Notes to Financial Statements
Years Ended June 30, 2019 and 2018
1. ORGANIZATION
Organization
Integrated Ventures, Inc. (the "Company," "we," "our," or "EMS Find") was incorporated in the State of Nevada on March 22, 2011, under the name of Lightcollar, Inc. On March 20, 2015, the Company amended its articles of incorporation and changed its name from Lightcollar, Inc. to EMS Find, Inc. On May 30, 2017, Integrated Ventures, Inc. (“Integrated Ventures”), a Nevada corporation, was formed as a wholly owned subsidiary of the Company. Pursuant to an Agreement and Plan of Merger dated May 30, 2017, Integrated Ventures was merged into the Company, with the Company being the surviving corporation and changing its name to Integrated Ventures, Inc.
The Company has discontinued its prior operations and changed its business focus from its prior technologies relating to the EMS Find platform to acquiring, launching and operating companies in the cryptocurrency sector, mainly in digital currency mining, equipment manufacturing, and sales of branded mining rigs, as well as blockchain software development.
The Company is developing and acquiring a diverse portfolio of digital currency assets and block chain technologies, and now operates cryptocurrency mining operations in two facilities located in Pennsylvania and New Jersey. Cryptocurrency mining revenues commenced in November 2017. Cryptocurrencies are a medium of exchange that uses decentralized control (a block chain) as opposed to a central bank to track and validate transactions. The Company, through its wholly owned subsidiary, BitcoLab, Inc., is currently mining Bitcoin, Litecoin and Ethereum, whereby the Company earns revenue by solving “blocks” to be added to the block chain.
As of June 30, 2019, the Company owned and operated approximately 880 miners of cryptocurrencies. On May 8, 2019, the Company consolidated all of its mining operations by signing a three-year lease and power purchase agreement with PetaWatt Properties, LLC, located in upstate NY and moving all of our cryptocurrency operations to that new location.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ significantly from those estimates.
Cash and Cash Equivalents
The Company maintains cash balances in non-interest-bearing accounts that currently do not exceed federally insured limits. For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. The Company had no cash equivalents at June 30, 2019 and 2018.
Restricted Cash
Amounts included in restricted cash represent funds required to be set aside pursuant to the digiMine Acquisition for the payment of defined digital currency mining expenditures. The restriction lapsed when the required expenditures were paid.
Digital Currencies
Digital currencies consist of Bitcoin, Litecoin and Ethereum, generally received for the Company’s own account as compensation for cryptocurrency mining services. Given that there is limited precedent regarding the classification and measurement of cryptocurrencies under current Generally Accepted Accounting Principles (“GAAP”), the Company has determined to account for these digital currencies as indefinite-lived intangible assets in accordance with Accounting Standards Update ("ASU") No. 350, Intangibles – Goodwill and Other, for the period covered by this report and in future reports unless and until further guidance is issued by the Financial Accounting Standards Board (“FASB”). An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not than an impairment exists. If it is determined that it is more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. Realized gains or losses on the sale of digital currencies are included in other income (expense) in the statements of operations.
Inventories
Inventories at June 30, 2018 consisted of cryptocurrency mining units held for sale or deployment in mining operations and are stated at the lower of cost or estimated realizable value. Payments to equipment suppliers prior to shipment of the equipment are recorded as equipment deposits.
Marketable Securities
We had no marketable securities as of June 30, 2019. Marketable securities included in current assets in the balance sheet as of June 30, 2018, are classified as trading securities, and reported at fair value based on quoted market prices. Changes in the fair value of the investments during the period are recorded as unrealized gains or losses in other income (expense) in the statements of operations. Realized gains or losses on the sale of marketable securities are included in other income (expense) in the statements of operations.
Property and Equipment
Property and equipment, consisting primarily of computer and other cryptocurrency mining equipment (transaction verification servers) and leasehold improvements, is stated at the lower of cost or estimated realizable value and is depreciated when placed into service using the straight-line method over estimated useful lives. The Company operates in an emerging industry for which limited data is available to make estimates of the useful economic lives of specialized equipment. Management has assessed the basis of depreciation of these assets and believes they should be depreciated over a three-year period due to technological obsolescence reflecting rapid development of hardware that has faster processing capacity and other factors. Additionally, during the year ended June 30, 2019, the Company wrote down cryptocurrency mining equipment by $2,097,930 to estimated net realizable value. The Company also wrote off abandoned leasehold improvements with a net book value of $107,150 to cost of goods sold during the year ended June 30, 2019. Maintenance and repairs are expensed as incurred and improvements are capitalized. Gains or losses on the disposition of property and equipment are recorded upon disposal.
Management has determined that the three-year diminishing value best reflects the current expected useful life of transaction verification servers. This assessment takes into consideration the availability of historical data and management’s expectations regarding the direction of the industry including potential changes in technology. Management will review this estimate annually and will revise such estimates as and when data becomes available.
To the extent that any of the assumptions underlying management’s estimate of useful life of its transaction verification servers are subject to revision in a future reporting period, either as a result of changes in circumstances or through the availability of greater quantities of data, then the estimated useful life could change and have a prospective impact on depreciation expense and the carrying amounts of these assets.
Goodwill
The excess of the cost over the fair value of net assets acquired in the digiMine acquisition is recorded as goodwill. Goodwill is not subject to amortization, but is reviewed for impairment annually, or more frequently whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. An impairment charge would be recorded to the extent the carrying value of goodwill exceeds its estimated fair value. The testing of goodwill under established guidelines for impairment requires significant use of judgment and assumptions. Changes in forecasted operations and other assumptions could materially affect the estimated fair values. Changes in business conditions could potentially require adjustments to these asset valuations. At June 30, 2018, the Company reviewed the goodwill recorded in the digiMine acquisition and determined that an impairment expense of $4,153,510 was required.
Derivatives
The Company evaluates its convertible debt, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for. The result of this accounting treatment is that under certain circumstances the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under this accounting standard are reclassified to liability at the fair value of the instrument on the reclassification date.
Where the number of warrants or common shares to be issued under these agreements is indeterminate, the Company has concluded that the equity environment is tainted, and all additional warrants and convertible debt are included in the value of the derivatives.
We estimate the fair value of the derivatives associated with our convertible notes payable, warrants, put-back rights associated with two asset purchase agreements, common stock issuable pursuant to a Series B preferred stock Exchange Agreement and a stock subscription payable using, as applicable, either the Black-Scholes pricing model or multinomial lattice models that value the derivative liability based on a probability weighted discounted cash flow model using future projections of the various potential outcomes. We estimate the fair value of the derivative liabilities at the inception of the financial instruments, and, in the case of our convertible notes payable, at the date of conversions to equity and at each reporting date, recording a derivative liability, debt discount, additional paid-in capital and a gain or loss on change in derivative liabilities as applicable. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price volatility, variable conversion prices based on market prices as defined in the respective agreements and probabilities of certain outcomes based on management projections. These inputs are subject to significant changes from period to period and to management’s judgment; therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material.
Impairment of Long-Lived Assets
All assets, including intangible assets subject to amortization, are reviewed for impairment when changes in circumstances indicate that the carrying amount of the asset may not be recoverable in accordance with ASC 350 and ASC 360. If the carrying amount of the asset exceeds the expected undiscounted cash flows of the asset, an impairment charge is recognized equal to the amount by which the carrying amount exceeds fair value or net realizable value. The testing of these intangibles under established guidelines for impairment requires significant use of judgment and assumptions. Changes in forecasted operations and other assumptions could materially affect the estimated fair values. Changes in business conditions could potentially require adjustments to these asset valuations. Total impairment expense, consisting of write downs for cryptocurrency mining equipment totaled $2,097,930 for the year ended June 30, 2019. Total impairment expense, consisting of write downs for equipment inventories, cryptocurrency mining equipment and goodwill, totaled $4,907,884 for the year ended June 30, 2018.
Fair Value of Financial Instruments
Disclosures about fair value of financial instruments require disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of June 30, 2019 and 2018, the amounts reported for cash, restricted cash, prepaid expenses and other current assets, equipment deposits, accounts payable, accrued expenses and due to related party approximate fair value because of their short maturities.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
|
·
|
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
|
|
|
|
|
·
|
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
|
|
|
|
|
·
|
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
Our marketable securities as of June 30, 2018 were measured at fair value on a recurring basis and estimated as follows:
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$
|
1,700
|
|
|
$
|
1,700
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
1,700
|
|
|
$
|
1,700
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Our derivative liabilities are measured at fair value on a recurring basis and estimated as follows:
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
1,617,774
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,617,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
|
$
|
1,617,774
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,617,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
2,886,965
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,886,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
|
$
|
2,886,965
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,886,965
|
|
Stock-Based Compensation
The Company accounts for all equity-based payments in accordance with ASC Topic 718, Compensation – Stock Compensation. ASC Topic 718 requires companies to recognize in the statement of operations the grant-date fair value of stock awards, stock options, warrants and other equity-based compensation issued to employees. The value of the portion of an award that is ultimately expected to vest is recognized as an expense over the requisite service periods using the straight-line attribution method. The fair value of a stock award is recorded at the fair market value of a share of the Company’s stock on the grant date. The Company estimates the fair value of stock options and warrants at the grant date by using an appropriate fair value model such as the Black-Scholes option pricing model or multinomial lattice models.
The Company accounts for non-employee share-based awards based upon ASC 505-50, Equity-Based Payments to Non-Employees. ASC 505-50 requires the costs of goods and services received in exchange for an award of equity instruments to be recognized using the fair value of the goods and services or the fair value of the equity award, whichever is more reliably measurable. The fair value of the equity award is determined on the measurement date, which is the earlier of the date that a performance commitment is reached or the date that performance is complete. Generally, our awards do not entail performance commitments. When an award vests over time such that performance occurs over multiple reporting periods, we estimate the fair value of the award as of the end of each reporting period and recognize an appropriate portion of the cost based on the fair value on that date. When the award vests, we adjust the cost previously recognized so that the cost ultimately recognized is equivalent to the fair value on the date the performance is complete.
Revenue Recognition
Effective July 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers, as amended, using the modified retrospective method, which requires the cumulative effect of adoption to be recognized as an adjustment to opening retained earnings in the period of adoption. There was no cumulative effect of adopting the new standard and no impact on our financial statements. The new standard provides a single comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific guidance. The standard’s stated core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, ASC 606 includes provisions within a five-step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, an entity satisfies a performance obligation.
Our revenues currently consist of cryptocurrency mining revenues and revenues from the sale of cryptocurrency mining equipment recognized in accordance with ASC 606 as discussed above. Amounts collected from customers prior to shipment of products are recorded as deferred revenue.
The Company earns its cryptocurrency mining revenues by providing transaction verification services within the digital currency networks of cryptocurrencies, such as Bitcoin, Litecoin and Ethereum. The Company satisfies its performance obligation at the point in time that the Company is awarded a unit of digital currency through its participation in the applicable network and network participants benefit from the Company’s verification service. In consideration for these services, the Company receives digital currencies, which are recorded as revenue using the closing U.S. dollar price of the related cryptocurrency on the date of receipt. Expenses associated with running the cryptocurrency mining operations, such as equipment depreciation, rent, operating supplies, rent, utilities and monitoring services are recorded as cost of revenues.
There is currently no specific definitive guidance in GAAP or alternative accounting frameworks for the accounting for the production and mining of digital currencies and management has exercised significant judgment in determining appropriate accounting treatment for the recognition of revenue for mining of digital currencies. Management has examined various factors surrounding the substance of the Company’s operations and the guidance in ASC 606, including identifying the transaction price, when performance obligations are satisfied, and collectability is reasonably assured being the completion and addition of a block to a blockchain and the award of a unit of digital currency to the Company. In the event authoritative guidance is enacted by the FASB, the Company may be required to change its policies which could result in a change in the Company’s financial statements.
Income Taxes
The Company adopted the provisions of ASC 740-10, Accounting for Uncertain Income Tax Positions. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax benefits. As of June 30, 2019, tax years 2018, 2017, 2016 and 2015 remain open for IRS audit. The Company has received no notice of audit from the IRS for any of the open tax years.
The Company adopted ASC 740-10, Definition of Settlement in FASB Interpretation No. 48, (“ASC 740-10”), which was issued on May 2, 2007. ASC 740-10 amends FIN 48 to provide guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. The term “effectively settled” replaces the term “ultimately settled” when used to describe recognition, and the terms “settlement” or “settled” replace the terms “ultimate settlement” or “ultimately settled” when used to describe measurement of a tax position under ASC 740-10. ASC 740-10 clarifies that a tax position can be effectively settled upon the completion of an examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. The adoption of ASC 740-10 did not have an impact on the accompanying financial statements.
Income (Loss) Per Share
Basic net income or loss per share is calculated by dividing net income or loss by the weighted average number of common shares outstanding for the period. Diluted income or loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as “in-the-money” stock options and warrants, convertible debt and convertible preferred stock, were exercised or converted into common stock. Equivalent shares are not utilized when the effect is anti-dilutive.
For the years ended June 30, 2019 and 2018, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share; therefore, basic net loss per share is the same as diluted net loss per share.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. This new pronouncement, as amended, is effective January 1, 2019 for calendar-year-end public companies, or July 1, 2019 for the Company. Early adoption is permitted. The Company is unable to determine the impact on its financial statements for the adoption of the new pronouncement.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify certain disclosure requirements of fair value measurements and are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently unable to determine the impact on its financial statements of the adoption of this new accounting pronouncement.
Although there are several other new accounting pronouncements issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, the Company does not believe any of these accounting pronouncements has had or will have a material impact on its financial position or results of operations.
Reclassifications
Certain amounts in the financial statements for the year ended June 30, 2018 have been reclassified to conform to the presentation for the year ended June 30, 2019.
3. GOING CONCERN
The Company has reported recurring net losses since its inception and used net cash in operating activities of $708,040 in the year ended June 30, 2019. As of June 30, 2019, the Company had an accumulated deficit of $20,983,207 and a total stockholders’ deficit of $1,088,343. These conditions raise substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The ability of the Company to reach a successful level of operations is dependent on the execution of management's plans, which include the raising of capital through the debt and/or equity markets, until such time that funds provided by operations are sufficient to fund working capital requirements. If the Company were not to continue as a going concern, it would likely not be able to realize its assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of the financial statements.
There can be no assurances that the Company will be successful in attaining a profitable level of operations or in generating additional cash from the equity/debt markets or other sources fund its operations. The financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary. Should the Company not be successful in its business plan or in obtaining the necessary financing to fund its operations, the Company would need to curtail certain or all operational activities and/or contemplate the sale of its assets, if necessary.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Cryptocurrency mining equipment
|
|
$
|
1,579,580
|
|
|
$
|
573,806
|
|
Furniture and equipment
|
|
|
16,366
|
|
|
|
14,427
|
|
Leasehold improvements
|
|
|
-
|
|
|
|
102,932
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,595,946
|
|
|
|
691,165
|
|
Less accumulated depreciation and amortization
|
|
|
(556,263
|
)
|
|
|
(58,060
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
1,039,683
|
|
|
$
|
633,105
|
|
Depreciation and amortization expense, included in cost of revenues, for the years ended June 30, 2019 and 2018 was $552,958 and $59,875, respectively.
5. ASSET PURCHASE AGREEMENT
On August 2, 2018, the Company entered into an Asset Purchase Agreement with Secure Hosting LLC, a Florida limited liability, for the purchase of 182 Ethereum mining machines.
As consideration for the purchase of the machines, the Company issued 38,018 restricted shares of its Series B convertible preferred stock, valued on an “as converted to common” basis at an aggregate of $3,003,422, based on the market value of the Company’s common stock on the date of the transaction.
Of the 182 machines purchased, 152 were placed into operations, and 30 units deemed to be under-performing will be utilized by the Company as repair parts or sold as repair parts. The Company performed a lower of cost or market impairment analysis on the machines purchased, including writing off the purchase price allocated to the defective machines, and recorded an impairment expense of $2,097,930, which amount is included in operating expenses for the year ended June 30, 2019.
The Agreement contains customary representations and warranties and covenants as of the Closing Date, including, without limitation, that the Equipment is (i) in good condition, (ii) free of all liens, (iii) not subject to any intellectual property rights other than software used in the Equipment and (iv) covered by certain manufacturer warranties. Because a portion of the machines were defective, certain shares of the Series B preferred stock issued in the transaction were subsequently returned to the Company and cancelled.
6. DIGIMINE ACQUISITION AND PREFERRED STOCK EXCHANGE AGREEMENT
In April 2018, the Company acquired the digital currency mining operations of digiMine LLC (“digiMine”) through two Asset Purchase Agreements (the “digiMine Acquisition”) in a transaction recorded as a business combination.
On April 16, 2018, the Company entered into an Asset Purchase Agreement with digiMine for the purchase of digiMine’s digital currency mining assets located in Marlboro, New Jersey, the principal assets consisting of: 150 cryptocurrency mining machines; all right, title and interest in, the lease and leasehold improvements for the premises on which digiMine’s business operates; all books and records pertaining to ownership of digiMine’s business as applicable; and restricted cash of $175,000. The Company issued 16,666 shares of its Series B preferred stock to digiMine.
The Company also entered into a separate Security and Pledge Agreement, dated as of April 13, 2018, securing its obligations to digiMine under the Asset Purchase Agreement.
digiMine has the right (the “Put-Back Right”), at any time commencing April 1, 2019, to require that the Company redeem for cash any of Seller’s then-outstanding Shares at a redemption price equal to 72% of the Shares. The Conversion Amount on execution is equal to $1,200,000 (the “Put-Back Price”) of such Shares; provided, that the Put Back Right expires with respect to any of the Shares at such time as the Shares are registered for resale. Each of the Shares for purposes of the Put-Back Price is equal to a fixed price of $100 per share.
On April 30, 2018, the Company entered into a second Asset Purchase Agreement with digiMine for the purchase of digiMine’s digital currency mining assets located in Marlboro, New Jersey, the principal assets consisting of: 97 cryptocurrency mining machines and computer workstation; digital currency portfolio with an estimated value of $15,487; all right, title and interest in, the lease and leasehold improvements for the premises on which digiMine’s business operates; all books and records pertaining to ownership of digiMine’s business as applicable; and restricted cash of $200,000. The Company issued 20,000 shares of its Series B preferred stock to digiMine.
The Company also entered into a separate Security and Pledge Agreement, dated as of April 30, 2018, securing its obligations to digiMine under the Agreement.
digiMine has the right (the “Put-Back Right”), at any time commencing May 1, 2019, to require that the Company redeem for cash any of Seller’s then-outstanding Shares at a redemption price equal to 72% of the Shares. The Conversion Amount on execution is equal to $1,440,000 (the “Put-Back Price”) of such Shares; provided, that the Put Back Right expires with respect to any of the Shares at such time as the Shares are registered for resale. Each of the Shares for purposes of the Put-Back Price is equal to a fixed price of $100 per share.
The Company has identified the Put-Back Rights associated with the two Asset Purchase Agreements as derivatives.
The Company engaged an independent valuation firm to estimate the fair value of the Series B preferred stock issued in the two Asset Purchase Agreements, to estimate the value of the derivative liabilities associated with the Put-Back Rights, and allocate the total consideration paid to the assets acquired. The valuation firm developed multinomial lattice models that valued the derivative liability based on a probability weighted discounted cash flow model using future projections of the various potential outcomes.
The total consideration paid in the Acquisition is summarized as follows:
Value of 36,667 total Series B preferred shares
|
|
$
|
1,163,806
|
|
Derivative liabilities associated with Put-Back Rights
|
|
|
3,729,109
|
|
|
|
|
|
|
Total consideration paid
|
|
$
|
4,892,915
|
|
The total consideration paid was allocated to the fair value of the assets acquired as follows:
Restricted cash
|
|
$
|
375,000
|
|
Property and equipment
|
|
|
350,349
|
|
Digital currencies
|
|
|
14,056
|
|
Goodwill
|
|
|
4,153,510
|
|
|
|
|
|
|
Total consideration allocated
|
|
$
|
4,892,915
|
|
No liabilities of digiMine were assumed by the Company in the Acquisition. The excess of consideration paid over fair value of assets acquired was recorded as goodwill.
The Company performed an impairment analysis on the goodwill at June 30, 2018 and recorded an impairment expense of $4,153,510, which amount is included in operating expenses for the year ended June 30, 2018. The total cash acquired of $375,000 was restricted to fund digital mining operations. As of June 30, 2019, the restricted cash had been fully utilized in digital mining operations.
On May 21, 2019, the Company and digiMine entered into an Exchange Agreement (the “Preferred Stock Exchange Agreement”) pursuant to which DigiMine agreed to surrender the remaining 20,000 shares of the Company’s Series B preferred stock held by it and terminate its rights under the Security and Pledge Agreement, dated April 30, 2018, in exchange for 10,000,000 shares (“Exchange Shares”) of the Company’s common stock, which are to be issued in ten tranches of 1,000,000 shares each beginning ten trading days after the date of the Exchange Agreement and each ten trading days thereafter. The Company identified a derivative liability associated with the obligation to issue the common shares recorded initially at $1,650,000 and recorded a loss on the Series B preferred stock exchange of $1,650,000.
With the sale of the 16,666 shares of Series B preferred stock by digiMine in April and May of 2019 and with the completion of the Exchange Agreement, the Put-Back Rights in connection with the April 16 and April 30, 2018 Asset Purchase Agreements have been eliminated and the associated derivative liability settled. Through June 30, 2019, the Company issued digiMine a total of 2,000,000 shares valued at $285,000 pursuant to the Preferred Stock Exchange Agreement.
7. RELATED PARTY TRANSACTIONS
We have one executive officer, Steve Rubakh, who is currently our only full-time employee and sole member of our Board of Directors. Mr. Rubakh is paid an annual salary established by the Board of Directors and is issued shares of Series B preferred stock for additional compensation. The number of shares issued, generally on a quarterly basis, is at the discretion of the Board of Directors.
On March 6, 2019, the Board of Directors of the Company set the annual compensation for Steve Rubakh, effective April 1, 2019, to include annual salary of $150,000 per year and the issuance on a quarterly basis of 50,000 shares of Series B preferred stock. During the years ended June 30, 2019 and 2018, the Company recorded salary expense to Mr. Rubakh of $150,000 and $131,250, respectively.
For the years ended June 30, 2019 and 2018, the Board of Directors authorized the issuance to Mr. Rubakh of 70,000 and 110,000 shares of Series B preferred stock, respectively, as part of Mr. Rubakh's compensation package. Stock-based compensation of $1,312,000 and $809,000 was recorded for the years ended June 30, 2019 and 2018, respectively, based on the market price of the Company’s common stock on an “as converted” basis.
In April 2019, Mr. Rubakh converted 30,000 shares of Series B preferred stock into 3,000,000 shares of common stock of the Company, recorded at the par value of the common stock issued.
On August 31, 2017, Mr. Rubakh converted accrued compensation of $15,625 into 347,222 common shares of the Company.
Amounts due to related party, including accrued salary to Mr. Rubakh, totaled $69,854 and $20,428 as of June 30, 2019 and 2018, respectively.
8. DEBT
Accrued Judgement
On May 4, 2018, the Company and LG Capital Funding, LLC (“LG”) entered into a Forbearance Agreement related to an October 14, 2016 judgment requiring the Company to pay $125,000 principal and $34,835 interest from an October 22, 2015 convertible promissory note payable to LG. According to terms of the Forbearance Agreement, the Company extinguished the debt in full by paying LG Capital $135,427 in April 2018 and $29,257 on July 11, 2018.
Convertible Notes Payable
Convertible notes payable, all classified as current, consist of the following at June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
|
|
|
|
Principal
|
|
|
Discount
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
Geneva Roth Remark Holdings, Inc. #2
|
|
$
|
43,000
|
|
|
$
|
11,582
|
|
|
$
|
31,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geneva Roth Remark Holdings, Inc. #3
|
|
|
78,000
|
|
|
|
24,253
|
|
|
|
53,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geneva Roth Remark Holdings, Inc. #4
|
|
|
63,000
|
|
|
|
21,605
|
|
|
|
41,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BHP Capital NY, Inc. #2
|
|
|
38,500
|
|
|
|
16,748
|
|
|
|
21,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Armada Investment Fund, LLC #2
|
|
|
38,500
|
|
|
|
16,747
|
|
|
|
21,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jefferson Street Capital LLC
|
|
|
38,500
|
|
|
|
16,747
|
|
|
|
21,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
St. George Investments LLC
|
|
|
500,000
|
|
|
|
234,671
|
|
|
|
265,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
799,500
|
|
|
$
|
342,353
|
|
|
$
|
457,147
|
|
On February 6, 2019, the Company entered into a second convertible promissory note with Geneva Roth Remark Holdings, Inc. (“Geneva” in the principal amount of $43,000. The note matures on February 6, 2020 and bears interest at 10%. A debt discount of $19,128 was recorded, including a derivative liability of $16,128. Geneva has the right beginning on the date that is 170 days following the date of the note to convert principal and accrued interest into shares of the Company’s common stock. The conversion price is 70% of the average of the three lowest trading prices of the Company’s common stock during the ten trading days ending on the latest complete trading day prior to the date of conversion. As of June 30, 2019, $7,546 of the debt discount had been amortized and there was accrued interest payable of $1,696. The Company recorded a derivative liability of $18,971 as of June 30, 2019.
On March 21, 2019, the Company entered into a third convertible promissory note with Geneva in the principal amount of $78,000. The note matures on March 21, 2020 and bears interest at 10%. A debt discount of $33,496 was recorded, including a derivative liability of $30,496. Geneva has the right beginning on the date that is 170 days following the date of the note to convert principal and accrued interest into shares of the Company’s common stock. The conversion price is 70% of the average of the three lowest trading prices of the Company’s common stock during the ten trading days ending on the latest complete trading day prior to the date of conversion. As of June 30, 2019, $9,243 of the debt discount had been amortized and there was accrued interest payable of $2,158. The Company recorded a derivative liability of $34,233 as of June 30, 2019.
On April 18, 2019, the Company entered into a fourth convertible promissory note with Geneva in the principal amount of $63,000. The note matures on April 18, 2020 and bears interest at 10%. A debt discount of $26,988 was recorded, including a derivative liability of $23,988. Geneva has the right beginning on the date that is 170 days following the date of the note to convert principal and accrued interest into shares of the Company’s common stock. The conversion price is 70% of the average of the three lowest trading prices of the Company’s common stock during the ten trading days ending on the latest complete trading day prior to the date of conversion. As of June 30, 2019, $5,383 of the debt discount had been amortized and there was accrued interest payable of $1,260. The Company recorded a derivative liability of $27,523 as of June 30, 2019.
On May 15, 2019, the Company entered into a second convertible promissory note with Armada Investment Fund, LLC (“Armada”) in the principal amount of $38,500, with an original issue discount of $2,500. The note matures on February 15, 2020 and bears interest at 8%. A debt discount of $20,098 was recorded, including a derivative liability of $15,598. Armada has the right beginning on the date that is 31 days following the date of the note to convert principal and accrued interest into shares of the Company’s common stock. The conversion price is 70% of the average of the three lowest trading prices of the Company’s common stock during the ten trading days ending on the latest complete trading day prior to the date of conversion. As of June 30, 2019, $3,350 of the debt discount had been amortized and there was accrued interest payable of $388. The Company recorded a derivative liability of $16,578 as of June 30, 2019.
On May 15, 2019, the Company entered into a second convertible promissory note with BHP Capital NY, Inc. (“BHP”) in the principal amount of $38,500, with an original issue discount of $2,500. The note matures on February 15, 2020 and bears interest at 8%. A debt discount of $20,097 was recorded, including a derivative liability of $15,597. BHP has the right beginning on the date that is 31 days following the date of the note to convert principal and accrued interest into shares of the Company’s common stock. The conversion price is 70% of the average of the three lowest trading prices of the Company’s common stock during the ten trading days ending on the latest complete trading day prior to the date of conversion. As of June 30, 2019, $3,350 of the debt discount had been amortized and there was accrued interest payable of $388. The Company recorded a derivative liability of $16,578 as of June 30, 2019.
On May 15, 2019, the Company entered into a convertible promissory note with Jefferson Street Capital LLC (“Jefferson”) in the principal amount of $38,500, with an original issue discount of $2,500. The note matures on February 15, 2020 and bears interest at 8%. A debt discount of $20,097 was recorded, including a derivative liability of $15,597. Jefferson has the right beginning on the date that is 31 days following the date of the note to convert principal and accrued interest into shares of the Company’s common stock. The conversion price is 70% of the average of the three lowest trading prices of the Company’s common stock during the ten trading days ending on the latest complete trading day prior to the date of conversion. As of June 30, 2019, $3,350 of the debt discount had been amortized and there was accrued interest payable of $388. The Company recorded a derivative liability of $16,578 as of June 30, 2019.
On June 26, 2019, the Company entered into an Exchange Agreement with St. George Investments LLC (“St. George”) pursuant to which a convertible promissory note payable to St. George in the principal amount of $500,000 was issued in consideration for the surrender by St. George of all outstanding warrants, which amount was recorded as a loss on settlement of warrants. The warrants were issued by the Company on January 19, 2018. The note matures on December 29, 2019 and bears interest at 5%. A debt discount and derivative liability of $239,773 was recorded at the inception of the note. St. George has the right beginning on the date of the note to convert principal and accrued interest into shares of the Company’s common stock. The conversion price is 80% of the average of the three lowest closing prices of the Company’s common stock during the twenty trading days preceding the date of conversion. As of June 30, 2019, $5,102 of the debt discount had been amortized and there was accrued interest payable of $438. The Company recorded a derivative liability of $251,590 as of June 30, 2019.
On September 17, 2018, the Company entered into a convertible promissory note with Geneva in the principal amount of $128,000. The note matures on September 26, 2019 and bears interest at 10%. A debt discount of $49,169 was recorded, including a derivative liability of $46,169. Geneva has the right beginning on the date that is 170 days following the date of the note to convert principal and accrued interest into shares of the Company’s common stock. The conversion price is 70% of the average of the three lowest trading prices of the Company’s common stock during the ten trading days ending on the latest complete trading day prior to the date of conversion. As of June 30, 2019, Geneva had converted in full principal of $128,000 and accrued interest of $6,400 into shares of common stock of the Company. As of June 30, 2019, the entire debt discount of $49,169 had been amortized.
On September 26, 2018, the Company entered into a convertible promissory note with BHP in the principal amount of $52,000, with an original issue discount of $2,000. The note matures on September 17, 2019 and bears interest at 8%. BHP was issued 75,000 shares of the Company’s common stock valued at $26,625 as a fee. A debt discount of $46,840 was recorded, including a derivative liability of $17,687. BHP has the right beginning on the date that is 31 days following the date of the note to convert principal and accrued interest into shares of the Company’s common stock. The conversion price is 70% of the average of the three lowest trading prices of the Company’s common stock during the ten trading days ending on the latest complete trading day prior to the date of conversion. As of June 30, 2019, BHP had converted in full principal of $57,200, including a penalty added to principal of $5,200, and accrued interest of $4,512 into shares of common stock of the Company. As of June 30, 2019, the entire debt discount of $46,840 had been amortized.
On September 26, 2018, the Company entered into a convertible promissory note with Armada in the principal amount of $52,000, with an original issue discount of $2,000. The note matures on September 17, 2019 and bears interest at 8%. Armada was issued 75,000 shares of the Company’s common stock valued at $26,625 as a fee. A debt discount of $46,840 was recorded, including a derivative liability of $17,687. Armada has the right beginning on the date that is 31 days following the date of the note to convert principal and accrued interest into shares of the Company’s common stock. The conversion price is 70% of the average of the three lowest trading prices of the Company’s common stock during the ten trading days ending on the latest complete trading day prior to the date of conversion. As of June 30, 2019, BHP had converted in full principal of $57,200, including a penalty added to principal of $5,200, and accrued interest of $4,512 into shares of common stock of the Company. As of June 30, 2019, the entire debt discount of $46,840 had been amortized.
On July 25, 2016, the Company entered into a convertible promissory note with River North Equity, LLC (“River North”) for $33,333. The convertible promissory note had a maturity date of March 29, 2017 and bore interest at 10%. The convertible promissory note provided for an OID of $3,333, a deduction of $4,000 for River North’s legal fees, and the Company recorded a debt discount of $30,051. The conversion price was the lower of 65% of the lowest traded price for the twenty consecutive trading days immediately preceding the applicable conversion date. In July 2017, River North converted the remaining principal of $4,660 into common shares of the Company and the accrued interest payable balance of $1,236 was written off, extinguishing the debt in full.
On October 6, 2016, the Company entered into a convertible promissory note with EMA Financial, LLC (“EMA”) for $33,000. The note had a maturity date of October 6, 2017 and bore interest at 12%. The Company recorded a debt discount of $33,000 and a derivative liability of $45,358. The conversion price was the lower of 50% of the lowest traded price for the twenty consecutive trading days immediately preceding the applicable conversion date or the closing bid price on the original issue date. In July 2017, EMA converted the remaining principal of $8,916, accrued interest payable of $2,715 and penalties totaling $29,908 into common shares of the Company, extinguishing the debt in full.
On December 2, 2016, the Company entered into a convertible promissory note with Global Opportunity Group, LLC (“Global”) for $18,700. The note had a maturity date of December 2, 2017 and bore interest at 12%. The convertible promissory note provided for an OID of $1,700; therefore, the net proceeds to the Company was $17,000. The Company recorded a debt discount and a derivative liability of $17,376. The conversion price was the lower of 50% of the lowest traded price for the twenty consecutive trading days immediately preceding the applicable conversion date or the closing bid price on the original issue date. In July and August 2017, Global converted the entire principal of $18,700 and fees totaling $1,250 into common shares of the Company and the accrued interest payable balance of $1,541 was written off, extinguishing the debt in full.
On December 13, 2016, the Company entered into a convertible promissory note with GPL Ventures LLC (‘GPL”) for $10,000. The note had a maturity date of July 13, 2017 and bore interest at 12%. The Company recorded a debt discount and derivative liability of $8,932. The conversion price was the lower of 50% of the lowest traded price for the twenty consecutive trading days immediately preceding the applicable conversion date or the closing bid price on the original issue date. In July 2017, GPL converted the entire principal of $10,000 into common shares of the Company and the accrued interest payable balance of $687 was written off, extinguishing the debt in full.
On February 13, 2017, the Company entered into a convertible promissory note with Global for $10,000. The note had a maturity date of February 13, 2018 and bore interest at 2%. The convertible promissory note provided for an OID of $1,000. Therefore, the net proceeds to the Company was $9,000. The Company recorded a debt discount and derivative liability of $8,487. The conversion price was 50% of the lowest traded price for the twenty consecutive trading days immediately preceding the applicable conversion date. On September 15, 2017, Global sold the $10,000 note and $1,117 accrued interest payable to A1 Solar Corp (“A1 Solar”). In October 2017 and January 2018, A1 Solar converted the entire principal of $11,117 and accrued interest of $77 into common shares of the Company, extinguishing the debt in full.
On March 28, 2017, the Company entered into a convertible promissory note with Howard Schraub (“Schraub”) for $16,500. The note had a maturity date of March 28, 2018 and bore interest at 10%. The Company recorded a debt discount of $16,500 and a derivative liability of $19,999. The conversion price was 50% of the lowest traded price for the twenty consecutive trading days immediately preceding the applicable conversion date. Additionally, the Company issued 12,100 seven-year warrants for common stock with an exercise price of $0.50 per share, subject to certain adjustments, and a cashless exercise option. These warrants were surrendered to the Company and cancelled on May 8, 2017. On July 31, 2017, Schraub assigned the $16,500 note to Global. In January 2018, Global converted the entire principal of $16,500 and accrued interest of $1,279 into common shares of the Company, extinguishing the debt in full.
On April 4, 2017, the Company entered into a convertible promissory note with Schraub for $20,000. The note had a maturity date of April 4, 2018 and bore interest at 10%. A debt discount of $20,000 and a derivative liability of $23,381 were recorded. The conversion price was 50% of the lowest traded price for the twenty consecutive trading days immediately preceding the applicable conversion date. Additionally, the Company issued 15,000 seven-year warrants for common stock with an exercise price of $0.50 per share, subject to certain adjustments, and a cashless exercise option. These warrants were surrendered to the Company and cancelled on May 8, 2017. On July 31, 2017, Schraub assigned the $20,000 note to Global. In October 2017 and December 2017, Global converted principal of $7,925 into common shares of the Company and on December 31, 2017 the Company issued marketable securities to Global in exchange for the remaining principal of $12,075 and accrued interest of $1,366, extinguishing the debt in full.
On December 30, 2017, the Company and Global entered into an Exchange Agreement pursuant to which warrants held by Global to purchase a total of 11,115 shares of the Company’s common stock were cancelled in exchange for a convertible promissory note payable to Global in the principal amount of $25,000. The note had a maturity date of December 30, 2018 and bore interest at an annual rate of 5%, compounded monthly. A debt discount of $25,000 and a derivative liability of $324,629 was recorded. Pursuant to a Purchase and Escrow Agreement dated December 31, 2017 between the Company and Global, the $25,000 principal and accrued interest payable of $3 were extinguished.
On July 6, 2017, Schraub converted fees of $600 into 12,370 common shares of the Company.
9. STOCKHOLDERS’ DEFICIT
Preferred Stock
Series A Preferred Stock
On January 25, 2019, the Board of Directors of the Company approved a resolution to increase the number of authorized preferred shares to 20,000,000 shares.
In March 2015, the Company filed with the State of Nevada a Certificate of Designation establishing the designations, preferences, limitations and relative rights of 1,000,000 shares of the Company's Series A preferred stock. Holders of the Series A preferred stock have the right to vote in aggregate, on all shareholder matters equal to 1,000 votes per share of Series A preferred stock. The shares of Series A preferred stock are not convertible into shares of common stock.
The Company has 1,000,000 shares of Series A preferred stock authorized, with 500,000 shares issued and outstanding as of June 30, 2019 and 2018, which were issued in March 2015 to members of the Company’s Board of Directors in consideration for services.
Series B Preferred Stock
On December 21, 2015, the Company filed a Certificate of Designation for a new Series B convertible preferred stock with the State of Nevada following approval by the board of directors of the Company. Five Hundred Thousand (500,000) shares of the Company's authorized preferred stock are designated as the Series B convertible preferred stock, par value of $0.001 per share and with a stated value of $0.001 per share (the "Stated Value"). Holders of Series B preferred stock shall be entitled to receive dividends, when and as declared by the Board of Directors out of funds legally available therefor. At any time and from time to time after the issuance of shares of the Series B preferred stock, each issued share of Series B preferred stock is convertible into 100 shares of the Company’s common stock. The holders of the Series B preferred stock shall have the right to vote together with holders of common stock, on an as "converted basis", on any matter that the Company's shareholders may be entitled to vote on, either by written consent or by proxy. Upon any liquidation, dissolution or winding-up of the Company, the holders of the Series B preferred stock shall be entitled to receive out of the assets of the Company, whether such assets are capital or surplus, for each share of Series B preferred stock an amount equal to the Stated Value, and all other amounts in respect thereof then due and payable prior to any distribution or payment shall be made to the holders of any junior securities.
The Company has 500,000 shares of Series B preferred stock authorized, with 30,000 and 309,166 shares issued and outstanding as of June 30, 2019 and 2018, respectively.
During the years ended June 30, 2019 and 2018, the Board of Directors authorized the issuance to Steve Rubakh of a total of 70,000 and 110,000 shares of Series B preferred stock, respectively, as part of his compensation package. Stock-based compensation – related party of $1,312,000 and $809,000 was recorded for the years ended June 30, 2019 and 2018, respectively, based on the market price of the Company’s common stock on an “as converted to common” basis.
On October 25, 2017, four investors entered into subscription agreements for the purchase of a total of 16,000 shares of Series B preferred stock for cash at $10 per share. Of the shares, 12,500 shares were issued for cash of $125,000 and a stock subscription payable of $35,000 was recorded for the other 3,500 shares. On January 9, 2019, the 3,500 shares of Series B preferred stock were issued for stock subscriptions payable of $35,000.
As more fully discussed in Note 6, in April 2018, the Company entered into two Asset Purchase Agreements with digiMine for the purchase of digiMine’s digital currency mining operations. The Company issued a total of 36,666 shares of Series B Preferred stock valued at $1,163,806 by an independent valuation firm.
As discussed in Note 5, on August 2, 2018, the Company entered into an Asset Purchase Agreement for the purchase of 182 cryptocurrency mining machines. As consideration for the purchase of the machines, the Company issued 38,018 shares of its Series B convertible preferred stock, valued on an “as converted to common” basis at an aggregate of $3,003,422. In December 2018, a total of 1,800 shares of Series B preferred stock originally issued pursuant to the Asset Purchase Agreement were returned to the Company and cancelled. In February 2019, an additional 1,200 shares of Series B preferred stock originally issued pursuant to the Asset Purchase Agreement were returned to the Company and cancelled.
During the year ended June 30, 2019, a total of 97,684 shares of Series B preferred stock were converted into 9,768,400 shares of common stock, including 30,000 shares converted by Mr. Rubakh into 3,000,000 shares of common stock of the Company. The Company recorded the conversions at $9,768, the par value of the common stock issued.
During the year ended June 30, 2019, a total of 3,000 shares of Series B preferred stock, valued at par value of $3, were returned to the Company and cancelled.
As discussed in Note 6, on May 21, 2019, the Company and digiMine entered into a Preferred Stock Exchange Agreement pursuant to which digiMine agreed to surrender 20,000 shares of the Company’s Series B preferred stock held by it and terminate its rights under the Security and Pledge Agreement, dated April 30, 2018, in exchange for 10,000,000 shares the Company’s common stock, which are to be issued in ten tranches of 1,000,000 shares each. The unissued common shares were valued at $1,650,000 and the Company recorded a derivative liability and corresponding loss on exchange of Series B preferred stock for this amount. As a result of the Preferred Stock Exchange Agreement and prior conversions by digiMine of Series B preferred stock into common stock, derivative liabilities of $2,571,265 were settled. Through June 30, 2019, a total of 2,000,000 common shares valued at a total of $285,000, were issued by the Company to digiMine.
Common Stock
On January 25, 2019, the Board of Directors of the Company approved a resolution to increase the number of authorized common shares to 250,000,000. The Company had 29,824,187 and 8,964,103 shares issued and outstanding as of June 30, 2019 and 2018, respectively.
During the year ended June 30, 2019, the Company issued a total of 20,860,084 shares of its common stock.
In May 2019, the Company issued 2,000,000 shares of common stock valued at $285,000 pursuant to a Preferred Stock Exchange Agreement (Note 6).
A total of 220,000 shares of common stock, valued at $82,057, based on the closing market price of stock on the date of grant, were issued to consultants in August and October 2018 and May 2019.
On September 26, 2018, a total of 150,000 shares of common stock valued at $53,250, based on the closing market price of stock on the date of grant, were issued to two lenders as loan fees. See Note 8.
A total of 4,950,000 shares of common stock were issued to a lender in the cashless exercise of warrants from August 2018 through May 2019 recorded at par value of $4,950, resulting in the extinguishment of derivative liabilities of $772,751. No gain or loss was recorded as the conversions were completed within the terms of the warrants. As further discussed in Note 8, the lender converted unexercised warrants into a convertible note payable in the principal amount of $500,000, which amount was recorded as a loss on settlement of warrants, resulting in further extinguishment of derivative liabilities totaling $2,123,969.
During March 2019 through May 2019, a total of 9,768,400 shares of common stock were issued in the conversion of 97,684 shares of Series B preferred stock. No gain or loss was recorded as the conversions were completed within the terms of the Series B preferred stock.
During March 2019 through June 2019, a total of 3,771,684 shares of common stock were issued in the conversion of notes payable principal of $242,400 and accrued interest of $15,367, resulting in the extinguishment of derivative liabilities totaling $95,755. No gain or loss was recorded as the conversions were completed within the terms of the debt agreements.
During the year ended June 30, 2018, the Company issued a total of 3,751,540 shares of its common stock.
On July 6, 2017, 188,240 shares of common stock were issued to a lender in the cashless exercise of warrants recorded at par value of $188. No gain or loss was recorded as the conversions were completed within the terms of the warrants.
On August 31, 2017, 347,222 shares of common stock valued at $15,625 were issued to Steve Rubakh for accrued compensation. See Note 7.
On January 19, 2018, the Company and St. George Investments LLC (“St. George”) entered into a Securities Purchase Agreement, pursuant to which St. George purchased 462,900 restricted common shares of the Company for $750,000. The Company received net proceeds of $720,000. The Company also issued to St. George a three-year warrant for the purchase of 347,175 shares of the Company’s common stock at an exercise price of $2.16 per share. The warrant was valued using the Black-Sholes option pricing model at $1.75 per share, or $607,556. The net proceeds received of $720,000 were allocated $411,429 to the shares purchased and $308,571 to the warrants issued based on estimated relative fair values. No derivative liability was recorded for the warrant as the Company’s equity environment was not considered tainted on the warrant issuance date.
During the year ended June 30, 2018, a total of 2,752,883 shares of the Company’s common stock valued at $193,162 were issued in conversion of $77,818 note principal, $4,073 accrued interest payable, $2,950 in fees and $29,909 in penalties. resulting in the extinguishment of derivative liabilities totaling $78,412. No gain or loss was recorded as the conversions were completed within the terms of the note agreements.
In September 2017, common shares outstanding were increased by 115 shares due to reverse split rounding.
10. WARRANTS
The Company has granted warrants to non-employee lenders in connection with the issuance of certain convertible promissory notes and to an investor in connection with the purchase of common shares of the Company. The Company has also granted warrants to officers and directors. Certain of the warrants have been subsequently surrendered to the Company and cancelled.
Warrant activity for the years ended June 30, 2019 and 2018 is as follows:
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contract Term
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
12,817
|
|
|
$
|
4.33
|
|
|
|
5.25
|
|
|
$
|
-
|
|
Granted
|
|
|
347,175
|
|
|
$
|
2.16
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(502
|
)
|
|
$
|
7.50
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
(11,115
|
)
|
|
$
|
3.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
348,375
|
|
|
$
|
2.20
|
|
|
|
2.55
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(99,713
|
)
|
|
$
|
2.16
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
(248,662
|
)
|
|
$
|
2.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at June 30, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Because the number of common shares to be issued under certain convertible notes payable and other agreements is indeterminate, the Company concluded that the equity environment was tainted as of June 30, 2019. Therefore, all warrants issued prior to that date were included in the Company’s calculations of derivative liabilities. With the cashless exercise of warrants and an exchange of warrants for a convertible promissory note (see Note 8) derivative liabilities totaling $772,751 and $2,123,969, respectively, were extinguished.
11. COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of the date of filing of this report, there were no pending or threatened lawsuits, except as stated below.
On May 4, 2018, the Company and LG Capital Funding, LLC ("LG") entered into a Forbearance Agreement related to a September 29, 2016 judgment for amounts due on a $125,000 promissory note payable to LG. According to terms of the Forbearance Agreement, the Company extinguished the debt in full by paying LG Capital $135,427 in April 2017 and $29,257 on July 11, 2018.
Operating Leases
During the year ended June 30, 2018, the Company consolidated its cryptocurrency mining operations in two locations, Huntingdon Valley, Pennsylvania and Marlboro, New Jersey, where facilities are leased under operating leases. As part of the consolidations, operating leases at two other locations were terminated. Subsequently, during the year ended June 30, 2019, the Company terminated these two operating leases when it further consolidated operations pursuant to a hosting arrangement in Carthage, New York.
The Carthage lease and power purchase agreement was entered into on May 10, 2019 for an initial term of 90 days, with an option to continue the lease for a subsequent 36 months. The Company’s sole obligation under the lease is to pay the lessor $0.41 on every kilowatt hour of electricity consumed in the Company’s cryptocurrency mining operations. Through June 30, 2019, the Company paid the lessor a total of $27,000.
The Company retained its operating lease for its Pennsylvania administrative location, which is on a month-to-month basis at $750 per month.
Total rent expense under operating leases was $81,930 and $49,295 for the years ended June 30, 2019 and 2018, respectively.
As of June 30, 2019, the Company had no obligation for future lease payments under non-cancelable operating leases.
NOTE 12. DERIVATIVE LIABILITIES
The Company as issued convertible notes payable, warrants and Series B preferred stock with put back rights and has entered into exchange and subscription agreements that contain certain provisions that have been identified as derivatives. As of June 30, 2019, the Company has determined that the number of common shares to be issued under these agreements is indeterminate; therefore, the Company concluded that the equity environment is tainted and all additional warrants, stock options convertible debt and obligations to issue common shares are included in the value of derivative liabilities.
The Company estimates the fair value of the derivative liabilities at the issuance date and at each subsequent reporting date, using a multinomial lattice model simulation. The model is based on a probability weighted discounted cash flow model using projections of the various potential outcomes.
During the years ended April 30, 2019 and 2018, we had the following activity in our derivative liabilities:
During the years ended June 30, 2019 and 2018, the Company had the following activity in its derivative liabilities:
|
|
Convertible
Notes Payable
|
|
|
Warrants
|
|
|
Put Back
Rights
|
|
|
Exchange Agreement
|
|
|
Common Stock Subscription
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities at June 30, 2017
|
|
$
|
84,545
|
|
|
$
|
646
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
85,191
|
|
Addition to liabilities for new debt issued
|
|
|
72,617
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
72,617
|
|
Addition to liabilities for put rights issued
|
|
|
-
|
|
|
|
-
|
|
|
|
3,729,109
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,729,109
|
|
Decrease due to conversion/assignment of debt
|
|
|
(480,969
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(480,969
|
)
|
Decrease due to exercise/surrender of warrants
|
|
|
-
|
|
|
|
(28,499
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(28,499
|
)
|
Change in fair value
|
|
|
323,807
|
|
|
|
27,853
|
|
|
|
(842,144
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(490,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities at June 30, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
2,886,965
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,886,965
|
|
Addition to liabilities for new debt/subscription
|
|
|
438,720
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
463,720
|
|
Addition to liabilities for Exchange Agreement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,485,000
|
|
|
|
-
|
|
|
|
1,485,000
|
|
Decrease due to conversions/assignments
|
|
|
(95,758
|
)
|
|
|
(2,124,588
|
)
|
|
|
(2,571,265
|
)
|
|
|
(120,000
|
)
|
|
|
-
|
|
|
|
(4,911,611
|
)
|
Decrease due to exercise/surrender of warrants
|
|
|
-
|
|
|
|
(774,642
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(774,642
|
)
|
Change in fair value
|
|
|
39,087
|
|
|
|
2,899,230
|
|
|
|
(315,700
|
)
|
|
|
(137,800
|
)
|
|
|
(16,478
|
)
|
|
|
2,468,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities at June 30, 2019
|
|
$
|
382,049
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,227,200
|
|
|
$
|
(8,522
|
)
|
|
$
|
1,617,771
|
|
Key inputs and assumptions used in valuing the Company’s derivative liabilities as of June 30, 2019 are as follows:
|
·
|
Stock prices on all measurement dates were based on the fair market value
|
|
|
|
|
·
|
Risk-free interest rate of 1.99% to 2.49%%
|
|
|
|
|
·
|
The probability of future financing was estimated at 100%
|
|
|
|
|
·
|
Computed volatility ranging from 233% to 303%
|
These inputs are subject to significant changes from period to period and to management's judgment; therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material.
13. INCOME TAXES
For the years ended June 30, 2019 and 2018, there was no provision for income taxes and deferred tax assets have been entirely offset by valuation allowances.
As of June 30, 2019, the Company has net operating loss carry forwards of approximately $2,034,586 that expire through the year 2037. The Company’s net operating loss carry forwards may be subject to annual limitations, which could reduce or defer the utilization of the losses as a result of an ownership change as defined in Section 382 of the Internal Revenue Code.
The Company’s income tax expense (benefit) differs from the “expected” tax expense (benefit) for Federal income tax purposes (computed by applying the United States Federal tax rate of 21% to income (loss) before income taxes), as follows:
|
|
Years Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Tax benefit at the statutory rate
|
|
$
|
(1,997,787
|
)
|
|
$
|
(1,171,265
|
)
|
State income taxes, net of federal income tax benefit
|
|
|
417,669
|
|
|
|
66,710
|
|
Non-deductible items
|
|
|
1,726,651
|
|
|
|
1,248,992
|
|
Non-taxable items
|
|
|
6,882
|
|
|
|
(104,668
|
)
|
Change in valuation allowance
|
|
|
(153,415
|
)
|
|
|
(39,769
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
The tax effects of the temporary differences between reportable financial statement income and taxable income are recognized as deferred tax assets and liabilities.
The tax years 2014 through 2019 remain open to examination by federal agencies and other jurisdictions in which it operates.
The tax effect of significant components of the Company’s deferred tax asset at June 30, 2019 and 2018, respectively, are as follows:
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
427,263
|
|
|
$
|
273,848
|
|
Less valuation allowance
|
|
|
(427,263
|
)
|
|
|
(273,848
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
-
|
|
|
$
|
-
|
|
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
Because of the historical earnings history of the Company, the net deferred tax assets as of June 30, 2019 and 2018 were fully offset by a 100% valuation allowance.
14. SUBSEQUENT EVENTS
Management has evaluated subsequent events according to the requirements of ASC TOPIC 855, and has reported the following:
Subsequent to June 30, 2019, the Company issued a total of 9,258,106 shares of its common stock:
|
·
|
5,000,000 shares were issued pursuant to a Series B Exchange Agreement.
|
|
|
|
|
·
|
4,258,106 shares were issued in conversion of $243,000 convertible note principal and $2,150 accrued interest.
|
On July 3, 2019, the Company entered into a third convertible promissory note with Armada in the principal amount of $137,500, with an original issue discount of $12,500. The note matures on July 3, 2020 and bears interest at 8%. Armada has the right at any time after the date of the note to convert principal and accrued interest into shares of the Company’s common stock. The conversion price is 70% of the average of the five lowest trading prices of the Company’s common stock during the fifteen trading days ending on the latest complete trading day prior to the date of conversion.
On July 3, 2019, the Company entered into a third convertible promissory note with BHP in the principal amount of $137,500, with an original issue discount of $12,500. The note matures on July 3, 2020 and bears interest at 8%. Armada has the right at any time after the date of the note to convert principal and accrued interest into shares of the Company’s common stock. The conversion price is 70% of the average of the five lowest trading prices of the Company’s common stock during the fifteen trading days ending on the latest complete trading day prior to the date of conversion.