CleanSpark, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2019, compared with fiscal 2018. Although the request identifies “2018 Q4,” this filing covers the full fiscal year ended September 30, 2019. The company’s 1-for-10 reverse split took effect December 11, 2019; share figures in the filing are generally adjusted retroactively.
Business context
CleanSpark develops microgrid and distributed-energy software, engineering services and equipment, serving commercial, military and residential customers. It also owns gasification technology but says it does not expect to devote significant resources to that business in 2020. In January 2019, it acquired Pioneer Critical Power’s intellectual property and customer list for stock and warrants, adding custom power-system hardware operations.
Key financial results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $4.53 million | $578,635 |
| Gross profit / gross margin | $671,696 / 14.8% | $187,861 / 32.5% |
| Operating expenses | $17.29 million | $7.26 million |
| Operating loss | $16.61 million | $7.08 million |
| Net loss | $26.12 million | $47.01 million |
| Cash used in operating activities | $5.70 million | $1.26 million |
| Cash and working capital at year-end | $7.84 million cash; $8.38 million working capital | $412,777 cash |
| Total liabilities / assets at year-end | $4.55 million / $23.43 million | $1.50 million / $17.56 million |
Goods sales contributed $3.75 million of FY2019 revenue; service, software and related revenue was $779,795. Cost of revenue rose to $3.86 million, largely reflecting switchgear contract manufacturing, materials, subcontractors and direct labor. The company recorded $6.92 million of software impairment, compared with $1.90 million of impairment in FY2018. Net loss improved year over year, but FY2018 included a $38.96 million derivative-liability loss; FY2019 included $9.48 million of interest expense, substantially affected by debt discounts and financing costs.
Liquidity, debt and financing
Operating and investing activities used $6.37 million in cash in FY2019, while financing activities provided $13.80 million, including $14.995 million of convertible-debt proceeds. At September 30, 2019, convertible notes had $12.0 million of face principal, secured by company assets, and a net carrying value of $2.90 million after unamortized discounts. The notes include variable-price conversion provisions, warrants and potential penalties; subsequent stock-price-related share issuances are also disclosed. Management stated cash and expected operating cash generation should cover anticipated requirements for at least 12 months, while also warning that revenue of $2–4 million is needed to support operations or additional financing may be needed in 2021.
Changes, outlook and principal risks
- Revenue increased substantially, but gross margin fell to 14.8% from 32.5%; operating cash use also increased.
- Management’s stated 2020 priority is the distributed-energy and microgrid business, including software development, customer service and marketing. The filing gives no clear quantitative revenue or earnings guidance.
- Customer concentration is significant: four customers each represented at least 10% of FY2019 sales, with the two largest accounting for approximately 62.6% combined. One vendor represented 84.1% of direct material costs.
- The company reports cumulative net losses of $93.1 million, a limited operating history, no gasifier sales, uncertain software commercialization and dependence on additional revenue or financing.
- The auditor gave an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. Material weaknesses included inadequate control documentation and monitoring, insufficient segregation of duties, IT-control deficiencies and insufficient board oversight. Management expected remediation before fiscal 2020 year-end; remediation was not yet established as complete.
- Other notable matters: the January 2019 Pioneer asset acquisition was valued at $6.07 million; the November 2019 International Land Alliance MOU and $500,000 investment in its preferred stock occurred after the reporting period and do not establish material contracted revenue. The filing reports no material pending legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Conversion, redemption, collateral, default and dilution terms of the secured convertible notes, including later share adjustments and post-year-end conversions.
- Cash runway against the reported $5.70 million annual operating cash burn, and whether forecast revenue or replacement financing is achieved.
- Customer and supplier concentration, contract profitability, collections and the $254,570 doubtful-account allowance.
- Basis for the $6.92 million software impairment and recoverability of the remaining capitalized software and intangible assets.
- Progress and independent confirmation of internal-control remediation, given the auditor’s adverse control opinion.
- Whether the ILAL MOU leads to executed projects and revenues, and the terms and value of the post-year-end investment.