Cleanspark, Inc 10-Q for FY2020 Q1

Cleanspark, Inc. (CLSK)

10-Q 2020-02-10 For: 2019-12-31

Added on April 12, 2026

About this 10-Q

Cleanspark, Inc filed this 10-Q on February 10, 2020, covering the quarter ended December 31, 2019 (FY2020 Q1).

Headline figures

Quarter ended December 31, 2019, as reported in this filing, compared with the same period a year earlier where the filing states it.

Revenue: $976.82K; up 271.5% from $262.91K a year earlier
Net loss: $1.92M

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[X]	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2019

[ ]	Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from __________ to __________

Commission File Number: 000-53498

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

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

	TABLE OF CONTENTS	Page
PART I – FINANCIAL INFORMATION
Item 1:	Financial Statements	3
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	8
Item 4:	Controls and Procedures	8
PART II – OTHER INFORMATION
Item 1:	Legal Proceedings	9
Item 1A:	Risk Factors	9
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	9
Item 3:	Defaults Upon Senior Securities	9
Item 4:	Mine Safety Disclosure	9
Item 5:	Other Information	9
Item 6:	Exhibits	10

	December 31, 2019			September 30, 2019
ASSETS
Current assets
Cash	$	6,376,557		$	7,838,857
Accounts receivable		707,506			777,716
Contract assets		28,517			57,077
Inventory		145,932			—
Prepaid expense and other current assets		608,275			1,210,395
Derivative asset		2,266,654			—
Investment in equity security		462,000			—
Investment in available for sale debt security, at fair value		425,700			—
Total current assets		11,021,141			9,884,045

Fixed assets, net		140,855			145,070
Operating lease right of use asset		74,549			—
Capitalized Software, net		1,015,911			1,055,197
Intangible assets, net		6,816,967			7,430,082
Goodwill		4,919,858			4,919,858

Total assets	$	23,989,281		$	23,434,252

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities	$	1,069,807		$	848,756
Contract liabilities		610,834			499,401
Convertible notes, net of unamortized discounts		623,905			—
Due to related parties		70,000			86,966
Lease liability		74,789			—
Loans payable, net of unamortized discounts		—			67,467
Total current liabilities		2,449,335			1, 502,590

Long- term liabilities
Convertible notes, net of unamortized discounts		3,784,590			2,896,321
Loans payable		150,000			150,000

Total liabilities		6,383,925			4,548,911

Stockholders' equity
Common stock; $0.001 par value; 100,000,000 shares authorized;
4,868,911 and 4,679,018 shares issued and outstanding as of December 31, 2019 and September 30, 2019, respectively		4,869			4,679
Preferred stock; $0.001 par value; 10,000,000 shares authorized;
1,750,000 and 1,000,000 Series A shares issued and outstanding as of December 31, 2019 and September 30, 2019, respectively		1,750			1,000
0 and 0 Series B shares issued and outstanding as of December 31, 2019 and September 30, 2019, respectively		—			—
Additional paid-in capital		112,571,454			111,936,125
Accumulated earnings (deficit)		(94,972,717	)		(93,056,463)
Total stockholders' equity		17,605,356			18,885,341

Total liabilities and stockholders' equity	$	23,989,281		$	23,434,252

	For the Three Months Ended
	December 31, 2019			December 31, 2018

Revenues, net	$	976,824		$	262,907

Cost of revenues		882,721			223,326

Gross profit		94,103			39,581

Operating expenses
Professional fees		1,516,587			1,016,007
Payroll expenses		711,539			160,351
Product development		—			348,660
General and administrative expenses		230,661			96,989
Depreciation and amortization		626,777			157,483
Total operating expenses		3,085,564			1,779,490

Loss from operations		(2,991,461	)		(1,739,909)

Other income (expense)
Loss on settlement of debt		—			(26,225)
Unrealized gain on equity security		368,868			—
Gain on derivative asset		2,266,654			—
Interest expense		(1,560,315	)		(517,417)
Total other income (expense)		1,075,207			(543,642)

Net loss	$	(1,916,254	)	$	(2,283,551)

Loss per common share - basic and diluted	$	(0.40	)	$	(0.63)

Weighted average common shares outstanding - basic and diluted		4,781,075			3,652,823

For the Three months Ended December 31, 2019
	Preferred Stock			Common Stock
	Shares		Amount	Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Total Stockholders' Deficit
Balance, September 30, 2019	1,000,000	$	1,000	4,679,018	$	4,679	$	111,936,125		$	(93,056,463	)	$	18,885,341
Shares issued for services	750,000		750	2,000		2		33,348			—			34,100
Options and warrants issued for services	—		—	—		—		602,169			—			602,169
Shares issued upon conversion of debt and accrued interest	—		—	187,100		187		(187	)		—			—
Rounding shares issued for stock split	—		—	793		1		(1	)		—			—
Net loss	—		—	—		—		—			(1,916,254	)		(1,916,254)
Balance, December 31, 2019	1,750,000		1,750	4,868,911		4,869		112,571,454			(94,972,717	)		17,605,356

	Amount		Level 1		Level 2		Level 3
Derivative asset	$	2,266,654	$	—	$	—	$	2,266,654
Investment in equity security		462,000		462,000
Investment debt security		425,700		425,700
Total	$	3,154,354	$	887,700	$	—	$	2,266,654

Fair value assumptions:	December 31, 2019
Risk free interest rate		1.58%
Expected term (months)		7
Expected volatility		190%
Expected dividends		0%

	December 31, 2019		September 30, 2019
Finished Goods	$	145,932	$	—
Total	$	145,932	$	—

	December 31, 2019			September 30, 2019
mVSO software	$	352,211		$	352,211
mPulse software		741,846			741,846
Capitalized Software:		1,094,057			1,094,057
Less: accumulated amortization		(78,146	)		(38,860)
Capitalized Software, net	$	1,015,911		$	1,055,197

	December 31, 2019			September 30, 2019
Patents	$	74,112		$	74,112
Websites		16,482			16,482
Customer list and non-compete agreement		5,722,024			5,722,024
Trademarks		5,928			5,928
Engineering trade secrets		4,370,269			4,370,269
Intangible assets:		10,188,815			10,188,815
Less: accumulated amortization		(3,371,848	)		(2,758,733)
Intangible assets, net	$	6,816,967		$	7,430,082

	December 31, 2019			September 30, 2019
Machinery and equipment	$	213,728		$	212,082
Leasehold improvements		7,801			—
Furniture and fixtures		75,121			75,121
Total		296,650			287,203
Less: accumulated depreciation		(155,795	)		(142,133)
Fixed assets, net	$	140,855		$	145,070

Long-term loans payable consist of the following:	December 31, 2019		September 30, 2019

Promissory notes	$	150,000	$	150,000

Total	$	150,000	$	150,000

Current loans payable consist of the following:	December 31, 2019		September 30, 2019

Promissory notes	$	—	$	50,000
Insurance financing loans		—		17,467
Current loans payable:		—		67,467
Unamortized debt discount		—		—

Total, net of unamortized discount	$	—	$	67,467

	For the Three Months Ended
	December 31, 2019			December 31, 2018
Cash Flows from Operating Activities
Net loss		(1,916,254	)	$	(2,283,551)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock based compensation		636,269			627,955
Unrealized gain on equity security		(368,868	)		—
Amortization of operating right of use asset		10,731
Depreciation and amortization		626,777			157,483
Amortization of capitalized software		39,286			348,660
Amortization of debt premium		(18,832	)
Loss on settlement of debt		—			26,225
Gain on derivative asset		(2,266,654	)		—
Amortization of debt discount		1,512,174			466,341
Changes in assets and liabilities
Decrease in prepaid expenses and other current assets		602,120			22,157
Decrease in contract assets		28,560			52,439
Increase in contract liabilities		111,433			—
(Increase) decrease in accounts receivable		70,210			(114,485)
Increase in accounts payable		221,051			252,971
Decrease in lease liability		(10,491	)		—
Increase in inventory		(145,932	)		—
Decrease in due to related parties		(16,966	)		(222,639)
Net cash used in operating activities		(885,386	)		(666,444)

Cash Flows from investing
Purchase of fixed assets		(9,447	)		(2,928)
Investment in capitalized software		—			(117,772)
Investment in debt and equity securities		(500,000	)		—
Net cash used in investing activities		(509,447	)		(120,700)

Cash Flows from Financing Activities
Payments on promissory notes		(67,467	)		(222,725)
Proceeds from related party debts		—			75,030
Payments on related party debts		—			(213,100)
Proceeds from convertible debt, net of issuance costs		—			4,995,000
Proceeds from exercise of warrants		—			1,089
Proceeds from issuance of common stock		—			361,801
Net cash from financing activities		(67,467	)		4,997,095

Principal	$	1,250,000
Unamortized debt discount		(626,095)
Total, net of unamortized discount		623,905

Principal	$	10,750,000
Unamortized debt discount		(6,965,410)
Total, net of unamortized discount	$	3,784,590

Fiscal year ending September 30, 2020	$	37,984
Fiscal year ending September 30, 2021		43,170
Total Lease Payments		81,154
Less: imputed interest		(6,365)
Total present value of lease liabilities	$	74,789

	§	The holders of shares of Series B Preferred Stock will have no right to vote on any matters, questions or proceedings of the Company including, without limitation, the election of directors;

	§	Commencing on the date of issuance, the Series B Preferred Stock will accrue cumulative in kind accruals (“the Accruals”) at the rate of 7.5% per annum;

	§	Upon any liquidation, dissolution or winding up of the Company, the holders of the Series B Preferred Stock will be entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount with respect to each share of Series B Preferred Stock equal to $5,000.00 (the “Face Value”), plus an amount equal to any accrued but unpaid Accruals thereon (the “Liquidation Value”);

	§	On maturity, the Company may redeem the Series B Preferred Stock by paying the holder the Liquidation Value;

	§	Before maturity, the Company may redeem the Series B Preferred stock on 30 days’ notice by paying 145% of the outstanding Face Value per share;

	§	If the Company determines to liquidate, dissolve or wind-up its business and affairs, the Company will, within three trading days of such determination and prior to effectuating any such action, redeem all outstanding shares of Series B Preferred Stock;

	§	In the event of a conversion of any shares of Series B Preferred Stock, the Company will (a) satisfy the payment of the Conversion Premium, which is defined as the Face Value of the shares converted multiplied by the product of 7.5% and the number of whole years between issuance and maturity, and (b) issue to the holder of the shares of Series B Preferred Stock a number of conversion shares equal to the Face Value divided by the applicable Conversion Price (defined as 90% of the of the 5 lowest individual daily volume weighted average prices of the Common Stock from issuance to conversion less $0.75 per share, but no less than the Floor Price ($3.50) with respect to the number of shares converted; While the note is outstanding if Triggering Events occur the conversion rate may be decreased by 10% and the interest rate increased by 10% for each Triggering Event. In the event of certain defaults, conversion price may not be subject to a floor.

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

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

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

	Number of Warrant Shares		Weighted Average Exercise Price
Balance, September 30, 2019		1,314,063	$	21.62
Warrants granted		—	$	—
Warrants expired		—		—
Warrants canceled		—		—
Warrants exercised		—		—
Balance, December 31, 2019		1,314,063	$	21.62

	Number of Option Shares		Weighted Average Exercise Price
Balance, September 30, 2019		81,254	$	11.82
Options granted		136,697	$	5.62
Options expired		—		—
Options canceled		—		—
Options exercised		—		—
Balance, December 31, 2019		217,951	$	7.93

Fair value assumptions – Options:	December 31, 2019
Risk free interest rate		1.52-1.73%
Expected term (years)		3-5
Expected volatility		124%-144%
Expected dividends		0%

	December 31, 2019			December 31, 2018
Customer A		91.2	%		—
Customer B		—			51.4%
Customer C		—			45.9%

	December 31, 2019			December 31, 2018
Vendor A		—			22.9%
Vendor B		—			19.0%
Vendor C		—			37.4%
Vendor D		—			17.1%
Vendor E		93.0	%		—

	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 (the “Holdback Shares”). The Holdback Shares will be released to Seller once p2k achieves certain revenue milestones for the future performance of p2k. The Holdback Shares will also be subject to the Leak-Out Terms once they are released from escrow 12 months from closing. The Shares and Holdback Shares were issued at a fair market value of $4.65 which was the closing price on January 31, 2020.

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


Date: February 10, 2020	By: /s/ Zachary K. Bradford Zachary K. Bradford Title: Chief Executive Officer (Principal Executive Officer)



Date: February 10, 2020	By: /s/Lori L. Love Lori L, Love Title: Chief Financial Officer (Principal Financial and Accounting Officer)

By:	/s/ Zachary Bradord
Name:	Zachary Bradford
Title:	Chief Executive Officer,
Date:	February 10, 2020

By:	/s/ Lori Love
Name:	Lori Love
Title:	Chief Financial Officer
Date:	February 10, 2020