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 October 15, 1987 as SmartData Corporation (“SmartData”). SmartData conducted a 504-public offering in the State of Nevada in December 1987 and began trading publicly in January 1988. Due to a series of unfortunate events, including the untimely death of the founding CEO, SmartData discontinued active business operations in 1992.

On March 25, 2014, we began operations in the alternative energy sector.

In December 2014, the Company changed its name to Stratean Inc. through a short-form merger in order to better reflect its new business plan.

On July 1, 2016, the Company entered into an Asset Purchase Agreement, as amended (the “Purchase Agreement”), with CleanSpark Holdings LLC, CleanSpark LLC, CleanSpark Technologies LLC, and Specialized Energy Solutions, Inc. (together, the “Seller”). Pursuant to the Purchase Agreement, the Company acquired CleanSpark, LLC and all the assets related to the Seller and its line of business and assumed $200,000 in liabilities.

In October 2016, the Company changed its name to CleanSpark, Inc. through a short-form merger in order to better reflect the brand identity.

On January 22, 2019, CleanSpark entered into an Agreement 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) 175,000 shares of common stock of CleanSpark, (ii) a five-year warrant to purchase 50,000 shares of common stock of CleanSpark at an exercise price of $16.00 per share, and (iii) a five-year warrant to purchase 50,000 shares of common stock of CleanSpark at an exercise price of $20.00 per share. As a result of the transaction, Pioneer became a wholly owned subsidiary of CleanSpark. On February 1, 2019, Pioneer was renamed to CleanSpark Critical Power Systems, Inc.

On December 10, 2019, the Financial Industry Regulatory Authority (“FINRA”) approved a 1:10 reverse stock split of the Company’s common stock. The reverse stock split took effect on December 11, 2019. Unless otherwise noted, impacted amounts and share information in 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 $1,688,935. The Transaction closed simultaneously upon the execution of the Agreement by the parties on January 31, 2020. As a result of the Transaction, p2k, is a wholly-owned subsidiary of the Company. (See note 3 for details.)

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.

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 $16,282,653 during the nine months ended June 30, 2020. In response to these conditions and to ensure the Company has sufficient capital for ongoing operations for a minimum of 12 months, we have raised additional capital through the sale of debt and equity securities pursuant to a registration statement on Form S-3. (See Note 10 and Note 18 for additional details.) As of June 30, 2020, the Company had working capital of $5,631,164.

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:

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.

Service Performance obligations satisfied over time.

We enter into long-term product service agreements with our customers primarily within our microgrid segment. These agreements require us to provide preventative maintenance, and standby support services that include certain levels of assurance regarding system performance throughout the contract periods; these contracts will generally range from 1 to 10 years. We account for items that are integral to the maintenance of the equipment as part of our service-related performance obligation, unless the customer has a substantive right to make a separate purchasing decision (e.g., equipment upgrade). Contract modifications that extend or revise contract terms are not uncommon and generally result in our recognizing the impact of the revised terms prospectively over the remaining life of the modified contract (i.e., effectively like a new contract). Revenues are recognized for these arrangements on a straight-line basis consistent with the nature, timing and extent of our services, which primarily relate to routine maintenance and as needed product repairs. Our billing terms for these contracts vary, but we generally invoice periodically as services are provided.

Contract assets represent revenue recognized in excess of amounts billed and include unbilled receivables (typically for cost reimbursable contracts) of $0 and contract work in progress (typically for fixed-price contracts) of $0 and $57,077 as of June 30, 2020 and September 30, 2019, respectively. Unbilled receivables, which represent an unconditional right to payment subject only to the passage of time, are reclassified to accounts receivable when they are billed under the terms of the contract. Advances that are payments on account of contract assets of $321,000 and $360,000 as of June 30, 2020 and September 30, 2019, respectively, have been deducted from contract assets. Contract liabilities represent amounts billed to clients in excess of revenue recognized to date. The Company recorded $149,493 and $499,401 in contract liabilities as of June 30, 2020 and September 30, 2019, respectively.

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.

 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 $8,073,781 and $2,209,542, respectively.

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 $1,955,776 and $7,838,857 in cash and no cash equivalents as of June 30, 2020 and September 30, 2019, respectively.

Accounts receivable

Is comprised of uncollateralized customer obligations due under normal trade terms. The Company performs ongoing credit evaluation of its customers and management closely monitors outstanding receivables based on factors surrounding the credit risk of specific customers, historical trends, and other information. The carrying amount of accounts receivable is reviewed periodically for collectability. If management determines that collection is unlikely, an allowance that reflects management’s best estimate of the amounts that will not be collected is recorded. Accounts receivable are presented net of an allowance for doubtful accounts of $400,741 and $254,570 at June 30, 2020, and September 30, 2019, respectively.

Retention receivable is the amount withheld by a customer until a contract is completed. Retention receivables of $171,513 and $159,989 were included in the balance of trade accounts receivable as of June 30, 2020 and September 30, 2019, respectively.

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.

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 $1,705,776. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk in these accounts. The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue. (See Note 17 for details.)

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 $0 and $0 at June 30, 2020 and September 30, 2019, respectively.

Stock-based compensation

The Company follows the guidelines in FASB Codification Topic ASC 718-10 “Compensation-Stock Compensation,” which requires companies to measure the cost of employee 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.

Earnings (loss) per share

The Company reports earnings (loss) per share in accordance with Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 260-10 “Earnings Per Share,” which provides for calculation of “basic” and “diluted” earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income or loss available to common stockholders by the weighted average common shares outstanding the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. The calculation of diluted net loss per share gives effect to common stock equivalents; however, potential common shares are excluded if their effect is anti-dilutive. As of June 30, 2020, there are 1,503,639 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 $681,169 since the stated rate of interest approximates market rates.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable.

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:

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:

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.

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 $1,688,935. The Transaction closed simultaneously upon the execution of the Agreement by the parties on January 31, 2020.

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:

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:

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.

The following is the unaudited pro forma information assuming the acquisition of p2k occurred on October 1, 2018:  

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.

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:

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 1,000 shares of Series B Preferred Stock (the “Preferred Stock”) of ILAL for an aggregate purchase price of US $500,000 (the “Stock Transaction”), less certain expenses and fees. The Series B Preferred Stock will accrue cumulative in kind accruals at a rate of 12% per annum and shall increase by 10% per annum upon the occurrence of any trigger event. ILAL may redeem by paying in cash within 9 months from the issuance date. The Preferred Stock becomes convertible into common stock after 9 months or when certain triggering events occur. In the event of a conversion of any shares of the Preferred Stock, the number of conversion shares is equal to the face value of the Preferred Stock divided by the applicable Conversion Price (defined at 65% of the 5 lowest individual daily volume weighted average prices of the Common Stock from issuance to conversion less $0.05 per share, but no less than the Floor Price ($0.01). While the Preferred Stock is outstanding if triggering events occur, the Conversion Rate may be decreased by 10% and the accrual rate increased by 10% for each triggering event.

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.

In connection with the Stock Transaction, ILAL issued 350,000 shares of its common stock to the Company as commitment shares. The commitment shares are recorded at $171,500, or $0.49 per share, which was the quoted price of the shares on June 30, 2020. 

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 $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.

The resulting income is reported net of all other costs, and CleanSpark recognized $20,000 in other income from the agreement for the period ended June 30, 2020. As of June 30, 2020, the balance of CleanSpark funds held in the joint venture (“JV”) account for future orders was $660,000  and is accounted for as a receivable from the third party partner since the Company considers itself as a passive investor in the JV. The receivable is reported in prepaid expenses and other current assets in the consolidated balance sheet.

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.

Capitalized software amortization recorded as cost of revenues and product development expense for the nine months ended June 30, 2020 and 2019 was $121,582 and $1,034,612, respectively.  

Amortization expense for the nine months ended June 30, 2020 and 2019 was $1,952,779 and $1,243,610, respectively.

Depreciation expense for the nine months ended June 30, 2020 and 2019 was $51,952 and $31,639, respectively.

Promissory Notes

On September 5, 2017, the Company executed a 9% secured promissory note with a face value of $150,000 with an investor. Under the terms of the promissory note, the Company received $150,000 and agreed to make monthly interest payments and repay the note principal 24 months from the date of issuance. On September 5, 2019, the investor extended the maturity date to September 5, 2021 and the modification was not deemed substantial. The note is secured by 15,000 shares which are held in escrow and would be issued to the note holder only in the case of an uncured default. As of June 30, 2020, the Company owed $150,000 in principal and $0 in accrued interest under the terms of the agreement and recorded interest expense of $10,133 and $10,096 during the nine months ended June 30, 2020 and 2019, respectively. 

On November 11, 2017, the Company executed a 10% secured promissory note with a face value of $100,000 with an investor. Under the terms of the promissory note the Company received $100,000 and agreed to make monthly interest payments and repay the note principal 24 months from the date of issuance. The note was secured by 10,000 shares which would be issued to the note holder only in the case of an uncured default. The Company repaid all principal and outstanding interest on August 13, 2019 and the 10,000 shares of common stock held as collateral were returned to treasury and cancelled on August 26, 2019. The Company recorded interest expense of $0 and $7,478 for the nine months ended June 30, 2020 and 2019, respectively.

On December 5, 2017, the Company executed a 9% secured promissory note with a face value of $50,000 with an investor. Under the terms of the promissory note the Company received $50,000 and agreed to make monthly interest payments and repay the note principal 24 months from the date of issuance. The note was secured by 5,000 shares which would be issued to the note holder only in the case of an uncured default. The Company repaid all principal and outstanding interest on December 5, 2019 and the 5,000 shares of common stock held as collateral were returned to treasury and cancelled on January 13, 2020. The Company recorded interest expense of $802 and $3,367 for the nine months ended June 30, 2020 and 2019, respectively.

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 $531,169 (the “PPP Loan”). The PPP Loan took the form of a promissory note issued by the Company that matures on May 7, 2022 and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments, less the amount of any potential forgiveness (discussed below), will commence on December 7, 2020. The PPP Loan provides for customary events of default, including, among others, those relating to failure to make payments thereunder. Borrower may prepay the principal of the PPP Loan at any time without incurring any prepayment penalties. The PPP Loan is non-recourse against any individual shareholder, except to the extent that such party uses the loan proceeds for an unauthorized purpose.

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. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, and covered utilities during the applicable period beginning on the date of loan approval. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee in excess of $100,000, prorated annually. Not more than 25% of the forgiven amount may be for non-payroll costs. Forgiveness is reduced if full-time headcount declines, or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25%. In the event the PPP Loan, or any portion thereof, is forgiven pursuant to the PPP, the amount forgiven is applied to outstanding principal. The Company recorded interest expense of $3,987 and $0 for the nine months ended June 30, 2020 and 2019, respectively.

Insurance financing loans

On February 11, 2019, the Company executed an unsecured 5.6% installment loan with a total face value of $78,603 with a financial institutional to finance its insurance policies. Under the terms of the installment notes the Company received $76,800 and agreed to make equal payments and repay the note 10 months from the date of issuance. As of September 30, 2019, $17,467 in principal remained outstanding. The Company repaid all principal and outstanding interest on November 4th, 2019.

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 $5,250,000. The note was secured by all assets of the Company. The Debenture has a maturity date of two years from the issuance date and the Company agreed to pay compounded interest on the unpaid principal balance of the Debenture at the rate equal 7.5%  per annum. Interest is payable on the date the applicable principal is converted or on maturity. The interest must be paid in cash and, in certain circumstances, may be paid in shares of common stock.

The transactions described above closed on December 31, 2018. In connection with the issuance of the Debenture and pursuant to the terms of the SPA, the Company issued to the Investor 10,000 shares of common stock and a Common Stock Purchase Warrant to acquire up to 308,333 shares of common stock for a term of three years (the “Warrant”) on a cash-only basis at an exercise price of $20.00 per share with respect to 125,000 Warrant Shares, $25.00 with respect to 100,000 Warrant Shares, $50.00 with respect to 50,000 Warrant Shares and $75.00 with respect to 33,333 Warrant Shares. The warrants and shares issued were fair valued and a debt discount of $4,995,000 was recorded as a result of the issuance of the warrants and shares and the recognition of a beneficial conversion feature on the Debenture. The Company also paid a $5,000 due diligence fee prior to receiving the funding which was also recorded as a debt discount.

Pursuant to the terms of the SPA, the Investor agreed to tender to the Company the sum of $5,000,000, of which the Company received the full amount as of the closing.

Prior to the maturity date, provided that no trigger event has occurred, the Company will have the right at any time upon 30 trading days’ prior written notice, in its sole and absolute discretion, to redeem all or any portion of the Debenture then outstanding by paying to the Investor an amount equal to 140% of the of the portion of the Debenture being redeemed.

The Investor may convert the Debenture into shares of the Company’s common stock at a conversion price equal to 95% of the mathematical average of the 5 lowest individual daily volume weighted average prices of the common stock, less $0.50 per share, during the period beginning on the issuance date and ending on the maturity date subject to certain floor price restrictions. In the event certain equity conditions exist, the Company may require that the Investor convert the Debenture. In no event shall the Debenture be allowed to affect a conversion if such conversion, along with all other shares of Company common stock beneficially owned by the Investor and its affiliates would exceed 4.99% of the outstanding shares of the common stock of the Company.

While the note is outstanding if Triggering Events occur the conversion rate may be decreased by 10% and the interest rate increased by 10% for each Triggering Event which may result in the issuance of additional shares.

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:

On January 7, 2019, the Investor converted $2,500,000 in principal and $875,000 in interest as a conversion premium, for 178,473 shares of the Company common stock at an effective conversion price of $18.90, due to a trigger event for the Company not filing its annual report on Form 10-K for the fiscal year ended September 30, 2018 on or before December 31, 2018.

On March 6, 2019, the Investor converted $1,000,000 in principal and $350,000 in interest as a conversion premium, for 71,389 shares of the Company common stock at an effective conversion price of $18.90, due to a trigger event for the Company not filing its annual report on Form 10-K for the fiscal year ended September 30, 2018 on or before December 31, 2018. 

On July 9, 2019, in accordance with the terms of the agreement the Investor was issued an additional 45,614 shares of common stock due to the decrease in stock price resulting in an effective conversion price of $15.06.

On July 16, 2019, in accordance with the terms of the agreement the Investor was issued an additional 18,246 shares of common stock due to the decrease in stock price resulting in an effective conversion price of $15.06.

On July 19, 2019, the Investor converted $500,000 in principal and $175,000 in interest as a conversion premium, for 45,109 shares of the Company common stock at an effective conversion price of $15.00 due to a trigger event for the Company not filing its annual report on Form 10-K for the fiscal year ended September 30, 2018 on or before December 31, 2018.

On August 23, 2019, in accordance with the terms of the agreement the Investor was issued an additional 43,721 shares of common stock due to the decrease in stock price resulting in an effective conversion price of $7.60.

On September 16, 2019, in accordance with the terms of the agreement the Investor was issued an additional 61,500 shares of common stock due to the decrease in stock price resulting in an effective conversion price of $7.30.

On October 17, 2019, in accordance with the terms of the agreement the Investor was issued an additional 90,000 shares of common stock due to the decrease in stock price resulting in an effective conversion price of $3.74.

On December 5, 2019, in accordance with the terms of the agreement the Investor was issued an additional 97,100 shares of common stock due to the decrease in stock price resulting in an effective conversion price of $3.15. 

On February 10, 2020, in accordance with the terms of the agreement the Investor was issued an additional 100,000 shares of common stock due to the decrease in stock price resulting in an effective conversion price of $3.15. 

On February 21, 2020, in accordance with the terms of the agreement the Investor was issued an additional 108,770 shares of common stock due to the decrease in stock price resulting in an effective conversion price of 2.69. 

On March 2, 2020, in accordance with the terms of the agreement the Investor was issued an additional 167,100 shares of common stock due to the decrease in stock price resulting in an effective conversion price of $1.87. 

On March 5, 2020, in accordance with the terms of the agreement the Investor was issued an additional 154,835 shares of common stock due to the decrease in stock price resulting in an effective conversion price of $1.83. 

On March 13, 2020, in accordance with the terms of the agreement the Investor was issued an additional 116,000 shares of common stock due to the decrease in stock price resulting in an effective conversion price of $1.50. 

On March 20, 2020, in accordance with the terms of the agreement the Investor was issued an additional 163,800 shares of common stock due to the decrease in stock price resulting in an effective conversion price of $1.50. 

On April 15, 2020, the Investor converted $1,250,000 in principal and $437,500 in interest, for 1,125,000 shares of the Company common stock at an effective conversion price of $1.50 due to a trigger event for the Company not filing its annual report on Form 10-K for the fiscal year ended September 30, 2018 on or before December 31, 2018. 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 $783,474 during the nine months ended June 30, 2020.

Securities Purchase Agreement – April 17, 2019

On April 17, 2019, the Company entered into a Securities Purchase Agreement (the “Agreement”) with an otherwise unaffiliated third-party institutional investor (the “Investor”), pursuant to which the Company agreed to issue to the Investor a $10,750,000 face value Senior Secured Redeemable Convertible Promissory Note (the “Debenture”) with a 7.5% original issue discount, 215 shares of our Series B Preferred Stock with a 7.5% original issue discount, a Common Stock Purchase Warrant (the “Warrant”) on a cash-only basis to acquire up to 230,000 shares (the “Warrant Shares”) of our common stock and 125,000 shares of our Common Stock. The aggregate purchase price for the Debenture, the Series B Preferred Stock the Warrant and the Common Stock is $20,000,000. (See Notes 13 and 14 for additional details.)  The Debenture was secured by all assets of the Company.

Pursuant to the first closing of the Agreement, which occurred on April 18, 2019, the Investor agreed to tender to the Company the sum of $10,000,000, for the Debenture, the Common Stock and the Warrant. No additional closings to sell the preferred stock have occurred and the Series B preferred stock was removed under the amendments to the Agreement discussed below.

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

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

The Investor may convert the Debenture into shares of the Company’s common stock at a conversion price equal to 90% of the mathematical average of the 5 lowest individual daily volume weighted average prices of the common stock, less $0.75 per share, during the period beginning on the issuance date and ending on the maturity date subject to certain floor price restrictions. In the event certain equity conditions exist, the Company may require that the Investor convert the Debenture. In no event shall the Debenture be allowed to effect a conversion if such conversion, along with all other shares of Company common stock beneficially owned by the Investor and its affiliates would exceed 4.99% of the outstanding shares of the common stock of the Company.

While the note is outstanding if Triggering Events occur the conversion rate may be decreased by 10% and the interest rate increased by 10% for each Triggering Event which may result in the issuance of additional shares.

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:

On May 5, 2020, the Investor converted $750,000 in principal and $112,500 in interest, for  575,000   shares of the Company common stock at an effective conversion price of $1.50.

On May 6, 2020, the Investor converted $600,000 in principal and $90,000 in interest, for 460,000 shares of the Company common stock at an effective conversion price of $1.50.

On May 7, 2020, the Investor converted $595,000 in principal and $89,250 in interest, for 456,167 shares of the Company common stock at an effective conversion price of $1.50.

On May 8, 2020, the Investor converted $350,000 in principal and $52,500 in interest, for 268,333 shares of the Company common stock at an effective conversion price of $1.50.

On May 11, 2020, the Investor converted $350,000 in principal and $52,500 in interest, for 268,333 shares of the Company common stock at an effective conversion price of $1.50.

On May 12, 2020, the Investor converted $730,000 in principal and $109,500 in interest, for 559,667 shares of the Company common stock at an effective conversion price of $1.50.

On May 13, 2020, the Investor converted $375,000 in principal and $56,250 in interest, for 287,500 shares of the Company common stock at an effective conversion price of $1.50.

On May 18, 2020, the Investor converted $360,000 in principal and $54,000 in interest, for 276,000 shares of the Company common stock at an effective conversion price of $1.50.

On May 19, 2020, the Investor converted $1,020,000 in principal and $153,000 in interest, for 782,000 shares of the Company common stock at an effective conversion price of $1.50.

On May 20, 2020, the Investor converted $380,000 in principal and $57,000 in interest, for 291,333 shares of the Company common stock at an effective conversion price of $1.50.

On May 21, 2020, the Investor converted $2,140,000 in principal and $321,000 in interest, for 1,640,667 shares of the Company common stock at an effective conversion price of $1.50.

On May 22, 2020, the Investor converted $3,100,000 in principal and $465,000 in interest, for 2,376,667 shares of the Company common stock at an effective conversion price of $1.50.

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 $8,320,205 during the nine months ended June 30, 2020.

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 $85,280 and $85,280, respectively, on the consolidated balance sheet. As of June 30, 2020, the Company's operating lease right of use asset and operating lease liability totaled $52,280 and $52,999, respectively. A weighted average discount rate of 10% was used in the measurement of the right of use asset and lease liability as of October 1, 2019. As the rate implicit in the lease is not readily determinable, the Company's incremental collateralized borrowing rate is used to determine the present value of lease payments. This rate gives consideration to the applicable Company collateralized borrowing rates and is based on the information available at the commencement date. The Company has elected to apply the short-term lease measurement and recognition exemption to leases with an initial term of 12 months or less; therefore, these leases are not recorded on the Company’s Consolidated Balance Sheet, but rather, lease expense is recognized over the lease term on a straight-line basis.

The Company's leases have remaining lease terms between one year to two years, with a weighted average lease term of 0.7 years at June 30, 2020. Some leases include multiple year renewal options.  The Company’s decision to exercise these renewal options is based on an assessment of its current business needs and market factors at the time of the renewal. Currently, the Company has no leases for which the option to renew is reasonably certain and therefore, options to renew were not factored into the calculation of its right of use asset and lease liability as of October 1, 2019.

The following is a schedule of the Company's operating lease liabilities by contractual maturity as of June 30, 2020:

Total operating lease costs of $38,328 and $38,523 the nine months ended June 30, 2020 and 2019, respectively, were included as part of administrative expense.

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 $353,140 during the nine months ended June 30, 2019. The agreement was terminated in October 2019 when Mr. Bradford stepped down as the CFO and took the position of CEO and accepted the associated employment agreement.

During the nine months ended June 30, 2020, the Company paid Blue Chip Accounting, LLC (“Blue Chip”) $86,658 for accounting, tax, administrative services and reimbursement for office supplies. Blue Chip is 50% beneficially owned by Mr. Bradford. Blue Chip performed all services at discounted rates and none of the charges were associated with work performed by Mr. Bradford. The services consisted of preparing and filing tax returns, bookkeeping, accounting and administrative support assistance. The Company also sub-leases office space from Blue Chip (see note 11 for additional details). During the nine months ended June 30, 2020, $10,150 was paid to Blue Chip for rent.

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 $125,154 and $127,772, during the nine months ended June 30, 2020 and 2019.

On March 12, 2019, the Agreement was terminated upon the execution of a separation agreement. All amounts owed from all agreements totaling $90,000 were paid in full. 

On September 28, 2018, in connection with the consulting agreement executed with Zero Positive, LLC, the Company issued warrants to purchase 90,000 shares of common stock at an exercise price of $8.00 per share to Zero Positive. The warrants were valued at $2,607,096 using the Black Scholes option pricing model based upon the following assumptions: term of 10 years, risk free interest rate of 3.05%, a dividend yield of 0% and volatility rate of 191%. The warrants vest as follows: 30,000 vested immediately, the balance vest evenly on the last day of each month over forty-two months beginning August 31, 2018. As of June 30, 2020, 62,857 warrants had vested, and the Company recorded an expense of $372,442 and 372,442 during the nine months ended June 30, 2020 and 2019.

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 $0 and $353,140, respectively during the nine months ended June 30, 2020 and 2019. The agreement was terminated on October 7, 2019 when Mr. Schultz stepped down as the CEO and took the position of Chairman of the Board. Mr. Schultz received $189,000 as compensation for his services as chairman of the board during the nine months ended June 30, 2020.

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 $49,500 in fees plus $176,000 in expense reimbursements for the nine months ended June 30, 2020. The agreement was terminated in March 2020.

Larry McNeill, Roger Beynon, Dr. Tom Wood –Directors

Effective January 1, 2019, the Company agreed to pay non-executive independent board members $2,500 per month. Mr. McNeill earned $22,500 and $15,000 in Board compensation during the nine months ended June 30, 2020 and 2019. Mr. Beynon and Dr. Wood each earned $22,500 and $0 in Board compensation during the nine months ended June 30, 2020 and 2019.

13. STOCKHOLDERS EQUITY

Overview

The Company’s authorized capital stock consists of 20,000,000 shares of common stock and 10,000,000 shares of preferred stock, par value $0.001 per share. As of June 30, 2020, there were 16,123,507 shares of common stock issued and outstanding and 1,750,000 shares of preferred stock issued and outstanding.

On December 10, 2019, the Financial Industry Regulatory Authority (“FINRA”) approved the Company’s 1:10 reverse stock split of the Company’s common stock. The reverse stock split took effect on December 11, 2019. Unless otherwise noted, impacted amounts and share information in the consolidated financial statements and notes thereto as of and for the periods 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.

Amendment to Articles of Incorporation

On August 9, 2019, the Company filed a Certificate of Amendment to its Articles of Incorporation to increase its authorized shares of common stock from 100,000,000 to 200,000,000. The amendment was previously approved by written consent of the Company’s Board and more than a majority of the voting power of its stockholders and delivered to stockholders of record as of the close of business July 2, 2019 pursuant to a Definitive Information Statement on Schedule 14C. As a result of the reverse split mentioned above, the effect of the filed amendment reduced the authorized shares to 20,000,000.

On October 4, 2019, pursuant to Article IV of our Articles of Incorporation, our Board of Directors voted to increase the number of shares of preferred stock designated as Series A Preferred Stock from one million (1,000,000) shares to two million (2,000,000) shares, par value $0.001.

Under the Certificate of Designation, holders of Series A Preferred Stock will be entitled to quarterly dividends on 2% of our earnings before interest, taxes and amortization. The dividends are payable in cash or common stock. The holders will also have a liquidation preference on the state value of $0.02 per share plus any accumulated but unpaid dividends. The holders are further entitled to have us redeem their Series A Preferred Stock for three shares of common stock in the event of a change of control and they are entitled to vote together with the holders of our common stock on all matters submitted to shareholders at a rate of forty-five (45) votes for each share held.

The rights of the holders of Series A Preferred Stock are defined in the relevant Amendment to the Certificate of Designation filed with the Nevada Secretary of State on October 9, 2019.

Certificate of Preferred Stock Designation

On April 16, 2019, pursuant to Article IV of our Articles of Incorporation, the Company’s Board of Directors voted to designate a class of preferred stock entitled Series B Preferred Stock, consisting of up to one hundred thousand (100,000) shares, par value $0.001. Under the Certificate of Designation, the holders of Series B Preferred Stock are entitled to the following powers, designations, preferences and relative participating, optional and other special rights, and the following qualifications, limitations and restrictions, among others as set forth in the Certificate of Designation:

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 1,964,313 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 22,000 shares of common stock for services rendered to independent consultants at a fair value of $54,000.

The Company issued 793 shares of common stock as a result of rounding related to the reverse stock split.

The Company issued 95,699 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 1,125,000 shares of common stock for the conversion of $1,250,000 in principal and $437,500 in interest at an effective conversion price of $1.50. (See Note 10 for additional details)

In relation to the Securities Purchase Agreement dated April 17, 2019, the Company issued 8,241,665 shares of common stock for the conversion of $10,750,000 in principal and $1,612,500 in interest as a conversion premium at an effective conversion price of $1.50. (See Note 10 for additional details)

The Company issued 25,019 shares of common stock as board and executive compensation at a fair value of $57,500. 

Common stock returned during the nine months ended June 30, 2020 

As a result of a note payoff on December 5, 2019, 5,000 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, 25,000 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 (750,000) shares of its designated Series A Preferred Stock to members of its board of directors for services rendered.  A fair value of $0.02 per share was determined by the Company. Director fees of $15,000 was recorded as a result of the stock issued.

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 $361,800 from 14 investors pursuant to private placement agreements with the investors to purchase 45,225 shares of the Company’s common stock at a purchase price equal to $8.00 for each share of common stock.

On September 11, 2018, the Company entered into an agreement with Regal Consulting, LLC for investor relations services. Under this agreement the Company agreed to issue 3,000 shares of the Company’s common stock per month as compensation for services plus additional cash compensation. During the nine months ended June 30, 2019, the Company issued a total of 18,000 shares of its common stock in accordance with the agreement. Stock compensation of $531,600 was recorded as a result of the stock issued under the agreement.

On October 15, 2018, the Company entered into an agreement with a consultant for services. Under this agreement the Company agreed to issue 3,000 shares of the Company’s common stock which vest evenly over a six month period from the agreement date. During the nine months ended June 30, 2019, the Company recorded stock compensation of $68,819 was recorded as a result of the stock issued under the agreement.

On October 2, 2018, an investor exercised warrants to purchase 300 shares of the Company’s $0.001 par value common stock at a purchase price equal to $3.63 for each share of Common stock. The Company receive $1,088 as a result of this exercise.

The Company issued 10,000 shares in relation to a Securities purchase agreement executed on December 31, 2018. (See Note 10 for additional details.)

On December 31, 2018, the Company settled $25,000 of a promissory note through the issuance of 2,500 shares of the Company’s common stock. The shares were valued at $51,225 and a $26,225 loss on settlement of debt was recorded as a result of the issuance.

On January 7, 2019, a total of 144,417 shares of the Company’s common stock were issued in connection with the cashless exercise of 150,000 common stock warrants at an exercise price of $0.83.

On January 7, 2019, an investor converted $2,500,000 in principal and $875,000 in interest,  for 178,472 shares of the Company’s common stock at an effective conversion price of $18.90.

On January 22, 2019, in accordance with a merger agreement, the Company issued 175,000 shares of the Company’s common stock.

On February 26, 2019, a total of 24,628 shares of the Company’s common stock were issued in connection with the cashless exercise of 25,000 common stock warrants at an exercise price of $0.83.

On March 6, 2019, the investor converted $1,000,000 in principal and $350,000 in interest as a conversion premium, for 71,389 shares of the Company’s common stock at an effective conversion price of $18.90.

On March 26, 2019, a total of 48,857 shares of the Company’s common stock were issued in connection with the cashless exercise of 50,000 common stock warrants at an exercise price of $0.83.

On April 9, 2019, an investor exercised warrants to purchase 900 shares of the Company’s common stock at a purchase price equal to $3.63. The Company received $3,267 as a result of this exercise.

The Company issued 125,000 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 25,000 shares of the Company’s common stock as compensation for services for a six month period plus additional cash considerations. The 25,000 shares vest upon issuance but if the agreement is terminated within 90 days of execution, the shares are to be returned and cancelled. The Company terminated the agreement and the shares were returned on February 10, 2020.

Common stock returned during the nine months ended June 30, 2019 

As a result of a conversion of a note on September 21, 2018, 13,750 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, 13,750 shares of common stock which were previously issued as a commitment fee returned to treasury and cancelled on January 8, 2019.

As of June 30, 2020, the outstanding warrants have a weighted average remaining term of 2.17 years and an intrinsic value of $194,250.

As of June 30, 2020, there are warrants exercisable to purchase 1,286,922 shares of common stock in the Company and 27,143 unvested warrants outstanding that cannot be exercised until vesting conditions are met. 996,198 of the warrants require a cash investment to exercise as follows, 5,000 required a cash investment of $8.00 per share, 449,865 require a cash investment of $15.00 per share, 125,000 require a cash investment of $20.00 per share, 103,000 require a cash investment of $25.00 per share, 200,000 require an investment of $35.00 per share, 10,000 require an investment of $40.00 per share, 60,000 require an investment of $50.00 per share, 38,333 require a cash investment of $75.00 per share and 5,000 require a cash investment of $100.00 per share. 317,867 of the outstanding warrants contain provisions allowing a cashless exercise at their respective exercise prices.

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 3,000 warrants to purchase shares of the Company’s common stock at an exercise price of $25.00 for a period of five years which vest evenly over a six-month period from the agreement date. During the nine months ended June 30, 2020 and 2019 the Company recorded stock compensation of $0 and $68,643 as a result of the stock issued under the agreement. The warrants were valued using the black-Scholes valuation model.

On December 31, 2018, in connection with a Securities purchase agreement (see Note 10 for additional details) the Company issued Common Stock Purchase Warrants to acquire up to 308,333 shares of common stock for a term of three years on a cash-only basis at an exercise price of $20.00 per share with respect to 125,000 Warrant Shares, $25.00 with respect to 100,000 Warrant Shares, $50.00 with respect to 50,000 Warrant Shares and $75.00 with respect to 33,333 Warrant Shares.

On August 28, 2018, in connection with the Consulting agreement executed with Zero Positive, LLC the Company issued warrants to purchase 90,000 shares of common stock at an exercise price of $8.00 per share to Zero Positive. The warrants were valued at $2,607,096 using the Black Scholes option pricing model. The warrants vest as follows: 30,000 warrants vested immediately, the balance vest evenly on the last day of each month over the forty-two months beginning August 31, 2018. As of June 30, 2020, 58,571 warrants had vested, and the Company recorded an expense of $372,442 and 372,442 during the nine months ended June 30, 2020 and 2019. (See Note 10 for additional details.)

On January 22, 2019, in accordance with a merger agreement, CleanSpark issued; a five year warrant to purchase 50,000 shares of CleanSpark common stock at an exercise price of $16.00 per share, and a five year warrant to purchase 50,000 shares of CleanSpark common stock at an exercise price of $20.00 per share.  The warrants were valued at $1,102,417 and $1,102,107, respectively.

On April 18, 2019, in connection with a Securities purchase agreement, the Company issued Common Stock Purchase Warrants to acquire up to 230,000 shares of common stock for a term of three years on a cash-only basis at an exercise price of $35.00 per share with respect to 200,000 Warrant Shares, $40.00 with respect to 10,000 Warrant Shares, $50.00 with respect to 10,000 Warrant Shares, $75.00 with respect to 5,000 Warrant Shares and $100.00 with respect to 5,000 Warrant Shares.

The Black-Scholes model utilized the following inputs to value the warrants granted during the nine months ended June 30, 2019:

On January 7, 2019, a total of 144,417 shares of the Company’s common stock were issued in connection with the cashless exercise of 150,000 common stock warrants at an exercise price of $0.83.

On February 26, 2019, a total of 24,628 shares of the Company’s common stock were issued in connection with the cashless exercise of 25,000 common stock warrants at an exercise price of $0.83.

On March 26, 2019, a total of 48,857 shares of the Company’s common stock were issued in connection with the cashless exercise of 50,000 common stock warrants at an exercise price of $0.83.

As of June 30, 2020, the Company expects to recognize $786,415 of stock-based compensation for the non-vested outstanding warrants over a weighted-average period of 1.5 years.

15. STOCK OPTIONS

The Company sponsors a stock-based incentive compensation plan known as the 2017 Incentive Plan (the “Plan”), which was established by the Board of Directors of the Company on June 19, 2017. A total of 300,000 shares were initially reserved for issuance under the Plan. As of June 30, 2020, there were 21,360 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.

As of June 30, 2020, there are options exercisable to purchase 216,717 shares of common stock in the Company. As of June 30, 2020, the outstanding options have a weighted average remaining term of was 2.59 years and an intrinsic value of $0.

Option activity for the nine months ended June 30, 2020

During the nine months ended June 30, 2020, the Company issued 233,233 options to purchase shares of common stock to employees; the shares were granted at quoted market prices ranging from $4.50 to $8.50. The options were valued at issuance using the Black Scholes model and stock compensation expense of $673,590 was recorded as a result of the issuances.

The Black-Scholes model utilized the following inputs to value the options granted during the nine months ended June 30, 2020:

As of June 30, 2020, the Company expects to recognize $245,300  of stock-based compensation for the non- vested outstanding options over a weighted-average period of 2.17 years.

Option activity for the nine months ended June 30, 2019

During the nine months ended June 30, 2019, the Company issued 12,788 options to purchase shares of common stock to employees, the shares were granted at quoted market prices ranging from $15.10 to $59.00. The options were valued at issuance using the Black Scholes model and stock compensation expense of $245,000 was recorded as a result of the issuances.

On March 10, 2018 the Company issued a total of 25,000 options to four consultants for advisory services. The options vest evenly 12 months from issuance. The options expire 24 months after issuance and require a cash investment to exercise. The options were valued at issuance using the Black Scholes model at $342,500 and amortized of the term of the agreement. During the nine months ended June 30, 2019, $191,425 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:

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 $2,300 in base rent per month through February 28, 2021. The lease term is on an annual basis beginning on March 1, 2020. 

San Diego Office

On May 15, 2018, the Company executed a 37 month lease agreement, which commenced on July 1, 2018 at 4360 Viewridge Avenue, Suite C, San Diego, California. The agreement calls for the Company to make payments of $4,057 in base rent per month through July 31, 2021 subject to an annual 3% rent escalation. Future minimum lease payments under the operating leases for the facilities as of June 30, 2020, are as follows:

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 $1,575 in base rent through January 1, 2021. The lease term is on an annual basis beginning January 2, 2020.

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 $1,801 in base rent through October 31, 2020. The lease expires on October 31, 2020.  The Company does not expect to renew.

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.

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.

18. SUBSEQUENT EVENTS

On July 7, 2020, the Company received its $660,000 in initial capital from the Contractual joint venture. The Company plans to continue to evaluate opportunities under the joint venture and will continue to provide capital for the procurement of PPE under this agreement as future opportunities continue to arise. (See note 5 for details).

On July 16, 2020, the Company filed a preliminary information statement wherein the Company’s shareholders approved to grant the Board authority to effectuate an increase in the number of authorized shares of Common Stock from 20,000,000 to no more than 50,000,000 and amend the Company’s 2017 Incentive Plan to increase the number of shares issuable from 300,000 to 1,500,000. The effective date of these actions is determined by the Board in its sole discretion.

On July 20, 2020, the Company sold 1,230,770 shares to an existing accredited investor at a price of $3.25 per share for gross proceeds of $4,000,000.

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.