CleanSpark, Inc. — Form 10-Q Summary
Business context and period. This report covers the fiscal quarter ended December 31, 2017, compared with the quarter ended December 31, 2016. CleanSpark provides microgrid design, engineering, development, and installation services and continues developing gasification technology. Management said it would focus on the CleanSpark business in 2018 rather than devote significant effort to gasification.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2017 | Quarter ended Dec. 31, 2016 |
|---|---|---|
| Revenue | $18,080 | $83,884 |
| Gross profit | $11,612 | $65,910 |
| Gross margin | 64.2% | 78.6% |
| Operating expenses | $1,051,996 | $845,735 |
| Operating loss | $(1,040,384) | $(779,825) |
| Net loss | $(1,056,515) | $(792,642) |
| Net loss per common share | $(0.03) | $(0.03) |
| Operating cash flow | $(384,864) | $(279,663) |
| Investing cash flow | $(17,640) | $(17,213) |
| Financing cash flow | $387,288 | $65,739 |
Revenue fell about 78%, primarily due to lower engineering and design revenue. Gross profit fell about 82%; operating expenses rose about 24%, with payroll and depreciation and amortization among the major costs. Depreciation and amortization was $560,540, versus $488,758 in the prior-year quarter.
Cash was $41,912 at December 31, down from $57,128 at September 30, 2017. Current assets were $129,357 and current liabilities were $487,641, producing a $358,284 working-capital deficit. Total assets were $20.2 million and total liabilities were $787,641. The balance sheet reports $417,500 of loans, including $117,500 current and $300,000 long-term, as well as a $53,333 related-party loan. Total stockholders’ equity was $19.5 million.
Material changes and notable items
- Net loss widened by about 33% year over year, while cash used in operations increased from $279,663 to $384,864.
- Quarter financing included $137,500 from common-stock placements, $10,000 from warrant exercises, and loan proceeds. The company issued 171,875 shares at $0.80 per share in private placements during the quarter.
- At quarter-end, 8,584,552 warrants were exercisable; 17,776 stock options were outstanding. The company had 33,608,894 common shares outstanding at December 31, 2017 and reported 34,018,869 as of February 13, 2018.
- Series A preferred stock carries 45 votes per share and a dividend entitlement equal to 2% of earnings before interest, taxes, and amortization, payable in cash or common stock.
- Three customers each accounted for more than 10% of quarterly revenue; the filing identifies Considine Companies, Firenze, and ClearSun Solar Corp. as representing 26.0%, 30.4%, and 36.5%, respectively.
Outlook, risks, and contingencies
- Management stated that available cash was insufficient to sustain operations at the current level for the next 12 months. Continued operations depend on additional financing, successful execution of the business plan, and eventual profitability; the filing says these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- The company plans to seek private-equity financing and expects to fund operations through increased sales and debt and/or equity financing, but there is no assurance financing will be available on acceptable terms or at all.
- Management said future revenue from existing or prospective contracts could not be estimated with certainty and that margins may be unstable. It expects operating expenses to rise if the company secures deployment contracts and expands operations.
- The company reported a $900,000 contract to install a turnkey microgrid at Camp Pendleton, with on-site work planned to begin in February 2018. It planned initial customer releases of mPulse 2.0 and DNA 2.0 in fiscal Q3 2018.
- Disclosure controls were deemed ineffective due to material weaknesses in segregation of duties/risk assessment and written accounting and reporting procedures. Planned remediation depends substantially on obtaining financing.
- Subsequent events included additional share placements, warrant exercises, and new borrowing, including demand notes bearing 15% interest. The company reported no pending legal proceedings or off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the company can raise sufficient capital to fund operations and address the going-concern uncertainty and control weaknesses.
- Whether the Camp Pendleton contract proceeds as planned and generates meaningful revenue and cash receipts; the filing does not provide a clear forecast of future revenue.
- The terms, maturities, and cost of outstanding and subsequent borrowings, and the potential dilution or voting effects of warrants, stock issuances, and preferred shares.
- Customer concentration and the extent to which low quarterly revenue reflects timing or a sustained decline in project activity.
- The reported financial data and customer-concentration figures: the filing provides no detailed reconciliation of the unusually high listed customer percentages to total quarterly revenue.