Filing summary
Entity and period: The supplied filing is Stratean, Inc.’s Form 10-Q for the quarter and six months ended March 31, 2016—not a filing under the CleanSpark, Inc. name in the request metadata. The quarter is the company’s fiscal second quarter. The financial statements are unaudited.
Business context and financial performance
Stratean describes its business as acquiring, licensing, and marketing technology intended to convert organic material and waste into synthesis gas. Its gasifier remained under development; the company had no revenue and had not reported significant customer negotiations.
| Metric | Three months ended Mar. 31, 2016 | Three months ended Mar. 31, 2015 | Six months ended Mar. 31, 2016 | Six months ended Mar. 31, 2015 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Operating expenses | $191,071 | $3,188,917 | $263,087 | $3,375,111 |
| Operating loss | $191,071 | $3,188,917 | $263,087 | $3,375,111 |
| Net loss | $190,350 | $3,188,917 | $262,366 | $3,380,255 |
| Basic loss per share | $0.01 | $0.17 | $0.01 | $0.19 |
With no revenue, gross margin is not meaningful. The 2016 loss reduction largely reflects substantially lower professional fees than in 2015, when stock-based consulting expense was particularly large. For the six months, 2016 professional fees were $214,157 versus $3,290,656; 2016 included $143,242 of advisor stock-based compensation and $45,000 of officer consulting fees. Depreciation and amortization rose to $20,485 from $1,329.
Cash, liquidity, and capitalization
- At March 31, 2016, cash was $151,689, current assets were $162,006, current liabilities were $13,411, and working capital was $148,595. Total assets were $856,481 and total liabilities were $13,411. The filing reports no senior securities defaults; it shows no interest-bearing debt balance on the balance sheet.
- For the six months, operating activities used $139,590, investing activities used $12,254, and financing activities provided $215,000. Cash increased by $63,156 from $88,533 at September 30, 2015.
- The company raised $215,000 from 16 investors in a private placement, issuing 645,000 common shares and warrants for 64,500 shares at an exercise price of $0.367. Common shares outstanding increased from 20,378,415 at September 30, 2015 to 21,058,415 at March 31, 2016; 21,058,415 were reported outstanding as of May 10, 2016.
- At March 31, 2016, 8,612,100 warrants were exercisable. The 400,000 outstanding Series A preferred shares carry voting rights of 45 votes per share, specified dividend and liquidation rights, and a change-of-control conversion feature.
Changes, outlook, and risks
- Compared with the prior-year periods, reported operating expenses and net losses fell sharply, chiefly because professional fees and stock-based consulting charges were much lower. Revenue remained zero.
- Management said it did not expect significant revenue until technology development was complete. The filing anticipated the gasifier might be sellable in the first quarter of 2017 and expected the independent testing project’s final report during the quarter ending September 30, 2016. Testing stages one through five of seven were reported complete.
- The company stated that it lacked sufficient cash to operate at its current level for the next 12 months and planned to seek additional private equity and/or debt financing. It cautioned that financing might not be available on acceptable terms or at all. The notes disclose cumulative losses of $4,156,644 and substantial doubt about the company’s ability to continue as a going concern.
- Management identified disclosure-control and internal-control material weaknesses: inadequate segregation of duties and risk assessment, and insufficient written accounting and reporting policies. Remediation had not occurred and depended substantially on securing financing.
- Other notable items include a $721 gain on disposal of office equipment and subsequent events: an agreement to acquire a patent for 7,500 shares, and a secretary services agreement providing for compensation of up to 150,000 shares and $150,000. The company reported no pending legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the issuer identity: the supplied document names Stratean, Inc., whereas the request metadata names CleanSpark, Inc.
- Assess the going-concern warning, available financing, cash runway, and the company’s dependence on further equity or debt funding.
- Verify gasifier test results, completion of the remaining testing stages, commercial readiness, and the ability to secure customers and generate revenue.
- Review potential dilution from outstanding warrants and preferred-stock voting and economic rights, as well as the terms and accounting for stock-based compensation.
- Review the material control weaknesses and remediation progress. The filing says the evaluation was carried out as of September 30, 2015, but concludes controls were ineffective as of March 31, 2016; clarify the evaluation-period wording.