CleanSpark, Inc.

Hi, everyone. On behalf of CleanSpark, Inc., I welcome you to our fiscal year 2020 financial results conference call. My name is Natasha Betancourt. I'm CleanSpark's chief of staff. With us today with prepared remarks are CleanSpark's chief executive officer, Zach Bradford, and Lori Love, our chief financial officer. Before beginning, I would like to remind everyone that with the exception of historical information, the matters discussed in this presentation are forward-looking statements that involve a number of risks and uncertainties. The actual results of the company could differ significantly from those statements. Factors that can cause or contribute to such differences include but are not limited to continued demand for the company's products, competitive factors, the company's ability to achieve future growth, the company's ability to produce and market new products in a timely fashion, The company's ability to continue to attract and retain skilled personnel and the company's ability to sustain or improve the current levels of productivity. These forward-looking statements are subject to risk and uncertainties, and actual results may differ materially. When used in this call, the words anticipate, could, estimate, intend, expect, believe, potential, will, should, project, and similar expressions as they relate to Clean Spark, Inc. are such a forward-looking statement. Investors are cautioned that all forward-looking statements involve risk and uncertainties that may cause actual results to differ from those anticipated by CleanSpark, Inc. at this time. Further information on the company's risk factors is contained in the company's quarterly and annual reports and filed with the Securities and Exchange Commission. Finally, please note that on today's call, management will refer to non-GAAP financial measures in which CleanSpark excludes certain expenses from its GAAP financial results. Please refer to CleanSpark's press release for May 6, 2021 for a full reconciliation of its non-GAAP performance measures to the most comparable GAAP financial measures. On May 6, 2021, the company filed its Form 10-Q, which is available on sec.gov and the company's website. We also issued a press release announcing our financial results. Participants on this call who may not have already done so may wish to look at the press release as the company provides a summary of the results on this call. The press release may be found at cleanspark.com slash investor dash relations slash news dash releases. Following the prepared remarks, we will open up for a short Q&A. Please feel free to enter your questions under the ask a question section at the bottom of your screen. With that said, I would like to turn the call over to our CEO, Zach Bradford.

Thank you very much, Natasha. Good afternoon, everyone, and thank you for joining our call. As Natasha noted, I am joined today by Lori Love, our Chief Financial Officer. I will begin with our 2021 second fiscal quarter highlights and business development activities, and then I will let Lori run through our financial results before a brief Q&A. This was another record-breaking quarter for CleanSpark, including a significant milestone achievement of the company reaching its first profitable quarter. Achieving profitability has been our guiding principle since we began the company. We were pleased to continue our trend of more than doubling revenues over the comparable reporting periods of the prior year. The addition of Bitcoin mining has dramatically enhanced our business and revenue growth. We also believe that we are the only publicly traded cryptocurrency mining company in the United States that mines 95% carbon neutral and we're on a path to improve that. Not only are we approaching carbon neutral, we are doing so at some of the lowest energy costs for Bitcoin mining in the nation. I will speak further about our ESG goals later in the call. Revenues in our Bitcoin mining and energy segments continue to show very strong growth trends. Achieving profitability for both the quarter and the fiscal year to date gives us even more confidence in our long-term business strategy. This growth necessitates an increase in guidance, which Laurie will speak to later in the presentation. I first want to comment on our energy segment. The energy segment of our business is strong, and we are seeing a rapid increase in sales. The energy industry as a whole is still encountering some global supply chain constraints surrounding, specifically, battery energy storage, which has temporarily impacted the timing of certain deployments. Fortunately, the flexibility of our technology as a vendor and hardware agnostic solution has enhanced our ability to manage these constraints, enabling us to work with multiple energy storage suppliers. We expect global supply chains to normalize near the end of 2021, but to avoid further interruption of deployments, we have taken steps to secure a large supply of energy storage products for the balance of this year, and we expect we will be able to meet all future demand for products through the remainder of the global shortage. The ability to secure the supply was supported by the funding the company secured in March of 2021. The total revenues in this segment were $1.1 million for the quarter and $2.3 million for the six-month period. We now have a contracted backlog of executed contracts to deliver over $24.5 million in energy solutions. And with battery supplies now in position, we expect our total energy revenues to increase significantly. and we anticipate delivering on approximately 14 to 18 million of those contracts over the next two quarters. We further expect beyond that our fiscal quarter ended December 2021 to be the strongest quarter our energy business has ever experienced. We are seeing the strongest growth in the residential sector, which accounted for approximately 40% of the total energy business revenues last quarter. We expect our residential energy revenues to increase to 60% to 70% of total revenues over the next two quarters. The growth over the next two quarters is expected to be largely connected to our Envolt product line. Envolt products are being released to customers in Southern California this summer, and we expect to further expand that rollout by late summer 2021. We also expect to see demand from commercial and industrial clients continue to increase as the U.S. begins to normalize business activities post-pandemic. We are currently executing on several commercial projects scheduled to be completed this year, and we also expect to close on several more that will be completed in fiscal 2022. Now onto our Bitcoin mining segment. The results we have achieved have exceeded all initial expectations and we are extremely bullish about our future. We believe that blockchain technologies are important for the future of our society and we are proud to support the blockchain and the system of trust it facilitates. Our current production capacity now exceeds 330 petahash a second. We expect to achieve 400 petahash in production capacity within the coming month as our May shipments arrive and are installed. We also have the latest generation Bitmain S19 and S19 Pro ant mining rigs scheduled to arrive as follows. We have 4,587 units coming in June, 1,150 units in July, 1,750 units coming in August and 1,600 units coming in September. In fiscal 2022, we expect to receive 1,890 units per month through July 2022 and then 290 units per month August through October of 2022. These deliveries are expected to increase our hash rate upon installation to over 1.2x to hash by September and to over 3.2x to hash in 2022. In addition to the S19s, we expect to receive 1,000 Avalon 1246 rigs in June of 2021. So to put this all in perspective, At current difficulty rates, 1.2x to hash would result in 7 to 9 Bitcoins per day, which at a Bitcoin price of $57,000, which was the price at the time this presentation was prepared, it would result in $400,000 to $510,000 per day in revenue, or $145 million to $185 million in annualized revenue. Further, at current difficulty rates again, 3.2x to hash that we would achieve by September of 2022 would result in 18 to 20 Bitcoins per day, which at a Bitcoin price of $57,000 would result in $1.02 million to $1.14 million per day or $370 to $415 million in annualized revenue. We continue to work on expanding the company's total energy capacity at our facilities to allow us to increase our Bitcoin mining capacity further. We currently expect to have the power capacity increase completed this summer and anticipate bringing additional mining equipment online in parallel with that available power. We have further increased our commitment to mining with the lowest carbon footprint possible. Again, today we believe we are the only public company in the United States that is mining using 95% carbon-free energy. Again, we intend to improve that to become carbon neutral. With this, our goal is also to mine Bitcoin at the lowest energy cost nationwide. Our intention is to prove that Bitcoin mining can be done sustainably, responsibly, and at a substantial profit. Our first on-site microgrid project at our Atlanta facilities is also expected to be completed later this year. Our plan is to install a microgrid that will provide resilient backup power to our network switches. This is important because the microgrid will keep the systems live during power blips, which are caused when the local utility or substation has momentary outages. These outages, often just a second or two, can cause significant disruptions if the network switches drop power. Even a momentary outage can cause mining rigs to lose their connection with the mining pool, and the resulting reboot and reconnection may take more than an hour for some rigs. For large operators like us, these outages can be costly, and a microgrid solution like this may pay for itself within the first few utility outages. Overall, we believe that our combined energy and Bitcoin strategy will continue to result in increasing profitability as we focus on increasing our energy solutions and Bitcoin mining activities. Overall, this certainly was an excellent quarter, and I want to mention a few additional operational highlights before I turn it over to Lori. In March of 2021, the company closed an underwritten public offering and received gross proceeds of $200 million before deducting underwriting expenses and fees. This funding has been a catalyst. It's created significant growth. We have now deployed a large portion of the capital to expand our Bitcoin mining operations in the purchase of mining rigs to support our expanded sales and marketing initiatives, along with securing critical supply chains for energy products. We've also seen rapid growth in our electric vehicle charging initiative. We now have 11 companies that are using our OpenADR software solutions to aid in load management and grid services for their EV charging station companies. Also, our team has now grown to 74 employees as of today. Finally, as mentioned, we've stepped up our marketing and brand activity significantly during 2021. We've added exceptional marketing and sales talent, expanding our efforts across all platforms. These investments and business development activities are key to what we believe will be a record year and will continue to be important assets in the future as our business expands. We continue to believe that the long-term winners in this industry will be the high quality, high integrity, and respected leaders such as CleanSpark. We will continue leading the way for the industry as we create long-term value for our shareholders. All of us at CleanSpark pride ourselves in our ability to solve modern energy challenges. We have a recognized and respected brand. We have a flexible and cutting-edge product line capable of delivering sustainable and intelligent solutions to the market. And we have a highly profitable Bitcoin mining facility that is 95% carbon neutral. These advantages position CleanSpark extremely well for the future. Now let me turn it over to our CFO, Lori Love, to run through our financials.

Thank you, Zach, and good morning, everybody. Let me make a few brief comments specific to our operating segments and growth. For the quarter ended March 31, 2021, our revenue was derived from three business segments that I will discuss individually. The first segment I want to discuss is our energy segment, which provides software, including our most recently launched Envolt residential sales solutions, switchgear equipment, and services. For further detail on our product offerings in this segment, I encourage you to review the MD&A section of our recently filed 10-Q or visit our website. This segment produced $2.3 million in revenue for the six months ended March 31, 2021, compared to $4.4 million for the six months ended March 31, 2020. This decrease is attributable to the reduction of commercial projects, which we attribute to the pandemic. For the three months ended, our revenues from this segment were $1.1 million compared to $3.4 million in 2020 for the same period. As discussed earlier, the reason for the decrease was our commercial line of business. We expect commercial projects in our backlog that were delayed to largely resume in the coming quarter. The company's wholly owned subsidiary, P2K Labs, is our digital agency segment. They provide design, software development, and other technology-based consulting services with internal design and marketing services to all CleanSpark companies. Revenues associated with this segment for the six months ended was $800,000 compared to $300,000 for the six months ended March 31, 2020. For the three months ended March 31, 2020, March 31, 2021 revenue was $426,000 compared to $296,000 for March 31, 2020. We expect to only see moderate growth in this segment as we continue to focus on the utilization of the resources of P2K internally. Finally, Our digital currency mining segment produced $7.4 million in revenue, which made up of 72% of our total revenue for the six-month period. For the three months ended March 31st, our mining revenue was $6.7 million, which was 82% of our revenue for the quarter. Due to this being a new segment for CleanSpark, there are no comparable revenues for the previous three and six months ended March 31st, 2020. Holistically, the company achieved $10.4 million in consolidated revenue for the six months ended March 31, which exceeds our entire fiscal year ended September 30, 2020. Comparatively, The company more than doubled its year-to-date revenue for the same period last year, and we expect that trend to continue as CleanSpark begins to deliver on its significant contracted backlog in the energy segment of our business and further deployment of its mining capabilities. Our cost of revenues and associated margins dramatically improved as we continue to focus our efforts on high margin revenue streams. The results of such efforts are evident with a nearly million dollar reduction in our cost of revenues while increasing revenue by more than double for the six months ended March 31st compared to March 31st, 2020. For the three months ended, Our costs of revenues were $1.5 million compared to $2.9 million, representing a $1.4 million decrease. We experienced an increase in professional fees of $1.6 million for the six months ended March 31, 2021, compared to March 31, 2020. For the three months ended March 31st, our legal fees increased by approximately $1.4 million compared to March 31st, 2020. The increase in the three and six month periods ending March 31st, 2021 is mostly attributable to legal fees. We actually expect these fees to decrease in the coming quarter as we resolve certain pending legal matters. Our payroll expenses increased by $4.8 million for the six months ended March 31st compared to March 31st, 2020, and increased by $2.3 million for the three months ended March 31st compared to March 31st, 2020. This is due to the significant increase in employees and associated costs and an increase in stock-based compensation. Our employee headcount now stands at 74, spanning all entities. Additionally, for the six months ended March 31st, the organization reported 8.9 million in other income, primarily driven by the unrealized gains on securities of 7.6 million. Also included in this figure is gains on sales of Bitcoin of 635,000. For the three months ended, Other income was $9.9 million, with the bulk of that made up of unrealized gains on securities of $8.7 million and a realized gain on sale of Bitcoin of $585,000. For the first time in the company's history, CleanSpark reported net income for not only the quarter, but also for the year to date. We posted year-to-date net income of $232,000. compared to a net loss of 7.7 million, which represents an improvement of nearly $8 million. For the three months ended March 31st, we posted net income of 7.4 million compared to a net loss of 5.8 million for the three months ended March 31st, 2020, which is an improvement of nearly $13 million. For the quarter ended March 31st, 2021, we reported earnings per basic share of 28 cents from a loss per share of $1.13 just one short year ago. Our balance sheet has improved, has continued to grow stronger and stronger with cash in excess of 157 million and working capital of over $171 million. The company has limited debt with only $8.9 million in total liabilities and net assets of $283 million. We also have $856,000 in inventory that will be installed and converted into revenue in the current quarter, along with deposits of $45.5 million for mining equipment. Since April 1st, the company has received and deployed 900 S19 Pros with more deliveries expected in the coming weeks. For further context on my commentary today on our reported numbers, please feel free to refer to our Form 10-Q. I now want to speak to our financial outlook and expectations. As a result of our strong trends, we are updating and increasing our revenue expectations for the 2021 fiscal year. We continue to expect our energy business to achieve $16 million to $20 million in revenues in fiscal 2021, and our digital agency business is expected to achieve $1 million in fiscal 2021. We expect to achieve between $30 and $40 million in Bitcoin mining revenues this year, which is an increase in expectations of $20 to $30 million overall since our most recent guidance. As a result, we expect to achieve between $47 to $67 million in combined revenues in fiscal 2021. We intend to remain as conservative in our projections as possible while still providing quality data points to our shareholders. Bitcoin is extremely volatile and as a result, it is difficult to forecast future performance. These future forecasts are based off an average Bitcoin price of $50,000. and fluctuations from that point will affect the final revenues actually recognized by the company. We have included the potential for shipment delays in mining equipment in our forecast. If there are no delays, our results could be significantly better. And if delays do occur and are longer than we have anticipated, it could negatively affect our forecasts. Our backlog for the non-Bitcoin mining segments remains strong at approximately $24.5 million as of the date of this call, an increase of $18 million from our $6.5 million guidance as of December 2020. This increase is directly attributable to our newly expanded sales team and our focus to aggressively increase our sales and all of our energy offerings. We believe our increase in contracted backlog demonstrates the pent-up demand for resilient distributed energy solutions as the pandemic begins to improve and also as the new administration has executed on their green initiatives. We also intend to continue with a strategy of holding the Bitcoin we mine as we believe that Bitcoin will continue to increase in value over time. As a result, we are pursuing methods to generate yield from the Bitcoins we hold on our balance sheet. Let me conclude by reiterating Zach's confidence in our long-term business outlook. We have continued to execute through a pandemic. While navigating supply chain constraints and yet quarter over quarter, we are delivering record-breaking results. With that, I would like to turn the call over to Natasha, who will be moderating the Q&A.