UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

[X]	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2019
[  ]	Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________  to __________
Commission File Number: 000-53498

CleanSpark, Inc.

(Exact name of Registrant as specified in its charter)

Nevada	87-0449945
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

70 North Main Street, Ste. 105

Bountiful, Utah 84010

(Address of principal executive offices)

(801) 244-4405

(Registrant’s telephone number)

 _______________________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days

[X] Yes [ ] No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

[  ] Large accelerated filer	[  ] Accelerated filer
[X] Non-accelerated filer	[X] Smaller reporting company
	[  ] Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 45,807,964 shares as of August 12 , 2019

	TABLE OF CONTENTS	Page
PART I – FINANCIAL INFORMATION
Item 1:	Financial Statements	3
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	9
Item 4:	Controls and Procedures	9
PART II – OTHER INFORMATION
Item 1:	Legal Proceedings	10
Item 1A:	Risk Factors	10
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	10
Item 3:	Defaults Upon Senior Securities	10
Item 4:	Mine Safety Disclosure	10
Item 5:	Other Information	10
Item 6:	Exhibits	11

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Our consolidated financial statements included in this Form 10-Q are as follows:

F-1 Consolidated Balance Sheets as of June 30, 2019 and September 30, 2018 (unaudited);

F-2 Consolidated Statements of Operations for the three and nine months ended June 30, 2019 and 2018 (unaudited);

F-3 Consolidated Statements of Stockholders’ Equity for the nine months ended June 30, 2019 and 2018 (unaudited);

F-4 Consolidated Statements of Cash Flow for the nine months ended June 30, 2019 and 2018 (unaudited);

F-5 Notes to Consolidated Financial Statements.

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, 2019 are not necessarily indicative of the results that can be expected for the full year.

3

CLEANSPARK, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	June 30, 2019				September 30, 2018
ASSETS
Current assets
Cash		$	8,016,078			$	412,777
Accounts receivable			784,140				34,141
Contract assets			4,282				52,439
Prepaid expense and other current assets			2,670,703				49,023
Total current assets			11,475,203				548,380
Fixed assets, net			82,662				86,731
Capitalized Software, net			8,389,407				8,786,226
Intangible assets, net			8,045,031				3,214,467
Goodwill			4,919,858				4,919,858
Total assets		$	32,912,161			$	17,555,662
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities		$	553,745			$	131,724
Contract liabilities			428,042				—
Convertible notes, net of unamortized discounts			—				69,121
Due to related parties			57,167				308,373
Loans from related parties			—				382,790
Loans payable, net of unamortized discounts			334,935				457,579
Total current liabilities			1,373,889				1,349,587
Long- term liabilities
Convertible notes, net of unamortized discounts			1,507,292				—
Loans payable			—				150,000
Total liabilities			2,881,181				1,499,587
Stockholders' equity
Common stock; $0.001 par value; 100,000,000 shares authorized;
44,658,282 and 36,116,447 shares issued and outstanding as of June 30, 2019 and  September 30, 2018, respectively			44,658				36,116
Preferred stock;  $0.001 par value; 10,000,000 shares authorized;
1,000,000 and 1,000,000 Series A shares issued and outstanding as of June 30, 2019 and September 30, 2018, respectively			1,000				1,000
0 and 0 Series B shares issued and outstanding as of June 30, 2019 and September 30, 2018, respectively			—				—
Additional paid-in capital			110,944,855				82,958,490
Accumulated earnings (deficit)			(80,959,533	)			(66,939,531
Total stockholders' equity			30,030,980				16,056,075
Total liabilities and stockholders' equity		$	32,912,161			$	17,555,662

The accompanying notes are an integral part of these unaudited consolidated financial statements.

F-1

CLEANSPARK, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	For the Three Months Ended						For the Nine Months Ended
	June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Revenues, net	$	1,222,736		$	328,586		$	2,209,542		$	466,931
Cost of revenues		1,006,144			288,400			1,821,488			372,145
Gross profit		216,592			40,186			388,054			94,786
Operating expenses
Professional fees		1,296,993			364,863			3,719,269			851,755
Payroll expenses		211,129			128,604			684,650			494,577
Product development		344,871			329,274			1,034,612			1,031,936
Research and development		—			3,880			—			6,841
General and administrative expenses		222,167			58,541			478,564			199,049
Depreciation and amortization		618,130			209,963			1,275,249			632,705
Total operating expenses		2,693,290			1,095,125			7,192,344			3,216,863
Loss from operations		(2,476,698	)		(1,054,939	)		(6,804,290	)		(3,122,077)
Other income (expense)
Loss on settlement of debt		—			(41,092	)		(19,425	)		(41,092)
Loss on derivative liability		—			(4,689,126	)		—			(4,958,009)
Interest expense		(1,495,213	)		(368,690	)		(7,196,287	)		(418,109)
Total other income (expense)		(1,495,213	)		(5,098,908	)		(7,215,712	)		(5,417,210)
Net loss	$	(3,971,911	)	$	(6,153,847	)	$	(14,020,002	)	$	(8,539,287)
Loss per common share - basic and diluted	$	(0.09	)	$	(0.18	)	$	(0.35	)	$	(0.25)
Weighted average common shares outstanding - basic and diluted		44,183,436			34,864,997			40,595,268			34,220,283

The accompanying notes are an integral part of these unaudited consolidated financial statements.

F-2

CLEANSPARK, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

For the Nine months Ended June 30, 2019
		Preferred Stock				Common Stock
		Shares		Amount		Shares			Amount			Additional Paid-in Capital			Accumulated Deficit			Total Stockholders' Deficit
Balance, September 30, 2018		1,000,000	$	1,000		36,116,447		$	36,116		$	82,958,490		$	(66,939,531	)	$	16,056,075
Shares issued for services		—		—		120,000			120			271,611			—			271,731
Options and warrants issued for services		—		—		—			—			377,475			—			377,475
Shares issued upon exercise of warrants		—		—		3,000			3			1,085			—			1,088
Beneficial conversion feature and shares and warrants issued with convertible debt		—		—		100,000			100			4,994,900			—			4,995,000
Shares issued for direct investment		—		—		452,250			452			361,348			—			361,800
Shares issued for settlement of debt		—		—		25,000			25			51,200			—			51,225
Commitment shares returned and cancelled		—		—		(137,500	)		(137	)		137			—			—
Net loss		—		—		—			—			—			(2,283,551	)		(2,283,551)
Balance, December 31, 2018		1,000,000		1,000		36,679,197			36,679			89,016,246			(69,223,082	)		19,830,843
Shares issued for services		—		—		90,000			90			328,598			—			328,688
Options and warrants issued for services		—		—		—			—			350,888			—			350,888
Shares issued upon exercise of warrants		—		—		2,178,964			2,179			(2,179	)		—			—
Shares issued upon conversion of debt		—		—		2,498,621			2,499			4,722,501			—			4,725,000
Shares and warrants issued under asset purchase agreement		—		—		1,750,000			1,750			6,070,274			—			6,072,024
Commitment shares returned and cancelled		—		—		(137,500	)		(138	)		138			—			—
Net loss		—		—		—			—			—			(7,764,540	)		(7,764,540)
Balance, March 31, 2019		1,000,000		1,000		43,059,282			43,059			100,486,466			(76,987,622	)		23,542,903
Shares issued for services		—		—		340,000			340			294,886			—			295,226
Options and warrants issued for services		—		—		—			—			161,495						161,495
Shares issued upon exercise of warrants		—		—		9,000			9			3,258			—			3,267
Beneficial conversion feature and shares and warrants issued with convertible debt		—		—		1,250,000			1,250			9,998,750			—			10,000,000
Net loss		—		—		—			—			—			(3,971,911	)		(3,971,911)
Balance, June 30, 2019	$	1,000,000		1,000	$	44,658,282		$	44,658		$	110,944,855		$	(80,959,533	)	$	30,030,980

For the Nine months Ended June 30, 2018
	Preferred Stock			Common Stock
	Shares		Amount	Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Total Stockholders' Deficit
Balance, September 30, 2017	1,000,000	$	1,000	33,409,471	$	33,409	$	40,240,468		$	(19,933,366	)	$	20,341,511
Options and warrants issued for services	—		—	—		—		24,749			—			24,749
Shares issued upon exercise of warrants	—		—	27,548		27		9,973			—			10,000
Shares issued for direct investment	—		—	171,875		172		137,328			—			137,500
Net loss	—		—	—		—		—			(1,056,515	)		(1,056,515)
Balance, December 31, 2017	1,000,000		1,000	33,608,894		33,608		40,412,518			(20,989,881	)		19,457,245
Options and warrants issued for services	—		—	—		—		279,051			—			279,051
Shares issued upon exercise of warrants	—		—	586,975		587		21,431			—			22,018
Shares issued for direct investment	—		—	43,000		43		34,357			—			34,400
Beneficial conversion feature and shares issued with convertible debt	—		—	237,500		238		303,836			—			304,074
Shares issued for settlement of debt	—		—	13,301		13		11,958			—			11,971
Net loss	—		—	—		—		—			(1,328,925	)		(1,328,925)
Balance, March 31, 2018	1,000,000		1,000	34,489,670		34,489		41,063,151			(22,318,806	)		18,779,834
Options and warrants issued for services	—		—	—		—		110,392			—			110,392
Shares issued upon exercise of warrants	—		—	1,353		2		2,028			—			2,030
Shares issued for direct investment	—		—	100,000		100		79,900			—			80,000
Fair value of tainted warrants reclassified to derivative liability	—		—	—		—		(12,537,117	)		—			(12,537,117)
Shares issued and held in escrow as collateral	—		—	300,000		300		(300	)		—			—
Shares issued for settlement of debt	—		—	28,339		28		63,734			—			63,762
Net loss	—		—	—		—		—			(6,153,847	)		(6,153,847)
Balance, June 30, 2018	1,000,000	$	1,000	34,919,362	$	34,919	$	28,781,788		$	(28,472,653	)	$	345,054

The accompanying notes are an integral part of these unaudited consolidated financial statements.

F-3

CLEANSPARK, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Nine Months Ended
	June 30, 2019			June 30, 2018
Cash Flows from Operating Activities
Net loss		(14,020,002	)	$	(8,539,287)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock based compensation		1,716,753			375,365
Commitment issued for debt financing		—			218,625
Depreciation and amortization		1,275,249			632,705
Amortization of capitalized software		1,034,612			1,030,823
Loss on derivative liability		—			4,958,009
Loss on settlement of debt		19,425			41,092
Amortization of debt discount		5,674,800			136,086
Shares issued as interest		1,225,000			—
Changes in assets and liabilities
Increase in prepaid expenses and other current assets		(2,621,680	)		(27,280)
Decrease in contract assets		48,157			—
Increase in contract liabilities		428,042			—
(Increase) decrease in accounts receivable		(749,999	)		7,925
Increase in accounts payable		428,821			55,045
Increase (decrease) in due to related parties		(251,206	)		209,751
Net cash used in operating activities		(5,792,028	)		(901,141)
Cash Flows from investing
Purchase of intangible assets		(2,150	)		(5,964)
Purchase of fixed assets		(27,570	)		(14,197)
Investment in capitalized software		(569,043	)		(270,618)
Net cash used in investing activities		(598,763	)		(290,779)
Cash Flows from Financing Activities
Payments on promissory notes		(507,876	)		(65,574)
Proceeds from promissory notes		78,603			587,989
Proceeds from related part debts		75,030			219,660
Payments on related party debts		(457,820	)		(60,000)
Proceeds from convertible debt, net of issuance costs		14,995,000			184,250
Payments on convertible debts		(555,000	)		—
Proceeds from exercise of warrants		4,355			34,048
Proceeds from issuance of common stock		361,800			251,900
Net cash from financing activities		13,994,092			1,152,273
Net increase (decrease) in Cash		7,603,301			(39,647)
Cash, beginning of period		412,777			57,128
Cash, end of period	$	8,016,078		$	17,481
Supplemental disclosure of cash flow information
Cash paid for interest	$	49,750		$	54,191
Cash paid for tax	$	—		$	—
Non-Cash investing and financing transactions
Shares issued as collateral returned to treasury	$	275		$	—
Stock issued to promissory notes	$	51,225		$	—
Stock issued to settle accounts payable	$	—		$	75,734
Debt discount on convertible debt	$	14,995,000		$	184,250
Shares and warrants issued for asset acquisition	$	6,070,274		$	—
Shares issued for conversion and accrued interest	$	4,725,000		$	—
Debt discount on promissory note	$	—		$	110,000
Recognition of derivative due to tainted equity environment	$	—		$	12,537,117
Shares issued and held in escrow as collateral	$	—		$	300
Cashless exercise of options	$	2,179		$	387
Option expense capitalized as software development costs	$	68,750		$	38,927

The accompanying notes are an integral part of these unaudited consolidated financial statements.

F-4

CLEANSPARK, INC.

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 nine months ended June 30, 2019.

Through CleanSpark Critical Power Systems, Inc., the Company provides customer hardware solutions for distributed energy systems that serve military and commercial residential properties. The equipment is generally sold under negotiated price contracts.

2. SUMMARY OF SIGNIFICANT POLICIES

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 $14,020,002 during the nine months ended June 30, 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 June 30, 2019, the Company had working capital of approximately $10,101,314.

F-5

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 $4,282 as of June 30, 2019. Unbilled receivables, which represent an unconditional right to payment subject only to the passage of time, are reclassified to accounts receivable when they are billed under the terms of the contract. Advances that are payments on account of contract assets of $0 and $0 as of June 30, 2019 and September 30, 2018, respectively, have been deducted from contract assets. Contract liabilities represent amounts billed to clients in excess of revenue recognized to date. The Company recorded $0 and $0 in contract liabilities as of June 30, 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 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).

F-6

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, which are recorded as liabilities. The Company recorded $428,042 and $0 in contract liabilities as of June 30, 2019 and September 30, 2018, respectively.

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 nine months ended June 30, 2019 and 2018, the Company reported revenues of $2,209,542 and $466,931, respectively.

Retention receivable is the amount withheld by a customer until a contract is completed. Retention receivables of $42,422 and $17,751 were included in the balance of trade accounts receivable as of June 30, 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 three months or less to be cash equivalents. There was $8,016,078 and $412,777 in cash and no cash equivalents as of June 30, 2019 and September 30, 2018, respectively.

F-7

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, 2019, the cash balance in excess of the FDIC limits was $7,766,078. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk in these accounts. The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue. (See Note 14 for details.)

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 June 30, 2019, there are 38,921,055 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 $12,500,000 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 are evaluating the potential impact to our financial position or results of operations.

In August 2018, the FASB issued ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which allows for the capitalization of certain implementation costs incurred in a hosting arrangement that is a service contract. ASU 2018-15 allows for either retrospective adoption or prospective adoption to all implementation costs incurred after the date of adoption. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.

In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASC 842”). The guidance requires lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. Existing sale-leaseback guidance, including guidance for real estate, is replaced with a new model applicable to both lessees and lessors. ASC 842 is effective for fiscal years beginning after December 15, 2018. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.

The Company has evaluated all other recent accounting pronouncements, and believes that none of them will have a material effect on the Company's financial position, results of operations or cash flows.

F-8

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 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 June 30, 2019 and September 30, 2018:

	June 30, 2019			September 30, 2018
mVSO software	$	5,015,724		$	4,708,203
mPulse software		6,665,044			6,334,772
Capitalized Software:		11,680,768			11,042,975
Less: accumulated amortization		(3,291,361	)		(2,256,749)
Capitalized Software, net	$	8,389,407		$	8,786,226

In accordance with ASC 985-20 the Company capitalized $637,793 in software development costs (including capitalized stock compensation cost of $68,750) related to the enhancements created for our mPulse and mVSO 2.0 platforms during the nine months ended June 30, 2019.

Capitalized software amortization recorded as product development expense for the nine months ended June 30, 2019 and 2018 was $1,034,612 and $1,030,823, respectively.

F-9

5. INTANGIBLE ASSETS

Intangible assets consist of the following as of June 30, 2019 and September 30, 2018:

	June 30, 2019			September 30 ,2018
Patents	$	74,112		$	71,962
Websites		16,482			16,482
Customer list and non-compete agreement		5,722,024			—
Trademarks		5,928			5,928
Engineering trade secrets		4,370,269			4,020,269
Software		—			26,990
Intangible assets:		10,188,815			4,141,631
Less: accumulated amortization		(2,143,784	)		(927,164)
Intangible assets, net	$	8,045,031		$	3,214,467

Amortization expense for the nine months ended June 30, 2019 and 2018 was $1,243,610 and $592,315, respectively.

6. FIXED ASSETS

Fixed assets consist of the following as of June 30, 2019 and September 30, 2018:

	June 30, 2019			September 30, 2018
Machinery and equipment	$	136,890		$	130,191
Furniture and fixtures		75,122			54,251
Total		212,012			184,442
Less: accumulated depreciation		(129,350	)		(97,711)
Fixed assets, net	$	82,662		$	86,731

Depreciation expense for the nine months ended June 30, 2019 and 2018 was $31,639 and $40,390, respectively.

7. LOANS

Long term

Long-term loans payable consist of the following:	June 30, 2019		September 30, 2018
Promissory notes	$	—	$	150,000
Total	$	—	$	150,000

Current

Current loans payable consist of the following:	June 30, 2019		September 30, 2018
Promissory notes	$	300,000	$	628,951
Insurance financing loans		34,935		10,257
Current loans payable:		334,935		639,208
Unamortized debt discount		—		(181,629)
Total, net of unamortized discount	$	334,935	$	457,579

F-10

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 June 30, 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 $10,096 and $10,097 during the nine months ended June 30, 2019 and 2018, respectively.

On October 6, 2017, the Company executed an unsecured variable interest rate promissory note with a maximum interest rate of 58.3% and a face value of $45,000 with a financial institution. Under the terms of the promissory note the Company received $45,000 and agreed to repay the note evenly over 12 months. 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 $12,375 and for the nine months ended June 30, 2019 and 2018, respectively.

On November 11, 2017, the Company executed a 10% secured promissory note with a face value of $100,000 with an investor. Under the terms of the promissory note the Company received $100,000 and agreed to make monthly interest payments and repay the note principal 24 months from the date of issuance. The note 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, 2019, the Company owed $100,000 in principal and $849 in accrued interest under the terms of the agreement and recorded interest expense of $7,478 and $6,411 and for the nine months ended June 30, 2019 and 2018, respectively.

On November 20, 2017, the Company executed a 10% unsecured promissory note with a face value of $80,000 with an investor. Under the terms of the promissory note the Company received $80,000 and agreed to make monthly interest payments and repay the note principal 12 months from the date of issuance. On November 21, 2018, the investor extended the maturity date to December 31, 2018. The Company repaid all principal and outstanding interest on December 31, 2018. The Company recorded interest expense of $2,017 and $4,866 during the nine months ended June 30, 2019 and 2018, respectively.

On December 5, 2017, the Company executed a 9% secured promissory note with a face value of $50,000 with an investor. Under the terms of the promissory note the Company received $50,000 and agreed to make monthly interest payments and repay the note principal 24 months from the date of issuance. The note is secured by 50,000 shares which would be issued to the note holder only in the case of an uncured default. As of June 30, 2019, the Company owed $50,000 in principal and $383 in accrued interest under the terms of the agreement and recorded interest expense of $3,367 and $2,552 for the nine months ended June 30, 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 $3,680 and for the nine months ended June 30, 2019 and 2018, respectively.

On May 22, 2018, the Company executed an unsecured variable interest rate promissory note with a maximum interest rate of 51.0% and a face value of $24,500 with a financial institution. Under the terms of the promissory note the Company received $24,500 and agreed to repay the note and interest evenly over 12 months. 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 nine months ended June 30, 2019 and 2018, respectively.

On June 15, 2018, the Company entered into a 10% secured promissory note with a face value of $116,600 pursuant to which the Company received $110,000, net of an original issue discount of 6% ($6,600). The Company also issued 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 June 30, 2019, the Company owed $0 in principal and $0 in accrued interest under the terms of the agreement and recorded interest expense of $3,217 during the nine months ended June 30, 2019. The Company determined the value associated with the warrants issued in connection with the note to be $110,000 which was recorded as a debt discount. The aggregate original issue discount, and debt discount related to the warrants have been accreted and charged to interest expenses as a financing expense in the amount of $48,424 and $479 for the nine months ended June 30, 2019 and 2018, respectively. The unamortized discount as of June 30, 2019 amounted to $0. The Company repaid all principal and outstanding interest on January 2, 2019.

F-11

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 nine months ended June 30, 2019. The unamortized discount as of June 30, 2019 amounted to $0. The Company repaid all principal and outstanding interest on January 2, 2019. As of June 30, 2019, the Company owed $0 in principal and $0 in accrued interest under the terms of the agreement and recorded interest expense of $3,003 and $0 and for the nine months ended June 30, 2019 and 2018, respectively.

On August 14, 2018, the Company executed an unsecured variable interest rate promissory note with a maximum interest rate of 58.57% and a face value of $19,600 with a financial institution. Under the terms of the promissory note the Company received $19,600 and agreed to repay the note and interest evenly over 12 months. As of September 30, 2018, the Company owed $17,967 in principal and $784 in accrued interest under the terms of the agreement. The Company repaid all principal and outstanding interest on October 1, 2018. The Company recorded interest expense of $0 and $0 and for the nine months ended June 30, 2019 and 2018, respectively.

On September 20, 2018, the Company executed a 10% unsecured promissory note with a face value of $52,500 with an investor, net of an original issue discount of 5% ($2,500). Under the terms of the promissory note the Company received $50,000 and agreed to repay the note principal and all accrued interest on December 31, 2018. The Company also issued 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 nine months ended June 30, 2019. The Company repaid all principal and outstanding interest on December 31, 2018. The Company recorded interest expense of $1,323 and $0 and for the nine months ended June 30, 2019 and 2018, respectively.

On September 21, 2018, the Company executed a 10% unsecured promissory note with a face value of $52,500 with an investor, 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 nine months ended June 30, 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 and $0 and for the nine months ended June 30, 2019 and 2018, respectively.

Insurance financing loans

In February 2018, the Company executed two unsecured 6.1% installment loans with a total face value of $35,089 with a financial institution 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 institution 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 June 30, 2019, $34,935 in principal remained outstanding.

F-12

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 nine months ended June 30, 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 nine months ended June 30, 2019.

Long-Term convertible notes

Securities Purchase Agreement – December 31, 2018

On December 31, 2018, the Company entered into a Securities Purchase Agreement (the “SPA”) with an otherwise unaffiliated third-party institutional investor (the “Investor”), pursuant to which the Company issued to the Investor a Senior Secured Redeemable Convertible Debenture (the “Debenture”) in the aggregate face value of $5,250,000. The note is secured by all assets of the Company. The Debenture has a maturity date of two years from the issuance date and the Company has agreed to pay compounded interest on the unpaid principal balance of the Debenture at the rate equal 7.5% per annum. Interest is payable on the date the applicable principal is converted or on maturity. The interest must be paid in cash and, in certain circumstances, may be paid in shares of common stock.

The transactions described above closed on December 31, 2018. In connection with the issuance of the Debenture and pursuant to the terms of the SPA, the Company issued to the Investor 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.

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.

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.

F-13

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.

The aggregate debt discount has been accreted and charged to interest expenses as a financing expense in the amount of $3,932,292 during the nine months ended June 30, 2019.

The Debenture at June 30, 2019 consists of:

Principal	$	1,750,000
Unamortized debt discount		(1,317,708)
Total, net of unamortized discount		432,292

Securities Purchase Agreement – April 17, 2019

On April 17, 2019, the Company entered into a Securities Purchase Agreement (the “Agreement”) with an otherwise unaffiliated third-party institutional investor (the “Investor”), pursuant to which the Company agreed to issue to the Investor a $10,750,000 face value Senior Secured Redeemable Convertible Promissory Note (the “Debenture”) with a 7.5% original issue discount, 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 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. (See Notes 10 and 11 for additional details.)

Pursuant to the first closing of the agreement, which occurred on April 18, 2019, the Investor agreed to tender to the Company the sum of $10,000,000, for the Debenture, the Common Stock and the Warrant. No additional closings to sell the preferred stock had occurred as of June 30, 2019.

The Debenture has a maturity date of two years from the issuance date and the Company has agreed to pay compounded interest on the unpaid principal balance of the Debenture at the rate equal 7.5% per annum. Interest is payable on the date the applicable principal is converted or on maturity. The interest must be paid in cash and, in certain circumstances, may be paid in shares of common stock.

Prior to the maturity date, provided that no trigger event has occurred, the Company will have the right at any time upon 30 trading days’ prior written notice, in its sole and absolute discretion, to redeem all or any portion of the Debenture then outstanding by paying to the Investor an amount equal to 145% of the of the portion of the Debenture being redeemed.

The Investor may convert the Debenture into shares of the Company’s common stock at a conversion price equal to 90% of the mathematical average of the 5 lowest individual daily volume weighted average prices of the common stock, less $0.075 per share, during the period beginning on the issuance date and ending on the maturity date subject to certain floor price restrictions. In the event certain equity conditions exist, the Company may require that the Investor convert the Debenture. In no event shall the Debenture be allowed to effect a conversion if such conversion, along with all other shares of Company common stock beneficially owned by the Investor and its affiliates would exceed 4.9% of the outstanding shares of the common stock of the Company.

While the note is outstanding if Triggering Events occur the conversion rate may be decreased by 10% and the interest rate increased by 10% for each Triggering Event.

The Debenture at June 30, 2019 consists of:

Principal	$	10,750,000
Unamortized debt discount		(9,675,000)
Total, net of unamortized discount		1,075,000

The aggregate debt discount has been accreted and charged to interest expenses as a financing expense in the amount of $1,075,000 during the nine months ended June 30, 2019.

Summary

Principal – December 31, 2018 Note	$	1,750,000
Principal – April 17, 2019 Note		10,750,000
Total principal on convertible notes (long-term)		12,500,000
Unamortized debt discount		(10,992,708)
Total convertible notes, net of unamortized discount (long-term)	$	1,507,292

F-14

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 $353,140 and $146,323, respectively during the nine months ended June 30, 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 June 30, 2019, Company owed $0 in principal and $0 in accrued interest under the terms of the agreements. The Company recorded interest expense of $1,147 during the nine months ended June 30, 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 $353,140 and $146,323, respectively during the nine months ended June 30, 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 nine months ended June 30, 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 nine months ended June 30, 2019. On January 3, 2019, the Company settled all remaining obligations under the notes through the payment of all outstanding principal and interest then outstanding. As of June 30, 2019, Company owed $0 in principal and $0 in accrued interest under the terms of the agreement.

During the nine months ended June 30, 2019, the Company paid Blue Chip Accounting, LLC $49,288 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 $127,772, during the nine months ended June 30, 2019.

Under the agreement Mr. Huber was also granted a one-time bonus of $50,000 on August 28, 2018, payment of which will be deferred until certain conditions are met. As of June 30, 2019, the bonus had not been paid. The term of the agreement is one year and automatically renews until cancelled by either party.

On September 28, 2018, in connection with the consulting agreement executed with Zero Positive, LLC Company issued warrants to purchase 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 June 30, 2019, 457,143 warrants had vested, and the Company recorded an expense of $372,442 during the nine months ended June 30, 2019.

During the nine months ended June 30, 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 $91,573 during the nine months ended June 30, 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 nine months ended June 30, 2019 with Larry McNeill, a Director of the Company. Under the terms of the promissory notes the Company received a total of $213,100 and agreed to repay the notes on demand. The Company recorded interest expense of $8,016 during the nine months ended June 30, 2019. On December 31, 2018, the Company settled all remaining obligations under the note through the payment of all outstanding principal and interest then outstanding.

Effective January 1, 2019, the Company agreed to pay non-executive board members $2,500 per month. Mr. McNeil earned $15,000 in Board compensation during the nine months ended June 30, 2019.

F-15

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 June 30, 2019, there were 44,658,282 shares of common stock issued and outstanding and 1,000,000 shares of preferred stock issued and outstanding.

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. In the event of certain defaults, conversion price may not be subject to a floor.

§ if at any time the Company grants, issues or sells any options, convertible securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which holder could have acquired if holder had held the number of shares of Common Stock acquirable upon conversion of Series B Preferred Stock;

§ At maturity (2 years from issuance), all outstanding shares of Series B Preferred Stock shall automatically convert into common stock at the Conversion Price; and

§ At no time may the holders of Series B Preferred Stock own more than 4.99% of the outstanding common stock in the Company.

F-16

Common Stock issuances during the nine months ended June 30, 2019

During the period commencing October 1, 2018 through December 31, 2018, the Company received $361,800 from 14 investors pursuant to private placement agreements with the investors to purchase 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 nine months ended June 30, 2019, the Company issued a total of 270,000 shares of its common stock in accordance with the agreement. Stock compensation of $782,700 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 nine months ended June 30, 2019, the Company recorded stock compensation of $75,000 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 $1,088 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 8 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.

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.

The Company issued 1,250,000 shares in relation to a Securities purchase agreement executed on April 17, 2018. (See Note 8 for additional details.)

On June 12, 2019, the Company entered into an agreement with SylvaCap Media for investor relations services. Under this agreement the Company agreed to issue 250,000 shares of the Company’s common stock as compensation for services for a six month period plus additional cash compensation. The 250,000 shares vest upon issuance but if the agreement is terminated within 90 days of execution the shares are to be returned and cancelled. Stock compensation of $44,126 was recorded as a result of the stock issued under the agreement.

Common stock returned during the nine months ended June 30, 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.

F-17

Common Stock issuances during the nine months ended June 30, 2018

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.

During the period commencing October 1, 2017 through June 30, 2018, the Company issued 300,000 shares of the Company’s $0.001 par value common stock as collateral for promissory notes, the shares are held in a third-party escrow account and will be returned to the Company upon repayment of the loans.

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.

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.

In connection with the issuance of the March 23, 2018, Labrys Fund, LP Convertible Note, the Company issued, 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. Consequently, the fair value of the returnable shares of $218,626 was charged to interest expense.

During the period commencing October 1, 2018 through June 30, 2018, the Company issued 41,640 shares of the Company’s $0.001 par value common stock to settle accounts payable. The shares were valued at $75,733 and the Company recorded a loss on settlement of debt of $41,092 result of the issuance.

11. STOCK WARRANTS

The following is a summary of stock warrant activity during the nine months ended June 30, 2019.

	Number of Warrant Shares			Weighted Average Exercise Price
Balance, September 30, 2018		8,989,299		$	0.89
Warrants granted		6,413,333		$	3.22
Warrants expired		—			—
Warrants canceled		—			—
Warrants exercised		(2,262,000	)		0.08
Balance,June 30, 2019		13,140,632		$	2.17

As of March 31, 2019, the outstanding warrants have a weighted average remaining term of was 4.06 years and an intrinsic value of $5,170,118.

F-18

As of June 30, 2019, there are warrants exercisable to purchase 12,697,775 shares of common stock in the Company and 442,857 unvested warrants outstanding that cannot be exercised until vesting conditions are met. 9,961,980 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, 2,000,000 require an investment of $3.50 per share, 100,000 require an investment of $4.00 per share, 600,000 require an investment of $5.00 per share, 383,333 require a cash investment of $7.50 per share and 50,000 require a cash investment of $10.00 per share. 3,178,652 of the outstanding warrants contain provisions allowing a cashless exercise at their respective exercise price.

Warrant activity for the nine months ended June 30, 2019

On October 15, 2018, the Company entered into an agreement with a consultant for services. Under this agreement the Company agreed to issue 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 nine months ended June 30, 2019, the Company recorded stock compensation of $68,643 as a result of the stock issued under the agreement. The warrants were valued using the black-Scholes valuation model.

On December 31, 2018, in connection with a Securities purchase agreement (see Note 8 for additional details) the Company issued Common Stock Purchase Warrants to acquire up to 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 April 18, 2019, in connection with a Securities purchase agreement (see Note 8 for additional details) the Company issued Common Stock Purchase Warrants to acquire up to 2,300,000 shares of common stock 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.

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 June 30, 2019, 457,143 warrants had vested, and the Company recorded an expense of $372,442 during the nine months ended June 30, 2019. (See Note 9 for additional details.)

On January 22, 2019, in accordance with a merger agreement, CleanSpark issued; a five-year warrant to purchase 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 nine months ended June 30, 2019:

Fair value assumptions – Warrants:	June 30, 2019
Risk free interest rate		2.36% -3.01%
Expected term (years)		3-5
Expected volatility		254-268%
Expected dividends		0%

On January 7, 2019, a total of 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 June 30, 2019, the Company expects to recognize $1,282,857 of stock-based compensation for the non-vested outstanding warrants over a weighted-average period of 2.51 years.

F-19

Warrant activity for the nine months ended June 30, 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 $1,633 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 7 for additional details.)

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 nine months ended June 30, 2019, the Company recognized $372,442 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 June 30, 2019, there were 2,552,910 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 nine months ended June 30, 2019.

	Number of Option Shares		Weighted Average Exercise Price
Balance, September 30, 2018		319,206	$	1.18
Options granted		127,884	$	1.95
Options expired		—		—
Options canceled		—		—
Options exercised		—		—
Balance, June 30, 2019		447,090	$	1.40

As of June 30, 2019, there are options exercisable to purchase 447,090 shares of common stock in the Company. As of June 30, 2019, the outstanding options have a weighted average remaining term of was 2.39 years and an intrinsic value of $239,392.

F-20

Option activity for the nine months ended June 30, 2019

During the nine months ended June 30, 2019, the Company issued 127,884 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 $245,000 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 nine months ended June 30, 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 nine months ended June 30, 2019:

Fair value assumptions – Options:	June 30, 2019
Risk free interest rate		2.21-2.91%
Expected term (years)		3
Expected volatility		239%-271%
Expected dividends		0%

As of June 30, 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 nine months ended June 30, 2018

During the nine months ended June 30, 2018, the Company issued 41,065 options to purchase shares of the common stock to employees, the shares were granted at quoted market prices between $1.57 and $3.45. The options were valued at issuance using the Black Scholes model and stock compensation expense of $75,000 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 June 30, 2018, $105,096 had been expensed as stock compensation.

The Black-Scholes model utilized the following inputs to value the options granted 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%

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 June 30, 2019, are $0.

On May 15, 2018, the Company executed a 37-month lease agreement, which commenced on July 1, 2018 at 4360 Viewridge Avenue, Suite C, San Diego, California. The agreement calls for the Company to make payments of $4,057 in base rent per month through July 31, 2021 subject to an annual 3% rent escalation. Future minimum lease payments under the operating leases for the facilities as of June 30, 2019, are as follows:

Fiscal year ending September 30, 2019 - $12,536

Fiscal year ending September 30, 2020 - $50,521

Fiscal year ending September 30, 2021 - $43,170

F-21

14. MAJOR CUSTOMERS AND VENDORS

For the nine months ended June 30, 2019 and 2018, the Company had the following customers that represented more than 10% of sales.

	June 30, 2019			June 30, 2018
Customer A		33.9	%		—
Customer B		21.4	%		—
Customer C		—			14.7%
Customer D		21.9	%		68.8%

For the nine months ended June 30, 2019 and 2018, the Company had the following suppliers that represented more than 10% of direct material costs.

	June 30, 2019			June 30, 2018
Vendor A		—			14.0%
Vendor B		—			28.4%
Vendor C		—			27.4%
Vendor D		—			10.3%
Vendor E		90.1	%		—

15. SUBSEQUENT EVENTS

Issuance of Common stock for services

During the period commencing July 1, 2019 through August 14, 2019, the Company issued 60,000 shares of the Company’s $0.001 par value common stock to Regal Consulting, LLC for investor relations services.

Issuance of Stock options to employees

During the period commencing July 1, 2019 through August 14, 2019, the Company issued 11,641 options to purchase shares of common stock to employees, the options were granted at quoted market prices ranging from $1.23 to $1.90.

Issuance of Common stock for convertible debt

On July 19, 2019, the investor converted $500,000 in principal and $175,000 in interest as a conversion premium, for 451,086 shares of the Company common stock at an effective conversion price of $1.82. (see Note 8 for additional details.)

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. On July 9, 2019, in accordance with the terms of the agreement the investor was issued an additional 456,140 shares of common stock due to the decrease in stock price resulting in an effective conversion price of $1.51. (see Note 8 for additional details.)

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. On July 16, 2019, in accordance with the terms of the agreement the investor was issued an additional 182,456 shares of common stock due to the decrease in stock price resulting in an effective conversion price of $1.51. (see Note 8 for additional details.)

Amendment to Articles of Incorporation

On August 9, 2019, the Company filed a Certificate of Amendment to its Articles of Incorporation to increase its authorized shares of common stock from 100,000,000 to 200,000,000. The amendment was previously approved by written consent of the Company’s Board and more than a majority of the voting power of its stockholders and delivered to stockholders of record as of the close of business July 2, 2019 pursuant to a Definitive Information Statement on Schedule 14C.

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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements 

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.

Company Overview

We are in the business of providing advanced energy software and control technology that enables a plug-and-play enterprise solution to modern energy challenges. Our services consist of intelligent energy monitoring and controls, microgrid design and engineering, microgrid consulting services, and turn-key microgrid implementation services. Our software allows energy users to obtain resiliency and economic optimization. Our software is uniquely capable of enabling a microgrid to be scaled to the user's specific needs and can be widely implemented across commercial, industrial, military and municipal deployment.

We refer to the operations surrounding the above plug-and-play energy solution as our Distributed Energy Management Business (the “DER Business”). The main assets of our DER Business include our propriety software systems (“Systems”) and also our engineering and methodology trade secrets. The Distributed Energy Systems and microgrids that utilize our Systems are capable of providing secure, sustainable energy with significant cost savings for our energy customers. The Systems allow customers to design, engineer, construct and then efficiently manage renewable energy generation, storage and consumption.

Integral to our Distributed Energy Business is our mPulse and mVSO software platforms (the “Platforms”). When the Platforms are implemented on a customer’s power system they are able to control the distributed energy resources on site to provide secure, sustainable energy often at significant cost savings for our energy customers. The Platforms allows customers to efficiently manage renewable energy generation, other distributed energy generation technologies including energy generation assets, energy storage assets, and energy consumption assets. By having autonomous control over the distributed facets of energy usage and energy storage, customers are able to reduce their dependency on utilities, thereby keeping energy costs relatively constant over time. The overall aim is to transform energy consumers into energy producers by supplying power that anticipates their routine instead of interrupting it.

Our Switchgear Acquisition

As an energy technology company, part of our business model is to assess our technologies, product offerings and business direction and determine whether any strategic acquisitions would benefit us. In line with our focus, on January 22, 2019 we acquired the outstanding capital stock of Pioneer Critical Power, Inc., a Delaware corporation (“Pioneer”), which we have since renamed and redomiciled to the State of Nevada and changed the name to CleanSpark Critical Power Systems Inc.

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As consideration for the transaction, we issued to its sole shareholder Pioneer Power Solutions, Inc. (“Pioneer Power”) a total of 1,750,000 shares of our common stock, a 5-year warrant to purchase 500,000 shares of our common stock at an exercise price of $1.60 per share and a 5-year warrant to purchase 500,000 shares of our common stock at an exercise price of $2.00 per share.

The parties also signed additional agreements in connection with the transaction, as previously disclosed in our SEC filings, mainly requiring Pioneer Power to indemnify us in certain circumstances and restricting Pioneer Power from engaging in a competing business.

We also signed a Contract Manufacturing Agreement, whereby Pioneer Power shall exclusively manufacture parallel switchgears, automatic transfer switches and related control and circuit protective equipment for us, for a period of eighteen months.

We plan to utilize the new intellectual property we gained from the acquisition and the manufacturing agreement in place to enter into the switchgear equipment sales industry. We acquired executed contracts and purchase orders, which we expect will result in significant gross sales during early 2019, as well as hired personnel to operate this new line of business.

As a result of this transaction, the parties terminated a contemplated asset purchase arrangement previously disclosed in our SEC filings.

Results of operations for the three months ended June 30, 2019 and 2018

Revenues

We earned revenues of $1,222,736 during the three months ended June 30, 2019, as compared with $328,586 in revenues for the same period ended 2018.

Gross Profit

Our cost of revenues was $1,006,144 for the three months ended June 30, 2019, resulting in gross profit of $216,592, as compared with cost of revenues of $288,400 for the three months ended June 30, 2018, resulting in gross profit of $40,186.

Our cost of revenues for the three months ended June 30, 2019 was mainly the result of materials, manufacturing, subcontractors and direct labor expense.

Material expenses decreased to $39,717 for the three months ended June 30, 2019, from $228,871 for the same period ended 2018. Our materials expense for the three months ended June 30, 2019 and 2018 consisted mainly of the cost of energy storage and related components installed at customer microgrids.

Manufacturing expenses increased to $894,561 for the three months ended June 30, 2019, from $0 for the same period ended 2018. Our manufacturing expense for the three months ended June 30, 2019 consisted mainly of the cost of contract manufacturing for our switchgear products.

Direct labor increased to $14,356 for the three months ended June 30, 2019, from $9,832 for the same period ended 2018. Our direct labor expenses for the three months ended June 30, 2019, and 2018 consisted mainly of allocated payroll costs of employees and consultants.

Subcontractor expenses increased to $57,510 for the three months ended June 30, 2019, from $48,923 for the same period ended 2018. Our subcontractor expenses for the three months ended June 30, 2019, and 2018 consisted mainly of fees charged by subcontractors for installation of solar panels and energy storage.

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Operating Expenses

We had operating expenses of $2,693,290 for the three months ended June 30, 2019, as compared with $1,095,125 for the three months ended June 30, 2018.

Professional fees increased to $1,296,993 for the three months ended June 30, 2019, from $364,863 for the same period ended June 30, 2018. Our professional fees expenses for the three months ended June 30, 2019 and 2018 consisted mainly of officers and directors’ consulting fees, consulting fees, audit and review fees and stock-based compensation.

Professional fees increased in 2019 mainly as a result of increased stock-based compensation and other consulting related to increased business development efforts and audit and legal fees in connection with our SEC reporting obligations.

Payroll expenses increased to $211,129 for the three months ended June 30, 2019, from $128,604 for the same period ended 2018. Our payroll expenses for the three months ended June 30, 2019 and 2018 consisted mainly of salary and wages expense and employee stock-based compensation.

General and administrative fees increased to $222,167 for the three months ended June 30, 2019, from $58,541 for the same period ended 2018. Our general and administrative expenses for the three months ended June 30, 2019 and 2018 consisted mainly of travel expenses, rent expenses, insurance expenses, dues and subscriptions and office expense.

Product development expense increased to $344,871 for the three months ended June 30, 2019, from $329,274 for the same period ended 2018. Our product development expenses for the three months ended June 30, 2019 and 2018 consisted mainly of amortization of capitalized software.

Depreciation and amortization expense increased to $618,130 for the three months ended June 30, 2019, from $209,963 for the same period ended 2018.

We expect that our operating expenses will increase in future quarters as we further implement our business plan. As we execute on customer contracts we may be required to hire and compensate additional personnel and support increased operational costs.

Other Expenses

Other expenses decreased to $1,495,213 for the three months ended June 30, 2019, from $5,098,908 for the same period ended June 30, 2018. Our other expenses for the three months ended June 30, 2019 consisted mainly of interest expense of $1,495,213. Our other expenses for the three months ended June 30, 2018 consisted of interest expense of $368,690, loss on derivative liability of $4,689,126 and loss on settlement of debt of 41,092.

Net Loss

We recorded a net loss of $3,971,911 for the three months ended June 30, 2019, as compared with a net loss of $6,153,847 for the same period ended June 30, 2018.

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Results of operations for the nine months ended June 30, 2019 and 2018

Revenues

We earned revenues of $2,209,542 during the nine months ended June 30, 2019, as compared with $466,931 in revenues for the same period ended 2018.

Gross Profit

Our cost of revenues was $1,821,488 for the nine months ended June 30, 2019, resulting in gross profit of $388,054, as compared with cost of revenues of $372,145 for the nine months ended June 30, 2018, resulting in gross profit of $94,786.

Our cost of revenues for the nine months ended June 30, 2019 was mainly the result of materials, manufacturing, subcontractors and direct labor expense.

Material expenses decreased to $125,782 for the nine months ended June 30, 2019, from $269,819 for the same period ended 2018. Our materials expense for the nine months ended June 30, 2019 and 2018 consisted mainly of the cost of solar panels and energy storage and related components installed at customer microgrids.

Manufacturing expenses increased to $1,215,993 for the nine months ended June 30, 2019, from $0 for the same period ended 2018. Our manufacturing expense for the nine months ended June 30, 2019 consisted mainly of the cost of contract manufacturing for our switchgear products.

Direct labor increased to $83,327 for the nine months ended June 30, 2019, from $21,916 for the same period ended 2018. Our direct labor expenses for the nine months ended June 30, 2019 and 2018 consisted mainly of allocated payroll costs of employees and consultants.

Subcontractor expenses increased to $389,009 for the nine months ended June 30, 2019, from $79,517 for the same period ended 2018. Our subcontractor expenses for the nine months ended June 30, 2019 and 2018 consisted mainly of fees charged by subcontractors for installation of solar panels and energy storage.

Operating Expenses

We had operating expenses of $7,192,344 for the nine months ended June 30, 2019, as compared with $3,216,863 for the nine months ended June 30, 2018.

Professional fees increased to $3,719,269 for the nine months ended June 30, 2019, from $851,755 for the same period ended June 30, 2018. Our professional fees expenses for the nine months ended June 30, 2019 consisted mainly of officers and directors’ consulting fees of $472,989, consulting fees of $848,489, and accounting, audit and review fees of $95,349 and stock-based compensation of $1,540,503. Our professional fees expenses for the nine months ended June 30, 2018 consisted mainly of officers’ consulting fees of $270,000, consulting fees of $169,275, and audit and review fees of $37,115 and stock-based compensation of $375,365. Professional fees increased in 2019 mainly as a result of increased stock-based compensation and other consulting related to increased business development efforts and audit and legal fees in connection with our SEC reporting obligations.

Payroll expenses increased to $684,650 for the nine months ended June 30, 2019, from $494,577 for the same period ended 2018. Our payroll expenses for the nine months ended June 30, 2019 consisted mainly of salary and wages expense of $508,400 and employee stock-based compensation of $176,250. Our payroll expenses for the nine months ended June 30, 2018 consisted mainly of salary and wages expense of $458,503 and employee stock-based compensation of $36,074.

General and administrative fees increased to $478,564 for the nine months ended June 30, 2019, from $199,049 for the same period ended 2018. Our general and administrative expenses for the nine months ended June 30, 2019 consisted mainly of travel expenses of $60,028, rent expenses of $52,378, insurance expenses of $79,939, dues and subscriptions of $136 092 and office expense of $30,116. Our general and administrative expenses for the nine months ended June 30, 2018 consisted mainly of travel expenses rent expenses, insurance expenses, dues and subscriptions and office expenses.

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Product development expense increased to $1,034,612 for the nine months ended June 30, 2019, from $1,031,936 for the same period ended 2018. Our product development expenses for the nine months ended June 30, 2019 and 2018 consisted mainly of amortization of capitalized software.

Depreciation and amortization expense increased to $1,275,249 for the nine months ended June 30, 2019, from $632,705 for the same period ended 2018.

We expect that our operating expenses will increase in future quarters as we further implement our business plan. As we execute on customer contracts we may be required to hire and compensate additional personnel and support increased operational costs.

Other Expenses

Other expenses increased to 7,215,712 for the nine months ended June 30, 2019, from $5,417,210 for the same period ended June 30, 2018. Our other expenses for the nine months ended June 30, 2019 consisted mainly of loss on settlement of debts of $19,425, and interest expense of $7,196,287. Our other expenses for the nine months ended June 30, 2018 consisted of interest expense of $418,109, loss on derivative liability of $4,958,009 and loss on settlement of debts of $41,092.

Net Loss

We recorded a net loss of $14,020,002 for the nine months ended June 30, 2019, as compared with a net loss of $8,539,287 for the same period ended June 30, 2018.

Liquidity and Capital Resources

As of June 30, 2019, we had total current assets of $11,475,203, consisting of cash, accounts receivable, and prepaid expenses and other current assets, and total assets in the amount of $32,912,161. Our total current and total liabilities as of June 30, 2019 were $1,373,889 and $2,881,181, respectively. We had working capital of $10,101,314 as of June 30, 2019.

Operating activities used $5,792,028 in cash for the nine months ended June 30, 2019, as compared with $901,141 for the same period ended June 30, 2018. Our net loss of $14,020,002 was the main component of our negative operating cash flow for the nine months ended June 30, 2019, offset mainly by loss on settlement of debt of $19,425, depreciation and amortization of $1,275,249, amortization of capitalized software of $1,034,612, amortization of debt discounts of $5,674,800, shares issued as interest of 1,225,000 and stock-based compensation of $1,716,753. Our net loss of $8,539,287 was the main component of our negative operating cash flow for the nine months ended June 30, 2018, offset mainly by depreciation and amortization of $632,705, amortization of capitalized software of $1,030,823, loss on derivative liability of $4,958,009 and stock based compensation of $375,365.

Cash flows used by investing activities during the nine months ended June 30, 2019 was $598,763, as compared with $290,779 for the same period ended June 30, 2018. Our investment in the capitalized software of $569,043 and purchase of fixed assets of $27,570 were the main components of our negative investing cash flow for the nine months ended June 30, 2019. Our investment in the capitalized software of $270,618, investment in intangible assets of $5,964 and purchase of fixed assets of $14,197 was the main component of our negative investing cash flow for the nine months ended June 30, 2018.

Cash flows provided by financing activities during the nine months ended June 30, 2019 amounted to $13,994,092, as compared with $1,152,273 for the nine months ended June 30, 2018. Our positive cash flows from financing activities for the nine months ended June 30, 2019 consisted of $361,800 in proceeds from the sale of common stock, $14,995,000 in net proceeds from convertible notes and $75,030 from related party debts off-set by repayments of $507,876 on promissory notes, repayments of $555,000 on convertible debts and repayments of $457,820 on related party debts. Our positive cash flows from financing activities for the nine months ended June 30, 2018 consisted mainly of proceeds from the sale of common stock of $251,900, short term notes of $587,989, $184,250 in net proceeds from convertible notes, and $219,660 from related party debts, offset by repayments of $65,574 on promissory notes and repayments of $60,000 on related party debts.

Off Balance Sheet Arrangements

As of June 30, 2019, there were no off-balance sheet arrangements.

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Recently Issued Accounting Pronouncements

In June 2018, the FASB issued ASU 2018-07, "Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting," which modifies the accounting for share-based payment awards issued to nonemployees to largely align it with the accounting for share-based payment awards issued to employees. ASU 2018-07 is effective for us for annual periods beginning October 1, 2019. We are evaluating the potential impact to our financial position or results of operations.

In August 2018, the FASB issued ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which allows for the capitalization of certain implementation costs incurred in a hosting arrangement that is a service contract. ASU 2018-15 allows for either retrospective adoption or prospective adoption to all implementation costs incurred after the date of adoption. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.

In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASC 842”). The guidance requires lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. Existing sale-leaseback guidance, including guidance for real estate, is replaced with a new model applicable to both lessees and lessors. ASC 842 is effective for fiscal years beginning after December 15, 2018. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.

The Company has evaluated all other recent accounting pronouncements, and believes that none of them will have a material effect on the Company's financial position, results of operations or cash flows.

Critical Accounting Policies

In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Our accounting policies are discussed in detail in the footnotes to our financial statements included in this Annual Report on Form 10-K for the year ended September 30, 2018, however we consider our critical accounting policies to be those related to revenue recognition, long-lived assets, accounts receivable, fair value of financial instruments, cash and cash equivalents, accounts receivable, warranty liability and stock-based compensation.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

A smaller reporting company is not required to provide the information required by this Item.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2019. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2019, our disclosure controls and procedures were not effective due to the presence of material weaknesses in internal control over financial reporting.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following material weaknesses which have caused management to conclude that, as of June 30, 2019, our disclosure controls and procedures were not effective: insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and SEC guidelines.

Remediation Plan to Address the Material Weaknesses in Internal Control over Financial Reporting

Our company plans to take steps to enhance and improve the design of our internal controls over financial reporting. During the period covered by this quarterly report on Form 10-Q, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we plan to implement the following changes during our fiscal year ending September 30, 2019: adopt sufficient written policies and procedures for accounting and financial reporting.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the nine months ended June 30, 2019 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are not a party to any pending legal proceeding which would have a material impact to the Company. We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us.

Item 1A. Risk Factors

A description of the risk factors associated with our business is included in the Item 1A of our Annual Report on Form 10-K for the year ended September 30, 2018, as updated by our subsequent filings under the Exchange Act. There have been no material changes to such risk factors as previously reported. In evaluating our business, you should carefully consider the risk factors discussed in our Annual Report on Form 10-K, as updated by our subsequent filings under the Exchange Act. The occurrence of any of the risks discussed in such filings, or other events that we do not currently anticipate or that we currently deem immaterial, could harm our business, prospects, financial condition and results of operations. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The information set forth below relates to our issuances of securities without registration under the Securities Act of 1933 during the reporting period which were not previously included in an Annual Report on Form 10-K, Quarterly Report on Form 10-Q or Current Report on Form 8-K.

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.

On June 12, 2019, the Company entered into an agreement with SylvaCap Media for investor relations services. Under this agreement the Company agreed to issue 250,000 shares of the Company’s common stock as compensation for services for a six-month period plus additional cash compensation.

During the period commencing July 1, 2019 through August 14, 2019, the Company issued 60,000 shares of the Company’s $0.001 par value common stock to Regal Consulting, LLC for investor relations services.

During the period commencing July 1, 2019 through August 14, 2019, the Company issued 11,641 options to purchase shares of common stock to employees, the options were granted at quoted market prices ranging from $1.23 to $1.90.

These securities were issued pursuant to Section 4(a)(2) of the Securities Act and/or Rule 506 promulgated thereunder. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The investors were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising. We directed our transfer agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibit Number	Description of Exhibit
31.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101 INS	XBRL Instance Document
101 SCH	XBRL Schema Document
101 CAL	XBRL Calculation Linkbase Document
101 LAB	XBRL Labels Linkbase Document
101 PRE	XBRL Presentation Linkbase Document
101 DEF	XBRL Definition Linkbase Document
*	These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the Registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 14, 2019	By: /s/ S. Matthew Schultz S. Matthew Schultz Title:    Chief Executive Officer (Principal Executive Officer)
Date: August 14, 2019
	By: /s/Zachary K. Bradford Zachary K. Bradford Title:    Chief Financial Officer (Principal Financial and Accounting Officer)

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