CleanSpark, Inc. — Form 10-Q Summary
Reporting period: Three months ended December 31, 2018 (the company’s fiscal first quarter). The filing is unaudited. CleanSpark provides microgrid engineering, design, construction and consulting services, alongside energy-management software. It reported that its work during the quarter was performed in California.
Financial results and liquidity
| Metric | Q1 ended Dec. 31, 2018 | Comparable 2017 quarter |
|---|---|---|
| Revenue | $262,907 | $18,080 |
| Gross profit | $39,581 | $11,612 |
| Gross margin | 15.1% | 64.2% |
| Operating expenses | $1,779,490 | $1,051,996 |
| Operating loss | $(1,739,909) | $(1,040,384) |
| Net loss | $(2,283,551) | $(1,056,515) |
| Basic loss per share | $(0.06) | $(0.03) |
| Cash used in operating activities | $(666,444) | $(384,864) |
- Revenue rose substantially from the low prior-year base, primarily from engineering and construction work. Gross profit increased in dollars, but gross margin fell sharply as materials, direct labor and subcontractor costs grew.
- Professional fees rose to $1.02 million, including substantial stock-based compensation and consulting, audit and legal costs. Interest expense was $517,417, including $466,341 of debt-discount amortization.
- At December 31, 2018, cash was $4.62 million, total current assets were $4.80 million, current liabilities were $1.61 million and working capital was approximately $3.19 million. Total assets were $21.44 million and stockholders’ equity was $19.83 million.
- Cash increased by $4.21 million during the quarter, mainly due to $5.00 million of net convertible-debt proceeds and $361,801 from common-stock issuance. Investing activities used $120,700, including $117,772 invested in capitalized software.
- Current liabilities included $353,833 of convertible notes, $541,483 of loans payable and $244,720 of related-party loans. Separately, the company issued a $5.25 million secured convertible debenture on December 31; the balance sheet showed no net long-term convertible debt after a $5.25 million debt discount. The debenture was secured by company assets.
Material changes, outlook and risks
- Management said it had raised capital through debt and equity securities and believed it had sufficient capital for at least 12 months of operations. The company had incurred losses for several years; actual results may differ, and interim results are not necessarily indicative of full-year performance.
- Management expects operating expenses to increase as it executes contracts and may need additional personnel. It said future software revenue could not be estimated reliably and did not expect significant Gasifier revenue until the technology is developed and marketed. The filing provides no quantified revenue or earnings guidance.
- Revenue was highly concentrated: Bethel-Webcor JV represented 51.4% and Macerich 45.9% of quarterly revenue. Four suppliers each represented more than 10% of direct material costs.
- On January 7, 2019, the debenture investor converted $2.5 million of principal and a $875,000 conversion premium into 1,784,729 shares at an effective $1.90 per share. The conversion followed a trigger event because the company had not filed its fiscal 2018 Form 10-K by December 31, 2018; the note terms also provide for reduced conversion pricing and higher interest following specified filing defaults.
- After quarter-end, the company repaid the EMA and Labrys convertible notes, related-party notes and certain promissory notes. It also repaid two promissory notes totaling $241,483 principal plus accrued interest. These payments and the debenture conversion affect subsequent liquidity and dilution.
- On January 22, 2019, CleanSpark completed its acquisition of Pioneer Critical Power, issuing 1.75 million shares and warrants for up to 1 million additional shares. Management said the acquired contracts and purchase orders were expected to generate significant sales in early 2019; this is an expectation, not reported-period revenue. A contemplated earlier asset purchase arrangement was terminated.
- Disclosure controls were reported ineffective because of material weaknesses in segregation of duties/risk assessment and written accounting and reporting procedures. Management planned remediation during fiscal 2019, dependent in part on financing. Cash exceeding FDIC insurance limits was $4.37 million at quarter-end.
- The filing reported no pending legal proceedings and no off-balance-sheet arrangements. It disclosed no quantified contingencies beyond those described above.
Important facts for investors to verify
- Whether the company can convert reported working capital and new financing into sustained operating cash flow, given continued losses and quarterly operating cash use.
- The full economic terms, security, conversion mechanics and subsequent treatment of the $5.25 million debenture, including the filing-default trigger and resulting share issuance.
- Customer and supplier concentration, contract execution, project margins, and whether expected switchgear sales materialize after the acquisition.
- Potential dilution: 56,406,617 shares issuable from outstanding options, warrants and convertible debt were excluded from diluted loss per share as anti-dilutive; reported common shares outstanding were 36,679,197 at December 31 and 41,490,596 as of February 13, 2019.
- Progress in remediating material weaknesses, and the accuracy of the filing’s debt, share-count and comparative balance-sheet disclosures; some balance-sheet share-date labels appear inconsistent in the supplied filing text.