CleanSpark, Inc. — Form 10-Q Summary
Reporting period: Three months ended December 31, 2016 (the company’s fiscal first quarter), compared with the three months ended December 31, 2015. The financial statements are unaudited.
Business context
CleanSpark provides microgrid design, engineering, installation, and consulting services following its July 2016 acquisition of CleanSpark, LLC’s business and related assets. It also continues developing gasification technology, but management says the Gasifier is not commercially ready. The company says it plans to prioritize its CleanSpark business in 2017.
Financial results and liquidity
| Metric | Quarter ended Dec. 31, 2016 | Comparable 2015 period |
|---|---|---|
| Revenue | $83,884 | $0 |
| Cost of revenue / gross profit | $17,974 / $65,910 | $0 / $0 |
| Gross margin | 78.6% | Not meaningful |
| Operating expenses | $845,735 | $72,016 |
| Operating loss | $(779,825) | $(72,016) |
| Net loss | $(792,642) | $(72,016) |
| Basic loss per share | $(0.03) | $(0.00) |
| Operating cash flow | $(279,663) | $(66,804) |
| Cash and cash equivalents at period end | $205,392 | $140,010 |
Quarter-end total assets were $32.32 million, including $19.36 million in the FlexPower system, $4.92 million in goodwill, and $4.51 million in microgrid assets. Total liabilities were $379,605; current liabilities were also $379,605, and the balance sheet reported no loans outstanding. Current assets were $367,711, leaving a $11,894 working-capital deficit and a current ratio of approximately 0.97. Cash declined $231,137 from September 30, 2016.
Investing activities used $17,213. Financing activities provided $65,739, including $68,000 from common-stock sales and $2,261 in loan repayments. The cash-flow statement reports depreciation and amortization of $488,758, largely reflecting acquired assets. No cash interest or taxes were reported as paid. The filing does not provide a clear gross-margin comparison for 2015 because that period had no revenue.
Material changes and management commentary
- Revenue began following the CleanSpark acquisition and came mainly from engineering design work for a microgrid layout. Management says it cannot reliably estimate future revenue because of customer-contract contingencies and the business’s early stage.
- Operating expenses rose substantially, particularly professional fees ($289,344 versus $46,362) and depreciation and amortization ($488,758 versus $7,128). Management attributed the professional-fee increase to officer and other consulting, software consulting, stock-based consulting, sales, audit, and investor-relations costs.
- The quarter’s net loss increased to $792,642 from $72,016. The company reported a $12,817 loss on disposal of assets.
- The July 2016 acquisition was recorded at $32.10 million, funded with 6.0 million common shares valued at $18.42 million and warrants for 4.5 million shares valued at $13.68 million. The acquisition included $4.92 million of goodwill and substantial intangible assets.
- Management stated that existing cash was insufficient to operate at the current level for the next 12 months and that additional financing is needed. It plans to seek private-equity financing and expects to rely on increased sales and debt or equity financing; management gives no quantified revenue, earnings, or cash-flow guidance.
- The filing identifies substantial doubt about the company’s ability to continue as a going concern, citing cumulative losses of $7.23 million, the need for capital, and uncertainty about obtaining it. The financial statements contain no adjustments for the outcome of that uncertainty.
- Two customers represented 38.1% and 46.7% of quarterly sales, indicating significant customer concentration. The filing reports no pending legal proceedings and no off-balance-sheet arrangements.
Subsequent events and controls
After quarter-end, the company raised $95,000 through sales of 118,750 shares at $0.80 per share. It also agreed to settle $158,753 owed to Webcor for $58,000 cash plus 50,000 shares; the filing reports a $111,747 settlement loss. Separately, CleanSpark Holdings agreed to reassume $44,919 of acquisition-related liabilities in settlement of an overage claim; the filing reports a $5,667 settlement loss.
Management concluded that disclosure controls were not effective because of material weaknesses involving inadequate segregation of duties and risk assessment, and insufficient written accounting and financial-reporting policies. Remediation plans depend substantially on obtaining financing. The filing states that no remediation had occurred during the quarter.
Most important facts for investors to verify
- Whether the company secured sufficient financing to address its stated 12-month cash shortfall and going-concern uncertainty.
- Whether the small initial revenue base converts into material, recurring microgrid project revenue, and how customer concentration changes.
- Whether acquired assets, goodwill, and intangible-asset valuations and amortization remain supportable as projects develop.
- The impact of share issuances, options, and warrants on dilution; common shares outstanding were 32,318,471 at December 31, 2016.
- Whether internal-control weaknesses are remediated and whether the company can fund the planned remediation.
- A cash-flow disclosure discrepancy: the cash-flow statement reports $65,739 of financing cash flow, while MD&A states $67,739. The cash-flow statement’s amount reconciles to the reported net cash decrease.
- The cover page gives 32,487,221 shares outstanding “as of February 13, 2016,” a date that precedes this filing period; investors should verify the intended date and current share count.