CleanSpark, Inc.

Welcome, everyone. On behalf of CleanSpark, Inc., thank you for joining our second quarter financial results conference call for fiscal year 2022. With us today with prepared remarks are CleanSpark's chief executive officer, Zach Bradford, and Gary Vaccarelli, our chief financial officer. On today's call, we will make forward-looking statements under the safe harbor provisions of the federal securities laws. Actual results may differ materially from those contemplated in these statements. Additional information concerning factors that would cause actual results to materially differ from these forward-looking statements are contained in today's press release and in our filings with the SEC. Except as required by law, we undertake no obligation to update these statements as a result of new information or otherwise. During today's call, we will also discuss certain non-GAAP financial measures about our performance. You can find the reconciliation of GAAP financial measures in our press release, which is in our 8K and will be posted on our website during this call. With that, it is my pleasure to turn the call over to our CEO, Zach Bradford.

Thank you, Rachel. Good afternoon, and thank you for taking time this late in the afternoon to join our call. QueenSpark is a values-driven company that is engaged in the once-in-a-lifetime opportunity of building the infrastructure of the new economy. And that's exactly what Bitcoin mining is. It is infrastructure that makes a difference in the lives of millions of people across the world. And that number is growing every day as more people are introduced to this transformational technology. Bitcoin is at an inflection point in human history, and we are proud to be part of it. This has been a quarter of execution for CleanSpark, and I'm looking forward to discussing some of those accomplishments during today's call, which we aim to keep brief, informative, and targeted towards those elements most important to our shareholders. We had our most productive quarter ever in terms of Bitcoin produced, minting 899 new Bitcoin, which is a 36% increase over the previous quarter. And we are on track to exceed our original hashrate expectations Our average production per day, even as difficulties increase, has surpassed 10 Bitcoin per day. And with the significant operational progress we are seeing at Norcross, we expect to see those numbers continue to tick upward. While we have mined more Bitcoin than ever before, we mine them at a lower average market price, which has weighed on our revenue generation. This has been a demanding market for high-growth, innovative-focused companies like ours. The macro conditions that all miners face, all public companies really, are changing in the face of inflation, war, and the pandemic's aftershocks. But our fundamentals are strong. The Bitcoin project has weathered difficult macro conditions before, and we expect it will emerge strong, just like us, on the other side of this business cycle. In fact, it is at this stage in the business cycle where the true winners, the strong, the wise, emerge. And we intend CleanSpark to be one of those winners. We anticipated the potential for market volatility and have built these market risks into our operating models. We've organized ourselves in such a way as to accommodate significant market shifts in price and value while supporting the future of Bitcoin. We understand the fear and uncertainty that these market conditions may bring. We saw similar Bitcoin prices just one year ago. Our preparation means that we are already ahead of the curve. We have not overextended ourselves in the terms of our commitment. In fact, we believe that the overcommitments of some of our peers could eventually create opportunities for us. As a company, we have always chosen strategy over ideology. This approach has proven to be the best route, and many of our peers are now following suit. Bitcoin has its fair share of ideological adherence. And to be clear, we do believe in Bitcoin, not only as a store of value or a medium of exchange, but it's something that is likely to have a truly transformational impact on society. But that belief cannot and should not ignore market reality. Bitcoin miners should operate in a manner that is as sustainable, long-lasting, and enduring as the Bitcoin project. In that way, the strengths of the Bitcoin blockchain become our own. One of our defining strengths has been our infrastructure-first approach to growth. We now have a line of sight on 600 megawatts of power. We expect this will enable us to power approximately 20 exahash per second. But we are starting with the infrastructure. We source low carbon power and build and source facilities before we acquire miners. Another strength is our capital structure. After the quarter ended, we signed a $35 million financing deal with Trinity Capital. Debt capital is currently one of the lowest costs of capital available to us. And being non-dilutive, it delivers on shareholder expectations while allowing us to finance our growth capital needs. Lastly, I want to take a moment to mention an initiative that has been particularly important to me. Bitcoin mining is a high-margin business, and it is imperative that some of those financial wins are realized by employees in terms of ownership opportunities and wage gains. This is why we announced wage increases last quarter for entry-level mining techs. The increase makes our workforce better paid than the workforces of even the largest technology and commerce companies in the country. We have also started executing equity plans that bring our employees into the family of shareholders. Pride of ownership extends up and down our organization, and because of that, our entire team is uniquely committed to the work at hand. As we mentioned in our last call, we have been considering strategic alternatives for the energy business. We continue to evaluate opportunities while considering the interest of our shareholders, employees, and customers. We intend to focus on maximizing capital and cash flow. Over 90% of our revenues and operating profits now come from mining, while we incurred losses on the energy segment. Currently, all possibilities are still on the table. But we plan to pursue the options that allow us to shore up our capital and cash flows in an expedient manner for the benefit of our shareholders. We believe this approach will allow us to shift the time and capital investment that are currently being routed to the energy segment and instead focus those efforts and capital exclusively on our mining operations. To our long-term shareholders, our vision of an abundant, clean, and affordable energy future remains as clear as the day you first heard it presented. We believe that Bitcoin mining gets us closer to that vision. For our newest shareholders, this may be less relevant as you were already invested in a sustainable Bitcoin mining company. But I wanted still to take a moment to explain this as transparently as possible, the decisions we are making, the decisions that we believe are best for our shareholders, employees, and customers. With that in mind, I'll turn it over to Gary to discuss our financial results. After Gary's portion of the call, I'll offer some further updates on the progress we've made on the strategy we outlined in our last Journey of Scholars. Gary, the floor is yours.

Thank you, Zach. I want to begin by further echoing the comments Zach made previously. This was a quarter of operational and strategic execution. While the industry faced some macro headwinds, I believe our company has the strongest financial position in its history. With that, I'm happy to now share our financial performance for the second quarter and six-month period ended March 31st, 2022. As presented in our Form 10-Q, which will be filed with the SEC today, our total revenues increased exponentially in the second quarter of 2022 versus the same quarter of the prior year. Total revenues for Q2 were $41.6 million compared to $8.1 million representing an increase of over four times. The overwhelming majority of this revenue was driven by our digital currency segment, with revenues tolling almost 37 million. The investments in mining equipment and infrastructure we have made to date have contributed to our growth in these revenues. Our energy segment saw a healthy increase as well, growing to 4.6 million in the second quarter of 2022, from approximately 1.3 million the same period of the prior year. The majority of this growth was due to the acquisition of SolarWatts, which occurred in the second quarter of last year. Total revenue sequentially increased approximately 1% in the second quarter versus the prior first quarter. Revenues from the digital currency mining increased slightly, even as Bitcoin faced pricing pressure. Despite mining more Bitcoins this quarter, the average price of Bitcoin decreased in the second quarter, offsetting the potential for revenue growth. The company did, however, experienced revenue growth of approximately $616,000 in its energy segment, representing an increase of almost 16% sequentially between the periods. Looking at gross profit, you will see the increase in revenues between the second quarter this year versus the same quarter last year translated to greater profits, particularly due to the high margins that Bitcoin mining brings. Gross profit in Q2 increased to $29.5 million from $6.6 million in the same period a year ago. Comparing the company's performance to the most recent quarter, gross profit decreased approximately 2.9 million to 29.5 from approximately 32.4 million, representing a 9% decrease. This sequential decrease was primarily driven by the fact we had more miners in service in the second quarter, thus consuming greater energy and incurring additional direct costs. Naturally, as Bitcoin prices increase and decrease, The company's gross margin will also be affected. As you will note, our gross margins contracted between the two sequential periods decreasing from 79% in the first quarter to 71% in the second quarter, which is directly attributable to the fluctuations in Bitcoin pricing. It is worth noting that while our gross margins have decreased due to direct influence of Bitcoin pricing, we have seen no incremental cost of revenue that is concerning. The efficiency of our mining operations continues to improve month by month. We have no concerns about material increases to our cost of revenues in the near term. Moving to the next slide, you will see the operating leverage of our business model continued through the second quarter. For the second quarter 2022, net income turned slightly negative to a loss of $170,000 from net income of $7.4 million the same quarter last year. The large swing compared to last year was primarily driven by unrealized gain on derivative security, which approximated $8.4 million. Sequentially, the company saw a reversal to a slight net loss as well. That loss of $170,000 reversed net income in the preceding first quarter of approximately $14.5 million. This decrease was primarily driven by lower Bitcoin prices in the second quarter. The company realized a loss of approximately $2.8 million on sale Bitcoin in the second quarter. And this loss is due to the fact that Bitcoin earned in prior periods was recorded at a higher dollar value compared to the time when the company converted Bitcoin to U.S. dollars. It's also worth noting that with the decrease in Bitcoin prices, the impairment expense was also lower in the current period, decreasing almost 90% from $6.2 million in the first quarter to $811,000 in the second quarter. Now, adjusted EBITDA is a non-gap metric. which management uses to determine the cash flow produced from operations. Reconciliation of adjusted EBITDA to net income can be found in our earnings release and Form 8K. You will see the theme of profitability continued as adjusted EBITDA was $22.5 million for Q2, an increase of more than 10 times over the second quarter from last year, which was approximately $1.9 million. Sequentially, the company saw adjusted EBITDA decrease slightly by approximately $1.8 million from Q1 to Q2. Again, the primary factors which contributed to the decrease in sequential adjusted EBITDA were lower average Bitcoin prices and higher costs of revenue associated with producing a greater number of coins. I'd like to make a few final comments regarding our second quarter operating expenses when compared to the first quarter. Payroll expenses saw an increase of approximately 19% in Q2 compared to Q1, accounting for a $1.7 million difference. The company made efforts in the second quarter to reduce the cash burden in the energy segment, and most of this difference is related to severance paid for reduction in force in the energy segment employees and prior executives. Additionally, we saw increases in general administrative expenses of $1.3 million, which primarily relates to stock-based compensation. This increase was directly driven by a full quarter of stock-based grants, as well as an impact from severance severance-related stock-based compensation. I'd also like to point out, as I did on the last call, that we remain subject to various accounting rules surrounding the valuation of stock-based comp. A significant portion of this non-cash expense relates to stock compensation, which either has strike prices significantly out of the money or represents market or performance-based awards, which have yet to be achieved. We are currently analyzing the financial reporting impact of our stock-based compensation plan as we look to align this non-cash expense with the economic realities of the industries. Professional fees saw a decrease of almost 73% or $2.4 million between the periods, as the first quarter included significant expenses related to the preparation and filing of the company's Form 10-K and its first-time compliance with certain provisions within the Sorghans-Oxley Act. When you combine professional fees, payroll expenses, and G&A expense, These indirect cash expenses only increase the combined 3.8% or $540,000 between the periods. Much of that increase is taken into consideration in adjustments to EBITDA as one-time expenses. We do not believe that the trajectory of the indirect costs will continue into future quarters as our business model does not require proportionate increases in indirect costs or overhead to support greater revenues. Management continues to use the adjusted EBITDA metric to evaluate its operations, and we expect adjusted EBITDA margins to remain high, so as long as Bitcoin prices cooperate. Turning to our balance sheet, we had approximately 1.9 million of cash on hand at March 31st. Additionally, we own 420 Bitcoin with a book value over 17 million, bringing the company's total liquidity to approximately 19 million. The company converted 720 Bitcoin to U.S. dollars during the quarter to pay for growth capex and operational expenses. As stated on the prior call, we expect to maintain minimal cash amounts on hand. With respect to liquidity, we continue to see Bitcoin as a store of value. We have not purchased any Bitcoin with proceeds from the recently executed Trinity financing. We use those proceeds strictly for growth capital over the next few months, and the majority of the cash we receive to closing still remains in our bank account. I feel this is important to note today, particularly given the slide and Bitcoin price over the last several weeks. On a final note, I want to turn your attention to our machine commitments as of March 31st. We have remaining commitments for almost 13,000 additional state-of-the-art Bitminer S19 series machines, which will add 1.3 exahash per second to our total hash rate. On these commitments, we have already funded deposits of almost $67 million, which will be applied to future deliveries. And I want to point out that this $67 million is already paid for using proceeds previously raised through conversion of Bitcoin and issuance of equity in 2021. The remaining cash commitment for the deliveries is approximately $20 million, for which we will be using proceeds from the recent Trinity financing we expect to take delivery monthly through October of this year. As Zach discussed in our last earnings call, we expect favorable price pressure on the cost per terahash due to supply chain issues being resolved, additional competition in the space, as well as macroeconomic conditions. While these current commitments will allow us to exceed four exahash per second, we are diligently working on securing the necessary number of miners to see through the Lancium agreement. Additionally, we are actively looking to obtain the capital required for the Lancium expansion with debt as our first option. We have been transparent about our capital strategy and expect to apply what we refer to as smart leverage for our balance sheet while utilizing the other levers of converting Bitcoin and only, if necessary, using equity. We believe we have a very strong balance sheet and can prioritize the efficient utilization of our assets. This means we do not expect miners to be sitting idle for long periods Nor do we want to over-leverage our balance sheet with capital that is not put to work. Jack, back to you.

Thanks, Gary. Before transitioning to the Q&A portion of today's call, I will briefly touch on our operational strategy. As I mentioned at the beginning of this call, we have put strategy over ideology, which has placed us in an enviable position to navigate current market volatility. Allow me to reiterate our capital infrastructure and ESG strategies. We've adopted a capital strategy that yields operational excellence and is rooted in the realities of our business. Take, for example, our announcement last year that we would start using some of the Bitcoin we mine to finance our growth and operations. The decision was met with mixed reactions. Since then, many of our peers have followed suit with one major difference. While we sold when Bitcoin was in the 60s, 50s, and 40,000s, our peers are now being forced to sell when Bitcoin is in the 30s. Some of them have paired that with issuing equity at extremely low relative share prices. We continue to execute a hodling strategy, the imperative word being strategy. We intend to hold Bitcoin and grow our Bitcoin reserves over the coming quarters. but we won't blindly accumulate Bitcoin at the cost of diluting our shareholders and taking on unnecessary debt. Our infrastructure strategy is another example of how we are making calculated choices that benefit us now and in the future. We put infrastructure first by securing power and facilities before securing machines, which is what we've done with Lanthium. As we predicted in Q1, basic cost per terahash has gone down as machines with nowhere to be plugged in have begun to enter the market. At the same time, innovative technologies are becoming available that are making Bitcoin mining more efficient. We are well positioned to take advantage of these cost savings and efficiency gains. Speaking of Lanthium, I'd like to take a moment to discuss why we chose them as a partner. Like Lancium, we share the belief that Bitcoin mining is essential for transitioning the US economy away from fossil fuels. Lancium's clean campuses encourage the development of new renewable energy generation while bringing flexibility and stability to the power grid. Through our partnership with them, we expect to have 50 megawatts operational with Lancium by the end of the calendar year, with another 150 megawatts operational in spring of 2023. We then have the option for an additional 300 megawatts that would bring the total capacity with Lancium to 500 megawatts. We expect this additional capacity would be built out in 2023 and ultimately would result in power to support bringing us up to approximately 20 exahash per second. With this power to back our growth in place, we also continue to look for new locations which we intend to own and operate ourselves. Our ESG commitments also reflect our approach to strategy over ideology. We are committed to low-carbon energy and believe that Bitcoin mining plays a role in that transition to a low-carbon economy. We power our facilities with hydro, solar, wind, nuclear, and even some natural gas, which we offset with renewable energy credits. There is a strong market argument for using and building renewable energy. And in fact, our peers are now coming to see this as true. Dirty miners are now making efforts to clean up their acts and transition to low-carbon energy. Leading Bitcoin's transition to low-carbon energy is one reason we partnered with the Sustainable Bitcoin Standard. Their mission is to make Bitcoin the most sustainable asset class in the world by using market-based incentives. Bitcoin is digital gold without the harmful effects on the environment, but only when it is sustainably and responsibly mined. While we believe there is a clear moral directive to mine Bitcoin with low-carbon resources, pairing it with these market-based incentives is a clear winner that we are proud to support. In respect to our other ESG commitments, we are in the process of rolling out our ESG portal on our investor website. The portal is a one-stop source for our disclosures and other information that are relevant to rating agencies and ESG-minded investors. While we don't support mandates, we do believe that the Bitcoin mining industry must leave the adoption of cleaner energy before governments mandate it for us. The choice is to be self-governed or be governed. We choose to be self-governed. Lastly, Let me conclude my prepared remarks by thanking my colleagues in the CleanSpark teams that have made our successes possible. For those of you who are listening right now, I want you to know that you are doing an excellent job. We have carried out impressive work over the last quarter. Our Atlanta teams have worked around the clock and continue to work around the clock to get our immersion cool facility at Norcross 100% operational. I am profoundly grateful to all of you. Thank you for being part of the CleanSpark team. Operator, this concludes our prepared remarks. We'd now like to open the line for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw from the question queue, please press star then 2. We will pause momentarily to assemble our roster. The first question is from Tyler DiMatteo of BTIG. Please go ahead.

Hi, everybody. Good afternoon. Thanks for taking the questions. Zach, if I could just go back to the comment you made about owning and operating, you know, maybe some other locations. What would the timeline be there? Would we look for that to be immersion cooling, or what would that look like? Have we had those conversations?

Hey, Tyler. Thanks for joining. Appreciate it. Yeah, I can address that at a high level. So, you know, we're looking at multiple sites right now. And, you know, we are at a level of evaluation on several of those. It would be our attention that we would lean towards immersion cooling at future sites. I think that is an important part of where the industry is going as a whole. And, you know, if you look at the miners and the importance of keeping them, you know, around long-term, increasing their longevity, increasing their performance. It's more likely than not that we really would be leaning into immersion as a chosen technology for future sites.

Okay, great. So then would we think about maybe relocating the coinment rigs, the 11,000 there or so, or would we kind of just the rigs we purchased then think about deploying them straight to immersion?

Yeah, you know, I think... You know, we want to keep our options open. You know, we would look to deploy our miners at the lowest cost areas, right? Our goal is to maximize the value. Now, if miner prices go the direction we think they're going to go, then we would be adding miners to the fleet and growing our extra hash from there. If market conditions change and it makes more sense to relocate miners, then we'll make that choice. Again, what we want to be able to do is take market conditions real time and make smart decisions on how we do that. So ultimately, you know, we're here to grow revenue and to grow value for the shareholders. So I think the options are both possible options on the table, but that's how we're viewing it right now is to really take real-time market decisions when we actually pull the trigger on that.

Okay, great. Well, that's all I have. I will turn it back to the queue. Thanks for taking the questions, guys. Appreciate it. Hey, thanks again, Tyler.

Again, if you have a question, please press star then 1. There are no other questions at this time. This concludes our question and answer session. I would like to turn the conference back over to Rachel Silverstein for closing remarks.

Before we end today's earnings call, I would like to remind everyone that this call will be available for replay later today. Please refer to today's press release for dial-in and replay instructions available via the 8K or the company's website. Thank you for joining.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.