CleanSpark, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and six months ended March 31, 2019 (CleanSpark’s fiscal second quarter of 2019), not 2018 Q2 as indicated in the request metadata. Financial statements are unaudited.
Business context and results
CleanSpark provides microgrid design, engineering, installation and energy-management software, and entered switchgear equipment sales through its January 2019 acquisition of Pioneer Critical Power. The company acquired specified intellectual property and customer lists, not a business, for stock and warrants valued at approximately $6.1 million.
| Metric | Three months ended Mar. 31, 2019 | Six months ended Mar. 31, 2019 |
|---|---|---|
| Revenue | $723,899 | $986,806 |
| Gross profit / margin | $131,881 / 18.2% | $171,462 / 17.4% |
| Operating expenses | $2,719,564 | $4,499,054 |
| Operating loss | $(2,587,683) | $(4,327,592) |
| Net loss | $(7,764,540) | $(10,048,091) |
| Basic loss per share | $(0.19) | $(0.26) |
For the comparable 2018 periods, quarterly revenue was $120,265 and net loss was $1,124,742; six-month revenue was $138,345 and net loss was $2,181,257. Revenue grew substantially, but losses widened. The filing attributes quarterly revenue growth partly to switchgear sales; manufacturing costs for switchgear were $330,882 for the quarter and $332,861 for the six-month period. Higher consulting, stock-based compensation, payroll, and depreciation and amortization contributed to higher operating expenses.
Cash, liquidity and debt
- At March 31, 2019, cash was $1,565,261, current assets $2,303,969, current liabilities $682,518, and working capital $1,621,451. Total assets were $24,438,095 and total liabilities $895,192.
- Six-month operating cash use was $2,507,862; investing cash use was $356,680; financing provided $4,017,026. Cash increased by $1,152,484 from September 30, 2018.
- Current loans payable were $361,136, and net long-term convertible notes were $212,674. These reported carrying values are affected by substantial unamortized debt discounts; the filing describes a $5.25 million face-value secured convertible debenture issued in December 2018. The investor converted $3.5 million of principal and conversion premium into shares during the period, following a filing-related trigger event.
- Interest expense was $5,701,074 for the six months, primarily reflecting $5,605,182 of debt-discount amortization. Thus reported interest expense and net loss substantially exceed cash interest paid, which was $49,750 in the six-month period.
Changes, outlook and material risks
- Customer concentration increased: three customers represented 44.0%, 35.8%, and 14.2% of six-month revenue. One vendor accounted for 83.1% of direct material costs.
- Management said it expects operating expenses to increase as the company executes contracts, hires personnel and expands operations. No quantified earnings or revenue guidance is provided. Management stated it raised debt and equity capital to support at least 12 months of operations.
- After quarter-end, CleanSpark reported an April financing agreement with aggregate purchase price of up to $20 million. It received $10 million at the first closing; additional preferred-stock funding was conditional on shareholder approvals and other specified steps, including a planned Nasdaq listing application. The financing includes secured convertible securities with conversion, redemption and dilution provisions.
- Disclosure controls were deemed ineffective because of material weaknesses, including insufficient written accounting and financial-reporting policies. Management planned remediation during fiscal 2019; the weakness had not been remediated as of the report date.
- Cash balances exceeded FDIC insurance limits by $1,315,261. The company disclosed no material pending legal proceedings and no material changes to previously reported risk factors. It also reported no off-balance-sheet arrangements.
Most important facts to verify
- Reconcile the December debenture’s face amount, conversions, remaining principal, discount amortization and reported carrying value; assess conversion-price and trigger-event terms and potential dilution.
- Confirm the amount and conditions of post-quarter financing actually funded, required shareholder approvals, and the company’s resulting cash runway.
- Assess whether revenue growth and the acquired switchgear business can produce sustainable gross margins, given customer and supplier concentration.
- Review progress in remediating the disclosed internal-control material weakness and the reliability of interim reporting.
- Monitor cash burn, collection of receivables, and dependence on additional financing. The filing cautions that interim results are not necessarily indicative of full-year results.