NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the new business plan.
On July 1, 2016, the Company
entered into an Asset Purchase Agreement, as amended (the “Purchase Agreement”), with CleanSpark Holdings LLC, CleanSpark
LLC, CleanSpark Technologies LLC and Specialized Energy Solutions, Inc. (together, the “Seller”). Pursuant to the Purchase
Agreement, the Company acquired CleanSpark, LLC and all the assets related to the Seller and its line of business and assumed $200,000
in liabilities.
In October 2016, the Company changed its name to
CleanSpark, Inc. through a short-form merger in order to better reflect the brand identity.
On January 22, 2019, CleanSpark
entered into an Agreement with Pioneer Critical Power, Inc., whereby it acquired certain intellectual property assets and clients
lists. As consideration the Company issued to its sole shareholder (i) 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
CleanSpark Critical Power Systems, Inc.
On December 5, 2019,
the Board of Directors approved a reverse stock split of the Company’s common stock, par value $0.001 per share. 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 fiscal years ended September
30, 2019 and 2018, have been adjusted for the stock split as if such stock split occurred on the first day of the first period
presented.
Line of Business
Through the acquisition of CleanSpark, LLC, the
Company provides microgrid solutions to military, commercial and residential properties.
The solutions offered consist
of software products and services, microgrid design and engineering, project consulting services. The work is performed under fixed
price bid contracts and negotiated price contracts. The Company performed the majority of its work in California during the year
ended September 30, 2019.
Through CleanSpark
Critical Power Systems, Inc., the Company provides customer hardware solutions for distributed energy systems that serve military
and commercial residential properties. The equipment is generally sold under negotiated price contracts.
2. SUMMARY OF
SIGNIFICANT POLICIES
This summary of significant
accounting policies of CleanSpark Inc. is presented to assist in understanding the Company’s consolidated financial statements.
The consolidated financial statements and notes are representations of the Company’s management, who
are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally
accepted in the United States of America and have been consistently applied in the preparation of the consolidated financial statements.
Liquidity
The Company has incurred
losses for the past several years while developing infrastructure and its software platforms. As shown in the accompanying audited
consolidated financial statements, the Company incurred net losses of $26,116,932 and $47,006,165 during the years ended September
30, 2019 and September 30, 2018, respectively. 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 Note8 for additional details.) As of September 30, 2019, the Company had working capital of approximately $8,381,455.
Principles of Consolidation
The accompanying consolidated
financial statements include the accounts of CleanSpark, Inc., and its wholly owned operating subsidiaries, CleanSpark, LLC, CleanSpark,
II, LLC and CleanSpark Critical Power Systems Inc. All material intercompany transactions have been eliminated upon consolidation
of these entities.
Use of estimates
– The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include
estimates used to review the Company’s goodwill impairment, impairments and estimations of long-lived assets, revenue recognition
on percentage of completion type contracts, allowances for uncollectible accounts, and the valuations of non-cash capital stock
issuances. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable
in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions.
Revenue Recognition
- We recognize revenue in accordance with generally accepted accounting principles as outlined in the Financial Accounting
Standard Board's (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue From Contracts with Customers,
which requires that five steps be followed in evaluating revenue recognition: (i) identify the contract with the customer; (ii)
identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price;
and (v) recognize revenue when or as the entity satisfied a performance obligation.
We did not have a cumulative
impact as of October 1, 2019 due to the adoption of Topic 606 and there was not an impact to our consolidated statements of operations
for the years ended September 30, 2019 and 2018 as a result of applying Topic 606.
Our accounting policy
on revenue recognition by type of revenue is provided below.
Engineering & Construction
Contracts and Service Contracts
The Company recognizes engineering
and construction contract revenue over time, as performance obligations are satisfied, due to the continuous transfer of control
to the customer. Engineering and construction contracts are generally accounted for as a single unit of account (a single performance
obligation) and are not segmented between types of services. The Company recognizes revenue based primarily on contract cost incurred
to date compared to total estimated contract cost (an input method). The input method is the most faithful depiction of the Company’s
performance because it directly measures the value of the services transferred to the customer. Customer-furnished materials, labor
and equipment and, in certain cases, subcontractor materials, labor and equipment, are included in revenue and cost of revenue
when management believes that the company is acting as a principal rather than as an agent (i.e., the company integrates the materials,
labor and equipment into the deliverables promised to the customer). Customer-furnished materials are only included in revenue
and cost when the contract includes construction activity and the Company has visibility into the amount the customer is paying
for the materials or there is a reasonable basis for estimating the amount. The Company recognizes revenue, but not profit, on
certain uninstalled materials that are not specifically produced, fabricated, or constructed for a project. Revenue on these uninstalled
materials is recognized when the cost is incurred (when control is transferred). Changes to total estimated contract cost or losses,
if any, are recognized in the period in which they are determined as assessed at the contract level. Pre-contract costs are expensed
as incurred unless they are expected to be recovered from the client. Project mobilization costs are generally charged to project
costs as incurred when they are an integrated part of the performance obligation being transferred to the client. Customer payments
on engineering and construction contracts are typically due within 30 to 45 days of billing, depending on the contract.
For service contracts (including
maintenance contracts) in which the Company has the right to consideration from the customer in an amount that corresponds directly
with the value to the customer of the Company’s performance completed to date, revenue is recognized when services are performed
and contractually billable. Service contracts that include multiple performance obligations are segmented between types of services.
For contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation
using an estimate of the stand-alone selling price of each distinct service in the contract. Revenue recognized on service contracts
that have not been billed to clients is classified as a current asset under contract assets on the Consolidated Balance 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 $57,077 as of September 30, 2019. Unbilled receivables,
which represent an unconditional right to payment subject only to the passage of time, are reclassified to accounts receivable
when they are billed under the terms of the contract. Advances that are payments on account of contract assets of $0 and $0 as
of September 30, 2019 and September 30, 2018, respectively, have been deducted from contract assets. Contract liabilities represent
amounts billed to clients in excess of revenue recognized to date. The Company recorded $499,401 and $0 in contract liabilities
as of September 30, 2019 and September 30, 2018, respectively.
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 year ended September 30, 2019
and 2018, the Company reported revenues of $4,532,782 and $578,635, respectively.
Cash and cash equivalents
– For purposes of the statements of cash flows, the Company considers all highly liquid investments and short-term debt
instruments with original maturities of three months or less to be cash equivalents. There was $7,838,857 and $412,777 in
cash and no cash equivalents as of September 30, 2019 and September 30, 2018, 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 $254,570
and $0 at September 30, 2019, and September 30, 2018, respectively.
Retention receivable is the
amount withheld by a customer until a contract is completed. Retention receivables of $159,989 and $17,751 were included in
the balance of trade accounts receivable as of September 30, 2019 and September 30, 2018, respectively
Concentration Risk
At times throughout the
year, the Company may maintain cash balances in certain bank accounts in excess of FDIC limits. As of September 30, 2019, the cash
balance in excess of the FDIC limits was $7,588,857. 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 for the years ended September 30, 2019 and 2018 were $0 and $0, 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 services received in exchange for an award of an equity instrument based
on the grant-date fair value of the award. Stock-based compensation expense is recognized on a straight-line basis over the requisite
service period. The Company accounts for non-employee share-based awards in accordance with FASB ASC 505-50 under which the awards
are valued at the earlier of a commitment date or upon completion of the services, based on the fair value of the equity instruments,
and are recognized as expense over the service period. The Company may issue compensatory shares for services including, but not
limited to, executive, management, accounting, operations, corporate communication, financial and administrative consulting services.
Earnings (loss) per
share – The Company reports earnings (loss) per share in accordance with Financial Accounting Standards Board’s
(“FASB”) Accounting Standards Codification (“ASC”) 260-10 “Earnings Per Share,” which
provides for calculation of “basic” and “diluted” earnings per share. Basic earnings per share includes
no dilution and is computed by dividing net income or loss available to common stockholders by the weighted average common shares
outstanding the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings
of an entity. The calculation of diluted net loss per share gives effect to common stock equivalents; however, potential common
shares are excluded if their effect is anti-dilutive. As of September 30, 2019, there are 5,508,400 shares issuable upon exercise
of outstanding options, warrants and convertible debt which have been excluded as anti-dilutive.
Long-lived Assets
– In accordance with the Financial Accounting Standards Board ("FASB") Accounts Standard Codification (ASC) ASC
360-10, "Property, Plant and Equipment," the carrying value of intangible assets and other long-lived assets is reviewed
on a regular basis for the existence of facts or circumstances that may suggest impairment. The Company recognizes impairment when
the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses, if any,
are measured as the excess of the carrying amount of the asset over its estimated fair value. During the years ended September
30, 2019 the Company recorded an impairment expense of $6,915,186 related to impairment of software and during the year ended September
30, 2019 the Company recorded an impairment expense of $1,896,090 related to a patent and client lists acquired in 2016 which the
Company does not anticipate utilizing in future periods, respectively.
Intangible Assets
and Goodwill – The Company accounts for business combinations under the acquisition method of accounting in accordance
with ASC 805, “Business Combinations,” where the total purchase price is allocated to the tangible and identified intangible
assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information
currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among
other things, asset valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the
fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.
The Company reviews its indefinite lived intangibles
and goodwill for impairment annually or whenever events or circumstances indicate that the carrying amount of the asset exceeds
its fair value and may not be recoverable. In accordance with its policies, the Company performed an assessment of indefinite lived
intangibles and goodwill and determined there was no impairment for the years ended September 30, 2019 and 2018.
Software Development
Costs– The Company capitalizes software development costs under guidance of ASC 985-20 “Costs of Software to be
Sold, Leased or Marketed”. Software development costs include payments made to independent software developers under development
agreements, as well as direct costs incurred for internally developed products. Software development costs are capitalized once
the technological feasibility of a product is established and such costs are determined to be recoverable. Technological feasibility
of a product requires both technical design documentation and infrastructure design documentation, or the completed and tested
product design and a working model. Significant management judgments and estimates are utilized in the assessment of when technological
feasibility is established, and the evaluation is performed on a product-by-product basis. For products where proven technology
exists, such as mPulse and mVSO this may occur early in the development cycle. Prior to a product's release, if and when we
believe capitalized costs are not recoverable, we expense the amounts as part
of "Product development." Capitalized costs for products that are cancelled or are expected to be abandoned are charged
to "Product development" in the period of cancellation. Amounts related to software development, such as product enhancements
to existing features, which are not capitalized are charged immediately to "Product development."
Commencing upon a product's
release, capitalized software development costs are amortized to "Cost of revenues—software amortization " based
on the ratio of current revenues to total projected revenues for the specific product, generally resulting in an amortization period
of seven years for our current product offerings. In accordance with ASC 985-35 in recognition of the uncertainties involved in
estimating future revenue, amortization will never be less than straight-line amortization of the products remaining estimated
economic life.
We evaluate the future
recoverability of capitalized software development costs on a quarterly basis. For products that have been released in prior periods,
the primary evaluation criterion is the actual performance of the software platform to which the costs relate. For products that
are scheduled to be released in future periods, recoverability is evaluated based on the expected performance of the specific products
to which the costs relate. Criteria used to evaluate expected product performance include: historical performance of comparable
products developed with comparable technology; market performance of comparable software; orders for the product prior to its release;
pending contracts and general market conditions.
Significant management
judgments and estimates are utilized in assessing the recoverability of capitalized costs. In evaluating the recoverability of
capitalized costs, the assessment of expected product performance utilizes forecasted sales amounts and estimates of additional
costs to be incurred. If revised forecasted or actual product sales are less than the originally forecasted amounts utilized in
the initial recoverability analysis, the net realizable value may be lower than originally estimated in any given quarter, which
could result in an impairment charge. Material differences may result in the amount and timing of expenses for any period if matters
resolve in a manner that is inconsistent with management's expectations. If an impairment occurs the reduced amount of the capitalized
software costs that have been written down to the net realizable value at the close of each annual fiscal period will be considered
the cost for subsequent accounting purposes.
Fair Value of financial
instruments –The carrying value of cash, accounts payable and accrued expenses, and debt (See Notes 7 & 8) approximate
their fair values because of the short-term nature of these instruments. Management believes the Company is not exposed to significant
interest or credit risks arising from these financial instruments. The carrying amount of the Company’s long-term convertible
debt is also stated at fair value 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.
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Level 1
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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.
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Level 2
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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.
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Level 3
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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.
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Income taxes –
The Company’s calculation of its tax liabilities involves dealing with uncertainties in the application of complex tax laws
and regulations in various taxing jurisdictions. The Company recognizes tax liabilities for uncertain tax positions based on management’s
estimate of whether it is more likely than not that additional taxes will be required. The Company had no uncertain tax positions
as of September 30, 2019 and 2018.
Deferred income taxes are
recognized in the consolidated financial statements for the tax consequences in future years of differences between the tax basis
of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates. Temporary differences
arise from net operating losses, differences in depreciation methods of archived images, and property and equipment, stock-based
and other compensation, and other accrued expenses. A valuation allowance is established when it is determined that it is more
likely than not that some or all of the deferred tax assets will not be realized.
The application of tax laws
and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are
subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings.
Therefore, the actual liability for U.S., or the various state jurisdictions, may be materially different from management’s
estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities.
Interest and penalties are included in tax expense.
The Company includes interest
and penalties arising from the underpayment of income taxes in the statements of operation in the provision for income taxes. As
of September 30, 2019, and 2018, the Company had no accrued interest or penalties related to uncertain tax positions.
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.
Segment Reporting
– Operating segments are defined as components of an enterprise for which separate financial information is available and
evaluated regularly by the chief operating decision maker, or decision-making group, in deciding the method to allocate resources
and assess performance. The Company currently has one reportable segment for financial reporting purposes, which represents the
Company's core business.
Recently issued accounting pronouncements
In June 2018, the FASB
issued ASU 2018-07, "Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,"
which modifies the accounting for share-based payment awards issued to nonemployees to largely align it with the accounting for
share-based payment awards issued to employees. ASU 2018-07 is effective for us for annual periods beginning October 1, 2019. We
are evaluating the potential impact to our financial position or results of operations.
In August 2018, the FASB
issued ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which allows for the capitalization
of certain implementation costs incurred in a hosting arrangement that is a service contract. ASU 2018-15 allows for either retrospective
adoption or prospective adoption to all implementation costs incurred after the date of adoption. ASU 2018-15 is effective for
fiscal years beginning after December 15, 2019. We are currently evaluating the impact the adoption of this new standard will have
on our financial position and results of operations.
In February 2016, the FASB
issued ASU 2016-02, “Leases” (“ASC 842”). The guidance requires lessees to recognize almost all leases
on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model,
requiring leases to be classified as either operating or finance. Lessor accounting is similar to the current model but updated
to align with certain changes to the lessee model and the new revenue recognition standard. Existing sale-leaseback guidance, including
guidance for real estate, is replaced with a new model applicable to both lessees and lessors. ASC 842 is effective for fiscal
years beginning after December 15, 2018. We are currently evaluating the impact the adoption of this new standard will have on
our financial position and results of operations.
The Company has evaluated
all other recent accounting pronouncements and believes that none of them will have a material effect on the Company's financial
position, results of operations or cash flows.
3. ACQUISITION OF PIONEER CRITICAL
POWER, INC. AND RELATED ASSETS
On January 22, 2019, CleanSpark
entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Pioneer Critical Power, Inc., a Delaware
corporation (the “Pioneer”), and CleanSpark Acquisition, Inc., a Delaware corporation and wholly-owned subsidiary of
CleanSpark (“Merger Sub”).
The Merger Agreement
provides that, subject to the terms and conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company
(the “Merger”), with Pioneer surviving the Merger as a wholly-owned subsidiary of CleanSpark. At the effective time
of the Merger, the issued and outstanding common shares of Pioneer were automatically converted into the right to receive: (i)
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 $20.00 per share. The Merger closed on January 22, 2019 with the filing of a Certificate of Merger in Delaware.
The Company accounted
for the acquisition of Pioneer as an asset acquisition under ASC 805, because the assets acquired did not meet the definition of
a business under ASC 805-10-55-4 as it lacked a substantive process at the time of the acquisition.
The Company determined the fair
value of the consideration in accordance with ASC 820 as follows:
Consideration
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Fair Value
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175,000 shares of common stock
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$
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3,867,500
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50,000 warrants @$16.00
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1,102,417
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50,000 warrants @$20.00
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1,102,107
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Total Consideration
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$
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6,072,024
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The Company allocated the purchase
price to the identifiable assets as follows:
Purchase Price Allocation
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Product drawings and diagrams
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$
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250,000
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UL files
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100,000
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Customer list & non-compete agreement
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5,722,024
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$
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6,072,024
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On February 1, 2019, Pioneer Critical
Power, Inc. was renamed CleanSpark Critical Power Systems, Inc.
Support Agreements
As a condition to the Merger
Agreement, on January 22, 2019, CleanSpark and Pioneer Power Solutions, Inc. (“Pioneer Power”), a Delaware corporation
and sole shareholder of Pioneer prior to the Merger, entered into a Non-Competition and Non-Solicitation Agreement whereby Pioneer
Power agreed, among other things, to not compete with the Company or solicit employees or customers of the Company for a period
of four years.
As another condition to
the Merger Agreement, on January 22, 2019, CleanSpark, the Company and Pioneer Power entered into an Indemnity Agreement, whereby
Pioneer Power agreed to indemnify CleanSpark for any claims made by Myers Power Products, Inc. in the case titled Myers Power
Products, Inc. v. Pioneer Power Solutions, Inc., Pioneer Custom Electrical Products, Corp., et al., Los Angeles County Superior
Court Case No. BC606546 (“Myers Power Case”) as they may relate to Pioneer or CleanSpark post-closing of the Merger
Agreement.
Finally, as another condition
to the Merger Agreement, on January 22, 2019, CleanSpark and Pioneer Power entered into a Contract Manufacturing Agreement, whereby
Pioneer Power shall exclusively manufacture parallel switchgears, automatic transfer switches and related control and circuit protective
equipment for CleanSpark for a period of eighteen months. The agreement did not create exclusivity for Pioneer and CleanSpark may
have other providers perform contract manufacturing services, as desired. As of September 30, 2019, CleanSpark had $1,000,608 on
deposit for manufacturing progress payments with Pioneer Power which is reflected on the consolidated balance sheet in prepaid
expense and other current assets.
4.
CAPITALIZED SOFTWARE
Capitalized software consists of the following as of
September 30, 2019 and September 30, 2018:
|
|
September 30,
2019
|
|
September 30,
2018
|
mVSO software
|
|
$
|
352,211
|
|
|
$
|
4,708,203
|
MPulse software
|
|
|
741,846
|
|
|
|
6,334,772
|
Less: accumulated amortization
|
|
|
(38,860
|
)
|
|
|
(2,256,749)
|
Capitalized Software, net
|
|
$
|
1,055,197
|
|
|
$
|
8,786,226
|
In accordance with ASC
985-20 the Company capitalized $637,792 in software development costs (including capitalized stock compensation cost of $68,750)
related to the enhancements created for our mPulse and mVSO platforms during the year ended September 30, 2019.
Capitalized software amortization recorded as
product development expense for the years ended September 30, 2019 and 2018 was $1,453,635 and $1,379,483, respectively.
During the year ended September 30, 2019, the Company
recorded an impairment of $6,915,186 related directly to components of our original software that were replaced.
5.
INTANGIBLE ASSETS
Intangible assets consist of the following as of September
30, 2019 and September 30, 2018:
|
|
September
30, 2019
|
|
September
30, 2018
|
Patents
|
|
$
|
74,112
|
|
|
$
|
71,962
|
Websites
|
|
|
16,482
|
|
|
|
16,482
|
Customer list and non-compete agreement
|
|
|
5,722,024
|
|
|
|
—
|
Trademarks
|
|
|
5,928
|
|
|
|
5,928
|
Engineering trade secrets
|
|
|
4,370,269
|
|
|
|
4,020,269
|
Software
|
|
|
—
|
|
|
|
26,990
|
Intangible assets:
|
|
|
10,188,815
|
|
|
|
4,141,631
|
Less: accumulated amortization
|
|
|
(2,758,733
|
)
|
|
|
(927,164)
|
Intangible assets, net
|
|
$
|
7,430,082
|
|
|
$
|
3,214,467
|
Amortization expense for the years ended September 30,
2019 and 2018 was $1,858,559 and $802,287, respectively.
6. FIXED ASSETS
Fixed assets consist of the following as of September
30, 2019 and September 30, 2018:
|
|
September 30, 2019
|
|
September 30, 2018
|
Machinery and equipment
|
|
|
212,082
|
|
|
$
|
130,191
|
Furniture and fixtures
|
|
|
75,121
|
|
|
|
54,251
|
Total
|
|
|
287,203
|
|
|
|
184,442
|
Less: accumulated depreciation
|
|
|
(142,133
|
)
|
|
|
(97,711)
|
Fixed assets, net
|
|
$
|
145,070
|
|
|
$
|
86,731
|
Depreciation expense for the years ended September
30, 2019 and 2018 was $44,422 and $52,694, respectively. During the years ended September 30, 2019 and 2018 the Company recorded
an impairment of fixed assets of $0 and $1,243.
7. LOANS
Long
term
|
|
September
30, 2019
|
|
September
30, 2018
|
Long-term loans
payable consist of the following:
|
|
|
|
|
|
|
|
|
|
Promissory
notes
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
150,000
|
|
|
$
|
150,000
|
Current
|
|
September
30, 2019
|
|
September
30, 2018
|
Current loans payable consist of the following:
|
|
|
|
|
|
|
|
|
Promissory notes
|
|
$
|
50,000
|
|
|
$
|
628,951
|
Insurance
financing loans
|
|
|
17,467
|
|
|
|
10,257
|
Current loans payable
|
|
|
67,467
|
|
|
|
639,208
|
Unamortized
debt discount
|
|
|
—
|
|
|
|
(181,629)
|
|
|
|
|
|
|
|
|
Total,
net of unamortized discount
|
|
$
|
67,467
|
|
|
$
|
457,579
|
Promissory Notes
On September 5, 2017,
the Company executed a 9% secured promissory note with a face value of $150,000 with an investor. Under the terms of the promissory
note, the Company received $150,000 and agreed to make monthly interest payments and repay the note principal 24 months from the
date of issuance. 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 September 30, 2019, the Company owed $150,000 in principal and $0 in accrued interest under
the terms of the agreement and recorded interest expense of $10,096 and $13,500 during the years ended September 30, 2019 and 2018,
respectively.
On October 6, 2017, the Company
executed an unsecured variable interest rate promissory note with a maximum interest
rate of 58.3% and a face value of $45,000 with a financial institution. Under the terms of the promissory note the Company received
$45,000 and agreed to repay the note evenly over 12 months. The Company repaid all principal and outstanding interest on October
1, 2018. The Company recorded interest expense of $0 and $14,175 for the years ended September 30, 2019 and 2018, respectively.
On November 11, 2017, the Company executed a
10% secured promissory note with a face value of $100,000 with an investor. Under the terms of the promissory note the Company
received $100,000 and agreed to make monthly interest payments and repay the note principal 24 months from the date of issuance.
The note 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 $7,478 and $6,411 and for the years
ended September 30, 2019 and 2018, respectively.
On November 20,
2017, the Company executed a 10% unsecured promissory note with a face value of $80,000 with an investor. Under the terms of
the promissory note the Company received $80,000 and agreed to make monthly interest payments and repay the note principal 12
months from the date of issuance. On November 21, 2018, the investor extended the maturity date to December 31, 2018. The
Company repaid all principal and outstanding interest on December 31, 2018. The Company recorded interest expense of $2,017
and $6,882 during the years ended September 30, 2019 and 2018, respectively.
On December 5, 2017,
the Company executed a 9% secured promissory note with a face value of $50,000 with an investor. Under the terms of the promissory
note the Company received $50,000 and agreed to make monthly interest payments and repay the note principal 24 months from the
date of issuance. The note is secured by 5,000 shares which would be issued to the note holder only in the case of an uncured default.
As of September 30, 2019, the Company owed $50,000 in principal and $0 in accrued interest under the terms of the agreement and
recorded interest expense of $3,367 and $2,552 for the years ended September 30, 2019 and 2018, respectively. The Company repaid
all principal and outstanding interest on December 4, 2019
On January 12, 2018, the
Company executed an unsecured variable interest rate promissory note with a maximum interest
rate of 58.5% and a face value of $18,400 with a financial institution. Under the terms of the promissory note the Company received
$18,400 and agreed to repay the note and interest evenly over 12 months. The Company repaid all principal and outstanding interest
on October 1, 2018. The Company recorded interest expense of $0 and $3,680 for the years ended September 30, 2019 and 2018, respectively.
On May 22, 2018, the Company
executed an unsecured variable interest rate promissory note with a maximum interest rate of 51.0% and a face value of $24,500
with a financial institution. Under the terms of the promissory note the Company received $24,500 and agreed to repay the note
and interest evenly over 12 months. The Company repaid all principal and outstanding interest on October 1, 2018. The Company recorded
interest expense of $0 and $0 and for the years ended September 30, 2019 and 2018, respectively.
On June 15, 2018, the Company
entered into a 10% secured promissory note with a face value of $116,600 pursuant to which the Company received $110,000, net of
an original issue discount of 6% ($6,600). The Company also issued 11,660 5-year warrants exercisable at $8.00 in connection with
issuance of the promissory note. The note is secured by the Company’s accounts receivable. Under the terms of the promissory
note, the Company agreed to make monthly interest payments and repay the note principal on January 31, 2019. As of September 30,
2019, the Company owed $0 in principal and $0 in accrued interest under the terms of the agreement and recorded interest expense
of $3,217 during the year ended September 30, 2019. The Company determined the value associated with the warrants issued in connection
with the note to be $110,000 which was recorded as a debt discount. The aggregate original issue discount, and debt discount related
to the warrants have been accreted and charged to interest expenses as a financing expense in the amount of $48,424 and $479 for
the years ended September 30, 2019 and 2018, respectively. The unamortized discount as of September 30, 2019 amounted to $0. The
Company repaid all principal and outstanding interest on January 2, 2019.
On
August 1, 2018, the Company entered into a 10% secured promissory note with a face value of $130,625 pursuant to which the
Company received $125,000, net of an original issue discount of 4.5% ($5,625). The Company also issued 2,500 5-year warrants
exercisable at $8.00 in connection with purchase of the promissory note. The proceeds of the note were used to settle in full
a note issued on February 27, 2018. The Company determined the value associated with the warrants issued in connection with
the note to be $71,373 which was recorded as a debt discount. The aggregate original issue discount, and debt
discount related to the warrants have been accreted and charged to interest expenses as a financing expense in the amount of
$38,499 for the year ended September 30, 2019. The unamortized discount as of September 30, 2019 amounted to $0.
The Company repaid all principal and outstanding interest on January 2, 2019. As of September 30, 2019, the Company
owed $0 in principal and $0 in accrued interest under the terms of the agreement and recorded interest expense of
$3,003 and $0 and for the year ended September 30, 2019 and 2018, respectively.
On August 14, 2018, the Company
executed an unsecured variable interest rate promissory note with a maximum interest rate of 58.57% and a face value of
$19,600 with a financial institution. Under the terms of the promissory note the Company received $19,600 and agreed to repay
the note and interest evenly over 12 months. As of September 30, 2018, the Company owed $17,967 in principal and $784 in
accrued interest under the terms of the agreement. The Company repaid all principal and outstanding interest on October 1,
2018. The Company recorded interest expense of $0 and $0 and for the years ended September 30,
2019 and 2018, respectively.
On
September 20, 2018, the Company executed a 10% unsecured promissory note with a face value of $52,500 with an investor, net of
an original issue discount of 5% ($2,500). Under the terms of the promissory note the Company received $50,000 and agreed to repay
the note principal and all accrued interest on December 31, 2018. The Company also issued 2,500 5-year warrants exercisable at
$8.00 in connection with purchase of the promissory note. The Company determined the value associated with the warrants issued in connection
with the notes to be $50,000 which was recorded as a debt discount. The aggregate original issue discount, and debt discount related
to the warrants have been accreted and charged to interest expenses as a financing expense in the amount of $47,353 the year
ended September 30, 2019. The Company repaid all principal and outstanding interest on December 31, 2018. The Company recorded
interest expense of $1,323 and $0 and for the year ended September 30, 2019 and 2018, respectively.
On September 21, 2018,
the Company executed a 10% unsecured promissory note with a face value of $52,500 with an investor, the note included an original
issue discount of 5% ($2,500). Under the terms of the promissory note the Company received $50,000 and agreed to repay the note
principal and all accrued interest on December 31, 2018. The Company also issued 2,500 5-year warrants exercisable at $8.00 in
connection with purchase of the promissory note. The Company has determined the value associated with the warrants issued in connection
with the notes to be $50,000 which has been recorded as a debt discount. The aggregate original issue discount, and debt discount
related to the warrants have been accreted and charged to interest expenses as a financing expense in the amount of $47,353 the
year ended September 30, 2019. On December 31, 2018, the Company settled all obligations under the promissory note through the
issuance of 2,500 shares of the Company’s common stock and payment of $25,000 in outstanding principal and interest then
outstanding of $1,467. A loss on settlement of debt of $26,225 was recorded related to the settlement of debt for the year ended
September 30, 2019. The Company recorded interest expense of $1,323 and $0 and for the year ended September 30, 2019 and 2018,
respectively.
Insurance financing
loans
In February 2018,
the Company executed two unsecured 6.1% installment loans with a total face value of $35,089 with a financial institutional to
finance its insurance policies. Under the terms of the installment notes the Company received $35,089 and agreed to make equal
payments and repay the notes’ principal 10 months from their dates of issuance. As of September 30, 2018, the Company owed
$10,257 in principal and $0 in accrued interest under the terms of the agreement. The Company repaid all principal and outstanding
interest on December 1, 2018.
On February 11, 2019,
the Company executed an unsecured 5.6% installment loan with a total face value of $78,603 with a financial 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.
8. CONVERTIBLE
NOTES PAYABLE
Labrys Fund, LP – March 23,
2018 Promissory Note Funding
On March 23, 2018, we
entered into a master convertible promissory note pursuant to which we could
borrow up to $500,000. On March 23, 2018 the Company borrowed $200,000, less debt issuance costs of $15,750. The note carries an
original issue discount of 10% ($20,000). Interest under the convertible promissory note is 12% per annum, and the principal and
all accrued but unpaid interest is due on September 23, 2018. The Lender also received 23,750 commitment shares at execution as
an inducement for entering into the agreement. The Company also incurred $15,750 of debt issuance costs on the note which was recorded
as a debt discount. The note was convertible at any date after the issuance date at the noteholder’s option into shares of
our common stock at a variable conversion price, The Conversion price equals the lesser of (1) 70% multiplied by the lowest "Trading
Price" during the previous 20 Trading Day period ending on the latest complete Trading Day prior to the date of this Note
and (2) 70% multiplied by the lowest "Trading Price" for the Common Stock during the 20 Trading Day period ending on
the latest complete Trading Day prior to the Conversion Date. The "Trading Price"
as defined by the agreement is the lesser of: (a) the lowest trade price on the OTC Pink, OTCQB, or applicable trading market (the
“OTC Market”) as reported by a reliable reporting service (“Reporting Service”) designated by the Holder
and (b) the lowest closing bid price on the OTC Market as reported by a Reporting Service designated by the Holder. The Company
recorded a debt discount in the amount of $85,348 in connection with the commitment shares and $98,902 in connection with the initial
valuation of the derivative liability related to the embedded conversion option of the note to be amortized utilizing the effective
interest method of accretion over the term of the note. On September 19, 2018, all principal and accrued interest of $220,000 and
$12,730, respectively was converted into 25,859 shares of the Company’s common stock resulting to an outstanding balance
of $0 as of September 30, 2018.
The aggregate debt discount have been accreted and charged to interest expenses as a financing expense in the amount of $220,000
during the year ended September 30, 2018.
Auctus
Fund, LLC – July 2, 2018 Promissory Note Funding
On July 2, 2018 the Company
entered into a Securities Purchase Agreement with Auctus Fund, LLC (“Auctus”), which was later amended on July 6,
2018, pursuant to which the Company issued to Auctus a Master Convertible Promissory Note (“Note”) pursuant to
which the Company could borrow up to $500,000. The Company also incurred $11,900 of debt issuance costs on the note which was
recorded as a debt discount. On July 11, Auctus paid $225,000 less $26,000 in legal and due diligence fees. The Note has a
maturity date of six months for each tranche funded and the Company has agreed to pay interest on the unpaid principal
balance of the Note at the rate of twelve percent (12%) per annum from the date on which the Note is issued (the “Issue
Date”) until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise.
The Company has the right to prepay the Note, provided it makes a payment to Auctus as set forth in the Note within 180 days
of its Issue Date. In connection with the issuance of the Note, the Company issued to Auctus, as a commitment fee, 13,750
shares of its common stock (the “Returnable Shares”) as well as 15,000 shares of its common stock (the
“Non-Returnable Shares”), as further provided in the Note. The Returnable Shares shall be returned to the
Company’s treasury if the Note is fully repaid and satisfied prior to the date, which is one hundred eighty (180) days
following the Issue Date, subject further to the terms and conditions of the Note. The Note is convertible at any date after
the issuance date at the noteholder’s option into shares of our common stock at a variable conversion price of 70% of
the lowest closing market price of our common stock during the previous 20 days to the date of the notice of conversion,
subject to adjustment in the case of default. The Note contains certain covenants, such as restrictions on: (i) distributions
on capital stock, (ii) stock repurchases, (iii) certain loans, (iii) sales and the transfer of assets, and (iv) participation
in 3(a)(10) transactions. The Note also contains certain anti-dilution provisions that apply in connection with any stock
split, stock dividend, stock combination, recapitalization or similar transactions. In addition, subject to
limited exceptions, Auctus will not have the right to convert any portion of the Note if Auctus, together with its
affiliates, would beneficially own in excess of 4.99% of the number of shares of the Company’s common stock outstanding
immediately after giving effect to its conversion. The Company recorded a debt discount in the amount of $130,829 in
connection with the Non-returnable shares and $56,271 in connection with the initial valuation of the derivative liability
related to the embedded conversion option of the Note to be amortized utilizing the effective interest method of accretion
over the term of the Note. On September 21, 2018, all principal and accrued interest of $225,000 and $5,474, respectively was
converted into 25,608 shares of the Company’s common stock resulting to an outstanding balance of $0 as of September
30, 2018.
The aggregate debt
discount have been accreted and charged to interest expenses as a financing expense in the amount of $225,000 during the year ended
September 30, 2018.
EMA Financial,
LLC – August 21, 2018 Promissory Note Funding
On August 21, 2018
we entered into a Securities Purchase Agreement with EMA Financial, LLC, (“EMA”), pursuant to which we issued and sold
to EMA a convertible promissory note, dated August 21, 2018 in the principal amount of $225,000 (the “Note”). The Note
is due six months from the date of issuance and bears interest at the rate of 12% per annum. The Company received $199,000 from
the investment less fees and debt issuance costs of $26,000 which was recorded as a debt discount. In connection with the issuance
of the Note, the Company issued to EMA, as a commitment fee, 13,750 shares of its common stock (the “Returnable Shares”)
as well as 10,000 shares of its common stock (the “Non-Returnable Shares”), as further provided in the Note. The Returnable
Shares shall be returned to the Company’s treasury if the Note is fully repaid and satisfied prior to the date, which is
one hundred eighty (180) days following August 21, 2018, subject further to the terms and conditions of the Note. The Note as amended
on September 27, 2018, is convertible at any date after the issuance date at the noteholder’s option into shares of our common
stock at a variable conversion price, equal to the lesser of (i) 70% of the lowest trading price during the previous 20 days and
ending on the latest trading date prior to the date of the Note, or (ii) a 70% of the lowest trading price for our common stock
during the 20 trading day period immediately prior to conversion but subject to a conversion floor price of $30.50. The floor price
is subject to reset under certain conditions. We have the right to prepay the Note at any time prior to 180 days following the
closing date. If we pay after September 24, 2018, we must pay an additional $25,000 as a prepayment penalty. The Note contains
customary default events which, if triggered and not timely cured, will result in default interest and penalties. The Note also
contains a right of first refusal provision with respect to future financings by us. The Company recorded a debt discount in the
amount of $113,727 in connection with the Non-returnable shares and $73,373 in connection with the initial valuation of the derivative
liability related to the embedded conversion option of the Note to be amortized utilizing the effective interest method of accretion
over the term of the Note. The aggregate debt discount have been accreted and charged to interest expenses as a financing expense
in the amount of $48,955 during the year ended September 30, 2018. As of September 30, 2018, the Company owed $225,000 in principal
and $2,959 in accrued interest under the terms of the agreement and recorded interest expense of $2,959 during the year ended September
30, 2018.
On January 3, 2019,
the Company settled all remaining obligations under the EMA note through the payment of all outstanding principal, prepayment penalties
and interest then outstanding of $225,000, $35,000 and $10,736, respectively. The unamortized debt discount on the note of $176,045
was fully amortized to interest expense during the year ended September 30, 2019.
In connection with the issuance of the Note,
the Company issued to the Purchaser, as a commitment fee, 13,750 returnable shares of its common stock. As a result of the repayment
the shares were returned to treasury and cancelled on January 8, 2019.
EMA loans payable consist of the following as of:
|
|
September
30, 2019
|
|
September 30,
2018
|
Current loan payable:
|
|
$
|
—
|
|
|
$
|
225,000
|
Unamortized debt discount
|
|
|
—
|
|
|
|
(176,045)
|
|
|
|
|
|
|
|
|
Total, net of unamortized discount
|
|
$
|
—
|
|
|
$
|
48,955
|
Labrys Fund, LP
– September 19, 2018 Promissory Note Funding
On March 23, 2018,
we entered into a master convertible promissory note pursuant to which we could borrow up to $500,000. On September 19, 2018 borrowed
$330,000, less debt issuance costs of $20,700. The note also carries an original issue discount of 10% ($30,000). Interest under
the convertible promissory note is 12% per annum, and the principal and all accrued but unpaid interest is due six months from
the date of issuance. The Note, as amended on September 27, 2018, is convertible at any date after the issuance date at the noteholder’s
option into shares of our common stock at a variable conversion price subject to a conversion floor price of $30.50, The Conversion
price equals the lesser of (1) 70% multiplied by the lowest "Trading Price" during the previous 20 Trading Day period
ending on the latest complete Trading Day prior to the date of this Note and (2) 70% multiplied by the lowest "Trading Price"
for the Common Stock during the 20 Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. The
"Trading Price" as defined by the agreement is the lesser of: (a) the lowest trade price on the OTC Pink, OTCQB, or applicable
trading market (the “OTC Market”) as reported by a reliable reporting service (“Reporting Service”) designated
by the Holder and (b) the lowest closing bid price on the OTC Market as reported by a Reporting Service designated by the Holder.
If the note is not repaid within 180 days of issuance the floor will cease to apply. The Company recorded a debt discount in the
amount of $279,300 in connection with the initial valuation of the derivative liability related to the embedded conversion option
of the note to be amortized utilizing the effective interest method of accretion over the term of the note.
The aggregate debt
discount have been accreted and charged to interest expenses as a financing expense in the amount of $20,166 during the year ended
September 30, 2018.
On January 3, 2019, the Company
settled all remaining obligations under the Labrys Fund, LP note through the payment of all outstanding principal and
interest then outstanding of $330,000 and $11,609, respectively. The unamortized discount on the note of $309,834 was fully
amortized to interest expense during the year ended September 30, 2019.
Labrys loans payable consist of the following as of:
|
|
September
30, 2019
|
|
September
30, 2018
|
Current loan payable:
|
|
$
|
—
|
|
|
$
|
330,000
|
Unamortized debt discount
|
|
|
—
|
|
|
|
(309,834)
|
|
|
|
|
|
|
|
|
Total, net of unamortized discount
|
|
$
|
—
|
|
|
$
|
20,166
|
Summary of all short-term convertible
debts:
Short term convertible notes payable consist of the following as of:
|
|
September
30, 2019
|
|
September 30,
2018
|
Current loan payable:
|
|
$
|
—
|
|
|
$
|
555,000
|
Unamortized debt discount
|
|
|
—
|
|
|
|
(485,879)
|
|
|
|
|
|
|
|
|
Total, net of unamortized discount
|
|
$
|
—
|
|
|
$
|
69,121
|
Long-Term convertible notes
Securities Purchase Agreement
– December 31, 2018
On December 31, 2018,
the Company entered into a Securities Purchase Agreement (the “SPA”) with an otherwise unaffiliated third-party institutional
investor (the “Investor”), pursuant to which the Company issued to the Investor a Senior Secured Redeemable Convertible
Debenture (the “Debenture”) in the aggregate face value of $5,250,000. The note is secured by all assets of the Company.
The Debenture has a maturity date of two years from the issuance date and the Company
has agreed to pay compounded interest on the unpaid principal balance of the Debenture at the rate equal 7.5% per annum. Interest
is payable on the date the applicable principal is converted or on maturity. The interest must be paid in cash and, in certain
circumstances, may be paid in shares of common stock.
The
transactions described above closed on December 31, 2018. In connection with the issuance of the Debenture and pursuant to
the terms of the SPA, the Company issued to the Investor 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.
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.
The aggregate debt discount
has been accreted and charged to interest expenses as a financing expense in the amount of $4,466,526 during the year ended September
30, 2019.
The Debenture at September 30,
2019 consists of:
Principal
|
|
$
|
1,250,000
|
Unamortized debt discount
|
|
|
(783,474)
|
Total, net of unamortized discount
|
|
|
466,526
|
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 10 and 11 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 September 30,
2019 consists of:
Principal
|
|
$
|
10,750,000
|
Unamortized debt discount
|
|
|
(8,320,205)
|
Total, net of unamortized discount
|
|
$
|
2,429,795
|
The aggregate debt discount
has been accreted and charged to interest expenses as a financing expense in the amount of $2,429,795 during the year ended September
30, 2019.
Summary of all long term convertible
debts:
Principal – December 31, 2018 Note
|
|
$
|
1,250,000
|
Principal – April 17, 2019 Note
|
|
|
10,750,000
|
Total principal on convertible notes (long-term)
|
|
|
12,000,000
|
Unamortized debt discount
|
|
|
(9,103,679)
|
Total convertible notes, net of unamortized discount (long-term)
|
|
$
|
2,896,321
|
9. RELATED
PARTY TRANSACTIONS
Zachary Bradford –
Chief Executive Officer, Director and Former Chief Financial Officer
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 $430,437 and $194,527, respectively during the years
ended September 30, 2019 and 2018. The Company owed Mr. Bradford $0 and $89,351 in deferred compensation and reimbursable expenses
as of September 30, 2019 and 2018, respectively. Deferred compensation is reported under due to related parties in the consolidated
balance sheets. 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 year ended September
30, 2018, the Company executed eleven 15% promissory notes with a total face value of $189,690 and executed two
additional 15% promissory notes with a total face value of $25,030 during the year ended September 30, 2019 with Zachary Bradford,
its Chief Executive Officer. Under the terms of the promissory notes the Company received a total of $214,720 and agreed to repay
the notes on demand. The Company recorded interest expense of $7,648 during the year ended September 30, 2019. On January 3, 2019,
the Company settled all remaining obligations under the notes through the payment of all outstanding principal and interest then
outstanding. As of September 30, 2019, Company owed $0 in principal and $0 in accrued interest under the terms of the agreement.
Bryan Huber – Chief
Innovation Officer and Former Chief Operations Officer and Director
On August 28, 2018, the Company
executed an agreement with Zero Positive, LLC an entity controlled by Mr. Huber. In accordance with the agreement with Zero Positive,
LLC, Mr. Huber earned $171,202, during the year ended September 30, 2019.
Under the agreement Mr. Huber
was also granted a one-time bonus of $50,000 on August 28, 2018, payment of which will be deferred until certain conditions are
met. As of September 30, 2019, the bonus had not been paid. The term of the agreement is one year and automatically renews until
cancelled by either party.
On September 28, 2018, in
connection with the consulting agreement executed with Zero Positive, LLC Company issued warrants to purchase 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 September 30, 2019, 48,572
warrants had vested, and the Company recorded an expense of $496,590 during the year ended September 30, 2019. During the
year ended September 30, 2018, the Company had a consulting agreement with Bryan Huber, for management services. In
accordance with this agreement, as amended, Mr. Huber earned $180,612 during year ended September 30, 2018.
Larry McNeill – Director
and former Chairman of the Board of Directors
During the year ended September
30, 2018, the Company executed eight 15% promissory notes with a total face value of $163,100 and executed an additional 15% promissory
note with a total face value of $50,000 during the year ended September 30, 2019 with Larry McNeill, a Director of the Company.
Under the terms of the promissory notes the Company received a total of $213,100 and agreed to repay the notes on demand. The Company
recorded interest expense of $8,016 during the year ended September 30, 2019. On December 31, 2018, the Company settled all remaining
obligations under the note through the payment of all outstanding principal and interest then outstanding.
Effective January 1, 2019,
the Company agreed to pay non-executive board members $2,500 per month. Mr. McNeil earned $22,500 in Board compensation during
the year ended September 30, 2019.
Matthew Schultz- Former
Chief Executive Officer and Director
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 $445,437 and $194,527, respectively during years ended September 30, 2019 and 2018. 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.
During the year ended
September 30, 2018, the Company executed two 15% promissory notes with a total face value of $30,000 with the spouse of the former
CEO of our Company. Under the terms of the promissory notes the Company received $30,000 and agreed to repay the note on demand.
On January 1, 2019, the Company settled all remaining obligations under the notes through the payment of all outstanding principal
and interest then outstanding. As of September 30, 2019, Company owed $0 in principal and $0 in accrued interest under the terms
of the agreements. The Company recorded interest expense of $1,147 during the year ended September 30, 2019.
10. 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 September 30, 2019, there were 4,679,018 shares of common stock issued and outstanding and 100,000 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 fiscal years ended September 30, 2019 and 2018, 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, attached hereto as Exhibit 3.11, and is incorporated by reference herein.
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.
|
Common Stock issuances during the
year ended September 30, 2019
During the period commencing
October 1, 2018 through December 31, 2018, the Company received $361,800 from 14 investors pursuant to private placement agreements
with the investors to purchase 45,225 shares of the Company’s $0.001 par value 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 year ended September 30, 2019, the Company issued a total of 36,000 shares of its common stock in accordance with the
agreement. Stock compensation of $897,870 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 year ended September
30, 2019, the Company recorded stock compensation of $68,818 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 (See Note 7) 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 178,473 shares of the Company
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. (see Note 3 for
additional details.)
On February 26, 2019, a total
of 24,622 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, an 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. (see Note 8 for additional details.)
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.
On April 9, 2019, an
investor exercised warrants to purchase 900 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 received $3,268 as a result of this exercise.
The Company issued 125,000
shares in relation to a Securities purchase agreement executed on April 17, 2019. (See Note 8 for additional details.)
On June 12, 2019, the Company
entered into an agreement with SylvaCap Media for investor relations services. Under this agreement the Company agreed to issue
25,000 shares of the Company’s common stock as compensation for services for a six month period plus additional cash compensation.
The 25,000 shares vest upon issuance but if the agreement is terminated within 90 days of execution the shares are to be returned
and cancelled. On September 10, 2019, the Company terminated the agreement and as a result the shares are required to be returned
and cancelled. No stock compensation expense has been recognized as the shares did not vest as a result of the termination. As of
September 30, 2019, the shares had not yet been returned.
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. (see Note 8 for additional details.)
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. (see Note 8 for additional details.)
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 $14.96. (see Note 8 for additional details.)
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. (see Note 8 for additional details.)
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. (see Note 8 for additional details.)
Common stock returned during
the year ended September 30, 2019
In connection with
the issuance of the Auctus Fund, LLC Convertible Note, the Company issued to Auctus, as a commitment fee 13,750 returnable shares
of its common stock. As a result of the conversion of the note on September 21, 2018, the shares were returned to treasury and
cancelled on December 21, 2018. In connection with the issuance of the EMA Financial, LLC Convertible Note, the Company issued
to EMA, as a commitment fee 13,750 returnable shares of its common stock. As a result, of the repayment of the note on January
3, 2019, the shares were returned to treasury and cancelled on January 8, 2019.
In connection with
the issuance of the Note dated November 11, 2017, the Company issued, as a commitment fee 10,000 returnable shares of its common
stock. As a result, of the repayment of the note on August 13, 2019, the shares were returned to treasury and cancelled.
Common Stock issuances during
the year ended September 30, 2018
During the period commencing
October 1, 2017 through September 30, 2018, the Company received $271,900 from 16 investors pursuant to private placement agreements
with the investors to purchase 33,988 shares of the Company’s $0.001 par value common stock at a purchase price equal to
$8.00 for each share of common stock.
During the year ended September
30, 2018, the Company issued 4,164 shares of the Company’s $0.001 par value common stock to settle accounts payable. The
shares were valued at $75,734 and the Company recorded a loss on settlement of debt of $41,092 result of the issuance.
In connection with the issuance
of the March 23, 2018, Labrys Fund, LP Convertible Note, the Company issued, as a commitment fee, 13,750 shares of its common stock
(the “Returnable Shares”) as well as 10,000 shares of its common stock (the “Non-Returnable Shares”). The
agreement was amended on June 29, 2018 and as a result the returnable shares were no longer returnable. Consequently, the fair
value of the returnable shares of $218,626 was charged to interest expense. On September 19, 2018, all principal and accrued interest
of $220,000 and $12,730, respectively was converted into 25,859 shares of the Company’s common stock. (See Note 8 for additional
details)
In connection with the issuance
of the Auctus Fund, LLC Convertible Note, the Company issued to Auctus, as a commitment fee, 13,750 shares of its common stock
(the “Returnable Shares”) as well as 15,000 shares of its common stock (the “Non-Returnable Shares”). On
September 21, 2018, all principal and accrued interest of $225,000 and $5,474, respectively was converted into 25,608 shares of
the Company’s common stock. Subsequent to September 30, 2018, as a result of the conversion the 13,750 returnable shares
were returned to the Company and cancelled.
In connection with the issuance
of a the EMA Financial, LLC Convertible Note, the Company issued EMA, as a commitment fee, 13,750 shares of its common stock (the
“Returnable Shares”) as well as 10,000 shares of its common stock (the “Non-Returnable Shares”). Subsequent
to September 30, 2018, the Company repaid all obligations under the note and the 13,750 returnable shares were returned to the
Company and cancelled on January 8, 2019.
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 $20,000 per month
in cash. As of September 30, 2018, the Company had issued 3,000 shares of its common stock in accordance with the agreement. Stock
compensation of $55,100 was recorded as a result of the stock issued under the agreement.
11. STOCK WARRANTS
The following is a summary of
stock warrant activity during the years ended September 30, 2019 and September 30, 2018.
|
|
Number of Warrant Shares
|
|
Weighted Average Exercise Price
|
Balance, September 30, 2017
|
|
|
861,210
|
|
|
$
|
8.50
|
Warrants granted
|
|
|
119,160
|
|
|
|
8.00
|
Warrants expired
|
|
|
—
|
|
|
|
—
|
Warrants canceled
|
|
|
—
|
|
|
|
—
|
Warrants exercised
|
|
|
(81,440
|
)
|
|
|
3.60
|
Balance, September 30, 2018
|
|
|
898,930
|
|
|
$
|
8.90
|
Warrants granted
|
|
|
641,333
|
|
|
$
|
32.20
|
Warrants expired
|
|
|
—
|
|
|
|
—
|
Warrants canceled
|
|
|
—
|
|
|
|
—
|
Warrants exercised
|
|
|
(226,200
|
)
|
|
|
0.80
|
Balance, September 30, 2019
|
|
|
1,314,063
|
|
|
$
|
21.70
|
As of September 30, 2019,
the outstanding warrants have a weighted average remaining term of was 2.86 years and an intrinsic value of $880,574.
As
of September 30, 2019, there are warrants exercisable to purchase 1,274,063 shares of common stock in the Company and 40,000 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 year ended
September 30, 2019
On October 15, 2018,
the Company entered into an agreement with a consultant for services. Under this agreement the Company agreed to issue 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 year ended September 30, 2019, the Company recorded stock compensation
of $68,643 as a result of the stock issued under the agreement. The warrants were valued using the black-Scholes valuation model.
On December 31, 2018, in
connection with a Securities purchase agreement (see Note 8 for additional details) the Company issued Common Stock Purchase Warrants
to acquire up to 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 April 18, 2019, in connection
with a Securities purchase agreement (see Note 8 for additional details) the Company issued Common Stock Purchase Warrants to
acquire up to 230,000 shares of common stock for a term of three years on a cash-only basis at an exercise price of $35.00
per share with respect to 200,000 Warrant Shares, $40.00 with respect to 10,000 Warrant Shares, $50.00 with respect to 10,000
Warrant Shares, $75.00 with respect to 5,000 Warrant Shares and $100.00 with respect to 5,000 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 September 30, 2019, 50,000
warrants had vested, and the Company recorded an expense of $496,590 during the year ended September 30, 2019. (See Note 9
for additional details.)
On January 22, 2019, in
accordance with a merger agreement, CleanSpark issued; a five-year warrant to purchase 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. (see note 3 for additional details.) The warrants were valued at $1,102,417 and
$1,102,107, respectively.
The Black-Scholes model utilized the
following inputs to value the warrants granted during the year ended September 30, 2019:
Fair value assumptions – Warrants:
|
|
September 30, 2019
|
Risk free interest rate
|
|
|
2.36% - 3.01%
|
Expected term (years)
|
|
|
3-5
|
Expected volatility
|
|
|
254% - 268%
|
Expected dividends
|
|
|
0%
|
On January 7, 2019, a total
of 144,417 shares of the Company’s common stock were issued in connection with the cashless exercise of 150,000 common stock
warrants with an exercise prices of $0.83.
On February 26, 2019, a
total of 24,623 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 September 30, 2019,
the Company expects to recognize $1,158,709 of stock-based compensation for the non-vested outstanding warrants over a weighted-average
period of 2.26 years.
Warrant activity for the year
ended September 30, 2018
During the year ended
September 30, 2018, certain investors exercised warrants to purchase 25,840 shares of the Company’s common stock at purchase
prices ranging from $0.83 to $15.00. The Company received total proceeds of $44,938 from the warrant exercises.
During the year ended September
30, 2018, a total of 45,989 shares of the Company’s common stock were issued in connection with the cashless exercise of
55,600 common stock warrants with an exercise prices of $3.60.
On January 1, 2018, the Company
issued warrants to purchase 10,000 shares of common stock at an exercise price of $8.00 per share to an advisor for business advisory
services. The warrants were valued at $234,095 using the Black Scholes option pricing model. The warrants vest evenly over the
six-month service period ended September 30, 2018.
On June 15, 2018, the Company
issued 11,660 5-year warrants exercisable at $8.00 to a lender in connection with a promissory note agreement. (See Note 8 for
additional details.)
On August 1, 2018, the
Company issued 2,500 5-year warrants exercisable at $8.00 to a lender in connection with a promissory note agreement. (See Note
8 for additional details.)
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 September 30, 2018, 32,857
warrants had vested, and the Company recorded an expense of $951,797 during the year ended September 30, 2018. (See Note 9
for additional details.)
On September 20, 2018, the
Company issued 2,500 5-year warrants exercisable at $8.00 to a lender in connection with a promissory note agreement. (See Note
8 for additional details.)
On September 21, 2018, the
Company issued 2,500 5-year warrants exercisable at $8.00 to a lender in connection with a promissory note agreement. (See Note
8 for additional details.)
The Black-Scholes model utilized the
following inputs to value the warrants granted during the year ended September 30, 2018:
Fair value assumptions – Warrants:
|
|
September 30, 2018
|
Risk free interest rate
|
|
|
2.01% - 3.05%
|
Expected term (years)
|
|
|
5-10
|
Expected volatility
|
|
|
158% - 265%
|
Expected dividends
|
|
|
0%
|
12. STOCK OPTIONS
The Company adopted 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 September
30, 2019, there were 218,759 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 years ended September 30, 2019 and year ended September 30, 2018.
|
|
Number of Option Shares
|
|
Weighted Average Exercise Price
|
Balance, September 30, 2017
|
|
|
690
|
|
|
$
|
34.50
|
Options granted
|
|
|
31,230
|
|
|
$
|
11.30
|
Options expired
|
|
|
—
|
|
|
|
—
|
Options canceled
|
|
|
—
|
|
|
|
—
|
Options exercised
|
|
|
—
|
|
|
|
—
|
Balance, September 30, 2018
|
|
|
31,920
|
|
|
$
|
11.80
|
Options granted
|
|
|
49,321
|
|
|
$
|
11.80
|
Options expired
|
|
|
—
|
|
|
|
—
|
Options canceled
|
|
|
—
|
|
|
|
—
|
Options exercised
|
|
|
—
|
|
|
|
—
|
Balance, September 30, 2019
|
|
|
81,241
|
|
|
$
|
11.80
|
As of September 30,
2019, there are options exercisable to purchase 55,241 shares of common stock in the Company and 26,000 unvested options outstanding
that cannot be exercised until vesting conditions are met. As of September 30, 2019, the outstanding options have a weighted average
remaining term of was 2.87 years and an intrinsic value of $4,438.
Option activity for the year ended September 30,
2019
During the year ended
September 30, 2019, the Company issued 49,321 options to purchase shares of common stock to employees, the shares were granted
at quoted market prices ranging from $8.50 to $59.00. The options were valued at issuance using the Black Scholes model and stock
compensation expense of $326,100 was recorded as a result of the issuances.
The Black-Scholes model utilized the following inputs
to value the options granted during the year ended September 30, 2019:
Fair value assumptions – Options:
|
|
September 30, 2019
|
Risk free interest rate
|
|
|
1.56% - 2.91%
|
Expected term (years)
|
|
|
3
|
Expected volatility
|
|
|
145%- 271%
|
Expected dividends
|
|
|
0%
|
As of September 30, 2019, the
Company expects to recognize $171,600 of stock-based compensation for the non-vested outstanding options over a weighted-average
period of 2.9 years.
Option activity for the year
ended September 30, 2018
During the year ended
September 30, 2018, the Company issued 6,230 options to purchase shares of the common stock to employees, the shares were granted
at quoted market prices ranging from $15.70 to $34.50. The shares were valued at issuance using the Black Scholes model and stock
compensation expense of $130,000 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 year ended September 30, 2018, $191,526
was been expensed as stock-based compensation.
The Black-Scholes model utilized the following inputs
to value the options granted during the year ended September 30, 2018:
Fair value assumptions – Options:
|
|
September 30, 2018
|
Risk free interest rate
|
|
|
1.46% - 2.78%
|
Expected term (years)
|
|
|
2-3
|
Expected volatility
|
|
|
120% - 191%
|
Expected dividends
|
|
|
0%
|
13. INCOME TAXES
The Company provides for
income taxes under FASB ASC 740, Accounting for Income Taxes. FASB ASC 740 requires the use of an asset and liability approach
in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial
statement and tax bases of assets and liabilities and the tax rates in effect currently.
FASB ASC 740 requires the
reduction of deferred tax assets by a valuation allowance, if, based on the weight of available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized. In the Company’s opinion, it is uncertain
whether they will generate sufficient taxable income in the future to fully utilize the net deferred tax asset. Accordingly,
a valuation allowance equal to the deferred tax asset has been recorded. The total deferred tax asset is approximately $8.9
million as of September 30, 2019 which is calculated by multiplying a 21% estimated tax rate by the cumulative net operating
loss (NOL) of approximately $42.3 million.
Due to the enactment of
the Tax Reform Act of 2017, we have calculated our deferred tax assets using an estimated corporate tax rate of 21%. US Tax codes
and laws may be subject to further reform or adjustment which may have a material impact to the Company’s deferred tax assets
and liabilities.
The significant components
of the Company's deferred tax assets and liabilities as of September 30, 2019 and 2018 are as follows:
As of September 30,
|
|
2019
|
|
2018
|
Cumulative tax net operating losses (in millions)
|
|
$
|
42.3
|
|
|
$
|
27.6
|
|
|
|
|
|
|
|
|
Deferred tax asset (in millions)
|
|
$
|
8.9
|
|
|
$
|
5.8
|
Valuation allowance (in millions)
|
|
|
(8.9
|
)
|
|
|
(5.8)
|
Current taxes payable
|
|
|
—
|
|
|
|
—
|
Income tax expense
|
|
$
|
—
|
|
|
$
|
—
|
As of September 30, 2019, and 2018,
the Company had gross federal net operating loss carryforwards of approximately $42.3 million and $27.6 million, respectively.
The Company plans to file its U.S.
federal return for the year ended September 30, 2019 upon the issuance of this filing. Upon filing of the tax return for the year
ended September 30, 2019 the actual deferred tax asset and associated valuation allowance available to the Company may differ
from management’s estimates. The tax years 2014-2018 remained open to examination for federal income tax purposes by the
major tax jurisdictions to which the Company is subject. No tax returns are currently under examination by any tax authorities.
14. COMMITMENTS
AND CONTINGENCIES
Office leases
The Company’s corporate
offices are located at 70 North Main Street, Suite 105, Bountiful, Utah 84010. The Company occupies the leased space on a month
to month basis at a rate of $850 per month. Future minimum lease payments under the
operating leases for the facilities as of September 30, 2019, are $0.
On May 15, 2018, the Company
executed a 37-month lease agreement, which commenced on July 1, 2018 at 4360 Viewridge Avenue, Suite C, San Diego,
California. The agreement calls for the Company to make payments of $4,057 in base rent per month through July 31, 2021
subject to an annual 3% rent escalation. Future minimum lease payments under the
operating leases for the facilities as of September 30, 2019, are as follows:
Fiscal year ending September 30, 2020
|
$50,521
|
Fiscal year ending September 30, 2021
|
$43,170
|
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.
15. MAJOR
CUSTOMERS AND VENDORS
For the years ended September 30, 2019 and 2018, the
Company had the following customers that represented more than 10% of sales.
|
|
September
30, 2019
|
|
September
30, 2018
|
Customer A
|
|
|
34.78
|
%
|
|
|
—
|
Customer B
|
|
|
27.79
|
%
|
|
|
—
|
Customer C
|
|
|
10.74
|
%
|
|
|
70.42%
|
Customer D
|
|
|
10.42
|
%
|
|
|
—
|
Customer E
|
|
|
—
|
|
|
|
11.82%
|
For the years ended September
30, 2019 and 2018, the Company had the following suppliers that represented more than 10% of direct material costs.
|
|
September 30, 2019
|
|
September 30, 2018
|
Vendor A
|
|
|
84.06
|
%
|
|
|
0%
|
Vendor B
|
|
|
2.52
|
%
|
|
|
26.52%
|
Vendor C
|
|
|
0.11
|
%
|
|
|
13.57%
|
Vendor D
|
|
|
—
|
|
|
|
27.47%
|
16.
SUBSEQUENT EVENTS
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
|
Strategic Investment
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 of ILAL for an aggregate purchase price of $500,000,
less certain expenses and fees. In connection with the Stock Transaction, ILAL also issued 350,000 shares of its common stock to
the Company as commitment shares. ILAL may issue additional shares of its common stock to the Company if certain conditions are
not satisfied.
Increase in Authorized Number of Series A Preferred Stock
On October 4, 2019, pursuant to Article IV of the Company’s Articles of Incorporation, the Company’s 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 stated value of $0.02 per share plus any accumulated but unpaid dividends. The holders are further
entitled to have the Company redeem their Series A Preferred Stock for three shares of common stock in the event of a change of
control and they are entitled to vote together with the holders of the Company’s common stock on all matters submitted to
shareholders at a rate of forty-five (45) votes for each share held.
Issuance of Series A Preferred Stock
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.
Issuance of Common stock for convertible debt
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 $3.20. (see Note8 for additional details.)
Reverse stock split
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.