CleanSpark, Inc. — Form 10-Q Summary
Period correction: The supplied filing is for the quarter ended June 30, 2019, and the nine months then ended. This does not match the request metadata of “2018 Q3.” Financial statements are unaudited.
Business context and reporting period
CleanSpark provides microgrid engineering, implementation and consulting services, energy-control software, and distributed-energy hardware. In January 2019, it acquired Pioneer Critical Power’s intellectual property and customer lists, adding switchgear and related equipment sales. The filing says the company performed its work in California during the nine-month period.
Financial results and position
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Nine months ended June 30, 2019 | Nine months ended June 30, 2018 |
|---|---|---|---|---|
| Revenue | $1.223 million | $0.329 million | $2.210 million | $0.467 million |
| Gross profit (margin) | $0.217 million (17.7%) | $0.040 million (12.2%) | $0.388 million (17.6%) | $0.095 million (20.3%) |
| Operating expenses | $2.693 million | $1.095 million | $7.192 million | $3.217 million |
| Operating loss | $2.477 million | $1.055 million | $6.804 million | $3.122 million |
| Net loss | $3.972 million | $6.154 million | $14.020 million | $8.539 million |
| Basic and diluted loss per share | $0.09 | $0.18 | $0.35 | $0.25 |
At June 30, 2019, cash was $8.016 million, current assets $11.475 million, current liabilities $1.374 million, and reported working capital $10.101 million. Total assets were $32.912 million and total liabilities $2.881 million. Stockholders’ equity was $30.031 million. The company reported no cash equivalents.
Operating activities used $5.792 million of cash in the nine months, versus $0.901 million in the prior-year period. Investing activities used $0.599 million, principally for capitalized software; financing activities provided $13.994 million. Cash increased by $7.603 million from September 30, 2018.
Long-term convertible notes had $12.5 million of face principal and $10.993 million of unamortized debt discount, for a reported carrying amount of $1.507 million. Current loans payable were $0.335 million. The company also reported $38.9 million of potential shares issuable upon exercise or conversion of outstanding options, warrants and convertible debt, excluded from diluted loss per share as anti-dilutive.
Material changes versus the prior comparable period
- Revenue rose substantially year over year, including new switchgear-related sales following the Pioneer acquisition. Gross profit increased in dollars, but the nine-month gross margin declined to 17.6% from 20.3%.
- Operating expenses more than doubled for the nine-month period, driven notably by professional fees, stock-based compensation, and higher depreciation and amortization.
- Nine-month net loss widened to $14.020 million from $8.539 million. Interest expense rose to $7.196 million from $0.418 million, largely reflecting debt-discount amortization and financing costs.
- Financing raised cash substantially, while common shares outstanding increased from 36.1 million at September 30, 2018 to 44.7 million at June 30, 2019. The filing reports 45.8 million shares outstanding as of August 12, 2019.
Outlook, risks, contingencies and unusual items
- No specific revenue or earnings guidance is provided. Management expects operating expenses to increase as it executes its business plan and may need additional personnel and operating capacity.
- Management said capital raised through debt and equity was intended to fund at least 12 months of ongoing operations. Despite positive working capital, the company has a history of losses and continuing operating cash outflows.
- The December 2018 and April 2019 secured convertible financings carry 7.5% interest and conversion provisions tied to market prices, with redemption premiums and potential conversion-price and interest-rate penalties upon triggering events. The filing describes a prior missed-10-K-filing trigger that resulted in conversion premiums and share issuance. Further conversions could dilute existing shareholders.
- The April financing included a $10.75 million face-value debenture and warrants; the filing reports $10 million received at the first closing. A planned preferred-stock closing had not occurred by June 30, 2019. Series B preferred terms include 7.5% annual accruals, conversion and redemption provisions, and a liquidation preference.
- Customer concentration was significant: three customers represented 33.9%, 21.4% and 21.9% of nine-month revenue. One supplier represented 90.1% of direct material costs. Cash exceeding FDIC insurance limits was $7.766 million.
- Disclosure controls were deemed ineffective due to a material weakness: insufficient written accounting and financial-reporting policies and procedures for U.S. GAAP and SEC requirements. Management said remediation had not yet been completed and planned to adopt written policies during fiscal 2019.
- Subsequent events included additional debt conversions into shares in July 2019 and an August 2019 increase in authorized common shares from 100 million to 200 million. The company reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the reporting period: this filing covers the quarter ended June 30, 2019, not 2018 Q3.
- Track cash burn, remaining cash runway, and whether the stated funding plan supports at least 12 months of operations.
- Review the convertible-debt and Series B terms, remaining principal, redemption costs, triggering-event provisions, and actual and potential dilution.
- Assess whether switchgear revenue and the Pioneer acquisition translate into sustainable gross margins, given the reported customer and supplier concentration.
- Monitor remediation of the material weakness and the accuracy and timeliness of future SEC reporting.