nature, timing and extent of our services, which primarily relate to routine maintenance and as needed product repairs. Our
billing terms for these contracts vary, but we generally invoice periodically as services are provided.
Variable Consideration
The nature of the company’s
contracts gives rise to several types of variable consideration, including claims and unpriced change orders; awards and incentive
fees; and liquidated damages and penalties. The company recognizes revenue for variable consideration when it is probable that
a significant reversal in the amount of cumulative revenue recognized will not occur. The company estimates the amount of revenue
to be recognized on variable consideration using the expected value (i.e., the sum of a probability-weighted amount) or the most
likely amount method, whichever is expected to better predict the amount. Factors considered in determining whether revenue associated
with claims (including change orders in dispute and unapproved change orders in regard to both scope and price) should be recognized
include the following: (a) the contract or other evidence provides a legal basis for the claim, (b) additional costs were caused
by circumstances that were unforeseen at the contract date and not the result of deficiencies in the company’s performance,
(c) claim-related costs are identifiable and considered reasonable in view of the work performed, and (d) evidence supporting the
claim is objective and verifiable. If the requirements for recognizing revenue for claims or unapproved change orders are met,
revenue is recorded only when the costs associated with the claims or unapproved change orders have been incurred. Back charges
to suppliers or subcontractors are recognized as a reduction of cost when it is determined that recovery of such cost is probable
and the amounts can be reliably estimated. Disputed back charges are recognized when the same requirements described above for
claims accounting have been satisfied.
The company generally
provides limited warranties for work performed under its engineering and construction contracts. The warranty periods typically
extend for a limited duration following substantial completion of the company’s work on a project. Historically, warranty
claims have not resulted in material costs incurred.
Practical Expedients
If the company has
a right to consideration from a customer in an amount that corresponds directly with the value of the company’s performance
completed to date (a service contract in which the company bills a fixed amount for each hour of service provided), the company
recognizes revenue in the amount to which it has a right to invoice for services performed.
The company does not adjust
the contract price for the effects of a significant financing component if the company expects, at contract inception, that the
period between when the company transfers a service to a customer and when the customer pays for that service will be one year
or less.
The company has made an
accounting policy election to exclude from the measurement of the transaction price all taxes assessed by governmental authorities
that are collected by the company from its customers (use taxes, value added taxes, some excise taxes).
For the nine months ended June 30,
2019 and 2018, the Company reported revenues of $2,209,542 and $466,931, respectively.
Retention receivable
is the amount withheld by a customer until a contract is completed. Retention receivables of $42,422 and $17,751 were included
in the balance of trade accounts receivable as of June 30, 2019 and September 30, 2018, respectively.
Cash and cash equivalents
–
For purposes of the statements 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 $8,016,078 and $412,777 in cash and no cash
equivalents as of June 30, 2019 and September 30, 2018, 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, 2019, the cash
balance in excess of the FDIC limits was $7,766,078. The Company has not experienced any losses in such accounts and believes it
is not exposed to any significant credit risk in these accounts. The Company had certain customers whose revenue individually represented
10% or more of the Company’s total revenue. (See Note 14 for details.)
Stock-based compensation
– The Company follows the guidelines in FASB Codification Topic ASC 718-10 “
Compensation-Stock Compensation,
”
which requires companies to measure the cost of employee services received in exchange for an award of an equity instrument based
on the grant-date fair value of the award. Stock-based compensation expense is recognized on a straight-line basis over the requisite
service period. The Company accounts for non-employee share-based awards in accordance with FASB ASC 505-50 under which the awards
are valued at the earlier of a commitment date or upon completion of the services, based on the fair value of the equity instruments,
and are recognized as expense over the service period. 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 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. As of June 30, 2019, there are 38,921,055 shares issuable upon exercise of
outstanding options, warrants and convertible debt which have been excluded as anti-dilutive.
Fair Value of financial
instruments
–The carrying value of cash, accounts payable and accrued expenses, and debt (See Notes 6 & 7) approximate
their fair values because of the short-term nature of these instruments. Management believes the Company is not exposed to significant
interest or credit risks arising from these financial instruments. The carrying amount of the Company’s long-term convertible
debt is also stated at fair value of $12,500,000 since the stated rate of interest approximates market rates.
Fair value is defined as
the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation
techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company
utilizes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last
unobservable.
|
•
|
Level 1 Quoted prices in active markets for
identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets
involving identical assets.
|
|
•
|
Level 2 Quoted prices for similar assets and
liabilities in active markets; quoted prices included for identical or similar assets and liabilities that are not active; and
model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. These
are typically obtained from readily-available pricing sources for comparable instruments.
|
|
•
|
Level 3 Unobservable inputs, where there is
little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own beliefs about the
assumptions that market participants would use in pricing the asset or liability, based on the best information available in the
circumstances.
|
Reclassifications
– Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications
had no effect on the reported results of operations or net assets of the Company.
Recently issued accounting pronouncements
In June 2018, the FASB
issued ASU 2018-07, "Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,"
which modifies the accounting for share-based payment awards issued to nonemployees to largely align it with the accounting for
share-based payment awards issued to employees. ASU 2018-07 is effective for us for annual periods beginning October 1, 2019. We
are evaluating the potential impact to our financial position or results of operations.
In August 2018, the FASB
issued ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which allows for the capitalization
of certain implementation costs incurred in a hosting arrangement that is a service contract. ASU 2018-15 allows for either
retrospective adoption or prospective adoption to all implementation costs incurred after the date of adoption. ASU 2018-15 is
effective for fiscal years beginning after December 15, 2019. We are currently evaluating the impact the adoption of this new standard
will have on our financial position and results of operations.
In February 2016, the
FASB issued ASU 2016-02, “Leases” (“ASC 842”). The guidance requires lessees to recognize almost all leases
on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model,
requiring leases to be classified as either operating or finance. Lessor accounting is similar to the current model, but updated
to align with certain changes to the lessee model and the new revenue recognition standard. Existing sale-leaseback guidance, including
guidance for real estate, is replaced with a new model applicable to both lessees and lessors. ASC 842 is effective for fiscal
years beginning after December 15, 2018. We are currently evaluating the impact the adoption of this new standard will have on
our financial position and results of operations.
The Company has evaluated
all other recent accounting pronouncements, and believes that none of them will have a material effect on the Company's financial
position, results of operations or cash flows.
3. ACQUISITION OF PIONEER CRITICAL POWER, INC. AND RELATED ASSETS
On January 22, 2019, CleanSpark
entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Pioneer Critical Power, Inc., a Delaware
corporation (the “Pioneer”), and CleanSpark Acquisition, Inc., a Delaware corporation and wholly-owned subsidiary of
CleanSpark (“Merger Sub”).
The Merger Agreement provides
that, subject to the terms and conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company (the
“Merger”), with Pioneer surviving the Merger as a wholly-owned subsidiary of CleanSpark. At the effective time of the
Merger, the issued and outstanding common shares of Pioneer were automatically converted into the right to receive: (i) 1,750,000
of the common stock of CleanSpark, (ii) a five-year warrant to purchase 500,000 shares of CleanSpark common stock at an exercise
price of $1.60 per share, and (iii) a five-year warrant to purchase 500,000 shares of CleanSpark common stock at an exercise price
of $2.00 per share. The Merger closed on January 22, 2019 with the filing of a Certificate of Merger in Delaware.
The Company accounted for
the acquisition of Pioneer as an asset acquisition under ASC 805, because the assets acquired did not meet the definition of a
business under ASC 805-10-55-4 as it lacked a substantive process at the time of acquisition.
The Company determined the fair value of the consideration
in accordance with ASC 820 as follows:
Consideration
|
|
Fair Value
|
1,750,000 shares of common stock
|
|
$
|
3,867,500
|
500,000 warrants @$1.60
|
|
|
1,102,417
|
500,000 warrants @$2.00
|
|
|
1,102,107
|
Total Consideration
|
|
$
|
6,072,024
|
The Company allocated the purchase price to the identifiable
assets as follows:
Purchase Price Allocation
|
|
|
Engineering designs
|
|
$
|
250,000
|
|
UL files
|
|
|
100,000
|
|
Customer list & non-compete agreement
|
|
|
5,722,024
|
|
|
|
$
|
6,072,024
|
|
On February 1, 2019, Pioneer Critical Power, Inc. was
renamed CleanSpark Critical Power Systems, Inc.
Support Agreements
As a condition to the Merger Agreement, on January
22, 2019, CleanSpark and Pioneer Power Solutions, Inc. (“Pioneer Power”), a Delaware corporation and sole shareholder
of Pioneer prior to the Merger, entered into a Non-Competition and Non-Solicitation Agreement whereby Pioneer Power agreed, among
other things, to not compete with the Company or solicit employees or customers of the Company for a period of four years.
As another condition to the Merger Agreement, on
January 22, 2019, CleanSpark, the Company and Pioneer Power entered into an Indemnity Agreement, whereby Pioneer Power agreed to
indemnify CleanSpark for any claims made by Myers Power Products, Inc. in the case titled
Myers Power Products, Inc. v. Pioneer
Power Solutions, Inc., Pioneer Custom Electrical Products, Corp., et al
., Los Angeles County Superior Court Case No. BC606546
(“Myers Power Case”) as they may relate to Pioneer or CleanSpark post-closing of the Merger Agreement.
Finally, as another condition to the Merger Agreement,
on January 22, 2019, CleanSpark and Pioneer Power entered into a Contract Manufacturing Agreement, whereby Pioneer Power shall
exclusively manufacture parallel switchgears, automatic transfer switches and related control and circuit protective equipment
for CleanSpark for a period of eighteen months. The agreement did not create exclusivity for Pioneer and CleanSpark may have other
providers perform contract manufacturing services, as desired.
4. CAPITALIZED SOFTWARE
Capitalized software consists of the following as of June
30, 2019 and September 30, 2018:
|
|
June
30, 2019
|
|
September
30, 2018
|
mVSO software
|
|
$
|
5,015,724
|
|
|
$
|
4,708,203
|
mPulse software
|
|
|
6,665,044
|
|
|
|
6,334,772
|
Capitalized Software:
|
|
|
11,680,768
|
|
|
|
11,042,975
|
Less: accumulated amortization
|
|
|
(3,291,361
|
)
|
|
|
(2,256,749)
|
Capitalized Software, net
|
|
$
|
8,389,407
|
|
|
$
|
8,786,226
|
In accordance with
ASC 985-20 the Company capitalized $637,793 in software development costs (including capitalized stock compensation cost of $68,750)
related to the enhancements created for our mPulse and mVSO 2.0 platforms during the nine months ended June 30, 2019.
Capitalized software
amortization recorded as product development expense for the nine months ended June 30, 2019 and 2018 was $1,034,612 and
$1,030,823, respectively.
5. INTANGIBLE ASSETS
Intangible assets consist of the following as of June
30, 2019 and September 30, 2018:
|
|
June
30, 2019
|
|
September
30 ,2018
|
Patents
|
|
$
|
74,112
|
|
|
$
|
71,962
|
Websites
|
|
|
16,482
|
|
|
|
16,482
|
Customer list and non-compete agreement
|
|
|
5,722,024
|
|
|
|
—
|
Trademarks
|
|
|
5,928
|
|
|
|
5,928
|
Engineering trade secrets
|
|
|
4,370,269
|
|
|
|
4,020,269
|
Software
|
|
|
—
|
|
|
|
26,990
|
Intangible assets:
|
|
|
10,188,815
|
|
|
|
4,141,631
|
Less: accumulated amortization
|
|
|
(2,143,784
|
)
|
|
|
(927,164)
|
Intangible assets, net
|
|
$
|
8,045,031
|
|
|
$
|
3,214,467
|
Amortization expense for the nine months ended June 30,
2019 and 2018 was $1,243,610 and $592,315, respectively.
6. FIXED ASSETS
Fixed assets consist of the following as of June 30, 2019
and September 30, 2018:
|
|
June 30, 2019
|
|
September 30, 2018
|
Machinery and equipment
|
|
$
|
136,890
|
|
|
$
|
130,191
|
Furniture and fixtures
|
|
|
75,122
|
|
|
|
54,251
|
Total
|
|
|
212,012
|
|
|
|
184,442
|
Less: accumulated depreciation
|
|
|
(129,350
|
)
|
|
|
(97,711)
|
Fixed assets, net
|
|
$
|
82,662
|
|
|
$
|
86,731
|
Depreciation expense for the nine months ended June
30, 2019 and 2018 was $31,639 and $40,390, respectively.
7. LOANS
Long term
Long-term loans payable consist of the following:
|
|
June 30, 2019
|
|
September 30, 2018
|
|
|
|
|
|
Promissory notes
|
|
$
|
—
|
|
|
$
|
150,000
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
150,000
|
Current
Current loans payable consist of the following:
|
|
June 30, 2019
|
|
September 30, 2018
|
|
|
|
|
|
Promissory notes
|
|
$
|
300,000
|
|
|
$
|
628,951
|
Insurance financing loans
|
|
|
34,935
|
|
|
|
10,257
|
Current loans payable:
|
|
|
334,935
|
|
|
|
639,208
|
Unamortized debt discount
|
|
|
—
|
|
|
|
(181,629)
|
|
|
|
|
|
|
|
|
Total, net of unamortized discount
|
|
$
|
334,935
|
|
|
$
|
457,579
|
Promissory Notes
On September 5, 2017,
the Company executed a 9% secured promissory note with a face value of $150,000 with an investor. Under the terms of the promissory
note, the Company received $150,000 and agreed to make monthly interest payments and repay the note principal 24 months from the
date of issuance. The note is secured by 150,000 shares which are held in escrow and would be issued to the note holder only in
the case of an uncured default. As of June 30, 2019, the Company owed $150,000 in principal and $1,146 in accrued interest under
the terms of the agreement and recorded interest expense of $10,096 and $10,097 during the nine months ended June 30, 2019 and
2018, respectively.
On October 6, 2017, the
Company executed an unsecured variable interest rate promissory note with a
maximum
interest rate of 58.3% and a face value of $45,000 with a financial institution. Under the terms of the promissory note the Company
received $45,000 and agreed to repay the note evenly over 12 months. As of September 30, 2018, the Company owed $3,750 in principal
and $450 in accrued interest under the terms of the agreement. The Company repaid all principal and outstanding interest on October
1, 2018. The Company recorded interest expense of $0 and $12,375 and for the nine months ended June 30, 2019 and 2018, respectively.
On November 11, 2017, the
Company executed a 10% secured promissory note with a face value of $100,000 with an investor. Under the terms of the promissory
note the Company received $100,000 and agreed to make monthly interest payments and repay the note principal 24 months from the
date of issuance. The note is secured by 100,000 shares which would be issued to the note holder only in the case of an uncured
default. As of June 30, 2019, the Company owed $100,000 in principal and $849 in accrued interest under the terms of the agreement
and recorded interest expense of $7,478 and $6,411 and for the nine months ended June 30, 2019 and 2018, respectively.
On November 20,
2017, the Company executed a 10% unsecured promissory note with a face value of $80,000 with an investor. Under the terms of
the promissory note the Company received $80,000 and agreed to make monthly interest payments and repay the note principal 12
months from the date of issuance. On November 21, 2018, the investor extended the maturity date to December 31, 2018. The
Company repaid all principal and outstanding interest on December 31, 2018. The Company recorded interest expense of $2,017
and $4,866 during the nine months ended June 30, 2019 and 2018, respectively.
On December 5, 2017, the
Company executed a 9% secured promissory note with a face value of $50,000 with an investor. Under the terms of the promissory
note the Company received $50,000 and agreed to make monthly interest payments and repay the note principal 24 months from the
date of issuance. The note is secured by 50,000 shares which would be issued to the note holder only in the case of an uncured
default. As of June 30, 2019, the Company owed $50,000 in principal and $383 in accrued interest under the terms of the agreement
and recorded interest expense of $3,367 and $2,552 for the nine months ended June 30, 2019 and 2018, respectively.
On January 12, 2018, the Company
executed an unsecured variable interest rate promissory note with a
maximum
interest
rate of 58.5% and a face value of $18,400 with a financial institution. Under the terms of the promissory note the Company received
$18,400 and agreed to repay the note and interest evenly over 12 months. As of September 30, 2018, the Company owed $6,133 in principal
and $184 in accrued interest under the terms of the agreement. The Company repaid all principal and outstanding interest on October
1, 2018. The Company recorded interest expense of $0 and $3,680 and for the nine months ended June 30, 2019 and 2018, respectively.
On May 22, 2018, the
Company executed an unsecured variable interest rate promissory note with a maximum interest rate of 51.0% and a face value
of $24,500 with a financial institution. Under the terms of the promissory note the Company received $24,500 and agreed to
repay the note and interest evenly over 12 months. As of September 30, 2018, the Company owed $18,375 in principal and $1,960
in accrued interest under the terms of the agreement. The Company repaid all principal and outstanding interest on October 1,
2018. The Company recorded interest expense of $0 and $0 and for the nine months ended June 30, 2019 and 2018,
respectively.
On June 15, 2018, the Company
entered into a 10% secured promissory note with a face value of $116,600 pursuant to which the Company received $110,000, net of
an original issue discount of 6% ($6,600). The Company also issued 116,600 5-year warrants exercisable at $0.80 in connection with
issuance of the promissory note. The note is secured by the Company’s accounts receivable. Under the terms of the promissory
note, the Company agreed to make monthly interest payments and repay the note principal on January 31, 2019. As of June 30, 2019,
the Company owed $0 in principal and $0 in accrued interest under the terms of the agreement and recorded interest expense of $3,217
during the nine months ended June 30, 2019. The Company determined the value associated with the warrants issued in connection
with the note to be $110,000 which was recorded as a debt discount. The aggregate original issue discount, and debt discount related
to the warrants have been accreted and charged to interest expenses as a financing expense in the amount of $48,424 and $479 for
the nine months ended June 30, 2019 and 2018, respectively. The unamortized discount as of June 30, 2019 amounted to $0. The Company
repaid all principal and outstanding interest on January 2, 2019.
On August 1, 2018,
the Company entered into a 10% secured promissory note with a face value of $130,625 pursuant to which the Company received
$125,000, net of an original issue discount of 4.5% ($5,625). The Company also issued 25,000 5-year warrants exercisable at
$0.80 in connection with purchase of the promissory note. The proceeds of the note were used to settle in full a note issued
on February 27, 2018. The Company determined the value associated with the warrants issued in connection with the note to be
$71,373 which was recorded as a debt discount. The aggregate original issue discount, and debt discount related to the
warrants have been accreted and charged to interest expenses as a financing expense in the amount of $38,499 the nine months
ended June 30, 2019. The unamortized discount as of June 30, 2019 amounted to $0. The Company repaid all principal and
outstanding interest on January 2, 2019. As of June 30, 2019, the Company owed $0 in principal and $0 in accrued interest
under the terms of the agreement and recorded interest expense of $3,003 and $0 and for the nine months ended June 30, 2019
and 2018, respectively.
On August 14, 2018, the Company
executed an unsecured variable interest rate promissory note with a
maximum
interest
rate of 58.57% and a face value of $19,600 with a financial institution. Under the terms of the promissory note the Company received
$19,600 and agreed to repay the note and interest evenly over 12 months. As of September 30, 2018, the Company owed $17,967 in
principal and $784 in accrued interest under the terms of the agreement. The Company repaid all principal and outstanding interest
on October 1, 2018. The Company recorded interest expense of $0 and $0 and for the nine months ended June 30, 2019 and 2018, respectively.
On September 20, 2018,
the Company executed a 10% unsecured promissory note with a face value of $52,500 with an investor, net of an original issue
discount of 5% ($2,500). Under the terms of the promissory note the Company received $50,000 and agreed to repay the note
principal and all accrued interest on December 31, 2018. The Company also issued 25,000 5-year warrants exercisable at $0.80
in connection with purchase of the promissory note. The Company determined the value associated with the warrants issued in
connection with the notes to be $50,000 which was recorded as a debt discount. The aggregate original issue discount, and
debt discount related to the warrants have been accreted and charged to interest expenses as a financing expense in the
amount of $47,353 the nine months ended June 30, 2019. The Company repaid all principal and outstanding interest on December
31, 2018. The Company recorded interest expense of $1,323 and $0 and for the nine months ended June 30, 2019 and 2018,
respectively.
On September 21,
2018, the Company executed a 10% unsecured promissory note with a face value of $52,500 with an investor, net of an original
issue discount of 5% ($2,500). Under the terms of the promissory note the Company received $50,000 and agreed to repay the
note principal and all accrued interest on December 31, 2018. The Company also issued 25,000 5-year warrants exercisable at
$0.80 in connection with purchase of the promissory note. The Company has determined the value associated with the warrants
issued in connection with the notes to be $50,000 which has been recorded as a debt discount. The aggregate original issue
discount, and debt discount related to the warrants have been accreted and charged to interest expenses as a financing
expense in the amount of $47,353 the nine months ended June 30, 2019. On December 31, 2018, the Company settled all
obligations under the promissory note through the issuance of 25,000 shares of the Company’s common stock and payment
of $25,000 in outstanding principal and interest then outstanding of $1,467. A loss on settlement of debt of $26,225 was
recorded related to the settlement of debt. The Company recorded interest expense of $1,323 and $0 and for the nine months
ended June 30, 2019 and 2018, respectively.
Insurance financing loans
In February 2018, the
Company executed two unsecured 6.1% installment loans with a total face value of $35,089 with a financial institution to finance
its insurance policies. Under the terms of the installment notes the Company received $35,089 and agreed to make equal payments
and repay the notes’ principal 10 months from their dates of issuance. The Company repaid all principal and outstanding interest
on December 1, 2018.
On February 11, 2019, the
Company executed an unsecured 5.6% installment loan with a total face value of $78,603 with a financial institution to finance
its insurance policies. Under the terms of the installment notes the Company received $76,800 and agreed to make equal payments
and repay the note 10 months from the date of issuance. As of June 30, 2019, $34,935 in principal remained outstanding.
8. CONVERTIBLE NOTES PAYABLE
Convertible note repayments
EMA Financial, LLC – August 21, 2018 Promissory
Note
On January 3, 2019,
the Company settled all remaining obligations under the EMA note through the payment of all outstanding principal, prepayment penalties
and interest then outstanding of $225,000, $35,000 and $10,736, respectively. The unamortized debt discount on the note of $176,045
was fully amortized to interest expense during the nine months ended June 30, 2019.
In connection with the issuance of the Note, the
Company issued to the Purchaser, as a commitment fee, 137,500 returnable shares of its common stock. As a result of the repayment
the shares were returned to treasury and cancelled on January 8, 2019.
Labrys Fund, LP – September 19, 2018
Promissory Note
On January 3, 2019, the Company settled
all remaining obligations under the Labrys Fund, LP note through the payment of all outstanding principal and interest then
outstanding of $330,000 and $11,609, respectively. The unamortized discount on the note of $309,834 was fully amortized to
interest expense during the nine months ended June 30, 2019.
Long-Term convertible notes
Securities
Purchase Agreement – December 31, 2018
On December 31, 2018, the
Company entered into a Securities Purchase Agreement (the “SPA”) with an otherwise unaffiliated third-party institutional
investor (the “Investor”), pursuant to which the Company issued to the Investor a Senior Secured Redeemable Convertible
Debenture (the “Debenture”) in the aggregate face value of $5,250,000. The note is secured by all assets of the Company.
The Debenture has a maturity date of two years from the issuance date and the Company has agreed to pay compounded interest on
the unpaid principal balance of the Debenture at the rate equal 7.5% per annum. Interest is payable on the date the applicable
principal is converted or on maturity. The interest must be paid in cash and, in certain circumstances, may be paid in shares of
common stock.
The transactions described above closed
on December 31, 2018. In connection with the issuance of the Debenture and pursuant to the terms of the SPA, the Company
issued to the Investor 100,000 shares of common stock and a Common Stock Purchase Warrant to acquire up to 3,083,333 shares
of common stock for a term of three years (the “Warrant”) on a cash-only basis at an exercise price of $2.00 per
share with respect to 1,250,000 Warrant Shares, $2.50 with respect to 1,000,000 Warrant Shares, $5.00 with respect to 500,000
Warrant Shares and $7.50 with respect to 333,333 Warrant Shares. The warrants and shares issued were fair valued and a debt
discount of $4,995,000 was recorded as a result of the issuance of the warrants and shares and the recognition of a
beneficial conversion feature on the Debenture. The Company also paid a $5,000 due diligence fee prior to receiving the
funding which was also recorded as a debt discount.
Pursuant to the terms
of the SPA, the Investor agreed to tender to the Company the sum of $5,000,000, of which the Company received the full amount as
of the closing.
Prior to the maturity date,
provided that no trigger event has occurred, the Company will have the right at any time upon 30 trading days’ prior written
notice, in its sole and absolute discretion, to redeem all or any portion of the Debenture then outstanding by paying to the Investor
an amount equal to 140% of the of the portion of the Debenture being redeemed.
The Investor may convert
the Debenture into shares of the Company’s common stock at a conversion price equal to 95% of the mathematical average of
the 5 lowest individual daily volume weighted average prices of the common stock, less $.05 per share, during the period beginning
on the issuance date and ending on the maturity date subject to certain floor price restrictions. In the event certain equity conditions
exist, the Company may require that the Investor convert the Debenture. In no event shall the Debenture be allowed to affect a
conversion if such conversion, along with all other shares of Company common stock beneficially owned by the Investor and its affiliates
would exceed 4.99% of the outstanding shares of the common stock of the Company.
While the note is outstanding if Triggering Events
occur the conversion rate may be decreased by 10% and the interest rate increased by 10% for each Triggering Event.
On January 7, 2019, the
investor converted $2,500,000 in principal and $875,000 in interest as a conversion premium, for 1,784,729 shares of the Company
common stock at an effective conversion price of $1.89, due to a trigger event for the Company not filing its annual report on
Form 10-K for the fiscal year ended September 30, 2018 on or before December 31, 2018.
On March 6, 2019, the
investor converted $1,000,000 in principal and $350,000 in interest as a conversion premium, for 713,892 shares of the Company
common stock at an effective conversion price of $1.89, due to a trigger event for the Company not filing its annual report on
Form 10-K for the fiscal year ended September 30, 2018 on or before December 31, 2018.
The aggregate debt discount
has been accreted and charged to interest expenses as a financing expense in the amount of $3,932,292 during the nine months ended
June 30, 2019.
The Debenture at June 30,
2019 consists of:
Principal
|
|
$
|
1,750,000
|
Unamortized debt discount
|
|
|
(1,317,708)
|
Total, net of unamortized discount
|
|
|
432,292
|
Securities Purchase Agreement – April 17, 2019
On April 17, 2019, the Company entered into
a Securities Purchase Agreement (the “Agreement”) with an otherwise unaffiliated third-party institutional investor
(the “Investor”), pursuant to which the Company agreed to issue to the Investor a $10,750,000 face value Senior Secured
Redeemable Convertible Promissory Note (the “Debenture”) with a 7.5% original issue discount, 2,150 shares of our Series
B Preferred Stock with a 7.5% original issue discount, a Common Stock Purchase Warrant (the “Warrant”) on a cash-only
basis to acquire up to 2,300,000 shares (the “Warrant Shares”) of our common stock and 1,250,000 shares of our Common
Stock. The aggregate purchase price for the Debenture, the Series B Preferred Stock the Warrant and the Common Stock is $20,000,000.
(See Notes 10 and 11 for additional details.)
Pursuant to the first closing of the agreement, which
occurred on April 18, 2019, the Investor agreed to tender to the Company the sum of $10,000,000, for the Debenture, the Common
Stock and the Warrant. No additional closings to sell the preferred stock had occurred as of June 30, 2019.
The Debenture has a maturity date of two years from
the issuance date and the Company has agreed to pay compounded interest on the unpaid principal balance of the Debenture at the
rate equal 7.5% per annum. Interest is payable on the date the applicable principal is converted or on maturity. The interest must
be paid in cash and, in certain circumstances, may be paid in shares of common stock.
Prior to the maturity date, provided that
no trigger event has occurred, the Company will have the right at any time upon 30 trading days’ prior written notice, in
its sole and absolute discretion, to redeem all or any portion of the Debenture then outstanding by paying to the Investor an amount
equal to 145% of the of the portion of the Debenture being redeemed.
The Investor may convert the Debenture into shares
of the Company’s common stock at a conversion price equal to 90% of the mathematical average of the 5 lowest individual daily
volume weighted average prices of the common stock, less $0.075 per share, during the period beginning on the issuance date and
ending on the maturity date subject to certain floor price restrictions. In the event certain equity conditions exist, the Company
may require that the Investor convert the Debenture. In no event shall the Debenture be allowed to effect a conversion if such
conversion, along with all other shares of Company common stock beneficially owned by the Investor and its affiliates would exceed
4.9% of the outstanding shares of the common stock of the Company.
While the note is outstanding
if Triggering Events occur the conversion rate may be decreased by 10% and the interest rate increased by 10% for each Triggering
Event.
The Debenture at June 30,
2019 consists of:
Principal
|
|
$
|
10,750,000
|
Unamortized debt discount
|
|
|
(9,675,000)
|
Total, net of unamortized discount
|
|
|
1,075,000
|
The aggregate debt discount has been accreted
and charged to interest expenses as a financing expense in the amount of $1,075,000 during the nine months ended June 30, 2019.
Summary
Principal – December 31, 2018 Note
|
|
$
|
1,750,000
|
Principal – April 17, 2019 Note
|
|
|
10,750,000
|
Total principal on convertible notes (long-term)
|
|
|
12,500,000
|
Unamortized debt discount
|
|
|
(10,992,708)
|
Total convertible notes, net of unamortized discount (long-term)
|
|
$
|
1,507,292
|
9. RELATED
PARTY TRANSACTIONS
Matthew Schultz- Chief Executive Officer and Director
The Company has a
consulting agreement with Matthew Schultz, our Chief Executive Officer, for management services. In accordance with this agreement,
as amended, Mr. Schultz earned $353,140 and $146,323, respectively during the nine months ended June 30, 2019 and 2018. The term
of the agreement is one year and automatically renews until cancelled by either party.
During the year ended September
30, 2018, the Company executed two 15% promissory notes with a total face value of $30,000 with the spouse of the CEO of our Company.
Under the terms of the promissory notes the Company received $30,000 and agreed to repay the note on demand. On January 1, 2019,
the Company settled all remaining obligations under the notes through the payment of all outstanding principal and interest then
outstanding. As of June 30, 2019, Company owed $0 in principal and $0 in accrued interest under the terms of the agreements. The
Company recorded interest expense of $1,147 during the nine months ended June 30, 2019.
Zachary Bradford –
President, Chief Financial Officer and Director
The Company has a consulting agreement
with ZRB Holdings, Inc, an entity wholly owned by Zachary Bradford, our Chief Financial Officer and director, for management
services. In accordance with this agreement, as amended, Mr. Bradford earned $353,140 and $146,323, respectively during the
nine months ended June 30, 2019 and 2018. The term of the agreement is one year and automatically renews until cancelled by
either party.
During the year ended September
30, 2018, the Company executed eleven 15% promissory notes with a total face value of $189,690 and executed two additional 15%
promissory notes with a total face value of $25,030 during the nine months ended June 30, 2019 with Zachary Bradford, its President
and Chief Financial Officer. Under the terms of the promissory notes the Company received a total of $214,720 and agreed to repay
the notes on demand. The Company recorded interest expense of $7,648 during the nine months ended June 30, 2019. On January 3,
2019, the Company settled all remaining obligations under the notes through the payment of all outstanding principal and interest
then outstanding. As of June 30, 2019, Company owed $0 in principal and $0 in accrued interest under the terms of the agreement.
During the nine months ended
June 30, 2019, the Company paid Blue Chip Accounting, LLC $49,288 for accounting, tax, administrative services and reimbursement
for office supplies. Blue Chip Accounting, LLC(“Blue Chip) is 50% beneficially owned by the Company’s CFO and President
Zachary Bradford. Blue Chip performed all services at discounted rates and none of the charges were associated with work performed
by Mr. Bradford. The services consisted of preparing and filing tax returns, bookkeeping, accounting and administrative support
assistance.
Bryan Huber – Chief
Operations Officer and Director
On August 28, 2018,
the Company executed an agreement with Zero Positive, LLC an entity controlled by Mr. Huber. In accordance with the agreement with
Zero Positive, LLC, Mr. Huber earned $127,772, during the nine months ended June 30, 2019.
Under the agreement Mr. Huber
was also granted a one-time bonus of $50,000 on August 28, 2018, payment of which will be deferred until certain conditions are
met. As of June 30, 2019, the bonus had not been paid. The term of the agreement is one year and automatically renews until cancelled
by either party.
On September 28, 2018,
in connection with the consulting agreement executed with Zero Positive, LLC Company issued warrants to purchase 900,000
shares of common stock at an exercise price of $0.80 per share to Zero Positive. The warrants were valued at $2,607,096 using
the Black Scholes option pricing model based upon the following assumptions: term of 10 years, risk free interest rate of
3.05%, a dividend yield of 0% and volatility rate of 191%. The warrants vest as follows: 300,000 vested immediately, the
balance vest evenly on the last day of each month over forty-two months beginning August 31, 2018. As of June 30, 2019,
457,143 warrants had vested, and the Company recorded an expense of $372,442 during the nine months ended June 30, 2019.
During the nine months ended
June 30, 2018, the Company had a consulting agreement with Bryan Huber, our Chief Operations Officer, for management services.
In accordance with this agreement, as amended, Mr. Huber earned $91,573 during the nine months ended June 30, 2018.
Larry McNeill – Chairman of the Board
of Directors
During the year ended
September 30, 2018, the Company executed eight 15% promissory notes with a total face value of $163,100 and executed an additional
15% promissory note with a total face value of $50,000 during the nine months ended June 30, 2019 with Larry McNeill, a Director
of the Company. Under the terms of the promissory notes the Company received a total of $213,100 and agreed to repay the notes
on demand. The Company recorded interest expense of $8,016 during the nine months ended June 30, 2019. On December 31, 2018, the
Company settled all remaining obligations under the note through the payment of all outstanding principal and interest then outstanding.
Effective January 1, 2019,
the Company agreed to pay non-executive board members $2,500 per month. Mr. McNeil earned $15,000 in Board compensation during
the nine months ended June 30, 2019.
10. STOCKHOLDERS EQUITY
Overview
The Company’s authorized
capital stock consists of 100,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock,
par value $0.001 per share. As of June 30, 2019, there were 44,658,282 shares of common stock issued and outstanding and 1,000,000
shares of preferred stock issued and outstanding.
Certificate of Preferred Stock Designation
On April 16, 2019,
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 B Preferred Stock, consisting of up to one hundred thousand (100,000) shares, par value
$0.001. Under the Certificate of Designation, the holders of Series B Preferred Stock are entitled to the following powers,
designations, preferences and relative participating, optional and other special rights, and the following qualifications,
limitations and restrictions, among others as set forth in the Certificate of Designation:
|
§
|
The holders of shares of Series B Preferred Stock will have no right to vote on any matters, questions or proceedings of the Company including, without limitation, the election of directors;
|
|
§
|
Commencing on the date of issuance, the Series B Preferred Stock will accrue cumulative in kind accruals (“the Accruals”) at the rate of 7.5% per annum;
|
|
§
|
Upon any liquidation, dissolution or winding up of the Company, the holders of the Series B Preferred Stock will be entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount with respect to each share of Series B Preferred Stock equal to $5,000.00 (the “Face Value”), plus an amount equal to any accrued but unpaid Accruals thereon (the “Liquidation Value”);
|
|
§
|
On maturity, the Company may redeem the Series B Preferred Stock by paying the holder the Liquidation Value;
|
|
§
|
Before maturity, the Company may redeem the Series B Preferred stock on 30 days’ notice by paying 145% of the outstanding Face Value per share;
|
|
§
|
If the Company determines to liquidate, dissolve or wind-up its business and affairs, the Company will, within three trading days of such determination and prior to effectuating any such action, redeem all outstanding shares of Series B Preferred Stock;
|
|
§
|
In the event of a conversion of any shares of Series B Preferred Stock, the Company will
(a) satisfy the payment of the Conversion Premium, which is defined as the Face Value of the shares converted multiplied by
the product of 7.5% and the number of whole years between issuance and maturity, and (b) issue to the holder of the shares
of Series B Preferred Stock a number of conversion shares equal to the Face Value divided by the applicable Conversion
Price (defined as 90% of the of the 5 lowest individual daily volume weighted average prices of the Common Stock from
issuance to conversion less $0.075 per share, but no less than the Floor Price [$1.00 prior to corporate approvals to
increase the authorized stock and approve the financing and $0.35 after approvals]) with respect to the number of shares
converted; While the note is outstanding if Triggering Events occur the conversion rate may be decreased by 10% and the
interest rate increased by 10% for each Triggering Event. In the event of certain defaults, conversion price may not be
subject to a floor.
|
|
§
|
if at any time the Company grants, issues or sells any options, convertible securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which holder could have acquired if holder had held the number of shares of Common Stock acquirable upon conversion of Series B Preferred Stock;
|
|
§
|
At maturity (2 years from issuance), all outstanding shares of Series B Preferred Stock shall automatically convert into common stock at the Conversion Price; and
|
|
§
|
At no time may the holders of Series B Preferred Stock own more than 4.99% of the outstanding common stock in the Company.
|
Common Stock issuances during the
nine months ended June 30, 2019
During the period commencing
October 1, 2018 through December 31, 2018, the Company received $361,800 from 14 investors pursuant to private placement agreements
with the investors to purchase 452,250 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.
On September 11, 2018, the
Company entered into an agreement with Regal Consulting, LLC for investor relations services. Under this agreement the Company
agreed to issue 30,000 shares of the Company’s common stock per month as compensation for services plus additional cash compensation.
During the nine months ended June 30, 2019, the Company issued a total of 270,000 shares of its common stock in accordance with
the agreement. Stock compensation of $782,700 was recorded as a result of the stock issued under the agreement.
On October 15, 2018, the Company
entered into an agreement with a consultant for services. Under this agreement the Company agreed to issue 30,000 shares of the
Company’s common stock which vest evenly over a six-month period from the agreement date. During the nine months ended June
30, 2019, the Company recorded stock compensation of $75,000 was recorded as a result of the stock issued under the agreement.
On October 2, 2018, an investor
exercised warrants to purchase 3,000 shares of the Company’s $0.001 par value common stock at a purchase price equal to $0.363
for each share of Common stock. The Company receive $1,088 as a result of this exercise.
The Company issued 100,000
shares in relation to a Securities purchase agreement executed on December 31, 2018. (See Note 8 for additional details.)
On December 31, 2018, the
Company settled $25,000 of a promissory note (See Note 7) through the issuance of 25,000 shares of the Company’s common stock.
The shares were valued at 51,225 and a $26,225 loss on settlement of debt was recorded as a result of the issuance.
On January 7, 2019, a
total of 1,444,170 shares of the Company’s common stock were issued in connection with the cashless exercise of 1,500,000
common stock warrants at an exercise price of $0.083.
On January 7, 2019, an investor
converted $2,500,000 in principal and $875,000 in interest as a conversion premium, for 1,784,729 shares of the Company common
stock at an effective conversion price of $1.89. (see Note 8 for additional details.)
On January 22, 2019, in accordance
with a merger agreement the Company issued 1,750,000 shares of the Company’s common stock. (see Note 3 for additional details.)
On February 26, 2019, a total
of 246,227 shares of the Company’s common stock were issued in connection with the cashless exercise of 250,000 common stock
warrants at an exercise price of $0.083.
On March 6, 2019, the
investor converted $1,000,000 in principal and $350,000 in interest as a conversion premium, for 713,892 shares of the Company
common stock at an effective conversion price of $1.89. (see Note 8 for additional details.)
On March 26, 2019, a total
of 488,567 shares of the Company’s common stock were issued in connection with the cashless exercise of 500,000 common stock
warrants at an exercise price of $0.083.
On April 9, 2019, an investor exercised
warrants to purchase 9,000 shares of the Company’s $0.001 par value common stock at a purchase price equal to $0.363
for each share of Common stock. The Company received $3,267 as a result of this exercise.
The Company issued 1,250,000
shares in relation to a Securities purchase agreement executed on April 17, 2018. (See Note 8 for additional details.)
On June 12, 2019, the Company
entered into an agreement with SylvaCap Media for investor relations services. Under this agreement the Company agreed to issue
250,000 shares of the Company’s common stock as compensation for services for a six month period plus additional cash compensation.
The 250,000 shares vest upon issuance but if the agreement is terminated within 90 days of execution the shares are to be returned
and cancelled. Stock compensation of $44,126 was recorded as a result of the stock issued under the agreement.
Common stock returned during the nine months
ended June 30, 2019
In connection with the issuance of the
Auctus Fund, LLC Convertible Note, the Company issued to Auctus, as a commitment fee 137,500 returnable shares of its common
stock. As a result of the conversion of the note on September 21, 2018, the shares were returned to treasury and cancelled on
December 21, 2018. In connection with the issuance of the EMA Financial, LLC Convertible Note, the Company issued to EMA, as
a commitment fee 137,500 returnable shares of its common stock. As a result, of the repayment of the note on January 3, 2019,
the shares were returned to treasury and cancelled on January 8, 2019.
Common Stock issuances during the nine months ended
June 30, 2018
During the period commencing
October 1, 2017 through June 30, 2018, the Company received $251,900 from 16 investors pursuant to private placement agreements
with the investors to purchase 314,875 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.
During the period commencing
October 1, 2017 through June 30, 2018, the Company issued 300,000 shares of the Company’s $0.001 par value common stock as
collateral for promissory notes, the shares are held in a third-party escrow account and will be returned to the Company upon repayment
of the loans.
On December 13, 2017,
an investor exercised warrants to purchase 27,548 shares of the Company’s $0.001 par value common stock at a purchase price
equal to $0.363 for each share of Common stock. The Company received $10,000 as a result of this exercise.
On January 19, 2018, an
investor exercised warrants to purchase 180,000 shares of the Company’s $0.001 par value common stock at a purchase price
equal to $0.083 for each share of Common stock. The Company received $14,940 as a result of this exercise.
On January 19, 2018, an investor
exercised warrants to purchase 15,000 shares of the Company’s $0.001 par value common stock at a purchase price equal to
$0.363 for each share of Common stock. The Company received $5,445 as a result of this exercise.
On January 29, 2018, an investor
exercised warrants to purchase 4,500 shares of the Company’s $0.001 par value common stock at a purchase price equal to $0.363
for each share of Common stock. The Company received $1,633 as a result of this exercise.
On February 8, 2018, an investor
exercised 456,000 warrants to purchase shares of the Company’s $0.001 par value common stock at a purchase price equal to
$0.367 for each share of Common stock. The investor elected to use the cashless exercise option and as a result the Company issued
387,475 shares of common stock.
On May 10, 2018, Bryan Huber
the Company’s Chief Operations Officer exercised warrants to purchase 1,353 shares of the Company’s $0.001 par value
common stock at a purchase price equal to $1.50 for each share of Common stock. The Company receive $2,030 as a result of this
exercise.
In connection with the issuance
of the March 23, 2018, Labrys Fund, LP Convertible Note, the Company issued, as a commitment fee, 137,500 shares of its common
stock (the “Returnable Shares”) as well as 100,000 shares of its common stock (the “Non-Returnable Shares”).
The agreement was amended on June 29, 2018 and as a result the returnable shares were no longer returnable. Consequently, the fair
value of the returnable shares of $218,626 was charged to interest expense.
During the period commencing October 1,
2018 through June 30, 2018, the Company issued 41,640 shares of the Company’s $0.001 par value common stock to settle
accounts payable. The shares were valued at $75,733 and the Company recorded a loss on settlement of debt of $41,092
result of the issuance.
11. STOCK WARRANTS
The following is a summary of stock
warrant activity during the nine months ended June 30, 2019.
|
|
Number of Warrant Shares
|
|
Weighted Average Exercise Price
|
Balance, September 30, 2018
|
|
|
8,989,299
|
|
|
$
|
0.89
|
Warrants granted
|
|
|
6,413,333
|
|
|
$
|
3.22
|
Warrants expired
|
|
|
—
|
|
|
|
—
|
Warrants canceled
|
|
|
—
|
|
|
|
—
|
Warrants exercised
|
|
|
(2,262,000
|
)
|
|
|
0.08
|
Balance,June 30, 2019
|
|
|
13,140,632
|
|
|
$
|
2.17
|
As of March 31, 2019, the outstanding warrants
have a weighted average remaining term of was 4.06 years and an intrinsic value of $5,170,118.
As of June 30, 2019, there are warrants exercisable
to purchase 12,697,775 shares of common stock in the Company and 442,857 unvested warrants outstanding that cannot be exercised
until vesting conditions are met. 9,961,980 of the warrants require a cash investment to exercise as follows, 50,000 required a
cash investment of $0.80 per share, 4,498,647 require a cash investment of $1.50 per share, 1,250,000 require a cash investment
of $2.00 per share, 1,030,000 require a cash investment of $2.50 per share, 2,000,000 require an investment of $3.50 per share,
100,000 require an investment of $4.00 per share, 600,000 require an investment of $5.00 per share, 383,333 require a cash investment
of $7.50 per share and 50,000 require a cash investment of $10.00 per share. 3,178,652 of the outstanding warrants contain provisions
allowing a cashless exercise at their respective exercise price.
Warrant activity for the nine months ended June 30, 2019
On October 15, 2018,
the Company entered into an agreement with a consultant for services. Under this agreement the Company agreed to issue 30,000 warrants
to purchase shares of the Company’s common stock at an exercise price of $2.50 for a period of five years which vest evenly
over a six-month period from the agreement date. During the nine months ended June 30, 2019, the Company recorded stock compensation
of $68,643 as a result of the stock issued under the agreement. The warrants were valued using the black-Scholes valuation model.
On December 31, 2018,
in connection with a Securities purchase agreement (see Note 8 for additional details) the Company issued Common Stock Purchase
Warrants to acquire up to 3,083,333 shares of common stock for a term of three years on a cash-only basis at an exercise price
of $2.00 per share with respect to 1,250,000 Warrant Shares, $2.50 with respect to 1,000,000 Warrant Shares, $5.00 with respect
to 500,000 Warrant Shares and $7.50 with respect to 333,333 Warrant Shares.
On April 18, 2019, in connection with a Securities
purchase agreement (see Note 8 for additional details) the Company issued Common Stock Purchase Warrants to acquire up to 2,300,000
shares of common stock for a term of three years on a cash-only basis at an exercise price of $3.50 per share with respect to
2,000,000 Warrant Shares, $4.00 with respect to 100,000 Warrant Shares, $5.00 with respect to 100,000 Warrant Shares, $7.50 with
respect to 50,000 Warrant Shares and $10.00 with respect to 50,000 Warrant Shares.
On August 28, 2018,
in connection with the Consulting agreement executed with Zero Positive, LLC the Company issued warrants to purchase 900,000
shares of common stock at an exercise price of $0.80 per share to Zero Positive. The warrants were valued at $2,607,096 using
the Black Scholes option pricing model. The warrants vest as follows: 300,000 warrants vested immediately, the balance vest
evenly on the last day of each month over the forty-two months beginning August 31, 2018. As of June 30, 2019, 457,143
warrants had vested, and the Company recorded an expense of $372,442 during the nine months ended June 30, 2019. (See Note 9
for additional details.)
On January 22, 2019, in accordance with
a merger agreement, CleanSpark issued; a five-year warrant to purchase 500,000 shares of CleanSpark common stock at an
exercise price of $1.60 per share, and a five-year warrant to purchase 500,000 shares of CleanSpark common stock at an
exercise price of $2.00 per share. (see note 3 for additional details.) The warrants were valued at $1,102,417 and
$1,102,107, respectively.
The Black-Scholes model utilized the following inputs
to value the warrants granted during the nine months ended June 30, 2019:
Fair value assumptions – Warrants:
|
|
June 30, 2019
|
Risk free interest rate
|
|
|
2.36% -3.01%
|
Expected term (years)
|
|
|
3-5
|
Expected volatility
|
|
|
254-268%
|
Expected dividends
|
|
|
0%
|
On January 7, 2019, a total
of 1,444,170 shares of the Company’s common stock were issued in connection with the cashless exercise of 1,500,000 common
stock warrants with an exercise prices of $0.083.
On February 26, 2019, a
total of 246,227 shares of the Company’s common stock were issued in connection with the cashless exercise of 250,000 common
stock warrants at an exercise price of $0.083.
On March 26, 2019, a total
of 488,567 shares of the Company’s common stock were issued in connection with the cashless exercise of 500,000 common stock
warrants at an exercise price of $0.083.
As of June 30, 2019, the Company
expects to recognize $1,282,857 of stock-based compensation for the non-vested outstanding warrants over a weighted-average period
of 2.51 years.
Warrant activity for the nine months ended
June 30, 2018
On December 13, 2017,
an investor exercised warrants to purchase 27,548 shares of the Company’s $0.001 par value common stock at a purchase price
equal to $0.363 for each share of Common stock. The Company received $10,000 as a result of this exercise.
On January 1, 2018, the Company
issued warrants to purchase 100,000 shares of common stock at an exercise price of $0.80 per share to an advisor for business advisory
services. The warrants were valued at $234,095 using the Black Scholes option pricing model based upon the following assumptions:
term of 5 years, risk free interest rate of 2.01%, a dividend yield of 0% and volatility rate of 158%. The warrants vest evenly
over the six-month services period ended June 30, 2018.
On January 19, 2018, an investor
exercised warrants to purchase 180,000 shares of the Company’s $0.001 par value common stock at a purchase price equal to
$0.083 for each share of Common stock. The Company received $14,940 as a result of this exercise.
On January 19, 2018,
an investor exercised warrants to purchase 15,000 shares of the Company’s $0.001 par value common stock at a purchase price
equal to $0.363 for each share of Common stock. The Company received $5,445 as a result of this exercise.
On January 29, 2018, an investor
exercised warrants to purchase 4,500 shares of the Company’s $0.001 par value common stock at a purchase price equal to $0.363
for each share of Common stock. The Company received $1,633 as a result of this exercise.
On June 15, 2018, the Company
issued 116,600 5-year warrants exercisable at $0.80 to a lender in connection with a promissory note agreement. (See Note 7 for
additional details.)
On February 8, 2018, an investor
exercised 456,000 warrants to purchase shares of the Company’s $0.001 par value common stock at a purchase price equal to
$0.367 for each share of Common stock. The investor elected to use the cashless exercise option and as a result the Company issued
387,475 shares of common stock.
During the nine months ended June 30, 2019,
the Company recognized $372,442 of stock-based compensation related to warrants.
12. 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 on June 19, 2017. A total of 3,000,000 shares were initially reserved for issuance under the Plan. As of June 30,
2019, there were 2,552,910 shares available for issuance under the plan.
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.
The following is a summary of stock
option activity during the nine months ended June 30, 2019.
|
|
Number of Option Shares
|
|
Weighted Average Exercise Price
|
Balance, September 30, 2018
|
|
|
319,206
|
|
|
$
|
1.18
|
Options granted
|
|
|
127,884
|
|
|
$
|
1.95
|
Options expired
|
|
|
—
|
|
|
|
—
|
Options canceled
|
|
|
—
|
|
|
|
—
|
Options exercised
|
|
|
—
|
|
|
|
—
|
Balance, June 30, 2019
|
|
|
447,090
|
|
|
$
|
1.40
|
As of June 30, 2019, there are options exercisable to purchase 447,090 shares
of common stock in the Company. As of June 30, 2019, the outstanding options have a weighted average remaining term of was 2.39
years and an intrinsic value of $239,392.
Option activity for the nine months ended June 30,
2019
During the nine months
ended June 30, 2019, the Company issued 127,884 options to purchase shares of common stock to employees, the shares were granted
at quoted market prices ranging from $1.51 to $5.90. The options were valued at issuance using the Black Scholes model and stock
compensation expense of $245,000 was recorded as a result of the issuances.
On March 10, 2018 the Company
issued a total of 250,000 options to four consultants for advisory services. The options vest evenly 12 months from issuance. The
options expire 24 months after issuance and require a cash investment to exercise. The options were valued at issuance using the
Black Scholes model at $342,500 and amortized of the term of the agreement. During the nine months ended June 30, 2019, $191,425
was been expensed as stock-based compensation.
The Black-Scholes model utilized the following inputs
to value the options granted during the nine months ended June 30, 2019:
Fair value assumptions – Options:
|
|
June 30, 2019
|
Risk free interest rate
|
|
|
2.21-2.91%
|
Expected term (years)
|
|
|
3
|
Expected volatility
|
|
|
239%-271%
|
Expected dividends
|
|
|
0%
|
As of June 30, 2019, the
Company expects to recognize $0 of stock-based compensation for the non-vested outstanding options over a weighted-average period
of 0 years.
Option activity for the nine
months ended June 30, 2018
During the nine months ended June 30, 2018, the
Company issued 41,065 options to purchase shares of the common stock to employees, the shares were granted at quoted market prices
between $1.57 and $3.45. The options were valued at issuance using the Black Scholes model and stock compensation expense of $75,000
was recorded as a result of the issuances.
On March 10, 2018
the Company issued a total of 250,000 options to four consultants for advisory services. The Options vest evenly 12 months from
issuance. The Options expire 24 months after issuance and require a cash investment to exercise. The options were valued at issuance
using the black Scholes model at $342,500. As of June 30, 2018, $105,096 had been expensed as stock compensation.
The Black-Scholes model utilized
the following inputs to value the options granted during the nine months ended June 30, 2018:
Fair value assumptions – Options:
|
|
June 30, 2018
|
Risk free interest rate
|
|
|
1.46-2.61%
|
Expected term (years)
|
|
|
2-3
|
Expected volatility
|
|
|
120%-182%
|
Expected dividends
|
|
|
0%
|
13. COMMITMENTS AND CONTINGENCIES
Office leases
The Company’s corporate
offices are located at 70 North Main Street, Suite 105, Bountiful, Utah 84010. The Company occupies the leased space on a month
to month basis at a rate of $850 per month. Future
minimum
lease payments under the
operating leases for the facilities as of June 30, 2019, are $0.
On May 15, 2018, the Company
executed a 37-month lease agreement, which commenced on July 1, 2018 at 4360 Viewridge Avenue, Suite C, San Diego, California.
The agreement calls for the Company to make payments of $4,057 in base rent per month through July 31, 2021 subject to an annual
3% rent escalation. Future
minimum
lease payments under the operating leases for the
facilities as of June 30, 2019, are as follows:
Fiscal year ending September 30, 2019 - $12,536
Fiscal year ending September 30, 2020 - $50,521
Fiscal year ending September 30, 2021 - $43,170
14. MAJOR CUSTOMERS AND VENDORS
For the nine months ended June 30, 2019 and
2018, the Company had the following customers that represented more than 10% of sales.
|
|
June 30, 2019
|
|
June 30, 2018
|
Customer A
|
|
|
33.9
|
%
|
|
|
—
|
Customer B
|
|
|
21.4
|
%
|
|
|
—
|
Customer C
|
|
|
—
|
|
|
|
14.7%
|
Customer D
|
|
|
21.9
|
%
|
|
|
68.8%
|
For the nine months ended June 30, 2019 and 2018,
the Company had the following suppliers that represented more than 10% of direct material costs.
|
|
June 30, 2019
|
|
June 30, 2018
|
Vendor A
|
|
|
—
|
|
|
|
14.0%
|
Vendor B
|
|
|
—
|
|
|
|
28.4%
|
Vendor C
|
|
|
—
|
|
|
|
27.4%
|
Vendor D
|
|
|
—
|
|
|
|
10.3%
|
Vendor E
|
|
|
90.1
|
%
|
|
|
—
|
15. SUBSEQUENT EVENTS
Issuance of Common stock for services
During the period commencing July 1, 2019 through
August 14, 2019, the Company issued 60,000 shares of the Company’s $0.001 par value common stock to Regal Consulting, LLC
for investor relations services.
Issuance of Stock options to employees
During the period commencing July 1, 2019 through
August 14, 2019, the Company issued 11,641 options to purchase shares of common stock to employees, the options were granted at
quoted market prices ranging from $1.23 to $1.90.
Issuance of Common stock for convertible
debt
On July 19, 2019, the
investor converted $500,000 in principal and $175,000 in interest as a conversion premium, for 451,086 shares of the Company common
stock at an effective conversion price of $1.82. (see Note 8 for additional details.)
On January 7, 2019, an investor
converted $2,500,000 in principal and $875,000 in interest as a conversion premium, for 1,784,729 shares of the Company common
stock at an effective conversion price of $1.89. On July 9, 2019, in accordance with the terms of the agreement the investor was
issued an additional 456,140 shares of common stock due to the decrease in stock price resulting in an effective conversion price
of $1.51. (see Note 8 for additional details.)
On March 6, 2019, the
investor converted $1,000,000 in principal and $350,000 in interest as a conversion premium, for 713,892 shares of the Company
common stock at an effective conversion price of $1.89. On July 16, 2019, in accordance with the terms of the agreement the investor
was issued an additional 182,456 shares of common stock due to the decrease in stock price resulting in an effective conversion
price of $1.51. (see Note 8 for additional details.)
Amendment to Articles
of Incorporation
On August 9, 2019, the Company filed a Certificate
of Amendment to its Articles of Incorporation to increase its authorized shares of common stock from 100,000,000 to 200,000,000.
The amendment was previously approved by written consent of the Company’s Board and more than a majority of the voting power
of its stockholders and delivered to stockholders of record as of the close of business July 2, 2019 pursuant to a Definitive
Information Statement on Schedule 14C.