CleanSpark, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2017 (fiscal Q2 2017); filed May 11, 2017. Figures are unaudited. The company acquired the CleanSpark business in July 2016, so prior-year comparisons do not reflect the same business scope.
Business context and key results
CleanSpark provides microgrid design, engineering, installation and consulting services and continues to develop gasification technology. Management said its 2017 focus was the CleanSpark business rather than significant investment in gasification.
| Metric | Three months ended Mar. 31, 2017 | Six months ended Mar. 31, 2017 | Prior-year comparable |
|---|---|---|---|
| Revenue | $200,749 | $284,633 | $0 in both periods |
| Gross profit | $26,135 | $92,045 | $0 |
| Gross margin | 13.0% | 32.3% | Not meaningful |
| Operating expenses | $1,122,812 | $1,968,547 | $191,071 / $263,087 |
| Operating loss | $(1,096,677) | $(1,876,502) | $(191,071) / $(263,087) |
| Net loss | $(1,201,379) | $(2,006,838) | $(190,350) / $(262,366) |
| Basic loss per share | $(0.04) | $(0.06) | $(0.01) / $(0.01) |
Most reported revenue came from microgrid engineering design work. Depreciation and amortization increased to $1,298,544 for the six months, largely reflecting acquired assets. Six-month other expense included a $117,414 debt-settlement loss and $105 interest expense.
Cash, liquidity and capital
- At March 31, 2017, cash was $238,406; current assets were $475,275 and current liabilities were $234,005, yielding working capital of $241,270. Total assets were $31.65 million and total liabilities $234,005. Assets included $19.06 million in the FlexPower system, $4.12 million in microgrid assets, $4.92 million in goodwill and $2.35 million in other intangible assets.
- Six-month operating cash use was $699,470; investing cash use was $65,957; financing provided $567,304. Financing included $549,001 from common-stock sales and $25,706 in short-term note proceeds, partly offset by loan repayments. Cash declined by $198,123 from September 30, 2016.
- Current liabilities included $105,869 due to related parties and $20,564 in loans. The filing reports no long-term debt balance.
- During the six months, the company sold 686,250 common shares at $0.80 for approximately $549,000. Common shares outstanding were 32,969,721 at March 31 and 33,063,471 as of May 5. A further 8,612,100 warrants were exercisable at March 31. The 1,000,000 Series A preferred shares carry 45 votes per share and specified dividend and change-of-control rights.
Changes, outlook and risks
- Revenue began to be reported in the current periods, while losses widened substantially against prior-year periods. The comparisons are affected by the July 2016 acquisition. Increased professional and general and administrative costs also contributed; depreciation and amortization rose sharply.
- Management said it could not estimate future revenue from existing or future contracts with certainty and did not expect significant gasifier revenue until development was complete. It cited a February 2017 microgrid feasibility study and pilot design award for a large REIT and said potential later projects could generate several million dollars each; these were prospective, not committed deployment revenue.
- Management stated available cash was insufficient to operate at the current level for the next 12 months. Continued operations depend on increased sales and additional debt or equity financing, with no assurance financing will be available on acceptable terms or at all. The filing identifies substantial doubt about the company’s ability to continue as a going concern.
- Disclosure controls were deemed ineffective due to material weaknesses in segregation of duties/risk assessment and written accounting and reporting procedures. Planned remediation depended substantially on obtaining financing and had not been completed during the period.
- Customer concentration was material: five customers represented 11.2%–25.3% each of six-month sales; two suppliers represented 62.1% and 32.1% of direct material costs. The company also undertakes maintenance and warranty responsibilities for the Camp Pendleton microgrid assets. No pending legal proceedings or off-balance-sheet arrangements were reported.
Most important facts to verify
- Reconcile the post-period equity raise disclosures: the financial-statement note reports $75,000 from two investors through May 5, while the MD&A reports $95,000 from four investors after period-end. The filing text does not provide a clear reconciliation.
- Assess cash runway and the likelihood, timing, terms and dilution impact of additional financing, given management’s less-than-12-month liquidity statement and going-concern warning.
- Review contract backlog, conversion of feasibility/design work into construction and operating contracts, customer collectability, and the effect of customer and supplier concentration.
- Evaluate the carrying values and useful lives of acquired assets, goodwill and intangibles, given large amortization charges and the company’s dependence on future commercialization.
- Confirm debt-settlement accounting and share dilution, including the reported $212,500 fair value of 50,000 shares issued to settle Webcor debt and the separate settlement-loss amounts disclosed in the statements and notes.