CleanSpark, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018; filed August 20, 2018. The request metadata says “2017 Q3,” but the filing itself reports 2018 Q3.
Business context
CleanSpark provides microgrid design, engineering, consulting, implementation and energy-control software, primarily through its mPulse and mVSO platforms. It said its 2018 focus was the CleanSpark business rather than gasification. Work during the nine-month period was performed in California.
Financial performance and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue, 2018 / 2017 | $328,586 / $103,908 | $466,931 / $388,541 |
| Gross profit, 2018 / 2017 | $40,186 / $32,603 | $94,786 / $124,648 |
| Gross margin, 2018 / 2017 | 12.2% / 31.4% | 20.3% / 32.1% |
| Operating expenses, 2018 / 2017 | $1,095,125 / $1,482,022 | $3,216,863 / $3,450,569 |
| Net loss, 2018 / 2017 | $6,153,847 / $1,449,577 | $8,539,287 / $3,456,415 |
| Basic loss per share, 2018 / 2017 | $0.18 / $0.04 | $0.25 / $0.11 |
Quarterly revenue rose substantially, but nine-month gross profit fell as costs of materials, subcontractors and labor increased. The nine-month operating loss narrowed to $3.12 million from $3.33 million; net loss widened largely because of derivative-liability remeasurement and higher interest expense. The nine-month derivative-liability loss was $4.96 million, and interest expense was $418,109.
At June 30, cash was $17,481, down from $57,128 at September 30, 2017. Current assets were $113,081 versus current liabilities of $18.79 million, producing a reported working-capital deficit of $18.68 million. Total assets were $19.44 million and total liabilities $19.09 million; stockholders’ equity was $345,054. The $17.70 million derivative liability was classified as current and valued using Level 3 inputs.
For the nine months, operating cash outflow was $901,141, investing cash outflow $290,779 and financing cash inflow $1,152,273. Financing included promissory-note proceeds, related-party borrowing, convertible debt, common-stock issuance and warrant exercises. Cash declined by $39,647 over the period.
Material changes, outlook and risks
- Management said it lacked sufficient cash to operate at the current level for the next 12 months and that substantial doubt existed about the company’s ability to continue as a going concern. Continued operations depend on additional financing, execution of its business plan and eventual profitability; no assurance of financing was given.
- The company reported more than $20 million of customer proposals in negotiation, but said timing and amounts of future revenue could not be estimated reliably. Management warned that delays or failure to secure contracts could affect forecasts and lead to impairment expense.
- A $900,000 Camp Pendleton microgrid contract was underway. Bethel-Webcor JV accounted for 68.8% of nine-month revenue, creating material customer concentration.
- Management expected operating expenses to increase as the business plan and contracts are implemented. It described variable margins as dependent on contract size and scope. No quantified earnings or revenue guidance was provided.
- The company offered a beta release of mPulse 2.0 to limited customers and expected testing and feature releases over the next two quarters. Its planned initial customer release was targeted for fiscal Q3 2018.
- A proposed Pioneer asset acquisition had not closed. Consideration included 7 million shares valued at $5.6 million, two five-year warrants for 1 million shares each, an 18-month note based on net current assets and liabilities, and an equipment lease. Closing was then expected by October 31, 2018, subject to conditions.
- Subsequent to quarter-end, the company disclosed a $550,000 convertible note, of which $225,000 was funded less fees, with a variable conversion price equal to 70% of the lowest closing market price over the prior 20 days. It also disclosed additional related-party loans. These financing terms carry dilution and repayment risks.
- Disclosure controls were deemed ineffective due to material weaknesses in segregation of duties/risk assessment and written accounting and reporting procedures. Remediation depended substantially on obtaining funding.
- The filing reported no pending legal proceedings and no off-balance-sheet arrangements. It also disclosed significant related-party compensation, deferred compensation and demand loans.
Important facts for investors to verify
- Whether CleanSpark obtained enough financing to meet near-term obligations and address the going-concern uncertainty.
- Whether proposed customer contracts converted to signed, funded work, particularly given Bethel-Webcor’s revenue concentration and the uncertain proposal pipeline.
- The valuation, accounting assumptions and potential cash or dilution consequences of the $17.70 million derivative liability and variable-price convertible notes.
- Whether the Pioneer transaction closed, what liabilities and assets transferred, and the actual dilution and financing burden.
- Whether management remediated the disclosed internal-control weaknesses and whether capitalized software and intangible assets remain recoverable.