Our consolidated financial statements included in this Form 10-Q
are as follows:
These consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial
information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. Operating results for the interim period ended June 30, 2018 are not necessarily
indicative of the results that can be expected for the full year.
The accompanying
notes are an integral part of these unaudited consolidated financial statements.
The accompanying
notes are an integral part of these unaudited consolidated financial statements.
The accompanying
notes are an integral part of these unaudited consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND LINE OF BUSINESS
Organization
CleanSpark, Inc. (“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, the Company entered into
an Asset and Intellectual Property Purchase Agreement pursuant to which the Company acquired: (i) all Intellectual Property rights,
title and interest in Patent # 8,105,401 'Parallel Path, Downdraft Gasifier Apparatus and Method' and Patent # 8,518,133 'Parallel
Path, Downdraft Gasifier Apparatus and Method' and (ii) all of the Property rights, title and interest in a 32 inch Downdraft
Gasifier ("Gasifier”) and (iii) assumed of $156,900 in liabilities.
In December 2014, the Company changed its name
to Stratean Inc. through a short-form merger in order to better reflect the new business plan.
On July 1, 2016, the Company entered into an
Asset Purchase Agreement, as amended (the “Purchase Agreement”), with CleanSpark Holdings LLC, CleanSpark LLC, CleanSpark
Technologies LLC and Specialized Energy Solutions, Inc. (together, the “Seller”). Pursuant to the Purchase Agreement,
the Company acquired CleanSpark, LLC and all the assets related to Seller and its line of business and assumed $200,000 in liabilities.
In October 2016, the Company changed its name
to CleanSpark, Inc. through a short-form merger in order to better reflect the brand identity.
Line
of Business
Through
the acquisition of CleanSpark, LLC, the Company provides microgrid solutions to military, commercial and residential properties.
The services
offered consist of turn-key microgrid implementation services, microgrid design and engineering, project development consulting
services and solar photovoltaic installation and consulting. The work is performed under fixed price bid contracts and negotiated
price contracts. The Company performed all of its work in California during the nine months ending June 30, 2018.
2. BASIS OF PRESENTATION AND GOING CONCERN
The accompanying unaudited interim financial
statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of
America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements
and notes thereto contained in the Company’s most recent Annual Financial Statements filed with the SEC on Form 10-K. In
the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial
position and the results of operations for the interim period presented have been reflected herein. The results of operations for
the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements
which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period,
as reported in the Form 10-K, have been omitted.
Going concern
– The accompanying
consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. The Company has incurred cumulative net losses of $28,472,653
since its inception and requires capital for its contemplated operational and marketing activities to take place. The Company’s
ability to raise additional capital through future issuances of common stock is unknown. The obtainment of additional financing,
the successful development of the Company’s contemplated plan of operations, and its transition, ultimately, to the attainment
of profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors
raises substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements
of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.
3. SUMMARY OF SIGNIFICANT POLICIES
This summary of significant accounting policies
of CleanSpark Inc. is presented to assist in understanding the Company’s consolidated financial statements. The consolidated
financial statements and notes are representations of the Company’s management, who are responsible for their integrity and
objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and
have been consistently applied in the preparation of the consolidated financial statements.
Principles of Consolidation
The accompanying consolidated
financial statements include the accounts of CleanSpark, Inc., and its wholly owned operating subsidiaries, CleanSpark, LLC, and
CleanSpark, II, LLC. All material intercompany transactions have been eliminated upon consolidation of these entities.
Use of estimates
–
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include
estimates used to review the Company’s goodwill, impairments and estimations of long-lived assets, revenue recognition on
percentage of completion type contracts, allowances for uncollectible accounts, inventory valuation, and the valuations of non-cash
capital stock issuances. The Company bases its estimates on historical experience and on various other assumptions that are
believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
Revenue Recognition
–
The Company recognizes revenue on arrangements
in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial
Statements” and No. 104, “Revenue Recognition”. In all cases, revenue is recognized only when the price is fixed
or determinable, persuasive evidence of an arrangement exists, the service is performed and collectability is reasonably assured.
For the nine months ended June 30, 2018 and 2017, the Company reported revenues of $466,931 and $388,541, respectively.
Revenues and related
costs on construction contracts are recognized using the “percentage of completion method” of accounting in accordance
with ASC 605-35, Accounting for Performance of Construction-Type and Certain Production Type Contracts (“ASC 605-35”).
Under this method, contract revenues and related expenses are recognized over the performance period of the contract in direct
proportion to the costs incurred as a percentage of total estimated costs for the entirety of the contract. Costs include direct
material, direct labor, subcontract labor and any allocable indirect costs. All un-allocable indirect costs and corporate general
and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company
will recognize the loss as it is determined.
Revisions in cost
and profit estimates during the course of the contract are reflected in the accounting period in which the facts, which require
the revision, become known. Provisions for estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized
in the period in which the revisions are determined.
The Asset, “Costs
in excess of billings”, represents revenues recognized in excess of amounts billed on contracts in progress. The Liability,
“Billings in excess of costs”, represents billings in excess of revenues recognized on contracts in progress. At June
30, 2018 and September 30, 2017, the costs in excess of billings balance were $0 and $0, and the billings in excess of costs balance
were $0 and $0, respectively.
Accounts receivables
are recorded on contracts for amounts currently due based upon progress billings, as well as retention, which are collectible upon
completion of the contracts. Accounts payable to material suppliers and subcontractors are recorded for amounts currently
due based upon work completed or materials received, as are retention due subcontractors, which are payable upon completion of
the contract. General and administrative expenses are charged to operations as incurred and are not allocated to contract
costs. Retention receivable is the amount withheld by a customer until a contract is completed. Retention receivables of $0
and $0 were included in the balance of trade accounts receivable as of June 30, 2018 and September 30, 2017, respectively.
Accounts Receivable
– Accounts
receivable is comprised of uncollateralized customer obligations due under normal trade terms. The Company performs ongoing credit
evaluation of its customers and management closely monitors outstanding receivables based on factors surrounding the credit risk
of specific customers, historical trends, and other information. The carrying amount of accounts receivable is reviewed periodically
for collectability. If management determines that collection is unlikely, an allowance that reflects management’s best estimate
of the amounts that will not be collected is recorded. Accounts receivable are presented net of an allowance for doubtful accounts
of $4,500 and $0 at June 30, 2018, and September 30, 2017, respectively.
Cash and cash equivalents
– For
purposes of the statement of cash flows, the Company considers all highly liquid investments and short-term debt instruments with
original maturities of three months or less to be cash equivalents. There was $17,481 and $57,128 in cash and cash equivalents
as of June 30, 2018 and September 30, 2017, respectively.
Concentration Risk
At times throughout the year, the Company may
maintain cash balances in certain bank accounts in excess of FDIC limits. As of June 30, 2018, the cash balance in excess of the
FDIC limits was $0. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant
credit risk in these accounts.
The Company had certain customers whose revenue individually
represented 10% or more of the Company’s total revenue. (see Note 16 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 periods ended June 30, 2018 and September 30, 2017 were $0 and $0, respectively.
Stock-based compensation
– The
Company follows the guidelines in FASB Codification Topic ASC 718-10 “
Compensation-Stock Compensation,
” which
provides investors and other users of financial statements with more complete and neutral financial information, by requiring that
the compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost will be
measured based on the fair value of the equity or liability instruments issued. ASC 718-10 covers a wide range of share-based compensation
arrangements, including share options, restricted share plans, performance-based awards, share appreciation rights and employee
share purchase plans. On June 9, 2017, the Company implemented an employee stock-based compensation plan and since inception of
the plan has issued 47,337 options to purchase shares of the Company’s common stock under this plan as of June 30, 2018.
The options are exercisable between $1.57 to $3.45 per share.
Non-Employee Stock Based Compensation
– The Company accounts for stock-based compensation awards issued to non-employees for services, as prescribed by ASC 718-10,
at either the fair value of the services rendered, or the instruments issued in exchange for such services, whichever is more readily
determinable, using the measurement date guidelines enumerated in ASC 505-50. The Company may issue compensatory shares for services
including, but not limited to, executive, management, accounting, operations, corporate communication, financial and administrative
consulting services.
Earnings (loss) per share
– The
Company reports earnings (loss) per share in accordance with Financial Accounting Standards Board’s (“FASB”)
Accounting Standards Codification (“ASC”) 260-10 “
Earnings Per Share,
” which provides for calculation
of “basic” and “diluted” earnings per share. Basic earnings per share includes no dilution and is computed
by dividing net income or loss available to common stockholders by the weighted average common shares outstanding for the period.
Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. The calculation
of diluted net loss per share gives effect to common stock equivalents; however, potential common shares are excluded if their
effect is anti-dilutive.
Long-lived Assets
– In accordance
with the Financial Accounting Standards Board ("FASB") Accounts Standard Codification (ASC) ASC 360-10, "Property,
Plant and Equipment," the carrying value of intangible assets and other long-lived assets is reviewed on a regular basis for
the existence of facts or circumstances that may suggest impairment. The Company recognizes impairment when the sum of the expected
undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses, if any, are measured as the excess
of the carrying amount of the asset over its estimated fair value. During the nine months ended June 30, 2018 and 2017 the Company
recorded an impairment expense of $0 and $0, respectively.
Indefinite Lived Intangibles and Goodwill
Assets
– The Company accounts for business combinations under the acquisition method of accounting in accordance with
ASC 805, “Business Combinations,” where the total purchase price is allocated to the tangible and identified intangible
assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information
currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among
other things, asset valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the
fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.
The Company tests
for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events or circumstances
indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. In accordance with its policies,
the Company performed a qualitative assessment of indefinite lived intangibles and goodwill at September 30, 2017 and determined
there was no impairment of indefinite lived intangibles and goodwill.
Software Development
Costs
– 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 2.0 and mVSO 2.0 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 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.
Income taxes
–
The Company accounts for its income taxes in accordance with FASB Codification Topic ASC 740-10, “
Income Taxes
”,
which requires recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry-forwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment date.
Reclassifications
– Certain prior year amounts have been reclassified for consistency with the current year presentation. On the Company’s
consolidated balance sheet as of September 30, 2017 $4,020,269, net of $333,139 in accumulated depreciation has been reclassified
from Flexpower system assets to intangible assets. This amount was associated with engineering and trade secrets. Flexpower assets
have been reclassified as capitalized software to more clearly reflect the nature of the assets. In addition, $132,892 and $797,290
in amortization and depreciation expense related to the capitalized software has been reclassified to product development expense
for the three and nine months ended June 30, 2017. 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
– The Company has evaluated the all recent accounting pronouncements through ASU 2018-06, and believes that none of them
will have a material effect on the Company's financial position, results of operations or cash flows except as discussed below.
Revenue from Contracts with Customers
. In
May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), which supersedes nearly all existing
revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or
services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for
those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment
and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. Additionally,
the new guidance requires enhanced disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising
from customer contracts, including revenue recognition policies to identify performance obligations, assets recognized from costs
incurred to obtain and fulfill a contract, and significant judgments in measurement and recognition.
In July 2015, the FASB made a decision to defer
the effective date of the new standard for one year and permit early adoption as of the original effective date. The
new standard will be effective for the Company as of October 1, 2018. The Company is currently evaluating the impact of the adoption
of this standard on its revenue recognition policy.
4. PREPAID EXPENSES
Prepaid expenses consist of the following as
of June 30, 2018 and September 30, 2017:
|
|
June 30, 2018
|
|
September 30, 2017
|
Prepaid compensation
|
|
$
|
—
|
|
|
$
|
5,241
|
Prepaid professional fees
|
|
|
2,500
|
|
|
|
2,500
|
Prepaid rent
|
|
|
4,057
|
|
|
|
—
|
Prepaid dues and subscriptions
|
|
|
9,602
|
|
|
|
4,696
|
Prepaid insurance and bonds
|
|
|
36,094
|
|
|
|
17,119
|
Total prepaid expenses
|
|
$
|
52,253
|
|
|
$
|
29,556
|
5. CAPITALIZED SOFTWARE
A microgrid is comprised of any number of generation,
energy storage, and smart distribution assets that serve single or multiple loads, both connected to the grid and islanded. Our
capitalized software (“Software”) assets are composed of our mPulse integrated microgrid control platform(“mPulse”),
microgrid value stream optimizer tool (“mVSO”) (formerly known as Dynamic Network Analysis (“DNA”)) which
together seamlessly integrate energy generation with energy storage devices and controls facility loads to provide energy optimization
and security in real time. Systems utilizing our software can interoperate with the local utility grid and allows users the ability
to obtain the most cost-effective power for a facility. Our software platforms are ideal for microgrid systems for the commercial,
industrial, mining, defense, campus and community users ranging from 4 kw to 100 MW and beyond and microgrids and distributed energy
systems utilizing the Company’s software platforms are capable of delivering power at or below the current cost of utility
power.
Proprietary software
mPulse
mPulse is a modular platform that enables fine-grained
control of a Microgrid based on customer operational goals, equipment and forecasts of load and generation. mPulse performs high-frequency
calculations, threshold-based alarming, execution of domain-specific business rules, internal and external health monitoring, historical
data persistence, and system-to-operator notifications. The modular design increases system flexibility and extensibility. In addition,
the deployment of the mPulse system follows a security-conscious posture by deploying hardware-based firewalls as well as encryption
across communication channels. mPulse allows configuration for site-specific equipment and operation and provides a clean, informative
user interface to allow customers to monitor and analyze the data streams that describe how their microgrid is operating.
mPulse supports CleanSpark’s innovative
fractal approach to microgrid design, which enables multiple microgrids on a single site to interact in a number of different ways,
including as peers, in a parent-child relationship, and in parallel or completely disconnected. Each grid can have different operational
objectives, and those operational objectives can change over time. Any microgrid can be islanded from the rest of the microgrid
as well as the larger utility grid. The mPulse software can control the workflow required in both the islanding steps as well as
the reconnecting steps of this maneuver and coordinate connected equipment such that connections are only made when it is safe
to do so. The mPulse software has proven to be robust and reliable, operating successfully at the Camp Pendleton FractalGrid installation
continuously for over 3 years with minimal maintenance and support required.
Microgrid value stream Optimizer (“mVSO”)
The mVSO platform provides a robust microgrid
modeling solution. mVSO takes utility rate data and load data for a customer site and helps automate the sizing and analysis of
potential microgrid solutions as well as providing a financial analysis around each grid configuration. mVSO uses historical weather
data to generate projected energy generation from PV arrays and models how storage responds to varying operational modes and command
logics based upon predicted generation and load curves. mVSO analysis multiple equipment combinations and operation situation to
determine the optimal grid configuration for a site based on the financials, equipment outlay, utility cost savings, etc., to arrive
at payback and IRR values. This ultimately provides us with data to design a microgrid that will meet the customers’ performance
benchmarks.
Version 2.0 improvements
On September 27, 2017, the Company launched
its development of mPulse 2.0 and DNA 2.0. These improvements are being built into our existing software platforms and add significant
improvements, which focus on positioning, integration, focus and quality, as outlined below.
Positioning
When mPulse originally was developed, a main
focus of the platform and the industry was resiliency of microgrid operation, specifically in military contexts. Since that time,
the microgrid landscape has continued to evolve, and there is growing opportunity within the commercial and industrial space as
the markets in these spaces desire microgrids capable of obtaining the highest economic advantage.
Further, this growing focus on economic advantage
is in line with the continued market evolution toward an open energy market at regional levels. CleanSpark wants to be well positioned
to enter into this market at each step of its availability, from responding to demand response requests all the way through participating
in ancillary grid service markets and fully open transactive energy markets as regulation matures. To position ourselves, the mPulse
platform operation is being improved to mirror the predicted energy market progression by implementing internal markets at each
level of the system. In these internal markets, energy producing assets are modeled as sellers, and energy consuming assets are
modeled as buyers, with the market playing matchmaker between the two and virtually “selling” available energy to the
highest bidder, thereby satisfying the energy loads at the highest economic advantage for both participants at any given moment.
The internal energy market running at our customers’
sites will take daily feeds of production and load forecasts from the platform to set up the daily market parameters, then ingest
a stream of current positions of both buyers and sellers as well as their individual pricing information, which is calculated based
on the details of the energy rate under which those consumers operate. Consumers bid into the market along the schedule of the
specific rate structure under which those loads operate, with bids including the calculated value of energy and power based on
that rate and the predicted total use and power profile during the time period of that bid. Based on the predicted generation profile
and the other active bids currently being satisfied, the market either fills or cannot fill the newly received bid, and based on
the market’s feedback, the consumer’s operation mode and setpoint will change, which will determine the actual control
commands sent to related equipment.
This market scenario is mirrored at every level,
from an individual node potentially consisting of only one producer and one consumer (power source and meter, respectively), to
a higher-level node, in which other nodes participate as either net producers or net consumers, to the site level, and even up
to regional level, where sites may participate in the market directly. At each level, details of the level below are aggregated
and abstracted away, so each level operates in a simple and self-similar way, mirroring the physical construction of the FractalGrid.
These markets shine in optimization scenarios, especially around times of just enough supply or even slight scarcity, which are
expected to allow CleanSpark to reap the maximum economic value for our customers even in the case of undersized grids. In addition,
this flexibility allows for ease of integration for new market participants at each level as regulation matures to support further
Demand Response programs, ancillary service markets, and eventually peer-to-peer transactive energy.
Integration
While mVSO has been invaluable in evaluating
sites for potential solutions and then creating detailed proposals for those sites, it currently exists as a siloed application.
The two tools will be integrated and share fundamental portions of the platform, which will enable increased consistency, performance,
feedback and overall system improvements.
At its root, mVSO is a simulation platform
that models the interactions of generation, load, and storage. This simulation uses customer-supplied or CleanSpark-derived load
data, generation forecasts, and modeled storage behavior to take a virtual site step by step through a time period with different
operation and equipment scenarios. Ultimately, this gives us data to produce a proposal and performance benchmarks that we may
be obligated to meet during actual site operation. In order to maximize the probability of meeting those performance obligations,
we will use the very same operational logic within the virtual site simulation, which will enable us to embed the economic optimization
market functionality within our proposal tool. This not only will help ensure our ability to produce the results we predict, it
will also help us understand the maximum value our system can provide to the customer from the start, which may increase the number
of opportunities open to us to pursue, unlocking more business.
By integrating the architectural patterns and
cloud operating platform of mVSO and mPulse we will increase performance of both tools, which will enable us to run large numbers
of simulation scenarios in parallel, increasing our analysis throughput. The elastic nature of the cloud will facilitate our storing
much more data which includes both information used as inputs to mVSO simulations as well as the simulation results. This data
will quickly grow into a wealth of data that will enable feedback into the model as well as continuous refinement of the parameters
that define optimal sites we should pursue, allowing us to target our business development efforts.
Focus
For mPulse 2.0, we are focusing on furthering
the development of the economic optimization logic in the platform, including an increased push toward deep learning algorithms
and more effective forecasting both on solar generation and facility load.
Quality
We employ a quality-first mindset in all aspects
of our software design. From a software architecture point of view, this translates in designing for the maintainability, extensibility,
scalability, availability, accessibility, and deployability of the system.
These planned improvements paired with our
design and engineering methods and experience should help keep CleanSpark on the cutting edge of the microgrid industry. The Company
plans to make an initial release of both mPulse 2.0 and DNA 2.0 available to customers in the Company’s third fiscal quarter
of 2018. As of the date of this filing the Company has offered a beta release of mPulse 2.0 to a limited number of customers and
will test system performance with these customers as feature sets are released of the next two quarters.
Capitalized software consists of the following
as of June 30, 2018 and September 30, 2017:
|
|
June 30, 2018
|
|
September 30, 2017
|
mVSO software
|
|
$
|
4,309,083
|
|
|
$
|
4,663,513
|
MPulse software
|
|
|
5,709,906
|
|
|
|
5,923,197
|
Less: accumulated amortization
|
|
|
(1,030,823
|
)
|
|
|
(877,266)
|
Capitalized Software, Net
|
|
$
|
8,988,166
|
|
|
$
|
9,709,444
|
In accordance with ASC 985 the Company capitalized
$309,545 in software development costs (including capitalized stock compensation cost of $38,927) related to the enhancements created
for our mPulse and mVSO 2.0 platforms during the nine months ended June 30, 2018.
Capitalized software amortization and recorded
as product development expense for the nine months ended June 30, 2018 and 2017 was $1,030,823 and $797,290, respectively.
6. INTANGIBLE AND OTHER ASSETS
Intangible assets consist of the following
as of June 30, 2018 and September 30, 2017:
|
|
June 30, 2018
|
|
September 30, 2017
|
Patents
|
|
$
|
95,437
|
|
|
$
|
89,473
|
Websites
|
|
|
14,532
|
|
|
|
14,532
|
Brand and Client lists
|
|
|
2,497,472
|
|
|
|
2,497,472
|
Trademarks
|
|
|
5,928
|
|
|
|
5,928
|
Engineering trade secrets
|
|
|
4,020,269
|
|
|
|
4,020,269
|
Software
|
|
|
26,990
|
|
|
|
26,990
|
Less: accumulated amortization
|
|
|
(1,343,293
|
)
|
|
|
(750,978)
|
Intangible assets, net
|
|
$
|
5,317,335
|
|
|
$
|
5,903,686
|
Amortization expense for the nine months ended
June 30, 2018 and 2017 was $592,315 and $408,823, respectively.
7. FIXED ASSETS
Fixed assets consist of the following as of
June 30, 2018 and September 30, 2017:
|
|
June 30, 2018
|
|
September 30, 2017
|
Machinery and equipment
|
|
$
|
135,262
|
|
|
$
|
133,061
|
Furniture and fixtures
|
|
|
86,389
|
|
|
|
74,393
|
Total
|
|
|
221,651
|
|
|
|
207,454
|
Less: accumulated depreciation
|
|
|
(122,403
|
)
|
|
|
(82,013)
|
Fixed assets, net
|
|
$
|
99,248
|
|
|
$
|
125,441
|
Depreciation expense for the nine months
ended June 30, 2018 and 2017 was $40,390 and $76,838, respectively. In 2017, the Company also recorded additional
depreciation expense of $1,019,910 related to microgrid assets which were impaired in 2017 for the nine months ended June 30,
2017.
8. LOANS
Long term
|
|
June 30, 2018
|
|
September 30, 2017
|
Long-term notes
payable consists of the following:
|
|
|
|
|
Promissory notes
|
|
|
300,000
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
300,000
|
|
|
$
|
150,000
|
On September 5, 2017,
the Company executed a 9% secured promissory note with a face value of $150,000 with an investor. Under the terms of the promissory
note the Company received $150,000 and agreed to make monthly interest payments and repay the note principal 24 months from the
date of issuance. The note is secured by 150,000 shares which are held in escrow and would be issued to the note holder only in
the case of an uncured default. As of June 30, 2018, the Company owed $150,000 in principal and $1,110 in accrued interested under
the terms of the agreement and recorded interest expense of $10,097 for the nine months ended June 30, 2018.
On November 11, 2017,
the Company executed a 10% secured promissory note with a face value of $100,000 with an investor. Under the terms of the promissory
note the Company received $100,000 and agreed to make monthly interest payments and repay the note principal 24 months from the
date of issuance. The note is secured by 100,000 shares which would be issued to the note holder only in the case of an uncured
default. As of June 30, 2018, The Company owed $100,000 in principal and $822 in accrued interested under the terms of the agreement
and recorded interest expense of $6,411 for the nine months ended June 30, 2018.
On December 5, 2017,
the Company executed a 9% secured promissory note with a face value of $50,000 with an investor. Under the terms of the promissory
note the Company received $50,000 and agreed to make monthly interest payments and repay the note principal 24 months from the
date of issuance. The note is secured by 50,000 shares which would be issued to the note holder only in the case of an uncured
default. As of June 30, 2018, The Company owed $50,000 in principal and $370 in accrued interested under the terms of the agreement
and recorded interest expense of $2,552 for the nine months ended June 30, 2018.
Current
|
|
June 30, 2018
|
|
September 30, 2017
|
Current notes payable consists of the following:
|
|
|
|
|
|
|
|
Promissory notes
|
|
|
373,212
|
|
|
|
—
|
Installment loans (insurance)
|
|
|
20,515
|
|
|
|
7,712
|
Unamortized Debt discount
|
|
|
(100,984
|
)
|
|
|
—
|
Unamortized Original issue discount
|
|
|
(7,529
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
Total, net of unamortized discount
|
|
$
|
285,214
|
|
|
$
|
7,712
|
Promissory Notes
On October 6, 2017,
the Company executed an unsecured variable interest rate promissory note with a maximum interest rate of 58.3% and a face
value of $45,000 with a financial institution. Under the terms of the promissory note the Company received $45,000 and agreed
to repay the note evenly over 12 months. As of June 30, 2018, The Company owed $15,000 in principal and $0 in accrued
interested under the terms of the agreement and recorded interest expense of $12,375 for the nine months ended June 30,
2018.
On November 20, 2017,
the Company executed a 10% secured 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. As of June 30, 2018, The Company owed $80,000 in principal and $658 in accrued interested under the terms of
the agreement and recorded interest expense of $4,866 for the nine months ended June 30, 2018.
On January 12, 2018,
the Company executed an unsecured variable interest rate promissory note with a maximum interest rate of 58.5% and a face value
of $18,400 with a financial institution. Under the terms of the promissory note the Company received $18,400 and agreed to repay
the note and interest evenly over 12 months. As of June 30, 2018, The Company owed $10,733 in principal and $0 in accrued interested
under the terms of the agreement and recorded interest expense of $3,680 for the nine months ended June 30, 2018.
On February 27, 2018,
we entered into a promissory note pursuant to which we borrowed $125,000. The note carries an original issue discount of 5.6% ($7,000).
Interest under the promissory note is 10% per annum. Under the terms of the promissory note the Company agreed to make interest
and principal payments equal to $2,500 or greater on a monthly basis. Any unpaid balance is due in full on August 1, 2018. As of
June 30, 2018, the Company owed $126,367 in principal and $1,051 in accrued interested under the terms of the agreement and recorded
interest expense of $4,379 for the nine months ended June 30, 2018. The aggregate original issued issue discount has been accreted
and charged to interest expenses as a financing expense in the amount of $5,530 and $0 during the nine months ended June 30, 2018
and 2017, respectively.
On May 22, 2018, the
Company executed a variable interest rate promissory note with a maximum interest rate of 51.0% and a face value of $24,500 with
a financial institution. Under the terms of the promissory note the Company received $24,500 and agreed to repay the note and interest
evenly over 12 months. As of June 30, 2018, The Company owed $24,500 in principal and $0 in accrued interested under the terms
of the agreement and recorded interest expense of $0 for the nine months ended June 30, 2018.
On June 15, 2018,
we entered into a 10% promissory note with a face value of $116,600 pursuant to which we received $110,000, the note also included
an original issue discount of 6% ($6,600). The Company also issued 116,600 5-year warrants exercisable at $0.80 in connection with
purchase of the promissory note. Under the terms of the promissory note the Company agreed to make monthly interest payments and
repay the note principal on December 15, 2018. As of June 30, 2018, The Company owed $116,600 in principal and $479 in accrued
interested under the terms of the agreement and recorded interest expense of $479 for the nine months ending June 30, 2018. The
Company has determined the value associated with the warrants issued in connection with the notes to be $110,000 which has been
recorded as a debt discount. The aggregate original issued 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 $9,016 and $0 during the nine months ended June
30, 2018 and 2017, respectively.
Installment loans
On February 3, 2018,
the Company executed a 6.1% installment loan with a face value of $25,781 with a financial institutional to finance an insurance
policy. Under the terms of the installment note the Company received $25,781 and agreed to make equal payments and repay the note
principal 10 months from the date of issuance. As of June 30, 2018, the Company owed $15,073 in principal and $0 in accrued interested
under the terms of the agreement.
On February 27, 2018,
the Company executed a 6.1% installment loan with a face value of $9,308 with a financial institutional to finance an insurance
policy. Under the terms of the installment note the Company received $9,308 and agreed to make equal payments and repay the note
principal 10 months from the date of issuance. As of June 30, 2018, the Company owed $5,442 in principal and $0 in accrued interested
under the terms of the agreement.
9. CONVERTIBLE NOTES
PAYABLE
Convertible Notes Payable at consists of the following:
|
|
June 30,
|
|
September 30,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
On
March 23, 2017, we entered into a convertible promissory note pursuant to which we borrowed $200,000, less debit 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 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.
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 aggregate original issued issue discount, beneficial conversion feature and debt issuance costs have been accreted and charged to interest expenses as a financing expense in the amount of $120,999 and $0 during the nine months ended June 30, 2018 and 2017, respectively.
|
|
|
200,000
|
|
|
|
—
|
Original issue discount
|
|
|
20,000
|
|
|
|
—
|
Unamortized debt issuance costs
|
|
|
(7,088
|
)
|
|
|
|
Unamortized Original issue discount
|
|
|
(9,000
|
)
|
|
|
|
Unamortized debt discount
|
|
|
(82,913
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
Total, net of unamortized discount
|
|
$
|
120,999
|
|
|
$
|
—
|
10. FAIR VALUE OF FINACNIAL
INSTRUMENTS AND DERIVATIVE LIABILITIES
The carrying value of cash, accounts
payable and accrued expenses, and debt (see Notes 8 & 9) approximate their fair values because of the short-term nature of
these instruments. Management believes the Company is not exposed to significant interest or credit risks arising from these financial
instruments. The carrying amount of the Company’s long-term debt is also stated at fair value of $300,000 since the stated
rate of interest approximates market rates.
Fair value is defined as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques
used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes
a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable.
|
●
|
|
Level 1
|
|
Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets.
|
|
●
|
|
Level 2
|
|
Quoted prices for similar assets and liabilities in active markets; quoted prices included for identical or similar assets and liabilities that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. These are typically obtained from readily-available pricing sources for comparable instruments.
|
|
●
|
|
Level 3
|
|
Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own beliefs about the assumptions that market participants would use in pricing the asset or liability, based on the best information available in the circumstances.
|
The following table presents the
derivative financial instruments, the Company’s only financial liabilities measured and recorded at fair value on the Company’s
balance sheets on a recurring basis, and their level within the fair value hierarchy as of June 30, 2018:
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
Embedded conversion derivative liability
|
|
$
|
581,663
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
581,663
|
Warrant and option derivative liabilities
|
|
$
|
17,122,365
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
17,122,365
|
Total
|
|
$
|
17,704,028
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
17,704,028
|
The embedded conversion feature
in the convertible debt instruments that the Company issued (See Note 9), was convertible at issuance which qualified them as a
derivative instrument since the number of shares issuable under the note is indeterminate based on guidance in ASC Topic No. 815-15,
“Derivatives and Hedging (“Topic No. 815-15”). Topic No. 815-15 requires the Company to bifurcate and separately
account for the conversion features as an embedded derivative contained in the Company’s convertible debt. This convertible
debt tainted all other equity linked instruments including all outstanding non-employee options and warrants on the date that the
instrument became convertible. The Company is required to carry the embedded derivative on its balance sheet at fair value and
account for any unrealized change in fair value as a component of results of operations.
The Black-Scholes model utilized
the following inputs to value the derivative liabilities at the date of issuance of the convertible note and at June 30, 2018:
Fair value assumptions:
|
|
June 30, 2018
|
Risk free interest rate
|
|
|
1.92-2.81
%
|
Expected term (years)
|
|
|
0.225-6.99
|
Expected volatility
|
|
|
144.59%-214.09%
|
Expected dividends
|
|
|
0%
|
The following table presents a
summary of the Company’s derivative liabilities associated with its convertible notes as of June 30, 2018, and September
30, 2017, and June 30, 2018:
|
|
Amount
|
Balance September 30, 2017
|
|
$
|
—
|
Debt discount originated from derivative liabilities
|
|
|
208,902
|
Initial loss recorded
|
|
|
265,009
|
Fair value of derivative liability at issuance reclassified from additional
paid in capital
|
|
|
12,537,117
|
Adjustment to derivative liability due to debt settlement
|
|
|
—
|
Change in fair market value of derivative liabilities
|
|
|
4,693,000
|
Balance June 30, 2018
|
|
$
|
17,704,028
|
11. RELATED PARTY TRANSACTIONS
Matthew Schultz- Chief Executive Officer
and Director
The Company has a consulting agreement with
Matthew Schultz, our Chief Executive Officer, for management services. In accordance with this agreement, as amended, Mr. Schultz
provides services to us in exchange for $15,000 in compensation for services plus a $1,000 medical insurance stipend, each month
plus a bonus of 0.5% of gross revenue. The Company has also agreed to reimburse Mr. Schultz for expenses incurred. The term of
the agreement is one year and automatically renews until cancelled by either party. During the nine months ending June 30, 2018
and 2017, Mr. Schultz earned $146,323 and $145,157, respectively, in accordance with this agreement. During the nine months ending
June 30, 2018, Mr. Schultz allowed the Company to defer $121,132 as accrued compensation. As of June 30, 2018, the Company owed
Mr. Schultz $121,132 in deferred compensation and reimbursable expenses.
On February 9, 2018,
the Company executed a 15% promissory note with a face value of $10,000 with the spouse of the CEO of our Company. Under the terms
of the promissory note the Company received $10,000 and agreed to repay the note on demand. As of June 30, 2018, Company’s
owed $10,000 in principal and $579 in accrued interested under the terms of the agreement.
On February 14, 2018,
the Company executed a 15% promissory note with a face value of $20,000 with the spouse of the CEO of our Company. Under the terms
of the promissory note the Company received $20,000 and agreed to repay the note on demand. As of June 30, 2018, Company’s
owed $20,000 in principal and $1,118 in accrued interested under the terms of the agreement.
Zachary Bradford – President, Chief
Financial Officer and Director
The Company has a consulting agreement with
Zachary Bradford, our Chief Financial Officer and director, for management services. In accordance with this agreement, as amended,
Mr. Bradford provides services to us in exchange for $15,000 in compensation for services plus a $1,000 medical insurance stipend,
each month plus a bonus of 0.5% of gross revenue. The Company has also agreed to reimburse Mr. Bradford for expenses incurred.
The term of the agreement is one year and automatically renews until cancelled by either party. During the nine months ended June
30, 2018 and 2017, Mr. Bradford earned $146,323 and $145,157, respectively, in accordance with this agreement. During the nine
months ended June 30, 2018, Mr. Bradford allowed the Company to defer $116,448 as accrued compensation. As of June 30, 2018, the
Company owed Mr. Bradford $116,448 in deferred compensation and reimbursable expenses.
On August 13, 2017, the
Company executed a 15% promissory note with a face value of $80,000 with Zachary Bradford, its President and Chief Financial Officer.
Under the terms of the promissory note the Company received $80,000 and agreed to repay the note evenly over 12 months. As of June
30, 2018, Company’s owed $13,333 in principal and $0 in accrued interested under the terms of the agreement.
On January 29, 2018,
the Company executed a 15% promissory note with a face value of $30,000 with Zachary Bradford, its President and Chief Financial
Officer. Under the terms of the promissory note the Company received $60,000 and agreed to repay the note on demand. As of June
30, 2018, Company’s owed $30,000 in principal and $1,874 in accrued interested under the terms of the agreement
On February 9, 2018,
the Company executed a 15% promissory note with a face value of $30,000 with Zachary Bradford, its President and Chief Financial
Officer. Under the terms of the promissory note the Company received $30,000 and agreed to repay the note on demand. As of June
30, 2018, Company’s owed $30,000 in principal and $1,738 in accrued interested under the terms of the agreement.
On May 8, 2018, the Company
executed a 15% promissory note with a face value of $10,000 with Zachary Bradford, its President and Chief Financial Officer. Under
the terms of the promissory note the Company received $10,000 and agreed to repay the note on demand. As of June 30, 2018, Company’s
owed $10,000 in principal and $218 in accrued interested under the terms of the agreement.
On May 15, 2018, the
Company executed a 15% promissory note with a face value of $10,000 with Zachary Bradford, its President and Chief Financial Officer.
Under the terms of the promissory note the Company received $10,000 and agreed to repay the note on demand. As of June 30, 2018,
Company’s owed $10,000 in principal and $189 in accrued interested under the terms of the agreement.
On June 8, 2018, the
Company executed a 15% promissory note with a face value of $26,030 with Zachary Bradford, its President and Chief Financial Officer.
Under the terms of the promissory note the Company received $26,030 and agreed to repay the note on demand. As of June 30, 2018,
Company’s owed $26,030 in principal and $235 in accrued interested under the terms of the agreement.
On June 11, 2018, the
Company executed a 15% promissory note with a face value of $2,000 with Zachary Bradford, its President and Chief Financial Officer.
Under the terms of the promissory note the Company received $2,000 and agreed to repay the note on demand. As of June 30, 2018,
Company’s owed $2,000 in principal and $16 in accrued interested under the terms of the agreement.
On June 13, 2018, the
Company executed a 15% promissory note with a face value of $2,530 with Zachary Bradford, its President and Chief Financial Officer.
Under the terms of the promissory note the Company received $2,530 and agreed to repay the note on demand. As of June 30, 2018,
Company’s owed $2,530 in principal and $18 in accrued interested under the terms of the agreement.
On June 29, 2018, the
Company executed a 15% promissory note with a face value of $15,000 with Zachary Bradford, its President and Chief Financial Officer.
Under the terms of the promissory note the Company received $15,000 and agreed to repay the note on demand. As of June 30, 2018,
Company’s owed $15,000 in principal and $6 in accrued interested under the terms of the agreement.
Bryan Huber – Chief operations
Officer and Director
The Company has a consulting agreement with
Bryan Huber, our Chief Operations Officer and director, for management services. In accordance with this agreement, as amended,
Mr. Huber provides services to us in exchange for $117,000 in compensation for services plus a $500 medical insurance stipend and
a bonus of 0.5% of gross revenue. The Company has also agreed to reimburse Mr. Huber for expenses incurred. The term of the agreement
is one year and automatically renews until cancelled by either party. During the nine months ending June 30, 2018 and 2017, Mr.
Huber earned $91,573 and $89,794, respectively, in accordance with this agreement. During the nine months ended June 30, 2018,
Mr. Huber allowed the Company to defer $9,760 as accrued compensation. As of June 30, 2018, the Company owed Mr. Huber $17,591
in deferred compensation and reimbursable expenses.
On May 10, 2018, Bryan Huber the Company’s
Chief Operations Officer exercised warrants to purchase 1,353 shares of the Company’s $0.001 par value common stock at a
purchase price equal to $1.50 for each share of Common stock. The Company receive $2,030 as a result of this exercise.
Larry McNeill – Chairman of the
Board of Directors
On January 11, 2018,
the Company executed a 15% promissory note with a face value of $9,000 with Larry McNeill, a Director of the Company. Under the
terms of the promissory note the Company received $9,000 and agreed to repay the note on demand. As of June 30, 2018, Company’s
owed $9,000 in principal and $629 in accrued interested under the terms of the agreement.
On January 16, 2018,
the Company executed a 15% promissory note with a face value of $7,100 with Larry McNeill, a Director of the Company. Under the
terms of the promissory note the Company received $7,100 and agreed to repay the note on demand. As of June 30, 2018, Company’s
owed $7,100 in principal and $481 in accrued interested under the terms of the agreement.
On January 19, 2018,
the Company executed a 15% promissory note with a face value of $8,000 with Larry McNeill, a Director of the Company. Under the
terms of the promissory note the Company received $8,000 and agreed to repay the note on demand. As of June 30, 2018, Company’s
owed $8,000 in principal and $533 in accrued interested under the terms of the agreement.
On February 23, 2018,
the Company executed a 15% promissory note with a face value of $5,000 with Larry McNeill, a Director of the Company. Under the
terms of the promissory note the Company received $5,000 and agreed to repay the note on demand. As of June 30, 2018, Company’s
owed $5,000 in principal and $261 in accrued interested under the terms of the agreement.
On March 19, 2018, the
Company executed a 15% promissory note with a face value of $25,000 with Larry McNeill, a Director of the Company. Under the terms
of the promissory note the Company received $25,000 and agreed to repay the note on demand. As of June 30, 2018, Company’s
owed $25,000 in principal and $1,058 in accrued interested under the terms of the agreement.
On May 7, 2018, the Company
executed a 15% promissory note with a face value of $10,000 with Larry McNeill, a Director of the Company. Under the terms of the
promissory note the Company received $10,000 and agreed to repay the note on demand. As of June 30, 2018, Company’s owed
$10,000 in principal and $222 in accrued interested under the terms of the agreement.
Employees
The Company’s line of business requires
high skilled employees who are appropriately compensated for their specialized skills. Employment agreements range from $90,000
to $172,500 per year, and may include a taxable stipend for healthcare, performance bonuses and are subject to standard payroll
taxes.
12. STOCKHOLDERS’ EQUITY
Overview
The Company’s authorized capital
stock consists of 100,000,000 shares of common stock and 10,000,000 shares of preferred stock, par value $0.001 per share. As
of June 30, 2018, there were 34,919,362 shares of common stock issued and outstanding and 1,000,000 shares of preferred stock
issued and outstanding.
Common Stock issuances
During the period commencing October 1, 2017
through June 30, 2018, the Company received $251,900 from 16 investors pursuant to private placement agreements with the investors
to purchase 314,875 shares of the Company’s $0.001 par value common stock at a purchase price equal to $0.80 for each share
of common stock.
In connection with the issuance of a Convertible
Note(see Note 9 for additional details), the Company issued to the Purchaser, as a commitment fee, 137,500 shares of its common
stock (the “Returnable Shares”) as well as 100,000 shares of its common stock (the “Non-Returnable Shares”).
The agreement was amended on June 29, 2018 and as a result the returnable shares were no longer returnable, as a result the fair
value of the returnable shares of $218,625 was charged to interest expense.
13. STOCK WARRANTS
The following is a summary of stock warrant
activity during the nine months ended June 30, 2018 and year ended September 30, 2017.
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
Balance, September 30, 2016
|
|
|
13,112,100
|
|
|
$
|
0.59
|
Warrants granted and assumed
|
|
|
—
|
|
|
$
|
—
|
Warrants expired
|
|
|
—
|
|
|
|
—
|
Warrants canceled
|
|
|
—
|
|
|
|
—
|
Warrants exercised
|
|
|
(4,500,000
|
)
|
|
|
0.083
|
Balance, September 30, 2017
|
|
|
8,612,100
|
|
|
$
|
0.85
|
Warrants granted and assumed
|
|
|
216,600
|
|
|
$
|
0.80
|
Warrants expired
|
|
|
—
|
|
|
|
—
|
Warrants canceled
|
|
|
—
|
|
|
|
—
|
Warrants exercised
|
|
|
(684,401
|
)
|
|
|
0.29
|
Balance, June 30, 2018
|
|
|
8,144,299
|
|
|
$
|
0.90
|
As of June 30, 2018, there are warrants exercisable
to purchase 8,144,299 shares of common stock in the Company. 4,500,000 of the outstanding warrants require a cash investment of
$1.50 per share to exercise and 3,644,299 of the outstanding warrants contain a provision allowing a cashless exercise. As of June
30, 2018, the outstanding warrants have an intrinsic value of $10,998,676. As of June 30, 2018, the weighted average remaining
term of the outstanding warrants was 4.53 years.
On December 13, 2017, an investor exercised
warrants to purchase 27,548 shares of the Company’s $0.001 par value common stock at a purchase price equal to $0.363 for
each share of Common stock. The Company receive $10,000 as a result of this exercise.
On January 1, 2018, the Company issued warrants
to purchase 100,000 shares of common stock at an exercise price of $0.80 per share to an advisor for business advisory services.
The warrants were valued at $234,095 using the Black Scholes option pricing model based upon the following assumptions: term of
5 years, risk free interest rate of 2.01%, a dividend yield of 0% and volatility rate of 158%. The warrants vest evenly over the
six-month service period ended June 30, 2018.
On January 19, 2018, an investor exercised
warrants to purchase 180,000 shares of the Company’s $0.001 par value common stock at a purchase price equal to $0.083 for
each share of Common stock. The Company receive $14,940 as a result of this exercise.
On January 19, 2018, an investor exercised
warrants to purchase 15,000 shares of the Company’s $0.001 par value common stock at a purchase price equal to $0.363 for
each share of Common stock. The Company receive $5,445 as a result of this exercise.
On January 29, 2018, an investor exercised
warrants to purchase 4,500 shares of the Company’s $0.001 par value common stock at a purchase price equal to $0.363 for
each share of Common stock. The Company receive $1,634 as a result of this exercise.
On February 8, 2018, an investor exercised
456,000 warrants to purchase shares of the Company’s $0.001 par value common stock at a purchase price equal to $0.367 for
each share of Common stock. The investor elected to use the cashless exercise option and as a result the Company issued 387,475
shares of common stock.
On May 10, 2018, Bryan Huber the Company’s
Chief Operations Officer exercised warrants to purchase 1,353 shares of the Company’s $0.001 par value common stock at a
purchase price equal to $1.50 for each share of Common stock. The Company receive $2,030 as a result of this exercise.
On June 15, 2018, the Company issued 116,600
5-year warrants exercisable at $0.80 to a lender in connection with a promissory note agreement. (see Note 8 for additional details.)
14. STOCK OPTIONS
The Company sponsors a stock-based incentive
compensation plan known as the 2017 Incentive Plan (the “Plan”), which was established by the Board of Directors of
the Company on June 19, 2017. A total of 3,000,000 shares were initially reserved for issuance under the Plan.
The following is a summary of stock option
activity during the nine months ended June 30, 2018 and year ended September 30, 2017.
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
Balance, September 30, 2016
|
|
—
|
|
—
|
Options granted and assumed
|
|
|
6,902
|
|
|
$
|
3.45
|
Options expired
|
|
|
—
|
|
|
|
—
|
Options canceled
|
|
|
—
|
|
|
|
—
|
Options exercised
|
|
|
—
|
|
|
|
—
|
Balance, September 30, 2017
|
|
|
6,902
|
|
|
$
|
3.45
|
Options granted and assumed
|
|
|
290,435
|
|
|
$
|
1.01
|
Options expired
|
|
|
—
|
|
|
|
—
|
Options canceled
|
|
|
—
|
|
|
|
—
|
Options exercised
|
|
|
—
|
|
|
|
—
|
Balance, June 30, 2018
|
|
|
297,337
|
|
|
$
|
1.06
|
As of June 30, 2018, there are options exercisable
to purchase 124,049 shares of common stock in the Company. As of June 30, 2018, the outstanding options have an intrinsic value
of $533,313. As of June 30, 2018, the weighted average remaining term of the outstanding options was 1.83 years.
During the nine months ended June 30, 2018,
the Company issued 40,435 options to purchase shares of the common stock to employees, the shares were granted at quoted market
prices ranging from $1.57 to $3.45. The shares were valued at issuance using the Black Scholes model and stock compensation expense
of $75,001 was recorded as a result of the issuances.
On March 10, 2018 the Company issued a total
of 250,000 options to four consultants for advisory services. The Options vest evenly 12 months from issuance. The options expire
24 months after issuance and require a cash investment to exercise. The options were valued at issuance using the Black Scholes
model at $342,500, as of June 30, 2018 of which $105,096 has vested and been expensed as stock compensation.
The Black-Scholes model utilized the
following inputs to value the options during the nine months ended June 30, 2018:
Fair value assumptions – Options:
|
|
June 30, 2018
|
Risk free interest rate
|
|
|
1.46-2.61%
|
Expected term (years)
|
|
|
2-3
|
Expected volatility
|
|
|
120%-182%
|
Expected dividends
|
|
|
0%
|
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.
15. COMMITMENTS AND CONTINGENCIES
Office leases
The Company’s corporate offices are located
at 70 North Main Street, Suite 105, Bountiful, Utah 84010. The Company occupies the leased space on a month to month basis at a
rate of $850 per month. Future minimum lease payments under the operating leases for the facilities as of June 30, 2018, 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.
The Company has prepaid the rent for the month ending July 31, 2018. Future minimum lease payments under the operating leases for
the facilities as of June 30, 2018, are as follows:
Fiscal year ending September 30, 2018
|
$8,114
|
Fiscal year ending September 30, 2019
|
$49,049
|
Fiscal year ending September 30, 2020
|
$50,521
|
Fiscal year ending September 30, 2021
|
$43,170
|
Contracts and awards
The Company was awarded a $900,000
contract from Bethel-Webcor JV. Under the contract terms we will install a turn-key advanced microgrid system at the U.S. Marine
Corps Base Camp Pendleton. The contract is in direct support of the United States Department of Navy's communication information
system (CIS) operations complex at the U.S. Marine Corps Base Camp Pendleton that was recently awarded to the Joint-Venture. The
Company begin on-site work for this project in February of 2018.
Asset Purchase - Pioneer Customer Electrical
Products Corp.
On May 2, 2018, CleanSpark, Inc. and Pioneer Custom Electric Products
Corp., a Nevada corporation and wholly-owned subsidiary of CleanSpark, Inc. (together, the “Company”), entered into
an Asset Purchase Agreement (the “Purchase Agreement”) with Pioneer Custom Electric Products Corp., a Delaware corporation
(the “Seller”). On June 29, 2018 the Company extended the closing date of the transaction to July 31, 2018 and subsequently
extended the closing to be on or earlier than December 31, 2018. The amendments were executed as the seller was unable to meet
all closeting conditions as of June 30, 2018. The transaction has not yet closed, the closing of the transactions contemplated
by the Purchase Agreement is currently expected to occur on October 31, 2018 (the “Closing Date”).
On the Closing Date, pursuant to the Purchase Agreement, the Company
will acquire all the assets (the “Assets”) and assume certain liabilities (the “Assumed Liabilities”) related
to Seller and its line of business. The Assets the Company purchased from Seller include:
-
All accounts receivable held by the Seller at Closing, less appropriate allowance for doubtful
accounts;
-
All trade accounts payable and accrued liabilities held by the Company at Closing;
-
All inventory held by the Seller at Closing;
-
Small tools;
-
Furniture and fixtures; and
-
Fee-Free license agreement for use of the Seller’s brand name; and
-
All purchase orders, customer contracts, and client list(s).
We agreed to assume the Assumed Liabilities under the Purchase Agreement,
including, among others, all trade accounts of the Seller that remain unpaid as of the Closing Date, all liabilities under the
assumed contracts, and all liabilities associated with the Assets post-Closing.
The Company intends to strategically use the assets to increase
its impact in the Microgrid market.
In exchange for the Assets, the Seller shall receive the following
consideration on the Closing Date:
-
an 18-month promissory note in the principal amount equal to the net carrying value of the
current assets and liabilities of the business at the Closing;
-
an equipment lease agreement, which shall provide for the lease of the equipment from Seller
to the Company;
-
7,000,000 shares of Purchaser Common Stock based on an agreed upon value of $0.80 per share,
for a total agreed upon value of $5,600,000;
-
a five-year warrant to purchase 1,000,000 shares of the Company’s Common Stock at
an exercise price of $1.60 per share; and
-
a five-year warrant to purchase 1,000,000 shares of the Company’s Common Stock at
an exercise price
-
of $2.00 per share.
The Purchase Agreement contains customary representations, warranties
and covenants.
16. MAJOR CUSTOMERS AND VENDORS
For the nine months ended June 30, 2018
and 2017, the Company had the following customers that represented more than 10% of sales.
|
|
June 30, 2018
|
|
June 30, 2017
|
Daoust
|
|
|
14.7%
|
|
|
—
|
Bethel-Webcor JV-1
|
|
|
68.8%
|
|
|
11.8%
|
Jacobs/ HDR a joint venture
|
|
|
—
|
|
|
15.2%
|
Macerich
|
|
|
—
|
|
|
21.4%
|
Firenze
|
|
|
—
|
|
|
23.4%
|
For the nine months ended June 30, 2018 and
2017, the Company had the following
suppliers that represented more than 10% of direct
material costs.
|
|
June 30, 2018
|
|
June 30, 2017
|
CED Greentech
|
|
|
14.0%
|
|
|
45.7%
|
Rexel USA, Inc.
|
|
|
28.4%
|
|
|
—
|
ESS, Inc.
|
|
|
27.4%
|
|
|
—
|
Baker Electric Inc.
|
|
|
10.3%
|
|
|
—
|
Simpliphi Power
|
|
|
1.9%
|
|
|
12.3%
|
17. SUBSEQUENT EVENTS
Loans from related
parties
On July 5, 2018,
the Company executed a 15% promissory note with a face value of $20,030 with Zachary Bradford, its President and Chief
Financial Officer. Under the terms of the promissory note the Company received $20,030 and agreed to repay the note on
demand.
On August 8, 2018,
the Company executed a 15% promissory note with a face value of $45,000 with Zachary Bradford, its President and Chief
Financial Officer. Under the terms of the promissory note the Company received $45,000 and agreed to repay the note on
demand.
On July 9, 2018, the
Company executed a 15% promissory note with a face value of $16,000 with Larry McNeill, a Director of the Company. Under the terms
of the promissory note the Company received $16,000 and agreed to repay the note on demand.
Convertible note
CleanSpark, Inc. (the “Company”
), entered into a Securities Purchase Agreement (“Securities Purchase Agreement”) dated July 2, 2018 with Auctus Fund,
LLC (the “Purchaser”), which was later amended on July 6, 2018, which required standard closing events such as funding
which were fulfilled on July 11, 2018, pursuant to which the Company issued to the Purchaser a Convertible Promissory Note (the
“Note”) in the aggregate principal amount of $550,000. The Purchaser paid $225,000 less $26,000 in legal and due diligence
fees on the Note.
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 the Purchaser 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 the Purchaser, as a commitment fee, 137,500 shares of its common stock (the “Returnable
Shares”) as well as 150,000 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, the Purchaser will not have the right to convert any portion of the Note if the Purchaser, 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.
Note payable
On August 1, 2018, we
entered into a 10% promissory note with a face value of $130,625 pursuant to which we received $125,000, the note also included
an original issue discount of 4.5% ($5,625). The Company also issued 25,000 5-year warrants exercisable at $0.80 in connection
with purchase of the promissory note. The proceeds of the note which were used to settle in full a note issued on February 27,
2018. Under the terms of the promissory note the Company agreed to make monthly interest only payments and repay the note principal
on November 30, 2018.