Business context and reporting period
CleanSpark, Inc. filed this Form 10-Q for the quarter ended March 31, 2021, its fiscal second quarter, with six-month results compared with the six months ended March 31, 2020. The company operates energy solutions, digital agency, and Bitcoin mining businesses. Bitcoin mining began following the December 2020 acquisition of ATL Data Centers; Solar Watt Solutions was acquired in February 2021. The filing states that interim results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Three months ended March 31, 2021 | Six months ended March 31, 2021 |
|---|---|---|
| Revenue | $8.12 million, versus $3.66 million | $10.38 million, versus $4.64 million |
| Operating loss | $2.50 million, versus $2.27 million | $8.67 million, versus $5.26 million |
| Net income (loss) | $7.40 million, versus $(5.82) million | $232,510, versus $(7.73) million |
| Net income (loss) per common share | Basic $0.28; diluted $0.22 | Basic and diluted $0.00 |
Quarterly revenue included $6.72 million from cryptocurrency mining; six-month mining revenue was $7.45 million. The quarter’s $9.90 million of other income included an $8.40 million unrealized derivative gain. For the six-month period, the $8.90 million of other income included a $7.38 million derivative gain and $542,000 of PPP loan forgiveness. Thus, reported net income—particularly for the quarter—was materially affected by non-operating gains rather than operating profitability.
For the six months, operating cash flow was negative $11.69 million and investing cash flow was negative $55.91 million; financing provided $221.74 million, principally from $224.26 million in underwritten offerings. Cash rose to $157.27 million from $3.13 million at September 30, 2020. Current assets were $178.46 million and current liabilities $7.34 million; total assets were $292.61 million and total liabilities $8.89 million. No loans payable remained at quarter-end; lease liabilities included $713,000 operating and $953,000 finance leases. The balance sheet implies working capital of approximately $171.12 million, while MD&A reports $171.30 million; the filing text does not reconcile the difference.
Material changes versus prior comparable periods
- Quarterly revenue more than doubled year over year, largely reflecting cryptocurrency mining and digital agency revenue; the six-month increase was primarily attributable to mining.
- Operating losses widened in both the quarter and six-month period. Professional fees, payroll, general and administrative expenses, and depreciation and amortization increased, reflecting growth, acquisitions, and mining operations.
- Cash and total assets increased substantially, supported by equity offerings. Common shares outstanding increased from 17.39 million at September 30, 2020 to 33.87 million at March 31, 2021, indicating significant equity financing and dilution.
- The company added ATL and Solar Watt, mining equipment, and related intangible assets and goodwill. Goodwill reached $32.03 million, compared with $5.90 million at September 30, 2020.
Outlook, risks, contingencies and unusual items
- Management said liquidity was sufficient for anticipated cash requirements for the next 12 months and beyond, and expected operating expenses to increase as the business plan is implemented. No formal revenue or earnings guidance was provided.
- Management aimed to exceed 1.0 EH/s of Bitcoin mining hash-rate capacity in fiscal 2021; stated existing facility capacity was over 300 PH/s. The company had approximately $146.5 million of miner purchase commitments at March 31, 2021 and had paid $42.8 million toward them. Subsequent to quarter-end, it entered agreements for approximately 23,900 additional servers totaling $192.3 million and paid $90.2 million toward those purchases in April.
- Bitcoin and digital-asset risks include price volatility, potential regulatory changes, and evolving accounting guidance. Digital currencies are carried at cost less impairment; impairment losses cannot be reversed. The company reported $5.66 million of digital currency at quarter-end.
- Disclosure controls and procedures were concluded to be ineffective as of March 31, 2021 because the recently acquired ATL entity was still adopting the company’s controls and procedures.
- Legal matters include an investor arbitration, in which an April 30, 2021 ruling favored the company on several claims, although other claims remained for trial, and a securities class action alleging misleading disclosures. The company disputed the claims; outcomes remained uncertain.
- A major customer accounted for 10.3% of six-month revenue, while a supplier represented 34.62% of direct material costs for the quarter. Cash held above FDIC insurance limits was approximately $157.0 million.
Important facts for investors to verify
- Reconcile the working-capital figures in the balance sheet, footnote, and MD&A.
- Assess the sustainability of operating performance apart from the substantial unrealized derivative gain and other non-operating income.
- Review Bitcoin mining expansion economics, equipment delivery and funding commitments, and exposure to Bitcoin price and network conditions.
- Evaluate acquisition integration, contingent consideration, goodwill and intangible-asset valuations, and the pace of equity dilution.
- Monitor remediation of ineffective disclosure controls and the status and potential exposure of the disclosed legal proceedings.