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 March 31, 2020 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 a customer list. As
consideration the Company issued to its sole shareholder (i) 175,000 of the common stock of CleanSpark, (ii) a five-year warrant
to purchase 50,000 shares of CleanSpark common stock at an exercise price of $16.00 per share, and (iii) a five-year warrant to
purchase 50,000 shares of CleanSpark common stock at an exercise price of $20.00 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
to CleanSpark Critical Power Systems, Inc.
On December 10, 2019, the Financial Industry
Regulatory Authority (“FINRA”) approved the 1:10 reverse stock split of the Company’s common stock. The reverse
stock split took effect on December 11, 2019. Unless otherwise noted, impacted amounts and share information in this report and
included in the financial statements and notes thereto as of and for the period ended March 31, 2020 and September 30, 2019, have
been adjusted for the stock split as if such stock split occurred on the first day of the first period presented.
On January 31, 2020, the Company entered into a Stock
Purchase Agreement (the “Agreement”) with p2klabs, Inc., a Nevada corporation (“p2k”), and its sole stockholder,
Amer Tadayon (“Seller”), whereby the Company purchased all of the issued and outstanding shares of p2k from the Seller
(the “Transaction”) in exchange for an aggregate purchase price of cash and equity of $1,688,935. The Transaction closed
simultaneously upon the execution of the Agreement by the parties on January 31, 2020. As a result of the Transaction, p2k, is
now a wholly-owned subsidiary of the Company. (See note 3 for details.)
Line of Business
Through
CleanSpark, LLC, the Company provides microgrid solutions to military, commercial and residential properties.
The services
offered consist of, microgrid design, engineering and consulting services. The work is generally performed under fixed price bid
contracts and negotiated price contracts.
Through
CleanSpark Critical Power Systems, Inc., the Company provides custom hardware solutions for distributed energy systems that serve
military and commercial residential properties. The equipment is generally sold under negotiated fixed price contracts.
Through
p2kLabs, Inc., the Company provides design, software development and other technology-based consulting services. The services provided
are generally an hourly arrangement or fixed-fee project-based arrangements.
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 $7,731,352 during the six months ended March 31, 2020. 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 8 for additional details.) As of March 31, 2020, the Company had working
capital of $3,713,881.
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, CleanSpark
Critical Power Systems Inc. and p2kLabs, 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, 2019 10-K. The revised accounting policy on revenue recognition is provided below. The
Company accounts for revenue contracts with customers through the following steps:
|
•
|
Identification of the contract, or contracts, with a customer
|
|
•
|
Identification of the performance obligations in the contract
|
|
•
|
Determination of the transaction price
|
|
•
|
Allocation of the transaction price to the performance obligations in the contract
|
|
•
|
Recognition of revenue when, or as, the Company satisfies a performance obligation
|
Engineering, Service & Installation
or Construction 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 Sheets.
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.
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 upon shipment or when the customer has physical possession
of the product depending on contract terms. 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 shipment 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 contract liabilities.
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 1 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.
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 and $57,077
as of March 31, 2020 and September 30, 2019, respectively. 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 $611,000 and $360,000 as of March 31, 2020 and
September 30, 2019, respectively, have been deducted from contract assets. Contract liabilities represent amounts billed to
clients in excess of revenue recognized to date. The Company recorded $590,241 and $499,401 in contract liabilities as of
March 31, 2020 and September 30, 2019, respectively.
Revenues
from software
The Company
derives its revenue from subscription fees from customers for access to its mVSO platform. The Company’s policy is to exclude
sales and other indirect taxes when measuring the transaction price of its subscription agreements.
The Company’s subscription agreements
generally have monthly or annual contractual terms. Revenue is recognized ratably over the related contractual term beginning on
the date that the platform is made available to a customer. Access to the platform represents a series of distinct services as
the Company continually provides access to, and fulfills its obligation to the end customer over the subscription term. The series
of distinct services represents a single performance obligation that is satisfied over time.
Revenues from design, software
development and other technology-based consulting services
For service contracts performed under
Master Services Agreements (“MSA”) and accompanying Statement(s) of Work (“SOW”), revenue is recognized
based on the performance obligation(s) outlined in the SOW which is typically hours worked or specific deliverable milestones.
In the case of a milestone-based SOW, the Company recognizes revenues as each deliverable is signed off by the customer.
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 six months ended March 31, 2020 and
2019, the Company reported revenues of $4,635,107 and $986,806, respectively.
Cash and cash equivalents – For
purposes of the consolidated 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 $4,506,510 and $7,838,857 in cash
and no cash equivalents as of March 31, 2020 and September 30, 2019, respectively.
Accounts
receivable - is comprised of uncollateralized customer obligations due under normal trade terms. The Company performs ongoing
credit evaluation of its customers and management closely monitors outstanding receivables based on factors surrounding the credit
risk of specific customers, historical trends, and other information. The carrying amount of accounts receivable is reviewed periodically
for collectability. If management determines that collection is unlikely, an allowance that reflects management’s best estimate
of the amounts that will not be collected is recorded. Accounts receivable are presented net of an allowance for doubtful accounts
of $373,285 and
$254,570 at March 31, 2020, and September 30, 2019, respectively.
Retention receivable is the amount withheld
by a customer until a contract is completed. Retention receivables of $158,300 and $159,989 were included in the balance of trade
accounts receivable as of March 31, 2020 and September 30, 2019, respectively.
Investment securities - Investment securities
include debt securities and equity securities. Debt securities are classified as available for sale (“AFS”) and are
reported as an asset in the Consolidated Balance Sheet at their estimated fair value. As the fair values of AFS debt securities
change, the changes are reported net of income tax as an element of OCI, except for other-than-temporarily-impaired securities.
When AFS debt securities are sold, the unrealized gains or losses are reclassified from OCI to non-interest income. Securities
classified as AFS are securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity.
Any decision to sell a security classified as AFS would be based on various factors, including significant movements in interest
rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, decline in credit quality, and
regulatory capital considerations.
Interest income is recognized based on the
coupon rate and increased by accretion of discounts earned or decreased by the amortization of premiums paid over the contractual
life of the security.
For individual debt securities where the Company
either intends to sell the security or more likely than not will not recover all of its amortized cost, the OTTI is recognized
in earnings equal to the entire difference between the security's cost basis and its fair value at the balance sheet date. For
individual debt securities for which a credit loss has been recognized in earnings, interest accruals and amortization and accretion
of premiums and discounts are suspended when the credit loss is recognized. Interest received after accruals have been suspended
is recognized in income on a cash basis.
The Company holds
investments in both publicly held and privately held equity securities.
Privately
held equity securities are recorded at cost and adjusted for observable transactions for same or similar investments of the issuer
(referred to as the measurement alternative) or impairment. All gains and losses on privately held equity securities, realized
or unrealized, are recorded through gains or
losses on equity securities on the consolidated statement of operations.
Publicly held equity securities are based on
fair value accounting with unrealized gains or losses resulting from changes in fair value reflected as unrealized gains or losses
on equity securities in our consolidated statement of operations.
Concentration Risk
At times throughout the year, the Company may
maintain cash balances in certain bank accounts in excess of FDIC limits. As of March 31, 2020, the cash balance in excess of the
FDIC limits was $4,256,510. 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.)
Warranty Liability – The Company
establishes warranty liability reserves to provide for estimated future expenses as a result of installation and product defects,
product recalls and litigation incidental to the Company’s business. Liability estimates are determined based on management’s
judgment, considering such factors as historical experience, the likely current cost of corrective action, manufacturers’
and subcontractors’ participation in sharing the cost of corrective action, consultations with third party experts such as
engineers, and discussions with the Company’s general counsel and outside counsel retained to handle specific product liability
cases. The Company’s manufacturers and service providers currently provide substantial warranties between ten to twenty-five
years with full reimbursement to replace and install replacement parts. Warranty costs and associated liabilities were $0 and $0
at March 31, 2020 and September 30, 2019, respectively.
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 and non-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 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 March 31, 2020, there are 9,603,552 shares
issuable upon exercise of outstanding options, warrants and convertible debt which have been excluded as anti-dilutive.
Fair value of financial instruments and
derivative asset –The carrying value of cash, accounts payable and accrued expenses, and debt (See Notes 8 & 9) 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 debt is
also stated at fair value of $10,900,000 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.
|
The following table presents the Company’s
financial instruments that are measured and recorded at fair value on the Company’s balance sheets
on a recurring basis, and their level within the fair value hierarchy as of March 31, 2020:
|
|
Amount
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
Derivative asset
|
|
$
|
824,891
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
824,891
|
Investment in equity security
|
|
|
252,000
|
|
|
|
252,000
|
|
|
|
—
|
|
|
$
|
—
|
Investment debt security
|
|
|
456,744
|
|
|
|
—
|
|
|
|
—
|
|
|
|
456,744
|
Total
|
|
$
|
1,533,635
|
|
|
$
|
252,000
|
|
|
$
|
—
|
|
|
$
|
1,281,635
|
The below table presents the change in the fair value
of the derivative asset and investment in debt security during the six months ended March 31, 2020:
|
|
Amount
|
Balance at September 30, 2019
|
|
$
|
—
|
Fair value at issuance, net of premium
|
|
|
456,744
|
Gain on derivative asset
|
|
|
824,891
|
Balance at March 31, 2020
|
|
$
|
1,281,635
|
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. The new standard did
not have a material impact on the Company’s results of operations or cash flows.
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 guidance
within ASU 2016-02, Leases. The amendments in ASU 2016-02 to Topic 842, Leases, require lessees to
recognize the lease assets and lease liabilities arising from operating leases in the statement of financial position. The accounting
applied by a lessor is largely unchanged from that applied under previous GAAP. The Company adopted the amendments to Topic 842
on October 1, 2019 using the modified retrospective approach. The Company elected the transition option issued under ASU 2018-11, Leases
(Topic 842) Targeted Improvements, which allows entities to
continue to apply the legacy guidance in ASC 840, Leases,
to prior periods, including disclosure requirements. Accordingly, prior period financial results and disclosures have not been
adjusted. The Company also elected to apply the package of practical expedients permitting entities to forgo reassessment
of: 1) expired or existing contracts that may contain leases; 2) lease classification of expired or existing leases; and 3) initial
direct costs for any existing leases. The Company has also elected to apply the short term lease measurement and recognition exemption
to leases with an initial term of 12 months or less. The most significant impact of the new standard on the Company’s Consolidated
Financial Statements was the recognition of a right of use asset and lease liability for operating leases for which the Company
is the lessee. Upon adoption of this guidance, on October 1, 2019, the Company recorded a Right of use asset and corresponding
lease liability of $85,280 and $85,280, respectively, on the Consolidated Balance Sheet. No cumulative effect adjustment to retained
earnings resulted from adoption of this guidance. The new standard did not have a material impact on the Company’s results
of operations or cash flows.
In January, 2017 the FASB issued guidance within
ASU 2017-01, Business Combinations. The amendments in ASU 2017-01 Clarify the definition of a business by providing a framework
to use in determining when a set of assets is a business. ASU 2017-01 is effective for us for annual periods beginning October
1, 2019. The new standard did not have a material impact on the Company’s results of operations or cash flows.
In January, 2017 the FASB issued guidance within
ASU 2017-04, Intangibles-Goodwill and Other. The amendments in ASU 2017-04 simplify the subsequent measurement of goodwill by comparing
the fair value of a reporting unit with its carrying amount. ASU 2017-04 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.
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 P2KLABS, INC.
On January 31, 2020, the Company, entered
into an Agreement with p2k, and its sole stockholder, Amer Tadayon, whereby the Company purchased all of the issued and outstanding
shares of p2k in exchange for an aggregate purchase price of cash and equity of $1,688,935. The Transaction closed simultaneously
upon the execution of the Agreement by the parties on January 31, 2020.
As a result of the Transaction, p2k is now a wholly-owned
subsidiary of the Company.
Pursuant to the terms of the Agreement, the purchase
price was as follows:
|
a)
|
$1,039,500
in cash was paid to the Seller;
|
|
|
|
|
b)
|
31,183
restricted shares of the Company’s common stock, valued at $145,000, were issued to the Seller (the “Shares”).
The Shares are subject to certain lock-up and leak-out provisions whereby the Seller may sell an amount of Shares equal to ten
percent (10%) of the daily dollar trading volume of the Company’s common stock on its principal market for the prior 30 days
(the “Leak-Out Terms”);
|
|
|
|
|
c)
|
$115,500
in cash was paid to an independent third-party escrow where such cash is subject to offset for adjustments to the purchase price
and indemnification purposes; and
|
|
|
|
|
d)
|
64,516 restricted shares of the Company’s common stock, valued at $300,000,
were issued to an independent third-party escrow (the “Holdback Shares”). The Holdback Shares will be released to
Seller once p2k achieves certain revenue milestones for the future performance of p2k.
The Holdback Shares will also be subject to the
Leak-Out Terms once they are released from escrow 12 months from closing.
The Shares and Holdback Shares were
deemed to have a fair market value of $4.65 per share which was the closing price of the Company’s common stock on January
31, 2020.
|
|
|
|
|
e)
|
26,950
Common Stock options which were deemed to have a fair market value of $88,935 on the date of the closing of the Transaction.
|
The Company accounted for the acquisition of p2k as
an acquisition of a business under ASC 805.
The Company determined the fair value of the consideration
given to the Seller in connection with the Transaction in accordance with ASC 820 was as follows:
Consideration:
|
|
Fair Value
|
Cash
|
|
$
|
1,155,000
|
95,699 shares of common stock
|
|
$
|
445,000
|
26,950 common stock options
|
|
$
|
88,935
|
Total Consideration
|
|
$
|
1,688,935
|
The total purchase price was allocated to identifiable assets deemed acquired, and liabilities assumed, of the Company’s
acquisition of p2k, based on their estimated fair values as indicated below. The business combination accounting is not yet
complete and the amounts assigned to the assets acquired and the liabilities assumed are provisional. Therefore, this may
result in future adjustments to the provisional amounts as new information is obtained about the facts and circumstances that
existed at the acquisition date.
Purchase
Price Allocation:
|
|
|
Customer
list
|
|
$
|
1,045,000
|
Design
and other assets
|
|
$
|
123,000
|
Goodwill
|
|
$
|
642,388
|
Other assets and liabilities
assumed, net
|
|
$
|
(121,453)
|
Total
|
|
$
|
1,688,935
|
The following is the unaudited
pro forma information assuming the acquisition of p2k occurred on October 1, 2018:
|
|
For
the Three Months Ended
|
|
For
the Six Months Ended
|
|
|
March
31, 2020
|
|
March
31, 2019
|
|
March
31, 2020
|
|
March
31, 2019
|
Net sales
|
|
$
|
3,716,725
|
|
|
$
|
924,906
|
|
|
$
|
5,006,806
|
|
|
$
|
1,409,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,970,217
|
)
|
|
$
|
(7,770,325
|
)
|
|
$
|
(7,851,673
|
)
|
|
$
|
(10,044,709)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share - basic and diluted
|
|
$
|
(1.15
|
)
|
|
$
|
(1.84
|
)
|
|
$
|
(1.56
|
)
|
|
$
|
(2.52)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic and diluted
|
|
|
5,188,384
|
|
|
|
4,217,662
|
|
|
|
5,031,749
|
|
|
|
3,980,517
|
The unaudited pro forma consolidated
financial results have been prepared for illustrative purposes only and do not purport to be indicative of the results of operations
that actually would have resulted had the acquisition occurred on the first day of the earliest period presented, or of future
results of the consolidated entities. The unaudited pro forma consolidated financial information does not reflect any operating
efficiencies and cost savings that may be realized from the integration of the acquisition. All transitions that would be considered
inter-company transactions for proforma purposes have been eliminated.
4. INVESTMENT IN INTERNATIONAL LAND ALLIANCE
International Land Alliance, Inc.
On November 5, 2019, CleanSpark entered into
a binding Memorandum of Understanding (the “MOU”) with International Land Alliance, Inc., a Wyoming corporation (“ILAL”),
in order to lay a foundational framework where the Company will deploy its energy solutions products and services to ILAL, its
energy projects, and its customers.
Pursuant to the terms of the MOU, the parties
will work in good faith and pursue the following priorities over the next twelve (12) months:
|
1)
|
The Company will perform feasibility studies to outline the details and scope of developing microgrid energy solutions to support ILAL projects.
|
|
2)
|
ILAL will (a) exclusively sell the Company’s products and services as part of ILAL’s power solution for its offering of off-grid properties, and (b) include the Company’s mPulse DER Energy Manager within the off-grid energy project bids;
|
|
3)
|
The Company will provide on-site testing, training, and support services to ILAL’s projects and operations
|
In connection with the MOU, and in order to
support the power and energy needs of ILAL’s development and construction of certain projects, the Company entered into a
Securities Purchase Agreement, dated as of November 6, 2019, with ILAL (the “SPA”).
Pursuant to the terms of the SPA, ILAL sold,
and the Company purchased 1,000 shares of Series B Preferred Stock (the “Preferred Stock”) of ILAL for an aggregate
purchase price of US $500,000 (the “Stock Transaction”), less certain expenses and fees. The Series B Preferred Stock
will accrue cumulative in kind accruals at a rate of 12% per annum and shall increase by 10% per annum upon the occurrence of any
trigger event. ILAL may redeem by paying in cash within 9 months from the issuance date. The Preferred Stock becomes convertible
into common stock after 9 months or when certain triggering events occur. In the event of a conversion of any shares of the Preferred
Stock, the number of conversion shares is equal to the face value of the Preferred Stock divided by the applicable Conversion Price
(defined at 65% of the 5 lowest individual daily volume weighted average prices of the Common Stock from issuance to conversion
less $0.05 per share, but no less than the Floor Price ($0.01). While the Preferred Stock is outstanding if triggering events occur,
the Conversion Rate may be decreased by 10% and the accrual rate increased by 10% for each triggering event.
The Company believes that, pursuant to the
terms and conditions of the SPA, at least two triggering events have occurred. Under this good faith belief, the Company believes
that as a result of the occurrence of these triggering events, the Series B Preferred stock should be convertible at the Company’s
option, and the interest and conversion rate should be adjusted by 10% for each such occurrence.
The Preferred Stock is recorded as an AFS debt
security and is reported at its estimated fair value as of March 31, 2020. As of March 31, 2020, the Company has identified a derivative
instrument in accordance with ASC Topic No. 815 due to the variable conversion feature upon certain triggering events that occurred
during the period. Topic No. 815 requires the Company to account for the conversion feature on its balance sheet at fair value
and account for changes in fair value as a derivative gain or loss.
The Black-Scholes model utilized the following
inputs to value the derivative asset at the date in which the derivative asset was determined through March 31, 2020.
Fair value assumptions:
|
|
March 31, 2020
|
Risk free interest rate
|
|
|
0.17%
|
Expected term (months)
|
|
|
4
|
Expected volatility
|
|
|
152%
|
Expected dividends
|
|
|
0%
|
In
connection with the Stock Transaction, ILAL issued 350,000 shares of its common stock to the Company as commitment shares. The
commitment shares are recorded at $252,000, or $0.72 per share, which was the quoted price of the shares on March 31, 2020.
5. CAPITALIZED SOFTWARE
Capitalized software consists of the following
as of March 31, 2020 and September 30, 2019:
|
|
March 31, 2020
|
|
September 30, 2019
|
mVSO software
|
|
$
|
437,136
|
|
|
$
|
352,211
|
mPulse software
|
|
|
741,846
|
|
|
|
741,846
|
Capitalized Software:
|
|
|
1,178,982
|
|
|
|
1,094,057
|
Less: accumulated amortization
|
|
|
(118,565
|
)
|
|
|
(38,860)
|
Capitalized Software, net
|
|
$
|
1,060,417
|
|
|
$
|
1,055,197
|
Capitalized
software amortization recorded as cost of revenues and product development expense for the six months ended March 31, 2020 and
2019 was $79,705 and $689,741, respectively.
6. INTANGIBLE ASSETS
Intangible assets consist of the following
as of March 31, 2020 and September 30, 2019:
|
|
March 31, 2020
|
|
September 30, 2019
|
Patents
|
|
$
|
74,112
|
|
|
$
|
74,112
|
Websites
|
|
|
8,115
|
|
|
|
16,482
|
Customer list and non-compete agreement
|
|
|
6,767,024
|
|
|
|
5,722,024
|
Design assets
|
|
|
123,000
|
|
|
|
—
|
Trademarks
|
|
|
5,928
|
|
|
|
5,928
|
Trade secrets
|
|
|
4,370,269
|
|
|
|
4,370,269
|
Intangible assets:
|
|
|
11,348,448
|
|
|
|
10,188,815
|
Less: accumulated amortization
|
|
|
(4,019,659
|
)
|
|
|
(2,758,733)
|
Intangible assets, net
|
|
$
|
7,328,789
|
|
|
$
|
7,430,082
|
Amortization expense for the six months ended
March 31, 2020 and 2019 was $1,269,293 and $635,955, respectively.
7. FIXED ASSETS
Fixed assets consist of the following as of
March 31, 2020 and September 30, 2019:
|
|
March 31, 2020
|
|
September 30, 2019
|
Machinery and equipment
|
|
$
|
201,856
|
|
|
$
|
212,082
|
Leasehold improvements
|
|
|
17,965
|
|
|
|
—
|
Furniture and fixtures
|
|
|
110,586
|
|
|
|
75,121
|
Total
|
|
|
330,407
|
|
|
|
287,203
|
Less: accumulated depreciation
|
|
|
(186,512
|
)
|
|
|
(142,133)
|
Fixed assets, net
|
|
$
|
143,895
|
|
|
$
|
145,070
|
Depreciation expense for the six months ended
March 31, 2020 and 2019 was $32,071 and $21,164, respectively.
8. LOANS
Long term
Long-term loans payable consist of the following:
|
|
March 31, 2020
|
|
September 30, 2019
|
|
|
|
|
|
Promissory notes
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
150,000
|
|
|
$
|
150,000
|
Current
Current loans payable consist of the following:
|
|
March 31, 2020
|
|
September 30, 2019
|
|
|
|
|
|
Promissory notes
|
|
$
|
—
|
|
|
$
|
50,000
|
Insurance financing loans
|
|
|
—
|
|
|
|
17,467
|
Current loans payable:
|
|
|
—
|
|
|
|
67,467
|
Unamortized debt discount
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Total, net of unamortized discount
|
|
$
|
—
|
|
|
$
|
67,467
|
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.
On September 5, 2019, the investor extended the maturity date to September 5, 2021 and the modification was not deemed substantial.
The note is secured by 15,000 shares which are held in escrow and would be issued to the note holder only in the case of an uncured
default. As of March 31, 2020, the Company owed $150,000 in principal and $0 in accrued interest under the terms of the agreement
and recorded interest expense of $6,767 and $6,729 during the six months ended March 31, 2020 and 2019, 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 was secured by 10,000 shares which would be issued to the note holder only in the case of an uncured default. The Company
repaid all principal and outstanding interest on August 13, 2019 and the 10,000 shares of common stock held as collateral were
returned to treasury and cancelled on August 26, 2019. The Company recorded interest expense of $0 and $4,985 for the six months
ended March 31, 2020 and 2019, 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 was secured by 5,000 shares which would
be issued to the note holder only in the case of an uncured default. The Company repaid all principal and outstanding interest
on December 5, 2019 and the 5,000 shares of common stock held as collateral were returned to treasury and cancelled on January
13, 2020. The Company recorded interest expense of $802 and $2,247 for the six months ended March 31, 2020 and 2019, respectively.
Insurance financing loans
On February 11, 2019, the Company executed
an unsecured 5.6% installment loan with a total face value of $78,603 with a financial institutional 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 September 30, 2019, $17,467 in principal remained outstanding. The Company
repaid all principal and outstanding interest on November 4th, 2019.
9. CONVERTIBLE NOTES PAYABLE
Short-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 10,000 shares of common stock and a Common Stock Purchase Warrant to acquire up to 308,333 shares of common stock
for a term of three years (the “Warrant”) on a cash-only basis at an exercise price of $20.00 per share with respect
to 125,000 Warrant Shares, $25.00 with respect to 100,000 Warrant Shares, $50.00 with respect to 50,000 Warrant Shares and $75.00
with respect to 33,333 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 $0.50 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 178,473 shares of the Company common stock at an
effective conversion price of $18.90, 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 71,389 shares of the Company common stock at an effective
conversion price of $18.90, 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 July 9, 2019, in accordance with
the terms of the agreement the investor was issued an additional 45,614 shares of common stock due to the decrease in stock price
resulting in an effective conversion price of $15.06.
On July 16, 2019, in accordance with
the terms of the agreement the investor was issued an additional 18,246 shares of common stock due to the decrease in stock price
resulting in an effective conversion price of $15.06.
On July 19, 2019, an investor converted
$500,000 in principal and $175,000 in interest as a conversion premium, for 45,109 shares of the Company common stock at an effective
conversion price of $15.00 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 August 23, 2019, in accordance with
the terms of the agreement the investor was issued an additional 43,721 shares of common stock due to the decrease in stock price
resulting in an effective conversion price of $7.60.
On September 16, 2019, in accordance
with the terms of the agreement the investor was issued an additional 61,500 shares of common stock due to the decrease in stock
price resulting in an effective conversion price of $7.30.
On October 17, 2019, in accordance
with the terms of the agreement the investor was issued an additional 90,000 shares of common stock due to the decrease in stock
price resulting in an effective conversion price of $3.74.
On December 5, 2019, in accordance
with the terms of the agreement the investor was issued an additional 97,100 shares of common stock due to the decrease in stock
price resulting in an effective conversion price of $3.15.
On February 10, 2020, in accordance
with the terms of the agreement the investor was issued an additional 100,000 shares of common stock due to the decrease in stock
price resulting in an effective conversion price of $3.15.
On February 21, 2020, in accordance
with the terms of the agreement the investor was issued an additional 108,770 shares of common stock due to the decrease in stock
price resulting in an effective conversion price of 2.69.
On March 2, 2020, in accordance with
the terms of the agreement the investor was issued an additional 167,100 shares of common stock due to the decrease in stock price
resulting in an effective conversion price of $1.87.
On March 5, 2020, in accordance with
the terms of the agreement the investor was issued an additional 154,835 shares of common stock due to the decrease in stock price
resulting in an effective conversion price of $1.83.
On March 13, 2020, in accordance with
the terms of the agreement the investor was issued an additional 116,000 shares of common stock due to the decrease in stock price
resulting in an effective conversion price of $1.50.
On March 20, 2020, in accordance with
the terms of the agreement the investor was issued an additional 163,800 shares of common stock due to the decrease in stock price
resulting in an effective conversion price of $1.50.
The aggregate debt discount has been
accreted and charged to interest expenses as a financing expense in the amount of $355,972 during the six months ended March 31,
2020.
The Debenture at March 31, 2020 consists of:
Principal
|
|
$
|
1,250,000
|
Unamortized debt discount
|
|
|
(427,502)
|
Total, net of unamortized discount
|
|
|
822,498
|
On March 4, and March 13, 2020 the Company entered into
amendments (the “Amendments”) with the Investor.
The Amendments amended the SPA and Debenture, as follows:
|
1)
|
A Floor Price of $1.50 per share of Common Stock was placed
on conversions by the Investor under the Debenture, with the Floor Price on the First Debenture not applying in the
occurrence of an event of default;
|
|
2)
|
Lowered the closing price of the Common Stock which may trigger an event of default from $5.00
per share to $1.75 per share for 5 consecutive trading days provided that any event of default will not be triggered, if at all,
until after June 11, 2020;
|
|
3)
|
Deleted the requirement that the Investor convert the Debenture at maturity and
|
|
4)
|
Allowed the Company, for a period of 90 days from March 13, 2020, to not reserve or issue to
the Investor more shares of Common Stock than were reserved for the Investor prior to March 31, 2020.
|
On April 15, 2020, the Investor fully converted
the remaining principal and interest into shares of the Company’s Common Stock. (See note 17 for additional details)
Long-Term convertible notes
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, 215 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 230,000 shares (the “Warrant Shares”) of our common
stock and 125,000 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 12 and 13 for
additional details.) The Debenture is secured by all assets of the Company.
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 September 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 $0.75 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 4.99% 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.
The Debenture at March 31, 2020 consists
of:
Principal
|
|
$
|
10,750,000
|
Unamortized debt discount
|
|
|
(5,625,342)
|
Total, net of unamortized discount
|
|
$
|
5,124,658
|
The aggregate debt discount has been
accreted and charged to interest expenses as a financing expense in the amount of $2,694,863 during the six months ended March
31, 2020.
On March 4, and March 13, 2020 the Company entered into
amendments (the “Amendments”) with the Investor.
The Amendments amended the SPA and Debenture, as follows:
|
1)
|
A
Floor Price of $1.50 per share of Common Stock was placed on conversions by the Investor
under the Debenture, not applying in the occurrence of an event of default;
|
|
2)
|
Lowered the closing price of the Common Stock which may trigger an event of default from $5.00
per share to $1.75 per share for 5 consecutive trading days provided that any event of default will not be triggered, if at all,
until after June 11, 2020;
|
|
3)
|
Deleted the requirement that the Investor convert the Debenture at maturity and
|
|
4)
|
Allowed the Company, for a period of 90 days from March 13, 2020, to not reserve or issue to
the Investor more shares of Common Stock than were reserved for the Investor prior to March 31, 2020.
|
|
5)
|
The Company and the Investor also agreed to remove the Second Closing and Company Option to sell
an aggregate of an additional $10,000,000 in securities under the Debenture. As a result of these changes, the Company was authorized
to terminate any and all documentation related to the 100,000 shares of Series B Preferred Stock that the Company’s Board
of Directors had previously voted to designate back on April 16, 2019.
|
On May 5, 2020, the investor converted $750,000
of principal and $112,500 of accrued interest into 575,000 shares of Common Stock. (See note 17 for additional details)
On May 6, 2020, the investor converted $600,000
of principal and $90,000 of accrued interest into 460,000 shares of Common Stock. (See note 17 for additional details)
On May 7, 2020, the investor converted $595,000
of principal and $89,250 of accrued interest into 456,167 shares of Common Stock. (See note 17 for additional details)
On May 8, 2020, the investor converted $350,000
of principal and $52,500 of accrued interest into 268,333 shares of Common Stock. (See note 17 for additional details)
10. LEASES
On October 1, 2019, the Company adopted
the amendments to ASC 842, Leases, which requires lessees to recognize lease assets and liabilities arising from operating
leases on the balance sheet. The Company adopted the new lease guidance using the modified retrospective approach and elected the
transition option issued under ASU 2018-11, Leases (Topic 842) Targeted Improvements, allowing entities to continue
to apply the legacy guidance in ASC 840, Leases, to prior periods, including disclosure requirements. Accordingly,
prior period financial results and disclosures have not been adjusted.
The Company has operating leases under
which it leases its branch offices and corporate headquarters, one of which is with a related party. Upon adoption of the new lease
guidance, on October 1, 2019, the Company recorded a right of use asset and corresponding lease liability of $85,280 and $85,280,
respectively, on the consolidated balance sheet. As of March 31, 2020, the Company's operating lease right of use asset and
operating lease liability totaled $63,554 and $64,033, respectively. A weighted average discount rate of 10% was
used in the measurement of the right of use asset and lease liability as of October 1, 2019. As the rate implicit in the lease
is not readily determinable, the Company's incremental collateralized borrowing rate is used to determine the present value of
lease payments. This rate gives consideration to the applicable Company collateralized borrowing rates and is based on the information
available at the commencement date. The Company has elected to apply the short-term lease measurement and recognition exemption
to leases with an initial term of 12 months or less; therefore, these leases are not recorded on the Company’s Consolidated
Balance Sheet, but rather, lease expense is recognized over the lease term on a straight-line basis.
The
Company's leases have remaining lease terms between one to two years, with a weighted average lease term of 0.9 years
at March 31, 2020. Some leases include multiple year renewal options. The
Company’s decision to exercise these renewal options is based on an assessment of its current business needs and market factors
at the time of the renewal. Currently, the Company has no leases for which the option to renew is reasonably certain and therefore,
options to renew were not factored into the calculation of its right of use asset and lease liability as of October 1, 2019.
The following is a schedule of the Company's
operating lease liabilities by contractual maturity as of September 30, 2019:
Fiscal year ending September 30, 2020
|
|
$
|
25,448
|
Fiscal year ending September 30, 2021
|
|
|
43,170
|
Total Lease Payments
|
|
|
68,618
|
Less: imputed interest
|
|
|
(4,585)
|
Total present value of lease liabilities
|
|
$
|
64,033
|
Total operating lease costs of $48,459 and $38,523
the six months ended March 31, 2020 and 2019, respectively, were included as part of administrative expense.
11. RELATED PARTY TRANSACTIONS
Zachary Bradford – Chief
Executive Officer, Director and Former Chief Financial Officer
During the six months ended March 31,
2019, the Company had a consulting agreement with ZRB Holdings, Inc., an entity wholly owned by Zachary Bradford, our Chief Executive
Officer and director, for management services. In accordance with this agreement, as amended, Mr. Bradford earned $190,140, during
the six months ended March 31, 2019. The agreement was terminated in October 2019 when Mr. Bradford stepped down as the CFO and
took the position of CEO and accepted the associated employment agreement.
During the six months ended March
31, 2020, the Company paid Blue Chip Accounting, LLC (“Blue Chip”) $55,199 for accounting, tax, administrative
services and reimbursement for office supplies. Blue Chip is 50% beneficially owned by Mr.
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. The Company also sub-leases office space from Blue Chip (see note 10 for additional details). During the six
months ended March 31, 2020, $5,575 was paid to Blue Chip for rent.
Bryan Huber – Former 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 $125,154 and $85,209, during the six months ended March 31, 2020 and 2019.
On
March 12, 2019, the Agreement was terminated upon the execution of a separation agreement. All amounts owed from all agreements
totaling $90,000 were paid in full.
On
September 28, 2018, in connection with the consulting agreement executed with Zero Positive, LLC, the Company issued warrants
to purchase 90,000 shares of common stock at an exercise price of $8.00 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: 30,000 vested immediately, the
balance vest evenly on the last day of each month over forty-two months beginning August 31, 2018. As of March 31, 2020, 54,286
warrants had vested, and the Company recorded an expense of $248,295 and
248,295 during the six months ended March 31, 2020 and 2019.
Matthew
Schultz- Chairman of the Board and Former Chief Executive Officer
The Company has a consulting agreement
with Matthew Schultz, our former Chief Executive Officer, for management services. In accordance with this agreement, as amended,
Mr. Schultz earned $0 and $48,000, respectively during the six months ended March 31, 2020 and 2019. The agreement was terminated
on October 7, 2019 when Mr. Schultz stepped down as the CEO and took the position of Chairman of the Board. Mr. Schultz received
$126,000 as compensation for his services as chairman of the board during the six months ended March 31, 2020.
The
Company additionally entered into an agreement on
November 15, 2019 with an organization to provide general investor relations and consulting services that Mr. Schultz is affiliated
with. The Company paid the organization $49,500 in fees plus $176,000 in expense reimbursements for the six months ended March
31, 2020. The agreement was terminated in March 2020.
Larry McNeill, Roger Beynon, Dr. Tom
Wood –Directors
Effective January 1, 2019, the Company agreed
to pay non-executive independent board members $2,500 per month. Mr. McNeill earned $15,000 and $15,000 in Board compensation during
the six months ended March 31, 2020 and 2019. Mr. Beynon and Dr. Wood each earned $15,000 and $0 in Board compensation during the
six months ended March 31, 2020 and 2019.
12. STOCKHOLDERS EQUITY
Overview
The Company’s authorized capital
stock consists of 20,000,000 shares of common stock and 10,000,000 shares of preferred stock, par value $0.001 per share. As of
March 31, 2020, there were 5,745,415 shares of common stock issued and outstanding and 1,750,000 shares of preferred stock issued
and outstanding.
On December 10, 2019, the Financial
Industry Regulatory Authority (“FINRA”) approved the Company’s 1:10 reverse stock split of the Company’s
common stock. The reverse stock split took effect on December 11, 2019. Unless otherwise noted, impacted amounts and share information
in the consolidated financial statements and notes thereto as of and for the periods ended March 31, 2020 and September 30, 2019,
have been adjusted for the stock split as if such stock split occurred on the first day of the first period presented.
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. As a result of the reverse split mentioned above, the effect of the filed
amendment reduced the authorized shares to 20,000,000.
On October 4, 2019, pursuant to Article
IV of our Articles of Incorporation, our Board of Directors voted to increase the number of shares of preferred stock designated
as Series A Preferred Stock from one million (1,000,000) shares to two million (2,000,000) shares, par value $0.001.
Under the Certificate of Designation, holders
of Series A Preferred Stock will be entitled to quarterly dividends on 2% of our earnings before interest, taxes and amortization.
The dividends are payable in cash or common stock. The holders will also have a liquidation preference on the state value of $0.02
per share plus any accumulated but unpaid dividends. The holders are further entitled to have us redeem their Series A Preferred
Stock for three shares of common stock in the event of a change of control and they are entitled to vote together with the holders
of our common stock on all matters submitted to shareholders at a rate of forty-five (45) votes for each share held.
The rights of the holders of Series A Preferred
Stock are defined in the relevant Amendment to the Certificate of Designation filed with the Nevada Secretary of State on October
9, 2019.
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 $0.75 per share, but no less than the Floor Price ($3.50) 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.
|
On March 6, 2020, the Company withdrew the Certificate of
Designation for the Series B Preferred Stock. At the time of withdrawal, no shares of Series B Preferred Stock were issued and
outstanding.
Common Stock issuances during the six months
ended March 31, 2020
The Company issued 997,605 shares of
common stock in accordance with the terms of the convertible debt agreement due to the decrease in stock price. (See Note 9 for
additional details.)
The Company issued 2,000 shares of
common stock for services rendered to an independent consultant.
The Company issued 793 shares of common
stock as a result of rounding related to the reverse stock split.
The Company issued 95,699 shares of
common stock in relation to the acquisition of p2k (See note 3 for additional details.)
Common stock returned during the six months
ended March 31, 2020
As a result of a note payoff on December
5, 2019, 5,000 shares common stock were returned to treasury and cancelled on January 13, 2020.
As a result of the cancellation of
an investor relations services contract, 25,000 shares were returned to treasury and cancelled on February 10, 2020.
Series A Preferred Stock issuances during
the six months ended March 31, 2020
On October
4, 2019, the Company authorized the issuance of a total of seven hundred and fifty thousand (750,000) shares of its designated
Series A Preferred Stock to members of its board of directors for services rendered.
A fair value of $0.02 per share was determined by the Company. Director fees of $15,000 was
recorded as a result of the stock issued.
Common Stock issuances during the six months
ended March 31, 2019
During the period commencing October
1, 2018 through March 31, 2019, the Company received $361,800 from 14 investors pursuant to private placement agreements with the
investors to purchase 45,225 shares of the Company’s common stock at a purchase price equal to $8.00 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 3,000 shares of the Company’s common stock per month as compensation for services plus
additional cash compensation. During the six months ended March 31, 2019, the Company issued a total of 18,000
shares of its common stock in accordance with the agreement.
Stock compensation of $531,600 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 3,000 shares of the Company’s
common stock which vest evenly over a six-month period from the agreement date. During the six months ended March 31, 2019, the
Company recorded stock compensation of $68,819 was recorded as a result of the stock issued under the agreement.
On October 2, 2018, an investor exercised
warrants to purchase 300 shares of the Company’s $0.001 par value common stock at a purchase price equal to $3.63 for each
share of Common stock. The Company receive $1,088 as a result of this exercise.
The Company issued 10,000 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 through
the issuance of 2,500 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 144,417
shares of the Company’s common stock were issued in connection with the cashless exercise of 150,000 common stock warrants
at an exercise price of $0.83.
On January 7, 2019, an investor converted
$2,500,000 in principal and $875,000 in interest as a conversion premium, for 178,472 shares of the Company’s common stock
at an effective conversion price of $18.90.
On January 22, 2019, in accordance
with a merger agreement, the Company issued 175,000 shares of the Company’s common stock.
On February 26, 2019, a total of 24,628
shares of the Company’s common stock were issued in connection with the cashless exercise of 25,000 common stock warrants
at an exercise price of $0.83.
On March 6, 2019, the investor converted
$1,000,000 in principal and $350,000 in interest as a conversion premium, for 71,389 shares of the Company’s common stock
at an effective conversion price of $18.90.
On March 26, 2019, a total of 48,857
shares of the Company’s common stock were issued in connection with the cashless exercise of 50,000 common stock warrants
at an exercise price of $0.83.
Common stock returned during the six months
ended March 31, 2019
As a result of a conversion of a note
on September 21, 2018, 13,750 shares common stock were returned to treasury and cancelled on December 21, 2018.
As a result of a note payoff on January
3, 2019, 13,750 shares of common stock were returned to treasury and cancelled on January 8, 2019.
13. STOCK WARRANTS
The following is a summary of stock warrant
activity during the six months ended March 31, 2020.
|
|
Number of Warrant Shares
|
|
Weighted Average Exercise Price
|
Balance, September 30, 2019
|
|
|
1,314,063
|
|
|
$
|
21.62
|
Warrants granted
|
|
|
—
|
|
|
$
|
—
|
Warrants expired
|
|
|
—
|
|
|
|
—
|
Warrants canceled
|
|
|
—
|
|
|
|
—
|
Warrants exercised
|
|
|
—
|
|
|
|
—
|
Balance, March 31, 2020
|
|
|
1,314,063
|
|
|
$
|
21.62
|
As of March 31, 2020, the outstanding warrants
have a weighted average remaining term of was 2.40 years and an intrinsic value of $88,500.
As of March 31,
2020, there are warrants exercisable to purchase 1,282,636 shares of common stock in the Company
and 31,429 unvested
warrants outstanding that cannot be exercised until vesting conditions are met. 996,198 of
the warrants require a cash investment to exercise as follows, 5,000 required a cash investment of $8.00 per share, 449,865 require
a cash investment of $15.00 per share, 125,000 require a cash investment of $20.00 per share, 103,000 require a cash investment
of $25.00 per share, 200,000 require an investment of $35.00 per share, 10,000 require an investment of $40.00 per share, 60,000
require an investment of $50.00 per share, 38,333 require a cash investment of $75.00 per share and 5,000 require a cash investment
of $100.00 per share. 317,865 of the outstanding warrants contain provisions allowing a cashless exercise at their respective exercise
prices.
Warrant activity for the six months ended
March 31, 2019
On
October 15, 2018, the Company entered into an agreement with a consultant for services. Under this agreement the Company agreed
to issue 3,000 warrants to purchase shares of the Company’s common stock at an exercise price of $25.00 for a period of
five years which vest evenly over a six-month period from the agreement date. During the six months ended March 31, 2020 and 2019
the Company recorded stock compensation of $0 and $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 9 for additional details) the Company issued Common Stock Purchase Warrants to acquire
up to 308,333 shares of common stock for a term of three years on a cash-only basis at an exercise price of $20.00 per share with
respect to 125,000 Warrant Shares, $25.00 with respect to 100,000 Warrant Shares, $50.00 with respect to 50,000 Warrant Shares
and $75.00 with respect to 33,333 Warrant Shares.
On August 28, 2018, in connection with the
Consulting agreement executed with Zero Positive, LLC the Company issued warrants to purchase 90,000 shares of common stock at
an exercise price of $8.00 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: 30,000 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 March 31, 2020, 58,571 warrants had vested, and the Company recorded
an expense of $248,295 and 248,295 during the six months ended March 31, 2020 and 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 50,000 shares of CleanSpark
common stock at an exercise price of $16.00 per share, and a five-year warrant to purchase 50,000 shares of CleanSpark common stock
at an exercise price of $20.00 per share. 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 six months ended March 31, 2019:
Fair value assumptions – Warrants:
|
|
March 31, 2019
|
Risk free interest rate
|
2.46% -3.01%
|
Expected term (years)
|
3-5
|
Expected volatility
|
265-268%
|
Expected dividends
|
0%
|
On January 7, 2019, a total of 144,417 shares
of the Company’s common stock were issued in connection with the cashless exercise of 150,000 common stock warrants at an
exercise price of $0.83.
On February 26, 2019, a total of 24,628 shares
of the Company’s common stock were issued in connection with the cashless exercise of 25,000 common stock warrants at an
exercise price of $0.83.
On March 26, 2019, a total of 48,857 shares
of the Company’s common stock were issued in connection with the cashless exercise of 50,000 common stock warrants at an
exercise price of $0.83.
As of March 31, 2020, the Company expects to
recognize $910,415 of stock-based compensation for the non-vested outstanding warrants over a weighted-average period of 1.8 years.
14. 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 300,000 shares were initially reserved for issuance under the Plan. As of March 31, 2020,
there were 10,513 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 six months ended March 31, 2020.
|
|
Number of Option Shares
|
|
Weighted Average Exercise Price
|
Balance, September 30, 2019
|
|
|
81,254
|
|
|
$
|
11.82
|
Options granted
|
|
|
233,233
|
|
|
$
|
5.28
|
Options expired
|
|
|
25,000
|
|
|
|
8.00
|
Options cancelled
|
|
|
—
|
|
|
|
—
|
Options exercised
|
|
|
—
|
|
|
|
—
|
Balance, March 31, 2020
|
|
|
289,487
|
|
|
$
|
6.88
|
As of March 31, 2020, there are options exercisable to purchase
261,577 shares of common stock in the Company. As of March 31, 2020, the outstanding options have a weighted average remaining
term of was 2.49 years and an intrinsic value of $0.
Option activity for the six months ended
March 31, 2020
During the six months ended March 31, 2020,
the Company issued 233,233 options to purchase shares of common stock to employees, the shares were granted at quoted market prices
ranging from $4.50 to $8.50. The options were valued at issuance using the Black Scholes model and stock compensation expense of
$716,740 was recorded as a result of the issuances.
The Black-Scholes model utilized the following
inputs to value the options granted during the six months ended March 31, 2020:
Fair value assumptions – Options:
|
|
March 31, 2020
|
Risk free interest rate
|
|
|
0.85-1.73%
|
Expected term (years)
|
|
|
3-5
|
Expected volatility
|
|
|
124%-209%
|
Expected dividends
|
|
|
0%
|
As
of March 31, 2020, the Company expects to recognize $291,084 of
stock-based compensation for the non- vested
outstanding options over a weighted-average period of 2.54 years.
Option activity for the six months ended
March 31, 2019
During the six months ended March 31, 2019,
the Company issued 11,737 options to purchase shares of common stock to employees, the shares were granted at quoted market prices
ranging from $15.10 to $59.00. The options were valued at issuance using the Black Scholes model and stock compensation expense
of $220,000 was recorded as a result of the issuances.
On March 10, 2018 the Company issued a total
of 25,000 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 six months ended March 31, 2019, $191,425 was expensed
as stock-based compensation.
The Black-Scholes model utilized the following
inputs to value the options granted during the six months ended March 31, 2019:
Fair value assumptions – Options:
|
|
March 31, 2019
|
Risk free interest rate
|
|
|
2.21-2.91%
|
Expected term (years)
|
|
|
3
|
Expected volatility
|
|
|
256%-271%
|
Expected dividends
|
|
|
0%
|
15. COMMITMENTS AND CONTINGENCIES
Office leases
Utah Corporate Office
On
November 22, 2019, the company entered into a lease to relocate the corporate office to 1185 South 1800 West, Suite 3, Woods Cross,
UT 84047. The agreement calls for the Company to make payments of $2,300 in base rent per month through February 28, 2021. The
lease term is on an annual basis beginning on March 1, 2020.
San Diego Office
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
March 31, 2020, are as follows:
Fiscal year ending (six months remaining) September 30, 2020
|
$25,448
|
Fiscal year ending September 30, 2021
|
$43,170
|
Las Vegas Offices
On January 2, 2020, the Company entered into a sublease
agreement for office space at 8475 S. Eastern Ave., Suite 200, Las Vegas, NV 89123. The agreement calls for the Company to make
monthly payments of $1,575 in base rent through January 1, 2021. The lease term is on an annual basis beginning January 2, 2020.
The
Company assumed p2k’s lease agreement entered into on October 17, 2017 at 7955 W. Badura Ave., Suite 1040, Las Vegas, NV
89113. The agreement calls for $1,801 in
base rent through October 31, 2020. The lease expires on October 31, 2020. The Company does not expect to renew.
Legal contingencies
From time to time we may be subject
to litigation. Risks associated with legal liability are difficult to assess and quantify, and their existence and magnitude can
remain unknown for significant periods of time. We have acquired liability insurance to reduce such risk exposure to the Company.
Despite the measures taken, such policies may not cover future litigation, or the damages claimed may exceed our coverage which
could result in continent liabilities.
16.
MAJOR CUSTOMERS AND VENDORS
For the six months ended March 31, 2020 and
2019, the Company had the following customers that represented more than 10% of sales.
|
|
March 31, 2020
|
|
March 31, 2019
|
Customer A
|
|
|
55.5
|
%
|
|
|
35.8%
|
Customer B
|
|
|
24.4
|
%
|
|
|
—
|
Customer C
|
|
|
—
|
|
|
|
44%
|
Customer D
|
|
|
—
|
|
|
|
14.2%
|
For the six months ended March 31, 2020 and
2019, the Company had the following suppliers that represented more than 10% of direct material costs. Internally developed product
costs and labor for services rendered are excluded from the calculation.
|
|
March 31, 2020
|
|
March 31, 2019
|
Vendor A
|
|
|
92.27
|
%
|
|
|
83.1%
|
17. SUBSEQUENT EVENTS
COVID-19 Joint Venture
On April 6, 2020, the Company entered into
a joint venture agreement with international partners to procure, distribute and supply masks, gowns, gloves, and other Personal
Protective Equipment (PPE) to be supplied to hospitals and frontline medical personnel. The agreement is effective until December
31, 2020, unless otherwise extended by unanimous consent of the members of the joint venture, including the Company.
The Manager of the joint venture, which is
not the Company or its affiliates, will have the duty to manage the day-to-day business of the joint venture, monitor the financial,
business and operational affairs of the joint venture and take all responsibilities related to the procurement and delivery of
products and related matters. The Company contributed the necessary capital in the amount of $660,000 on April 6, 2020 to assist
with the importation of these products into the United States, with the potential for additional monies to be lent by the Company
to the joint venture, upon mutual consent if necessary.
Conversion of convertible promissory notes
On April 8, 2020, in accordance with the terms
of the December 31, 2018 Securities Purchase Agreement, the Investor was issued an additional 172,400 shares of common stock due
to the decrease in stock price resulting in an effective conversion price of $1.50. (see note 9 for additional details)
On April 9, 2020, in accordance with the terms
of the December 31, 2018 Securities Purchase Agreement, the Investor was issued an additional 794,308 shares of common stock due
to the decrease in stock price resulting in an effective conversion price of $1.50. (see note 9 for additional details)
On April 15, 2020, in connection with
December 31, 2018 Securities Purchase Agreement, the Investor converted $1,250,000 in principal and $437,500 in interest as a conversion
premium, for 1,125,000 shares of the Company’s common stock at an effective conversion price of $1.50 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. (see note 9 for additional details)
On May 5, 2020, in connection with the Securities
Purchase Agreement dated April 17, 2019, the investor converted $750,000 in principal and $112,500 in interest as a conversion
premium for 575,000 shares of the Company’s common stock at an effective conversion price of $1.50. (see note 9 for additional
details)
On May 6, 2020, in connection with the Securities
Purchase Agreement dated April 17, 2019, the investor converted $600,000 in principal and $90,000 in interest as a conversion premium
for 460,000 shares of the Company’s common stock at an effective conversion price of $1.50. (see note 9 for additional details)
On May 7, 2020, in connection with the Securities
Purchase Agreement dated April 17, 2019, the investor converted $595,000 in principal and $89,250 in interest as a conversion premium
for 456,167 shares of the Company’s common stock at an effective conversion price of $1.50. (see note 9 for additional details)
On May 8, 2020, in connection with the Securities
Purchase Agreement dated April 17, 2019, the investor converted $350,000 in principal and $52,500 in interest as a conversion premium
for 268,333 shares of the Company’s common stock at an effective conversion price of $1.50. (see note 9 for additional details)
On May 11, 2020, in connection with the Securities
Purchase Agreement dated April 17, 2019, the investor converted $350,000 in principal and $52,500 in interest as a conversion premium
for 268,333 shares of the Company’s common stock at an effective conversion price of $1.50. (see note 9 for additional details)
Amendment of convertible promissory notes
On May 1, 2020, the Company entered into a
third amendment (the “Third Amendment”) with the Investor. The Third Amendment amended the Securities Purchase Agreements
and Debentures dated December 31, 2018 and April 17, 2019 that were previously amended on March 4, 2020 and March 13, 2020.
As provided in the Third Amendment, the Company
will not be required to reserve or issue to Investor more shares of Common Stock than were reserved for Investor prior to the Amendment
Date until September 29, 2020.
In addition, the Company previously amended the Agreement to lower
the Closing Price of the Common Stock which may trigger an Event of Default from $5.00 per share under the Agreements down to $1.75
per share for 5 consecutive Trading Days after June 11, 2020. The Third Amendment further amended this clause in the Agreements
to provide that an Event of Default under this provision would not be triggered, if at all, until after September 29, 2020.