CleanSpark, Inc. (CLSK) Q2 2023 Earnings Report, Transcript and Summary

Good afternoon, my name is Jean-Louis and I will be your conference operator today. At this time, I would like to welcome everyone to the conference call. [Operator Instructions] Thank you. At this time, I would like to turn the floor over to Isaac Holyoak, Chief Communications Officer. Go ahead, sir.

Thanks, JL and thank you for joining us today for CleanSpark's Fiscal Second Quarter Financial Results Call, covering the period January 1 2023 through March 31st, 2023. Our press release was issued about 30 minutes ago and is available on our website at www.cleanspark.com forward/investors. Today's call is also being webcast and a replay and transcript will be available on our website. I'm here with Zach Bradford, our Chief Executive Officer and Gary Vecchiarelli, our Chief Financial Officer. Keep in mind that some of the statements we make today are forward-looking and based on our best view of the world and our businesses as we see them today. As described in our SEC filings and on our website, those elements may change as the world changes. We will also discuss certain non-GAAP financial measures concerning our performance during toady's call. You can find the reconciliation of GAAP financial measures in our press release which is available on our website. It is now my pleasure to turn the call over to Zach.

Thank you, Isaac. Good afternoon and welcome to our second quarter earnings presentation. Thank you for joining us to learn more about how this quarter has positioned us to reach our yearend target of 16 exahash per second, which I add, we've been making noteworthy progress towards. The Washington expansion is well on its way to being fully operational, the land at Sandersville has been leveled and prepared for construction and we've acquired 99% of the machines either under contract or in-transit that we need to fill both of these facilities. It has been a quarter of execution. The work ahead of us is about fulfilling the existing commitments we made to you shareholders, as we grow quickly and mindfully in preparation for halving next spring. I want to share more of our near-term vision with you later in this call, but first I'll review some of the key highlights for the quarter. We ended our second quarter with a hash rate of 6.7 exahashs per second, almost triple where we were during the same period last year. That hash rate, even with difficulty reaching all-time highs, resulted in 1,871 Bitcoins mined, doubling what we mined during the same period last year. Recall that Bitcoin's price was substantially higher a year-ago. During this time last year, we mined fewer Bitcoin, but the value of that Bitcoin was higher. This resulted in revenues increasing slightly when compared to the same prior year period. When compared sequentially, Bitcoin's recent price recovery has resulted in higher revenues quarter-over-quarter. In particular, I would like to call out that our efforts resulted in adjusted EBITDA turning positive for the fiscal year-to-date and the current quarter, reversing and overcoming the negative adjusted EBITDA we experienced last quarter during the lowest of the bear market lows. I also want to take a moment to discuss our efficiency. Efficiency is one of the most important indicators for miner help as we head towards halving. In April of next year, the block reward will decrease from 6.25 Bitcoins to 3.125 Bitcoin, while a corresponding price action is expected to take effect as it has in past halving cycles, only the most efficient miners will have the production capacity and balance sheet to capitalize on this historic event. At CleanSpark, we are positioning our self to take full advantage of the halving by ensuring that we are among the most efficient miners in the industry. Right now, our fleet average is 31 watts per terahash. As the XPs we ordered last month are delivered and come online, we expect our fleet-wide efficiency to accelerate, landing us at or below 26 watts per terahash on a fleet average. As I mentioned, efficiency will be one of the most important metrics for analyzing miner health, as we near Bitcoin halving. Let me take a moment to share with you how we are preparing ourselves to capitalize on the events surrounding halving, preparing maybe two passive award. In fact, we are training for halving, as with any big race, the real work starts months and months before the meeting the starting line. This work is the growing phase of our training regimen. We are logging miles, carving up and driving energy into our operational muscles, as all worthy competitors know to really excel on race day, the initial pace of heavy training must be carefully moderated, in fact to win the race, competitors adjust the regimen to be a little less intense as the rate start becomes imminent. The reason for the adjustment is to store energy that can then be spent on race day once the starting line is crossed. For us that starting line is not on a trail or a mountain bike, the starting line is halving and the beginning of another four-year cycle. I'd like to share with you two principles that are guiding our training regimen. Our first principle is mindful growth. There is a season for rapid growth and there is a season for slower and more moderate growth. We are in a rapid growth phase and we'll continue there for the next few quarters. For perspective, we expect to more than double our hash rate by reaching our guidance at the end-of-the calendar year. That is extraordinary growth. As I said earlier in the call, we have secured about 99% of the machines we need to reach our targets and the infrastructure that will house those machines is advancing at pace. We are excited to have you on-board for this rapid growth stage and for the returns we expect to generate. We believe this is an exceptionally good time to be a CleanSpark shareholder. Our second principle is maximizing profitability. We expect to achieve this through efficiency gains and the benefits of scale. There is a misunderstanding about our industry that the work is as simple as finding cheap power, plugging in a machine and then writing it out, but a little sophistication goes a very long way. We have been implementing various high-performance and high-efficiency measures at many of our sites and have found that we can meaningfully increase the margins of the Bitcoin we mine with minimal impact on the total amount of Bitcoin we mine, this means that for every Bitcoin we mine, we can drive more to our bottom line, where it will stay. In addition to efficiency, the benefits of scale are central to maximizing profitability. Scale provides certainty and that certainty will matter more than ever in the next cycle. First, scale allows us to more efficiently manage corporate overhead. We expect to stay lean even as our operations grow, which means more dollars make it to our bottom line. Secondly, scale gives us the flexibility and optionality to make acquisitions that are funded with our own operating capital. Maximizing profitability during the last few months preceding halving also allows us to hunker down, increase our hurdle balance, grow our capital and prepare to make good on the events surrounding halving when that moment arises -- arrive. In this manner, our rapid expansion and the resulting scale prepares us to shift from growth to building our balance sheet, so we are well-positioned for the opportunities we expect halving to bring. Of course, halving is not next quarter or the one after that, but it's on the horizon. Let me tell you a little about what you can expect this summer, because it is shaping up to be very productive. First, let me start with machine deliveries then I'll share the details of our campus expansion, both in Washington and Sandersville. As I mentioned, our future deliveries include 20,000 Bitmain S19 J Pro pluses and 45,000 XPs. The purchase of those XPs was a big win for our shareholders and I'm proud to claim that with this purchase, we call the bottom of the market for the price per terahash for the XPs. These are incredibly efficient miners and we are thrilled to add them to our fleet. We predicted XP prices would drop and we patiently waited to make this purchase until the conditions were ripe, resulting in what we believe is a better ROI on the purchase, as compared to any of our peers. Once received and energize, these machines will add 8.74 exahash per second to our hash rate, giving us a total hash rate of 15.9 exahash, leaving us a small delta of 100 petahash per second to reach our target. We're working closely to close that gap now and we are holding conversations that we expect to lead to securing the additional hash rate we need. We expect to fill this gap with additional XPs. Hash rate I might add, that will be owned and operated by us. Our Washington expansion which is expected to add almost 2 exahash per second to our operations is on-schedule and expected to go-live in mid June. Our teams and partners have worked tirelessly to meet deadlines. As you can see in the photo on your screen, that work is paying-off. By the end of this week, three of the four buildings will be complete. The fourth building is ready for the racks to be installed and we expect to start racking machines in the completed buildings this month, so that once we are ready to turn-on the power the facility can go-live without delay. I'm grateful to our partners in Washington. Our work there has been good for the heart and soul of the company. The team there is dedicated to the vision and the community is proud to have us as an anchor institution in the town. We are important driver of the tax base and an increasingly important voice in the community. We thank the citizens of Washington for welcoming us with open arms and we consider them as part of the CleanSpark family. Next, allow me to update you on the Sandersville expansion. This expansion once fully complete, will add 6.3 exahash per second to our operational capacity, bringing the total capacity at Sandersville to 8.6 exahash per second, making it one of the largest Bitcoin mining data centers in the country. We are carefully managing supply chain risks related to the project to ensure energization occur simultaneously with the final machine being plugged in. We intend to build the Sandersville site using a traditional air-cooled method, much like our data center in Washington. The campus is on the outskirts of the community, distant from schools and neighborhoods, get close enough for our teams in Sandersville. We will supply further updates on the time lines in an upcoming monthly update. Lastly, I want to briefly touch on the political climate in the United States. We are closely following policy and regulatory developments. We expect mining policy in America to be enacted at the state-level and we are happy to see states across the country enact policies that are protecting this important freedom. Bitcoin volume has reached record highs in the last few weeks, a sign that more people are turning to this essential commodity as both the medium of exchange and as a store of value. Before turning the floor to Gary, I'd like to end by thanking our teams for their frit and resolve. We have the hardest working teams and best culture in the industry, hands down. I can't imagine a better group to lead. We are committed to this work because we believe it's transformational. That believe powers everything we do. I couldn't be prouder of them. To you, Gary.

Thank you, Zach. As Zach started the call with, we had an excellent second quarter, where we saw growth not only year-over-year, but also over our Q1 performance. Diving into the numbers for the second quarter of our 2023 fiscal year. This quarter we mined 1,871 Bitcoins, which is more than double our Bitcoin production over the same quarter last year. Our revenues increased 14% to $42.5 million compared to last year. Our revenue per Bitcoin this quarter was approximately 22,700, whereas last year our revenue per Bitcoin was over 41,000. While our revenues do not reflect the significant growth in our hash rate and Bitcoin production over the last few quarters, we are well-positioned to take advantage of even the slightest increase in Bitcoin prices. For example, looking at our performance compared to last quarter, we mined 22% more Bitcoin this quarter, yet our revenues increased over 50% sequentially. As you are aware, Bitcoin prices are two year lows late last year, as our average revenue per Bitcoin was 18,100 in the first quarter, a 25% difference from the revenue per Bitcoin recognized this quarter. Looking at our gross profit, the changes in Bitcoin price had direct effect on our profitability, compared to the same quarter last year, we saw a decrease in gross profit of approximately $8 million. However, our gross profit increased over $13 million compared to the immediate preceding quarter. Our cost per Bitcoin mined was 11,700 in the second quarter, compared to $9,600 in the second quarter of last year. This increase of 23% was primarily due to difficulty increases and higher-cost of energy at our own facilities, which was approximately $0.046 a kilowatt hour. When compared to the first quarter, our cost to mine decreased by 16% as our first quarter power costs were approximately $0.059 due to the extreme cold winter temperatures. Please note, these rates include taxes, capacity fees, transmission costs and margins to the providers. While we saw increases in power costs year-over-year at our wholly owned locations, those power increases were offset by a decrease in our hosting fees per Bitcoin as we saw a decrease year-over-year from 15,400 to 13,800 or a 10% favorable reduction. I want to point out that our all-in hosting fee for the second quarter was $0.059, which by itself is a very favorable hosting rate. Even though we are subject to market based pricing, we are comfortable that our power purchase agreements provide the necessary flexibility to take advantage of lower-power prices which we saw as low as $0.016 wholesale in the second quarter, while managing our power consumption during peak load times. Furthermore, we believe that the cost of power has somewhat normalized and we expect our blended breakeven price to remain in the range of 11,000 to 13,000 per Bitcoin with the anticipated energization of the 45,000 XPs in the back-half of this calendar year, we would expect the best-in-class efficiency of those machines to help keep our price per Bitcoin mined in this range, so as long as domestic energy markets remain stable. I want to close out my comments regarding our margins by pointing out that we have some enhanced disclosures regarding our cost of revenues, which can be found in Management's Discussion and Analysis portion of our Form 10-Q. These disclosures have additional information regarding our cost of mined Bitcoin for both our own facilities and colocation facilities and lay out the cost I previously described, with additional information regarding the amount and pricing of our energy consumed. Moving to the next slide, our GAAP loss for the second quarter was $18.5 million compared to a slight loss in the same quarter of last year. The majority of this difference was due to increased depreciation and amortization of approximately $11 million, driven by our significant purchase and deployment of top of the line Bitmain ASICs, as well as the assets acquired in the Washington and Sandersville transactions. Also included in the quarterly net loss is $2.7 million of legal reserve related to the settlement of an outstanding litigation with a vendor in our discontinued energy business. Compared to Q1, our net loss favorably decreased $10.4 million or 36%, which is primarily driven by significantly lower bitcoin prices last quarter and consequently lower gross margins. Our adjusted EBITDA was $12.7 million, decreasing $7 million this quarter over the same quarter last year due to much lower Bitcoin prices. However, our adjusted EBITDA in Q2 reversed negative adjusted EBITDA of approximately $2 million in the prior first quarter, again related to the rebound in bitcoin prices between the periods. With respect to adjusted EBITDA, I want to point out that we previously excluded non-cash impairment losses related to Bitcoin and realized gains and losses on sale of Bitcoin from our calculation of adjusted EBITDA, but have determined such items are part of our normal ongoing operations and will no longer be excluding them from our calculation of adjusted EBITDA. These numbers here reflect the adjusted calculation. Turning our attention to the balance sheet. We held $10.3 million of cash on hand at March 31 and 196 Bitcoin, that brought our total liquidity over $15 million. Our book value of total assets is over $530 million, which includes $5.4 million in assets classified as held for sale. We continue to pay down our long-term debt rapidly, as we paid down 11% or $1.9 million of our debt in the last quarter, bringing the total down to $17.6 million outstanding. I also want to point out in our April Bitcoin mining update released last week, we disclosed that we held 313 Bitcoin as of April 30th. With the increase in Bitcoin prices and corresponding increased margins, we are expecting to increase our HODL balance if bitcoin pricing maintains these levels. So if the bitcoin price cooperates or even increases, we expect our HODL balance to increase for the remainder of the year as well. Lastly, I'd like to emphasize how meaningful our recent purchase of 45,000 XPs. This purchase is important, not just because the acquisition represents the lowest price of XPs on record, but because we have now fixed a large portion of our CapEx equation. Historically, ASIC prices have followed trends at Bitcoin and while we remain optimistic about the price appreciation of Bitcoin, such appreciation has historically come at a cost with higher ASIC CapEx. Therefore, by fixing the price for these 45,000 miners, we're able to plan our cash flows with greater precision. With that, I will turn the call back over to Isaac.

Thanks, Gary. Operator, this concludes our prepared remarks. We would now like to open the line for questions from analysts.

[Operator Instructions] Our first question comes from the line of Mike Colonnese of H.C. Wainwright.

Congratulations on the XT order, really great to see that. So two questions for me. First, it would be great to hear your views on the recent spike in transaction fees in the Bitcoin network, which we view primarily driven by the proliferation of these BRC20 tokens. So I guess, how are you guys thinking about the short and long term implications on fees from these new use cases, which are certainly increasing demand for block space here?

Yeah, a few thoughts on this. What is good for Bitcoin is using the blockchain and we're seeing use cases that are different, the ordinals are a great example of something that has led to kind of a rapid increase in usage. Something positive I think that this brings is that it will bring in my opinion increased investment in layer two technologies. And the more layer two technologies that get put into use, the more useful the Bitcoin blockchain will continue to be. Now in the near-term, that's led to some pretty dramatic shifts in transaction fees associated with the blockchain that has pushed us to nearly 30 bitcoin a day. And it's turned out really well for us. And what I expect though is this in particular instance, it corresponds with the launch of a bunch of ordinals and a lot of excitement around it. I do expect the transaction fees to normalize. We're already seeing that happen a little bit, but we really came out of an environment with extremely low fees. We're talking 1% to 3% and we've really seen an increase that's been significant, moving that closer to the teens. And although the last three days have been very outsized, which as much as 76% of the block rewards being fees to us on a daily average. I really do think it's going to normalize, which is actually good for Bitcoin, things will normalize, teens, maybe even the 20s could be lower. But our business, I want to stress, is built to be sustainable with or without the transaction fees. We see the transaction fees as pure upside and we're going to enjoy it while it's here, but we're also not going to count on it being around tomorrow or the next day or in six months. Although, I do think that we will see healthy fees and that is part of how Bitcoin will ultimately work on the long run as the block sizes decrease, we do expect the transaction fees to really sustain mining on a 100-year plan.

And second one for me, now that you've secured nearly all the miners to get you to the 16 exahash by year-end, can you speak to your level of confidence in having all the necessary infrastructure built out to house these miners? Are there any potential risks that investors should be aware of that could delay infrastructure -- the infrastructure build specifically related to supply chain constraints or perhaps energization?

So I'm happy to say, we have a great track record. This won't be the first time we've built out infrastructure and although construction always brings with it some unpredictability, we feel extremely confident in all the variables that we have inside our control, so such as our construction time lines. We feel really, really good about those and are extremely confident that we have everything in place that we will need to get there in time. In addition, it's about securing the miners. We have those secured, obviously, small delta, which will be pretty easy to fill in the future. So everything we can control, we feel really good about. Obviously, anything can happen, but right now, we're feeling great about it.

Your next question comes from the line of Josh Siegler of Cantor Fitzgerald.

This is Will Carlson on for Josh. First question, when thinking kind of about your capital allocation and your HODL balance which has been steadily increasing and you provided a little bit of color on the updated philosophy around that. But how are you thinking about funding current operations and then potential growth considering Bitcoin price levels, should we assume that you're going to be thinking more debt and equity? Or yeah, just kind of color around that would be super helpful.

Yeah, we're -- one thing I always want to stress is, we are going to pay our own way operationally. We've always said that and we're going to -- we plan to continue to do so at this time. And margins, margins create the opportunity for our HODL balance to increase. I think it's important to know because we're not asking our shareholders to keep the lights on, we're going to do that ourselves with what we produce, but margins are improving and I'll even talk about the question that Mike just brought up, transaction fees have created an incredible opportunity where all of that really is going to margin, all that bonus, all that upside. And we expect a lot of that to end up in the HODL balance. We really do think it's important to continue to push the HODL balance as we approach halving. For us, it's all about timing and we do think that the time is right because -- for the next, call it, a little less than 12 months, it will be cheaper now than it will be after that forever more once halving takes place to produce that bitcoin. So now it's the time to start building it and to build it out of margins. That's really how we're thinking about the HODL.

And then also on energy costs, just kind of how those have been trending in short Georgia, you've provided some good color, but any update on conversations with [ LIAG ] or I mean is your philosophy around ensuring that cheap power at your Georgia sites?

Yeah, absolutely. So a big part of our strategy has been managing the power. What I can tell you and we spoke about it before, when the time is right, we have opportunities to begin to hedge that power and lock it in. With the opportunities that we had in the first four months of the year, if we've taken that, we would have had on average power prices that would have been $0.01 higher than it would have been because, again, active management is an important part of the strategy. The flexible nature and load of Bitcoin mining is something we're taking advantage of. So for more full context, we have seen power prices last quarter as we mentioned as low as $0.016 and this quarter as low as $0.013 on a wholesale basis. So we're keeping a very close eye on it and I do expect the time will come when it's the appropriate time to lock in those power rates. The great opportunity that we have is, it's a pretty quick process when it comes that what we have set up. We can go in, we can buy power strips and we can hedge that power. I expect even on a long-term basis, we would hedge a portion of our power, that may be 30%, it may be 50%, maybe 70% so that we can continue to take advantage of these market swings that are proving to be beneficial. And so that's how we're thinking about it right now. I do think the time to do it's probably not tomorrow, but it's probably not too far off before we start locking in blocks and percentages of our total power consumption. But things on that front are going very well. We have quite a bit of flexibility, but again I'm happy to say that we are outperforming what the market hedges that are available now are really up in front of us.

Our next question comes from the line of Greg Lewis of BTIG.

I did want to touch real quick on the power question. Gary, you kind of talked about pricing heading a little bit lower after winter. Kind of curious, realizing that the power use source is nuclear, so it could be relatively fixed. There is some variability around that. Is there any way to get a sense for how much of that variability if any is tied to natural gas prices just given the weakness in natural gas prices and the expectation of that over the next, I guess, in the medium term?

Yes, Greg, ultimately, natural gas is proven to be -- have a very high correlation with power prices just any grid wide, but it's really an indexing feature. We've seen as much as a 94% correlation. With that said, what we're seeing though is the utility providers themselves, a lot of them got caught out when the events in Ukraine and obviously, the natural gas spike happened. They've basically smartened up. They were willing to take some pretty bold bets on how they did or didn't hedge. And what we're seeing with the utilities that are operating in Georgia, Georgia Power, in particular, has taken some pretty good steps where from outside looking in, it looks like they've hedged that risk pretty well, not saying that it doesn't exist, but I don't think that the indexing risk that we saw a year ago will be coming forward. And I think that, that will ultimately be helped not only by the utilities, maybe getting a little smarter about how they're managing their own risk, but also because they can turn back and they have a backstop of nuclear power, which doesn't have a flexible input cost, it's really a fixed and very low cost. So we're feeling really good about the outlook in Georgia in general and don't see the natural gas risk to be as severe as it was a year ago.

And then one for me on Sandersville. I guess we're in the process of building that out, is there any kind of -- and realizing there could be some variability, is there any way to think about the cadence of that build-out in terms of CapEx over the next couple of quarters?

Yeah, the way to think about it is it's really going to be kind of an even spread between now and the end of the year. How we're doing it is, we expect the power to -- the sub-station being built by the utility, it's going to come online to give our facility power in the fourth quarter. And we will have the building fully built and ready to go. We expect at the early part of that quarter because there's going to be 45,000 machines to rack. And that takes a lot of man hours to actually put into place. And so we want to start racking machines before the utility is done. So really, let's call it by early to end of October is when we want our site to be done so we can get ready. That leaves us, of course, 60 days of flexibility to still meet our goals before the end of the year. But that's how we're thinking about the cadence. If you think about cash flow side, of course, you always pay for it after it's done, so it's going to always lag a month in that way too.

Thank you. There are no further questions at this time. I'd like to turn the call back to Isaac Holyoak, please.

Thank you. I'd like to thank you for your questions and for joining us today. We wish everyone listening a good afternoon and evening.

Ladies and gentlemen, with that we'll conclude today's conference. We thank you for attending. You may now disconnect your lines.+