UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the fiscal year ended September 30, 2016
For the transition period from _________ to ________
Commission file number: 000-53498
CleanSpark, Inc.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of incorporation or organization)
87-0449945
(I.R.S. Employer Identification No.)
70 North Main Street, Ste. 105
Bountiful, Utah
(Address of principal executive offices)
84010
(Zip Code)
Registrant’s telephone number: (801) 244-4405
Securities registered under Section 12(b) of the Exchange Act:
Title of each class
None
Name of each exchange on which registered
Not applicable
Securities registered under Section 12(g) of the Exchange Act:
Title of each class
Common Stock, $.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second
fiscal quarter. $27,918,597
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 30,752,119 shares as of
December 27, 2016
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Table of Contents
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Properties
Legal Proceedings
Mine Safety Disclosure
TABLE OF CONTENTS
PART I
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits, Financial Statement Schedules
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Item 1. Business
Our Business
PART I
We are in the business of acquiring, licensing and marketing patents and technology to create sustainable energy for our energy customers. Our mission is to lead
a revolution in transforming global energy into a clean, affordable, and sustainable infrastructure that promotes socio-economic upliftment.
We recently entered into an asset purchase agreement and amendment thereto (the “Purchase Agreement”), and acquired substantially all of the assets of
CleanSpark Holdings, LLC. As a result of the Purchase Agreement and the acquisition of the assets, we have taken over the CleanSpark business as another
opportunity in the energy sector, along with our existing Gasifier business. We believe that that synergies created from these businesses will strengthen our overall
capacity to obtain financing, increase our customer base, open new distribution channels and increase our competitive strength in the energy market, all to the
ultimate benefit of our shareholders.
Our Flex Power System Business
Integral to CleanSpark’s business is the Flex Power System (the “System”), which we acquired in the acquisition of the assets. The System provides secure,
sustainable energy with significant cost savings for its energy customers. The System allows customers to efficiently manage renewable energy generation, other
distributed energy generation technologies including waste to energy, energy storage systems, and consumption. By having autonomous control over the facets of
energy usage and energy storage, customers are able to reduce their dependency on utilities, thereby keeping energy costs relatively constant over time. The
overall aim is to transform energy consumers into energy producers by supplying power that anticipates their routine instead of interrupting it.
Around the world, the aging grid is becoming unstable and unreliable due to increases in loads and lack of new large-scale generation facilities. This inherent
instability is compounded by the push to integrate a growing number and variety of renewable but intermittent energy generators and advanced technologies into
outdated electrical systems. Simultaneously, defense installations, industrial complexes, communities, and campuses across the world are turning to virtual power
plants, distributed energy resources (DERs), energy storage systems (ESSs), and microgrids as a means to decrease their reliance from the grid, utilize cleaner
power, and enhance energy security and surety.
The convergence of these factors has created a “perfect storm” in the power supply optimization and energy management arena. Efficiently building and
operating DERs, ESSs, the macrogrid, and microgrids of tomorrow, while maximizing the use of sustainable energy to produce affordable, stable, predictable, and
reliable power on a large scale, is a significant opportunity that first-movers can leverage to capture a large share of this emerging global industry.
A microgrid is comprised if any number of generation, energy storage, and smart distribution assets that serve a single or multiple loads, both connected to the
grid and “islanded.” In the past, microgrids have consisted or off-grid generators organized with controls to provide power where utility lines cannot run. Today,
modern microgrids integrate renewable energy generation systems (REGS), DERs, with advanced ESSs and interoperate with the local utility grid. Advanced
autonomous cyber-secure microgrids controls relay information between intelligent hardware and localized hybrid-cloud infrastructure to make decisions in real-
time that deliver optimum power where it is needed, when it is needed.
Our System is an integrated Distributed Energy Resource Management System (DERMS) including microgrid control functionality that seamlessly integrates all
forms of energy generation with DERS, ESS, and control of facility loads to provide energy security for the entire system, or a subset of critical circuits, in real
time free of cyber threats. Able to interoperate with the local utility grid, the System brings users the ability to choose when to buy or sell power to and from the
grid and participate in the developing wholesale ancillary services markets, enabling what we believe is the most cost effective power solution that exists on the
current market.
Our System is ideal for commercial, industrial, mining, defense, campus and community users and ranges in size from 4KW to 10MW and beyond and can
deliver power at or below the current cost of utility power over the lifetime of the System.
Our services consist of intelligent solar monitoring solutions, microgid design and engineering, project development consulting services, System installation and
consulting, and turn-key microgrid implementation services. The work is performed under fixed price bid contracts, negotiated price contracts, fully financed
power purchase agreements, or energy services agreements such as Microgrid as a Service (MaaS).
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mPulse Software Suite
Our System utilizes our mPulse Energy Operating Platform software suite, which is broken down into three core components: “Receptor” monitoring solution,
“FractalNode” Microgrid Controller, and “Cortex” Microgrid Operations Center. The Receptor line of monitoring solutions allows users to monitor energy
supply and demand with nearly no additional hardware. The FractalNode Controller allows users to employ control and energy management capabilities utilizing
CleanSpark’s FractalGrid systems architecture for Distributed Energy Resources (DERs) optimization and microgrid functionality. Cortex Microgrid Operation
Centers simplify portfolio customer’s fleet management and allow users to access aggregated data of multiple systems while offering drill down capability and
streamlining Operations and Maintenance (O&M) functions.
We recently hired a software systems engineer company to assist us with an upgrade of our existing software system. We will also be hiring an internal team of
software developers in January of 2017. Our existing system (Version 1.0) works well, but integrates a number of coding languages and requires some custom
engineering for each client implementation. Our upgraded software (Version 2.0) is expected to provide a more streamlined, maintainable, self-configuring, and
scalable solution for our clients and allow us to more quickly and profitability implement our solution across multiple and rapidly increasing customer sites. We
are developing a solution that can be implemented with either basic or advanced features to meet the needs of our customers and will be launching the features
across our platform upon completion. We expect the Version 2 improvements upon Version 1 software features to be completed as outlined below:
Phase 1: Version 2 Smart Solar Monitoring Solution – January 2017
Phase 2: Version 2 Solar + Storage Solution – March 2017
Phase 3: Version 2 Full Microgrid platform – April 2017
Phase 4: Version 2 Utility Dispatchable Microgrid platform – May 2017
MicroGrid Development Projects
The California Energy Commission (CEC) awarded a grant to Harper Construction Company, Inc. in July 2013 to support a microgrid technology demonstration
project. CleanSpark was subcontracted to provided design, development, integration, and installation services for the FractalGrid at the School of Infantry in the
52 Area of Marine Corps Base Camp Pendleton. The Project was subsequently transferred to CleanSpark for consideration and an agreement to indemnify Harper
Construction for all future responsibilities of maintenance, operations and warranty.
The project included integration of our Version 1.0 proprietary software and controls platform with a variety of energy storage technologies. The system utilizes
solar energy generated by pre-existing existing fixed-tilt solar photovoltaic panels and fifteen dual axis tracking concentrated photovoltaic units. Our distributed
controls combine the generation with energy storage technologies to create four separate microgrids that self-align together to create a larger microgrid that ties
directly into the larger utility grid at the 12kV level, allowing the base to consume energy from the most reliable, affordable source at any given time. The system
provides a 100% renewable and sustainable solution to energy security.
In the event of an outage or other energy surety threat, the software can autonomously separate the microgrids from the utility and the controls operate them
independently in “island” mode, without interrupting service to critical circuits. Once energy from the grid is stabilized, our platform reconnects the microgrid to
the utility. Each individual fractal microgrid can work independently or in concert as the larger 1.1MW FractalGrid, sharing data and energy throughout the group
to improve efficiency, protect critical circuits, manage supply and demand, and allow for maintenance or repairs, as needed. The entire installation provides the
Marine Corps and Department of the Navy with reliable energy security with built in cyber defense.
Since the CEC Grant described above, we have begun the first and second stages of a follow-on implementation at the Marine Corps Base Camp Pendleton which
is composed of a $75,000 engineering and design contract. The contract has been expanded through exercise of a contract option to engage us for a $60,000
optimization and control logic development that may result in an additional contract option for $2,362,472 for construction, integration and commissioning of the
designed and optimized System configuration. We expect the prime contractor to exercise these options. We anticipate the requirement of $500,000 to $750,000
in project financing, line of credit or similar funding to complete this project. As of the date of this filing we have completed billings of $75,000 in relation to the
engineering and design contract and $36,593 related to the optimization and control logic development contract.
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This project is an example of the far reaching capabilities of our System and the variety of applications that are available as plug and play solutions. We are
pursuing additional microgrid projects and anticipate the need for additional short-term project line of credit or other similar financing of up to $750,000 over the
next twelve months to effectively execute on these proposals.
Our Gasifier Business
Integral to our existing business is the Gasifier. We own Patent Nos. 9,359,567, 8,518,133 8,105,401 and 8,347,829 protecting our gasification technology and
process for using feedstock comprising gaseous fuel. Our technology converts any organic material into SynGas. SynGas can be used as clean, renewable,
environmentally friendly, warming fuel for power plants, motor vehicles, and as feedstock for the generation of DME (Di-Methyl Ether). DME is the premier
energy carrier and offers a range of important benefits:
• Simple and low cost of production
• An environmentally-benign propellant and coolant
• Clean-burning and high energy efficiency
• Lower transportation and distribution costs
• Easily converted into other fuels and chemicals
Our Gasifier converts the following materials into clean, reusable, renewable, and affordable energy:
• Municipal Solid Waste (MSW)
• Municipal sewage sludge
• Food and cooking waste
• Petroleum sludge and oily wastes
• Animal manures
• Cellulosic and non-cellulosic biomass
• Energy crops
• Scrap tires
• Coal
The process involves the grinding, drying, separating, mixing, and then pelletizing of solid waste. These pellets constitute the feedstock for the Gasifier. Gasifying
the pellets produces SynGas. SynGas can be converted into multiple forms of energy including motor vehicle and jet fuels. The SynGas produced is so clean that
it generally does not require hot-gas cleanup. SynGas is mostly hydrogen and carbon monoxide. Hydrogen and carbon monoxide are primary building blocks for
fuels and chemicals. SynGas is a clean burning fuel suitable for use in duel-fuel diesel engines, gas turbines, and steam boilers.
We believe that our process will turn the world’s waste problem into an abundant, renewable resource of energy. Our production can be adapted to the specific
energy requirements of a given area. Communities are expected to benefit from the countless options created including inexpensive green electric power for
homes, clean-burning fuel for garbage trucks, street maintenance equipment, or for resale to other municipalities. Because of the modular nature of the
components intrinsic to the process, the plant could provide one energy source, then be converted to provide a different energy product. Our facility could produce
additional electric power during the peak demand part of the day and produce fuels during the rest of the day.
Our market segmentation is vast as we expect to apply our technology to anything that is carbon based. The markets for which we have focused our efforts
include: the electric utility market, municipal waste, processing plants, the refining sector, stranded natural gas fields, and Canadian oil sands.
We have begun pursuing opportunities to utilize the assets and intellectual properties purchased. We aim to further develop these technologies in order to pursue
licensing, manufacturing and direct sales agreements for our Gasifier technology.
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The technologies and prototype will begin undergoing clinical lab testing to further establish its capability of producing large volumes of clean, renewable energy
from any carbon compound (Municipal Solid Waste (MSW) , Coal, Sewage Sludge) into clean Synthesis Gas. Our Gasifier is still under development and a
commercially viable Gasifier is not expected to be sellable until the fourth quarter of 2017. In December of 2014, we executed an agreement with Combustion
Resources, LLC to independently test our production model prototype. Combustion was engaged to independently test the Gasifer's performance and certify the
results of its performance. Combustion Resources completed the initial stages of testing. Upon completion of the testing an initial project report was published
outlining the results and suggested improvements. We are preparing the suggested improvements and anticipate that the cost of these improvements will be
between $50,000 and $75,000. Upon completion of the improvement we will conduct an extended test run with an independent third party. We believe the results
of these independent tests will provide the results needed to prove its commercial viability, at which time we would begin to actively market our Gasifier units.
We have not engaged in any significant negotiations to sell our Gasifier products to any major customers. Once completed, we intend to distribute our products
through advertisements and sales calls on potential customers with demonstrations of how the products work. We anticipate the need for a project financing
partner, which we have not yet identified to support manufacturing and at least $250,000 in financing to support the required sales activities. The failure to acquire
customers to generate revenues will negatively affect our financial performance and anticipate the need for at least $500,000 in financing over the next twelve
months to execute on our business plans.
Competition
We face significant competition in the alternative energy and microgrid markets. Some of our competitors have substantially larger financial and other resources.
Factors that affect our ability to further test a commercially viable Gasifier and upgrade our System include available funds, available information and our
standards established for projected return on investment.
Our Flex Power System is set up to compete against larger companies. The Flex Power System is an integrated DERMS and microgrid control platform that
seamlessly integrates energy generation with energy storage devices and controls facility loads to provide energy security in real time. The system is able to
interoperate with the local utility grid and allows users the ability to obtain the most cost effective power for a facility. The System is technology agnostic and can
incorporate into multiple vendors and manufacturers products and legacy systems. The Flex Power System is ideal for commercial, industrial, mining, defense,
campus and community users ranging from 4 kw to 10 MW and beyond and can deliver power at or below the current cost of utility power. All of these attributes
contribute to our ability to compete with the larger, more established competitors that typically rely on their own manufactured products and hardware solutions to
enable proprietary controls that provide similar functionality. By requiring replacement of existing hardware with compatible hardware, and being limited to
single-vendor solutions, system deployment costs of single-vendor solutions with limited ability for legacy asset integration typically result in higher costs when
compared to the Flex Power System.
DERMS with Microgrid control technologies are new to the market and can be deployed in various formats. Seven technologies that are predominantly used in
commercial applications and/or have been extensively studied are:
• Locus (Power monitoring)
• GridBridge (Power monitoring)
• Siemens (Intelligence and Automation)
• Schnider Electric (Intelligence and automation)
• ABB (Intelligence and Automation)
• General Electric (Intelligence and Automation)
• Hitachi (Intelligence and Automation)
• Spirae (Intelligence and automation and Project Proposal Tool)
• Energy Toolbase (Project Design Tool)
• Homer (Project Design Tool)
• Growing Labs Inc. (Project Design Tool and Intelligence/Automation)
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These current technologies of our competitors have a number of inherent potential shortfalls:
• Operational sensitivity to specific hardware solutions potentially increasing the cost of implementations.
• Non-automated systems require constant monitoring increasing operating costs.
The principal advantages of our System are:
• Technology agnostic approach allows customers to leverage aged legacy systems reducing implementation costs.
• The automated process is user friendly and does not require highly qualified engineers to operate.
• We believe our project optimization tool is more accurate than alternative options on the market due to inclusion of current costing, confirmed and
validated operational performance data of ESSs instead of specified performance, state/federa/local incentives, and comparative rate structure engine.
Our Gasifier system is set up to compete against larger gasification projects. Our modular concept allows for parallel processing so a facility could be easily
expanded or reduced without risk or changing the basic structure by simply adding or removing module units; it also allows for multiple end product processing,
producing electricity, ethanol, and fuels simultaneously, and for universal parts which reduces maintenance costs. This design factor solves repair and
maintenance problems by simply shutting down the unit(s) to be repaired and bringing the reserve unit(s) online. All of these attributes contribute to our ability to
compete with the larger, more established competitors that have large systems that require significant downtime for maintenance and repair.
Gasification technologies can incorporate any one of a number of Gasifiers. Eight gasification technologies that are predominantly used in commercial
applications and/or have been extensively studied are:
• Texaco Entrained Flow (Downflow) Gasifier
• E-Gas Entrained Flow (Upflow) Gasifier
• Shell Entrained Flow (Upflow) Gasifier
• KRW Fluidized-Bed Gasifier
• Kellogg Transport Reactor Gasifier
• Lurgi Dry Ash Gasifier
• British Gas/Lurgi Fixed Bed Gasifier
• Plasma Gasification
These current technologies of our competitors have a number of inherent problems:
• Large footprint plants and high operating costs.
• Operational sensitivity to properties of different feedstock especially moisture content.
• Tendency to caking and bridging.
• Produces a dirty gas, expensive to clean or only suitable for low efficiency conversion in a steam-boiler turbine generator (10% electrical efficiency).
• Inefficient usage of created energy to power plasma conversion.
The principal advantages of our Gasifier are:
• Modular concept allows for parallel processing so a facility could be easily expanded or reduced without risk or changing the basic structure by simply
adding or removing module units; it also allows for multiple end product processing, producing electricity, ethanol, and fuels simultaneously, and for
universal parts, which reduces maintenance costs.
• The one stage process is very simple and does not require highly qualified engineers to operate because of the automation.
• The direct heat transfer of the gases to the material being gasified is efficient, and as a natural consequence of the process, the product gas is stripped of its
impurities, eliminating the costly hot gas clean up associated with other Gasifiers.
• Pollutant absorbing binder aids in efficiency, cracking hydrocarbons acting as a catalyst, and absorbs the pollutants, oxidizes carbon eliminating water
vapor and all but 5 – 10% carbon dioxide, which in the Company’s estimation will eliminate the need for carbon sequestration.
• Ash by product makes an excellent road and cement aggregate.
• Process is nearly 100% environmentally friendly.
• Any and all liquid and solid organic wastes can be utilized and disposed of, producing no residual wastes.
Intellectual Property
In relation to our Gasifier business, we own the following patents: Patent No. 9,359,567 ‘Gasification Method Using Feedstock Comprising Gaseous Fuels’;
Patent No. 8,518,133 ‘Parallel Path, Downdraft Gasifier Apparatus and Method’; and Patent No. 8,105,401 ‘Parallel Path, Downdraft Gasifier Apparatus and
Method.’
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On April 26, 2016, we entered into Stock Purchase Agreement with James Harper to acquire an additional patent as represented in an Assignment of even date.
Specifically, the Agreement granted us the United States Patent No. 8,347,829 issued January 8, 2013 by the United States Patent and Trademark Office. The
Assignment transfers the patent and all rights associated therewith to us. Through this Assignment, the Company is now the sole owner of the patent, which is an
invention entitled Electrolytic Reactor and Related Methods for Supplementing the Air Intake of an Internal Combustion Engine. The Company anticipates
integrating this technology, in whole or in part, into its downdraft gasification system, enabling the capture and conversion of process byproducts into incremental
energy.
In relation to our microgrid business, we intend to file for patent protection on our System. We recently hired a software engineering company to assist with
improvements and upgrades to our technology and we will also be hiring an internal team of software developers in January 2017. The ability of our staff and
outside consultants to improve the system will likely affect our ability to apply for patent protection. There is no assurance that we will be able to obtain a patent
on our System.
Government Regulation
We are subject to federal, state and local laws and regulations governing environmental quality and pollution control. It is anticipated that, absent the occurrence
of an extraordinary event, compliance with existing federal, state and local laws, rules and regulations concerning the protection of the environment and human
health will not have a material effect upon us, our capital expenditures, or earnings. We cannot predict what effect additional regulation or legislation,
enforcement policies thereunder and claims for damages for injuries to property, employees, other persons and the environment resulting from our operations. Our
operations are subject to environmental regulation by state and federal authorities including the Environmental Protection Agency (“EPA”). This regulation has
not increased the cost of planning, designing and operating to date. Although we believe that compliance with environmental regulations will not have a material
adverse effect on our operations or results of these operations, there can be no assurance that significant costs and liabilities, including criminal penalties, will not
be incurred. Moreover, it is possible that other developments, including stricter environmental laws and regulations, and claims for damages for injuries to
property or persons resulting from our activities could result in substantial costs and liabilities.
In the conduct of our activities our operations will be subject to the requirements of the federal Occupational Safety and Health Act (“OSHA”) and comparable
state statutes. The OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of the federal Superfund Amendment
and Reauthorization Act and similar state statutes require us to organize information about hazardous materials used, released or produced in its operations.
Certain of this information must be provided to employees, state and local governmental authorities and local citizens. We are also subject to the requirements and
reporting set forth in OSHA workplace standards.
Other than the above regulations and maintaining our good standing in the State of Nevada, complying with applicable local business licensing requirements,
complying with all state and federal tax requirements, preparing our periodic reports under the Securities Exchange Act of 1934, as amended, and complying with
other applicable securities laws, rules, and regulations, we do not believe that existing or probably governmental regulations will have a material effect on our
operations. We do not currently require the approval of any governmental agency or affiliated program for our operations.
Employees, Consultants and Contractors
We currently have no employees, but instead contract the services of consultants in the various areas of expertise as required. The way in which our business
currently operates is as follows:
Our Chief Executive Officer, S. Matthew Schultz, currently manages our day-to-day operations. He is responsible for the negotiation of contracts, oversees the
design, marketing and implementation of the products and processes, and manages licenses, patents, and other intangible assets. In addition to daily management
tasks, Mr. Schultz also researches financing and potential investors.
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Our CFO, Zachary K. Bradford, is responsible for implementing our strategic goals and objectives. He is also in charge of managing our financial risks, financial
planning, accounting records, SEC filings, reviewing financial data, reporting financial performance, preparing budgets, and monitoring expenditures and costs.
Our COO, Bryan Huber, is responsible for implementing and overseeing our general operations and research and development activities. In addition, he is
responsible for determining the feasibility and marketability of our technology and future technologies that we may acquire.
The amount of time devoted to us currently by officers is due to the limited operations and resources we have. However, we feel the time devoted to operations is
enough to cover our current operational requirements.
Item 1A. Risk Factors
We are subject to various risks that may materially harm our business, prospects, financial condition and results of operations. An investment in our common
stock is speculative and involves a high degree of risk. In evaluating an investment in shares of our common stock, you should carefully consider the risks
described below, together with the other information included in this report.
The risks described below are not the only risks we face. If any of the events described in the following risk factors actually occurs, or if additional risks and
uncertainties later materialize, that are not presently known to us or that we currently deem immaterial, then our business, prospects, results of operations and
financial condition could be materially adversely affected. In that event, the trading price of our common stock could decline, and you may lose all or part of your
investment in our shares. The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in
these forward-looking statements.
Risks Related to Our Business
We lack an established operating history and have incurred losses in prior periods, expect to incur losses in the future and we can give no assurance that our
operations will result in profits.
We have a limited operating history that makes it difficult to evaluate our business. Historical sales pertaining to our System have been in low volume, and we
cannot say with certainty when we will begin to achieve profitability. We have not sold any of our Gasifiers.
Since inception, we have sustained $6,434,840 in net losses and we had a net loss for the year ended September 30, 2016 of $2,540,562. We expect to have
operating losses at least until such time as we have developed a substantial and stable revenue base. We cannot assure you that we can develop a substantial and
stable revenue base or achieve or sustain profitability on a quarterly or annual basis in the future.
If we do not obtain such financing, we may have to scale back or cease our activities, which will significantly harm our chances of success.
Because we have generated only a small amount of revenue and currently operate at a significant loss, we are completely dependent on the continued availability
of financing in order to continue our business. There can be no assurance that financing sufficient to enable us to continue our operations will be available to us in
the future. Moreover, even if we are able to obtain financing, it could be on terms that causes our company’s stock price to suffer or further dilutes shareholder
interests in our company. Most of our financing in 2016 was from the issuance of our common stock. Our failure to obtain future financing, financing on terms
that are acceptable to us, or to produce levels of revenue to meet our financial needs could result in our inability to continue as a going concern and, as a result,
our investors could lose their entire investment. In order to maximize our potential for success, we required a total of $3,000,000 to $4,000,000 in additional
financing. As explained in this annual report, this money is needed for our software upgrades to our System, testing and refinement of our Gasifier, marketing and
sales of both sides of our business operations and for working capital. An additional $2,500,000 would be needed approximately 12 months thereafter, to expand
further commercialization of our products and services.
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Our future success is difficult to predict because we operate in emerging and evolving markets, and the industries in which we compete are subject to volatile
and unpredictable cycles.
The renewable energy, DERMS, microgrid and related industries are emerging and evolving markets which may make it difficult to evaluate our future prospects
and which may lead to period to period variability in our operating results. Our products and services are based on unique technology which we believe offers
significant advantages to our customers, but the markets we serve are in a relatively early stage of development and it is uncertain how rapidly they will develop.
It is also uncertain whether our products will achieve high levels of demand and acceptance as these markets grow. If companies in the industries we serve do not
perceive or value the benefits of our technologies and products, or if they are unwilling to adopt our products as alternatives to traditional power solutions, the
market for our products and services may not develop or may develop more slowly than we expect, which could significantly and adversely impact our operating
results.
As a supplier to the renewable energy, DERMS, microgrid and related industries, we may be subject to business cycles. The timing, length, and volatility of these
business cycles may be difficult to predict. These industries may be cyclical due to sudden changes in customers’ manufacturing capacity requirements and
spending, which depend in part on capacity utilization, demand for customers’ products, inventory levels relative to demand, and access to affordable capital.
These changes may affect the timing and amounts of customers’ purchases and investments in technology, and affect our orders, net sales, operating expenses,
and net income. In addition, we may not be able to respond adequately or quickly to the declines in demand by reducing our costs.
To meet rapidly changing demand in each of the industries we serve, we must effectively manage our resources and production capacity. During periods of
decreasing demand for our products, we must be able to appropriately align our cost structure with prevailing market conditions, effectively manage our supply
chain, and motivate and retain key employees. During periods of increasing demand, we must have sufficient inventory to fulfill customer orders, effectively
manage our supply chain, and attract, retain, and motivate a sufficient number of qualified individuals. If we are not able to timely and appropriately adapt to
changes in our business environment or to accurately assess where we are positioned within a business cycle, our business, financial condition, or results of
operations may be materially and adversely affected.
The industries in which we compete are highly competitive and we may be unable to successfully compete to survive.
We compete in the market for renewable energy products, DERMS, and microgrid technology and associated services that is intensely competitive. Evolving
industry standards, rapid price changes and product obsolescence also impact the market. Our competitors include many domestic and foreign companies, most of
which have substantially greater financial, marketing, personnel and other resources than we do. Our current competitors or new market entrants could introduce
new or enhanced technologies, products or services with features that render our technologies, products or services obsolete, less competitive or less marketable.
Our success will be dependent upon our ability to develop products that are superior to existing products and products introduced in the future, and which are cost
effective. In addition, we may be required to continually enhance any products that are developed as well as introduce new products that keep pace with
technological change and address the increasingly sophisticated needs of the marketplace. Even if our current technologies prove to be commercially feasible,
there is extensive research and development being conducted on alternative energy sources that may render our technologies and protocols obsolete or otherwise
non-competitive.
There can be no assurance that we will be able to keep pace with the technological demands of the marketplace or successfully develop products that will succeed
in the marketplace. As a small company, we will be at a competitive disadvantage to most of our competitors, which include larger, established companies that
have substantially greater financial, technical, manufacturing, marketing, distribution and other resources than us. There can be no assurance that we will have the
capital resources available to undertake the research that may be necessary to upgrade our equipment or develop new devices to meet the efficiencies of changing
technologies. Our inability to adapt to technological change could have a materially adverse effect on our results of operations.
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To date we have had only three customers for our System and none for our Gasifiers so we cannot assure you that our customer base will increase.
We had revenue from one customer, Bethel-Webcor JV-1, which accounted for 100% of net revenue for the year ended September 30, 2016. We have recently
acquired two additional customers for our System. As we sell our products and services to just one customer at this time, we cannot assure you that our customer
base will expand or that any decline in net revenue attributable to customer losses will be replaced in a timely manner. If we fail to commercialize our products
and services and increase our customer base, our business will fail.
Product development is an inherently uncertain process, and we may encounter unanticipated development challenges and may not be able to meet our
product development and commercialization milestones.
Product development and testing may be subject to unanticipated and significant delays, expenses and technical or other problems. We cannot guarantee that we
will successfully achieve our milestones within our planned timeframe or ever. We develop prototypes of planned products prior to the full commercialization of
these products. We cannot predict whether prototypes of future products will achieve results consistent with our expectations. A prototype could cost significantly
more than expected or the prototype design and construction process could uncover problems that are not consistent with our expectations. Prototypes of
emerging products are a material part of our business plan, and if they are not proven to be successful, our business and prospects could be harmed.
More generally, the commercialization of our products may also be adversely affected by many factors not within our control, including:
• the willingness of market participants to try a new product and the perceptions of these market participants of the safety, reliability, functionality and cost
effectiveness of our products;
• the emergence of newer, possibly more effective technologies;
• the future cost and availability of the raw materials and components needed to manufacture and use our products; and
• the adoption of new regulatory or industry standards that may adversely affect the use or cost of our products.
Accordingly, we cannot predict that our products will be accepted on a scale sufficient to support development of mass markets for them.
We rely on patents and proprietary rights to protect our technology, and enforcing those rights could disrupt our business operation and divert precious
resources that could ultimately harm our future prospects.
We rely on a combination of trade secrets, confidentiality agreements and procedures and patents to protect our proprietary technologies. We own patent numbers
8,518,133 and 8,105,401 ‘Parallel Path, Downdraft Gasifier Apparatus and Method'’ and patent number 9,359,567 ‘Gasification Method Using Feedstock
Comprising Gaseous Fuel’– which covers our Gasifier technology. We also own patent number 8,342,829 entitled ‘Electrolytic Reactor and Related Methods for
Supplementing the Air Intake of an Internal Combustion Engine.’
The claims contained in any patent may not provide adequate protection for our products and technology. In the absence of patent protection, we may be
vulnerable to competitors who attempt to copy our products or gain access to our trade secrets and know-how. In addition, the laws of foreign countries may not
protect our proprietary rights to this technology to the same extent as the laws of the U.S.
If a dispute arises concerning our technology, we could become involved in litigation that might involve substantial cost. Litigation could divert substantial
management attention away from our operations and into efforts to enforce our patents, protect our trade secrets or know-how or determine the scope of the
proprietary rights of others. If a proceeding resulted in adverse findings, we could be subject to significant liabilities to third parties. We might also be required to
seek licenses from third parties to manufacture or sell our products. Our ability to manufacture and sell our products may also be adversely affected by other
unforeseen factors relating to the proceeding or its outcome.
We are currently involved in a matter that may divert attention away from our business operations and which may subject us to expend significant resources that
could be better utilized in developing our own business and technologies. Prior to acquiring CleanSpark, LLC, several employees whom are no longer with the
company have started a competing firm. We have been in discussions with this group about the nature of their activities and the intellectual property they are
currently developing in their business. We believe there may be potential claims against this firm. If we pursue these claims, we may be involved in litigation of
the type described above with uncertain potential outcomes.
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As we continue to grow and to develop our intellectual property, we could attract threats from patent monetization firms or competitors alleging infringement
of intellectual property rights.
Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater
resources. If we do not prevail in this type of litigation, we may be required to: pay monetary damages; stop commercial activities relating to our product; obtain
one or more licenses in order to secure the rights to continue manufacturing or marketing certain products; or attempt to compete in the market with substantially
similar products. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue some of our operations.
A material part of our success will depend on our ability to manage our suppliers and contract manufacturers. Our failure to manage our suppliers and
contract manufacturers could materially and adversely affect our results of operations and relations with our customers.
We rely upon suppliers to provide the components necessary to build our products and on contract manufacturers to procure components and assemble our
products. There can be no assurance that key suppliers and contract manufacturers will provide components or products in a timely and cost efficient manner or
otherwise meet our needs and expectations. Our ability to manage such relationships and timely replace suppliers and contract manufacturers, if necessary, is
critical to our success. Our failure to timely replace our contract manufacturers and suppliers, should that become necessary, could materially and adversely affect
our results of operations and relations with our customers.
If we are the subject of future product defect or liability suits, our business will likely fail.
In the course of our planned operations, we may become subject to legal actions based on a claim that our products are defective in workmanship or have caused
personal or other injuries. We currently maintain limited liability insurance and such coverage may not be adequate to cover all potential claims. Moreover, even
if we are able to maintain sufficient insurance coverage in the future, any successful claim could significantly harm our business, financial condition and results of
operations.
We may be exposed to lawsuits and other claims if our products malfunction, which could increase our expenses, harm our reputation and prevent us from
growing our business.
Any liability for damages resulting from malfunctions of our products could be substantial, increase our expenses and prevent us from growing or continuing our
business. Potential customers may rely on our products for critical needs and a malfunction of our products could result in warranty claims or other product
liability. In addition, a well-publicized actual or perceived problem could adversely affect the market’s perception of our products. This could result in a decline in
demand for our products, which would reduce revenue and harm our business. Further, since our products are used in systems that are made by other
manufacturers, we may be subject to product liability claims even if our products do not malfunction.
Any failure by management to properly manage growth could have a material adverse effect on our business, operating results and financial condition.
If our business develops as expected, we anticipate that we will grow rapidly in the near future. Our failure to properly manage our expected rapid growth could
have a material adverse effect on our ability to retain key personnel. Our expansion could also place significant demands on our management, operations,
systems, accounting, internal controls and financial resources. If we experience difficulties in any of these areas, we may not be able to expand our business
successfully or effectively manage our growth. Any failure by management to manage growth and to respond to changes in our business could have a material
adverse effect on our business, financial condition and results of operations.
The lack of management experience in the renewable energy and microgrid industries could adversely affect our company.
Some members of management and the board of directors may not have prior experience in the energy industry. Some members do, however, have extensive
work experience in the reclamation, environmental industries, energy industries, financial/accounting industries, and business management. The lack of
experience in the alternative energy industry may impair our managements’ and directors’ ability to evaluate and make decisions involving our current operations
and any future projects we may undertake in the alternative energy industry. Such impairment and lack of experience could adversely affect our business,
financial condition and future operations.
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If we are unable to attract and retain a sufficient number of skilled engineers and workers our ability to pursue projects may be adversely affected and our
costs may increase.
Our rate of growth will be confined by resource limitations as competitors and customers compete for increasingly scarce resources. We believe that our success
depends upon our ability to attract, develop and retain a sufficient number of affordable trained engineers that can execute our operational strategy. The demand
for trained engineers and other skilled workers is currently high. If we are unable to attract and retain a sufficient number of skilled personnel, our ability to
pursue projects may be adversely affected and the costs of performing our existing and future projects may increase, which may adversely impact our margins.
We have engaged in and may engage in acquisitions that could disrupt our business, cause dilution to our stockholders and reduce our financial resources.
We have been involved in significant acquisitions in our lifespan. In the future, we may enter into transactions to acquire other businesses, products or
technologies. If we do identify suitable candidates, we may not be able to make such acquisitions on favorable terms or at all. Any acquisitions we have made or
plan to make may not strengthen our competitive position, and these transactions may be viewed negatively by customers or investors. We have and may decide
in the future to incur debt in connection with an acquisition or issue our common stock or other securities to the stockholders of the acquired company, which
would reduce the percentage ownership of our existing stockholders. We could incur losses resulting from undiscovered liabilities of the acquired business that
are not covered by the indemnification we may obtain from the seller. In addition, we may not be able to successfully integrate the acquired personnel,
technologies and operations into our existing business in an effective, timely and non-disruptive manner. Acquisitions may also divert management from day-to-
day responsibilities, increase our expenses and reduce our cash available for operations and other uses. We cannot predict the number, timing or size of future
acquisitions or the effect that the acquisition we have engaged in or any such future transactions might have on our operating results.
Our business is substantially dependent on utility rate structures and government incentive programs that encourage the use of alternative energy sources.
The reduction or elimination of government subsidies and economic incentives for energy-related technologies would harm our business.
We believe that near-term growth of energy-related technologies, including power conversion technology, relies partly on the availability and size of government
and economic incentives and grants (including, but not limited to, the U.S. Investment Tax Credit and various state and local incentive programs). These incentive
programs could be challenged by utility companies, or for other reasons found to be unconstitutional, and/or could be reduced or discontinued for other reasons.
The reduction, elimination, or expiration of government subsidies and economic incentives could harm our business.
A combination of utility rate structures and government subsidies that encourage the use of alternative energy sources is a primary driver of demand for our
products. For example, public utilities are often allowed to collect demand charges on commercial and industrial customers in addition to traditional usage
charges. In addition, the federal government and many states encourage the use of alternative energy sources through a combination of direct subsidies and tariff
incentives such as net metering for users that use alternative energy sources such as solar power. California also encourages alternative energy technology through
its Self-Generation Incentive Program, or SGIP, which offers rebates for businesses and consumers who adopt certain new technologies. Other states have similar
incentives and mandates which encourage the adoption of alternative energy sources. Notwithstanding the adoption of other incentive programs, we expect that
California will be the most significant market for the sale of our products in the near term. Should California or another state in which we derive a substantial
portion of our product revenues in the future change its utility rate structure or eliminate or significantly reduce its incentive programs, demand for our products
could be substantially affected, which would adversely affect our business prospects, financial condition and operating results.
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Risks Related to Our Securities
If a market for our common stock does not develop, shareholders may be unable to sell their shares.
Our common stock is quoted under the symbol “CLSK” on the OTCQB operated by OTC Markets Group, Inc, an electronic inter-dealer quotation medium for
equity securities. We do not currently have an active trading market. There can be no assurance that an active and liquid trading market will develop or, if
developed, that it will be sustained.
Our securities are very thinly traded. Accordingly, it may be difficult to sell shares of our common stock without significantly depressing the value of the stock.
Unless we are successful in developing continued investor interest in our stock, sales of our stock could continue to result in major fluctuations in the price of the
stock.
Our common stock price may be volatile and could fluctuate widely in price, which could result in substantial losses for investors.
The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond
our control, including:
• technological innovations or new products and services by us or our competitors;
• government regulation of our products and services;
• the establishment of partnerships with other technology companies;
• intellectual property disputes;
• additions or departures of key personnel;
• sales of our common stock
• our ability to integrate operations, technology, products and services;
• our ability to execute our business plan;
• operating results below expectations;
• loss of any strategic relationship;
• industry developments;
• economic and other external factors; and
• period-to-period fluctuations in our financial results.
Because we have nominal revenues to date, you should consider any one of these factors to be material. Our stock price may fluctuate widely as a result of any of
the above.
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of
particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
We have the right to issue shares of preferred stock. If we were to issue preferred stock, it is likely to have rights, preferences and privileges that may
adversely affect the common stock.
We are authorized to issue 10,000,000 shares of “blank check” preferred stock, with such rights, preferences and privileges as may be determined from time-to-
time by our board of directors. Our board of directors is empowered, without stockholder approval, to issue preferred stock in one or more series, and to fix for
any series the dividend rights, dissolution or liquidation preferences, redemption prices, conversion rights, voting rights, and other rights, preferences and
privileges for the preferred stock. We currently have 1,000,000 shares of our preferred stock outstanding, the features of which are contained elsewhere in this
annual report.
The issuance of shares of preferred stock, depending on the rights, preferences and privileges attributable to the preferred stock, could reduce the voting rights and
powers of the common stock and the portion of our assets allocated for distribution to common stockholders in a liquidation event, and could also result in
dilution in the book value per share of the common stock we are offering. The preferred stock could also be utilized, under certain circumstances, as a method for
raising additional capital or discouraging, delaying or preventing a change in control of the Company, to the detriment of the investors in the common stock
offered hereby. We cannot assure you that we will not, under certain circumstances, issue shares of our preferred stock.
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We have not paid dividends in the past and have no immediate plans to pay dividends.
We plan to reinvest all of our earnings, to the extent we have earnings, in order to market our products and to cover operating costs and to otherwise become and
remain competitive. We do not plan to pay any cash dividends with respect to our securities in the foreseeable future. We cannot assure you that we would, at any
time, generate sufficient surplus cash that would be available for distribution to the holders of our common stock as a dividend. Therefore, you should not expect
to receive cash dividends on our common stock.
If securities or industry analysts do not publish or do not continue to publish research or reports about our business, or if they issue an adverse or misleading
opinion regarding our stock, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us or our business. If any of
the analysts who cover us now or in the future issue an adverse opinion regarding our stock, our stock price would likely decline. If one or more of these analysts
ceases coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock
price or trading volume to decline.
Because we are subject to the “Penny Stock” rules, the level of trading activity in our stock may be reduced.
The Securities and Exchange Commission has adopted regulations which generally define "penny stock" to be any listed, trading equity security that has a market
price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. The penny stock rules require a broker-dealer, prior
to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny
stocks and the risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in
the customer’s account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock, the broker-dealer make a special written
determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure
requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules which
may increase the difficulty Purchasers may experience in attempting to liquidate such securities.
Provisions in the Nevada Revised Statutes and our Bylaws could make it very difficult for an investor to bring any legal actions against our directors or
officers for violations of their fiduciary duties or could require us to pay any amounts incurred by our directors or officers in any such actions.
Members of our board of directors and our officers will have no liability for breaches of their fiduciary duty of care as a director or officer, except in limited
circumstances, pursuant to provisions in the Nevada Revised Statutes and our Bylaws as authorized by the Nevada Revised Statutes. Specifically, Section 78.138
of the Nevada Revised Statutes provides that a director or officer is not individually liable to the company or its shareholders or creditors for any damages as a
result of any act or failure to act in his or her capacity as a director or officer unless it is proven that (1) the director’s or officer’s act or failure to act constituted a
breach of his or her fiduciary duties as a director or officer and (2) his or her breach of those duties involved intentional misconduct, fraud or a knowing violation
of law. This provision is intended to afford directors and officers protection against and to limit their potential liability for monetary damages resulting from suits
alleging a breach of the duty of care by a director or officer. Accordingly, you may be unable to prevail in a legal action against our directors or officers even if
they have breached their fiduciary duty of care. In addition, our Bylaws allow us to indemnify our directors and officers from and against any and all costs,
charges and expenses resulting from their acting in such capacities with us. This means that if you were able to enforce an action against our directors or officers,
in all likelihood, we would be required to pay any expenses they incurred in defending the lawsuit and any judgment or settlement they otherwise would be
required to pay. Accordingly, our indemnification obligations could divert needed financial resources and may adversely affect our business, financial condition,
results of operations and cash flows, and adversely affect prevailing market prices for our common stock.
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Item 2. Properties
Currently, we do not own any real estate. On January 22, 2016, we terminated our lease agreement at 2391 South 1560 West, Unit B, Woods Cross Utah and
relocated our corporate office to 70 North Main Street, Suite 105, Bountiful Utah 84010. We executed a one-year lease agreement that calls for us to make
payments of $850 per month. We have prepaid rent for January 2017.
We operate our California operations out of leased office space located at 6365 Nancy Ridge Drive, 2nd Floor San Diego, CA 92121. On December 15, 2016
we executed an 18-month agreement that calls for us to make payments of $2,375 per month in 2017 and $2,446 per month in 2018.
CleanSpark, LLC has agreed to provide the power produced by its mircogrid assets located on the FractalGrid demonstration facility to Camp Pendleton
Marine Corp Base free of charge until 2024. In exchange we have been granted the permission to locate our system on the base and the access to conduct
guided tours of the FractalGrid demonstration facility for our potential customers.
Item 3. Legal Proceedings
We are not a party to any pending legal proceeding. We are not aware of any pending legal proceeding to which any of our officers, directors, or any
beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is quoted under the symbol “CLSK” on the OTCQB operated by OTC Markets Group, Inc.
PART II
There is currently no active trading market for our securities. There is no assurance that a regular trading market will develop, or if developed, that it will be
sustained. Therefore, a shareholder may be unable to resell his securities in our company.
The following table sets forth the range of high and low bid quotations for our common stock for each of the periods indicated as reported by the OTCQB.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Quarter Ended
September 30, 2016
June 30, 2016
March 31, 2016
December 31, 2015
Fiscal Year Ending September 30, 2016
High $
3.75
3.75
3.00
3.52
Quarter Ended
September 30, 2015
June 30, 2015
March 31, 2015
December 31, 2014
Fiscal Year Ending September 30, 2015
High $
3.56
4.00
6.00
1.17
Low $
2.80
2.00
2.25
3.00
Low $
1.90
1.01
6.00
1.17
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Penny Stock
The Securities Exchange Commission has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks
are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the
NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or
system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by
the Commission, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading;
(b) contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation
to such duties or other requirements of Securities' laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for
penny stocks and the significance of the spread between the bid and ask price;(d) contains a toll-free telephone number for inquiries on disciplinary actions;
(e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and;(f) contains such other information and is in such
form, including language, type, size and format, as the Commission shall require by rule or regulation.
The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with; (a) bid and offer quotations for the penny stock;(b)
the compensation of the broker-dealer and its salesperson in the transaction;(c) the number of shares to which such bid and ask prices apply, or other
comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statements showing the market value of
each penny stock held in the customer's account.
In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules; the broker-dealer must make a
special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt
of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.
These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our stock if it becomes subject to these penny
stock rules. Therefore, because our common stock is subject to the penny stock rules, stockholders may have difficulty selling those securities.
Holders of Our Common Stock
As of December 27, 2016, we had 179 holders of record of our common stock, with others in street name.
The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of the common
stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption or sinking fund provisions
applicable to the common stock.
Dividends
There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, do
prohibit us from declaring dividends where after giving effect to the distribution of the dividend:
1. we would not be able to pay our debts as they become due in the usual course of business, or;
2.
our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have
preferential rights superior to those receiving the distribution.
We have not declared any dividends and we do not plan to declare any dividends in the foreseeable future.
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Recent Sales of Unregistered Securities
During the period commencing October 1, 2015 through March 31, 2016, we received $215,000 from 16 investors pursuant to private placement agreements with
the investors to purchase 645,000 shares of our common stock and warrants to purchase 64,500 shares of our common stock at a purchase price equal to $0.33 for
each share of common stock and 10% warrant coverage. The warrant allows the holder to purchase shares of our common stock at $0.367 per share.
During the period commencing July 1, 2016 through September 30, 2016, we received $598,800 from 9 investors pursuant to private placement agreements with
the investors to purchase 748,500 shares of our common stock at a purchase price equal to $0.80 for each share of common stock.
On April 26, 2016, we entered into Stock Purchase Agreement with James Harper to acquire a patent from Mr. Harper as represented in an Assignment of even
date. The Agreement granted 7,500, shares of our common stock, valued at $23,475, to Mr. Harper in exchange for the Assignment.
On June 30, 2016, we issued a total of 600,000 shares of our Series A Preferred Stock to the four members of our board of directors for services rendered.
On July 1, 2016, in connection with the Purchase Agreement, we issued to CleanSpark Holdings, LLC 6,000,000 shares of common stock and warrants to
purchase 4,500,000 shares of common stock exercisable at $1.50 per share.
In November of 2016, we issued 2,932,704 shares of common stock to officers for the cashless exercise of options.
These securities were issued pursuant to Section 4(2) of the Securities Act and/or Rule 506 promulgated thereunder. The investor represented his intention to
acquire the securities for investment only and not with a view towards distribution. The investor was given adequate information about us to make an informed
investment decision. We did not engage in any general solicitation or advertising. We directed our transfer agent to issue the stock certificates with the appropriate
restrictive legend affixed to the restricted stock.
Securities Authorized for Issuance under Equity Compensation Plans
Equity Compensation
Plans Not Approved by
the Shareholders
Equity compensation plans
approved by security
holders
Equity compensation plans
not approved by security
holders
November 4, 2014(1)
March 12, 2015(2)
March 12, 2015(3)
March 18, 2015(4)
January 22, 2016(5)
Total
Number of Securities
to
be issued upon
exercise
of outstanding
options
(a)
Weighted-
average
exercise price
of
outstanding
options
(b)
Number of Securities
remaining available
for future issuance
under
equity compensation
plans
(c)
-
-
180,000
4,500,000
180,000
285,000
450,000
5,595,000
18
$0.33
$0.083
$0.083
$0.363
$0.367
0.312
–
-
-
-
-
-
–
Table of Contents
(1) On November 4, 2014, we entered into a consulting agreement for grant writing services. Pursuant to this agreement the Company issued 180,000
shares of our $0.001 par value common stock valued at $0.33 per share or $60,000.
(2) On March 12, 2015, we issued warrants to officers and members of the board of directors as compensation for services performed. The warrants
were issued under the following terms; non-transferable, fully vested on March 31, 2015, expire ten years from the date of grant, strike price of
$0.083 and become immediately exercisable upon the occurrence of a significant liquidating, restructuring or change of control event.
(3) On March 12, 2015, as compensation for his appointment, Mr. Pattee was granted a non-statutory option to purchase 180,000 shares of common
stock under the following terms: non-transferable, fully vest on March 31, 2015, expire five years from the date of grant, strike price of $0.083 and
become immediately exercisable upon the occurrence of a significant liquidating, restructuring or change of control event.
(4) On March 18, 2015, we granted an option to purchase 285,000 shares of common stock to a consultant. The options were issued under the
following terms; non-transferable, fully vest on March 31, 2015, expire ten years from the date of grant, strike price of $0.363 and become
immediately exercisable upon the occurrence of a significant liquidating, restructuring or change of control event.
(5) On January 22, 2016, we issued warrants to purchase 450,000 shares of common stock to a Mr. Greg Gohlinghorst for business advisory services.
The warrants were issued under the following terms: fully vest on January 31, 2016, expire five years from the date of grant and strike price of
$0.367.
Item 6. Selected Financial Data
A smaller reporting company is not required to provide the information required by this Item.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and
expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-
looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,”
“will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-
harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for
purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to
risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and future prospects on a
consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates,
competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements
and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether
as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially
affect our financial results, is included herein and in our other filings with the SEC.
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Results of Operations for the Year Ended September 30, 2016 and 2015
Revenues
We earned $82,031 in revenues during the year ended September 30, 2016, as compared with no revenues for the year ended September 30, 2015. We earned
revenues in the last quarter of our fiscal year as a result of our technology acquisition from CleanSpark. However, because we only just acquired CleanSpark
and given the contractual contingencies with CleanSpark’s customers and its early stage of operation, we are unable to estimate with any degree of certainty
the amount of future revenues, if any, from existing contracts. Also, we do not anticipate earning significant revenues from our Gasifier business until such
time that we have fully developed our technology and are able to market our products.
Gross Profit
Our cost of revenues were $31,264 for the year ended September 30, 2016 resulting in gross profit of $50,767. Because of the nature of our business, we do
not anticipate any stability in margins because the sale of our products and services is expected to vary with our existing and future contract customers.
Operating Expenses
We had operating expenses of $2,592,018 for the year ended September 30, 2016, as compared with $3,479,859 for the year ended September 30, 2015.
Professional fees decreased to $1,925,593 for the year ended September 30, 2016 from $3,377,956 for the same period ended September 30, 2015. Our
professional fees expenses for the year ended September 30, 2016 consisted mainly of stock based compensation for consulting of $1,482,052, consulting fees
of $157,500 paid to officers of the Company and legal, filing, accounting, consulting and investor relations fees of $98,819.
Research and development fees decreased to $1,826 for the year ended September 30, 2016 from $52,288 for the same period ended September 30, 2015. Our
research and development expenses for the year ended September 30, 2016 consisted mainly of expenses incurred to during the independent testing of our
Gasifier. We expect research and development fees to increase as we upgrade our software for our System and conduct testing and refinement of our Gasifier.
General and administrative fees increased to $86,143 for the year ended September 30, 2016 from $46,815 for the same period ended September 30, 2015.
Our general and administrative expenses for the year ended September 30, 2016 consisted mainly of travel expenses of $18,988, rent expenses of $12,380 and
$54,755 in other general expenses incurred for ongoing operations.
Depreciation and amortization expense increased to $578,456 for the year ended September 30, 2016 from $2,800 for the same period ended September 30,
2015.
Other Income/Expenses
We had other income of $689 for the year ended September 30, 2016, compared with other expenses of $5,144 for the year ended September 30, 2015. Our
other income for the year ended September 30, 2016 was the result of a gain on the disposal of assets, as compared to other expenses in the same period
ending September 30, 2015, which consisted entirely of interest expenses.
Net Loss
Net loss for the year ended September 30, 2016 was $2,540,562 compared to net loss of $3,485,003 for the year ended September 30, 2015.
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Liquidity and Capital Resources
As of September 30, 2016, we had total current assets of $604,366, consisting of cash, accounts receivable, amounts due from shareholders and prepaid
expenses, and total assets in the amount of $33,019,542. Our total current liabilities as of September 30, 2016 were $357,421. We had working capital of
$246,945 as of September 30, 2016.
Operating activities used $438,165 in cash for the year ended September 30, 2016, as compared with $190,661 for the same period ended September 30,
2015. Our net loss of $2,540,562 was the main component of our negative operating cash flow for the year ended September 30, 2016, offset mainly by stock
based consulting of $1,544,982 and depreciation and amortization of $578,456.
Cash flows used by investing activities during the year ended September 30, 2016 was $20,855 as a result of the purchase of fixed and intangible assets.
Cash flows provided by financing activities during the year ended September 30, 2016 amounted to $807,016 and consisted of $813,800 in proceeds from our
private offering of common stock and warrants, offset by $6,784 in payments on short-term loans.
Despite the efforts we have made to raise money and to settle debt, based upon our current financial condition, we do not have sufficient cash to operate our
business at the current level for the next twelve months. We intend to fund operations through increased sales and debt and/or equity financing arrangements,
which may be insufficient to fund expenditures or other cash requirements. We plan to seek additional financing in a private equity offering to secure funding
for operations. There can be no assurance that we will be successful in raising additional funding. If we are not able to secure additional funding, the
implementation of our business plan will be impaired. There can be no assurance that such additional financing will be available to us on acceptable terms or
at all.
Recently Issued Accounting Pronouncements
We do not expect the adoption of any recently issued accounting pronouncements to have a significant impact on our results of operations, financial position
or cash flow.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC
indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires
management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently
uncertain.
Our accounting policies are discussed in detail in the footnotes to our financial statements included in this Annual Report on Form 10-K for the year ended
September 30, 2016, however we consider our critical accounting policies to be those related to revenue recognition, long-lived assets, accounts receivable,
fair value of financial instruments, cash and cash equivalents, accounts receivable, warranty liability, stock-based compensation, non-employee stock based
compensation
Going Concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. We have incurred cumulative net losses of $6,434,840 since our inception and require capital for our contemplated
operational and marketing activities to take place. Our ability to raise additional capital through future issuances of common stock is unknown. The
obtainment of additional financing, the successful development of our contemplated plan of operations, and our transition, ultimately, to the attainment of
profitable operations are necessary for us to continue operations. The ability to successfully resolve these factors raise substantial doubt about our ability to
continue as a going concern. Our financial statements do not include any adjustments that may result from the outcome of these aforementioned
uncertainties.
Off Balance Sheet Arrangements
As of September 30, 2016, there were no off balance sheet arrangements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
A smaller reporting company is not required to provide the information required by this Item.
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Item 8. Financial Statements and Supplementary Data
Index to Financial Statements Required by Article 8 of Regulation S-X:
Audited Consolidated Financial Statements:
F-1
F-2
F-3
F-4
F-5
F-6
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of September 30, 2016 and 2015;
Consolidated Statements of Operations for the years ended September 30, 2016 and 2015;
Consolidated Statement of Stockholders’ Deficit
Consolidated Statements of Cash Flows for the years ended September 30, 2016 and 2015;
Notes to Consolidated Financial Statements
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
CleanSpark, Inc.
We have audited the accompanying consolidated balance sheets of CleanSpark Inc. as of September 30, 2016 and September 30, 2015 and the
related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended
September 30, 2016. CleanSpark Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CleanSpark Inc. as of
September 30, 2016 and September 30, 2015, and the results of its operations and its cash flows for each of the years in the two-year period
ended September 30, 2016 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note
2 to the financial statements, the Company has minimal revenues, has incurred recurring losses and recurring negative cash flow from operating
activities, and has an accumulated deficit which raises substantial doubt about its ability to continue as a going concern. Management’s plans
concerning these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ AMC Auditing
AMC Auditing
Las Vegas, Nevada
December 29, 2016
F-1
Table of Contents
CLEANSPARK, INC.
CONSOLIDATED BALANCE SHEETS
(AUDITED)
ASSETS
Current assets
Cash
Accounts receivable
Due from Shareholder
Prepaid expense
Total current assets
Flexpower system
Goodwill
Microgrid Assets
Intangible assets
Fixed Assets
Deposits
Total assets
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued liabilities
Due to related parties
Loans
Total current liabilities
Total liabilities
Stockholders' equity (deficit)
September 30,
2016
September 30,
2015
$
$
436,529 $
57,095
53,020
57,722
604,366
19,675,986
4,919,858
4,567,838
2,467,930
782,975
589
88,533
—
—
24,391
112,924
—
—
—
44,470
657,647
2,358
33,019,542
817,399
291,187 $
63,973
2,261
357,421
357,421
53,967
1,473
—
55,440
55,440
Common stock; $0.001 par value; 100,000,000 shares authorized; 27,834,415 and
20,378,415 shares issued and outstanding as of September 30, 2016 and September
30, 2015, respectively
Preferred stock; $0.001 par value; 10,000,000 shares authorized; 1,000,000 and
400,000 shares issued and outstanding as of September 30, 2016 and September 30,
2015, respectively
Additional paid-in capital
Accumulated earnings (deficit)
Total stockholders' equity (deficit)
27,834
20,378
1,000
39,068,127
(6,434,840)
32,662,121
400
4,635,459
(3,894,278)
761,959
Total liabilities and stockholders' equity (deficit)
$
33,019,542 $
817,399
The accompanying notes are an integral part of these financial statements.
F-1
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CLEANSPARK, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(AUDITED)
Revenues
Cost of revenues
Gross profit
Operating expenses
Professional fees
Research and development
General and administrative expenses
Depreciation and amortization
Total operating expenses
Loss from operations
Other income (expense)
Interest expense
Gain on disposal of assets
Total other income (expense)
Net income (loss)
Basic income (loss) per common share
For the Year Ended
September 30,
2016
September 30,
2015
$
82,031 $
31,264
50,767
1,925,593
1,826
86,143
578,456
2,592,018
—
—
—
3,377,956
52,288
46,815
2,800
3,479,859
(2,541,251)
(3,479,859)
(32)
721
689
(5,144)
—
(5,144)
$
$
(2,540,562) $
(3,485,003)
(0.11) $
(0.18)
Basic weighted average common shares outstanding
22,528,668
19,229,062
The accompanying notes are an integral part of these financial statements.
F-2
Table of Contents
CLEANSPARK, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
(AUDITED)
Preferred Stock
Common Stock
Balance, September 30, 2014
Shares
Amount
Shares
Amount
—
— 17,409,915
17,410
Additional
Paid-in
Capital
1,100,131
Accumulated
Deficit
(409,275)
Total
Stockholders'
Deficit
708,266
Shares issued for services
Options and warrants issued for
services
Shares issued for direct investment
Shares issued on settlement of debt
Preferred Shares issued for services
Net loss
Balance, September 30, 2015
Shares issued for services
Options and warrants issued for
services
Shares issued for direct investment
Shares and warrants issued to aquire
assets
Preferred Shares issued for services
Net loss
Balance, September 30, 2016
—
—
2,070,000
2,070
687,930
—
690,000
—
—
—
400,000
—
400,000
—
—
726,000
—
172,500
—
—
400
—
—
400 20,378,415
—
726
172
—
—
20,378
2,556,296
241,274
49,828
—
—
4,635,459
—
—
—
—
(3,485,003)
(3,894,278)
2,556,296
242,000
50,000
400
(3,485,003)
761,959
—
—
55,000
55
164,945
—
165,000
—
—
—
—
—
1,393,500
—
1,394
1,342,350
812,406
—
—
1,342,350
813,800
—
600,000
—
1,000,000
—
600
—
6,007,500
—
—
1,000 27,834,415
6,007 32,112,967
—
—
27,834 39,068,127
—
—
—
—
(2,540,562)
(6,434,840)
32,118,974
600
(2,540,562)
32,662,121
The accompanying notes are an integral part of these financial statements.
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Table of Contents
CLEANSPARK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(AUDITED)
Cash Flows from Operating Activities
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Imputed interest on related party debt
Stock based consulting
Depreciation and amortization
Stock issued for acquisition
Cash received in acquisition
Changes in assets and liabilities
(Increase) decrease in prepaid expense
(Increase) decrease in deposits
Increase in accounts receivable
Increase in shareholder receivable
Increase (decrease) in accounts payable
Increase (decrease) in accounts payable related party
Net cash from operating activities
Cash Flows from investing
Purchase of intangible assets
Purchase of fixed assets
Gain on disposal of fixed assets
Net cash used in investing activities
Cash Flows from Financing Activities
Payments on short-term loans
Proceeds from issuance of common stock
Net cash from financing activities
Net increase (decrease) in Cash
Beginning cash balance
Ending cash balance
Supplemental disclosure of cash flow information
Cash paid for interest
Cash paid for tax
Non-Cash investing and financing transactions
Shares issued for debt
Shares and warrants issued for assets
Preferred shares issued for services
Shares and warrants issued for services
Options and warrants for services
For the Year Ended
September 30,
2016
September 30,
2015
$
(2,540,562) $
(3,485,003)
—
1,544,982
578,456
—
19,371
(57,552)
10,235
(37,031)
(2,257)
(16,307)
62,500
(438,165)
(11,182)
(9,673)
—
(20,855)
(6,784)
813,800
807,016
5,143
3,242,305
2,800
—
—
1,143
(2,358)
—
—
45,309
—
(190,661)
(2,594)
(76,953)
—
(79,547)
—
242,000
242,000
347,996
(28,208)
88,533
116,741
436,529 $
88,533
— $
— $
—
—
— $
32,118,974 $
600 $
165,000 $
1,342,350 $
50,000
—
—
690,000
2,556,296
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of these financial statements.
F-4
Table of Contents
CLEANSPARK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AUDITED)
1. ORGANIZATION AND LINE OF BUSINESS
Organization
CleanSpark, Inc. (the "Company") was incorporated in the state of Nevada on October 15, 1987 as SmartData Corporation. SmartData conducted a 504 public
offering in the State of Nevada in December 1987 and began trading publicly in January 1988. Due to a series of unfortunate events, including the untimely
death of the founding CEO, SmartData discontinued active business operations in 1992.
On March 25, 2014, the Company entered into an Asset and Intellectual Property Purchase Agreement pursuant to which the Company acquired: (i) all
Intellectual Property rights, title and interest in Patent # 8,105,401 'Parallel Path, Downdraft Gasifier Apparatus and Method' and Patent # 8,518,133 'Parallel
Path, Downdraft Gasifier Apparatus and Method' and (ii) all of the Property rights, title and interest in a 32 inch Downdraft Gasifier ("Gasifier”) and (iii)
assumed of $156,900 in liabilities.
In December 2014, we changed our company name to Stratean Inc. through a short-form merger in order to better reflect our new business plan.
On July 1, 2016, the Company entered into an Asset Purchase Agreement, as amended (the “Purchase Agreement”), with CleanSpark Holdings LLC,
CleanSpark LLC, CleanSpark Technologies LLC and Specialized Energy Solutions, Inc. (together, the “Seller”). Pursuant to the Purchase Agreement, the
Company acquired CleanSpark, LLC and all the assets related to Seller and its line of business and assumed $200,000 in liabilities.
In October 2016, we changed our company name to CleanSpark, Inc. through a short-form merger in order to better reflect our brand identity.
Line of Business
Through the acquisition of CleanSpark, LLC, the Company provides microgrid solutions to military, commercial and residential properties.
Our services consist of intelligent solar monitoring solutions, microgid design and engineering, project development consulting services, System installation
and consulting, and turn-key microgrid implementation services. The work is performed under fixed price bid contracts, negotiated price contracts, fully
financed power purchase agreements, or energy services agreements such as Microgrid as a Service (MaaS).
We also continue to pursue the development of our gasification technologies for commercial deployment. We have been granted multiple patents protecting
what we believe to be a breakthrough design for the next generation in waste-to-energy technology. The increased efficiency compared to existing solutions
results in a significantly lower cost per watt of electricity produced. We have completed a commercial prototype and have completed preliminary testing and
we are currently working with our manufacturing partners to improve durability and efficiency. Upon completion of product development, we intend to
deploy our gasification solutions to our pipeline of commercial microgrid customers in order maximize the conversion of our customer waste streams into
electricity.
2. GOING CONCERN
Going concern – The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The Company has incurred cumulative net losses of $6,434,840 since its inception
and requires capital for its contemplated operational and marketing activities to take place. The Company’s ability to raise additional capital through future
issuances of common stock is unknown. The obtainment of additional financing, the successful development of the Company’s contemplated plan of
operations, and its transition, ultimately, to the attainment of profitable operations are necessary for the Company to continue operations. The ability to
successfully resolve these factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements of
the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.
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Table of Contents
3. SUMMARY OF SIGNIFICANT POLICIES
This summary of significant accounting policies of CleanSpark Inc. is presented to assist in understanding the Company’s consolidated financial statements.
The consolidated financial statements and notes are representations of the Company’s management, who are responsible for their integrity and objectivity.
These accounting policies conform to accounting principles generally accepted in the United States of America, and have been consistently applied in the
preparation of the consolidated financial statements.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of CleanSpark, Inc., and its wholly owned operating subsidiaries, CleanSpark,
LLC, and CleanSpark, II, LLC. 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, impairments and estimations of long-lived
assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible accounts, inventory valuation, and the valuations of non-
cash capital stock issuances. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in
the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition – The Company recognizes revenue on arrangements in accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 101, “Revenue Recognition in Financial Statements” and No. 104, “Revenue Recognition”. In all cases, revenue is recognized only when the
price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectability is reasonably assured. For the periods
ended September 30, 2016 and 2015 the Company reported revenues of $82,031 and $0, respectively.
Revenues and related costs on construction contracts are recognized using the “percentage of completion method” of accounting in accordance with ASC
605-35, Accounting for Performance of Construction-Type and Certain Production Type Contracts (“ASC 605-35”). Under this method, contract revenues
and related expenses are recognized over the performance period of the contract in direct proportion to the costs incurred as a percentage of total estimated
costs for the entirety of the contract. Costs include direct material, direct labor, subcontract labor and any allocable indirect costs. All un-allocable indirect
costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the
Company will recognize the loss as it is determined.
Revisions in cost and profit estimates during the course of the contract are reflected in the accounting period in which the facts, which require the revision,
become known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job
performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in
revisions to costs and income and are recognized in the period in which the revisions are determined.
The Asset, “Costs in excess of billings”, represents revenues recognized in excess of amounts billed on contracts in progress. The Liability, “Billings in excess
of costs”, represents billings in excess of revenues recognized on contracts in progress. At September 30, 2016 and September 30, 2015, the costs in excess of
billings balance were $nil and $nil, and the billings in excess of costs balance were $0 and $0, respectively.
Accounts receivables are recorded on contracts for amounts currently due based upon progress billings, as well as retention, which are collectible upon
completion of the contracts. Accounts payable to material suppliers and subcontractors are recorded for amounts currently due based upon work completed or
materials received, as are retention due subcontractors, which are payable upon completion of the contract. General and administrative expenses are charged
to operations as incurred and are not allocated to contract costs. Retention receivable is the amount withheld by a customer until a contract is completed.
Retention receivables of $0 and $0 were included in the balance of trade accounts receivable as of September 30, 2016 and September 30, 2015, respectively.
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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 $0 and $0 at September 30, 2016, and September 30, 2015, respectively.
Cash and cash equivalents – For purposes of the statement 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 $436,529 and $88,533 in cash and cash equivalents as of
September 30, 2016 and September 30, 2015, respectively.
Concentration Risk
At times throughout the year, the Company may maintain cash balances in certain bank accounts in excess of FDIC limits. As of September 30, 2016, the
cash balance in excess of the FDIC limits was $110,423. The Company has not experienced any losses in such accounts and believes it is not exposed to any
significant credit risk in these accounts.
Fair Value of Financial Instruments – The carrying amounts reflected in the balance sheets for cash, accounts payable and accrued expenses approximate the
respective fair values due to the short maturities of these items. The Company does not hold any investments that are available-for-sale.
As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than
the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market
data, which require the reporting entity to develop its own assumptions.
The three levels of the fair value hierarchy are described below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the
asset or liability;
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by
little or no market activity).
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. Our 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 for the years ended September 30, 2016 and 2015
were $0 and $0, respectively.
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Table of Contents
Stock-based compensation – The Company follows the guidelines in FASB Codification Topic ASC 718-10 “Compensation-Stock Compensation,” which
provides investors and other users of financial statements with more complete and neutral financial information, by requiring that the compensation cost
relating to share-based payment transactions be recognized in the financial statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. ASC 718-10 covers a wide range of share-based compensation arrangements, including share options, restricted share plans,
performance-based awards, share appreciation rights and employee share purchase plans. As of September 30, 2016, the Company has not implemented an
employee stock based compensation plan.
Non-Employee Stock Based Compensation – The Company accounts for stock based compensation awards issued to non-employees for services, as
prescribed by ASC 718-10, at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily
determinable, using the measurement date guidelines enumerated in ASC 505-50. 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 for 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.
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 flows 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.
Indefinite Lived Intangibles and Goodwill Assets
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 tests for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and 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 a qualitative
assessment of indefinite lived intangibles and goodwill at September 30, 2016 and 2015, and determined there was no impairment of indefinite lived
intangibles and goodwill.
Business Combinations
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated
fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such
valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing
certain intangible assets include, but are not limited to, future expected cash flows from acquired customer lists, acquired technology, and trade names from a
market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable,
but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is one
year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the
conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
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Income taxes – The Company accounts for its income taxes in accordance with FASB Codification Topic ASC 740-10, “Income Taxes”, which requires
recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
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. The
Company currently has one reportable segment for financial reporting purposes, which represents the Company's core business.
Recently Issued Accounting Pronouncements –The Company has evaluated the all recent accounting pronouncements through ASU 2016-20, and believes
that none of them will have a material effect on the Company's financial position, results of operations or cash flows.
4. BUSINESS ACQUISITION
On July 1, 2016, the Company entered into the Purchase Agreement with Seller. Pursuant to the Purchase Agreement, the Company acquired all the assets
related to Seller and its line of business and assumed certain liabilities.
The Assets the Company purchased from Seller include:
Equipment and other tangible assets;
Domain names, websites and intellectual property;
All rights to causes of action, lawsuits, judgments, claims and demands of any nature available to or being pursued by the Seller;
Contracts to which Seller is bound;
Current and future customer accounts, including accounts receivable;
The holdings that CleanSpark Holdings LLC has in CleanSpark LLC, and any investments it has as well; and
Any other assets of any nature whatsoever that are related to or used in connection with the business of Seller and its goodwill.
On July 20, 2016, the parties to the Purchase Agreement entered into an amendment (the “Amendment”) that revised the assets to be acquired under the
Purchase Agreement. Specifically, the parties decided on the following:
Specialized Energy Solutions, Inc. would transfer and assign the ability to use its name and all of its Intellectual Property to Cleanspark II, LLC, and
thereafter Specialized Energy Solutions, Inc. will not be included in the Assets acquired; and
Clean Spark Technologies, LLC agrees to transfer and assign all of its Intellectual Property to Cleanspark II, LLC, and thereafter Clean Spark
Technologies, LLC will not be included in the Assets acquired.
The Amendment also included an option to acquire Specialized Energy Solutions, Inc. and Clean Spark Technologies, LLC, which the parties agreed upon as
follows:
Cleanspark II, LLC is hereby granted a 3-year exclusive option to purchase Specialized Energy Solutions, Inc. for 1,000 shares of CleanSpark Inc.
Common Stock; and
Cleanspark II, LLC is hereby granted a 3-year exclusive option to purchase Clean Spark Technologies, LLC for 1,000 shares of CleanSpark Inc.
Common Stock.
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On August 19, 2016, the parties to the Purchase Agreement entered into a second amendment that revised the Closing Date of the transaction.
The Assumed Liabilities, consisted of certain accounts payable amounting to approximately $262,873 arising out of the Assets. Per the agreement the
liabilities were to be limited to $200,000 therefore $62,873 must be reimbursed by CleanSpark Holdings, LLC.
As consideration, the Company issued to Seller six million (6,000,000) shares of common stock with a fair value of $18,420,000 and five-year warrants to
purchase four million five hundred thousand (4,500,000) shares of common stock at an exercise price of $1.50 per share. The warrants were valued at
$13,675,500 using the Black Scholes option pricing model based upon the following assumptions: term of 5 years, risk free interest rate of 1.0%, a dividend
yield of 0% and volatility rate of 218%. The warrants were fully earned and vested on July 1, 2016.
Simultaneously with the Purchase Agreement, the Company entered into certain ancillary agreements (the “Ancillary Agreements”) with Seller, consisting of
a bill of sale, intellectual property assignment and lock-up agreement. The lock-up agreement prevents Seller from selling the Company’s securities in the
public market for a year.
The Purchase Agreement contained customary representations, warranties and covenants. In addition, the Company and Seller agreed to appoint one (1)
candidate chosen by Seller to the board of directors of the Company. As a result, Bryan Huber was appointed as a member of the board of directors. The term
of the appointment of shall be in accordance with the Company’s bylaws.
CleanSpark provides microgrid, design, engineering, installation and consulting services to military, commercial and residential customers. The acquisition is
designed to enhance our services for renewable technology and provide a pipeline for deployment of our gasification technology. As a result of the Purchase
Agreement, CleanSpark, LLC became a wholly-owned subsidiary of the Company.
The acquisition was accounted for under ASC 805 and the transaction was valued for accounting purposes at $32,095,500, which was the fair value of the
Assets acquired at time of acquisition. The assets and liabilities of the Seller were recorded at their respective fair values as of the date of acquisition. Since
the Company determined there were no other separately identifiable intangible assets, any difference between the cost of the acquired entity and the fair value
of the assets acquired and liabilities assumed is recorded as goodwill. The acquisition date estimated fair value of the consideration transferred consisted of
the following:
Shares of Common Stock
Stock warrants
Total purchase price
Tangible assets acquired
Liabilities assumed
Net tangible assets
Intangible assets acquired
Goodwill
Total purchase price
$
$
$
$
18,420,000
13,675,500
32,095,500
4,911,367
(262,573)
4,648,794
22,526,847
4,919,859
32,095,500
Key factors that make up the goodwill created by the transaction include knowledge and experience of the acquired team and infrastructure.
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Pro forma results
The following tables set forth the unaudited pro forma results of the Company as if the acquisition of Seller had taken place on the first day of the periods
presented. These combined results are not necessarily indicative of the results that may have been achieved had the companies been combined as of the first
day of the periods presented.
September 30, 2016 September 30, 2015
Total revenues
547,211
$
Net Income (loss)
(5,428,519) (6,801,592)
Basic and diluted net income (loss) per common share$ (0.19) $ (0.27)
1,988,172 $
Year ended,
Year ended,
5. FIXED ASSETS
Fixed assets consist of the following as of September 30, 2016 and September 30, 2015:
September 30,
2016
September 30,
2015
Machinery and equipment $
Tenant improvements
Furniture and fixtures
Total
Less: accumulated
depreciation
Fixed assets, net
$
769,276 $
-
72,484
841,760
(58,785)
782,975 $
654,918
1,533
1,475
657,926
(279)
657,647
Depreciation expense for the years ended September 30, 2016 and 2015 was $58,897 and $279, respectively.
6. MICROGRID ASSETS
Microgrid assets consist of the combined assets at our FractalGrid Demonstration facility located at Camp Pendleton Marine Corps Base. The California
Energy Commission awarded a grant to Harper Construction Company, Inc. in July 2013 to support a microgrid technology demonstration project.
CleanSpark was subcontracted to provided design, development, integration, and installation services for the FractalGrid at the School of Infantry in the 52
Area of Marine Corps Base Camp Pendleton. The Project was subsequently transferred to CleanSpark for consideration and an agreement to indemnify
Harper Construction for all future responsibilities of maintenance, operations and warranty.
The project included integration of CleanSpark’s proprietary software and controls platform with a variety of energy storage technologies. The system utilizes
solar energy generated by pre-existing existing fixed-tilt solar photovoltaic panels and fifteen dual axis tracking concentrated photovoltaic units. CleanSpark’s
distributed controls combine the generation with energy storage technologies to create four separate microgrids that self-align together to create a larger
microgrid that ties directly into the larger utility grid at the 12kV level, allowing the base to consume energy from the most reliable, affordable source at any
given time. The system provides a 100% renewable and sustainable solution to energy security.
In the event of an outage or other energy surety threat, the software can autonomously separate a number of the nested microgrids from the utility and the
controls operate them independently in “island” mode, without interrupting service to critical circuits. Once energy from the grid is stabilized, CleanSpark’s
platform reconnects the microgrid to the utility. Each individual fractal microgrid can work independently or in concert as the larger 1.1MW FractalGrid,
sharing data and energy throughout the group to improve efficiency, protect critical circuits, manage supply and demand, and allow for maintenance or
repairs, as needed. The entire installation provides the Marine Corps and Department of the Navy with reliable energy security with built in cyber defense.
The microgrid assets were acquired as part of the CleanSpark acquisition and the project was capitalized at $4,625,339 which was the fair value of the assets
at the time of the acquisition.
F-11
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The microgrid assets consist of the following as of September 30, 2016 and September 30, 2015:
Camp Pendleton
FractalGrid
Less: accumulated
depreciation
Fixed assets, net
September 30,
2016
September 30,
2015
$
$
4,625,339 $
(57,501)
4,567,838 $
-
-
Depreciation expense for the years ended September 30, 2016 and 2015 was $57,501 and $0, respectively.
7. FLEXPOWER SYSTEM
A Distributed Energy Resource system with microgird functionality is comprised of any number of generation, energy storage, and smart distribution assets
that serve single or multiple loads, both connected to the grid and islanded, either entirely or a subset of critical loads. The FlexPower system is an integrated
Distibuted Energy Resource Management System (DERMS) and microgrid control platform that seamlessly integrates energy generation with energy storage
devices and controls facility loads to provide energy security in real time. The system is able to interoperated with the local utility grid and allows users the
ability to obtain the most cost effective power for a facility. The FlexPower system is ideal for commercial, industrial, mining, defense, campus and
community users ranging from 4 kw to 10 MW and beyond and can deliver power at or below the current cost of utility power.
The FlexPower System proprietary software and methodology was acquired as part of the CleanSpark acquisition and the project was capitalized at
$20,007,624 which was the fair value of the assets at the time of the acquisition.
The FlexPower system consist of the following as of September 30, 2016 and September 30, 2015:
September 30,
2016
September 30,
2015
FlexPower System
Less: accumulated
amortization
Intangible assets, net
$
$
20,007,624 $
(331,638)
19,675,986 $
-
-
-
Amortization expense for the years ended September 30, 2016 and 2015 was $331,638 and $0, respectively.
8. INTANGIBLE AND OTHER ASSETS
Intangible assets consist of the following as of September 30, 2016 and September 30, 2015:
September 30,
2016
September 30,
2015
Patents
Websites
Brand and Client lists
Trademarks
Software
Less: accumulated
amortization
Intangible assets, net
$
$
82,641 $
9,777
2,497,472
4,858
10,728
(137,546)
2,467,930 $
51,596
-
-
-
-
(7,126)
44,470
Amortization expense for the years ended September 30, 2016 and 2015 was $130,420 and $2,251, respectively.
9. RELATED PARTY TRANSACTIONS
On October 1, 2014 the Company entered into a Consulting agreement with Matthew Schultz, its Chief Executive Officer for management services. In
accordance with this agreement, Mr. Schultz provides services to the Company in exchange for $7,500 per month plus reimbursable expenses incurred. The
term of the agreement was one month and automatically renewed each month until cancelled by either party. During the year ending September 30, 2016, Mr.
Schultz was paid $97,500 in accordance with this agreement and is owed $15,000 in accrued compensation as of September 30, 2016.
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On July 1, 2016, the Company entered into a Consulting agreement with Zachary Bradford, its Chief Financial Officer for management services. In
accordance with this agreement, Mr. Bradford provides services to the Company in exchange for $15,000 per month plus reimbursable expenses incurred. Mr.
Bradford agreed to defer $10,000 of his compensation per month for the quarter ended September 30, 2016. During the year ending September 30, 2016, Mr.
Bradford was paid $15,000 in accordance with this agreement and was owed $30,000 in accrued compensation as of September 30, 2016.
On July 1, 2016 as part of the acquisition of the assets of Cleanspark, LLC, the Company agreed to assume certain trade payables not to exceed $200,000
associated with the ongoing business. On the date of the acquisition, the Company assumed $262,573 in liabilities and, as a result, $62,573 became
reimbursable by CleanSpark Holdings, LLC who is now a shareholder. During the quarter ending September 30, 2016, the Company received net
reimbursements of $9,553 related to this balance.
10. PREPAID EXPENSES
Prepaid expenses consist of the following as of September 30, 2016 and September 30, 2015:
September 30,
2016
September 30,
2015
Prepaid stock
compensation
Prepaid rents
Prepaid insurance
Total prepaid expenses
$
$
50,130 $
850
6,742
57,722 $
24,232
159
-
24,391
The Board of Directors created a Board of Advisors to provide the Officers and Directors with advice and insight and appointed Brad Pattee to serve as a
member of the board of advisors for a period of one year.
As compensation for his appointment, Mr. Patee was granted 180,000 non-statutory options under the following terms: non-transferable, fully vest on March
31, 2015, expire five years from the date of grant, strike price of $0.083 and become immediately exercisable upon the occurrence of a significant liquidating,
restructuring or change of control event.
The 180,000 stock options were valued at $54,411 using the Black-Scholes option pricing model based upon the following assumptions: term of 5 years, risk
free interest rate of 2.11%, a dividend yield of 0% and volatility rates of 110%. The amount was capitalized as a prepaid expense and will be amortized over
a twelve-month term, during the year ended September 30, 2016 the Company recorded an expense of $24,232.
On January 22, 2016, the Company appointed Mr. Greg Gohlinghorst as a member of the Company’s board of advisors. He was issued 35,000 shares of
common stock for his appointment. The shares were valued at $105,000 or $3.00 per share. The amount was capitalized as a prepaid expense and will be
amortized over a twelve-month term, during the year ended September 30, 2016 the Company recorded an expense of $72,295.
On January 15, 2016, we entered into an Investor Relations Consulting Agreement with Hayden IR (“HIR”) to serve as our investor relations firm for a period
of twelve months. Under the Agreement, HIR’s responsibilities include: implementing and maintaining an ongoing market support system to expand
awareness of our company in the investment community; arranging conference calls and interviews; providing feedback on expectations of results and
company value; assisting with the presentation of periodic results of operations; monitoring newswires and industry publications; drafting and coordinating
press releases, among other services.
As compensation for the services under the Agreement, we agreed to pay HIR a cash monthly fee of $3,500 for the first six months of the Agreement. The
monthly fee will increase to $6,500 for the last six months of the Agreement. We also agreed to issue to HIR 20,000 shares of restricted common stock within
30 days of execution. The shares were valued at $60,000 or $3.00 per share. The Stock compensation has been recorded as a prepaid expense and will be
amortized evenly over the twelve-month service period. During the year ending September 30, 2016, the Company has recorded $42,575 in stock based
compensation associated with this agreement.
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Table of Contents
11. STOCKHOLDERS’ EQUITY (DEFICIT)
Overview
Our authorized capital stock consists of 100,000,000 shares of common stock and 10,000,000 shares of preferred stock, par value $0.001 per share. As of
September 30, 2016, there were 27,834,415 shares of our common stock issued and outstanding and 1,000,000 shares of preferred stock issued and
outstanding.
Description of Common Stock
Our common stock is entitled to one vote per share on all matters submitted to a vote of the stockholders, including the election of directors. Except as
otherwise required by law or provided in any resolution adopted by our board of directors with respect to any series of preferred stock, the holders of our
common stock will possess all voting power. Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of election
of directors, by a plurality) of the votes entitled to be cast by all shares of our common stock that are present in person or represented by proxy, subject to any
voting rights granted to holders of any preferred stock. Holders of our common stock representing fifty percent (50%) of our capital stock issued, outstanding
and entitled to vote, represented in person or by proxy, are necessary to constitute a quorum at any meeting of our stockholders. A vote by the holders of a
majority of our outstanding shares is required to effectuate certain fundamental corporate changes such as a liquidation, merger or an amendment to our
articles of incorporation.
Subject to any preferential rights of any outstanding series of preferred stock created by our board of directors from time to time, the holders of shares of our
common stock will be entitled to such cash dividends as may be declared from time to time by our board of directors from funds available therefor.
Subject to any preferential rights of any outstanding series of preferred stock created from time to time by our board of directors, upon liquidation, dissolution
or winding up, the holders of shares of our common stock will be entitled to receive pro rata all assets available for distribution to such holders.
In the event of any merger or consolidation of our company with or into another company in connection with which shares of our common stock are
converted into or exchangeable for shares of stock, other securities or property (including cash), all holders of our common stock will be entitled to receive
the same kind and amount of shares of stock and other securities and property (including cash). Holders of our common stock have no pre-emptive rights, no
conversion rights and there are no redemption provisions applicable to our common stock.
Description of Preferred Stock
Our board of directors is authorized to divide the authorized shares of our preferred stock into one or more series, each of which must be so designated as to
distinguish the shares of each series of preferred stock from the shares of all other series and classes. Our board of directors is authorized, within any
limitations prescribed by law and our articles of incorporation, to fix and determine the designations, rights, qualifications, preferences, limitations and terms
of the shares of any series of preferred stock, including, but not limited to, the following:
•
•
•
•
•
•
•
the rate of dividend, the time of payment of dividends, whether dividends are cumulative, and the date from which any dividends accrue;
whether shares may be redeemed, and, if so, the redemption price and the terms and conditions of redemption;
the amount payable upon shares in the event of voluntary or involuntary liquidation;
sinking fund or other provisions, if any, for the redemption or purchase of shares;
the terms and conditions on which shares may be converted, if the shares of any series are issued with the privilege of conversion;
voting powers, if any, provided that if any of the preferred stock or series thereof have voting rights, such preferred stock or series shall vote
only on a share for share basis with the common stock on any matter, including, but not limited to, the election of directors, for which such
preferred stock or series has such rights; and,
subject to the foregoing, such other terms, qualifications, privileges, limitations, options, restrictions, and special or relative rights and
preferences, if any, of shares or such series as the board of directors may, at the time so acting, lawfully fix and determine under the laws of
the State of Nevada.
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Table of Contents
On April 15, 2015, the Company filed a Certificate of Amendment to the Company’s Articles of Incorporation (the “Certificate of Amendment”) with the
Nevada Secretary of State. The Certificate of Amendment authorized ten million (10,000,000) shares of preferred stock. The Company’s Board of Directors
and a majority of its shareholders approved the Certificate of Amendment.
On April 15, 2015, pursuant to Article IV of our Articles of Incorporation, the Company’s Board of Directors voted to designate a class of preferred stock
entitled Series A Preferred Stock, consisting of up to one million (1,000,000) shares, par value $0.001. Under the Certificate of Designation, holders of Series
A Preferred Stock will be entitled to quarterly dividends on 2% of our earnings before interest, taxes and amortization. The dividends are payable in cash or
common stock. The holders will also have a liquidation preference on the state value of $0.02 per share plus any accumulated but unpaid dividends. The
holders are further entitled to have the Company 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 the Company’s common stock on all matters submitted to shareholders at a rate of forty-five (45)
votes for each share held.
Common Stock issuances
During the period commencing October 1, 2015 through March 31, 2016, the Company received $215,000 from 16 investors pursuant to private placement
agreements with the investors to purchase 645,000 shares of CleanSpark $0.001 par value common stock and warrants to purchase 64,500 shares of
CleanSpark $0.001 par value common stock at a purchase price equal to $0.33 for each share of Common stock and 10% warrant coverage. The warrant
allows the holder to purchase shares of the Company's $0.001 par value common stock at $0.367 per share.
During the period commencing July 1, 2016 through September 30, 2016, the Company received $598,800 from 9 investors pursuant to private placement
agreements with the investors to purchase 748,500 shares of CleanSpark $0.001 par value common stock at a purchase price equal to $0.80 for each share of
Common stock.
On April 26, 2016, the Company entered into Stock Purchase Agreement with James Harper to acquire a patent from Mr. Harper as represented in an
Assignment of even date. Specifically, the Agreement granted 7,500, shares of the Company’s common stock, valued at $23,475, to Mr. Harper in exchange
for the Assignment of United States Patent No. 8,342829 issued January 8, 2013 by the United States Patent and Trademark Office. The Assignment transfers
the Patent and all rights associated therewith to the Company. Through this Assignment, the Company is now the sole owner of the Patent, which is an
invention entitled Electrolytic Reactor and Related Methods for Supplementing the Air Intake of an Internal Combustion Engine. The Company anticipates
integrating this technology, in whole or in part, into its downdraft gasification system, enabling the capture and conversion of process byproducts into
incremental energy.
On July 1, 2016, the Company, entered into the Purchase Agreement with Seller. Pursuant to the Purchase Agreement, the Company acquired all the assets
related to Seller and its line of business and assumed certain liabilities. As part of the consideration the Company issued to Seller six million (6,000,000)
shares of common stock with a fair value of $18,420,000 (See Note 3. BUSINESS ACQUISITION for additional details).
Preferred Stock issuances
On June 30, 2016, the Company issued a total of 600,000 shares of its Series A Preferred Stock to the four members of the Company’s board of directors for
services rendered.
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Table of Contents
12. STOCK WARRANTS
The following is a summary of stock warrants activity during the year ended September 30, 2016 and 2015.
Balance, September 30, 2014
Warrants granted and assumed
Warrants expired
Warrants canceled
Warrants exercised
Balance, September 30, 2015
Warrants granted and assumed
Warrants expired
Warrants canceled
Warrants exercised
Balance, September 30, 2016
Number of Shares
60,000 $
8,037,600 $
—
—
—
8,097,600 $
5,014,500 $
—
—
—
13,112,100 $
Weighted Average
Exercise Price
0.36
0.10
—
—
—
0.10
1.38
—
—
—
0.59
As of September 30, 2016, 13,112,100 warrants are exercisable.
On January 22, 2016, the Company issued warrants to purchase 450,000 shares of common stock at an exercise price of $0.367 per share to a Mr. Greg
Gohlinghorst for business advisory services. The warrants were valued at $1,342,350 using the Black Scholes option pricing model based upon the following
assumptions: term of 5 years, risk free interest rate of 1.49%, a dividend yield of 0% and volatility rate of 212%. The warrants were fully earned and vested
on January 31, 2016.
On July 1, 2016, the Company, entered into the Purchase Agreement with Seller. Pursuant to the Purchase Agreement, the Company acquired all the assets
related to Seller and its line of business and assumed approximately $200,000 in liabilities. As part of the consideration the Company issued to Seller five-
year warrants to purchase four million five hundred thousand (4,500,000) shares of common stock at an exercise price of $1.50 per share. The warrants were
valued at $13,675,500 using the Black Scholes option pricing model based upon the following assumptions: term of 5 years, risk free interest rate of 1.0%, a
dividend yield of 0% and volatility rate of 218%. The warrants were fully earned and vested on July 1, 2016. (See Note 3. BUSINESS ACQUISITION for
additional details).
13. INCOME TAXES
The Company provides for income taxes under FASB ASC 740, Accounting for Income Taxes. FASB ASC 740 requires the use of an asset and liability
approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax
bases of assets and liabilities and the tax rates in effect currently.
FASB ASC 740 requires the reduction of deferred tax assets by a valuation allowance, if, based on the weight of available evidence, it is more likely than not
that some or all of the deferred tax assets will not be realized. In the Company’s opinion, it is uncertain whether they will generate sufficient taxable income
in the future to fully utilize the net deferred tax asset. Accordingly, a valuation allowance equal to the deferred tax asset has been recorded. The total deferred
tax asset is $565,057 which is calculated by multiplying a 34% estimated tax rate by the cumulative net operating loss (NOL) adjusted for the following
items:
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Table of Contents
The components of the Company's deferred tax asset as of September 30, 2016 and 2015 are as follows:
For the period ended September 30,
Book loss for the year
Adjustments:
Non-deductible portion of meals and entertainment
Non-deductible portion of stock compensation
Non-deductible penalties
Tax loss for the year
Estimated effective tax rate
Deferred tax asset
2016
2015
$ (2,540,562) $ (3,485,003)
6,068
1,482,052
-
(1,052,442)
34%
1,035
3,242,463
-
(241,505)
34%
$ (357,830) $ (82,112)
As of September 30,
Deferred tax asset
Valuation allowance
Current taxes payable
$
Income tax expense
$
2016
2015
565,057 $
(565,057)
-
- $
207,257
(207,257)
-
-
Below is a chart showing the total estimated corporate federal net operating loss (NOL) and the year in which it will expire.
Year
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
Total
Amount
358,000
82,000
1,000
12,000
7,000
13,000
6,000
10,000
7,000
1,000
1,000
—
61,000
—
4,000
2,000
565,000
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Expiration
2036
2035
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
The Company will file its U.S. federal return for the year ended September 30, 2016 upon the issuance of this filing. The tax years 2012-2015 remained open
to examination for federal income tax purposes by the major tax jurisdictions to which the Company is subject. No tax returns are currently under
examination by any tax authorities.
F-17
Table of Contents
14. COMMITMENTS AND CONTINGENCIES
On January 22, 2016, the Company terminated its lease agreement at 2391 South 1560 West, Unit B, Woods Cross Utah and relocated its corporate office to
70 North Main Street, Suite 105, Bountiful, Utah 84010. The Company executed a one-year lease agreement that calls for the Company to make payments of
$850 per month. The Company has prepaid rent for January 2017. Future minimum lease payments under the operating leases for the facilities as of
September 30, 2016, are $2,550.
CleanSpark, LLC has agreed to provide the power produced by its mircogrid assets located on the FractalGrid demonstration facility to Camp Pendleton
Marine Corp Base free of charge until 2024. In exchange we have been granted the permission to locate our system on the base and the access to conduct
guided tours of the FractalGrid demonstration facility for our potential customers.
15. MAJOR CUSTOMER
For the years ended September 30, 2016 and 2015 we had the following customers that represented more than 10% of sales.
September 30, 2016
September 30,
2015
Bethel-Webcor JV-1
100%
-
For the years ended September 30, 2016 and 2015 we had no suppliers that represented more than 10% of direct material costs.
16. SUBSEQUENT EVENTS
On October 31, 2016, we filed Articles of Merger with the Secretary of State of Nevada in order to effectuate a merger with our wholly-owned subsidiary,
CleanSpark, Inc. Shareholder approval was not required under Section 92A.180 of the Nevada Revised Statutes. As part of the merger, our board of directors
authorized a change in our name to “CleanSpark, Inc.” and our Articles of Incorporation have been amended to reflect this name change. In connection with
the name change, our common stock now trades under the symbol “CLSK” that more resembles our new name.
In November of 2016, the Company issued 2,932,704 shares of common stock for the cashless exercise of options.
During the period commencing October 1, 2016 through December 29, 2016, the Company received $68,000 from 5 investors pursuant to private placement
agreements with the investors to purchase 95,000 shares of CleanSpark Inc. $0.001 par value common stock at a purchase price equal to $0.80 for each share
of Common stock.
F-18
Table of Contents
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
On September 13, 2016, Seale & Beers, CPAs, (the “Former Accountant”) informed us that the Former Accountant was in the process of being acquired by
AMC Auditing, LLC. As a result of the acquisition, on November 14, 2016, the Former Accountant resigned as our independent registered public accounting
firm and we engaged AMC Auditing, LLC (the “New Accountant”) as our independent registered public accounting firm. The engagement of the New
Accountant was approved by our Board of Directors.
On November 11, 2016, we filed a Form 8-K announcing the change in auditors and that filing is incorporated by reference herein.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, we have carried out an evaluation of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this annual report, being September 30, 2016. This evaluation was carried out under the supervision and
with the participation of our management, including our Chief Executive Officer and Chief Financial Officer.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed
or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities
and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information
required to be disclosed in our company’s reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Based upon that evaluation, including our Chief Executive Officer and Chief Financial Officer, we have concluded that our disclosure controls and procedures
were ineffective as of the end of the period covered by this annual report.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934). Management has assessed the effectiveness of our internal control over financial reporting as of September 30, 2016 based
on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a
result of this assessment, management concluded that, as of September 30, 2016, our internal control over financial reporting was not effective. Our
management identified the following material weaknesses in our internal control over financial reporting, which are indicative of many small companies with
small staff: (i) inadequate segregation of duties and effective risk assessment; and (ii) insufficient written policies and procedures for accounting and financial
reporting with respect to the requirements and application of both US GAAP and SEC guidelines.
We plan to take steps to enhance and improve the design of our internal control over financial reporting. During the period covered by this annual report on
Form 10-K, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we hope to implement the
following changes during our fiscal year ending September 30, 2017: (i) appoint additional qualified personnel to address inadequate segregation of duties
and ineffective risk management; and (ii) adopt sufficient written policies and procedures for accounting and financial reporting. The remediation efforts set
out in (i) and (ii) are largely dependent upon our securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful
in securing such funds, remediation efforts may be adversely affected in a material manner.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public accounting firm pursuant to an exemption for non-accelerated filers set forth in
Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
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Table of Contents
Remediation of Material Weakness
We are unable to remedy our controls related to the inadequate segregation of duties and ineffective risk management until we receive financing to hire
additional employees. We are currently in the process of hiring an outsourced controller to improve the controls for accounting and financial reporting.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2016 that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Internal Controls
Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and procedures or our
internal control over financial reporting are or will be capable of preventing or detecting all errors or all fraud. Any control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that misstatements, due to error or fraud will not occur or that all control issues and
instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty
and that breakdowns may occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of controls. The design of any system of controls is based in part on certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any
evaluation of controls effectiveness to future periods are subject to risk.
Item 9B. Other Information
On December 28, 2016, Todd Thompson resigned as our corporate secretary.
On December 29, Bryan Huber was appointed as our Chief Operating Officer and Director. We reassigned Michael Barrett to VP of Gasification.
On December 29, 2016, Zachary Bradford, our Chief Financial Officer, was appointed as our President to memorialize his expanded role in our company.
Mr. Huber’s and Mr. Bradford’s employment history and other information is set forth below in Part III Item 10. and incorporated herein by reference.
Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth the names, ages and positions of our current directors and executive officers.
PART III
Name
Age
Position(s)
S. Matthew Schultz
Bruce L. Lybbert
Zachary K. Bradford
Bryan Huber
Larry McNeill
Chief Executive Officer
and Director
Director
President, Chief
Financial Officer and
Director
Chief Operating Officer
and Director
Director
47
72
30
34
74
24
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Set forth below is a brief description of the background and business experience of our executive officers and directors.
S. Matthew Schultz, Chief Executive Officer, has been involved in many capacities with several publicly traded companies. Most recently, he served as the
President and CEO of Amerigo Energy, Inc., creating multiple syndicated offerings of developmental oil production programs, as well as overseeing the
operations from permitting through production. Since 1999, he has assisted numerous development and early stage companies to secure financing and
experience significant growth. As the President of Wexford Capital Ventures, Inc., he was instrumental in funding companies both domestically and abroad.
While serving as the Chairman of Pali Financial Group, Inc., he assisted in market development of dozens of public corporations. He was a founding
member and the Vice President of the Utah Consumer Lending Association. A native of Lander, WY, he studied management and finance at Weber State
University.
Aside from that provided above, Mr. Schultz does not hold and has not held over the past five years any other directorships in any company with a class of
securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of the Exchange Act or any company
registered as an investment company under the Investment Company Act of 1940.
Mr. Schultz is qualified to serve on our Board of Directors because of his experience and knowledge in public company reporting and financing and work in
the energy sector.
Zachary K. Bradford, President, Chief Financial Officer, is a licensed Certified Public Accountant in Nevada and a member of the American Institute of
Certified Public Accountants. He has served as the managing partner of a public accounting and consulting firm in Henderson, Nevada since June 2013 and
has served as a consultant and outsourced CFO for several companies in both the public and private sectors. Mr. Bradford holds a B.S. in Accounting and a
Masters of Accountancy from Southern Utah University. From March of 2015 to June 2016, Mr. Bradford served as a member of the board of directors and
Chief Financial Officer of Epic Stores Corp.
Aside from that provided above, Mr. Bradford does not hold and has not held over the past five years any other directorships in any company with a class of
securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of the Exchange Act or any company
registered as an investment company under the Investment Company Act of 1940.
Mr. Bradford is qualified to serve on our Board of Directors because of his experience and knowledge in public company reporting and accounting.
Bryan Huber, Chief Operating Officer, Mr. Huber has over 13 years of experience in the design-build construction and energy industries. He has extensive
experience and specialization with sustainable energy design and implementation, sustainable building design and construction, energy efficiency program
design and development, renewable energy design and integration, project management, quality assurance, and project commissioning. In addition, Bryan
brings with him a core competency within renewable energy Independent Power Producer deal structuring, design, forecasting, financial modeling, incentive
monetization, project financing, and deployment. As a Co-Founder of CleanSpark, Bryan continues to be integrally involved in technology development
management, refinement, implementation, and operation of CleanSpark’s Energy Operating Platform.
Bryan holds a B.S. in Construction Engineering & Management from Purdue University’s School of Civil Engineering, has completed Master’s coursework
in Architecture focusing on integration of Distributed Energy Resource Systems into the built environment, and is a LEED Accredited Professional through
the United States Green Building Council.
Aside from that provided above, Mr. Huber does not hold and has not held over the past five years any other directorships in any company with a class of
securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of the Exchange Act or any company
registered as an investment company under the Investment Company Act of 1940.
Mr. Huber is qualified to serve on our Board of Directors because of his experience and knowledge in the renewable energy industry.
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Table of Contents
Michael Barrett, Vice President of Gasification, Mr. Barrett is a licensed General Engineering and General Building Contractor with over 25 years’
experience in the construction and development industries. He is also a founding partner and principle of ICON Renewables, LLC. Where he has gained over
10 years of specialized waste-to-energy project development experience. He has worked directly with national and international industry leaders producing
thousands of tons of high-value feedstocks annually. Mr. Barrett has served as a professional consultant for several public and private sector firms and
provides services such as investigation, discovery and research. Mr. Barrett has provided regulatory management over many large commercial and industrial
projects such as Rio-Tinto Kennecott Mine and Facilities, Utah’s Olympic Oval, Salt Lake County Emergency Operations Center, Jail and Sheriff
Headquarters, Central Valley Water Reclamation Facility and many other large projects.
Aside from that provided above, Mr. Barrett does not hold and has not held over the past five years any other directorships in any company with a class of
securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of the Exchange Act or any company
registered as an investment company under the Investment Company Act of 1940.
Bruce L. Lybbert, Director, A seasoned veteran of the brokerage industry and Wall Street has served on the Board of Directors in several Companies in the
public and Private sectors. Mr. Lybbert co-founded Tel America, Inc. in 1982, growing it into a successful communications giant, which became the largest
regional long distance carrier in the western United States. Mr. Lybbert holds a B.A. in finance and marketing from Weber State University and pursued post-
graduate studies in finance at New York University.
Aside from that provided above, Mr. Lybbert does not hold and has not held over the past five years any other directorships in any company with a class of
securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of the Exchange Act or any company
registered as an investment company under the Investment Company Act of 1940.
Mr. Lybbert is qualified to serve on our Board of Directors because of his experience and knowledge in public company reporting and financing.
Larry McNeill, Director, has a master’s degree in Business Administration from Armstrong University, a BA in Business Administration, Economics, and
Russian language from Minnesota State University, and has completed the course work towards his PhD in Business Management.
Larry has a diverse business background that includes a range of broad business skills gained from his many roles in Real Estate, Finance, Research, Legal,
Management, and Business Strategies. These roles include serving as the Director of Safeway Grocery Stores, Inc's Consumer, Sales, and Store Location
research departments where he was responsible for the expansion of Safeway in Europe, Australia and Canada. The Director of Market Research for A&P
where he was responsible for the Company's expansion into Saudi Arabia. An Executive Officer of Smiths Food and Drug Centers for 17 years; most recently
as the Senior Vice President of Corporate Development overseeing the Research, Real Estate, and Legal Departments. Mr. McNeill retired from Smith’s Food
& Drug Stores in 1996 after the Fred Meyer merger was completed.
He has since served as the Chief Financial Officer of Theater Candy Corporation and Videolocity, Inc.
Aside from that provided above, Mr. McNeill does not hold and has not held over the past five years any other directorships in any company with a class of
securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of the Exchange Act or any company
registered as an investment company under the Investment Company Act of 1940.
Mr. McNeill s qualified to serve on our Board of Directors because of his experience and knowledge in business management and financing.
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Term of Office
Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in
accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board.
Family Relationships
There are no family relationships between or among the directors, executive officers or persons nominated or chosen by us to become directors or executive
officers.
Involvement in Certain Legal Proceedings
To the best of our knowledge, during the past ten years, none of the following occurred with respect to a present or former director, executive officer, or
employee: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding
traffic violations and other minor offenses); (3) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court
of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business,
securities or banking activities; and (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading
Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
Committees of the Board
Our company currently does not have nominating, compensation or audit committees or committees performing similar functions nor does our company have a
written nominating, compensation or audit committee charter. Our directors believe that it is not necessary to have such committees, at this time, because the
functions of such committees can be adequately performed by the board of directors.
Our company does not have any defined policy or procedural requirements for shareholders to submit recommendations or nominations for directors. The board
of directors believes that, given the stage of our development, a specific nominating policy would be premature and of little assistance until our business
operations develop to a more advanced level. Our company does not currently have any specific or minimum criteria for the election of nominees to the board of
directors and we do not have any specific process or procedure for evaluating such nominees. The board of directors will assess all candidates, whether submitted
by management or shareholders, and make recommendations for election or appointment.
A shareholder who wishes to communicate with our board of directors may do so by directing a written request addressed to our CEO and director, S. Matthew
Schultz, at the address appearing on the first page of this annual report.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company’s directors and executive officers and persons who beneficially own more than ten percent of a
registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and
other equity securities of the Company. Officers, directors and greater than ten percent beneficial shareholders are required by SEC regulations to furnish us
with copies of all Section 16(a) forms they file. To the best of the Company’s knowledge based solely on a review of Forms 3, 4, and 5 (and any amendments
thereof) received by us during or with respect to the year ended September 30, 2014, the following persons have not filed on a timely basis, the identified
reports required by Section 16(a) of the Exchange Act during fiscal year ended September 30, 2016:
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Table of Contents
Code of Ethics
Name and principal position
S. Matthew Schultz, President
Zachary Bradford, CFO
Michael Barrett, COO
Bruce Lybbert, Director
Larry McNeill, Director
Todd Thompson
Number of
late reports
0
0
0
0
0
0
Transactions
not timely
reported
1
1
0
1
1
0
Known
failures to file
a required
form
0
0
0
0
0
1
We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller. We will
provide, at no cost, a copy of the Code of Ethics to any shareholder upon receiving a written request sent to the Company’s address shown on Page 1 of this
report.
Item 11. Executive Compensation
The table below summarizes all compensation awarded to, earned by, or paid to our former or current executive officers for the fiscal years ended September
30, 2016 and 2016.
SUMMARY COMPENSATION TABLE
Salary
($)
Bonus
($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive Plan
Compensation
($)
Nonqualified
Deferred
Compensation
Earnings ($)
All Other
Compensation
($)
Total
($)
Year
2015
2016 —
2015
2016 —
2015
2016 —
2015
2016 —
100,000
—
600 482,861
—
15,000
94,500
97,500
677,361
113,100
100,000
—
600 482,861
—
30,000
15,000
582,861
45,600
—
—
—
—
12,000
16,000
28,000
—
100,000 482,861
—
—
—
582,861
Name and
principal
position
S. Matthew
Schultz
CEO
Zachary
Bradford
President and
CFO
Bryan
Huber
COO
Michael
Barrett
VP of
Gasification
Narrative Disclosure to the Summary Compensation Table
On October 1, 2014, we entered into a Consulting agreement with Matthew Schultz, our Chief Financial Officer for management services. In accordance with
this agreement Mr. Schultz provides services to us in exchange for $7,500 per month plus reimbursable expenses incurred. The term of the agreement is one
month and automatically renews each month until cancelled by either party. During the year ending September 30, 2016 and 2015 Mr. Schultz was paid
$97,500 and $94,500, respectively, in accordance with this agreement and is owed $15,000 in accrued compensation as of September 30, 2016.
On July 1, 2016, we entered into a Consulting agreement with Zachary Bradford, our President and Chief Financial Officer for management services. In
accordance with this agreement, Mr. Bradford provides services to us in exchange for $15,000 per month plus reimbursable expenses incurred. Mr. Bradford
agreed to defer $10,000 of his compensation per month for the quarter ended September 30, 2016. During the year ending September 30, 2016, Mr. Bradford
was paid $15,000 in accordance with this agreement and was owed $30,000 in accrued compensation as of September 30, 2016.
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Table of Contents
Other than disclosed above there are no formal agreements to compensate any officers for their services. Our officers and directors are reimbursed for
expenses incurred on our behalf. However, our officers and directors have received benefits in the form of shares of our common stock and warrants.
Aside from the payment of stock and warrants in March of 2015, we have not adopted any retirement, pension, profit sharing, stock option or insurance
programs or other similar programs for the benefit of our officers or employees.
Outstanding Equity Awards at Fiscal Year-End
The table below summarizes all unexercised options, stock that has not vested, and equity incentive plan awards for each named executive officer as of
September 30, 2016.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
OPTION AWARDS
STOCK AWARDS
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
Option
Exercise
Price
($)
Option
Expiration
Date
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have
Not
Vested
(#)
Equity
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#)
Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
($)
Number
of
Shares
or Units
of
Stock
That
Have
Not
Vested
(#)
—
—
$ 0.083 3/12/25 —
—
—
—
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
Name
Michael
Barrett 1,500,000
Director Compensation
The table below summarizes all compensation of our directors for the year ended September 30, 2016.
DIRECTOR COMPENSATION
Fees
Earned
or
Paid in
Cash
($)
—
—
Name
Bruce Lybbert
Larry McNeill
Stock
Awards
($)
Option
Awards
($)
600 —
600 —
Non-Equity
Incentive Plan
Compensation
($)
—
—
Non-Qualified
Deferred
Compensation
Earnings ($)
—
—
All Other
Compensation
($)
—
—
Total
($)
600
600
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Table of Contents
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth as of December 27, 2016 the number and percentage of the 30,752,119 shares of outstanding common stock which, according
to the information supplied to the Company, were beneficially owned by (i) each person who is currently a director of the Company, (ii) each executive
officer, (iii) all current directors and executive officers of the Company as a group and (iv) each person who, to the knowledge of the Company, is the
beneficial owner of more than 5% of the outstanding common stock. Except as otherwise indicated, the persons named in the table have sole voting and
dispositive power with respect to all shares beneficially owned, subject to community property laws where applicable.
Except as otherwise indicated, the address of each of the persons named in the table below is c/o CleanSpark, Inc., 70 North Main Street, Ste. 105 Bountiful,
Utah 84010.
Name of Beneficial
Owner
5% or Greater
Stockholders
CleanSpark Holdings, LLC
9666 Businesspark Ave
Unit 207
San Diego, CA 92131
Directors and named
executive officers
S. Matthew Schultz
Bruce Lybbert
Zachary Bradford
Michael Barrett
Larry McNeill
Bryan Huber
All Officers and Directors
as a Group (5 Persons)
Number of Shares of Par Value
$0.001 Common Stock Beneficially
Owned
Percentage
of Class
6,000,000
6,451,308(1)
4,479,643(2)
3,358,632(3)
2,596,140(4)
1,920,000(5)
—
18,805,723
19.5%
21.0%
13.9%
10.9%
8.0%
6.0%
0%
53.3%
(1) Includes 4,800,000 shares of common stock held in the S M Schultz IRRV TR to which Mr. Schultz is the beneficial owner, 1,241,352 shares of
common stock held in his name and 409,956 shares of common stock held by his spouse.
(2) Includes 729,643 shares of common stock held in his name, 2,250,000 shares of common stock held by Jacque Lybbert, Mr. Lybbert’s spouse, and
options to purchase 1,500,000 shares of common stock.
(3) Includes 3,238,632 shares of common stock held in ZRB Holdings Inc. in which Mr. Bradford is the beneficial owner and 120,000 shares of common
stock held in BlueChip Advisors LLC in which Mr. Bradford shares beneficial ownership.
(4) Includes 1,096,140 shares of common stock held in his name and options to purchase 1,500,000 shares of common stock.
(5) Includes 420,000 shares of common stock held in his name and options to purchase 1,500,000 shares of common stock.
The following table sets forth as of December 27, 2016 the number and percentage of the 1,000,000 shares of outstanding Series A Preferred Stock which,
according to the information supplied to the Company, were beneficially owned by (i) each person who is currently a director of the Company, (ii) each
executive officer, (iii) all current directors and executive officers of the Company as a group and (iv) each person who, to the knowledge of the Company, is
the beneficial owner of more than 5% of the outstanding shares of Series A Preferred Strock. Except as otherwise indicated, the persons named in the table
have sole voting and dispositive power with respect to all shares beneficially owned, subject to community property laws where applicable.
Except as otherwise indicated, the address of each of the persons named in the table below is c/o CleanSpark, Inc., 70 North Main Street, Ste. 105 Bountiful,
Utah 84010.
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Table of Contents
Name of Beneficial Owner
5% or Greater Stockholders
NONE
Directors and named
executive officers
S. Matthew Schultz
Bruce Lybbert
Zachary Bradford
Bryan Huber
Michael Barrett
Larry McNeill
All Officers and Directors
as a Group (5 Persons)
Number of Shares of Par Value
$0.001 Series A Preferred Stock
Beneficially Owned
Percentage
of Class
250,000
250,000
250,000
—
—
250,000
25%
25%
25%
0%
0%
25%
1,000,000
100%
Item 13. Certain Relationships and Related Transactions, and Director Independence
Except as provided below and in “Executive Compensation” set forth above, for the past two fiscal years there have not been, and there is not currently
proposed, any transaction or series of similar transactions to which we were or will be a participant in which the amount involved exceeded or will exceed the
lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years, and in which any director, executive
officer, holder of 5% or more of any class of our capital stock or any member of the immediate family of any of the foregoing persons had or will have a
direct or indirect material interest.
On July 1, 2016 as part of the acquisition of the assets of Cleanspark, LLC, we agreed to assume certain trade payable not to exceed $200,000 associated with
the ongoing business. On the date of the acquisition we assumed 262,573 in liabilities and as a result $62,573 became reimbursable by CleanSpark Holdings,
LLC who is now a shareholder. During the quarter ending September 30, 2016, we received net reimbursements of $9,533 related to this balance.
Item 14. Principal Accounting Fees and Services
Below is the table of Audit Fees billed by our auditors in connection with the audits of the Company’s annual financial statements for the years ended:
Financial Statements for the
Year Ended September 30 Audit Services
Audit Related
Fees
Tax Fees
Other Fees
2016
2015
$20,000
$7,000
$
$
31
0 $
0 $
0 $
0 $
0
0
Table of Contents
PART IV
Item 15. Exhibits, Financial Statements Schedules
(a) Financial Statements and Schedules
The following financial statements and schedules listed below are included in this Form 10-K.
Financial Statements (See Item 8)
(b) Exhibits
Exhibit Number
2.1
2.2
2.3
2.4
2.5
3.1
3.2
3.3
3.4
3.5
3.6
3.7
4.1
10.1
10.2
10.3
10.4
31.1
31.2
32.1
101**
Description
Stock Purchase Agreement(9)
Assignment(9)
Asset Purchase Agreement(11)
Amendment to Asset Purchase Agreement(12)
Amendment to Asset Purchase Agreement(13)
Articles of Incorporation, as amended (1)
Amended Bylaws (2)
Articles of Merger (3)
Certificate of Amendment (4)
Certificate of Designation (4)
Certificate of Change (5)
Articles of Merger(14)
Form of Warrant (6)
Debt Settlement Agreement (7)
Debt Settlement Agreement (7)
Investor Relations Consulting Agreement(8)
Agreement for Appointment of Corporate Secretary(10)
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
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
The following materials from the Company’s Annual Report on Form 10-K for the year ended September 30,
2016 formatted in Extensible Business Reporting Language (XBRL).
1. Incorporated by reference to the Form 10 filed on November 11, 2008.
2. Incorporated by reference to the 8-K filed on February 12, 2013.
3. Incorporated by reference to the 8-K filed on December 1, 2014.
4. Incorporated by reference to the 8-K filed on April 16, 2015.
5. Incorporated by reference to the 8-K filed on May 13, 2015.
6. Incorporated by reference to the 8-K filed on March 17, 2015.
7. Incorporated by reference to the 8-K filed on January 6, 2015.
8. Incorporated by reference to the 8-K filed on January 19, 2016.
9. Incorporated by reference to the 8-K filed on May 2, 2016.
10. Incorporated by reference to the 8-K filed on May 9, 2016.
11. Incorporated by reference to the 8-K filed on July 7, 2016.
12. Incorporated by reference to the 8-K filed on July 22, 2016.
13. Incorporated by reference to the 8-K filed on August 22, 2016.
14. Incorporated by reference to the 8-K filed on November 14, 2016.
32
Table of Contents
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SIGNATURES
CleanSpark Inc.
By:
By:
/s/ S. Matthew Schultz
S. Matthew Schultz
President, Chief Executive Officer, Principal Executive Officer and Director
December 30, 2016
/s/ Zachary Bradford
Zachary Bradford
Chief Financial Officer, Principal Financial Officer, Principal Accounting Officer and Director
December 30, 2016
In accordance with Section 13 or 15(d) of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
By:
By:
By:
By:
By:
/s/ S. Matthew Schultz
S. Matthew Schultz
President, Chief Executive Officer, Principal Executive Officer and Director
December 30, 2016
/s/ Zachary Bradford
Zachary Bradford
Chief Financial Officer, Principal Financial Officer, Principal Accounting Officer and Director
December 30, 2016
/s/ Bruce L. Lybbert
Bruce L. Lybbert
Director
December 30, 2016
/s/ Larry McNeill
Larry McNeill
Director
December 30, 2016
/s/ Bryan Huber
Bryan Huber
Chief Operations Officer and Director
December 30, 2016
33
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
I, S. Matthew Schultz, certify that;
1.
I have reviewed this annual report on Form 10-K for the year ended September 30, 2016 of CleanSpark, Inc. (the “registrant”);
2.
3.
4.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: December 30, 2016
/s/ S. Matthew Schultz
By: S. Matthew Schultz
Title: Chief Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
I, Zachary Bradford, certify that;
1.
I have reviewed this annual report on Form 10-K for the year ended September 30, 2016 of CleanSpark, Inc. (the “registrant”);
2.
3.
4.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: December 30, 2016
/s/ Zachary Bradford
By: Zachary Bradford
Title: Chief Financial Officer
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
In connection with the quarterly Report of CleanSpark, Inc. (the “Company”) on Form 10-K for the year ended September 30, 2016 filed with the Securities
and Exchange Commission (the “Report”), I, S. Matthew Schultz, Chief Executive Office, and I, Zachary Bradford, Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.
2.
By:
Name:
Title:
Date:
By:
Name:
Title:
Date:
The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates
presented and the consolidated result of operations of the Company for the periods presented.
/s/ S. Matthew Schultz
S. Matthew Schultz
Principal Executive Officer, and Director
December 30, 2016
/s/ Zachary Bradford
Zachary Bradford
Principal Financial Officer
December 30, 2016
This certification has been furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.