Business context and reporting period
The filing is Stratean, Inc.’s unaudited Form 10-Q for the quarter and nine months ended June 30, 2016, signed August 22, 2016. Although the request identifies CleanSpark, the filing names Stratean as the registrant. Stratean described its existing gasifier technology business; its acquisition of CleanSpark-related assets closed on July 1, 2016, after the reporting period.
Financial results and liquidity
| Metric | Three months ended June 30, 2016 | Nine months ended June 30, 2016 | Comparable 2015 period |
|---|---|---|---|
| Revenue | $0 | $0 | $0 |
| Operating expenses | $133,503 | $396,590 | $54,776; $3,429,887 |
| Net loss | $133,503 | $395,869 | $54,776; $3,435,031 |
| Basic loss per share | $0.01 | $0.02 | $0.00; $0.18 |
| Operating cash flow | Not presented quarterly | $(206,335) | $(203,907) |
At June 30, cash was $81,854, current assets $93,766, current liabilities $61,662, and working capital $32,104. Total assets were $781,025 and total liabilities $61,662. The filing reports no interest-bearing debt at period-end; liabilities consisted of accounts payable/accruals and $1,473 due to related parties. Nine-month investing cash use was $15,344, financing cash provided was $215,000 from common-stock and warrant placements, and cash declined $6,679 to $81,854. Gross margin and other margin percentages are not meaningful because revenue was zero.
Material changes versus prior periods
- Quarterly operating expenses increased to $133,503 from $54,776, primarily reflecting $50,000 of gasifier testing and higher depreciation and amortization.
- Nine-month operating expenses fell to $396,590 from $3.43 million, principally because professional fees declined to $268,560 from $3.34 million. The prior-year amount included substantial stock-based compensation; current-period professional fees included $146,742 in advisor stock compensation.
- Nine-month operating cash use was broadly similar year over year, while cash decreased from $88,533 at September 30, 2015 to $81,854 at June 30, 2016.
- Common shares outstanding were 21,058,415 at June 30, versus 20,378,415 at September 30, 2015. The cover page reports 27,684,420 shares outstanding as of August 19, 2016, following subsequent transactions.
Outlook, risks, contingencies, and unusual items
- Going concern and funding: Management said cash was insufficient to support operations at the current level for the next 12 months. The company had cumulative losses of $4.29 million and stated that substantial doubt existed about its ability to continue as a going concern. Additional financing was not assured.
- CleanSpark acquisition after quarter-end: On July 1, Stratean acquired CleanSpark-related assets, assumed approximately $200,000 of certain accounts payable, issued the seller 6 million common shares and two-year warrants for 4.5 million shares at $1.50, and undertook to fund pre-approved subsidiary budget needs for nine months. Amendments excluded two seller entities from the acquired assets but granted three-year options to acquire them for 1,000 Stratean shares each. The filing does not quantify the acquisition’s expected revenue or earnings contribution.
- Project and development funding: Management estimated approximately $30,000 to complete mPulse software version 2.0, expected in the quarter ending September 30, 2016. A Camp Pendleton microgrid project had a $75,000 design contract, with additional options of $60,000 and $2.36 million; $40,000 had been billed. Management estimated $500,000–$750,000 of funding for that project and another $750,000 over nine months for other microgrid proposals.
- Gasifier: Commercial sales were not expected until at least the first quarter of 2017. Five of seven independent testing stages were complete; suggested improvements were estimated at $50,000–$75,000, and a final report was anticipated by December 31, 2016. A $50,000 testing payment remained due upon invoice. Management also cited at least $750,000 of financing needs over the next 12 months and no significant negotiations with major gasifier customers.
- Controls and governance: Management concluded disclosure controls were ineffective due to material weaknesses in segregation of duties/risk assessment and written accounting and reporting procedures. Remediation depended in part on obtaining financing. The company issued 600,000 Series A preferred shares to directors on June 30; Series A terms include 45 votes per share, a 2% share of earnings before interest, taxes and amortization, and change-of-control and liquidation provisions.
- The company reported no pending legal proceedings or off-balance-sheet arrangements. No formal earnings guidance was provided.
Important facts for investors to verify
- Confirm the registrant and reporting-period alignment: the supplied request says CleanSpark, while this filing is for Stratean, Inc., and CleanSpark assets were acquired after quarter-end.
- Review post-acquisition financial statements and the accounting for the shares, warrants, assumed liabilities, options, and nine-month funding commitment.
- Assess available financing, cash runway, and the basis for management’s going-concern plan and stated project funding requirements.
- Track CleanSpark customer contracts, project milestones and billings, and gasifier testing results, costs, and path to commercial sales; the filing says future revenue estimates were uncertain.
- Evaluate the dilution and voting effects of outstanding warrants, the acquisition issuance, and Series A preferred stock, and monitor remediation of the disclosed control weaknesses.