CleanSpark Is A Failed Business Roll-Up In A Vicious Court Battle With Its Largest Shareholder – $3 Price Target (NASDAQ:CLSK)

CleanSpark, Inc. (CLSK) claims to provide software as a service, physical controllers, and consultation services to renewable energy infrastructure. This allows the company to have a diverse range of tools and abilities to help a client create a suitable microgrid platform. However, the reality is CLSK’s microgrid business has not gained any traction, and we doubt it ever will.

CLSK was a former OTC traded stock and got uplisted to the Nasdaq on 1/24/20. CLSK has been trading between $2-$3 from early March until early July, which is a fraction of its current price, which closed at $10.40 on 10/7/20. We believe the reason for the rapid rise in share price is due to news flow with buzz words that attract retail investors, primarily regarding microgrids and electric vehicle batteries and charging stations, sectors that have become hot this quarter.

However, its business hasn’t generated significant revenues and its losses have remained substantial. Its technology doesn’t appear to have any advantage over its competition which are established companies like Siemens and GE. After a year of cash burn, we believe that the stock will fade back to $2-$3 where it was trading a few months ago.

What we believe will accelerate CLSK’s downfall, is the expected selling of shares by its largest shareholder, Discover Growth Fund (“Discover”). What we believe most CLSK shareholders don’t realize, is CLSK is in a vicious court battle with Discover which is demanding additional shares at a $1.50 price. The worst case scenario for CLSK, is if it owes Discover hundreds of millions of shares, as stated in CLSK’s appeal filed on 9/18/20. Discovery has a history of selling its entire position of its many previous investments.

CleanSpark Small Revenues And Consistent Losses

CLSK was acquired in 2016 by Statean Energy, which was a clean energy trash company. The following is their twitter profile:

Source: Twitter

Stratean later changed its name to CleanSpark. Stratean’s 2016 investor presentation, highlights the CleanSpark acquisition on page 8. It states that over three years, from 2013-2016, CleanSpark generated about $14M in revenues.

CleanSpark was acquired for $36M in an all-equity transaction. In our opinion, the company is likely worth about that amount today, if not less because of its many business failures.

The following are CLSK’s revenues and losses over the past eight quarters:

Source: CLSK SEC filings

Q120 and Q220 show revenue growth over the same quarters respectively in 2019. But revenues are still small. CLSK is still suffering consistent losses. As shown above, it lost about $4.5M in the first half of 2020. Since the vast majority of its sales are reselling switchgears, its gross margin is less than 20%.

CleanSpark’s Court Battle With Their Largest Shareholder Will Likely End Badly

CLSK’s largest shareholder is Discover Growth Fund LLC (“Discover”), which has financed them three times through convertible debentures, some of which it has already converted. Discover’s total holding is 7% as of 7/20/20.

Discover claims that due to CLSK’s violations of terms in their original securities purchase agreement with CLSK, Discover is owed shares at $1.50 apiece. The following are some highlights from the lawsuit filings. We underlined the most disturbing points.

From the CleanSpark Docket 27 Ruling:

From the CleanSpark appeal filed on 9/18/20:

From CLSK’s original complaint filed on 8/5/20:

From Discover’s Opposition Brief court docket filed on 8/10/20:

From the Bench Conference of the CleanSpark vs Discover Growth Fund Lawsuit on 8/17/20:

Discover Growth Fund Background

Discover Growth Fund is owned and managed by John C Kirkland, LinkedIn profile below.

Source: Linkedin

Before he became a big investor, Kirkland was a partner attorney in prominent Los Angeles law offices. In 2011, he left big law to become a vulture investor. From 2011-2014, he worked at Ironridge Global Partners. From 2014 to the present he has run Discover. Discover has an investment and exit strategy that has made it successful but has left their investments’ stock price destroyed.

First, Discover issues convertible debentures to a listed company desperate for cash. The debentures include “triggering” clauses requiring companies to issue extra shares to Discover if:

  • After conversion, but within the debenture period, share price falls below the conversion price.
  • Company files to the SEC without Discover’s approval.

Debentures also grant a right of first refusal to Discover if the company finds new third-party financing. There is also an ironclad arbitration clause binding the company to arbitration in the U.S. Virgin Islands, where Discover is based.

Many Other Investments By Discover Growth Fund Ended With A Devastating Lawsuit

Kirkland, through Ironridge and Discover, has invested in many companies (almost all penny stocks) since 2011. Several of these companies have sued Discover to get out of the binding arbitration clause. So far, the courts have ruled against CLSK, and we believe it will probably lose the lawsuit.

We have reason to believe that CLSK will eventually suffer the same fate as Discover’s other investments, which every one that we’ve seen has gotten its share price crushed.

Discover made a similar securities purchase agreement (SPA) with Cemtrex (CETX). Here is the transcript of a bench conference of Discover’s lawsuit against Cemtrex (CETX) on 5/29/19.

The following is a quote from Cemtrex’s attorney from the bench conference:

CETX currently trades on the Nasdaq with a market cap below $20M.

Another company that Discover engaged in a lawsuit over its investment, was Gopher Protocol (OTCPK:GOPH). See the lawsuit here. On 7/17/19, GOPH changed its name to GBT Technologies, ticker symbol: GTCH. GTCH currently trades on the OTC with a market cap below $3M.

Discover invested in Generex Biotech (OTCQB:GNBT) and engaged in a lawsuit with the company. See lawsuit here. GNBT currently trades on the OTC with a market cap below $20M.

Discover invested in OWC Pharma (OTCPK:OWCP) and engaged in a lawsuit with the company. See lawsuit here. OWCP currently trades on the OTC for less than a penny with a market cap below $5M.

Discover invested in Camber Energy (CEI) and engaged in a lawsuit with the company. See lawsuit here. CEI currently trades on the NYSE with a market cap below $20M.

Discover invested in 6D Global Tech (OTCPK:SIXD) and engaged in a lawsuit with the company. See lawsuit here. SIXD currently trades on the OTC with a market cap below $100K.

Discover invested in Beyond Commerce (OTCPK:BYOC), see details here. BYOC now trades on the OTC with a share price below a penny and a market cap below $6M.

CleanSpark Issues New Business PRs Based On Whatever The Current Hot Sector Is, But Has Lacked Business Success

Over the past couple years, CLSK has issued PRs announcing involvement in “trendy” sectors. The following are hot sectors that CLSK has issued PRs on, but haven’t generated much revenue.

Cannabis Sector

CLSK played on the hot cannabis sector.

On 10/3/17, CLSK issued a PR with the headline:

CleanSpark to Speak at 6th Annual CannaGrow Expo on October 28

On 4/22/19, CLSK issued a PR with the headline:

CleanSpark Announces $20m Financing to Support Microgrid Solutions for Commercial Customers Including Cannabis Growers

The idea was to focus on the cannabis space to reduce the expensive energy operating costs for cannabis growers.

On 10/23/19, CLSK announced that it received a contract to create a power system for an indoor Cannabis grow facility in California.

However, on 1/23/20, CLSK announced that its contract with the Cannabis grower didn’t happen. It doesn’t appear CLSK is pursuing business related to Cannabis. It states:

CleanSpark’s past press releases discussing forward-looking statements about the growth opportunities in the Cannabis industry were in reference to the specific possibility of providing energy controls software to energy providers who could then deploy them across many industries with inefficient energy use, including the Cannabis industry. To date, however, those possibilities have not occurred and the Company is not currently focusing significant marketing efforts in that manner

Since that contract fell through, we believe investors should be cautious in trusting CLSK’s other new business PRs. Especially those PRs that omit important details.

Cryptocurrency Sector

On 1/11/18, when cryptocurrency was a hot sector, CLSK announced that it received a microgrid contract for a cryptocurrency mining operator. Since then, CLSK hasn’t published any follow-up PRs regarding this contract or any others relating to cryptocurrency mining.

Coronavirus Sector

On 3/17/20, CLSK announced that its subsidiary, P2Klabs, created a mobile app to keep residents informed on what’s happening in their neighborhoods. This includes coronavirus statistics.

On 4/9/20, CLSK announced that it had invested in Personal Protective Equipment (PPE) to be supplied to hospitals fighting the COVID-19 outbreak. It states in its latest 10-Q that CLSK invested $660K in this PPE, and has only received $20K in income from it. A very small return so far.

EV Charging Sector

On 10/6/20, CLSK issued a PR titled: CleanSpark Enters EV Charing Market Through GridFabric Platform. Like its failed efforts to enter other sectors, we doubt CLSK will show any success in the EV charging market. EV charging is just the next hot sector that CLSK can PR about which gives its stock price a temporary boost.

CleanSpark’s Interesting Business Relationship With International Land Alliance

Over the past year, CLSK has put out several PRs about its business relationship with International Land Alliance (OTC: ILAL). The most recent one was on 10/1/20, as shown below from Yahoo Finance:

ILAL is described as a residential land development company primarily in the Baja California Norte region of Mexico. The following are ILAL’s select financials over the past 4 quarters:

Source: sec.gov

As shown in ILAL’s financials above, it makes so little revenue, it’s hardly a real business. Its cash balance was almost zero in Q319 and Q120, and its quarterly losses are much higher than its revenue. With total liabilities greater than total assets, ILAL has a negative book value. It has reported only $1.4M worth of investment properties.

We don’t see how ILAL can pay P2klabs for services, yet CLSK felt this business was important enough to publish a PR on it. P2klabs is a company that CLSK acquired on 2/6/20 that doesn’t appear to have any synergies with its core microgrid business. It’s described as a “design and innovation consulting firm that specializes in applying design, technology, and business process methodologies to create intuitive digital experiences and journeys that help transform and grow businesses.”

On 11/5/19, CLSK announced a partnership with ILAL to provide the company with its microgrid software. Part of this deal included the purchase of 350K shares of common shares and 1000 preferred shares of ILAL for $500K. As shown in its financials above, ILAL ran through this $500K very quickly. If CLSK is really growing its microgrid business, it doesn’t make sense to us for it to invest its precious capital in this broke company.

On 11/21/19, CLSK announced that ILAL has “completed site preparation” to build a golf community in Baja, California. However, with almost $0 in cash, we doubt that ILAL is going to be able to build a bunch of condominiums and a golf course. That PR was almost a year ago, and it doesn’t appear ILAL has made any progress since then. It’s last video of the property was on 3/24/20, shown on YouTube, and it’s just a bunch of disturbed dirt and an outhouse.

Source: YouTube

On 9/28/20, ILAL issued a PR stating that it “started” construction at Bajamar. But wasn’t construction already started almost a year ago?

CLSK’s investment in ILAL seems to have been a bad one. However, if CLSK can keep producing PRs from this deal to entice uninformed retail investors to buy shares, then perhaps the appreciation in share price from the PRs was worth the original $500K investment.

CleanSpark’s CEO Is Inexperienced With Only An Accounting Background

Looking at Zachary Bradford, CLSK’s CEO, background doesn’t seem to fit his position. Below is his LinkedIn profile.

Source: LinkedIn

Bradford is only 34 years old with an accounting background. Typically, a microgrid company would have a CEO with an engineering background.

Before Bradford, CLSK’s CEO was Matthew Schultz. Schultz is now the chairman of the board. Schultz is in his 50s, far from retirement age. We aren’t sure why he passed the reins over to Bradford.

CleanSpark Doesn’t Seem To Have Any Technical Advantage With Its Microgrid Software

CLSK had a jump in equipment sales in the first months of 2020. But their equipment sales are low margin and were down again in the last quarter. CLSK says SAAS is how they will scale and make money, yet they don’t do much SAAS business.

If we assume CLSK has a legitimate microgrid business that just needs time to grow, then the question is what is their moat? CLSK, and their customers, don’t mention any proprietary tech or capacities that are better than competing microgrid products. Microgrid competition is tough. According to altenergymag.com, the following are the top five microgrid manufacturers:

  1. Lockheed Martin
  2. ABB Ltd.
  3. General Electric
  4. Eaton Corp.
  5. Siemens

A Look At CleanSpark’s Recent PRs Which Lack Details

In our experience, it’s never a good thing when a company lacks detail in one of its PRs. Generally, if the PR’s details were good news, then it would likely be included in the PR or in a separate filing. Most of CLSK’s PRs lack very important details. Let’s look at the most recent PRs that we haven’t discussed previously in this report.

9/23/20 PR: CleanSpark Awarded US Embassy Contract

CLSK announced it received a contract to provide intelligent switchgear upgrades and support for a US Embassy located on the African continent.

This is PR lacks so many details. CLSK doesn’t disclose:

  • How it got this contract.
  • Which country in Africa is it located.
  • How much it’s getting paid.
  • When the work begins.

It does say that the contract is for a term of 5 years but how much work is actually done in that time frame, if any, is uncertain.

9/21/20 PR: CleanSpark Commissions Software on New Microgrid Featuring Tesla Batteries

CLSK is providing its patented mPulse controls with market-based forecasting and operation. Its customer is Micro Technologies SA, a major international assembly and manufacturing company. This microgrid is for their new factory located in the San Jose, Alajuela Province of Costa Rica.

Again, this PR doesn’t disclose:

  • How it got this contract.
  • How much it’s getting paid.
  • When the work begins.
  • What its relationship is with Micro Technologies SA.

9/10/20 PR: CleanSpark Announces Multi-Unit Switchgear Contract and Expansion into New Markets

CLSK announced it has received a contract for multiple units of its switchgear equipment from its energy development partner in Houston, TX.

This PR doesn’t disclose:

  • The name of the partner.
  • How much revenue is the contract for.

We just know it’s for switchgear units to be installed on a surface water pumping station in the Houston area. Also for them to be installed in a Texas-based grocery chain. It states in the PR that CLSK has shipped over $7.4M in Switchgear during the current fiscal year. This “fiscal year” for CLSK includes the quarter ended 12/31/19. For the first nine months of this fiscal year, CLSK has only reported $8.074M in revenues. This means that over 90% of its revenues are in switchgear. CLSK doesn’t manufacture this hardware, it’s a reseller, which gives it low gross margins.

Conclusion

Clean energy stocks are hot right now, and CLSK has rallied over 300% since early July from this trend. The buying is coming from uninformed retail investors and trend players, not from institutions. The only institution that holds a significant position, is Discover Growth Fund. However, if Discover wins the lawsuit, it will receive at least hundreds of thousands of shares of CLSK at $1.50 per share. The anticipation of this happening will likely cause some shareholders to sell.

As CLSK has no apparent edge with its technology, we believe it will continue to take losses every quarter. Within a year, with continued losses and heavy dilution, we predict it will sell all the way down to $3 per share, and go even lower on further cash burn.

Disclosure: I am/we are short CLSK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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