Our consolidated financial statements included in
this Form 10-Q are as follows:
This report on Form 10-Q for the quarter ended June
30, 2021, should be read in conjunction with the Company's annual report on Form 10-K for the year ended September 30, 2020, filed with
the Securities and Exchange Commission (“SEC”) on December 17, 2020.
The accompanying consolidated financial statements
and footnotes 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, 2021 are not necessarily indicative of the
results that can be expected for the full year.
The accompanying notes are an
integral part of these unaudited consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
AND LINE OF BUSINESS
Organization
The Company - CleanSpark, Inc.
CleanSpark, Inc. (“CleanSpark”,
“we”, “our”, the "Company") was incorporated in the state of Nevada on October 15, 1987 under
the name, SmartData Corporation. In October 2016, the Company changed its name to CleanSpark, Inc. in order to better reflect the Company’s
brand identity.
The Company, through itself and its wholly
owned subsidiaries, has operated in the alternative energy sector since March 2014, and in the digital currency mining sector since December
2020.
Acquisitions Related to Subsidiaries
and/or Assets of the Company
CleanSpark, LLC
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.
CleanSpark Critical Power Systems, Inc.
On January 22, 2019, CleanSpark entered into
an agreement with Pioneer Critical Power, Inc., whereby it acquired certain intellectual property assets and client lists. As a result
of the transaction, Pioneer Critical Power Inc. became a wholly owned subsidiary of the Company. On February 1, 2019, Pioneer Critical
Power, Inc. was renamed to CleanSpark Critical Power Systems, Inc.
p2klabs, Inc.
On January 31, 2020, the Company entered into
a Stock Purchase Agreement with p2klabs, Inc (“p2k”), and its sole stockholder, whereby the Company purchased all of the issued
and outstanding shares of p2k from its sole stockholder. As a result of the transaction, p2k became a wholly owned subsidiary of the Company.
GridFabric, LLC
On August 31, 2020, the Company entered into
a Membership Interest Purchase Agreement with GridFabric, LLC, (“GridFabric”), and its sole member, whereby the Company purchased
all of the issued and outstanding membership units of GridFabric from its sole member. As a result of the transaction, GridFabric became
a wholly owned subsidiary of the Company.
ATL Data Centers
LLC
On December 9, 2020, the Company entered into an Agreement
and Plan of Merger (the “Merger”) with ATL Data Centers LLC (“ATL”), and its members whereby the Company purchased
all of the issued and outstanding membership units of ATL from its members. As a result of the transaction, ATL became a wholly owned
subsidiary of the Company. (See Note 3 for details.)
Solar Watt Solutions,
Inc.
On February 23, 2021, the Company entered into an
Agreement and Plan of Merger (the “Merger”) with Solar Watt Solutions, Inc. (“SWS”), and its owners whereby the
Company purchased all of the issued and outstanding shares of SWS from its owners. As a result of the transaction, SWS became a wholly
owned subsidiary of the Company. (See Note 3 for details.)
Lines of Business
Energy Business Segment
Through CleanSpark,
LLC, we provide microgrid engineering, design and software solutions to military, commercial and residential customers. Our services consist
of distributed energy microgrid system engineering and design, and project consulting services. The work is generally performed under
fixed price bid contracts and negotiated price contracts.
Through CleanSpark
Critical Power Systems, Inc., we provide custom hardware solutions for distributed energy systems that serve government and commercial
customers. The equipment is generally sold under negotiated fixed price contracts.
Through GridFabric,
LLC, we provide Open Automated Demand Response (“OpenADR”) and other middleware communication protocol software solutions
to commercial and utility customers.
Through Solar
Watt Solutions, Inc., which we acquired in February 2021, we provide solar, energy storage, and alternative microgrid energy solutions
for homeowners and commercial businesses in Southern California.
Digital
Currency Mining Segment
We entered the
Bitcoin mining industry through our acquisition of ATL Data Centers LLC in December 2020, and we have recently acquired additional equipment
and infrastructure capacity in order to expand our Bitcoin mining operations.
We mine Bitcoin through ATL Data Centers LLC, and
our recently formed subsidiary, CleanBlok, Inc.
Other business activities
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.
Through ATL Data Centers LLC, we provide traditional
data center services, such as providing customers with rack space, power and equipment, and offer several cloud services including, virtual
services, virtual storage, and data backup services.
Through our recently formed subsidiary CSRE Properties, LLC, we maintain
real property holdings for ATL Data Centers LLC and CleanBlok Inc.
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 report on Form 10-K for the year ended September 30, 2020, filed with the SEC on December
17, 2020 (“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 in this quarterly report
on Form 10-Q 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.
As shown in the accompanying unaudited consolidated financial statements,
the Company incurred a net loss of $16,444,619
during the nine months ended June 30, 2021. While the company has experienced negative cash flows from operations,
the Company has sufficient capital for ongoing operations from raising additional capital through the registered sale of equity securities
pursuant to a registration statement on Form S-3. (See Notes 11 and 17 for additional details.) In addition, the Company is continuing
to grow its business segments through which it expects to grow the working capital base. As of June 30, 2021, the Company had working
capital of $39,940,292.
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., p2kLabs, Inc, GridFabric, LLC, ATL Data Centers LLC, CleanBlok, Inc., CSRE Properties, LLC and Solar Watt
Solutions, 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, intangible
assets acquired, 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.
Revenue
Recognition
We recognize revenue in accordance with generally
accepted accounting principles as outlined in the Financial Accounting Standard Board's (“FASB”) Accounting Standards Codification
(“ASC”) 606, Revenue From Contracts with Customers, which requires that five steps be followed in evaluating revenue recognition:
(i) identify the contract with the customer; (ii) identity the performance obligations in the contract; (iii) determine the transaction
price; (iv) allocate the transaction price; and (v) recognize revenue when or as the entity satisfied a performance obligation.
Our accounting policy on revenue recognition by type of revenue is
provided below.
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.
The
Company recognizes energy (solar panel and battery) installation contract revenue
for residential customers at a point in time upon completion of the installation. The revenues associated with energy installations for
commercial customers are recognized over a period of time as noted in the engineering and construction contract revenue disclosure above.
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 digital currency mining
The Company has entered into a digital asset mining
pool to provide computing power to the mining pool. The contracts are terminable at any time by either party and the Company’s
enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. In exchange for providing
computing power, the Company is entitled to a fractional share of the fixed cryptocurrency award the mining pool operator receives (less
net digital asset transaction fees to the mining pool operator which are recorded as a component of cost of revenues), for successfully
adding a block to the blockchain. The Company’s fractional share is based on the proportion of computing power the Company contributed
to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm.
The transaction consideration the Company receives is noncash consideration, in the form of digital currency, which the Company measures
at fair value on the date received. The consideration is dependent on the number of digital assets mined on any given day. Fair
value of the digital currency award received is determined using the spot price of the related digital currency at the time of receipt.
There is currently no specific definitive guidance
under GAAP or alternative accounting framework for the accounting for digital currencies recognized as revenue or held, and management
has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted
by the FASB, the Company may be required to change its policies, which could have an effect on the Company’s consolidated financial
position and results from operations.
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). Generally, shipping costs
are included in the price of equipment unless the customer requests a non-standard shipment. In situations where an alternative shipment
arrangement has been made, the Company recognizes the shipping revenue upon customer receipt of the shipment.
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.
Due to the customized nature of the equipment,
the Company does not allow for customer returns.
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 $4,103 as of June 30, 2021 and September 30, 2020,
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 $0 and $0 as of June 30, 2021 and September 30, 2020, respectively, have been deducted from contract assets. Contract liabilities
represent customer deposits and amounts billed to clients in excess of revenue recognized to date. The Company recorded $596,873 and $64,198
in contract liabilities as of June 30, 2021 and September 30, 2020, respectively.
Revenues
from software
The Company derives its software revenue from
both subscription fees from customers for access to its (i) energy software offerings and software license sales and (ii) support services.
Revenues from software licenses are generally recognized upfront when the software is made available to the customer, and revenues from
the related support is generally recognized ratably over the contract term. 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 revenue as each deliverable is signed off by the customer.
Revenues from data center services
The Company provides data services such as
providing its customers with rack space, power and equipment, and cloud services such as virtual services, virtual storage, and data backup
services, generally based on monthly services provided at a defined price included in the contracts. The performance obligations are the
services provided to a customer for the month based on the contract. The transaction price is the price agreed with the customer for the
monthly services provided and the revenues are recognized monthly based on the services rendered for the month.
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, 2021 and 2020, the Company reported revenues of $22,293,321
and $8,073,781,
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 $22,209,870 and $3,126,202 in cash and cash equivalents as of June 30, 2021 and September 30,
2020, respectively.
Digital
Currency
Digital currencies are included in current assets
in the consolidated balance sheets. Digital currencies are recorded at cost less impairment, and amounts held are accounted for as intangible
assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually,
or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived
asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the
digital currency at the time its fair value is being measured. In testing for impairment, the Company has the option to first perform
a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not
more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it
is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost
basis of the asset. Subsequent reversal of impairment losses is not permitted.
Digital currencies awarded to the Company through
its mining activities are included within operating activities on the accompanying consolidated statements of cash flows. The sales of
digital currencies are included within investing activities in the accompanying consolidated statements of cash flows and any realized
gains or losses from such sales are included in other income (expense) in the consolidated statements of operations. The Company accounts
for its gains or losses in accordance with the first in first out (FIFO) method of accounting.
The following table presents the activities of the
digital currencies for the nine months ended June 30, 2021:
|
|
Amount
|
Balance at September 30, 2020
|
|
$
|
—
|
Additions
of digital currencies
|
|
|
16,098,643
|
Realized
gain on sale of digital currencies
|
|
|
672,065
|
Sale of digital
currencies
|
|
|
(2,499,757)
|
Digital currencies
issued for services
|
|
|
(162,038)
|
Impairment
loss
|
|
|
(3,720,481)
|
Balance
at June 30, 2021
|
|
$
|
10,388,432
|
Accounts
receivable
Accounts receivable is comprised of uncollateralized customer obligations
due under normal trade terms. The Company performs ongoing credit evaluation of its customers and management closely monitors outstanding
receivables based on factors surrounding the credit risk of specific customers, historical trends, and other information. The carrying
amount of accounts receivable is reviewed periodically for collectability. If management determines that collection is unlikely, an allowance
that reflects management’s best estimate of the amounts that will not be collected is recorded. Accounts receivable are presented
net of an allowance for doubtful accounts of $695,688 and
$42,970 at June 30, 2021, and September 30, 2020, respectively.
Retention receivable is the amount withheld
by a customer until a contract is completed. Retention receivables of $0 and $615 were included in Accounts receivable, net as of June 30, 2021 and
September 30, 2020, respectively.
Inventories
Inventories are stated at the lower of cost or net
realizable value with cost being measured on a first-in, first-out basis. For solar panel and battery installations, the Company transfers
component parts from inventories to cost of goods sold once installation is complete. The Company periodically reviews inventories for
unusable and obsolete items based on assumptions about future demand and market conditions. Based on this evaluation, provisions are made
to write inventories down to their net realizable value. The composition of inventory as of June 30, 2021 is as follows:
|
|
|
|
|
Inventory
|
|
Amount
|
Batteries and
solar panels
|
|
|
3,033,075
|
|
Supplies and other materials
|
|
|
1,007,332
|
|
Balance at June 30, 2021
|
|
|
4,040,407
|
|
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 sheets 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 other than temporary impairment
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 as well as
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. However, as described in Note 1, the Company primarily operates in the alternative energy sector
and in the digital currency mining sector, and thus, it is not in the business of investing in securities.
Privately held equity securities are recorded
at cost and adjusted for observable transactions for the 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 the consolidated statements 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, 2021, the cash balance in excess of the FDIC limits was
$21,959,870. 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 one customer whose revenue individually represented 10% or more of the Company’s total revenue. (See Note 15 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 as of June 30, 2021 and September
30, 2020, 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 during 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, 2021 and June 30, 2020, there were 1,375,805 shares
and 1,503,639 shares, respectively, issuable upon exercise of outstanding options and warrants, as well as 5,250,000 shares issuable
upon preferred stock conversions, that were excluded from the current and prior period calculations of diluted net loss per share as
their inclusion would have been anti-dilutive to the Company’s net loss.
Property
and equipment
Property
and equipment are stated at cost. Construction in progress is the construction or development of property and equipment that has not
yet been placed in service for its intended use. Depreciation for equipment, buildings, and leasehold improvements commences once they
are ready for its intended use. Land is not depreciated. Depreciation is calculated on a straight-line basis over the estimated useful
life of the asset as follows:
|
|
Useful
life
|
Building
|
|
|
30 years
|
Machinery and equipment
|
|
|
1 - 7 years
|
Mining equipment
|
|
|
3
- 15 years
|
Leasehold improvements
|
|
|
Shorter
of estimated lease term or 5 years
|
Furniture and fixtures
|
|
|
1 - 5 years
|
Long-lived
Assets
In accordance with the Financial Accounting
Standards Board ("FASB") Accounts Standard Codification (ASC) ASC 360-10, "Property, Plant and Equipment," the carrying
value of intangible assets and other long-lived assets is reviewed on a regular basis for the existence of facts or circumstances that
may suggest impairment. The Company recognizes impairment when the sum of the expected undiscounted future cash flow is less than the
carrying amount of the asset. Impairment losses, if any, are measured as the excess of the carrying amount of the asset over its estimated
fair value. For the nine months ended June 30, 2021 and 2020, the Company did not record an impairment expense.
Intangible
Assets and Goodwill
The Company accounts for business combinations
under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,” where the total purchase price
is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The
purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after
obtaining more information regarding, among other things, asset valuations, liabilities assumed, and revisions to preliminary estimates.
The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized
as goodwill.
The Company reviews its indefinite lived intangibles
and goodwill for impairment annually or whenever events or circumstances indicate that the carrying amount of the asset exceeds its fair
value and may not be recoverable. In accordance with its policies, the Company performed an assessment of indefinite lived intangibles
and goodwill and determined there was no impairment for the nine months ended June 30, 2021 and 2020.
Software
Development Costs
The Company capitalizes software development
costs under guidance of ASC 985-20 “Costs of Software to be Sold, Leased or Marketed” for our mPulse platform and under ASC
350-40 “Internal Use Software” for our mVSO, Canvas & Plaid products. Software development costs include payments made
to independent software developers under development agreements, as well as direct costs incurred for internally developed products. Software
development costs are capitalized once the technological feasibility of a product is established and such costs are determined to be recoverable.
Technological feasibility of a product requires both technical design documentation and infrastructure design documentation, or the completed
and tested product design and a working model. Significant management judgments and estimates are utilized in the assessment of when technological
feasibility is established, and the evaluation is performed on a product-by-product basis. For products where proven technology exists,
this may occur early in the development cycle. Prior to a product's release, if and when we believe
capitalized costs are not recoverable, we expense the amounts as part of "Product
development." Capitalized costs for products that are cancelled or are expected to be abandoned are charged to "Product development"
in the period of cancellation. Amounts related to software development, such as product enhancements to existing features, which are not
capitalized are charged immediately to "Product development."
Commencing upon a product's release, capitalized
software development costs are amortized to "Cost of revenues—software amortization" based on the ratio of current revenues,
to total projected revenues for the specific product, generally resulting in an amortization period of seven years for our current product
offerings. In recognition of the uncertainties involved in estimating future revenue, amortization will never be less than straight-line
amortization of the products remaining estimated economic life.
We evaluate the future recoverability of capitalized
software development costs on a quarterly basis. For products that have been released in prior periods, the primary evaluation criterion
is the actual performance of the software platform to which the costs relate. For products that are scheduled to be released in future
periods, recoverability is evaluated based on the expected performance of the specific products to which the costs relate. Criteria used
to evaluate expected product performance include: historical performance of comparable products developed with comparable technology,
market performance of comparable software, orders for the product prior to its release, pending contracts, and general market conditions.
Significant management judgments and estimates are utilized in assessing
the recoverability of capitalized costs. In evaluating the recoverability of capitalized costs, the assessment of expected product performance
utilizes forecasted sales amounts and estimates of additional costs to be incurred. If revised forecasted or actual product sales are
less than the originally forecasted amounts utilized in the initial recoverability analysis, the net realizable value may be lower than
originally estimated in any given quarter, which could result in an impairment charge. Material differences may result in the amount and
timing of expenses for any period if matters resolve in a manner that is inconsistent with management's expectations. If an impairment
occurs, the reduced amount of the capitalized software costs that have been written down to the net realizable value at the close of each
annual fiscal period will be considered the cost for subsequent accounting purposes.
Fair
value of financial instruments and derivative asset
The carrying value of cash, accounts payable and accrued
expenses, and debt (See Note 8) 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.
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, 2021 and September 30, 2020, respectively:
Fair
value measured at June 30, 2021:
|
|
Amount
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Derivative asset
|
|
$
|
7,434,630
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,434,630
|
Investment in equity security
|
|
|
223,823
|
|
|
|
223,823
|
|
|
|
—
|
|
|
|
—
|
Investment in debt security
|
|
|
500,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
500,000
|
Total
|
|
$
|
8,158,453
|
|
|
$
|
223,823
|
|
|
$
|
—
|
|
|
$
|
7,934,630
|
Fair value measured at September 30, 2020:
|
|
Amount
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Derivative asset
|
|
$
|
2,115,269
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,115,269
|
Investment in equity security
|
|
|
210,000
|
|
|
|
210,000
|
|
|
|
—
|
|
|
|
—
|
Investment
in debt security
|
|
|
500,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
500,000
|
Total
|
|
$
|
2,825,269
|
|
|
$
|
210,000
|
|
|
$
|
—
|
|
|
$
|
2,615,269
|
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, 2021:
|
|
Amount
|
Balance at September 30, 2020
|
|
$
|
2,615,269
|
Gain on derivative asset
|
|
|
5,319,361
|
Balance at June 30, 2021
|
|
$
|
7,934,630
|
Reclassifications
Certain prior year amounts have been reclassified
for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations or net
assets of the Company.
Segment
Reporting
Operating segments are defined as components
of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker,
or decision-making group, in deciding the method to allocate resources and assess performance. To better align with the Company’s
core focus, the Company reduced its reportable segments down to two by eliminating the digital agency segment. Results associated with
that component are now being reported under other revenue and eliminations.
Recently
issued accounting pronouncements
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. 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 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The
purpose of the standard is to improve the overall usefulness of fair value disclosures to financial statement users and reduce unnecessary
costs to companies when preparing the disclosures. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 and requires
the application of the prospective method of transition (for only the most recent interim or annual period presented in the initial fiscal
year of adoption) to the new disclosure requirements for (1) changes in unrealized gains and losses included in other comprehensive income
and (2) the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13
also requires prospective application to any modifications to disclosures made because of the change to the requirements for the narrative
description of measurement uncertainty. The effects of all other amendments made by ASU 2018-13 must be applied retrospectively to all
periods presented. 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.
The new standard did not have a material impact on the Company’s results of operations or cash flows.
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 a smaller reporting company for fiscal
years beginning after December 15, 2022. 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.
ACQUISITIONS
SOLAR WATT SOLUTIONS, INC
On February 23, 2021, the Company entered into an
Agreement and Plan of Merger (the “Merger Agreement”) with Solar Watt Solutions, Inc. (“SWS”) and its owners (the
“Sellers”).
At the closing on February 24, 2021, SWS became a
wholly owned subsidiary of the Company. In exchange, the Company issued (i) 477,703
shares of restricted common stock based on the average closing price of the Company’s common stock (as reflected on Nasdaq.com)
for the five trading days including and immediately preceding the closing date of $32.74
per share to the sellers, of which (a) 167,685
shares would be fully earned on closing, and (b) an additional 310,018
shares were issued and held in escrow, subject to holdback pending Sellers’ satisfaction of certain future milestones with
all such shares subject to a lock up of no less than 180 days and a leak out of no more than 10% of average daily trading value of the
prior 30 days for a period of 36 months following the closing, and (ii) up to $3,850,000 in cash was remitted to the Sellers, of which:
(c) $1,350,000 was remitted to Sellers on a pro rata basis at closing, less payment of $500,000 in Sellers’ debt at closing, (d)
$200,000 in cash was held back by the Company for a period of nine months to satisfy potential damages from indemnification claims and
any amounts owed pursuant to post-closing adjustments, which is included in the acquisition liability balance on the consolidated balance
sheet, (e) an additional $100,000 in cash was held back by the Company for a period of 90 days to satisfy any amounts owed pursuant to
post-closing adjustments, which is included in the acquisition liability balance on the consolidated balance sheet, and (f) up to $2,500,000
in cash was held back by the Company pending the Sellers’ satisfaction of certain future milestones, which is included in the contingent
consideration balance on the consolidated balance sheet.
The
Company determined the fair value of the consideration given to the sellers of SWS in connection with the transaction in accordance with
ASC 820 was as follows:
Consideration:
|
|
Fair Value
|
Cash
|
|
$
|
1,350,000
|
Contingent consideration
|
|
|
2,500,000
|
477,703 shares of common stock
|
|
|
13,246,704
|
Total Consideration
|
|
$
|
17,096,704
|
The total purchase price was allocated to identifiable
assets deemed acquired, and liabilities assumed, based on their estimated fair values as indicated below. We recorded certain adjustments
to the preliminary purchase price allocation during the three and nine months ended June 30, 2021, that resulted in a net increase of
$448,042 to goodwill. The business combination accounting is not yet final, 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
|
|
$
|
5,122,733
|
Goodwill
|
|
$
|
12,499,248
|
Other assets and liabilities assumed, net
|
|
$
|
(525,277)
|
Total
|
|
$
|
17,096,704
|
ATL DATA CENTERS, LLC
On December 9, 2020, the Company entered into an Agreement
and Plan of Merger (the “Merger”) with ATL Data Centers LLC (“ATL”) and its members.
At the closing,
ATL became a wholly owned subsidiary of the Company. In exchange, the Company issued 1,618,285 shares of restricted common stock based
on the average closing price of the Company’s common stock (as reflected on Nasdaq.com) for the five trading days including and
immediately preceding the closing date of $11.988 per share, to the selling members of ATL, of which: (i) 642,309 shares were fully earned
on closing, and (ii) an additional 975,976 shares
were issued and held in escrow, subject to holdback pending satisfaction of certain indemnification claims and future milestones, with
all such shares subject to a lock up of no less than 180 days and a leak out of no more than 10% of the average daily trading value of
the prior 30 days.
The consideration remitted in connection
with the Merger is subject to adjustment based on post-closing adjustments to closing cash, indebtedness, and transaction expenses of
ATL within 90 days of closing. The Company also assumed approximately $6.9 million in debts of ATL at closing. As part of the transaction
costs, the Company issued 41,708 shares of common stock for an aggregate value of $545,916 to the broker.
Of the 975,976 shares held in escrow, 515,724 shares
were released to the selling members of ATL and 68,194 shares were returned to the Company and canceled due to non-satisfaction of certain
indemnification claims during the three and nine months ended June 30, 2021. The remaining 392,058 shares held in escrow consist of 72,989
shares subject to holdback pending satisfaction of further indemnification claims and 319,069 shares subject to satisfaction of future
milestones.
The Company accounted for the acquisition
of ATL as an acquisition of a business under ASC 805.
The Company determined the fair value of the consideration
given to the selling members of ATL in connection with the transaction in accordance with ASC 820 was as follows:
Consideration:
|
|
Fair Value
|
1,550,091 shares of common stock
|
|
$
|
20,290,692
|
Total Consideration
|
|
$
|
20,290,692
|
The total purchase price was allocated to identifiable
assets deemed acquired, and liabilities assumed, based on their estimated fair values as indicated below. The business combination accounting
is not yet final, 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. In connection with the return of the 68,194
shares held in escrow that were cancelled due to the non-satisfaction of certain indemnification claims, total consideration,
including contingent consideration, decreased by $892,659
during the three and nine months ended June 30, 2021. Including the 68,194
returned shares, adjustments to the preliminary purchase price allocation resulted in a net decrease to goodwill of $685,037
and $810,570
during the three and nine months ended June 30, 2021, respectively.
Purchase Price Allocation:
|
|
|
Strategic contract
|
|
$
|
7,457,970
|
Goodwill
|
|
$
|
13,394,675
|
Other assets and liabilities assumed, net
|
|
$
|
(561,953)
|
Total
|
|
$
|
20,290,692
|
The strategic contract relates to
supply of a critical input to our digital currency mining business. The other assets and liabilities assumed includes $5.475 million in
digital currency mining equipment and notes payable related to this equipment, which was settled by the Company during the nine months
ended June 30, 2021. In connection with the acquisition, the Company had acquired an operating lease related to a rental building, which
had a purchase option associated with the lease agreement. The Company exercised the purchase option to buy the property in May
2021 and as a result terminated the lease (see Note 7 for further details).
P2K LABS, INC
On January 31, 2020, the Company, entered
into an Agreement with p2k, and its sole stockholder, Amer Tadayon (the “Seller”), whereby the Company purchased all of the
issued and outstanding shares of p2k in exchange for an aggregate adjusted 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 became a wholly
owned subsidiary of the Company.
Pursuant to the terms of the Agreement, the purchase
price was as follows:
|
a)
|
$1,039,500
in cash was paid to the Seller;
|
|
|
|
|
|
|
|
|
b)
|
31,183 restricted shares of the Company’s common stock, valued at $145,000, were issued to the Seller (the “Shares”). The Shares are subject to certain lock-up and leak-out provisions whereby the Seller may sell an amount of Shares equal to ten percent (10%) of the daily dollar trading volume of the Company’s common stock on its principal market for the prior 30 days (the “Leak-Out Terms”);
|
|
|
|
|
c)
|
$115,500 in cash was paid to an independent third-party escrow where such cash is subject to offset for adjustments to the purchase price and indemnification purposes; and
|
|
|
|
|
d)
|
64,516 restricted shares of the Company’s
common stock, valued at $300,000, were issued to an independent third-party escrow agent (the “Holdback Shares”) and will
be released to the Seller upon achievement of certain revenue milestones. During the nine months ended June 30, 2021, 56,444 restricted
shares of the Company’s common stock were released to the Seller and the balance of 8,072 shares of the Company’s common stock
were returned and cancelled. The Holdback Shares are subject to the Leak-Out Terms.
The Shares and Holdback Shares were deemed
to have a fair market value of $4.65 per share which was the closing price of the Company’s common stock on January 31, 2020.
|
|
|
|
|
e)
|
26,950 common stock options that were deemed
to have a fair market value of $88,935 on the date of the closing of the transaction.
|
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
|
|
$
|
1,155,000
|
95,699 shares of common stock
|
|
$
|
445,000
|
26,950 common stock options
|
|
$
|
88,935
|
Total Consideration
|
|
$
|
1,688,935
|
The
total purchase price of the Company’s acquisition of p2k was allocated to identifiable assets deemed acquired, and liabilities
assumed, based on their estimated fair values as indicated below.
Purchase Price Allocation:
|
|
|
Customer list
|
|
$
|
730,000
|
Design and other assets
|
|
$
|
123,000
|
Goodwill
|
|
$
|
957,388
|
Other assets and liabilities assumed, net
|
|
$
|
(121,453)
|
Total
|
|
$
|
1,688,935
|
GRIDFABRIC, LLC
On August 31, 2020, the Company entered
into a Membership Interest Purchase Agreement (the “Agreement”) with GridFabric, and its sole member, Dupont Hale Holdings,
LLC (the “Seller”), whereby the Company purchased all of the issued and outstanding membership units of GridFabric from the
Seller (the “Transaction”) in exchange for an aggregate purchase price of cash and stock of up to $1,400,000 (the
“Purchase Price”). The Transaction closed simultaneously with execution on August 31, 2020. As a result of the Transaction,
GridFabric, became a wholly owned subsidiary of the Company.
Pursuant to the terms of the Agreement, the Purchase
Price was as follows:
|
a)
|
$360,000 in cash was paid to the Seller at closing;
|
|
|
|
|
b)
|
$400,000 in cash was delivered to an independent third-party escrow agent where such cash is subject to offset for adjustments to the Purchase Price and indemnification purposes for a period of 12 months;
|
|
c)
|
26,427 restricted shares of the Company’s common stock, valued at $250,000, were issued to the Seller (the “Shares”). The Shares are subject to certain leak-out provisions whereby the Seller may sell an amount of Shares equal to no more than ten percent (10%) of the daily dollar trading volume of the Company’s common stock on its principal market for the prior 30 days (the “Leak-Out Terms”); and
|
|
|
|
|
d)
|
additional shares of the Company’s common stock, valued at up to $750,000, will be issuable to Seller if GridFabric achieves certain revenue and product release milestones related to the future performance of GridFabric (the “Earn-out Shares”). The Earn-Out Shares are also subject to the Leak-Out Terms.
|
The Shares were issued at
a fair market value of $9.46 per share. The Earn-Out Shares are accounted for as contingent consideration and the number of
shares to be issued will be determined based on the closing price of the Company’s common stock on the date such milestone event
occurs.
The Agreement contains standard representations,
warranties, covenants, indemnification and other terms customary in similar transactions.
In connection with the transaction, the
Company also entered into employment relationships and non-compete agreements with GridFabric’s key employees for a period of 36
months and plans to issue future equity compensation to said employees, subject to approval of the Company’s board of directors.
The Company accounted for the acquisition
of GridFabric 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
|
|
$
|
400,000
|
26,427 shares of common stock
|
|
$
|
250,000
|
Contingent consideration - common stock issuable upon achievement of milestone(s)
|
|
$
|
750,000
|
Total Consideration
|
|
$
|
1,400,000
|
The total purchase price of the Company’s acquisition of GridFabric
was allocated to identifiable assets deemed acquired, and liabilities assumed, based on their estimated fair values as indicated below.
Purchase Price Allocation:
|
|
|
Software
|
|
$
|
1,120,000
|
Customer list
|
|
$
|
60,000
|
Non-compete
|
|
$
|
190,000
|
Goodwill
|
|
$
|
26,395
|
Net Assets
|
|
$
|
3,605
|
Total
|
|
$
|
1,400,000
|
The following is the unaudited pro forma information assuming the acquisition
of GridFabric, p2k Labs, ATL, and SWS occurred on October 1, 2019:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
|
June 30, 2021
|
|
June 30, 2020
|
|
June 30, 2021
|
|
June 30, 2020
|
Net sales
|
|
$
|
11,916,065
|
|
|
$
|
4,824,897
|
|
|
$
|
24,883,292
|
|
|
$
|
11,522,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,677,127
|
)
|
|
$
|
(8,464,370
|
)
|
|
$
|
(17,050,808
|
)
|
|
$
|
(16,467,306)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share – basic and diluted
|
|
$
|
(0.49
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(1.80)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic and diluted
|
|
|
34,014,221
|
|
|
|
13,173,509
|
|
|
|
29,382,905
|
|
|
|
9,145,775
|
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 would have actually
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 transactions 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, the Company 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.
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 Company
also received 350,000 shares (“commitment shares”) of ILAL’s common stock. The Preferred Stock will accrue
cumulative in-kind accruals at a rate of 12% per annum and may increase upon the occurrence of certain events. The Preferred is now
convertible into common stock at a variable rate as calculated under the agreement terms.
The
commitment shares are recorded at fair value as of June 30, 2021 of $223,823.
The Preferred Stock is recorded as an AFS debt security
and is reported at its estimated fair value as of June 30, 2021. The Company identified a derivative instrument in accordance with ASC
Topic No. 815 due to the variable conversion feature. 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 as of June 30, 2021
Fair value assumptions:
|
|
June 30, 2021
|
Risk free interest rate
|
|
|
0.05
|
%
|
Expected term (months)
|
|
|
1.5
|
|
Expected volatility
|
|
|
141.80
|
%
|
Expected
dividends
|
|
|
0
|
%
|
5.
CAPITALIZED SOFTWARE
Capitalized software consists of the following as
of June 30, 2021 and September 30, 2020:
|
|
June 30, 2021
|
|
September 30, 2020
|
mVSO software
|
|
$
|
437,135
|
|
|
$
|
437,135
|
mPulse software
|
|
|
741,846
|
|
|
|
741,846
|
Less: accumulated amortization
|
|
|
(328,868
|
)
|
|
|
(202,778)
|
Capitalized Software, net
|
|
$
|
850,113
|
|
|
$
|
976,203
|
Capitalized
software amortization recorded as part of amortization expense for the nine months ended June 30, 2021 and 2020 was $126,090
and $121,582,
respectively.
6.
INTANGIBLE ASSETS
The Company amortizes intangible assets with
finite lives over their estimated useful lives, which range between two and twenty years as follows:
Useful
life
|
|
|
|
Patents
|
|
|
13-20 years
|
Websites
|
|
|
3 years
|
Customer list and non-compete agreement
|
|
|
1.5-4 years
|
Design assets
|
|
|
2 years
|
Trademarks
|
|
|
14 years
|
Engineering trade secrets
|
|
|
1-7 years
|
Strategic contract
|
|
|
5 years
|
Software
|
|
|
4 years
|
Intangible assets consist of the following
as of June 30, 2021 and September 30, 2020:
|
|
June
30, 2021
|
|
September
30, 2020
|
Customer list
and non-compete agreement
|
|
$
|
11,824,757
|
|
|
$
|
6,702,024
|
Strategic contract
|
|
|
7,457,970
|
|
|
|
—
|
Trade secrets
|
|
|
4,370,269
|
|
|
|
4,370,269
|
Software
|
|
|
1,120,000
|
|
|
|
1,120,000
|
Design assets
|
|
|
123,000
|
|
|
|
123,000
|
Patents
|
|
|
74,112
|
|
|
|
74,112
|
Websites
|
|
|
8,115
|
|
|
|
8,115
|
Trademarks
|
|
|
5,928
|
|
|
|
5,928
|
Intangible
assets:
|
|
|
24,984,151
|
|
|
|
12,403,448
|
Less:
accumulated amortization
|
|
|
(9,592,806
|
)
|
|
|
(5,353,792)
|
Intangible
assets, net
|
|
$
|
15,391,345
|
|
|
$
|
7,049,656
|
Amortization
expense for the nine months ended June 30, 2021 and 2020 was $4,239,280
and $1,952,779,
respectively.
The Company expects to record amortization
expense of intangible assets over the next five years and thereafter as follows:
|
|
|
|
2021
(three months remaining)
|
|
|
$
|
1,941,474
|
|
2022
|
|
|
|
7,072,469
|
|
2023
|
|
|
|
2,492,479
|
|
2024
|
|
|
|
2,065,344
|
|
2025
|
|
|
|
1,495,888
|
|
Thereafter
|
|
|
|
323,691
|
|
Total
|
|
|
$
|
15,391,345
|
7.
PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following
as of June 30, 2021 and September 30, 2020:
|
|
June 30, 2021
|
|
September 30, 2020
|
Mining equipment
|
|
$
|
62,399,492
|
|
|
|
—
|
Land and building
|
|
|
4,444,685
|
|
|
|
—
|
Machinery and equipment
|
|
|
309,833
|
|
|
|
193,042
|
Leasehold improvements
|
|
|
44,347
|
|
|
|
17,965
|
Furniture and fixtures
|
|
|
107,660
|
|
|
|
82,547
|
Construction in progress
|
|
|
140,336
|
|
|
|
—
|
Total
|
|
|
67,446,353
|
|
|
|
293,554
|
Less: accumulated depreciation
|
|
|
(2,693,210
|
)
|
|
|
(175,560)
|
Fixed assets, net
|
|
$
|
64,753,143
|
|
|
$
|
117,994
|
Depreciation
expense for the nine months ended June 30, 2021 and 2020 was $2,517,650 and
$51,952, respectively.
On May 19, 2021, the Company exercised its purchase
option on the ATL lease agreement to purchase property for $4.4 million at 2380 Godby Road, College Park, Georgia. The property contains
approximately six acres and includes approximately 41,000 square feet of office and warehouse space. ATL utilizes, and intends to utilize,
this space for cryptocurrency mining activities.
The
Company has purchase commitments for approximately $203.6
million related to purchase of miners as of
June 30, 2021, and the Company has paid $125.9 million towards these commitments as of the end of this period.
8.
LOANS
Long term
Long-term loans payable consists of the following:
|
|
|
|
|
|
|
June 30, 2021
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
Promissory notes
|
|
$
|
—
|
|
|
$
|
531,169
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
531,169
|
Promissory Notes
On 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 Company applied for and received loan forgiveness from the SBA on March 23, 2021. The entire principal balance and interest
charges were forgiven. The gain on loan forgiveness of $531,169 is included in other income in the consolidated statements of operations
during the nine months ended June 30, 2021.
9.
LEASES
Effective October 1, 2019, the Company accounts
for its leases under ASC 842, 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, corporate headquarters, and data center, one of which is with a related party. As of June 30,
2021, the Company's operating lease right of use asset and operating lease liability totaled $559,182 and $554,669, respectively.
A weighted average discount rate of 10% was used in the measurement of the right of use asset and lease liability. 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 sheets, but rather, lease expense is recognized over the lease term on a straight-line basis.
As of June 30, 2021, the Company’s
operating leases had a weighted-average remaining lease term of 5 years. 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 June 30, 2021. These operating leases also have
a weighted average discount rate of 10% at June 30, 2021.
The following is a schedule of the Company's
operating lease liabilities by contractual maturity as of June 30, 2021:
|
|
|
|
Fiscal year ending September 30, 2021 (three months remaining)
|
|
$
|
22,613
|
Fiscal year ending September 30, 2022
|
|
|
136,696
|
Fiscal year ending September 30, 2023
|
|
|
140,797
|
Fiscal year ending September 30, 2024
|
|
|
145,021
|
Fiscal year ending September 30, 2025
|
|
|
149,372
|
Thereafter
|
|
|
114,531
|
Total Lease Payments
|
|
|
709,030
|
Less: imputed interest
|
|
|
(154,361)
|
Total present value of lease liabilities
|
|
$
|
554,669
|
Total operating lease costs of $327,991 and $38,328 for
the nine months ended June 30, 2021 and 2020, respectively, were included as part of General and administrative expenses. The Company
terminated its ATL lease agreement upon exercise of its purchase option (see Note 7 for additional details). The lease agreement was entered
into on June 6, 2020 for a two year term at $52,958 of base rent per month.
The Company has financing leases in relation to the
equipment used at its data center. The following is a schedule of the Company’s financing lease liabilities by contractual maturity
as of June 30, 2021:
|
|
|
Fiscal year ending September 30, 2021 (three months remaining)
|
|
$
|
104,698
|
Fiscal year ending September 30, 2022
|
|
|
414,998
|
Fiscal year ending September 30, 2023
|
|
|
321,154
|
Fiscal year ending September 30, 2024
|
|
|
135,180
|
Fiscal year ending September 30, 2025
|
|
|
12,320
|
Thereafter
|
|
|
1,851
|
Total lease payments
|
|
|
990,201
|
Less: imputed interest
|
|
|
(117,461)
|
Total
present value of lease liabilities
|
|
$
|
872,740
|
These financing leases have a weighted
average lease term of 3.15 years and a weighted average discount rate of 10.0% at June 30, 2021.
10.
RELATED PARTY TRANSACTIONS
Zachary Bradford – Chief Executive
Officer and Director
During the nine months ended June
30, 2021, the Company paid Blue Chip Accounting, LLC (“Blue Chip”) $131,890 for accounting, tax, administrative services
and reimbursement for office supplies. Blue Chip is 50% beneficially owned by Mr. Bradford. None of the services were associated
with work performed by Mr. Bradford. The services consisted of bookkeeping, accounting, and administrative support assistance. The Company
also sub-leases office space from Blue Chip (see Note 14 for additional details). During the nine months ended June 30, 2021, $13,725 was
paid to Blue Chip for rent.
Matthew Schultz - Chairman of the Board
The Company 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.
11.
STOCKHOLDERS EQUITY
Overview
The Company’s authorized
capital stock consists of 50,000,000 shares of common stock and 10,000,000 shares of preferred stock, par value $0.001 per share. As of
June 30, 2021, there were 34,697,943 shares of common stock issued and outstanding, and 1,750,000 shares of preferred stock issued and
outstanding.
Amendment to Articles of Incorporation
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 are 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.
On October 7, 2020, the
Company executed that certain first amendment to 2017 Equity Incentive Plan to increase its option pool from 300,000 to 1,500,000 shares
of common stock (the “Plan Amendment”).
On March 16, 2021, the Company filed a Certificate of Amendment
to its Articles of Incorporation with the Nevada Secretary of State to increase its authorized shares of common stock to 50,000,000.
Common Stock issuances during the nine months ended
June 30, 2021
The Company issued 4,444,445 shares
of the Company’s common stock in connection with its underwritten equity offering at a price of $9.00 per share for net proceeds
of approximately $37.05 million.
The Company issued 236,000 shares of common stock as settlement of accrued bonus compensation related to the year ended September 30, 2020. The fair value of these shares was approximately $1.9 million and was fully expensed for in the prior year. The Company issued 327,725 shares of common stock for the current year related to bonus compensation. The fair value of these shares is approximately $3.07 million, out of which approximately $2.55 million has been expensed during the nine months ended June 30, 2021.
The Company issued 1,618,285 shares of common stock in relation to the acquisition of ATL (See Note 3 for additional details.)
The
Company issued 55,093
shares of common stock for services rendered for a total fair value of approximately $786,000 which
has been fully expensed during the nine months ended June 30, 2021.
The Company issued 387,345 shares of common stock in relation to the exercise of stock options and warrants. (See Notes 12 and 13 for additional details.)
The Company issued 477,703 shares of common stock in relation to the acquisition of SWS (See Note 3 for additional details.)
The
Company issued 18,392
restricted stock units for a total fair value of $510,000
of shares of common stock to certain SWS employees as part of the transaction to incentivize the employees for retention purposes.
These restricted stock units vest over a period of
one year, and we have expensed $80,821 during the nine months ended June 30, 2021.
The Company issued 9,090,910 shares of the Company’s common stock in connection with its underwritten public equity offering at a price of $22.00 per share for net proceeds of approximately $187.2 million.
On
June 3, 2021, the Company entered into an At The Market Offering Agreement (“ATM”) with H.C. Wainwright & Co., LLC, to
create an at-the-market equity program under which the Company may, from time to time, offer and sell shares of its common stock having
an aggregate gross offering price of up to $500,000,000
to or through H.C. Wainwright & Co., LLC. During the nine months ended June 30, 2021, the Company issued 731,190
shares of the Company’s common stock under The ATM for net proceeds of $11,860,566.
The shares were sold pursuant to a prospectus dated March 15, 2021 and a prospectus supplement dated June 3, 2021 filed with the SEC.
Common stock returned during the nine months ended
June 30, 2021
As a result of an adjustment of
holdback shares to actual milestones earned in relation to the p2k acquisition, 8,072 shares were returned and cancelled. (See Note 3
for additional details.)
As a result of an adjustment of holdback shares
pursuant to Article II and Schedule A of that certain Agreement and Plan of Merger in connection with the acquisition of ATL, 68,194 shares
were returned and cancelled. (See Note 3 for additional details.)
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.
The
Company issued 22,000 shares
of common stock for services rendered to independent consultants and
board members 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.
In relation to a 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.
In relation to a 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.
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
three 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.
We accrued $177,505 in preferred stock dividends
payable for the nine months ended June 30, 2021.
12.
STOCK WARRANTS
The following is a summary of stock warrant activity
during the nine months ended June 30, 2021.
|
|
Number of Warrant Shares
|
|
Weighted Average Exercise Price
|
Balance, September 30, 2020
|
|
|
1,299,215
|
|
|
$
|
21.82
|
Warrants granted
|
|
|
—
|
|
|
|
—
|
Warrants expired
|
|
|
(432,721
|
)
|
|
|
15.00
|
Warrants canceled / forfeited
|
|
|
—
|
|
|
|
—
|
Warrants exercised
|
|
|
(250,790
|
)
|
|
|
11.77
|
Balance, June 30, 2021
|
|
|
615,704
|
|
|
$
|
30.71
|
During
the nine months ended June 30, 2021, a total of 173,990
shares of the Company’s common stock were issued in connection with the exercise of common stock warrants at exercise prices
ranging from $3.36
and $20.00,
for total consideration of $2,883,622.
On
June 30, 2021, a total of 74,437 shares of the Company’s common stock were issued in connection with the cashless exercise
of 76,800 common stock warrants at exercise prices ranging from $0.83 to $3.67.
As of June 30, 2021, the outstanding warrants
have a weighted average remaining term was 0.93 years and an intrinsic value of $924,250.
As of June
30, 2021, there are warrants exercisable to purchase 605,704 shares of common stock in the Company
and 10,000 unvested
warrants outstanding that cannot be exercised until vesting conditions are met. 418,834 of the warrants require a cash investment to exercise
as follows, 2,500 require a cash investment of $8.00 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,
38,334 require a cash investment of $75.00 per share and 5,000 require a cash investment of $100.00 per share. 196,870 of the outstanding
warrants contain provisions allowing a cashless exercise at their respective exercise prices.
13.
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. On October 7, 2020, the Company executed a first amendment to the Plan to increase its share pool from 300,000 to 1,500,000 shares
of common stock. As of June 30, 2021, there were 26,261 shares available for issuance under the Plan.
On July 16, 2021, the Board unanimously approved to
(i) increase the number of shares of common stock authorized for issuance under the Plan by an additional 2,000,000 shares, resulting
(if such increase is authorized by the
Company’s stockholders at the annual meeting
of stockholders on September 15, 2021) in the aggregate of 3,500,000
shares of common stock authorized for issuance under
the Plan, and (ii) revise Section 19 of the Plan to more closely
align with the provisions of Section 422 of the Internal
Revenue Code of 1986, as amended, and Section 17.2 of the
Plan (the “Plan Amendment”).
As of July 16, 2021, options to purchase an aggregate
of 801,500 shares of common stock have been issued to three
officers of the Company, conditioned upon stockholder
approval of the Plan Amendment and ratification of such
issuances by the Company’s stockholders, which
approval must occur on or prior to April 16, 2022, or such options
shall be rendered null and void.
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, 2021:
|
|
Number
of Option Shares
|
|
Weighted
Average Exercise Price
|
Balance,
September 30, 2020
|
|
|
277,948
|
|
|
$
|
6.34
|
Options
granted
|
|
|
636,750
|
|
|
|
14.98
|
Options
expired
|
|
|
(11,928
|
)
|
|
|
9.13
|
Options
canceled / forfeited
|
|
|
(3,751
|
)
|
|
|
21.21
|
Options
exercised
|
|
|
(138,918
|
)
|
|
|
6.10
|
Balance,
June 30, 2021
|
|
|
760,101
|
|
|
$
|
13.50
|
As of June 30, 2021, there are options exercisable to purchase
357,774 shares of common stock in the Company. As of June 30, 2021, the outstanding options have a weighted average remaining term of
was 3.31 years and an intrinsic value of $3,721,218.
Option activity for the nine months ended June
30, 2021
During the nine months ended June 30,
2021, a total of 138,918 shares of the Company’s common stock were issued in connection with the exercise of 138,918 common stock
options at exercise prices ranging from $4.65 and $24.40, for a total consideration of $847,940.
During
the nine months ended June 30, 2021, the Company granted 636,750 options with a total fair value of $9,536,795 to
purchase shares of common stock to employees. The Company offset $953,125 of stock compensation expense against bonuses accrued during
the prior year. The shares were granted at quoted market prices ranging from $7.55 to $34.67 and were valued at issuance using the Black
Scholes model.
The Black-Scholes model utilized the following inputs
to value the options granted during the nine months ended June 30, 2021:
Fair value assumptions – Options:
|
|
June 30, 2021
|
Risk free interest rate
|
|
|
0.10-0.41%
|
Expected term (years)
|
|
|
1.7 – 5.3
|
Expected volatility
|
|
|
142%-240%
|
Expected dividends
|
|
|
0%
|
During the nine months ended June 30, 2021, the Company recognized $8,599,029 of stock compensation expense. As of June 30, 2021, the Company expects to recognize approximately $5.5 million of stock-based compensation for the non-vested outstanding options over a weighted-average period of 2.42 years.
On April 16, 2021, the Company’s board of directors
approved one-time options to key executives Zachary Bradford, Lori Love and S. Matthew Schultz subject to the availability of shares
under the Company’s 2017 Equity Incentive Plan with any remaining equity options to be granted when the Company obtains
shareholder approval to increase the shares under the Plan. As of June 30, 2021, 801,500 of
these options were waiting to be issued pending the shareholder approval.
Option activity for the nine months ended June 30, 2020
During the nine months ended June 30, 2020, the Company recognized $1,171,632 of stock compensation expense and granted 233,233 options to purchase shares of common stock to employees, where such options 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:
Fair value assumptions – Options:
|
|
June 30, 2020
|
Risk free interest rate
|
|
|
0.85-1.73%
|
Expected term (years)
|
|
|
3-5
|
Expected volatility
|
|
|
124%-209%
|
Expected dividends
|
|
|
0%
|
14.
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, unless
otherwise cancelled the lease automatically renews annually. The lease was renewed through February 28 ,
2022.
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
called for the Company to make payments of $4,057 in base rent per month through July 31, 2021 subject to an annual 3% rent
escalation. The lease was terminated on July 31, 2021.
Carlsbad Office
On June 17, 2021, the Company entered into a lease agreement at 2042 Corte Del Nogal, Suite C, Carlsbad, CA 92011. The agreement calls for the company to make monthly payments of $11,307 in base rent through June 30, 2026, subject to an annual 3% rent escalation.
Las Vegas Offices
On
January 2, 2020, the Company entered into a sublease agreement with Blue Chip 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 called for $1,801 in base rent through October 31, 2020. The Company did not renew this lease and it was terminated on October 31, 2020.
Contingent consideration
On August 31, 2020, the Company acquired GridFabric. Pursuant to the terms of the purchase agreement, additional shares of the Company’s common stock valued at up to $750,000 will be issuable if GridFabric achieves certain revenue and product release milestones.
On
February 24, 2021, the Company acquired SWS. Pursuant to the terms of the purchase agreement, additional cash consideration of $2,500,000
will be payable if Solar Watt Solutions achieves
certain revenue milestones.
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 contingent liabilities.
For a description of our material pending
legal proceedings, please see Part II, Item I of this Quarterly Report on Form 10Q.
15. MAJOR CUSTOMERS AND VENDORS
For the nine months ended June 30, 2021 and 2020,
the Company had the following customers that represented more than 10% of our sales. We report revenue from both customers under our Energy
Segment.
|
|
June 30, 2021
|
|
June 30, 2020
|
Customer A
|
|
|
10.0%
|
|
|
60.3%
|
Customer B
|
|
|
—
|
|
|
14.1%
|
For the nine months ended June 30, 2021 and 2020,
the Company had one supplier that represented more than 10% of our direct costs. Internally developed product costs and labor for services
rendered are excluded from the calculation. We report costs from vendor A under our Energy Segment and vendor B under our Digital Currency
Mining Segment.
|
|
June 30, 2021
|
|
June 30, 2020
|
Vendor A
|
|
|
28.77%
|
|
|
85.7%
|
Vendor B
|
|
|
24.83%
|
|
|
—
|
16.
SEGMENT REPORTING
We disclose segment information that is consistent with the way in
which management operates and views the business. To better align with the Company’s core focus, the Company reduced its reportable
segments down to two by eliminating the digital agency segment. Results associated with that component are now being reported under other
revenue and eliminations. Our operating structure now contains the following reportable segments:
Energy Segment – Consisting of our CleanSpark,
LLC, CleanSpark Critical Power Systems, Inc., GridFabric, and Solar Watt Solutions lines of business, this segment provides services,
equipment, and software to the energy industry.
Digital
Currency Mining Segment – Consisting of ATL and CleanBlok, Inc., this segment mines digital
currency assets, namely Bitcoin.
16.
SEGMENT REPORTING - Segment Reporting Assets
|
|
For
the Three Months Ended
|
|
For
the Nine Months Ended
|
|
|
June
30, 2021
|
|
June
30, 2020
|
|
June
30, 2021
|
|
June
30, 2020
|
Revenue
|
|
|
|
|
|
|
|
|
Energy
|
|
$
|
2,863,997
|
|
|
$
|
3,080,833
|
|
|
$
|
4,985,062
|
|
|
$
|
7,484,079
|
Digital
Currency Mining
|
|
|
8,649,440
|
|
|
|
—
|
|
|
|
16,098,643
|
|
|
|
—
|
Total
Segment Revenues
|
|
$
|
11,513,437
|
|
|
$
|
3,080,833
|
|
|
$
|
21,083,705
|
|
|
$
|
7,484,079
|
Other
revenue and eliminations
|
|
|
402,628
|
|
|
|
357,841
|
|
|
|
1,209,616
|
|
|
|
589,702
|
Consolidated
Revenues
|
|
$
|
11,916,065
|
|
|
$
|
3,438,674
|
|
|
$
|
22,293,321
|
|
|
$
|
8,073,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
(excluding depreciation and amortization)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
$
|
(1,635,401
|
)
|
|
$
|
(530,074
|
)
|
|
$
|
(4,711,928
|
)
|
|
$
|
(2,294,571)
|
Digital
Currency Mining
|
|
|
3,985,963
|
|
|
|
—
|
|
|
|
11,052,565
|
|
|
|
—
|
Total
segment profit/(loss)
|
|
$
|
2,350,562
|
|
|
$
|
(530,074
|
)
|
|
$
|
6,340,637
|
|
|
$
|
(2,294,571)
|
Corporate
items and eliminations (including depreciation and amortization)
|
|
|
19,027,689
|
|
|
|
8,021,227
|
|
|
|
22,785,256
|
|
|
|
13,988,082
|
Net
Loss
|
|
$
|
(16,677,127
|
)
|
|
$
|
(8,551,301
|
)
|
|
$
|
(16,444,619
|
)
|
|
$
|
(16,282,653)
|
Total Assets
|
|
June 30, 2021
|
|
September 30, 2020
|
Energy
|
|
$
|
34,277,907
|
|
|
$
|
13,621,190
|
Digital Currency Mining
|
|
|
228,128,995
|
|
|
|
—
|
Other and Corporate assets
|
|
|
35,081,919
|
|
|
|
8,718,873
|
Total
|
|
$
|
297,488,821
|
|
|
$
|
22,340,063
|
17. SUBSEQUENT
EVENTS
On July 8, 2021, the Company, through its wholly owned
subsidiary, CleanBlok, entered into a services agreement with Coinmint, LLC (“Coinmint”). Pursuant to the agreement, Coinmint
has agreed to house and power certain of CleanBlok’s cryptocurrency mining equipment in its facilities, and to use commercially
reasonably efforts to mine Bitcoin on behalf of CleanBlok. All Bitcoin mining services performed by Coinmint for CleanBlok shall be conducted
using mining equipment owned by CleanBlok, which equipment will be delivered by CleanBlok to a designated hosting locations over the term
of the agreement.
Pursuant to the agreement, as consideration for the
Hosting Services, CleanBlok shall pay Coinmint services fees, which shall be based on the operating costs incurred by Coinmint in performing
the Services, and a variable fee calculated based on the profitability of the Bitcoin mined during the relevant payment periods, subject
to uptime performance commitments. The Agreement has an initial term of one year, after which it will renew automatically for three-month
periods until terminated in accordance with the terms of the Agreement.
On July 22, 2021, the Company created CSRE Properties
Norcross, LLC, a single member limited liability company and wholly owned subsidiary of the Company, under the laws of the State of Georgia.
The entity was created to hold certain real-estate assets of the Company.
On July 28, 2021, the Company created CSRE Property
Management Company, LLC, a single member limited liability company and wholly owned subsidiary of the Company, under the laws of the State
of Georgia. The entity was created to hold certain real-estate assets of the Company.
On August 6, 2021, CSRE Properties Norcross, LLC purchased
certain real property located at 5295 Brook Hollow Parkway, Norcross, Georgia for $6,550,000. The property consists of approximately seven
acres and includes an approximately 87,000 square foot office building. The Company, through its subsidiary CleanBlok, Inc., intends to
utilize this office space to conduct certain of its cryptocurrency mining activities.
Between July 1, 2021 and August 13, 2021, the Company issued 893,324
shares of the Company’s common stock in connection with its ATM for net proceeds of $12,198,106.