CleanSpark, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended June 30, 2017; balance sheet compared with September 30, 2016. The company reports as a smaller reporting company. CleanSpark provides microgrid design, engineering, installation and consulting services and continues developing gasification technology.
Financial performance and position
| Metric | Three months ended June 30, 2017 | Nine months ended June 30, 2017 |
|---|---|---|
| Revenue | $103,908 | $388,541 |
| Gross profit / gross margin | $32,603 / 31.4% | $124,648 / 32.1% |
| Operating expenses | $1,482,022 | $3,450,569 |
| Net loss | $1,449,577 | $3,456,415 |
| Basic loss per share | $0.04 | $0.11 |
- Revenue was nil in the comparable 2016 periods. Management said most 2017 revenue came from microgrid engineering-design work; it could not reliably estimate future contract revenue.
- Depreciation and amortization was $1,004,317 for the quarter and $2,302,861 for the nine months, up substantially from 2016 following the CleanSpark asset acquisition.
- At June 30, cash was $150,049, current assets $229,240, current liabilities $164,773, working capital $64,467, and total assets $30,426,731. Total liabilities were $164,773; current loans were $15,423. The balance sheet shows $30,261,958 of stockholders’ equity.
- Nine-month operating cash use was $981,804; investing cash use was $92,840; financing cash provided was $788,164. Cash fell $286,480 from September 30, 2016. Financing included $775,002 from common-stock issuance.
- Common shares outstanding increased from 27,834,415 at September 30, 2016 to 33,277,221 at June 30, 2017; 33,370,971 were reported outstanding August 13, 2017. The company also had warrants exercisable for 8,612,100 shares.
Changes, outlook and risks
- Compared with 2016, the company began generating revenue after acquiring the CleanSpark business in July 2016, but losses and operating expenses rose sharply. Professional fees and payroll also increased; depreciation and amortization were the largest operating expense.
- Management said it would prioritize the CleanSpark business in 2017, improve and market its microgrid system, and continue developing its technology. A feasibility study and pilot design awarded by a large retail real-estate owner could lead to future projects, but deployment and revenue are uncertain. No quantified earnings or revenue guidance was provided.
- Management stated it did not have sufficient cash to operate at the current level for the next 12 months and planned to seek additional private-equity financing and pursue sales. The filing says additional financing and profitable operations are necessary; their availability and achievement are uncertain. The company reported cumulative losses of $9,891,255 and substantial doubt about its ability to continue as a going concern.
- Disclosure controls were deemed ineffective due to material weaknesses in segregation of duties/risk assessment and written accounting and reporting procedures. Remediation depended in part on securing financing.
- Customer concentration was significant: four customers accounted for 11.8%–23.4% each of nine-month sales. One supplier represented 45.7% of direct material costs. The company reported no pending legal proceedings or off-balance-sheet arrangements.
- Unusual items included a $117,414 nine-month loss on debt settlement and a $12,817 loss on disposal of assets. Related-party consulting arrangements generated reported expenses, including $145,157 each for the CEO and President/CFO during the nine months.
- Commitments included a San Diego office lease with remaining minimum payments of $7,125 for fiscal 2017 and $19,335 for fiscal 2018, plus a month-to-month office arrangement. The company also undertook maintenance and warranty responsibilities for the Camp Pendleton microgrid assets.
- After quarter-end, the company raised $75,000 from six investors through a private placement at $0.80 per share. Management stated operating results for the interim period are not necessarily indicative of full-year results.
Investor verification points
- Verify cash runway, financing needs and subsequent funding against the going-concern warning and stated 12-month cash shortfall.
- Assess whether design and feasibility work converts into funded microgrid deployment contracts and recurring revenue.
- Review the basis and recoverability of large acquired asset balances, including the FlexPower system, microgrid assets, goodwill and other intangibles, and related amortization.
- Evaluate customer and supplier concentration, related-party compensation, and potential dilution from outstanding warrants and future equity financing.
- Track remediation of the disclosed material weaknesses and the effectiveness of internal controls in subsequent filings.