Business context and reporting period
CleanSpark, Inc. provides microgrid engineering, implementation and energy-management software, principally through its mPulse and mVSO platforms. It also owns gasification technology, which remains under development. This filing is the Form 10-K for the fiscal year ended September 30, 2018—not a 2017 fourth-quarter report as indicated in the request metadata. The filing reports annual results, not a separate Q4 period.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $578,635 | $447,963 |
| Gross profit | $187,861 | $151,668 |
| Gross margin | 32.5% | 33.9% |
| Operating expenses | $7,263,792 | $13,529,885 |
| Loss from operations | $(7,075,931) | $(13,378,217) |
| Net loss | $(47,006,165) | $(13,498,526) |
| Cash used in operating activities | $(1,260,521) | $(1,361,865) |
| Cash used in investing activities | $(419,232) | $(126,320) |
| Cash provided by financing activities | $2,035,402 | $1,108,784 |
Revenue increased about 29%, while gross margin declined about 1.4 percentage points. The FY2018 net loss included a $38,964,688 loss on derivative liabilities, which the cash-flow statement adds back in reconciling net loss to operating cash flow. Operating expenses fell year over year, largely as impairment and depreciation/amortization charges were lower; payroll expense increased substantially, including stock-based compensation.
At September 30, 2018, cash was $412,777, total current assets $548,380, current liabilities $1,349,587 and working capital deficit $801,207. Total liabilities were $1,499,587, including $150,000 of long-term loans. The balance sheet reported $69,121 of convertible notes and $457,579 of current loans, both net of unamortized discounts, as well as $382,790 of related-party loans. Total assets were $17,555,662. The filing provides no operating margin; the reported gross margin is shown above.
Material changes versus the prior comparable period
- Revenue rose from $447,963 to $578,635, but gross margin narrowed from 33.9% to 32.5%.
- Operating expenses decreased from $13.5 million to $7.3 million, with impairment expense falling from $8.6 million to $1.9 million.
- Net loss increased to $47.0 million from $13.5 million, driven chiefly by the $39.0 million derivative-liability loss and higher interest expense.
- Cash increased to $412,777 from $57,128, supported by financing inflows; operations continued to consume cash.
- Common shares outstanding increased to 36,116,447 at fiscal year-end from 33,409,471 a year earlier. Convertible financing, warrants and equity compensation create additional dilution exposure.
Outlook, commentary, risks and unusual items
- Management said financing obtained after year-end was expected to fund operations through FY2019, but warned that absent revenue growth the company could need to scale back, cease activities or seek further financing. It estimated that $2 million–$4 million in annual revenue cash flows, or similar additional financing, would be needed to support current operations and potentially 2020 needs.
- The company plans to prioritize its CleanSpark energy-management business over gasifier development. Management described mPulse 2.0 as in limited beta, targeting a full release in Q1 2019, and mVSO 2.0 in Q2 2019. These are forward-looking targets, not reported results.
- The $900,000 Camp Pendleton microgrid contract was underway, with completion expected in early 2019. A Macerich agreement authorized only an initial $88,250 of services; the potential $18 million installation was subject to later written approvals and a separate construction contract.
- The proposed Pioneer asset purchase remained under negotiation and subject to conditions, including release of liens; completion was not assured. Gasifiers had not been sold, required further testing and development, and were not expected to be commercially sellable until additional resources were invested.
- After year-end, CleanSpark closed a senior secured convertible debenture with $5.25 million face value, receiving $5 million. It was secured by company assets and carried 7.5% compounded interest, conversion and warrant terms. On January 7, 2019, following a filing-timing trigger event, $2.5 million principal and an $875,000 conversion premium were converted into 1,784,729 shares. The filing says the 10-K was signed January 15, 2019.
- The company reported no pending legal proceedings. It cited significant risks including recurring losses, limited customers, customer and supplier concentration, competition, technology commercialization, financing dependence, dilution and thinly traded OTCQB shares.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at September 30, 2018, citing inadequate segregation of duties/risk assessment and insufficient written accounting and reporting procedures. The 2018 auditor gave an unqualified opinion on the financial statements but did not attest to internal-control effectiveness. Management said subsequent financing alleviated the substantial doubt about going concern previously noted in the 2017 audit report.
- Related-party arrangements included management consulting compensation, deferred compensation and 15% related-party notes. The company also recorded $951,797 of expense for vested warrants issued to an entity controlled by its COO.
Important facts for investors to verify
- Reconcile the request’s “2017 Q4” period label with the actual FY2018 10-K and confirm any separate quarterly information from the relevant filing.
- Review the audited financial statements and notes for the $39.0 million derivative loss, convertible-note accounting, debt discounts and the company’s reported subsequent financing.
- Confirm the debenture’s remaining balance, collateral, conversion and warrant terms, and subsequent share issuances; assess resulting dilution.
- Track cash burn, working-capital needs, debt repayments and whether revenue or financing meets management’s stated funding needs.
- Verify whether the Macerich project received all required authorizations and a construction contract, and whether the Camp Pendleton project was completed and collected.
- Check actual release, customer adoption and monetization of mPulse 2.0/mVSO 2.0, and progress and required funding for gasifier testing.
- Monitor remediation of the disclosed material weaknesses and any changes in financial controls or reporting reliability.