Our consolidated financial statements included in this Form 10-Q
are as follows:
These consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial
information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. Operating results for the interim period ended March 31, 2019 are not necessarily
indicative of the results that can be expected for the full year.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND LINE OF BUSINESS
Organization
CleanSpark, Inc. (“CleanSpark”,
“we”, “our”, the "Company") was incorporated in the state of Nevada on October 15, 1987 as SmartData
Corporation. SmartData conducted a 504-public offering in the State of Nevada in December 1987 and began trading publicly in January
1988. Due to a series of unfortunate events, including the untimely death of the founding CEO, SmartData discontinued active business
operations in 1992.
On March 25, 2014, we began operations in the
alternative energy sector.
In December 2014, the Company changed its name
to Stratean Inc. through a short-form merger in order to better reflect its new business plan.
On July 1, 2016, the Company entered into an
Asset Purchase Agreement, as amended (the “Purchase Agreement”), with CleanSpark Holdings LLC, CleanSpark LLC, CleanSpark
Technologies LLC and Specialized Energy Solutions, Inc. (together, the “Seller”). Pursuant to the Purchase Agreement,
the Company acquired CleanSpark, LLC and all the assets related to the Seller and its line of business and assumed $200,000 in
liabilities.
In October 2016, the Company changed its name
to CleanSpark, Inc. through a short-form merger in order to better reflect the brand identity.
On January 22, 2019, CleanSpark entered into an Agreement with Pioneer
Critical Power, Inc., whereby it acquired certain intellectual property assets and clients lists. As consideration the Company
issued to its sole shareholder (i) 1,750,000 of the common stock of CleanSpark, (ii) a five-year warrant to purchase 500,000 shares
of CleanSpark common stock at an exercise price of $1.60 per share, and (iii) a five-year warrant to purchase 500,000 shares of
CleanSpark common stock at an exercise price of $2.00 per share. As a result of the transaction Pioneer Critical Power Inc. became
a wholly owned subsidiary of CleanSpark Inc. On February 1, 2019, Pioneer Critical Power, Inc. was renamed
CleanSpark
Critical Power Systems, Inc.
Line
of Business
Through
CleanSpark, LLC, the Company provides microgrid solutions to military, commercial and residential properties.
The services
offered consist of turn-key microgrid implementation services, microgrid design and engineering, project development consulting
services and solar photovoltaic installation and consulting. The work is performed under fixed price bid contracts and negotiated
price contracts. The Company performed all of its work in California during the six months ended March 31, 2019.
Through
CleanSpark Critical Power Systems, Inc., the Company provides customer hardware solutions for distributed energy systems that serve
military and commercial residential properties. The equipment is generally sold under negotiated price contracts.
2. SUMMARY OF SIGNIFICANT POLICIES
Basis of Presentation and Liquidity
The accompanying unaudited interim financial
statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of
America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements
and notes thereto contained in the Company’s most recent Annual Financial Statements filed with the SEC on Form 10-K. In
the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial
position and the results of operations for the interim period presented have been reflected herein. The results of operations for
the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements
which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period,
as reported in the Form 10-K, have been omitted.
The Company has incurred losses for the past
several years while developing infrastructure and its software platforms. As shown in the accompanying unaudited consolidated financial
statements, the Company incurred net losses of $10,048,091 during the six months ended March 31, 2019. In response to these conditions
and to ensure the Company has sufficient capital for ongoing operations for a minimum of 12 months we have raised additional capital
through the sale of debt and equity securities pursuant to a registration statement on Form S-3. (See Note 7 for additional details.)
As of March 31, 2019, the Company had working capital of approximately $1,621,451.
Principles of Consolidation
The accompanying consolidated
financial statements include the accounts of CleanSpark, Inc., and its wholly owned operating subsidiaries, CleanSpark, LLC, CleanSpark,
II, LLC and CleanSpark Critical Power Systems Inc. All material intercompany transactions have been eliminated upon consolidation
of these entities.
Use of estimates
–
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include
estimates used to review the Company’s goodwill impairment, impairments and estimations of long-lived assets, revenue recognition
on percentage of completion type contracts, allowances for uncollectible accounts, and the valuations of non-cash capital stock
issuances. The Company bases its estimates on historical experience and on various other assumptions that are believed to
be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
Revenue Recognition
– Upon adoption
of ASC Topic 606, the Company revised its accounting policy on revenue recognition from the policy provided in the Notes to
Consolidated Financial Statements included in our September 30, 2018 10-K. The revised accounting policy on revenue recognition
is provided below.
Engineering & Construction Contracts
and Service Contracts
The company recognizes engineering and construction
contract revenue over time, as performance obligations are satisfied, due to the continuous transfer of control to the customer.
Engineering and construction contracts are generally accounted for as a single unit of account (a single performance obligation)
and are not segmented between types of services. The company recognizes revenue based primarily on contract cost incurred
to date compared to total estimated contract cost (an input method). The input method is the most faithful depiction of the company’s
performance because it directly measures the value of the services transferred to the customer. Customer-furnished materials, labor
and equipment and, in certain cases, subcontractor materials, labor and equipment, are included in revenue and cost of revenue
when management believes that the company is acting as a principal rather than as an agent (i.e., the company integrates the materials,
labor and equipment into the deliverables promised to the customer). Customer-furnished materials are only included in revenue
and cost when the contract includes construction activity and the company has visibility into the amount the customer is paying
for the materials or there is a reasonable basis for estimating the amount. The company recognizes revenue, but not profit, on
certain uninstalled materials that are not specifically produced, fabricated, or constructed for a project. Revenue on these uninstalled
materials is recognized when the cost is incurred (when control is transferred). Changes to total estimated contract cost or losses,
if any, are recognized in the period in which they are determined as assessed at the contract level. Pre-contract costs are expensed
as incurred unless they are expected to be recovered from the client. Project mobilization costs are generally charged to project
costs as incurred when they are an integrated part of the performance obligation being transferred to the client. Customer payments
on engineering and construction contracts are typically due within 30 to 45 days of billing, depending on the contract.
For service contracts (including maintenance
contracts) in which the company has the right to consideration from the customer in an amount that corresponds directly with the
value to the customer of the company’s performance completed to date, revenue is recognized when services are performed and
contractually billable. Service contracts that include multiple performance obligations are segmented between types of services.
For contracts with multiple performance obligations, the company allocates the transaction price to each performance obligation
using an estimate of the stand-alone selling price of each distinct service in the contract. Revenue recognized on service contracts
that have not been billed to clients is classified as a current asset under contract assets on the Consolidated Balance Sheet.
Amounts billed to clients in excess of revenue recognized on service contracts to date are classified as a current liability under
contract liabilities. Customer payments on service contracts are typically due within 30 days of billing, depending on the contract.
Contract assets represent revenue recognized
in excess of amounts billed and include unbilled receivables (typically for cost reimbursable contracts) of $0 and contract work
in progress (typically for fixed-price contracts) of $0 as of March 31, 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 March 31, 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 $2,242 and $0 in contract liabilities as of March 31, 2019 and September 30,
2018, respectively.
Revenues from Sale of Equipment
Performance Obligations Satisfied at
a point in time.
We recognize revenue on agreements for
non-customized equipment we sell on a standardized basis for sale to the market at a point in time. We recognize revenue at the
point in time that the customer obtains control of the good, which is generally no earlier than when the customer has physical
possession of the product. We use proof of delivery for certain large equipment with more complex logistics, whereas the delivery
of other equipment is estimated based on historical averages of in-transit periods (i.e., time between shipment and delivery).
In situations where arrangements include
customer acceptance provisions based on seller or customer-specified objective criteria, we recognize revenue when we have concluded
that the customer has control of the goods and that acceptance is likely to occur. We generally do not provide for anticipated
losses on point in time transactions prior to transferring control of the equipment to the customer.
Our billing terms for these point in
time equipment contracts vary and generally coincide with delivery to the customer; however, within certain businesses, we receive
progress payments from customers for large equipment purchases, which is generally to reserve production slots with our manufacturing
partners.
Service Performance obligations satisfied
over time.
We enter into long-term product service
agreements with our customers primarily within our microgrid segment. These agreements require us to provide preventative maintenance,
and standby support services that include certain levels of assurance regarding system performance throughout the contract periods,
these contracts will generally range from 5 to 10 years. We account for items that are integral to the maintenance
of the equipment as part of our service related performance obligation, unless the customer has a substantive right to make a separate
purchasing decision (e.g., equipment upgrade). Contract modifications that extend or revise contract terms are not uncommon and
generally result in our recognizing the impact of the revised terms prospectively over the remaining life of the modified contract
(i.e., effectively like a new contract). Revenues are recognized for these arrangements on a straight line basis consistent with
the nature, timing and extent of our services, which primarily relate to routine maintenance and as needed product repairs. Our
billing terms for these contracts vary, but we generally invoice periodically as services are provided.
Variable Consideration
The nature of the company’s contracts
gives rise to several types of variable consideration, including claims and unpriced change orders; awards and incentive fees;
and liquidated damages and penalties. The company recognizes revenue for variable consideration when it is probable that a significant
reversal in the amount of cumulative revenue recognized will not occur. The company estimates the amount of revenue to be recognized
on variable consideration using the expected value (i.e., the sum of a probability-weighted amount) or the most likely amount method,
whichever is expected to better predict the amount. Factors considered in determining whether revenue associated with claims
(including change orders in dispute and unapproved change orders in regard to both scope and price) should be recognized include
the following: (a) the contract or other evidence provides a legal basis for the claim, (b) additional costs were caused
by circumstances that were unforeseen at the contract date and not the result of deficiencies in the company’s performance,
(c) claim-related costs are identifiable and considered reasonable in view of the work performed, and (d) evidence supporting
the claim is objective and verifiable. If the requirements for recognizing revenue for claims or unapproved change orders are met,
revenue is recorded only when the costs associated with the claims or unapproved change orders have been incurred. Back charges
to suppliers or subcontractors are recognized as a reduction of cost when it is determined that recovery of such cost is probable
and the amounts can be reliably estimated. Disputed back charges are recognized when the same requirements described above for
claims accounting have been satisfied.
The company generally provides limited warranties
for work performed under its engineering and construction contracts. The warranty periods typically extend for a limited duration
following substantial completion of the company’s work on a project. Historically, warranty claims have not resulted in material
costs incurred.
Practical Expedients
If the company has a right to consideration
from a customer in an amount that corresponds directly with the value of the company’s performance completed to date (a service
contract in which the company bills a fixed amount for each hour of service provided), the company recognizes revenue in the amount
to which it has a right to invoice for services performed.
The company does not adjust the contract price
for the effects of a significant financing component if the company expects, at contract inception, that the period between when
the company transfers a service to a customer and when the customer pays for that service will be one year or less.
The company has made an accounting policy election
to exclude from the measurement of the transaction price all taxes assessed by governmental authorities that are collected by the
company from its customers (use taxes, value added taxes, some excise taxes).
For the six months ended March 31, 2019 and
2018, the Company reported revenues of $986,806 and $138,345, respectively.
Retention receivable
is the amount withheld by a customer until a contract is completed. Retention receivables of $42,105 and $17,751 were included
in the balance of trade accounts receivable as of March 31, 2019 and September 30, 2018, respectively.
Cash and cash equivalents
– For
purposes of the statements of cash flows, the Company considers all highly liquid investments and short-term debt instruments with
original maturities of six months or less to be cash equivalents. There was $1,565,261 and $412,777 in cash and no cash equivalents
as of March 31, 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 March 31, 2019, the cash balance in excess of the
FDIC limits was $1,315,261. 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 17 for details.)
Stock-based compensation
– The
Company follows the guidelines in FASB Codification Topic ASC 718-10 “
Compensation-Stock Compensation,
” which
requires companies to measure the cost of employee services received in exchange for an award of an equity instrument based on
the grant-date fair value of the award. Stock-based compensation expense is recognized on a straight-line basis over the requisite
service period. The Company accounts for non-employee share-based awards in accordance with FASB ASC 505-50 under which the awards
are valued at the earlier of a commitment date or upon completion of the services, based on the fair value of the equity instruments,
and are recognized as expense over the service period. The Company may issue compensatory shares for services including, but not
limited to, executive, management, accounting, operations, corporate communication, financial and administrative consulting services.
Earnings (loss) per share
– The
Company reports earnings (loss) per share in accordance with Financial Accounting Standards Board’s (“FASB”)
Accounting Standards Codification (“ASC”) 260-10 “
Earnings Per Share,
” which provides for calculation
of “basic” and “diluted” earnings per share. Basic earnings per share includes no dilution and is computed
by dividing net income or loss available to common stockholders by the weighted average common shares outstanding the period. Diluted
earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. The calculation
of diluted net loss per share gives effect to common stock equivalents; however, potential common shares are excluded if their
effect is anti-dilutive. As of March 31, 2019, there are 25,870,166 shares issuable upon exercise of outstanding options, warrants
and convertible debt which have been excluded as anti-dilutive.
Fair Value of financial instruments
–The carrying value of cash, accounts payable and accrued expenses, and debt (See Notes 6 & 7) approximate their fair
values because of the short-term nature of these instruments. Management believes the Company is not exposed to significant interest
or credit risks arising from these financial instruments. The carrying amount of the Company’s long-term convertible debt
is also stated at fair value of $1,750,000 since the stated rate of interest approximates market rates.
Fair value is defined as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques
used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes
a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable.
|
•
|
Level 1
|
Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets.
|
|
•
|
Level 2
|
Quoted prices for similar assets and liabilities in active markets; quoted prices included for identical or similar assets and liabilities that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. These are typically obtained from readily-available pricing sources for comparable instruments.
|
|
•
|
Level 3
|
Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own beliefs about the assumptions that market participants would use in pricing the asset or liability, based on the best information available in the circumstances.
|
Reclassifications
– Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications
had no effect on the reported results of operations or net assets of the Company.
Recently issued accounting pronouncements
In June 2018, the FASB issued ASU 2018-07,
"Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting," which modifies
the accounting for share-based payment awards issued to nonemployees to largely align it with the accounting for share-based payment
awards issued to employees. ASU 2018-07 is effective for us for annual periods beginning October 1, 2019. We do not expect the
adoption of the standard will impact our financial position or results of operations.
In August 2018, the
FASB issued ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which allows
for the capitalization of certain implementation costs incurred in a hosting arrangement that is a service contract. ASU
2018-15 allows for either retrospective adoption or prospective adoption to all implementation costs incurred after the date
of adoption. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019. We are currently evaluating the
impact the adoption of this new standard will have on our financial position and results of operations.
In February 2016, the FASB issued ASU
2016-02, “Leases” (“ASC 842”). The guidance requires lessees to recognize almost all leases on their balance
sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring
leases to be classified as either operating or finance. Lessor accounting is similar to the current model, but updated to align
with certain changes to the lessee model and the new revenue recognition standard. Existing sale-leaseback guidance, including
guidance for real estate, is replaced with a new model applicable to both lessees and lessors. ASC 842 is effective for fiscal
years beginning after December 15, 2018. We are currently evaluating the impact the adoption of this new standard will have on
our financial position and results of operations.
The Company has evaluated
all other recent accounting pronouncements, and believes that none of them will have a material effect on the Company's financial
position, results of operations or cash flows.
3. ACQUISITION OF PIONEER CRITICAL POWER, INC.
AND RELATED ASSETS
On January 22, 2019
,
CleanSpark entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Pioneer Critical Power, Inc.,
a Delaware corporation (the “Pioneer”), and CleanSpark Acquisition, Inc., a Delaware corporation and wholly-owned
subsidiary of CleanSpark (“Merger Sub”).
The
Merger Agreement provides that, subject to the terms and conditions set forth in the Merger Agreement, Merger Sub will merge with
and into the Company (the “Merger”), with Pioneer surviving the Merger as a wholly-owned subsidiary of CleanSpark.
At the effective time of the Merger, the issued and outstanding common shares of Pioneer were automatically converted into the
right to receive: (i) 1,750,000 of the common stock of CleanSpark, (ii) a five-year warrant to purchase 500,000 shares of CleanSpark
common stock at an exercise price of $1.60 per share, and (iii) a five-year warrant to purchase 500,000 shares of CleanSpark common
stock at an exercise price of $2.00 per share. The Merger closed on January 22, 2019 with the filing of a Certificate of Merger
in Delaware.
The Company accounted for the acquisition of Pioneer as an asset
acquisition under ASC 805, because the assets acquired did not meet the definition of a business under ASC 805-10-55-4 as it lacked
a substantive process
at the time of acquisition.
The
Company determined the fair value of the consideration in accordance with ASC 820 was as follows:
Consideration
|
|
Fair
Value
|
1,750,000 shares of common
stock
|
|
$
|
3,867,500
|
500,000 warrants @$1.60
|
|
|
1,102,417
|
500,000 warrants
@$2.00
|
|
|
1,102,107
|
Total Consideration
|
|
$
|
6,072,024
|
The
Company allocated the purchase price to the identifiable assets as follows:
Purchase Price Allocation
|
|
|
Engineering designs
|
|
$
|
250,000
|
UL files
|
|
|
100,000
|
Customer list & non-compete agreement
|
|
|
5,722,024
|
|
|
$
|
6,072,024
|
On
February 1, 2019, Pioneer Critical Power, Inc. was renamed
CleanSpark Critical Power Systems,
Inc.
Support
Agreements
As
a condition to the Merger Agreement, on January 22, 2019, CleanSpark and Pioneer Power Solutions, Inc. (“Pioneer Power”),
a Delaware corporation and sole shareholder of Pioneer prior to the Merger, entered into a Non-Competition and Non-Solicitation
Agreement whereby Pioneer Power agreed, among other things, to not compete with the Company or solicit employees or customers
of the Company for a period of four years.
As
another condition to the Merger Agreement, on January 22, 2019, CleanSpark, the Company and Pioneer Power entered into an Indemnity
Agreement, whereby Pioneer Power agreed to indemnify CleanSpark for any claims made by Myers Power Products, Inc. in the case
titled
Myers Power Products, Inc. v. Pioneer Power Solutions, Inc., Pioneer Custom Electrical Products, Corp., et al
.,
Los Angeles County Superior Court Case No. BC606546 (“Myers Power Case”) as they may relate to Pioneer or CleanSpark
post-closing of the Merger Agreement.
Finally,
as another condition to the Merger Agreement, on January 22, 2019, CleanSpark and Pioneer Power entered into a Contract Manufacturing
Agreement, whereby Pioneer Power shall exclusively manufacture parallel switchgears, automatic transfer switches and related control
and circuit protective equipment for CleanSpark for a period of eighteen months. The agreement did not create exclusivity for
Pioneer and CleanSpark may have other providers perform contract manufacturing services, as desired.
4.
CAPITALIZED SOFTWARE
Capitalized
software consists of the following as of March 31, 2019 and September 30, 2018:
|
|
March 31, 2019
|
|
September 30, 2018
|
mVSO software
|
|
$
|
4,869,549
|
|
|
$
|
4,708,203
|
mPulse software
|
|
|
6,549,479
|
|
|
|
6,334,772
|
Less: accumulated amortization
|
|
|
(2,946,490
|
)
|
|
|
(2,256,749)
|
Capitalized Software, net
|
|
$
|
8,472,538
|
|
|
$
|
8,786,226
|
In
accordance with ASC 985-20 the Company capitalized $376,053 in software development costs (including capitalized stock compensation
cost of $45,000) related to the enhancements created for our mPulse and mVSO 2.0 platforms during the six months ended March 31,
2019.
Capitalized
software amortization recorded as product development expense for the six months ended March 31, 2019 and 2018 was $689,741 and
$691,310, respectively.
5.
INTANGIBLE ASSETS
Intangible
assets consist of the following as of March 31, 2019 and September 30, 2018:
|
|
March 31, 2019
|
|
September 30, 2018
|
Patents
|
|
$
|
71,962
|
|
|
$
|
71,962
|
Websites
|
|
|
16,482
|
|
|
|
16,482
|
Brand and Client lists
|
|
|
5,722,024
|
|
|
|
—
|
Trademarks
|
|
|
5,928
|
|
|
|
5,928
|
Engineering trade secrets
|
|
|
4,370,269
|
|
|
|
4,020,269
|
Software
|
|
|
—
|
|
|
|
26,990
|
Less: accumulated amortization
|
|
|
(1,536,129
|
)
|
|
|
(927,164)
|
Intangible assets, net
|
|
$
|
8,650,536
|
|
|
$
|
3,214,467
|
Amortization
expense for the six months ended March 31, 2019 and 2018 was $635,955 and $395,919, respectively.
6.
FIXED ASSETS
Fixed
assets consist of the following as of March 31, 2019 and September 30, 2018:
|
|
March 31, 2019
|
|
September 30, 2018
|
Machinery and equipment
|
|
$
|
136,890
|
|
|
$
|
130,191
|
Furniture and fixtures
|
|
|
73,179
|
|
|
|
54,251
|
Total
|
|
|
210,069
|
|
|
|
184,442
|
Less: accumulated depreciation
|
|
|
(118,875
|
)
|
|
|
(97,711)
|
Fixed assets, net
|
|
$
|
91,194
|
|
|
$
|
86,731
|
Depreciation
expense for the six months ended March 31, 2019 and 2018 was $21,164 and $26,841, respectively.
7.
LOANS
Long
term
Long-term loans payable consist of the following:
|
|
March 31, 2019
|
|
September 30, 2018
|
|
|
|
|
|
Promissory notes
|
|
$
|
—
|
|
|
$
|
150,000
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
150,000
|
Current
Current loans payable consist of the following:
|
|
March 31, 2019
|
|
September 30, 2018
|
|
|
|
|
|
Promissory notes
|
|
$
|
300,000
|
|
|
$
|
628,951
|
Insurance financing loans
|
|
|
61,136
|
|
|
|
10,257
|
Unamortized debt discount
|
|
|
—
|
|
|
|
(181,629)
|
|
|
|
|
|
|
|
|
Total, net of unamortized discount
|
|
$
|
361,136
|
|
|
$
|
457,579
|
Promissory Notes
On September 5, 2017,
the Company executed a 9% secured promissory note with a face value of $150,000 with an investor. Under the terms of the promissory
note, the Company received $150,000 and agreed to make monthly interest payments and repay the note principal 24 months from the
date of issuance. The note is secured by 150,000 shares which are held in escrow and would be issued to the note holder only in
the case of an uncured default. As of March 31, 2019, the Company owed $150,000 in principal and $1,146 in accrued interest under
the terms of the agreement and recorded interest expense of $6,729 and $6,731 during the six months ended March 31, 2019 and 2018,
respectively.
On October 6, 2017, the
Company executed an unsecured variable interest rate promissory note with a maximum interest rate of 58.3% and a face value of
$45,000 with a financial institution. Under the terms of the promissory note the Company received $45,000 and agreed to repay the
note evenly over 12 months. As of September 30, 2018, the Company owed $3,750 in principal and $450 in accrued interest under the
terms of the agreement. The Company repaid all principal and outstanding interest on October 1, 2018. The Company recorded interest
expense of $0 and $9,563 and for the six months ended March 31, 2019 and 2018, respectively.
On November 11, 2017,
the Company executed a 10% secured promissory note with a face value of $100,000 with an investor. Under the terms of the promissory
note the Company received $100,000 and agreed to make monthly interest payments and repay the note principal 24 months from the
date of issuance. The note is secured by 100,000 shares which would be issued to the note holder only in the case of an uncured
default. As of March 31, 2019, the Company owed $100,000 in principal and $849 in accrued interest under the terms of the agreement
and recorded interest expense of $4,985 and $3,918 and for the six months ended March 31, 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 $2,871 during the six months
ended March 31, 2019 and 2018, respectively.
On December 5, 2017,
the Company executed a 9% secured promissory note with a face value of $50,000 with an investor. Under the terms of the promissory
note the Company received $50,000 and agreed to make monthly interest payments and repay the note principal 24 months from the
date of issuance. The note is secured by 50,000 shares which would be issued to the note holder only in the case of an uncured
default. As of March 31, 2019, the Company owed $50,000 in principal and $383 in accrued interest under the terms of the agreement
and recorded interest expense of $2,247 and $1,430 for the six months ended March 31, 2019 and 2018, respectively.
On January 12, 2018,
the Company executed an unsecured variable interest rate promissory note with a maximum interest rate of 58.5% and a face value
of $18,400 with a financial institution. Under the terms of the promissory note the Company received $18,400 and agreed to repay
the note and interest evenly over 12 months. As of September 30, 2018, the Company owed $6,133 in principal and $184 in accrued
interest under the terms of the agreement. The Company repaid all principal and outstanding interest on October 1, 2018. The Company
recorded interest expense of $0 and $1,472 and for the six months ended March 31, 2019 and 2018, respectively.
On May 22, 2018, the
Company executed an unsecured variable interest rate promissory note with a maximum interest rate of 51.0% and a face value of
$24,500 with a financial institution. Under the terms of the promissory note the Company received $24,500 and agreed to repay the
note and interest evenly over 12 months. As of September 30, 2018, the Company owed $18,375 in principal and $1,960 in accrued
interest under the terms of the agreement. The Company repaid all principal and outstanding interest on October 1, 2018. The Company
recorded interest expense of $0 and $0 and for the six months ended March 31, 2019 and 2018, respectively.
On June 15, 2018, the
Company entered into a 10% secured promissory note with a face value of $116,600 pursuant to which the Company received $110,000,
net of an original issue discount of 6% ($6,600). The Company also issued 116,600 5-year warrants exercisable at $0.80 in connection
with issuance of the promissory note. The note is secured by the Company’s accounts receivable. Under the terms of the promissory
note, the Company agreed to make monthly interest payments and repay the note principal on January 31, 2019. As of March 31, 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 six months ended March 31, 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 for the six
months ended March 31, 2019. The unamortized discount as of March 31, 2019 amounted to $0. The Company repaid all principal and
outstanding interest on January 2, 2019.
On August 1, 2018, the
Company entered into a 10% secured promissory note with a face value of $130,625 pursuant to which the Company received $125,000,
net of an original issue discount of 4.5% ($5,625). The Company also issued 25,000 5-year warrants exercisable at $0.80 in connection
with purchase of the promissory note. The proceeds of the note were used to settle in full a note issued on February 27, 2018.
The Company determined the value associated with the warrants issued in connection with the note to be $71,373 which was recorded
as a debt discount. The aggregate original issue discount, and debt discount related to the warrants have been accreted and charged
to interest expenses as a financing expense in the amount of $38,499 the six months ended March 31, 2019. The unamortized discount
as of March 31, 2019 amounted to $0. . The Company repaid all principal and outstanding interest on January 2, 2019. The note is
secured by the Company’s accounts receivable. As of March 31, 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 during the six months ended March 31, 2019.
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 six months ended March 31, 2019 and 2018, respectively.
On September 20, 2018,
the Company executed a 10% unsecured promissory note with a face value of $52,500 with an investor, net of an original issue discount
of 5% ($2,500). Under the terms of the promissory note the Company received $50,000 and agreed to repay the note principal and
all accrued interest on December 31, 2018. The Company also issued 25,000 5-year warrants exercisable at $0.80 in connection with
purchase of the promissory note. The Company determined the value associated with the warrants issued in connection with the notes
to be $50,000 which was recorded as a debt discount. The aggregate original issue discount, and debt discount related to the warrants
have been accreted and charged to interest expenses as a financing expense in the amount of $47,353 the six months ended March
31, 2019. The Company repaid all principal and outstanding interest on December 31, 2018. The Company recorded interest expense
of $1,323 during the six months ended March 31, 2019.
On September 21, 2018,
the Company executed a 10% unsecured promissory note with a face value of $52,500 with an investor, net of an original issue discount
of 5% ($2,500). Under the terms of the promissory note the Company received $50,000 and agreed to repay the note principal and
all accrued interest on December 31, 2018. The Company also issued 25,000 5-year warrants exercisable at $0.80 in connection with
purchase of the promissory note. The Company has determined the value associated with the warrants issued in connection with the
notes to be $50,000 which has been recorded as a debt discount. The aggregate original issue discount, and debt discount related
to the warrants have been accreted and charged to interest expenses as a financing expense in the amount of $47,353 the six months
ended March 31, 2019. On December 31, 2018, the Company settled all obligations under the promissory note through the issuance
of 25,000 shares of the Company’s common stock and payment of $25,000 in outstanding principal and interest then outstanding
of $1,467. A loss on settlement of debt of $26,225 was recorded related to the settlement of debt. The Company recorded interest
expense of $1,323 during the six months ended March 31, 2019.
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. 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 March 31, 2018, $61,136 in principal remained outstanding.
8. CONVERTIBLE NOTES
PAYABLE
Convertible note repayments
EMA Financial, LLC – August
21, 2018 Promissory Note
On January 3, 2019, the Company settled all
remaining obligations under the EMA note through the payment of all outstanding principal, prepayment penalties and interest then
outstanding of $225,000, $35,000 and $10,736, respectively. The unamortized debt discount on the note of $176,045 was fully amortized
to interest expense during the six months ended March 31, 2019.
In connection with the issuance of the Note,
the Company issued to the Purchaser, as a commitment fee, 137,500 returnable shares of its common stock. As a result of the repayment
the shares were returned to treasury and cancelled on January 8, 2019.
Labrys Fund, LP – September 19, 2018 Promissory Note
On January 3, 2019, the Company settled all
remaining obligations under the Labrys Fund, LP note through the payment of all outstanding principal and interest then outstanding
of $330,000 and $11,609, respectively. The unamortized discount on the note of $309,834 was fully amortized to interest expense
during the six months ended March 31, 2019.
Long-Term convertible notes
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 two years from the issuance date and the Company has agreed to pay compounded interest on the unpaid
principal balance of the Debenture at the rate equal 7.5% per annum. Interest is payable on the date the applicable principal is
converted or on maturity. The interest must be paid in cash and, in certain circumstances, may be paid in shares of common stock.
The transactions described above
closed on December 31, 2018. In connection with the issuance of the Debenture and pursuant to the terms of the SPA, the Company
issued to the Investor 100,000 shares of common stock and a Common Stock Purchase Warrant to acquire up to 3,083,333 shares of
common stock for a term of three years (the “Warrant”) on a cash-only basis at an exercise price of $2.00 per share
with respect to 1,250,000 Warrant Shares, $2.50 with respect to 1,000,000 Warrant Shares, $5.00 with respect to 500,000 Warrant
Shares and $7.50 with respect to 333,333 Warrant Shares. The warrants and shares issued were fair valued and a debt discount of
$4,995,000 was recorded as a result of the issuance of the warrants and shares and the recognition of a beneficial conversion feature
on the Debenture. The Company also paid a $5,000 due diligence fee prior to receiving the funding which was also recorded as a
debt discount.
Pursuant to the terms of the SPA,
the Investor agreed to tender to the Company the sum of $5,000,000, of which the Company received the full amount as of the closing.
Pursuant to the SPA, the Company
agreed to sell the Debenture, the shares of common stock issuable upon conversion of the Debenture, the Warrant and the shares
of common stock issuable upon exercise of the Warrant pursuant to an effective shelf registration statement on Form S-3 (Registration
No 333-228063), declared effective by the Securities and Exchange Commission on November 20, 2018.
Prior to the maturity date, provided
that no trigger event has occurred, the Company will have the right at any time upon 30 trading days’ prior written notice,
in its sole and absolute discretion, to redeem all or any portion of the Debenture then outstanding by paying to the Investor an
amount equal to 140% of the of the portion of the Debenture being redeemed.
The Investor may convert the Debenture
into shares of the Company’s common stock at a conversion price equal to 95% of the mathematical average of the 5 lowest
individual daily volume weighted average prices of the common stock, less $.05 per share, during the period beginning on the issuance
date and ending on the maturity date subject to certain floor price restrictions. In the event certain equity conditions exist,
the Company may require that the Investor convert the Debenture. In no event shall the Debenture be allowed to affect a conversion
if such conversion, along with all other shares of Company common stock beneficially owned by the Investor and its affiliates would
exceed 4.99% of the outstanding shares of the common stock of the Company.
While the note is outstanding if
Triggering Events occur the conversion rate may be decreased by 10% and the interest rate increased by 10% for each Triggering
Event.
Principal
|
|
$
|
1,750,000
|
Unamortized debt discount
|
|
|
(1,537,326)
|
Total, net of unamortized discount
|
|
|
212,674
|
|
|
|
|
Total convertible notes, net (long-term)
|
|
$
|
212,674
|
The aggregate debt discount has
been accreted and charged to interest expenses as a financing expense in the amount of $3,712,674 during the six months ended March
31, 2019.
On January 7, 2019, the investor
converted $2,500,000 in principal and $875,000 in interest as a conversion premium, for 1,784,729 shares of the Company common
stock at an effective conversion price of $1.89, due to a trigger event for the Company not filing its annual report on Form 10-K
for the fiscal year ended September 30, 2018 on or before December 31, 2018.
On March 6, 2019, the investor
converted $1,000,000 in principal and $350,000 in interest as a conversion premium, for 713,892 shares of the Company common stock
at an effective conversion price of $1.89, due to a trigger event for the Company not filing its annual report on Form 10-K for
the fiscal year ended September 30, 2018 on or before December 31, 2018.
9. RELATED PARTY TRANSACTIONS
Matthew Schultz- Chief Executive Officer
and Director
The Company has a consulting agreement with
Matthew Schultz, our Chief Executive Officer, for management services. In accordance with this agreement, as amended, Mr. Schultz
earned $190,140 and $96,516, respectively during the six months ended March 31, 2019 and 2018. The term of the agreement is one
year and automatically renews until cancelled by either party.
During the year ended September 30, 2018, the
Company executed two 15% promissory notes with a total face value of $30,000 with the spouse of the CEO of our Company. Under the
terms of the promissory notes the Company received $30,000 and agreed to repay the note on demand. . On January 1, 2019, the Company
settled all remaining obligations under the notes through the payment of all outstanding principal and interest then outstanding.
As of March 31, 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 six months ended March 31, 2019.
Zachary Bradford – President, Chief
Financial Officer and Director
The Company has a consulting agreement with
ZRB Holdings, Inc, an entity wholly owned by Zachary Bradford, our Chief Financial Officer and director, for management services.
In accordance with this agreement, as amended, Mr. Bradford earned $190,140 and $96,516, respectively during the six months ended
March 31, 2019 and 2018. The term of the agreement is one year and automatically renews until cancelled by either party.
During the year ended September 30, 2018, the
Company executed eleven 15% promissory notes with a total face value of $189,690 and executed two additional 15% promissory notes
with a total face value of $25,030 during the six months ended March 31, 2019 with Zachary Bradford, its President and Chief Financial
Officer. Under the terms of the promissory notes the Company received a total of $214,720 and agreed to repay the notes on demand.
The Company recorded interest expense of $7,648 during the six months ended March 31, 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
March 31, 2019, Company owed $0 in principal and $0 in accrued interest under the terms of the agreement.
During the six months
ended March 31, 2019, the Company paid Blue Chip Accounting, LLC $11,461 for accounting, tax, administrative services and reimbursement
for office supplies. Blue Chip Accounting, LLC(“Blue Chip) is 50% beneficially owned by the Company’s CFO and President
Zachary Bradford. Blue Chip performed all services at discounted rates and none of the charges were associated with work performed
by Mr. Bradford. The services consisted of preparing and filing tax returns, bookkeeping, accounting and administrative support
assistance.
Bryan Huber – Chief Operations
Officer and Director
On August 28, 2018, the Company executed an
agreement with Zero Positive, LLC an entity controlled by Mr. Huber. In accordance with the agreement with Zero Positive, LLC,
Mr. Huber earned $85,209, during the six months ended March 31, 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 March
31, 2019, the bonus had not been paid. The term of the agreement is one year and automatically renews until cancelled by either
party.
On September 28, 2018, in connection with the
consulting agreement executed with Zero Positive, LLC Company issued warrants to purchase 900,000 shares of common stock at an
exercise price of $0.80 per share to Zero Positive. The warrants were valued at $2,607,096 using the Black Scholes option pricing
model based upon the following assumptions: term of 10 years, risk free interest rate of 3.05%, a dividend yield of 0% and volatility
rate of 191%. The warrants vest as follows: 300,000 vested immediately, the balance vest evenly on the last day of each month over
forty-two months beginning August 31, 2018. As of March 31, 2019, 414,286 warrants had vested, and the Company recorded an expense
of $248,295 during the six months ended March 31, 2019.
During the six months ended March 31, 2018,
the Company had a consulting agreement with Bryan Huber, our Chief Operations Officer, for management services. In accordance with
this agreement, as amended, Mr. Huber earned $61,500 during the six month ending March 31, 2018.
Larry McNeill – Chairman of the
Board of Directors
During the year ended
September 30, 2018, the Company executed eight 15% promissory notes with a total face value of $163,100 and executed an additional
15% promissory note with a total face value of $50,000 during the six months ended March 31, 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 six months ended March 31, 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 $7,500 in Board compensation during
the six month ending March 31, 2019.
10. STOCKHOLDERS’ EQUITY
Overview
The Company’s authorized capital
stock consists of 100,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par
value $0.001 per share. As of March 31, 2019, there were 43,059,282 shares of common stock issued and outstanding and 1,000,000
shares of preferred stock issued and outstanding.
Common Stock issuances during the six months
ended March 31, 2019
During the period commencing October 1, 2018
through December 31, 2018, the Company received $361,800 from 14 investors pursuant to private placement agreements with the investors
to purchase 452,250 shares of the Company’s $0.001 par value common stock at a purchase price equal to $0.80 for each share
of common stock.
On September 11, 2018, the Company entered
into an agreement with Regal Consulting, LLC for investor relations services. Under this agreement the Company agreed to issue
30,000 shares of the Company’s common stock per month as compensation for services plus additional cash compensation. During
the six months ended March 31, 2019, the Company issued a total of 180,000 shares of its common stock in accordance with the agreement.
Stock compensation of $531,600 was recorded as a result of the stock issued under the agreement.
On October 15, 2018, the Company entered into
an agreement with a consultant for services. Under this agreement the Company agreed to issue 30,000 shares of the Company’s
common stock which vest evenly over a six-month period from the agreement date. During the six months ended March 31, 2019, the
Company recorded stock compensation of $68,819 was recorded as a result of the stock issued under the agreement.
On October 2, 2018, an investor exercised warrants
to purchase 3,000 shares of the Company’s $0.001 par value common stock at a purchase price equal to $0.363 for each share
of Common stock. The Company receive $1,089 as a result of this exercise.
The Company issued 100,000 shares in relation
to a Securities purchase agreement executed on December 31, 2018. (See Note 7 for additional details.)
On December 31, 2018,
the Company settled $25,000 of a promissory note (See Note 7) through the issuance of 25,000 shares of the Company’s common
stock. The shares were valued at 51,225 and a $26,225 loss on settlement of debt was recorded as a result of the issuance.
On January 7, 2019, a total of 1,444,170 shares
of the Company’s common stock were issued in connection with the cashless exercise of 1,500,000 common stock warrants at
an exercise price of $0.083.
On January 7, 2019, an investor converted $2,500,000
in principal and $875,000 in interest as a conversion premium, for 1,784,729 shares of the Company common stock at an effective
conversion price of $1.89. (see Note 8 for additional details.)
On January 22, 2019, in accordance with a merger agreement the Company
issued 1,750,000 shares of the Company’s common stock. (see note 3 for additional details.)
On February 26, 2019, a total of 246,227 shares
of the Company’s common stock were issued in connection with the cashless exercise of 250,000 common stock warrants at an
exercise price of $0.083.
On March 6, 2019, the investor converted $1,000,000
in principal and $350,000 in interest as a conversion premium, for 713,892 shares of the Company common stock at an effective conversion
price of $1.89. (see Note 8 for additional details.)
On March 26, 2019, a total of 488,567 shares
of the Company’s common stock were issued in connection with the cashless exercise of 500,000 common stock warrants at an
exercise price of $0.083.
Common stock returned during the six months
ended March 31, 2019
In connection with the issuance of the Auctus
Fund, LLC Convertible Note, the Company issued to Auctus, as a commitment fee 137,500 returnable shares of its common stock. As
a result of the conversion of the note on September 21, 2018, the shares were returned to treasury and cancelled on December 21,
2018.
In connection with the issuance of the EMA
Financial, LLC Convertible Note, the Company issued to EMA, as a commitment fee 137,500 returnable shares of its common stock.
As a result, of the repayment of the note on January 3, 2019, the shares were returned to treasury and cancelled on January 8,
2019.
Common Stock issuances during the six months
ended March 31, 2018
During the period commencing October 1, 2018
through March 31, 2018, the Company received $171,900 from 14 investors pursuant to private placement agreements with the investors
to purchase 214,875 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.
On December 13, 2017, an investor exercised
warrants to purchase 27,548 shares of the Company’s $0.001 par value common stock at a purchase price equal to $0.363 for
each share of Common stock. The Company received $10,000 as a result of this exercise.
On January 19, 2018, an investor exercised
warrants to purchase 180,000 shares of the Company’s $0.001 par value common stock at a purchase price equal to $0.083 for
each share of Common stock. The Company received $14,940 as a result of this exercise.
On January 19, 2018, an investor exercised
warrants to purchase 15,000 shares of the Company’s $0.001 par value common stock at a purchase price equal to $0.363 for
each share of Common stock. The Company received $5,445 as a result of this exercise.
On January 29, 2018, an investor exercised
warrants to purchase 4,500 shares of the Company’s $0.001 par value common stock at a purchase price equal to $0.363 for
each share of Common stock. The Company received $1,633 as a result of this exercise.
On February 8, 2018, an investor exercised
456,000 warrants to purchase shares of the Company’s $0.001 par value common stock at a purchase price equal to $0.367 for
each share of Common stock. The investor elected to use the cashless exercise option and as a result the Company issued 387,475
shares of common stock.
11. STOCK WARRANTS
The following is a summary of stock warrant
activity during the six months ended March 31, 2019.
|
|
Number of Warrant Shares
|
|
Weighted Average Exercise Price
|
Balance, September 30, 2018
|
|
|
8,989,299
|
|
|
$
|
0.89
|
Warrants granted
|
|
|
4,113,333
|
|
|
$
|
2.89
|
Warrants expired
|
|
|
—
|
|
|
|
—
|
Warrants canceled
|
|
|
—
|
|
|
|
—
|
Warrants exercised
|
|
|
(2,253,000
|
)
|
|
|
0.36
|
Balance, March 31, 2019
|
|
|
10,840,632
|
|
|
$
|
1.81
|
As of March 31, 2019, the outstanding warrants
have a weighted average remaining term of was 5.28 years and an intrinsic value of $20,216,703.
As of March 31, 2019, there
are warrants exercisable to purchase 10,357,918 shares of common stock in the Company and 482,714
unvested warrants outstanding that cannot be exercised until vesting conditions are met. 7,661,980 of the warrants require a cash
investment to exercise as follows, 50,000 required a cash investment of $0.80 per share, 4,498,647 require a cash investment of
$1.50 per share, 1,250,000 require a cash investment of $2.00 per share, 1,030,000 require a cash investment of $2.50 per share,
500,000 require an investment of $5.00 per share and 333,333 require a cash investment of $7.50 per share. 3,178,652 of the outstanding
warrants contain provisions allowing a cashless exercise at their respective exercise price.
Warrant activity for the six months ended
March 31, 2019
On October 15, 2018, the Company entered into
an agreement with a consultant for services. Under this agreement the Company agreed to issue 30,000 warrants to purchase shares
of the Company’s common stock at an exercise price of $2.50 for a period of five years which vest evenly over a six-month
period from the agreement date. During the six months ended March 31, 2019, the Company recorded stock compensation of $68,643
as a result of the stock issued under the agreement. The warrants were valued using the black-Scholes valuation model.
On December 31, 2018, in connection with
a Securities purchase agreement (see note 8 for additional details) the Company issued Common Stock Purchase Warrants to
acquire up to 3,083,333 shares of common stock for a term of three years on a cash-only basis at an exercise price of $2.00
per share with respect to 1,250,000 Warrant Shares, $2.50 with respect to 1,000,000 Warrant Shares, $5.00 with respect to
500,000 Warrant Shares and $7.50 with respect to 333,333 Warrant Shares.
On August 28, 2018, in
connection with the Consulting agreement executed with Zero Positive, LLC the Company issued warrants to purchase 900,000
shares of common stock at an exercise price of $0.80 per share to Zero Positive. The warrants were valued at $2,607,096 using
the Black Scholes option pricing model. The warrants vest as follows: 300,000 warrants vested immediately, the balance vest
evenly on the last day of each month over the forty-two months beginning August 31, 2018. As of March 31, 2019, 371,429
warrants had vested, and the Company recorded an expense of $248,295 during the six months ended March 31, 2019. (See Note 9
for additional details.)
On January 22, 2019, in
accordance with a merger agreement, CleanSpark issued; a five-year warrant to purchase 500,000 shares of CleanSpark common
stock at an exercise price of $1.60 per share, and a five-year warrant to purchase 500,000 shares of CleanSpark common stock
at an exercise price of $2.00 per share. (see note 3 for additional details.) The warrants were valued at $1,102,417 and
$1,102,107, respectively.
The Black-Scholes model utilized the
following inputs to value the warrants granted during the six months ended March 31, 2019:
Fair value assumptions – Warrants:
|
|
March 31, 2019
|
Risk free interest rate
|
|
|
2.46% -3.01%
|
Expected term (years)
|
|
|
3-5
|
Expected volatility
|
|
|
265-268%
|
Expected dividends
|
|
|
0%
|
On January 7, 2019, a total of 1,444,170 shares
of the Company’s common stock were issued in connection with the cashless exercise of 1,500,000 common stock warrants with
an exercise prices of $0.083.
On February 26, 2019, a total of 246,227 shares
of the Company’s common stock were issued in connection with the cashless exercise of 250,000 common stock warrants at an
exercise price of $0.083.
On March 26, 2019, a total of 488,567 shares
of the Company’s common stock were issued in connection with the cashless exercise of 500,000 common stock warrants at an
exercise price of $0.083.
As of March 31, 2019, the Company expects to recognize
$1,407,004 of stock-based compensation for the non-vested outstanding warrants over a weighted-average period of 2.83 years.
Warrant activity for the six months ended
March 31, 2018
On December 13, 2017, an investor exercised
warrants to purchase 27,548 shares of the Company’s $0.001 par value common stock at a purchase price equal to $0.363 for
each share of Common stock. The Company received $10,000 as a result of this exercise.
On January 1, 2018, the Company issued warrants
to purchase 100,000 shares of common stock at an exercise price of $0.80 per share to an advisor for business advisory services.
The warrants were valued at $234,095 using the Black Scholes option pricing model based upon the following assumptions: term of
5 years, risk free interest rate of 2.01%, a dividend yield of 0% and volatility rate of 158%. The warrants vest evenly over the
six month services period ended June 30, 2018.
On January 19, 2018, an investor exercised
warrants to purchase 180,000 shares of the Company’s $0.001 par value common stock at a purchase price equal to $0.083 for
each share of Common stock. The Company received $14,940 as a result of this exercise.
On January 19, 2018, an investor exercised
warrants to purchase 15,000 shares of the Company’s $0.001 par value common stock at a purchase price equal to $0.363 for
each share of Common stock. The Company received $5,445 as a result of this exercise.
On January 29, 2018, an investor exercised
warrants to purchase 4,500 shares of the Company’s $0.001 par value common stock at a purchase price equal to $0.363 for
each share of Common stock. The Company received $1,634 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.
During the six months ended March 31, 2019,
the Company recognized $508,363 of stock-based compensation related to warrants.
12. STOCK OPTIONS
The Company sponsors a stock-based incentive
compensation plan known as the 2017 Incentive Plan (the “Plan”), which was established by the Board of Directors of
the Company on June 19, 2017. A total of 3,000,000 shares were initially reserved for issuance under the Plan. As of March 31,
2019, there were 2,622,379 shares available for issuance under the plan.
The Plan allows the Company
to grant incentive stock options, non-qualified stock options, stock appreciation right, or restricted stock. The incentive stock
options are exercisable for up to ten years, at an option price per share not less than the fair market value on the date the option
is granted. The incentive stock options are limited to persons who are regular full-time employees of the Company at the date of
the grant of the option. Non-qualified options may be granted to any person, including, but not limited to, employees, independent
agents, consultants and attorneys, who the Company’s Board believes have contributed, or will contribute, to the success
of the Company. Non-qualified options may be issued at option prices of less than fair market value on the date of grant and may
be exercisable for up to ten years from date of grant. The option vesting schedule for options granted is determined by the Board
of Directors at the time of the grant. The Plan provides for accelerated vesting of unvested options if there is a change in control,
as defined in the Plan.
The following is a summary of stock option
activity during the six months ended March 31, 2019.
|
|
Number of Option Shares
|
|
Weighted Average Exercise Price
|
Balance, September 30, 2018
|
|
|
319,206
|
|
|
$
|
1.18
|
Options granted
|
|
|
117,365
|
|
|
$
|
1.91
|
Options expired
|
|
|
—
|
|
|
|
—
|
Options canceled
|
|
|
—
|
|
|
|
—
|
Options exercised
|
|
|
—
|
|
|
|
—
|
Balance, March 31, 2019
|
|
|
436,571
|
|
|
$
|
1.38
|
As of March 31, 2019, there are options exercisable
to purchase 436,571 shares of common stock in the Company. As of March 31, 2019, the outstanding options have a weighted average
remaining term of was 2.63 years and an intrinsic value of $1,700,174.
Option activity for the six months ended
March 31, 2019
During the six months ended March 31, 2019,
the Company issued 117,365 options to purchase shares of common stock to employees, the shares were granted at quoted market prices
ranging from $1.51 to $5.90. The options were valued at issuance using the Black Scholes model and stock compensation expense of
$220,000 was recorded as a result of the issuances.
On March 10, 2018 the Company issued a total
of 250,000 options to four consultants for advisory services. The options vest evenly 12 months from issuance. The options expire
24 months after issuance and require a cash investment to exercise. The options were valued at issuance using the Black Scholes
model at $342,500 and amortized of the term of the agreement. During the six months ended March 31, 2019, $191,425 was been expensed
as stock-based compensation.
The Black-Scholes model utilized the
following inputs to value the options granted during the six months ended March 31, 2019:
Fair value assumptions – Options:
|
|
March 31, 2019
|
Risk free interest rate
|
|
|
2.21-2.91%
|
Expected term (years)
|
|
|
3
|
Expected volatility
|
|
|
256%-271%
|
Expected dividends
|
|
|
0%
|
As of March 31, 2019, the Company expects to recognize $0 of stock-based
compensation for the non-vested outstanding options over a weighted-average period of 0 years.
Option activity for the six months ended
March 31, 2018
During the six months ended March 31, 2018,
the Company issued 25,794 options to purchase shares of the common stock to employees, the shares were granted at quoted market
prices between $1.59 and $3.45. The options were valued at issuance using the Black Scholes model and stock compensation expense
of $50,000 was recorded as a result of the issuances.
On March 10, 2018 the Company issued a total
of 250,000 options to four consultants for advisory services. The Options vest evenly 12 months from issuance. The Options expire
24 months after issuance and require a cash investment to exercise. The options were valued at issuance using the black Scholes
model at $342,500. As of March 31, 2018, $19,705 had been expenses as stock compensation.
The Black-Scholes model utilized the
following inputs to value the options granted during the six months ended March 31, 2018:
Fair value assumptions – Options:
|
|
March 31, 2018
|
Risk free interest rate
|
|
|
1.46-2.36%
|
Expected term (years)
|
|
|
2-3
|
Expected volatility
|
|
|
120%-179%
|
Expected dividends
|
|
|
0%
|
13. COMMITMENTS AND CONTINGENCIES
Office leases
The Company’s corporate offices are located
at 70 North Main Street, Suite 105, Bountiful, Utah 84010. The Company occupies the leased space on a month to month basis at a
rate of $850 per month. Future minimum lease payments under the operating leases for the facilities as of March 31, 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 March 31, 2019, are as follows:
Fiscal year ending September 30, 2019 - $24,707
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 began on-site work for this project in February of 2018 and completed its scope of work in May 2019.
14. MAJOR CUSTOMERS AND VENDORS
For the six months ended March 31, 2019
and 2018, the Company had the following customers that represented more than 10% of sales.
|
|
March 31, 2019
|
|
March 31, 2018
|
Customer A
|
|
|
44.0
|
%
|
|
|
—
|
Customer B
|
|
|
35.8
|
%
|
|
|
—
|
Customer C
|
|
|
14.2
|
%
|
|
|
—
|
Customer D
|
|
|
—
|
|
|
|
16.0%
|
Customer E
|
|
|
|
|
|
|
45.0%
|
For the six months ended March 31, 2019 and
2018, the Company had the following
suppliers that represented more than 10% of direct
material costs.
|
|
March 31, 2019
|
|
March 31, 2018
|
Vendor A
|
|
|
0.8
|
%
|
|
|
49.2%
|
Vendor B
|
|
|
—
|
|
|
|
41.3%
|
Vendor C
|
|
|
83.1
|
%
|
|
|
—
|
15. SUBSEQUENT EVENTS
Issuance of Common
stock for services
During the period commencing
April 1, 2019 through May 15, 2018, the Company issued 60,000 shares of the Company’s $0.001 par value common stock to Regal
Consulting, LLC for investor relations services.
Warrant exercise
On April 9, 2019, an investor exercised warrants
to purchase 9,000 shares of the Company’s $0.001 par value common stock at a purchase price equal to $0.363 for each share
of Common stock. The Company received $3,267 as a result of this exercise.
Issuance of Stock options to employees
During the period commencing April 1,
2019 through May 15, 2019, the Company issued 6,352 options to purchase shares of common stock to employees, the options
were granted at quoted market prices ranging from $2.20 to $3.48.
Securities Purchase Agreement
On April 17, 2019, the Company entered into a Purchase Agreement
(the “Agreement”) with an otherwise unaffiliated third-party institutional investor (the “Investor”), pursuant
to which the Company agreed to issue to the Investor a $10,750,000 face value Senior Secured Redeemable Convertible Promissory
Note (the “Debenture”) with a 7.5% original issue discount, 2,150 shares of our Series B Preferred Stock with a 7.5%
original issue discount, a Common Stock Purchase Warrant (the “Warrant”) on a cash-only basis to acquire up to 2,300,000
shares (the “Warrant Shares”) of our common stock (our “Common Stock”) and 1,250,000 shares of our Common
Stock.
The aggregate purchase price for the Debenture, the Series B Preferred
Stock the Warrant and the Common Stock is $20,000,000.
At the first closing, which occurred on April 18, 2019, we sold
the Debenture, the Common Stock and the Warrant for $10,000,000. At the second closing, we plan to sell 1,075 shares of Series
B Preferred Stock for $5,000,000 upon approval of our shareholders: (1) to increase our authorized common stock from 100,000,000
shares, par value $0.001 per share, to 200,000,000 shares, and (2) to approve the Agreement and the issuance of the Debenture,
the Series B Preferred Stock, the Warrant, the Common Stock and the shares underlying the Debenture and the Series B Preferred
Stock and the Warrant Shares. We have also agreed to submit an application for listing on the Nasdaq Capital Market within 45 days
of executing the Agreement. Within 30 days of approval of the above corporate actions and upon listing with the Nasdaq Capital
Market, we have an option to sell the remaining 1,075 shares of Series B Preferred Stock at $5,000 per share with a 7.5% OID for
the sum of up to $5,000,000.
The Debenture has a maturity date 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.
Pursuant to the Agreement, the Company agreed to sell the above
securities pursuant to an effective shelf registration statement on Form S-3 (Registration No 333-228063), declared effective by
the Securities and Exchange Commission on November 20, 2018, and a related prospectus supplement thereto.
Prior to the maturity date, provided that no trigger event has occurred,
the Company will have the right at any time upon 30 trading days’ prior written notice, in its sole and absolute discretion,
to redeem all or any portion of the Debenture then outstanding by paying to the Investor an amount equal to 145% of the of the
portion of the Debenture being redeemed.
The Investor may convert the Debenture into
shares of the Company’s common stock at a conversion price equal to 90% of the mathematical average of the 5 lowest individual
daily volume weighted average prices of the common stock, less $0.075 per share, during the period beginning on the issuance date
and ending on the maturity date
. The conversion price is subject
to a floor price of
$1.00 per share until we complete the above corporate
actions and then the floor will be adjusted to $0.35 per
share
.
In the event certain equity conditions exist, the Company may require that the Investor convert the Debenture. In no event shall
the Debenture be allowed to effect a conversion if such conversion, along with all other shares of Company common stock beneficially
owned by the Investor and its affiliates would exceed 4.9% of the outstanding shares of the common stock of the Company.
The Series B Preferred Stock may convert into Common Stock and has
other features as noted in the Certificate of Designation we filed with the State of Nevada, which is made an exhibit to this Current
Report. The Warrant is exercisable for a term of three years on a cash-only basis at an exercise price of $3.50 per share with
respect to 2,000,000 Warrant Shares, $4.00 with respect to 100,000 Warrant Shares, $5.00 with respect to 100,000 Warrant Shares,
$7.50 with respect to 50,000 Warrant Shares and $10.00 with respect to 50,000 Warrant Shares.
As part of the transaction, our shareholders owning and controlling
more than 51% of our outstanding shares of Series A Preferred Stock and Common Stock were required to execute Voting Agreements
that required those shareholders to vote in favor of the Purchase Agreement and issuance of the securities covered thereby.
Certificate of Preferred Stock Designation
On April 16, 2019, pursuant to Article IV of our Articles of Incorporation,
the Company’s Board of Directors voted to designate a class of preferred stock entitled Series B Preferred Stock, consisting
of up to one hundred thousand (100,000) shares, par value $0.001. Under the Certificate of Designation, the holders of Series B
Preferred Stock are entitled to the following powers, designations, preferences and relative participating, optional and other
special rights, and the following qualifications, limitations and restrictions, among others as set forth in the Certificate of
Designation:
|
§
|
The holders of shares of Series B Preferred Stock will have no right to vote on any matters, questions or proceedings of the Company including, without limitation, the election of directors;
|
|
§
|
Commencing on the date of issuance, the Series B Preferred Stock will accrue cumulative in kind accruals (“the Accruals”) at the rate of 7.5% per annum;
|
|
§
|
Upon any liquidation, dissolution or winding up of the Company, the holders of the Series B Preferred Stock will be entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount with respect to each share of Series B Preferred Stock equal to $5,000.00 (the “Face Value”), plus an amount equal to any accrued but unpaid Accruals thereon (the “Liquidation Value”);
|
|
§
|
On maturity, the Company may redeem the Series B Preferred Stock by paying the holder the Liquidation Value;
|
|
§
|
Before maturity, the Company may redeem the Series B Preferred stock on 30 days’ notice by paying 145% of the outstanding Face Value per share;
|
|
§
|
If the Company determines to liquidate, dissolve or wind-up its business and affairs, the Company will, within three trading days of such determination and prior to effectuating any such action, redeem all outstanding shares of Series B Preferred Stock;
|
|
§
|
In the event of a conversion of any shares of Series B Preferred Stock, the Company will
(a) satisfy the payment of the Conversion Premium, which is defined as the Face Value of the shares converted multiplied by
the product of 7.5% and the number of whole years between issuance and maturity, and (b) issue to the holder of the shares
of Series B Preferred Stock a number of conversion shares equal to the Face Value divided by the applicable Conversion
Price (defined as 90% of the of the 5 lowest individual daily volume weighted average prices of the Common Stock from
issuance to conversion less $0.075 per share, but no less than the Floor Price [$1.00 prior to corporate approvals to
increase the authorized stock and approve the financing and $0.35 after approvals]) with respect to the number of shares
converted; While the note is outstanding if Triggering Events occur the conversion rate may be decreased by 10% and the
interest rate increased by 10% for each Triggering Event.
|
|
§
|
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.
|