CleanSpark, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016. This annual filing includes results for the full fiscal year, not a standalone fourth quarter. The company acquired substantially all assets of CleanSpark Holdings’ microgrid business on July 1, 2016 and changed its name to CleanSpark, Inc. in October 2016.
Business context and financial performance
CleanSpark combines its acquired Flex Power System microgrid and energy-management business with its existing gasification technology business. The Flex Power System integrates distributed generation, energy storage and facility controls. The Gasifier, intended to convert organic materials into synthesis gas, remained under development and had no product sales.
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $82,031 | $0 |
| Cost of revenue / gross profit | $31,264 / $50,767 | $0 / $0 |
| Operating expenses | $2,592,018 | $3,479,859 |
| Operating loss | $(2,541,251) | $(3,479,859) |
| Net loss | $(2,540,562) | $(3,485,003) |
| Basic loss per share | $(0.11) | $(0.18) |
| Cash used in operating activities | $(438,165) | $(190,661) |
FY2016 gross margin was approximately 61.9%, calculated from reported revenue and gross profit; management cautioned that margins may vary with contract mix. Revenue arose in the final quarter following the acquisition, and one customer, Bethel-Webcor JV-1, represented 100% of reported FY2016 revenue. The filing says the company had recently acquired two additional System customers, but gives no clear estimate of future revenue from existing contracts.
Balance sheet, liquidity and capital
- At September 30, 2016, cash was $436,529; current assets were $604,366; current liabilities were $357,421; and working capital was $246,945.
- Total assets were $33.0 million, including $19.7 million attributed to the FlexPower System, $4.6 million of microgrid assets, $2.5 million of other intangible assets and $4.9 million of goodwill. Total liabilities were $357,421, including $2,261 of loans; the filing reports no long-term debt.
- Operating cash use of $438,165 was offset by $807,016 of financing cash flow, principally $813,800 from common-stock issuance. Cash ended the year at $436,529.
- The company reported accumulated losses of $6,434,840 and stated it lacked sufficient cash to operate at its current level for the next 12 months. Management identified a need for $3 million–$4 million of additional financing, with a further $2.5 million potentially needed about 12 months later. The auditor and management cited substantial doubt about the company’s ability to continue as a going concern.
Material changes and unusual items
- The CleanSpark asset acquisition was accounted for at approximately $32.1 million: 6 million common shares valued at $18.42 million and warrants for 4.5 million shares, valued at $13.68 million. The acquired assets included substantial identified intangible assets and goodwill. The purchase price allocation relied on estimates and could be adjusted during the measurement period.
- Shares issued for the acquisition and other transactions increased common shares outstanding to 27,834,415 at September 30, 2016, from 20,378,415 a year earlier. After year-end, 2,932,704 shares were issued upon cashless option exercises; 30,752,119 shares were outstanding as of December 27, 2016. At September 30, 13,112,100 warrants were exercisable.
- Professional fees fell to $1.93 million from $3.38 million, while depreciation and amortization rose to $578,456 from $2,800, reflecting the acquired assets and related noncash charges. Stock-based consulting expense was $1,544,982.
- Series A preferred stock carries 45 votes per share, a 2% quarterly dividend on earnings before interest, taxes and amortization, and change-of-control conversion provisions. All 1 million preferred shares were outstanding at year-end and held by directors.
Outlook, risks and contingencies
- Management said it could not reliably estimate future revenue from acquired customer contracts. It expected to invest in software upgrades and Gasifier testing; it anticipated the Gasifier would not be commercially sellable until the fourth quarter of 2017. These are expectations, not assured outcomes.
- A Camp Pendleton follow-on project included a $75,000 engineering and design contract and a $60,000 optimization and controls option. A further $2,362,472 construction option could follow, but the filing said it expected the prime contractor to exercise the options. The company reported billings of $75,000 and $36,593, respectively, and estimated $500,000–$750,000 in project financing would be needed. It also anticipated up to $750,000 in short-term project financing for other proposals.
- Management cited dependence on future debt or equity financing, limited operating history, customer concentration, competition, development and commercialization risk, and dependence on utility rates and government incentives. The company had no employees and relied on consultants at the reporting date.
- Management disclosed potential intellectual-property claims involving a competing firm founded by former acquired-business employees; it said the company was not party to any pending legal proceeding. Environmental, workplace-safety and product-liability exposures were also described.
- Disclosure controls and internal control over financial reporting were assessed as ineffective. Material weaknesses included inadequate segregation of duties and insufficient written accounting and reporting procedures. Remediation depended substantially on obtaining financing.
Investor verification priorities
- Confirm the company’s current cash runway, financing raised since the filing, financing terms and any going-concern developments.
- Verify customer additions, contract contingencies, revenue concentration and whether the Camp Pendleton options were exercised and funded.
- Review the acquisition valuation, goodwill and intangible-asset assumptions, and subsequent impairment testing.
- Reconcile current shares, preferred-stock voting rights, outstanding options and warrants, and potential dilution.
- Check progress on software releases, Gasifier testing and commercialization, and remediation of disclosed control weaknesses.