Business context and reporting period
CleanSpark, Inc. filed this Form 10-Q for the quarter and six months ended March 31, 2020 (fiscal Q2 2020; the request metadata says 2019 Q2, but the filing covers 2020). The company provides microgrid engineering, energy-management software and controls, and switchgear hardware; its January 2020 acquisition of p2kLabs added technology consulting and software-development services. Interim results are unaudited and not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue, 2020 / 2019 | $3.66m / $0.72m | $4.64m / $0.99m |
| Gross profit, 2020 / 2019 | $0.70m / $0.13m | $0.80m / $0.17m |
| Gross margin, 2020 / 2019 | 19.2% / 18.2% | 17.2% / 17.4% |
| Operating loss, 2020 / 2019 | $(2.27)m / $(2.59)m | $(5.26)m / $(4.33)m |
| Net loss, 2020 / 2019 | $(5.82)m / $(7.76)m | $(7.73)m / $(10.05)m |
| Basic and diluted loss per share, 2020 / 2019 | $(1.13) / $(1.88) | $(1.56) / $(2.59) |
- Management attributed the revenue increase primarily to switchgear product sales. Six-month cost of goods sold rose to $3.71m from $0.33m, while total operating expenses increased to $6.06m from $4.50m. Higher payroll, general and administrative costs, and depreciation and amortization contributed to the increase.
- Six-month operating cash use was $1.26m, down from $2.51m a year earlier. Investing used $2.00m, including $1.14m for p2kLabs and $0.75m for investments; financing used $0.07m. Cash declined by $3.33m to $4.51m from September 30, 2019.
- At March 31, the financial statements report current assets of $8.33m, current liabilities of $4.62m, working capital of $3.71m, total assets of $22.49m, and total liabilities of $9.89m. Convertible notes, net of discounts, totaled $5.95m current and long-term; loans payable were $0.15m long-term. The filing describes debt secured by company assets and conversion terms that can result in substantial share issuance.
- Management stated it believed liquidity was sufficient for anticipated cash requirements for the next 12 months, while cautioning that profitability and access to acceptable additional financing were not assured. No quantified revenue or earnings guidance is provided.
Material changes, outlook and risks
- Revenue growth was substantial, but six-month operating loss widened and gross margin edged down. Lower interest expense helped reduce reported net loss; the six-month comparison also included derivative and equity-security gains. In the March quarter, the company recorded a $1.44m derivative loss and a $0.21m unrealized equity-security loss.
- The p2kLabs acquisition had provisional purchase accounting and added $0.64m of goodwill; consideration was $1.69m, including $1.16m cash, stock, and options. Management expects operating expenses may rise as it expands operations and executes contracts.
- Convertible-debt amendments in March set a $1.50 conversion floor in specified circumstances and changed default and share-reservation provisions. Subsequent to quarter-end, the December 2018 note was fully converted on April 15; further conversions of the April 2019 notes were disclosed in May. These transactions issued substantial common shares. The cover reports 9,864,656 shares outstanding as of May 11, 2020.
- After quarter-end, the company contributed $660,000 to a PPE joint venture, with potential for additional funding by mutual agreement. COVID-19 could disrupt supply chains and operations; the filing says its eventual impact was uncertain.
- Customer concentration was high: two customers represented 55.5% and 24.4% of six-month revenue; one supplier represented 92.27% of direct material costs. The company reported no material pending legal proceedings and no off-balance-sheet arrangements.
- Disclosure controls were deemed ineffective due to material weaknesses in internal-control documentation and risk assessment, and information-technology controls. Management planned remediation before fiscal year-end 2020, subject to testing. The filing also identifies risks around future financing, competition, economic conditions, and execution.
Important facts for investors to verify
- Reconcile the financial statements with conflicting MD&A balance-sheet figures: the MD&A reports current assets of $8.84m, total assets of $23.00m, current liabilities of $5.12m, and total liabilities of $10.40m, which differ from the balance sheet. The MD&A working-capital figure agrees with the balance-sheet calculation.
- Confirm the common-share count: the balance sheet reports 5,745,115 shares at March 31, while Note 12 reports 5,745,415; assess subsequent debt conversions and potential dilution against the May 11 cover count.
- Review remaining convertible-debt balances, conversion and default terms, subsequent conversions, and the share-reservation restrictions, including their effects on dilution and liquidity.
- Assess whether the company’s cash, working capital, customer and supplier concentration, and planned remediation of material weaknesses support its stated 12-month liquidity expectation.
- Track p2kLabs integration and revenue milestones tied to escrowed acquisition shares, and the PPE joint venture’s performance and additional funding exposure.