Avoid Bitcoin Miner TeraWulf Inc. (NASDAQ:WULF)

Introduction

I saw the following news headline on Seeking Alpha and decided to look under the hood of TeraWulf Inc. (NASDAQ:WULF) (the “Company“).

TeraWulf stock surges over 20% after highlighting low-cost status, debt repayment”

While I am mildly bullish to neutral on Bitcoin (BTC-USD) (“Bitcoin“) in the short-term, I have been increasingly cautious on several crypto miners, as noted in a recent article about Bitfarms Ltd. (BITF). Having reviewed the Company’s most recent financial reporting materials, I am BEARISH on the Company for several reasons:

First, the Company’s stock soared in 2023 as shown in the chart below, and, in my view, a repeat of 2023’s stellar performance is not likely, particularly if the Company cannot show a GAAP profit (and it is not close to doing that).

Second, the Bitcoin halving expected to occur in April (the “Halving Event“) will cause Bitcoin’s mining rewards to decrease from 6.25 BTC to 3.125 BTC, and likely result in a lower hash rate, making it more difficult for the miners to generate revenue. Indeed, the Company’s CEO has acknowledged that its cost to mine bitcoin will increase by more than 40% after the Halving Event:

‘We estimate that our cost to mine a bitcoin is among the lowest compared to other publicly-listed bitcoin mining companies at approximately $25,000 per bitcoin before the halving and $37,000 after the halving,’ said Chairman and CEO Paul Prager.”

Third, the Company is heavily reliant on raising funds in the capital markets in order to fund operations. In this regard, the table below shows that common stock outstanding at the end of 2021, 2022 and 2023, respectively, as per the Consolidated Statements of Stockholder Equity included in the recent 2023 10-K Annual Report filing (the “10K“) The chart also shows net proceeds from equity issuances and total annual revenue in the respective years. Overall, the shareholder dilution from 2021 to 2023 has been substantial. Moreover, the table below shows that, to date, stock issuances are more important than actual operating revenues in terms of financing the Company’s operations.

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*No revenue during start-up period of February 8, 2021 to December 31, 2021

Fourth, for all the talk of the Company being a low cost producer in its earnings-call presentation, the Company has an accumulated deficit of nearly $260 million and its Consolidated Statement of Operations for 2023 shows a net loss of $75 million.

Fifth, and I saved the worst for last, the Company has $123 million of debt that needs to be paid off, renegotiated or refinanced in 2024. Even if the Company is able to stay afloat, it will be at the expense of shareholders in favor of the Company’s creditors. And further material dilution of equity holders has already started to happen in the first quarter of 2024. According to the 10K:

In February 2024, the Company repaid $40.0 million of the principal balance of the Term Loans, in the aggregate….

The Company does not indicate how much cash it has on its balance sheet after the payment. The 10K does give a hint as to how the payment was made, however:

Additionally, if a business need requires its use, the Company has an active at-the-market sales agreement for sale of shares of Common Stock having an aggregate offering price of up to $200.0 million (the “ATM Sales Agreement”), which had a remaining capacity of $81.2 million and $29.8 million as of December 31, 2023 and March 19, 2024, respectively. The issuance of Common Stock under this agreement would be made pursuant to the Company’s effective registration statement on Form S-3 (Registration statement No. 333-262226).

In short, it looks like the Company has issued an additional $51.4 million of common stock in the first quarter of 2024, further diluting shareholders in order to make a debt payment.

***

For the foregoing reasons, the Company should be avoided.

Brief Background

Per its recent earnings press release, the Company “owns and operates vertically integrated, environmentally clean bitcoin mining facilities in the United States. Led by an experienced group of energy entrepreneurs, the Company currently has two Bitcoin mining facilities: the wholly owned Lake Mariner facility in New York, and Nautilus Cryptomine facility in Pennsylvania, a joint venture with Cumulus Coin, LLC.” The mining operations of the Company generate Bitcoin “powered by 95% zero carbon energy resources including nuclear, hydro, and solar with a goal of utilizing 100% zero-carbon energy.”

The Company seeks to provide industry leading mining economics at scale. At the time of writing, the Company had a market capitalization above $500 million and was trading at $2.54.

Stock Performance

The Company began trading on the Nasdaq on December 14, 2021 under the symbol WULF. Since that time, as shown in the chart below, the Company’s stock price has 1) been on a steep downward trajectory, losing more than 90% of its value, and 2) in a material fashion, trailed both the S&P 500 and the Valkyrie Bitcoin Miners ETF (WGMI) (the “Bitcoin Miners ETF“).

While the Company has not performed well, its stock price recently jumped after its most recent earning announcement. Below, I briefly review some highlights of those earnings.

Q4 2023 Earnings

On March 19, 2024, the Company reported financial performance for the quarter ended, and year ended, December 31, 2023. A few highlights from the Company’s press release are included below [all data from such press release]:

• Revenue increased 360% to $69.2 million in 2023, as compared to $15.0 million in fiscal 2022 driven by increased bitcoin production and higher average realized bitcoin prices during the period.
• Reported cash and cash equivalents of $54.4 million as of December 31, 2023, as compared to $1.3 million at fiscal year-end 2022.
• Self-mined bitcoin production increased 550% to 3,407 in 2023, as compared to 524 in fiscal 2022.

On the plus side, it is good to see the Company’s production of Bitcoin has increased materially year over year and debt is going down. However, per Note 9 of the Company’s audited financial statements, the Company has nearly $123.5 million of debt due in 2024.

Review of Balance Sheet

Selected Balance Sheet Items (in thousands)

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Source: Company Website (Financial Information)

A couple of things stand out in looking at three years of balance sheet figures. First, total cash increased by approximately $11 million from 2021 to 2023. In context, however, the company raised over $180 million in equity proceeds during the period as shown in the earlier table.

Second, while the Company has $123 million of long-term debt due in 2024, it has generated less than $90 million of revenue in its first two full years of operations. Even with the $40 million debt pay down in the first quarter of 2024, the Company has a lot of wood to chop to pay down that debt. If the Bitcoin price falls in a material way, the Company will really be in a bind.

Third, the Accumulated Deficit (representing the cumulative amount of net losses the Company has generated since its formation) of nearly $260 million now exceeds Total Equity. Needless to say, it is important for the Company to start generating some profits and reducing the deficit out of free cash flow.

Risks and Conclusion

The risks of investing in the Company are included in the linked 10K above. Particular concerns about investing in the Company, among others, are as follows:

First, the Company has not been able to generate net income.

Second, the Company is dependent on equity and debt issuances to finance operations.

Third, the Halving Event will cause a material increase in the Company’s operating expenses (i.e., costs of producing Bitcoin).

Fourth, there are significant risks that the Company will not be able to satisfy its debt obligations due in 2024, or if it does satisfy them, it will be to the detriment of the common shareholders via (further) material dilution, a process which has already started.

***

For the reasons set forth in this article above, the Company should be avoided for the foreseeable future. The Company is currently being run for the benefit of its creditors. Given the Bitcoin bull market, however, I would not short it (at this time), unless it was part of a pair trade. Do your own due diligence, however.