CleanSpark, Inc.

Welcome, everyone. On behalf of CleanSpark, Inc., I welcome you to our third fiscal quarter financial results conference call. My name is Rachel Silverstein. I'm CleanSpark's VP of Compliance and General Counsel. 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 as defined within federal securities laws. Investors are cautioned that these forward-looking statements involve a number of risks and uncertainties. The actual results of the company could differ materially 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, regulatory developments, changes in Bitcoin difficulty rates, the company's ability to achieve future growth, the company's ability to produce and market new products in a timely fashion, uncertainty surrounding the pandemic, 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. Forward-looking statements may include words such as anticipate, could, estimate, intend, expect, believe, potential, will, should, project, and similar expressions. Further information on the company's risk factors is contained in the company's quarterly and annual reports filed with the Securities and Exchange Commission. Today, August 16th, the company will file its Form 10-Q, which will be available on SEC.gov and the company's website. A press release announcing our financial results will also be issued tomorrow. Participants on this call may wish to look at the press release, as the company will include a summary of the results discussed on this call. 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 a full reconciliation of its non-GAAP performance measures to the most comparable GAAP financial measures. The press release will be available at www.cleanspark.com forward slash investor dash relations forward slash news dash releases forward slash. Following the prepared remarks, we will open up for a short Q&A for the analyst community. With that said, I would like to turn the call over to our CEO, Zach Bradford.

Rachel, thank you very much. Good afternoon, everybody, and thank you for joining our call. As Rachel noted, I am also joined today by Lori Love, our Chief Financial Officer. This was another great quarter of strong growth for CleanSpark. This rapid growth means CleanSpark more than doubled its comparable year-over-year revenues. At the conclusion of the nine months ended June 30th, we realized $22.3 million in revenue, representing 176% revenue growth when compared to the nine-month period one year ago. For the three months ended June 30th, we realized $11.9 million in revenue, representing 250% revenue growth when compared to the same period three months ago. Our growth was not without challenges. The companies continued to navigate the volatility of Bitcoin, successfully procure for immediate and future delivery over 30,000 next-generation mining rigs. We managed our supply chain constraints, resolved a legal dispute, aggressively expanded our sales and marketing efforts, and increased our labor force for energy products while increasing our quarterly energy revenue by 61% from the prior quarter. Now, rapid growth is not free, and our efforts ultimately resulted in a loss for the quarter. It is important to note, though, that many of these expenses, but not all, were related to non-cash items or were considered one-time non-reoccurring expenses. Lori will speak to these specifics during her section of the presentation later. Achieving long-term profitability is our guiding principle as we continue our trend of rapid revenue growth. We are now halfway through our fourth fiscal quarter and the efforts we've taken over the prior three quarters have placed the company in a very strong position as we move into our next fiscal year. We believe these efforts will translate into a bright future and increase shareholder value. We now expect to more than double our current hash rate before the end of 2021 and more than quadruple our current hash rate in 2022. Our energy business continues to build momentum with positive regulatory tailwinds and incentives in place for green energy, along with our backlog of executed contracts of over $20 million. The combined efforts of our Bitcoin mining and energy businesses are expected to contribute to record growth through the balance of 2021 and 2022. I will turn it over to Lori to review the third fiscal quarter financial results. After Lori, I will cover business developments and other current developments. Then Lori will run through our earnings expectations before a brief Q&A and closing remarks.

Thank you, Zach, and good afternoon, everyone. I would first like to discuss our balance sheet and operating capital as it is our assets that drive the future of our business. All the numbers I reference to our balance sheet will be as of June 30th, 2021. All the numbers I reference and related to our statement of operations will be for the three and nine month periods ended June 30th, 2021 and June 30th, 2020. Our balance sheet continued to strengthen with working capital of over $36.2 million. The company has limited liabilities with only $15.7 million in total liabilities and net assets of $281.8 million. We have grown the net assets on our balance sheet by a factor of over 17 times since the start of this fiscal year. We are pleased with the strength of our balance sheet and the strong foundation it has created for our growth. I also want to highlight a few specific assets that will drive our continued growth. We had cash of $22.2 million and over $4 million in inventory. The majority of that inventory we expect to install and convert into revenue over the fourth quarter. We also had $62.4 million in mining equipment, the majority of which was fully installed and hashing as of June 30th. In addition to the miners that we had on hand, we also fully paid deposits of $125.8 million for mining equipment scheduled to be delivered after June 30th. The mining equipment ordered will drive a substantial amount of revenue for the company over the coming years. A significant portion of the equipment arrived and was installed in August, which will increase our revenues in the current quarter. I will now turn to the results of our operations and related growth. I will first discuss our revenues. For the quarter ended, our total revenue is derived from three reportable lines of revenue, which I will discuss individually. These reportable lines of revenues are digital currency mining, energy projects and services, and other revenue activities, which includes all other revenue generating activities that fall outside of our two core lines of business. For further details on all our lines of revenues, I encourage you to review our 10Q. Our digital currency mining activities produced $16.1 million in revenue, which made up 72% of our total revenue for the nine-month period. For the three-month period, these activities produced $8.6 million in revenue, or 73% of our total revenues. Our digital currency mining revenues increased by $1.9 million, or 22% from the previous quarter ended March 31st. This quarter-over-quarter increase was driven by the deployment of additional miners and, because of these efforts, increased Bitcoin receipt. We expect rapid growth in this segment. There are no comparable revenues for the previous three and nine periods, nine-month periods ending June 30, 2020, due to this being a new line of business this year. Overall, we are pleased with these results and our growth in the sector. The growth from last quarter, although significant, represents only a fraction of the growth in our future, and we are very excited about what the future holds. At the end of the quarter, we were required to measure our Bitcoin assets for impairment, which I will discuss shortly, but it should be noted that the price has since recovered and now exceeds the average value of the Bitcoin we held at quarter end, against which that impairment was measured. I also want to mention that we continued with our strategy of holding Bitcoin. We only sold 1.25 Bitcoin last quarter at prices above $60,000. Our energy business activities produced $5 million year-to-date revenue, which made up of 22% of our total revenue. For the three-month period, these activities produced $2.9 million in revenue, or 24% of our revenue. Our energy revenues increased by $1.8 million, or 61%, from the previous quarter ended March 31st. This quarter over quarter growth came primarily from revenues associated with the residential energy business. We have also experienced strong growth in our open ADR software solutions, which aid in load management and grid services. The electric vehicle sector is leading this growth as we now have 15 customers. Due to our strong backlog of executed contracts and inventory improvements, we expect our total energy revenues to increase significantly over the next 12 months. I will now briefly cover our other revenues. Our other business activities produced $400,000 and $1.2 million for the three and nine months ended. Overall, we don't expect our other business activities to play a significant role in our revenue growth for the company. Holistically, the company achieved $22.3 million in consolidated revenue for the nine months ended June 30th. For the comparative year-over-year three- and nine-month period, we saw revenue growth of 250% and 176% respectively. It is also worth mentioning that our nine-month revenue was more than double the $10 million in revenues we reported for our entire fiscal year ended September 30, 2020. Doubling annual revenues in nine months is a noteworthy achievement. We expect that our trend of significant growth will continue as CleanSpark deploys and expands its mining capabilities and delivers on its contracted backlog in the energy segment. I will now discuss our costs and expenses. Our direct cost of revenues, excluding depreciation and amortization, was $6.7 million. Our cost of revenues and associated margins continue to improve as we focus our efforts on high margin revenue streams. The results of such efforts are evident with only a $119,000 increase in costs of revenues while increasing revenue by more than two and a half times for the nine months ended compared to the same period. For the three months ended, our costs of revenues were $3.8 million compared to $2.8 million for the prior year representing a million dollar increase in costs with the corresponding revenue increase of nearly three and a half times. We experienced an increase in professional fees of three million for the nine months ended compared to 2020. For the three months ended, our legal fees increased by approximately 1.3 million compared to 2020. The increase in the three and nine months periods is mostly attributable to legal fees. In June, we resolved the case related to much of these fees, so we expect these costs to dramatically improve in the coming quarter. Our payroll expenses increased by $15.7 million for the nine months ended compared to 2020 and increased by $10.8 million for the three months ended compared to 2020. This is largely due to costs for employee bonuses and stock-based compensation that are largely considered non-recurring events. In addition, the company continues to add talent to support our tremendous growth. Our employee headcount now stands at 74, spanning all entities. CleanSpark, like all companies holding substantial amounts of digital currency, is required to measure impairment to the value of Bitcoin pursuant to U.S. accounting rules. As a result of the decreased value of Bitcoin at the end of the quarter, we incurred losses on the impairment of Bitcoin of $3.7 million. As I previously stated, Bitcoin price has increased significantly since the end of last quarter. For the nine months ended, the organization reported a $6.8 million in other income primarily driven by the unrealized gains on securities of $5.3 million. Also included in this figure is gains on sales of Bitcoin of $672,000. For the three months ended, our other expenses were $2 million with a bulk of that made up of unrealized losses on securities of $2.2 million. These unrealized losses do not represent actual sales of investments. Rather, they represent market price fluctuations that are measured at the conclusion of each reporting period. Overall, CleanSpark reported a net loss of $16.4 million for the nine months ended compared to $16.3 million for the nine months ended 2020. The company reported a net loss of $16.7 million for the three months ended compared to $8.6 million for the same period ending 2020.