UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the quarterly period ended | |
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the transition period from __________ to __________ | |
Commission File Number: |
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
|
(Address of principal executive offices) |
(Registrant’s telephone number, including area code) |
N/A |
(Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
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
☒
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 | ☒ |
☐ Non-accelerated filer | |
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 ☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
shares as of July 30, 2020.
1 |
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 | 11 |
Item 4: | Controls and Procedures | 11 |
PART II – OTHER INFORMATION
| ||
Item 1: | Legal Proceedings | 12 |
Item 1A: | Risk Factors | 12 |
Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds | 12 |
Item 3: | Defaults Upon Senior Securities | 12 |
Item 4: | Mine Safety Disclosures | 13 |
Item 5: | Other Information | 13 |
Item 6: | Exhibits | 13 |
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, 2020 (unaudited) and September 30, 2019; |
F-2 | Consolidated Statements of Operations for the three and nine months ended June 30, 2020 and 2019 (unaudited); |
F-3 | Consolidated Statements of Stockholders’ Equity for the nine months ended June 30, 2020 and 2019 (unaudited); |
F-4 | Consolidated Statements of Cash Flows for the nine months ended June 30, 2020 and 2019 (unaudited); |
F-5 | Notes to Consolidated Financial Statements (unaudited). |
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, 2020 are not necessarily indicative of the results that can be expected for the full year.
3 |
CLEANSPARK, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, 2020 | September 30, 2019 | ||||||
ASSETS | |||||||
Current assets | |||||||
Cash | $ | $ | |||||
Accounts receivable, net | |||||||
Contract assets | |||||||
Prepaid expense and other current assets | |||||||
Derivative investment asset | |||||||
Investment equity security | |||||||
Investment debt security, AFS, at fair value | |||||||
Total current assets | |||||||
Fixed assets, net | |||||||
Operating lease right of use asset | |||||||
Capitalized software, net | |||||||
Intangible assets, net | |||||||
Goodwill | |||||||
Total assets | $ | $ | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Current liabilities | |||||||
Accounts payable and accrued liabilities | $ | $ | |||||
Contract liabilities | |||||||
Lease liability | |||||||
Due to related parties | |||||||
Loans payable, net of unamortized discounts | |||||||
Total current liabilities | |||||||
Long- term liabilities | |||||||
Convertible notes, net of unamortized discounts | |||||||
Loans payable | |||||||
Total liabilities | |||||||
Stockholders' equity | |||||||
Common stock; $ | par value; shares authorized; and shares issued and outstanding as of June 30, 2020 and September 30, 2019, respectively|||||||
Preferred stock; $ | par value; shares authorized; Series A shares; authorized; and issued and outstanding as of June 30, 2020 and September 30, 2019, respectively|||||||
Additional paid-in capital | |||||||
Accumulated deficit | ( | ) | ( | ||||
Total stockholders' equity | |||||||
Total liabilities and stockholders' equity | $ | $ |
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, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | ||||||||||||
Revenues, net | |||||||||||||||
Sale of goods revenues | $ | $ | $ | $ | |||||||||||
Service, software and related revenues | |||||||||||||||
Total revenues, net | |||||||||||||||
Cost of revenues | |||||||||||||||
Cost of goods sold | |||||||||||||||
Cost of services | |||||||||||||||
Total cost of revenues | |||||||||||||||
Gross profit | |||||||||||||||
Operating expenses | |||||||||||||||
Professional fees | |||||||||||||||
Payroll expenses | |||||||||||||||
Product development | |||||||||||||||
General and administrative expenses | |||||||||||||||
Depreciation and amortization | |||||||||||||||
Total operating expenses | |||||||||||||||
Loss from operations | ( | ) | ( | ) | ( | ) | ( | ||||||||
Other income (expense) | |||||||||||||||
Other income | |||||||||||||||
Loss on settlement of debt | ( | ||||||||||||||
Unrealized gain/(loss) on equity security | ( | ) | |||||||||||||
Unrealized gain on derivative asset | |||||||||||||||
Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ||||||||
Total other income (expense) | ( | ) | ( | ) | ( | ) | ( | ||||||||
Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ||||
Loss per common share - basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ||||
Weighted average common shares outstanding - basic and diluted |
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, 2020 | |||||||||||||||||||||||||||
Preferred Stock | Common Stock | ||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Equity | |||||||||||||||||||||
Balance, September 30, 2019 | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
Shares issued for services | |||||||||||||||||||||||||||
Options and warrants issued for services | |||||||||||||||||||||||||||
Shares issued upon conversion of debt and accrued interest | ( | ) | |||||||||||||||||||||||||
Rounding shares issued for stock split | ( | ) | |||||||||||||||||||||||||
Net loss | ( | ) | ( | ||||||||||||||||||||||||
Balance, December 31, 2019 | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
Shares returned and cancelled | ( | ) | ( | ) | |||||||||||||||||||||||
Options issued for business acquisition | |||||||||||||||||||||||||||
Options and warrants issued for services | |||||||||||||||||||||||||||
Shares issued for business acquisition | |||||||||||||||||||||||||||
Shares issued upon conversion of debt and accrued interest | ( | ) | |||||||||||||||||||||||||
Net loss | ( | ) | ( | ||||||||||||||||||||||||
Balance, March 31, 2020 | ( | ) | |||||||||||||||||||||||||
Shares issued for services | |||||||||||||||||||||||||||
Options and warrants issued for services | |||||||||||||||||||||||||||
Shares issued upon conversion of debt and accrued interest | |||||||||||||||||||||||||||
Net loss | ( | ) | ( | ||||||||||||||||||||||||
Balance, June 30, 2020 | ( | ) |
For the Nine Months Ended June 30, 2019 | |||||||||||||||||||||||||||
Preferred Stock | Common Stock | ||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Equity | |||||||||||||||||||||
Balance, September 30, 2018 | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
Shares issued for services | |||||||||||||||||||||||||||
Options and warrants issued for services | |||||||||||||||||||||||||||
Shares issued upon exercise of warrants | |||||||||||||||||||||||||||
Beneficial conversion feature and shares and warrants issued with convertible debt | |||||||||||||||||||||||||||
Shares issued for direct investment | |||||||||||||||||||||||||||
Shares issued for settlement of debt | |||||||||||||||||||||||||||
Commitment shares returned and cancelled | ( | ) | ( | ) | |||||||||||||||||||||||
Net loss | ( | ) | ( | ||||||||||||||||||||||||
Balance, December 31, 2018 | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
Shares issued for services | |||||||||||||||||||||||||||
Options and warrants issued for services | |||||||||||||||||||||||||||
Shares issued upon exercise of warrants | ( | ) | |||||||||||||||||||||||||
Shares issued upon conversion of debt | |||||||||||||||||||||||||||
Shares and warrants issued under asset purchase agreement | |||||||||||||||||||||||||||
Commitment shares returned and cancelled | ( | ) | ( | ) | |||||||||||||||||||||||
Net loss | ( | ) | ( | ||||||||||||||||||||||||
Balance, March 31, 2019 | $ | ( | ) | $ | |||||||||||||||||||||||
Shares issued for services | |||||||||||||||||||||||||||
Options and warrants issued for services | |||||||||||||||||||||||||||
Shares issued upon exercise of warrants | |||||||||||||||||||||||||||
Beneficial conversion feature and shares and warrants issued with convertible debt | |||||||||||||||||||||||||||
Net loss | ( | ) | ( | ||||||||||||||||||||||||
Balance, June 30, 2019 | $ | ( | ) | $ |
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, 2020 | June 30, 2019 | ||||||
Cash Flows from Operating Activities | |||||||
Net loss | ( | ) | $ | ( | |||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Stock based compensation | |||||||
Unrealized gain on equity security | ( | ) | |||||
Amortization of operating lease right of use asset | |||||||
Depreciation and amortization | |||||||
Amortization of capitalized software | |||||||
Loss on settlement of debt | |||||||
Provision for bad debts | |||||||
Gain on derivative asset | ( | ) | |||||
Amortization of debt discount | |||||||
Changes in operating assets and liabilities | |||||||
(Increase) decrease in prepaid expenses and other current assets | ( | ||||||
Increase in contract assets | |||||||
Increase (decrease) in contract liabilities, net | ( | ) | |||||
Increase in accounts receivable | ( | ) | ( | ||||
Increase in accounts payable | |||||||
Decrease in lease liability | ( | ) | |||||
Decrease in due to related parties | ( | ) | ( | ||||
Net cash used in operating activities | ( | ) | ( | ||||
Cash Flows from Investing Activities | |||||||
Purchase of intangible assets | ( | ||||||
Purchase of fixed assets | ( | ) | ( | ||||
Acquisition of p2kLabs | ( | ) | |||||
Investment in capitalized software | ( | ) | ( | ||||
Investment in debt and equity securities | ( | ) | |||||
Investment in contractual joint venture | ( | ) | |||||
Net cash used in investing activities | ( | ) | ( | ||||
Cash Flows from Financing Activities | |||||||
Payments on promissory notes | ( | ) | ( | ||||
Proceeds from promissory notes | |||||||
Proceeds from related party debts | |||||||
Payments on related party debts | ( | ||||||
Proceeds from convertible debt, net of issuance costs | |||||||
Payments on convertible debts | ( | ||||||
Proceeds from exercise of warrants | |||||||
Proceeds from issuance of common stock | |||||||
Net cash provided by financing activities | |||||||
Net increase (decrease) in Cash | ( | ) | |||||
Cash, beginning of period | |||||||
Cash, end of period | $ | $ | |||||
Supplemental disclosure of cash flow information | |||||||
Cash paid for interest | $ | $ | |||||
Cash paid for tax | $ | $ | |||||
Non-cash investing and financing transactions | |||||||
Day one recognition of right of use asset and liability | $ | $ | |||||
Shares and options issued for business acquisition | $ | $ | |||||
Shares issued as collateral returned to treasury | $ | $ | |||||
Stock issued to promissory notes | $ | $ | |||||
Debt discount on convertible debt | $ | $ | |||||
Shares and warrants issued for asset acquisition | $ | $ | |||||
Shares issued for conversion of debt and accrued interest | $ | $ | |||||
Cashless exercise of options | $ | $ | |||||
Option expense capitalized as software development costs | $ | $ |
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 & History
CleanSpark,
Inc. (“CleanSpark”, “we”, “our”, the "Company") was incorporated in the State of
Nevada on
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 $
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 and Plan of Merger with Pioneer Critical Power, Inc. (“Pioneer”),
whereby the Company acquired certain intellectual property assets and a customer list. As consideration, the Company issued
to Pioneer’s sole shareholder (i)
warrant to purchase
On December 10, 2019, the Financial Industry Regulatory Authority (“FINRA”) approved a reverse stock split of the Company’s common stock. The reverse stock split took effect on December 11, 2019. Unless otherwise noted, impacted amounts and share information in this report and included in the financial statements and notes thereto as of and for the period ended June 30, 2020 and September 30, 2019, have been adjusted for the stock split as if such stock split occurred on the first day of the first period presented.
On January 31, 2020, the
Company entered into a Stock Purchase Agreement (the “Agreement”) with p2klabs, Inc., a Nevada corporation (“p2k”),
and its sole stockholder, Amer Tadayon (“Seller”), whereby the Company purchased all of the issued and outstanding
shares of p2k from the Seller (the “Transaction”) in exchange for an aggregate purchase price of cash and equity of
$
Line of Business
Through CleanSpark, LLC, the Company provides microgrid solutions to military, commercial, and residential properties.
The services offered consist of microgrid design and engineering, and project development consulting services. The work is generally performed under fixed price bid contracts and negotiated price contracts.
Through CleanSpark Critical Power Systems, Inc., the Company provides custom hardware solutions for distributed energy systems that serve military and commercial residential properties. The equipment is generally sold under negotiated fixed price contracts.
Through p2kLabs, Inc., the Company provides design, software development, and other technology-based consulting services. The services provided are generally an hourly arrangement or fixed-fee project-based arrangements.
F-5 |
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 $
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of CleanSpark, Inc., and its wholly owned operating subsidiaries, CleanSpark, LLC, CleanSpark II LLC, CleanSpark Critical Power Systems Inc. and p2kLabs, Inc. All material intercompany transactions have been eliminated upon consolidation of these entities.
Use of estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review the Company’s goodwill impairment, impairments and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible accounts, and the valuations of non-cash capital stock issuances. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions including, but not limited to, the ultimate impact that COVID-19 may have on the Company’s operations and financial results during 2020 as such impact will depend on the ultimate severity and scope of the COVID-19 pandemic. We are not able to fully quantify the impact that the COVID-19 pandemic will have on our financial results during 2020 and beyond, but developments related to COVID-19 could affect the Company’s financial performance in 2020.
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 Annual Report on Form 10-K for the year ended September 30, 2019. The revised accounting policy on revenue recognition is provided below. The Company accounts for revenue contracts with customers through the following steps:
• | Identification of the contract, or contracts, with a customer |
• | Identification of the performance obligations in the contract |
• | Determination of the transaction price |
• | Allocation of the transaction price to the performance obligations in the contract |
• | Recognition of revenue when, or as, the Company satisfies a performance obligation |
F-6 |
Engineering, Service & Installation or Construction Contracts
The Company recognizes engineering and construction contract revenue over time, as performance obligations are satisfied, due to the continuous transfer of control to the customer. Engineering and construction contracts are generally accounted for as a single unit of account (a single performance obligation) and are not segmented between types of services. The Company recognizes revenue based primarily on contract cost incurred to date compared to total estimated contract cost (an input method). The input method is the most faithful depiction of the Company’s performance because it directly measures the value of the services transferred to the customer. Customer-furnished materials, labor and equipment and, in certain cases, subcontractor materials, labor and equipment, are included in revenue and cost of revenue when management believes that the company is acting as a principal rather than as an agent (i.e., the company integrates the materials, labor and equipment into the deliverables promised to the customer). Customer-furnished materials are only included in revenue and cost when the contract includes construction activity and the Company has visibility into the amount the customer is paying for the materials or there is a reasonable basis for estimating the amount. The Company recognizes revenue, but not profit, on certain uninstalled materials that are not specifically produced, fabricated, or constructed for a project. Revenue on these uninstalled materials is recognized when the cost is incurred (when control is transferred). Changes to total estimated contract cost or losses, if any, are recognized in the period in which they are determined as assessed at the contract level. Pre-contract costs are expensed as incurred unless they are expected to be recovered from the client. Project mobilization costs are generally charged to project costs as incurred when they are an integrated part of the performance obligation being transferred to the client. Customer payments on engineering and construction contracts are typically due within 30 to 45 days of billing, depending on the contract.
For service contracts (including maintenance contracts) in which the Company has the right to consideration from the customer in an amount that corresponds directly with the value to the customer of the Company’s performance completed to date, revenue is recognized when services are performed and contractually billable. Service contracts that include multiple performance obligations are segmented between types of services. For contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation using an estimate of the stand-alone selling price of each distinct service in the contract. Revenue recognized on service contracts that have not been billed to clients is classified as a current asset under contract assets on the Consolidated Balance Sheets. Amounts billed to clients in excess of revenue recognized on service contracts to date are classified as a current liability under contract liabilities. Customer payments on service contracts are typically due within 30 days of billing, depending on the contract.
Revenues from Sale of Equipment
Performance Obligations Satisfied at a point in time.
We recognize revenue on agreements for non-customized equipment we sell on a standardized basis to the market at a point in time. We recognize revenue at the point in time that the customer obtains control of the good, which is generally upon shipment or when the customer has physical possession of the product depending on contract terms. We use proof of delivery for certain large equipment with more complex logistics, whereas the delivery of other equipment is estimated based on historical averages of in-transit periods (i.e., time between shipment and delivery).
In situations where arrangements include customer acceptance provisions based on seller or customer-specified objective criteria, we recognize revenue when we have concluded that the customer has control of the goods and that acceptance is likely to occur. We generally do not provide for anticipated losses on point in time transactions prior to transferring control of the equipment to the customer.
Our billing terms for these point in time equipment contracts vary and generally coincide with shipment to the customer; however, within certain businesses, we receive progress payments from customers for large equipment purchases, which is generally to reserve production slots with our manufacturing partners, which are recorded as contract liabilities.
F-7 |
Service Performance obligations satisfied over time.
We enter into long-term product service agreements with our customers primarily within our microgrid segment. These agreements require us to provide preventative maintenance, and standby support services that include certain levels of assurance regarding system performance throughout the contract periods; these contracts will generally range from 1 to 10 years. We account for items that are integral to the maintenance of the equipment as part of our service-related performance obligation, unless the customer has a substantive right to make a separate purchasing decision (e.g., equipment upgrade). Contract modifications that extend or revise contract terms are not uncommon and generally result in our recognizing the impact of the revised terms prospectively over the remaining life of the modified contract (i.e., effectively like a new contract). Revenues are recognized for these arrangements on a straight-line basis consistent with the nature, timing and extent of our services, which primarily relate to routine maintenance and as needed product repairs. Our billing terms for these contracts vary, but we generally invoice periodically as services are provided.
Contract
assets represent revenue recognized in excess of amounts billed and include unbilled receivables (typically for cost
reimbursable contracts) of $
Revenues from software
The Company derives its revenue from subscription fees from customers for access to its mVSO platform. The Company’s policy is to exclude sales and other indirect taxes when measuring the transaction price of its subscription agreements.
The Company’s subscription agreements generally have monthly or annual contractual terms. Revenue is recognized ratably over the related contractual term beginning on the date that the platform is made available to a customer. Access to the platform represents a series of distinct services as the Company continually provides access to, and fulfills its obligation to the end customer over the subscription term. The series of distinct services represents a single performance obligation that is satisfied over time.
Revenues from design, software development and other technology-based consulting services
For service contracts performed under Master Services Agreements (“MSA”) and accompanying Statement(s) of Work (“SOW”), revenue is recognized based on the performance obligation(s) outlined in the SOW which is typically hours worked or specific deliverable milestones. In the case of a milestone-based SOW, the Company recognizes revenues as each deliverable is signed off by the customer.
Variable Consideration
The nature of the Company’s contracts gives rise to several types of variable consideration, including claims and unpriced change orders; awards and incentive fees; and liquidated damages and penalties. The Company recognizes revenue for variable consideration when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The Company estimates the amount of revenue to be recognized on variable consideration using the expected value (i.e., the sum of a probability-weighted amount) or the most likely amount method, whichever is expected to better predict the amount. Factors considered in determining whether revenue associated with claims (including change orders in dispute and unapproved change orders in regard to both scope and price) should be recognized include the following: (a) the contract or other evidence provides a legal basis for the claim, (b) additional costs were caused by circumstances that were unforeseen at the contract date and not the result of deficiencies in the company’s performance, (c) claim-related costs are identifiable and considered reasonable in view of the work performed, and (d) evidence supporting the claim is objective and verifiable. If the requirements for recognizing revenue for claims or unapproved change orders are met, revenue is recorded only when the costs associated with the claims or unapproved change orders have been incurred. Back charges to suppliers or subcontractors are recognized as a reduction of cost when it is determined that recovery of such cost is probable, and the amounts can be reliably estimated. Disputed back charges are recognized when the same requirements described above for claims accounting have been satisfied.
F-8 |
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, 2020 and 2019, the Company reported revenues of $
Cash and cash equivalents
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid
investments and short-term debt instruments with original maturities of three months or less to be cash equivalents. There was
$
Accounts receivable
Is comprised of uncollateralized customer obligations due under normal trade terms. The Company performs ongoing
credit evaluation of its customers and management closely monitors outstanding receivables based on factors surrounding the credit
risk of specific customers, historical trends, and other information. The carrying amount of accounts receivable is reviewed periodically
for collectability. If management determines that collection is unlikely, an allowance that reflects management’s best estimate
of the amounts that will not be collected is recorded. Accounts receivable are presented net of an allowance for doubtful accounts
of $
Retention receivable
is the amount withheld by a customer until a contract is completed. Retention receivables of $
Investment securities
Investment securities include debt securities and equity securities. Debt securities are classified as available for sale (“AFS”) and are reported as an asset in the Consolidated Balance Sheet at their estimated fair value. As the fair values of AFS debt securities change, the changes are reported net of income tax as an element of OCI, except for other-than-temporarily-impaired securities. When AFS debt securities are sold, the unrealized gains or losses are reclassified from OCI to non-interest income. Securities classified as AFS are securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as AFS would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, decline in credit quality, and regulatory capital considerations.
Interest income is recognized based on the coupon rate and increased by accretion of discounts earned or decreased by the amortization of premiums paid over the contractual life of the security.
F-9 |
For individual debt securities where the Company either intends to sell the security or more likely than not will not recover all of its amortized cost, the OTTI is recognized in earnings equal to the entire difference between the security's cost basis and its fair value at the balance sheet date. For individual debt securities for which a credit loss has been recognized in earnings, interest accruals and amortization and accretion of premiums and discounts are suspended when the credit loss is recognized. Interest received after accruals have been suspended is recognized in income on a cash basis.
The Company holds investments in both publicly held and privately held equity securities.
Privately held equity securities are recorded at cost and adjusted for observable transactions for same or similar investments of the issuer (referred to as the measurement alternative) or impairment. All gains and losses on privately held equity securities, realized or unrealized, are recorded through gains or losses on equity securities on the consolidated statement of operations.
Publicly held equity securities are based on fair value accounting with unrealized gains or losses resulting from changes in fair value reflected as unrealized gains or losses on equity securities in our consolidated statement of operations.
Concentration Risk
At times throughout
the year, the Company may maintain cash balances in certain bank accounts in excess of FDIC limits. As of June 30, 2020, the cash
balance in excess of the FDIC limits was $
Warranty Liability
The Company establishes warranty liability reserves to provide for estimated future expenses as a result
of installation and product defects, product recalls and litigation incidental to the Company’s business. Liability estimates
are determined based on management’s judgment, considering such factors as historical experience, the likely current cost
of corrective action, manufacturers’ and subcontractors’ participation in sharing the cost of corrective action, consultations
with third party experts such as engineers, and discussions with the Company’s general counsel and outside counsel retained
to handle specific product liability cases. The Company’s manufacturers and service providers currently provide substantial
warranties between ten to twenty-five years with full reimbursement to replace and install replacement parts. Warranty costs and
associated liabilities were $
The Company follows the guidelines in FASB Codification Topic ASC 718-10 “Compensation-Stock Compensation,” which requires companies to measure the cost of employee and non-employee services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period. The Company may issue compensatory shares for services including, but not limited to, executive, management, accounting, operations, corporate communication, financial and administrative consulting services.
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, 2020, there are shares issuable upon exercise of outstanding options and warrants which have been excluded as anti-dilutive.
Fair value of financial instruments and derivative asset
The carrying value of cash, accounts payable and accrued expenses, and
debt (See Notes 9 & 10) approximate their fair values because of the short-term nature of these instruments. Management believes
the Company is not exposed to significant interest or credit risks arising from these financial instruments. The carrying amount
of the Company’s long-term debt is also stated at fair value of $
F-10 |
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable.
• | Level 1 Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets. |
• | Level 2 Quoted prices for similar assets and liabilities in active markets; quoted prices included for identical or similar assets and liabilities that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. These are typically obtained from readily-available pricing sources for comparable instruments. |
• | Level 3 Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own beliefs about the assumptions that market participants would use in pricing the asset or liability, based on the best information available in the circumstances. |
The following table presents the Company’s financial instruments that are measured and recorded at fair value on the Company’s balance sheets on a recurring basis, and their level within the fair value hierarchy as of June 30, 2020:
Amount | Level 1 | Level 2 | Level 3 | ||||||||||||
Derivative asset | $ | $ | $ | $ | |||||||||||
Investment in equity security | $ | ||||||||||||||
Investment in debt security | |||||||||||||||
Total | $ | $ | $ | $ |
The below table presents the change in the fair value of the derivative asset and investment in debt security during the nine months ended June 30, 2020:
Amount | |||
Balance at September 30, 2019 | $ | ||
Fair value at issuance, net of premium | |||
Gain on derivative asset | |||
Balance at June 30, 2020 | $ |
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations or net assets of the Company.
Recently issued accounting pronouncements
In June 2018, the FASB issued ASU 2018-07, "Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting," which modifies the accounting for share-based payment awards issued to nonemployees to largely align it with the accounting for share-based payment awards issued to employees. ASU 2018-07 is effective for us for annual periods beginning October 1, 2019. The new standard did not have a material impact on the Company’s results of operations or cash flows.
In August 2018, the FASB issued ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which allows for the capitalization of certain implementation costs incurred in a hosting arrangement that is a service contract. ASU 2018-15 allows for either retrospective adoption or prospective adoption to all implementation costs incurred after the date of adoption. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.
F-11 |
In February 2016, the FASB issued guidance within ASU 2016-02, Leases. The amendments in ASU 2016-02 to Topic 842, Leases, require lessees to recognize the lease assets and lease liabilities arising from operating leases in the statement of financial position. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. The Company adopted the amendments to Topic 842 on October 1, 2019 using the modified retrospective approach. The Company elected the transition option issued under ASU 2018-11, Leases (Topic 842) Targeted Improvements, which allows entities to continue to apply the legacy guidance in ASC 840, Leases, to prior periods, including disclosure requirements. Accordingly, prior period financial results and disclosures have not been adjusted. The Company also elected to apply the package of practical expedients permitting entities to forgo reassessment of: 1) expired or existing contracts that may contain leases; 2) lease classification of expired or existing leases; and 3) initial direct costs for any existing leases. The Company has also elected to apply the short term lease measurement and recognition exemption to leases with an initial term of 12 months or less. The most significant impact of the new standard on the Company’s Consolidated Financial Statements was the recognition of a right of use asset and lease liability for operating leases for which the Company is the lessee. Upon adoption of this guidance, on October 1, 2019, the Company recorded a Right of use asset and corresponding lease liability of $85,280 and $85,280, respectively, on the Consolidated Balance Sheet. No cumulative effect adjustment to retained earnings resulted from adoption of this guidance. The new standard did not have a material impact on the Company’s results of operations or cash flows.
In January 2017, the FASB issued guidance within ASU 2017-04, Intangibles-Goodwill and Other. The amendments in ASU 2017-04 simplify the subsequent measurement of goodwill by comparing the fair value of a reporting unit with its carrying amount. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.
In June, 2016, the FASB issued guidance within ASU 2016-13, Financial Instruments – Credit Losses. The amendments in ASU 2016-13 require assets measured at amortized cost and establishes an allowance of credit losses for available for sale debt securities. ASU 2016-13 is effective for fiscal years beginning after December 15, 2020. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.
The Company has evaluated all other recent accounting pronouncements, and believes that none of them will have a material effect on the Company's financial position, results of operations or cash flows.
3. ACQUISITION OF P2KLABS, INC.
On January 31,
2020, the Company, entered into an Agreement with p2k, and its sole stockholder, Amer Tadayon, whereby the Company purchased all
of the issued and outstanding shares of p2k in exchange for an aggregate purchase price of cash and equity of $
As a result of the Transaction, p2k is a wholly-owned subsidiary of the Company.
Pursuant to the terms of the Agreement, the purchase price was as follows:
a) | $ | |
b) | restricted shares of the Company’s
common stock, valued at $ | |
c) | $ |
F-12 |
d) | $
The Shares and Holdback Shares were deemed to have a fair market value of per share which was the closing price of the Company’s common stock on January 31, 2020. | |
e) |
The Company accounted for the acquisition of p2k as an acquisition of a business under ASC 805.
The Company determined the fair value of the consideration given to the Seller in connection with the Transaction in accordance with ASC 820 was as follows:
Consideration: | Fair Value | ||
Cash | $ | ||
shares of common stock | $ | ||
$ | |||
Total Consideration | $ |
The total purchase price was allocated to identifiable assets deemed acquired, and liabilities assumed, of the Company’s acquisition of p2k, based on their estimated fair values as indicated below. The business combination accounting is not yet complete, and the amounts assigned to the assets acquired and the liabilities assumed are provisional. Therefore, this may result in future adjustments to the provisional amounts as new information is obtained about the facts and circumstances that existed at the acquisition date.
Purchase Price Allocation: | |||
Customer list | $ | ||
Design and other assets | $ | ||
Goodwill | $ | ||
Other assets and liabilities assumed, net | $ | ( | |
Total | $ |
The following is the unaudited pro forma information assuming the acquisition of p2k occurred on October 1, 2018:
For the Three Months Ended | For the Nine months ended | ||||||||||||||
June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | ||||||||||||
Net sales | $ | $ | $ | $ | |||||||||||
Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ||||
Loss per common share - basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ||||
Weighted average common shares outstanding - basic and diluted |
The unaudited pro forma consolidated financial results have been prepared for illustrative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the first day of the earliest period presented, or of future results of the consolidated entities. The unaudited pro forma consolidated financial information does not reflect any operating efficiencies and cost savings that may be realized from the integration of the acquisition. All transitions that would be considered inter-company transactions for proforma purposes have been eliminated.
F-13 |
4. INVESTMENT IN INTERNATIONAL LAND ALLIANCE
International Land Alliance, Inc.
On November 5, 2019, CleanSpark entered into a binding Memorandum of Understanding (the “MOU”) with International Land Alliance, Inc., a Wyoming corporation (“ILAL”), in order to lay a foundational framework where the Company will deploy its energy solutions products and services to ILAL, its energy projects, and its customers.
Pursuant to the terms of the MOU, the parties will work in good faith and pursue the following priorities over the next twelve (12) months:
1) | The Company will perform feasibility studies to outline the details and scope of developing microgrid energy solutions to support ILAL projects. |
2) | ILAL will (a) exclusively sell the Company’s products and services as part of ILAL’s power solution for its offering of off-grid properties, and (b) include the Company’s mPulse DER Energy Manager within the off-grid energy project bids; |
3) | The Company will provide on-site testing, training, and support services to ILAL’s projects and operations |
In connection with the MOU, and in order to support the power and energy needs of ILAL’s development and construction of certain projects, the Company entered into a Securities Purchase Agreement, dated as of November 6, 2019, with ILAL (the “ILAL SPA”).
Pursuant to
the terms of the ILAL SPA, ILAL sold, and the Company purchased shares
of Series B Preferred Stock (the “Preferred Stock”) of ILAL for an aggregate purchase price of US $
The Company believes that, pursuant to the terms and conditions of the ILAL SPA, at least two triggering events have occurred. Under this good faith belief, the Company believes that as a result of the occurrence of these triggering events, the Series B Preferred stock should be convertible at the Company’s option, and the interest and conversion rate should be adjusted by 10% for each such occurrence.
The Preferred Stock is recorded as an AFS debt security and is reported at its estimated fair value as of June 30, 2020. As of June 30, 2020, the Company has identified a derivative instrument in accordance with ASC Topic No. 815 due to the variable conversion feature upon certain triggering events that occurred during the period. Topic No. 815 requires the Company to account for the conversion feature on its balance sheet at fair value and account for changes in fair value as a derivative gain or loss.
The Black-Scholes model utilized the following inputs to value the derivative asset at the date in which the derivative asset was determined through June 30, 2020.
Fair value assumptions: | June 30, 2020 | ||
Risk free interest rate | |||
Expected term (months) | |||
Expected volatility | |||
Expected dividends |
In connection with the Stock Transaction, ILAL issued shares of its common stock to the Company as commitment shares. The commitment shares are recorded at , or per share, which was the quoted price of the shares on June 30, 2020.
F-14 |
5. CONTRACTUAL JOINT VENTURE
On April 6, 2020, the Company entered into a joint venture agreement with third party partners to procure, distribute, and supply Personal Protective Equipment (PPE) for hospitals and frontline medical personnel. The agreement is effective until December 31, 2020, unless otherwise extended by mutual consent.
The
Company contributed capital in the amount of $
The
resulting income is reported net of all other costs, and CleanSpark recognized $
On
July 7, 2020, the Company received its $
6. CAPITALIZED SOFTWARE
Capitalized software consists of the following as of June 30, 2020 and September 30, 2019:
June 30, 2020 | September 30, 2019 | ||||||
mVSO software | $ | $ | |||||
mPulse software | |||||||
Capitalized Software: | |||||||
Less: accumulated amortization | ( | ) | ( | ||||
Capitalized Software, net | $ | $ |
Capitalized
software amortization recorded as cost of revenues and product development expense for the nine months ended June 30, 2020 and
2019 was $
7. INTANGIBLE ASSETS
Intangible assets consist of the following as of June 30, 2020 and September 30, 2019:
June 30, 2020 | September 30, 2019 | ||||||
Patents | $ | $ | |||||
Websites | |||||||
Customer list and non-compete agreement | |||||||
Design assets | |||||||
Trademarks | |||||||
Trade secrets | |||||||
Intangible assets: | |||||||
Less: accumulated amortization | ( | ) | ( | ||||
Intangible assets, net | $ | $ |
Amortization
expense for the nine months ended June 30, 2020 and 2019 was $
F-15 |
8. FIXED ASSETS
Fixed assets consist of the following as of June 30, 2020 and September 30, 2019:
June 30, 2020 | September 30, 2019 | ||||||
Machinery and equipment | $ | $ | |||||
Leasehold improvements | |||||||
Furniture and fixtures | |||||||
Total | |||||||
Less: accumulated depreciation | ( | ) | ( | ||||
Fixed assets, net | $ | $ |
Depreciation
expense for the nine months ended June 30, 2020 and 2019 was $
9. LOANS
Long term
Long-term loans payable consist of the following: | June 30, 2020 | September 30, 2019 | |||||
Promissory notes | $ | $ | |||||
Total | $ | $ |
Current
Current loans payable consist of the following: | June 30, 2020 | September 30, 2019 | |||||
Promissory notes | $ | $ | |||||
Insurance financing loans | |||||||
Current loans payable: | |||||||
Unamortized debt discount | |||||||
Total, net of unamortized discount | $ | $ |
Promissory Notes
On September
5, 2017, the Company executed a
On November
11, 2017, the Company executed a
F-16 |
On December 5, 2017, the Company
executed a
May
7, 2020, the Company applied for a loan from Celtic Bank Corporation, as lender, pursuant to the Paycheck Protection Program
of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) as administered by the U.S. Small
Business Administration (the "SBA"). On May 15, 2020, the loan was approved and the Company received
the proceeds from the loan in the amount of $
All
or a portion of the PPP Loan may
be forgiven by the SBA and lender upon application by the Company and upon
documentation of expenditures in accordance with the SBA requirements.
Insurance financing loans
On February
11, 2019, the Company executed an unsecured 5.6% installment loan with a total face value of $
10. CONVERTIBLE NOTES PAYABLE
Short-Term convertible notes
Securities Purchase Agreement – December 31, 2018
On
December 31, 2018, the Company entered into a Securities Purchase Agreement (the “SPA”) with an otherwise unaffiliated
third-party institutional investor (the “Investor”), pursuant to which the Company issued to the Investor a Senior
Secured Redeemable Convertible Debenture (the “Debenture”) in the aggregate face value of $
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
F-17 |
Pursuant to the terms of
the SPA, the Investor agreed to tender to the Company the sum of $
On March 4, March 13, and May 1, 2020 the Company entered into amendments (the “Amendments”) with the Investor.
The Amendments amended the SPA and Debenture, as follows:
1) | A
Floor Price of $ | |
2) | Lowered the closing price of the Common Stock
which may trigger an event of default from $ |
3) | Deleted the requirement that the Investor convert the Debenture at maturity and |
4) | Allowed the Company, to not reserve or issue to the Investor more shares of Common Stock than were reserved for the Investor prior to the amendment date until September 29, 2020. |
On January 7, 2019, the Investor converted
$
On March 6, 2019, the Investor
converted $
On July 9, 2019, in accordance with
the terms of the agreement the Investor was issued an additional $
On July 16, 2019, in accordance with
the terms of the agreement the Investor was issued an additional $
On July 19, 2019, the Investor converted
$
F-18 |
On August 23, 2019, in accordance with
the terms of the agreement the Investor was issued an additional $
On September 16, 2019, in accordance
with the terms of the agreement the Investor was issued an additional $
On October 17, 2019, in accordance
with the terms of the agreement the Investor was issued an additional $
On December 5, 2019, in accordance
with the terms of the agreement the Investor was issued an additional $
On February 10, 2020, in accordance
with the terms of the agreement the Investor was issued an additional $
On February 21, 2020, in accordance
with the terms of the agreement the Investor was issued an additional
On March 2, 2020, in accordance with
the terms of the agreement the Investor was issued an additional $
On March 5, 2020, in accordance with
the terms of the agreement the Investor was issued an additional $
On March 13, 2020, in accordance with
the terms of the agreement the Investor was issued an additional $
On March 20, 2020, in accordance with
the terms of the agreement the Investor was issued an additional $
On April 15, 2020, the Investor converted
$
The
aggregate debt discount has been accreted and charged to interest expenses as a financing expense in the amount of $
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 $
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 $
F-19 |
The
Debenture has a maturity date of
On March 4, March 13, and May 1, 2020 the Company entered into amendments (the “Amendments”) with the Investor.
The Amendments amended the SPA and Debenture, as follows:
1) | A Floor Price of $ | |
2) | Lowered the closing price of the Common Stock
which may trigger an event of default from $ |
3) | Deleted the requirement that the Investor convert the Debenture at maturity and |
4) | Allowed the Company, to not reserve or issue to the Investor more shares of Common Stock than were reserved for the Investor prior to the amendment date until September 29, 2020. |
5) |
On
May 5, 2020, the Investor converted $
On May 6, 2020, the Investor converted
$
On May 7, 2020, the Investor converted
$
On May 8, 2020, the Investor converted
$
On May 11, 2020, the Investor converted
$
F-20 |
On May 12, 2020, the Investor converted
$
On May 13, 2020, the Investor converted
$
On May 18, 2020, the Investor converted
$
On May 19, 2020, the Investor converted
$
On May 20, 2020, the Investor converted
$
On May 21, 2020, the Investor converted
$
On May 22, 2020, the Investor converted
$
As of June 30, 2020, the Debenture was fully converted into shares of the Company’s common stock.
The
aggregate debt discount has been accreted and charged to interest expenses as a financing expense in the amount of $
11. LEASES
On October 1, 2019, the Company adopted the amendments to ASC 842, Leases, which requires lessees to recognize lease assets and liabilities arising from operating leases on the balance sheet. The Company adopted the new lease guidance using the modified retrospective approach and elected the transition option issued under ASU 2018-11, Leases (Topic 842) Targeted Improvements, allowing entities to continue to apply the legacy guidance in ASC 840, Leases, to prior periods, including disclosure requirements. Accordingly, prior period financial results and disclosures have not been adjusted.
The Company
has operating leases under which it leases its branch offices and corporate headquarters, one of which is with a related party.
Upon adoption of the new lease guidance, on October 1, 2019, the Company recorded a right of use asset and corresponding lease
liability of $
The
Company's leases have remaining lease terms between
F-21 |
The following is a schedule of the Company's operating lease liabilities by contractual maturity as of June 30, 2020:
Fiscal year ending September 30, 2020 | $ | ||
Fiscal year ending September 30, 2021 | |||
Total Lease Payments | |||
Less: imputed interest | ( | ||
Total present value of lease liabilities | $ |
Total operating
lease costs of $
12. RELATED PARTY TRANSACTIONS
Zachary Bradford – Chief Executive Officer, Director and Former Chief Financial Officer
During
the nine months ended June 30, 2019, the Company had a consulting agreement with ZRB Holdings, Inc., an entity wholly owned by
Zachary Bradford, our Chief Executive Officer and director, for management services. In accordance with this agreement, as amended,
Mr. Bradford earned $
During
the nine months ended June 30, 2020, the Company paid Blue Chip Accounting, LLC (“Blue Chip”) $
Bryan Huber – Former Officer and Director
On August
28, 2018, the Company executed an agreement with Zero Positive, LLC an entity controlled by Mr. Huber. In accordance with the
agreement with Zero Positive, LLC, Mr. Huber earned $
On
March 12, 2019, the Agreement was terminated upon the execution of a separation agreement. All amounts owed from all agreements
totaling $
On September
28, 2018, in connection with the consulting agreement executed with Zero Positive, LLC, the Company issued warrants to purchase
Matthew Schultz- Chairman of the Board and Former Chief Executive Officer
The
Company has a consulting agreement with Matthew Schultz, our former Chief Executive Officer, for management services. In accordance
with this agreement, as amended, Mr. Schultz earned $
The
Company additionally entered into an agreement on November 15, 2019 with an organization to provide general investor relations
and consulting services that Mr. Schultz is affiliated with. The Company paid the organization $
Larry McNeill, Roger Beynon, Dr. Tom Wood –Directors
Effective January
1, 2019, the Company agreed to pay non-executive independent board members $
F-22 |
13. STOCKHOLDERS EQUITY
Overview
The Company’s authorized capital stock consists of shares of common stock and shares of preferred stock, par value per share. As of June 30, 2020, there were shares of common stock issued and outstanding and shares of preferred stock issued and outstanding.
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 to . The amendment was previously approved by written consent of the Company’s Board and more than a majority of the voting power of its stockholders and delivered to stockholders of record as of the close of business July 2, 2019 pursuant to a Definitive Information Statement on Schedule 14C. As a result of the reverse split mentioned above, the effect of the filed amendment reduced the authorized shares to .
On October 4, 2019, pursuant to Article IV of our Articles of Incorporation, our Board of Directors voted to increase the number of shares of preferred stock designated as Series A Preferred Stock from one million ( ) shares to two million ( ) shares, par value .
The rights of the holders of Series A Preferred Stock are defined in the relevant Amendment to the Certificate of Designation filed with the Nevada Secretary of State on October 9, 2019.
Certificate of Preferred Stock Designation
On April 16, 2019, pursuant to Article IV of our Articles of Incorporation, the Company’s Board of Directors voted to designate a class of preferred stock entitled Series B Preferred Stock, consisting of up to one hundred thousand ( ) shares, par value . 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 |
F-23 |
§ | 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 $ | |
§ | 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 | |
§ | 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; | |
§ |
§ | 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 ( | |
▪ | At no time may the holders of Series B Preferred
Stock own more than |
On March 6, 2020, the Company withdrew the Certificate of Designation for the Series B Preferred Stock. At the time of withdrawal, no shares of Series B Preferred Stock were issued and outstanding.
Common Stock issuances during the nine months ended June 30, 2020
The Company issued
shares of common stock in accordance with the terms of the convertible debt agreement due to the decrease in stock price. (See Note 10 for additional details.)
The Company issued $
The Company issued
shares of common stock as a result of rounding related to the reverse stock split.
The Company issued
shares of common stock in relation to the acquisition of p2k (See note 3 for additional details.)
In relation to the Securities Purchase
Agreement dated December 31, 2018, the Company issued shares of common stock for the conversion of $
F-24 |
In
relation to the Securities Purchase Agreement dated April 17, 2019, the Company issued shares of common stock for
the conversion of $
The Company issued $
Common stock returned during the nine months ended June 30, 2020
As a result of a note payoff on December 5, 2019, shares common stock were returned to treasury and cancelled on January 13, 2020.
As a result of the cancellation of an investor relations services contract, shares were returned to treasury and cancelled on February 10, 2020.
Series A Preferred Stock issuances during the nine months ended June 30, 2020
On October
4, 2019, the Company authorized the issuance of a total of seven hundred and fifty thousand ($
Common Stock issuances during the nine months ended June 30, 2019
During
the period commencing October 1, 2018 through June 30, 2019, the Company received $
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
On
October 15, 2018, the Company entered into an agreement with a consultant for services. Under this agreement the Company
agreed to issue
On October
2, 2018, an investor exercised warrants to purchase
The Company issued shares in relation to a Securities purchase agreement executed on December 31, 2018. (See Note 10 for additional details.)
On
December 31, 2018, the Company settled $
On January
7, 2019, a total of
On
January 7, 2019, an investor converted $
On January 22, 2019, in accordance with a merger agreement, the Company issued shares of the Company’s common stock.
F-25 |
On February
26, 2019, a total of
On March
6, 2019, the investor converted $
On March
26, 2019, a total of
On April
9, 2019, an investor exercised warrants to purchase
The Company issued shares in relation to the Securities purchase agreement executed on April 17, 2019.
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
Common stock returned during the nine months ended June 30, 2019
As a result of a conversion of a note on September 21, 2018, shares common stock which were previously issued as a commitment fee were returned to treasury and cancelled on December 21, 2018.
As a result of a note payoff on January 3, 2019, shares of common stock which were previously issued as a commitment fee returned to treasury and cancelled on January 8, 2019.
14. STOCK WARRANTS
The following is a summary of stock warrant activity during the nine months ended June 30, 2020.
Number of Warrant Shares | Weighted Average Exercise Price | ||||||
Balance, September 30, 2019 | $ | ||||||
Warrants granted | $ | ||||||
Warrants expired | |||||||
Warrants cancelled | |||||||
Warrants exercised | |||||||
Balance, June 30, 2020 | $ |
As of June 30,
2020, the outstanding warrants have a weighted average remaining term of $
As of June 30,
2020, there are warrants exercisable to purchase shares of common stock in the Company and unvested
warrants outstanding that cannot be exercised until vesting conditions are met.
F-26 |
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
On December 31, 2018, in connection with a Securities purchase agreement (see Note 10 for additional details) the Company issued Common Stock Purchase Warrants to acquire up to shares of common stock for a term of three years on a cash-only basis at an exercise price of per share with respect to Warrant Shares, with respect to Warrant Shares, with respect to Warrant Shares and with respect to Warrant Shares.
On August
28, 2018, in connection with the Consulting agreement executed with Zero Positive, LLC the Company issued warrants to
purchase $
On
January 22, 2019, in accordance with a merger agreement, CleanSpark issued; a
On April 18,
2019, in connection with a Securities purchase agreement, the Company issued Common Stock Purchase Warrants to acquire up to
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 | - | |
Expected term (years) | - | |
Expected volatility | - % | |
Expected dividends |
On January 7,
2019, a total of
On February
26, 2019, a total of
On March 26,
2019, a total of
As of June 30, 2020, the Company expects to recognize of stock-based compensation for the non-vested outstanding warrants over a weighted-average period of .
F-27 |
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 shares were initially reserved for issuance under the Plan. As of June 30, 2020, there were 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, 2020.
Number of Option Shares | Weighted Average Exercise Price | ||||||
Balance, September 30, 2019 | $ | ||||||
Options granted | |||||||
Options expired | |||||||
Options cancelled | ( | ) | |||||
Options exercised | |||||||
Balance, June 30, 2020 | $ |
As of June 30, 2020, there are options exercisable to purchase shares of common stock in the Company. As of June 30, 2020, the outstanding options have a weighted average remaining term of was and an intrinsic value of .
F-28 |
Option activity for the nine months ended June 30, 2020
During the nine
months ended June 30, 2020, the Company issued $
The Black-Scholes model utilized the following inputs to value the options granted during the nine months ended June 30, 2020:
Fair value assumptions – Options: | June 30, 2020 | ||
Risk free interest rate | - | ||
Expected term (years) | - | ||
Expected volatility | - | ||
Expected dividends |
As of June 30, 2020, the Company expects to recognize of stock-based compensation for the non- vested outstanding options over a weighted-average period of .
Option activity for the nine months ended June 30, 2019
During the nine
months ended June 30, 2019, the Company issued $
On March 10, 2018 the Company issued a total of options to four consultants for advisory services. The options vest evenly from issuance. The options expire after issuance and require a cash investment to exercise. The options were valued at issuance using the Black Scholes model at and amortized of the term of the agreement. During the nine months ended June 30, 2019, was 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 | - | ||
Expected term (years) | |||
Expected volatility | - | ||
Expected dividends |
16. COMMITMENTS AND CONTINGENCIES
Office leases
Utah Corporate Office
On
November 22, 2019, the company entered into a lease to relocate the corporate office to 1185 South 1800 West, Suite 3, Woods Cross,
UT 84047. The agreement calls for the Company to make payments of $
San Diego Office
On May 15,
2018, the Company executed a
Fiscal year ending (three months remaining) September 30, 2020 | $ |
Fiscal year ending September 30, 2021 | $ |
Las Vegas Offices
On January 2,
2020, the Company entered into a sublease agreement for office space at 8475 S. Eastern Ave., Suite 200, Las Vegas, NV 89123.
The agreement calls for the Company to make monthly payments of $
The Company
assumed p2k’s lease agreement entered into on October 17, 2017 at 7955 W. Badura Ave., Suite 1040, Las Vegas, NV 89113.
The agreement calls for $
Legal contingencies
From time to time we may be subject to litigation. Risks associated with legal liability are difficult to assess and quantify, and their existence and magnitude can remain unknown for significant periods of time. We have acquired liability insurance to reduce such risk exposure to the Company. Despite the measures taken, such policies may not cover future litigation, or the damages claimed may exceed our coverage which could result in continent liabilities.
F-29 |
17. MAJOR CUSTOMERS AND VENDORS
For the nine months ended June 30, 2020 and 2019, the Company had the following customers that represented more than 10% of sales.
June 30, 2020 | June 30, 2019 | ||||||
Customer A | % | ||||||
Customer B | % | ||||||
Customer C | |||||||
Customer D |
For the nine months ended June 30, 2020 and 2019, the Company had the following suppliers that represented more than 10% of direct material costs. Internally developed product costs and labor for services rendered are excluded from the calculation.
June 30, 2020 | June 30, 2019 | ||||||
Vendor A | % |
18. SUBSEQUENT EVENTS
On July 7, 2020, the Company received
its $
On July 20, 2020, the Company sold
$
An investor has advised us that it considers the July 21, 2020 filing of the Form 8-K without that investor’s prior review to be a contractual breach. We believe the investor’s position is without merit given that the governing contract does not provide that investor any right to prior review of the Form 8-K. We intend to vigorously defend against any claims brought by the investor related to the filing of the Form 8-K. We are not in a position to estimate potential impact at this time.
F-30 |
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 and consulting 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 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 175,000 shares of our common stock, a 5-year warrant to purchase 50,000 shares of our common stock at an exercise price of $16.00 per share and a 5-year warrant to purchase 50,000 shares of our common stock at an exercise price of $20.00 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, 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.
Our acquisition of p2kLabs, Inc.
As CleanSpark continues to drive towards profitability and further market and sell CleanSpark software and controls, our acquisition of p2kLabs, Inc. not only contributes additional revenues, but also adds depth to our team in sales, marketing, design and software development.
We plan to maximize the value of our offering, internalize what would otherwise be expenses, and diversify our ability to better serve our valued clients.
As consideration for the transaction, we issued to its sole shareholder, Amer Tadayon, a total of 95,699 shares of our common stock and paid $1,155,000 in cash.
The parties also signed additional agreements in connection with the transaction, as previously disclosed in our SEC filings, mainly an employment agreement with Amer Tadayon. See note 3 for details.
Nasdaq Listing
On January 24, 2020, the Company was approved for listing on the Nasdaq Capital Market (“Nasdaq”).
Our Contractual Joint Venture
CleanSpark entered into an agreement with partners to procure, distribute and supply Personal Protective Equipment (PPE) for hospitals and frontline medical personnel. The agreement is effective until December 31, 2020, unless otherwise extended by mutual consent.
The Company contributed capital in the amount of $660,000 on April 6, 2020 to assist with the procurement of these products, with the potential for additional monies to be lent by the Company to the contractual joint venture, upon mutual consent if necessary.
Under the agreement, the Company will receive $0.20 per unit for each mask sold and a mutually agreeable amount for other types of PPE’s sold through the use of its funds. Such proceeds are distributed to the Company as soon as commercially reasonable after receipt from such customer or at the Company’s option reinvested for additional purchases.
5 |
CleanSpark recognized and received $20,000 in other income from this agreement for the period ended June 30, 2020. See note 5 for details.
On July 7, 2020, the Company received its $660,000 in initial capital from the JV. The Company plans to continue to evaluate opportunities under the JV and will continue to provide capital for the procurement of PPE under this agreement as future opportunities continue to arise.
Results of operations for the three months ended June 30, 2020 and 2019
Revenues
Revenues increased to $3,438,674 during the three months ended June 30, 2020, as compared with $1,222,736 in revenues for the same period ended 2019 primarily due to revenue from our switchgear products and mPulse sales.
Gross Profit
Our cost of revenues was $2,893,939 for the three months ended June 30, 2020, resulting in gross profit of $544,735, as compared with cost of revenues of $1,006,144 for the three months ended June 30, 2019, resulting in gross profit of $216,592.
Our cost of revenues for the three months ended June 30, 2020 was mainly the result of manufacturing, hardware, and service expenses.
Cost of goods sold increased to $2,751,964 for the three months ended June 30, 2020, from $914,220 for the same period ended 2019. Our product sale expense consisted mainly of the cost of contract manufacturing for our switchgear products and hardware costs.
Our cost of services increased to 141,975 for the three months ended June 30, 2020, from $91,924 for the same period ended 2019. Our service, software and related revenues expenses for the three months ended June 30, 2020, and 2019 consisted mainly of allocated payroll costs of employees and consultants and subcontractors for services rendered from our acquisition of p2k and installation of solar panels and energy storage.
Operating Expenses
We had operating expenses of $2,688,334 for the three months ended June 30, 2020, as compared with $2,693,290 for the three months ended June 30, 2019.
Professional fees decreased to $709,367 for the three months ended June 30, 2020, from $1,296,993 for the same period ended June 30, 2019. Our professional fees expenses for the three months ended June 30, 2020 consisted mainly of officers and directors’ consulting fees of $105,500, consulting fees of $434,236, and accounting, audit and review fees of $25,900 and stock-based compensation of $143,731. Our professional fees expenses for the three months ended June 30, 2019 consisted mainly of officers’ consulting fees of $375,500, consulting fees of $436,653, and audit and review fees of $11,000 and stock-based compensation of $431,721. Professional fees decreased in 2020 mainly as a result of decreased stock-based compensation and officers and directors’ consulting fees.
Payroll expenses increased to $996,555 for the three months ended June 30, 2020, from $211,129 for the same period ended 2019. Our payroll expenses for the three months ended June 30, 2020 consisted mainly of salary and wages expense of $967,355 and employee stock-based compensation of $29,200. Our payroll expenses for the three months ended June 30, 2019 consisted mainly of salary and wages expense of $209,879 and employee stock-based compensation of $1,250.
General and administrative fees increased to $279,045 for the three months ended June 30, 2020, from $222,167 for the same period ended 2019. Our general and administrative expenses for the three months ended June 30, 2020 consisted mainly of marketing expenses of $32,322, rent expenses of $34,445, insurance expenses of $65,833, dues and subscriptions of $61,675 and office expense of $6,267. Our general and administrative expenses for the three months ended June 30, 2019 consisted mainly of travel expenses of $32,994, rent expenses of $17,575, insurance expenses of $36,626, dues and subscriptions of $37,093 and office expense of $17,391.
6 |
Product development expense decreased to $0 for the three months ended June 30, 2020, from $344,871 for the same period ended 2019. Our product development expenses for the three months ended June 30, 2020 and 2019 consisted mainly of amortization of capitalized software.
Depreciation and amortization expense increased to $703,367 for the three months ended June 30, 2020, from $618,130 for the same period ended 2019.
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 income (expenses)
Other income/(expenses) increased to ($6,407,702) for the three months ended June 30, 2020, from ($1,495,213) for the same period ended June 30, 2019. Our other income/(expenses) for the three months ended June 30, 2020 consisted mainly of an unrealized loss on equity securities of ($80,500), derivative gain of $719,294 and interest expense of ($7,066,496). Our other expenses for the three months ended June 30, 2019 consisted of interest expense of ($1,495,213).
Net Loss
We recorded a net loss of $8,551,301 for the three months ended June 30, 2020, as compared with a net loss of $3,971,911 for the same period ended June 30, 2019.
Results of operations for the nine months ended June 30, 2020 and 2019
Revenues
Revenues increased to $8,073,781 during the nine months ended June 30, 2020, as compared with $2,209,542 in revenues for the same period ended 2019 primarily due to revenue from our switchgear products and mPulse sales.
Gross Profit
Our cost of revenues was $6,730,906 for the nine months ended June 30, 2020, resulting in gross profit of $1,342,875, as compared with cost of revenues of $1,821,488 for the nine months ended June 30, 2019, resulting in gross profit of $388,054.
Our cost of revenues for the nine months ended June 30, 2020 was mainly the result of product sale and service, software and related revenues expenses.
Cost of goods sold increased to $6,458,086 for the nine months ended June 30, 2020, from $1,245,102 for the same period ended 2019. Our product sale expense for the nine months ended June 30, 2020 consisted mainly of the cost of contract manufacturing for our switchgear products.
Cost of services decreased to $272,820 for the nine months ended June 30, 2020, from $576,386 for the same period ended 2019. Our service, software and related revenues expenses for the nine months ended June 30, 2020, and 2019 consisted mainly of allocated payroll costs of employees and consultants and subcontractors for services rendered from our acquisition of p2k and installation of solar panels and energy storage.
Operating Expenses
We had operating expenses of $8,749,987 for the nine months ended June 30, 2020, as compared with $7,192,344 for the nine months ended June 30, 2019.
7 |
Professional fees increased to $3,231,945 for the nine months ended June 30, 2020, from $3,719,269 for the same period ended June 30, 2019. Our professional fees expenses for the nine months ended June 30, 2020 consisted mainly of officers and directors’ consulting fees of $571,654, consulting fees of $1,233,008, legal fees of $332,020 and accounting, audit and review fees of $120,060 and stock-based compensation of $975,143. Our professional fees expenses for the nine months ended June 30, 2019 consisted mainly of officers’ consulting fees of $848,489, consulting fees of $1,071,107, legal fees of $146,682, and audit and review fees of $95,349 and stock-based compensation of $1,540,503. 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 $2,692,474 for the nine months ended June 30, 2020, from $684,650 for the same period ended 2019. Our payroll expenses for the nine months ended June 30, 2020 consisted mainly of salary and wages expense of $2,606,586 and employee stock-based compensation of $85,888. 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.
General and administrative fees increased to $820,837 for the nine months ended June 30, 2020, from $478,564 for the same period ended 2019. Our general and administrative expenses for the nine months ended June 30, 2020 consisted mainly of marketing expenses of $108,869, travel expenses of $80,648, rent expenses of $82,904, insurance expenses of $159,519, dues and subscriptions of $230,713 and office expense of $27,467. 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.
Product development expense decreased to $0 for the nine months ended June 30, 2020, from $1,034,612 for the same period ended 2019. Our product development expenses for the nine months ended June 30, 2020 and 2019 consisted mainly of amortization of capitalized software.
Depreciation and amortization expense increased to $2,004,731 for the nine months ended June 30, 2020, from $1,275,249 for the same period ended 2019.
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 income (Expenses)
Other income/(expenses) increased to ($8,875,541) for the nine months ended June 30, 2020, from ($7,215,712) for the same period ended June 30, 2019. Our other income/(expenses) for the nine months ended June 30, 2020 consisted mainly of an unrealized gain on equity securities of $78,368, derivative gain of $1,544,185 and interest expense of ($10,518,094). Our other expenses for the nine months ended June 30, 2019 consisted of interest expense of ($7,196,287), and loss on settlement of debt of (19,425).
Net Loss
We recorded a net loss of $16,282,653 for the nine months ended June 30, 2020, as compared with a net loss of $14,020,002 for the same period ended June 30, 2019.
Liquidity and Capital Resources
As of June 30, 2020, we had total current assets of $7,220,044, consisting of cash, accounts receivable, and prepaid expenses and other current assets, and total assets in the amount of $20,628,304. Our total current and total liabilities as of June 30, 2020 were $1,588,880 and $2,270,049, respectively. We had working capital of $5,631,164 as of June 30, 2020.
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Operating activities used $3,679,081 in cash for the nine months ended June 30, 2020, as compared with $5,792,028 for the same period ended June 30, 2019. Our net loss of $16,282,653 was the main component of our negative operating cash flow for the nine months ended June 30, 2020, offset mainly by unrealized gain on equity security of ($78,368), gain on derivative asset of ($1,544,185), depreciation and amortization of $2,004,731, amortization of capitalized software of $121,582, amortization of debt discounts of $9,022,759, accounts payable of $2,347,566, and stock-based compensation of $1,171,632. 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, stock based compensation of $1,716,753 and an increase in accounts payable of $1,653,821.
Cash flows used by investing activities during the nine months ended June 30, 2020 was $2,667,702, as compared with $598,763 for the same period ended June 30, 2019. Our acquisition of p2kLabs, Inc. of $1,141,990, investment in International Land Alliance and other equity securities of $750,000, investment in Contractual Joint Venture of $660,000, and purchase of fixed assets of $30,787 were the main components of our negative investing cash flow for the nine months ended June 30, 2020. 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.
Cash flows provided by financing activities during the nine months ended June 30, 2020 amounted to $463,702, as compared with $13,994,092 for the nine months ended June 30, 2019. Our cash flows from financing activities for the nine months ended June 30, 2020 consisted of repayments of ($67,467) on promissory note and proceeds from promissory notes of $531,169. 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 note, repayments of $555,000 on convertible debts and repayments of $457,820 on related party debts.
Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of our sales and marketing, the timing of new product introductions and the continuing market acceptance of our products and services.
Management believes that the Company has sufficient liquidity to satisfy its anticipated cash requirements for the next twelve months. However, there can be no assurance that our operations will become profitable or that external sources of financing, including the issuance of debt and/or equity securities, will be available at times and on terms acceptable to us, or at all. The Company’s management prepares budgets and monitors the financial results of the Company as a tool to align liquidity needs to the recurring business requirements.
We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise monies on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected.
Off Balance Sheet Arrangements
As of June 30, 2020, there were no off-balance sheet arrangements.
Recently Issued Accounting Pronouncements
In June 2018, the FASB issued ASU 2018-07, "Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting," which modifies the accounting for share-based payment awards issued to nonemployees to largely align it with the accounting for share-based payment awards issued to employees. ASU 2018-07 is effective for us for annual periods beginning October 1, 2019. The new standard did not have a material impact on the Company’s results of operations or cash flows.
9 |
In August 2018, the FASB issued ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which allows for the capitalization of certain implementation costs incurred in a hosting arrangement that is a service contract. ASU 2018-15 allows for either retrospective adoption or prospective adoption to all implementation costs incurred after the date of adoption. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.
In February 2016, the FASB issued guidance within ASU 2016-02, Leases. The amendments in ASU 2016-02 to Topic 842, Leases, require lessees to recognize the lease assets and lease liabilities arising from operating leases in the statement of financial position. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. The Company adopted the amendments to Topic 842 on October 1, 2019 using the modified retrospective approach. The Company elected the transition option issued under ASU 2018-11, Leases (Topic 842) Targeted Improvements, which allows entities to continue to apply the legacy guidance in ASC 840, Leases, to prior periods, including disclosure requirements. Accordingly, prior period financial results and disclosures have not been adjusted. The Company also elected to apply the package of practical expedients permitting entities to forgo reassessment of: 1) expired or existing contracts that may contain leases; 2) lease classification of expired or existing leases; and 3) initial direct costs for any existing leases. The Company has also elected to apply the short term lease measurement and recognition exemption to leases with an initial term of 12 months or less. The most significant impact of the new standard on the Company’s Consolidated Financial Statements was the recognition of a right of use asset and lease liability for operating leases for which the Company is the lessee. Upon adoption of this guidance, on October 1, 2019, the Company recorded a Right of use asset and corresponding lease liability of $85,280 and $85,280, respectively, on the Consolidated Balance Sheet. No cumulative effect adjustment to retained earnings resulted from adoption of this guidance. The new standard did not have a material impact on the Company’s results of operations or cash flows.
In January 2017, the FASB issued guidance within ASU 2017-04, Intangibles-Goodwill and Other. The amendments in ASU 2017-04 simplify the subsequent measurement of goodwill by comparing the fair value of a reporting unit with its carrying amount. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.
In June 2016, the FASB issued guidance within ASU 2016-13, Financial Instruments – Credit Losses. The amendments in ASU 2016-13 require assets measured at amortized cost and establishes an allowance of credit losses for available for sale debt securities. ASU 2016-13 is effective for fiscal years beginning after December 15, 2020. 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 our Annual Report on Form 10-K for the year ended September 30, 2019, 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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K.
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, 2020. 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, 2020, 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 material weaknesses in the design of internal control related to the following areas: (i) Lack of documentation around the components of internal control and inadequate risk assessment process over the Company’s internal controls; and (ii) Inadequate controls over information technology.
Remediation Plan to Address the Material Weaknesses in Internal Control over Financial Reporting
Management has implemented and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions include: (i) we intend to adopt a different financial reporting software that has increased controls built into the system functionality by the end of the current fiscal year, in the interim we plan to implement additional controls to mitigate existing controls risks inherent to our existing accounting software; (ii) additional controls to improve risk assessment procedures to ensure all risks have been addressed.
We believe that these actions will remediate the material weaknesses, once management has performed its assessment of our internal controls over financial reporting including the remedial measures described above. The weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of fiscal 2020.
Changes in Internal Control over Financial Reporting
Other than continuing with the remediation actions described above related to the material weakness in our internal controls, there has been no change in our internal control over financial reporting during the quarter ended June 30, 2020 that have materially affected, or are reasonably 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
Please carefully consider the information set forth in this Quarterly Report on Form 10-Q and the risk factors discussed in Part I, Item I A. of our Annual Report on Form 10-K for the year ended September 30, 2019, which could materially affect our business, financial condition or future results. 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.
Our business may be subject to risks arising from pandemic, epidemic, or an outbreak of diseases, such as the recent outbreak of the COVID-19 illness.
The recent outbreak of the novel strain of coronavirus, or COVID-19, which has been declared by the World Health Organization to be a “public health emergency of international concern,” has spread across the globe and is impacting worldwide economic activity. A public health pandemic, including COVID-19, poses the risk that we or our employees, contractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities. While it is not possible at this time to estimate the impact that COVID-19 could have on our business, the continued spread of COVID-19 and the measures taken by the governments of countries affected could disrupt the supply chain and adversely impact our business, financial condition or results of operations. The COVID-19 outbreak and mitigation measures may also have an adverse impact on global economic conditions which could have an adverse effect on our business and financial condition. The extent to which the COVID-19 outbreak impacts our results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact.
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.
During the period commencing October 1, 2019 through June 30, 2020, the Company issued 47,019 shares of common stock and 750,000 shares of preferred stock, as compensation for services.
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.
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Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit Number | Description of Exhibit |
10.1 | Joint Venture agreement, dated April 6, 2020 |
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 4, 2020 | By: /s/ Zachary K. Bradford Zachary K. Bradford Title: Chief Executive Officer (Principal Executive Officer) |
Date: August 4, 2020 | By: /s/Lori L. Love Lori L. Love Title: Chief Financial Officer (Principal Financial and Accounting Officer) |
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