CleanSpark, Inc. — Form 10-Q Summary
Reporting period: Three months ended December 31, 2019 (the company’s fiscal first quarter). Amounts are in U.S. dollars. The filing is unaudited.
Business context
CleanSpark provides microgrid engineering and consulting, energy-management software, and distributed-energy equipment. Its switchgear business contributed to the quarter’s revenue growth. The company reports consolidated results for CleanSpark and its wholly owned subsidiaries.
Financial performance and liquidity
| Metric | Quarter ended Dec. 31, 2019 | Prior-year quarter |
|---|---|---|
| Revenue | $976,824 | $262,907 |
| Gross profit / margin | $94,103 / 9.6% | $39,581 / 15.1% |
| Operating expenses | $3,085,564 | $1,779,490 |
| Operating loss | $(2,991,461) | $(1,739,909) |
| Net loss | $(1,916,254) | $(2,283,551) |
| Net cash used in operations | $(885,386) | $(666,444) |
Revenue increased about 271%, primarily from switchgear products, but gross margin declined. Operating expenses rose about 73%, notably professional fees, payroll, and depreciation and amortization. Net loss narrowed despite a larger operating loss, in part because results included a $2.27 million gain on a derivative asset and a $369,000 unrealized equity-security gain. Interest expense was $1.56 million, including substantial noncash amortization of convertible-debt discounts.
Cash and cash equivalents were $6.38 million at December 31, down from $7.84 million at September 30. Investing activities used $509,000, including a $500,000 investment in International Land Alliance; financing activities used $67,000. Working capital was $8.57 million, with current assets of $11.02 million and current liabilities of $2.45 million.
Total liabilities were $6.38 million. Convertible notes had $12.0 million in stated principal ($1.25 million current and $10.75 million long-term) and $4.41 million in net carrying value after discounts. The notes are secured by company assets and include conversion and other terms that may result in substantial dilution. The company reported 4.87 million common shares and 1.75 million Series A preferred shares outstanding at quarter-end.
Changes, outlook, and notable items
- Management said it had raised capital through debt and equity securities under an S-3 registration statement to support at least 12 months of operations. The quarter’s cash-flow statement, however, shows no financing proceeds in the period.
- Management expects operating expenses to increase as it pursues its business plan and may add personnel and operating capacity.
- Customer concentration was significant: one customer represented 91.2% of quarterly revenue. One vendor represented 93.0% of direct material costs.
- The $500,000 International Land Alliance preferred-stock investment carries a 12% annual in-kind accrual and a variable conversion feature. The related derivative was valued at $2.27 million using Level 3 inputs, including 190% expected volatility; its $2.27 million gain materially affected reported results.
- The company adopted lease accounting and recorded a right-of-use asset and lease liability. It also completed a 1-for-10 reverse stock split in December 2019.
- Subsequent events: Nasdaq approved the company for listing on January 24, 2020. On January 31, 2020, CleanSpark acquired p2k Labs for stated consideration of $1.6 million in cash and stock, including escrowed consideration.
- Management concluded disclosure controls were ineffective because of material weaknesses involving control documentation and risk assessment, monitoring and review, segregation of duties, IT controls, and board oversight. Remediation was underway; management expected completion before the end of fiscal 2020, subject to testing.
- The filing reports no material pending legal proceedings and no material changes to previously disclosed risk factors. It cautions that forward-looking statements are subject to risks including capital availability, competition, economic conditions, regulation, and interest rates.
Data clarity note: The filing’s MD&A and financial statements do not fully reconcile on product-development expense and software amortization. The statements of operations show no product-development expense for 2019, while MD&A cites $26,639; the cash-flow discussion cites software amortization of $20,454, whereas the financial-statement note reports $39,286. The filing text does not provide a clear reconciliation.
Important facts for investors to verify
- Whether revenue growth can be sustained and gross margins improve, given the low quarterly margin and high customer concentration.
- The source, assumptions, and continuing volatility of the $2.27 million Level 3 derivative valuation and the related noncash gain.
- Convertible-note repayment, conversion, trigger-event, and anti-dilution terms, and the resulting potential share dilution.
- Cash runway and the status and terms of capital raised under the S-3, including whether management’s stated 12-month funding objective remains supported.
- Progress in remediating material weaknesses and the company’s resolution of the expense and amortization inconsistencies in the filing.
- Integration and financial impact of the p2k Labs acquisition and the switchgear business.