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Seeking Alpha 2023-06-21 11:00:40

CleanSpark: A Fundamentals Perspective

Summary CleanSpark reported mining 609 Bitcoins in May 2023, with revenues growing by 14.2% in Q2 of fiscal 2023. The company is expanding its facilities and mining machines, aiming to double its hash rate by the end of the calendar year. Despite growth potential, CleanSpark has not yet demonstrated consistent profitability over consecutive quarters. CleanSpark (CLSK), a small-cap cryptocurrency miner, began life in 2014 as an advanced energy technology company, converting organic matter into synthesis gas. After acquiring ATL Data Centers in 2020, it refocused itself on Bitcoin data mining. The firm continues to expand with new facilities and Bitcoin mining machines. In its May 2023 Update, it reported mining 609 Bitcoins, valued at approximately $27,400 each. CleanSpark sold 471 of them that month and received $12.9 million in proceeds. Also according to the Update, it ranked 44 th on the Financial Times’ 2022 list of the 500 Fastest Growing Companies in the Americas. In addition, it ranked 13 th on Deloitte’s Fast 500. Revenue, EBITDA, and earnings In the second quarter of fiscal 2023 (January through March), CleanSpark’s revenue grew by 14.2%, from $37.2 million to $42.5 million. That continued a trend that began when it switched to Bitcoin mining: CLSK Revenue chart (SeekingAlpha) There are two aspects to its revenue. One is the number of coins produced by day, month or quarter. The second is the value of each coin, which depends on external markets. No individual company has much, if any influence, over the cryptomarkets, just as few firms have much influence over stock markets. Still, as CFO Gary A. Vecchiarelli commented in the Q2 earnings release, "The rebound in Bitcoin prices translated to greater gross profit margins and cash flow in the second quarter." However, companies in the industry do have numerous opportunities to increase their output. Or, more importantly, increase their output in relation to the investments they make. CleanSpark’s 10-K for 2022 identified the most important of those factors, “Factors such as access to computer processing capacity, interconnectivity, electricity cost, environmental factors (such as cooling capacity) and location play important roles in mining.” Fast growth is a necessity as the company prepares for a semi-scheduled halving of Bitcoin prices, probably in the first half of next year. In April or May, miners will be awarded 3.125 bitcoins for every block they successfully mine. Currently, they receive 6.25. To offset the halving, a company will need to double its production. Speaking during the second-quarter earnings conference call, CEO Zach Bradford sounded optimistic: “We are in a rapid growth phase and we'll continue there for the next few quarters. For perspective, we expect to more than double our hash rate by reaching our guidance at the end-of-the calendar year. That is extraordinary growth. As I said earlier in the call, we have secured about 99% of the machines we need to reach our targets and the infrastructure that will house those machines is advancing at pace.” One more aspect of revenue reporting deserves attention. The company does not necessarily sell all the Bitcoins it mines. At the end of the second quarter, it held $10.3 in cash plus 196 Bitcoin, giving it total liquidity of roughly $15 million. Turning to EBITDA, adjusted EBITDA fell in the second quarter, and, unfortunately, also continued a trend in the wrong direction: CLSK EBITDA chart (SeekingAlpha) It’s much the same story for earnings per share, diluted, before extraordinary items: CLSK Chart of EPS (SeekingAlpha) For the second quarter, basic EPS and diluted EPS were negative, at -$0.23, compared to break-even for the same quarter last year. CFO Gary Vecchiarelli explained in the conference call, “our GAAP loss for the second quarter was $18.5 million compared to a slight loss in the same quarter of last year. The majority of this difference was due to increased depreciation and amortization of approximately $11 million, driven by our significant purchase and deployment of top of the line Bitmain ASICs, as well as the assets acquired in the Washington and Sandersville transactions.” Normalized basic EPS and normalized diluted EPS were negative as well: -$0.14. A year earlier, they were positive, at $0.03. Expenses and other considerations One tried-and-true method of generating positive EPS is by minimizing costs. That brings us to some items found in CleanSpark’s Q2-fiscal 2023 and 10-K for the year ended September 30, 2022. First, the company has a net loss from discontinued operations (energy technology). For the second quarter, that amounted to $294,000, well down from the $2,203,000 million loss in Q2-2022. For the year ended September 30, 2022, its loss was $17,236,961. Second, CleanSpark provided stock-based compensation, a non-cash expense, of $11.620 million for the second quarter. Extrapolated out over four quarters, that would suggest annual compensation of more than $45 million. In fiscal 2022, the figure was $31.465 million. That seems like more than adequate compensation for a company that is losing money, especially one that had total revenue of $131.5 million in fiscal 2022. Third, CleanSpark paid out $3.339 million in legal fees in the first quarter, which the company says was due to a litigation settlement and transaction matters. Some of that may be attributable to the wind-down of its energy business. Otherwise, it, too, seems more than one would expect for a company of this size. Fourth, there is the matter of stock issuances and dilution. At the end of Q2 fiscal 2023, the company’s weighted average common shares count was 80.460 million, nearly double the 41.390 million outstanding at the end of Q2 fiscal 2023. For shareholders, those issuances, including some for executive compensation, nearly cut the value of CleanSpark shares in half. That’s a material haircut for investors still waiting for a black bottom line. On the positive side, expansion has required little debt. Valuation The SeekingAlpha system gives the firm an A rating for valuation, which, in my opinion, is a bit high. First, two important valuation metrics are not available because the company operates at a loss: the P/E and PEG ratios. Second, I noted that revenue went up as CleanSpark moved from the energy business to Bitcoin mining. But the share price has been flowing in the opposite direction: CLSK Price Chart (SeekingAlpha) I know the firm has much promise, not least because it is aggressively expanding its footprint. Still, we haven’t yet seen the company give us a couple of consecutive quarters of profitability. I don’t expect the share price to head upward until it does. Third, this is cryptocurrency country, where the volatility of Bitcoin is very high. What if the next halving is not the only factor driving down prices next year? Other perspectives SeekingAlpha analysts give CleanSpark a Buy rating, with a score of 4.00. Wall Street analysts and the Quants give the firm a Strong Buy rating, with scores of 4.75 and 4.62, respectively. The professionals who manage institutional funds own a reasonable 43.77% of the shares outstanding, and in the past quarter, 59 holders increased their positions, 39 reduced them, and 14 held. Conclusion Given the company’s growth potential, I might have given it a Strong Buy; however, I have a number of reservations, as outlined above. In particular, its fundamentals are those of a company that has not proven its ability to consistently generate profits over several consecutive quarters (and years).

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