CleanSpark, Inc. — Form 10-Q Summary
Reporting period: The filing covers the three and nine months ended June 30, 2020, for CleanSpark’s fiscal third quarter. The request metadata says “2019 Q3,” but that does not match the filing period.
Business context and results
CleanSpark provides microgrid engineering and energy-management software, sells distributed-energy hardware, and—following its January 2020 acquisition of p2kLabs—provides technology consulting services. Management attributed revenue growth principally to switchgear products and mPulse sales.
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue, 2020 | $3.44 million | $8.07 million |
| Revenue, 2019 | $1.22 million | $2.21 million |
| Gross profit, 2020 | $545,000 | $1.34 million |
| Gross profit, 2019 | $217,000 | $388,000 |
| Net loss, 2020 | $8.55 million | $16.28 million |
| Net loss, 2019 | $3.97 million | $14.02 million |
Gross margin was approximately 15.8% for the quarter versus 17.7% a year earlier, and 16.6% for the nine-month period versus 17.6%. Nine-month operating expenses rose to $8.75 million from $7.19 million. Loss per share improved to $0.77 from $0.90 for the quarter and to $2.32 from $3.45 for nine months; weighted-average shares increased substantially.
Cash, liquidity and capital
- Cash was $1.96 million at June 30, down from $7.84 million at September 30, 2019. Working capital was $5.63 million; current assets were $7.22 million and current liabilities $1.59 million.
- Cash used in operations was $3.68 million for nine months, compared with $5.79 million in 2019. Investing activities used $2.67 million; financing activities provided $464,000. Cash declined by $5.88 million during the period.
- Total liabilities were $2.27 million, including $681,000 of long-term loans, primarily the 1% PPP loan. Convertible debentures were fully converted to common stock by June 30.
- Interest expense was $10.52 million for nine months, including $9.02 million of amortization of debt discount. This materially increased reported losses despite the cash-flow reconciliation.
Material changes, outlook and risks
- Revenue grew sharply, but goods costs also rose substantially; nine-month cost of goods sold increased to $6.46 million from $1.25 million. Payroll and general and administrative costs increased, while product-development expense fell to zero.
- Common shares outstanding rose from 4.68 million at September 30, 2019 to 16.12 million at June 30, 2020, largely through debt conversions. The filing reports 17.35 million shares outstanding as of July 30.
- The p2kLabs acquisition had a stated purchase price of $1.69 million, including cash and equity; purchase-price allocation remained provisional. The company also invested $500,000 in ILAL preferred stock and contributed $660,000 to a PPE joint venture; the JV funds were returned July 7.
- Management said it believed liquidity was sufficient for anticipated cash needs for at least 12 months, while cautioning that profitability and access to future financing were uncertain. No quantified revenue or earnings guidance was provided. Management expected operating expenses could increase as the business expands.
- Risks include COVID-19 disruption, dependence on concentrated customers (one customer represented 60.3% of nine-month revenue) and a concentrated supplier (85.7% of direct material costs), and potential need for additional financing. The company reported material weaknesses in financial-reporting controls, including inadequate control documentation/risk assessment and IT controls; remediation was ongoing.
- Subsequent events included a July 20 stock sale for $4.0 million gross proceeds and a disclosed investor dispute alleging a contractual breach related to an 8-K filing. The company said it could not estimate the dispute’s potential impact.
Important facts for investors to verify
- Whether reported revenue growth and gross margins translate into sustainable cash generation, given continued operating losses and falling cash.
- The effect of debt conversions, further equity issuance, and authorized-share changes on dilution; shareholders approved authority to increase authorized common shares to as many as 50 million, subject to Board action.
- The valuation, conversion terms, and recoverability of the ILAL securities and the status and economics of the PPE joint venture.
- Progress and testing of the stated internal-control remediation, and the status and possible financial impact of the investor dispute.
- Customer and supplier concentration, COVID-19 effects, and management’s assumptions underlying its 12-month liquidity assessment.