Q2 2022 CleanSpark Inc Earnings Call
Good afternoon, and welcome to the clean Spark second quarter 2022 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero after.
Today's presentation, there will be an opportunity to ask questions.
Ask a question you May press Star then one on your Touchtone phone to withdraw from the question queue. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Rachel Silverstein Senior VP of compliance and General Counsel. Please go ahead.
Welcome everyone on behalf of clean Spark Inc. Thank you for joining our second quarter financial results conference call for fiscal year 2022.
With us today with prepared remarks are cleaned Sparks, Chief Executive Officer, Zach Bradford and Gary back Rally, 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.
On 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 8-K and will be posted on our website. During this call.
With that it is my pleasure to turn the call over to our C E O Zach Bradford.
Thank you Rachel good afternoon, and thank you for taking time this late in the afternoon to join our call.
Green Spark is a values driven company that is engaged in the one set a lifetime opportunity.
The infrastructure of the new economy.
And that's exactly what they get.
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 human history, and we are proud to be part of it.
This has been a quarter of execution for clean spark and I'm looking forward to discussing some of the 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 produce mentoring.
899, new bitcoin.
Which is a 36% increase over the previous quarter.
And we are on track to exceed our original hatchery expectation.
Our average production per day, even its difficulties increase has surpassed 10 bit quaint per day.
And with the significant operational progress we are seeing at Norcross, we expect to see those numbers continue to tick upward.
What we have mined more bitcoin than ever before we mined 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 condition all minor thing.
All public companies really.
Are changing in the face of inflation war and the pandemic after shot.
But our fundamentals are strong.
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 is at this stage in the business cycle, where the true winter the strong the wise emerge and we intend clean spark to be one of those winners.
We anticipated the potential for market volatility and have built these market risks into our operating model we have.
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 mean 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 over commitments 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 shallow ideological it here.
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.
The Gwen minor should operate in a manner that is as sustainable long lasting and enduring as the bitcoin project in.
In that way the strengths of the bitcoin blockchain become around.
One of our defining strength 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 enable us to power approximately 20 extra hash per second.
We're starting with the infrastructure, we source low carbon power.
And build and source facilities before we acquire miners.
Another strength of our capital structure. After the quarter ended we signed at $35 million financing deal with Trinity capital.
That capital is currently one of the lowest cost of capital available to us.
Being non dilutive it delivers and shareholder expectations, while allowing us to finance our growth capital needs.
Lastly, I want to take a moment to mention an initiative that's been particularly important to me.
Mining is a high margin business.
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 tax the increased makes our workforce better paid than the workforces of even the largest technology and commerce companies of the country. We have also started to execute.
Using equity plans that bring our employees into the family of shareholders.
Right of ownership extends up and down our organization and because of that our entire team is uniquely committed to the work ahead.
As we mentioned in our last call, we had 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.
We incurred losses on the energy segment.
Currently all possibilities are still on the table.
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.
Currently being router to the energy segment, and instead focus those efforts and capital exclusively on our mining operation.
Through our long term shareholders, our vision of an abundant clean and affordable energy future remains is clearer today you first started presented.
We believe the bitcoin mining gets us closer to that vision.
For our newest shareholders.
Maybe less relevant as you were already invested in a sustainable bitcoin mining company.
But I wanted to still to take a moment to explain this as transparently as possible the decisions we are making.
Decisions that we believe are best for our shareholders employees and customers.
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 you've made on the strategy, we outlined at our last earnings call.
Gary corridor.
Thank you Sir.
I want to begin by further echoing the comments exact made previously.
This was a quarter of operational and strategic execution.
While the industry face 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.
Second quarter and six months period ended March 31.
<unk> 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 increase of over four times.
The overwhelming majority of this revenue was driven by our digital currency segment with revenues totaling almost $37 million.
Investments in mining equipment and infrastructure, we've made the date that 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 store, one 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.
<unk> mining more bitcoins this quarter.
Average price of bitcoin decreased in the second quarter offsetting the potential for revenue growth.
The company did however experienced revenue growth of approximately 616000 in the 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 brakes.
Gross profit in Q2 increased to $29 5 million from $6 6 million in the same period a year ago.
When comparing the company's performance to the most recent quarter gross profit decreased approximately $2 9 million to 29, and a house 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.
It's really.
When prices increase and decrease the Companys 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 the direct influence of bitcoin pricing, we have seen no incremental cost of revenue that is concerning.
Patiency of our mining operations continues to improve month by month with no concerns about material increases to our cost of revenues in the near term.
Moving to the next slide you.
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 170000 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 derivatives six.
<unk>, which approximated $8 4 million.
<unk> the company saw reversal to a slight net loss as well net loss of 170000 reverse net income in the preceding first quarter of approximately $14 5 million.
This decrease was primarily driven by lower <unk> 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 <unk> earned in prior periods was recorded at a higher dollar value compared to the time when company when the company converted bitcoin to you.
Dollars.
It is also worth noting there.
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 811000 in the second quarter.
Adjusted EBITDA is a non-GAAP metric, which management uses to determine the cash flow produced from operations. A reconciliation of adjusted EBITDA to net income can be found in our earnings release and form 8-K.
You'll see the theme of profitability continued adjusted EBITDA was $22 5 million for Q2, an increase of more than 10 times over the second quarter from last year, which approximately which was approximately $1 9 million <unk>.
Sequentially. The company saw adjusted EBITDA decreased slightly by approximately $1 8 million from Q1 to Q2.
Ken.
Mary factors, which contributed to the decrease in sequential adjusted EBITDA were lower average big corn prices and higher cost of revenue associated with producing a greater number of points.
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 billion difference. The company made efforts in the second quarter to reduce the cash burn 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 and administrative expenses of $1 3 million, which primarily relates to stock based compensation.
This increase was directly driven.
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 it did on the last call that we remained subject to various accounting rules surrounding the valuation of stock based comp.
<unk> portion of this noncash expense related to stock compensation, which either has strike prices significantly out of the money or represents market, where performance based awards, which have yet to be achieved.
We are currently analyzing financial reporting impact for stock based compensation plan as we look to align this noncash 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 the company's Form 10-K.
First time compliance with certain provisions within the Assortments OXXO gas.
When you combined professional fees payroll expenses and G&A expense these indirect cash expenses.
Only increased a combined three 8% or 540000 between the periods much of that increase is taken into consideration and 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.
Support greater revenues.
Essentially 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 with approximately $1 9 million of cash on hand at March 31. Additionally.
Additionally, we own 420, bitcoin with book value over $17 million, bringing the company's total liquidity to approximately $19 million. The company converted 720 bitcoin to U S dollar.
During the quarter to pay for growth Capex and operational expenses, we stated on the prior call we expect to maintain minimal cash amounts on shift.
With respect to liquidity, we continue to see bitcoin as a store value.
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 received the closing still remains in our bank accounts I feel this is important to note today, particularly given the slide in bitcoin price over the last several weeks.
On a final note I want to turn your attention to our machine commitments as of March 31.
We have remaining commitments for almost 13000 additional state of the art bit minor S. 19 series machines, which will add 123 <unk> per second to our total SaaS rates on these commitments. We are already funded deposits of almost $67 million, which will be applied to future deliveries.
And I want to point out that the $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.
Jack discussed in our last earnings call, we expect favorable price pressure on the cost per ton due to supply chain issues being resolved additional competition in this space as well as macroeconomic conditions.
While these current commitments will allow us to exceed four <unk> per second we are diligently working on securing the necessary number of miners to see through the land agreement.
Additionally, we are actively looking to obtain the capital required for the Lansing expansion with that.
First option.
We've been transparent about our capital strategy, we 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 have prioritized 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 overleverage, our balance sheet with capital that does not put to work.
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.
Now me to reiterate our capital infrastructure and ESG strategy.
We've adopted a capital strategy that yields operational excellence and is rooted in the realities of our business take.
Take for example, our announcement last year that we would start using some of the Bitcoin mine finance our growth and operations.
The decision was met with mixed reaction.
Since then many of our peers have followed suit with one major difference.
While we sold when bitcoin within the 60 50 and 40000 are peers are now being forced to sell when bitcoin is in the <unk>.
Some of them have paired that with issuing equity at extremely low relative share prices.
We continue to execute a hotlink strategy, the imperative word being strategy.
We intend to hold bitcoin and grow our bitcoin reserves over the coming quarters, but we wont blindly accumulate bitcoin at the cost of diluting our shareholders and taking an 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 landsea.
As we predicted in Q1 <unk> cost per Terra has it gone down at machines with nowhere to be plugged in had 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 land Kim I would like to take a moment to discuss why we chose them as a partner.
<unk> cm, we shared the belief that the coin mining as essential for transitioning the U S economy away from fossil fuels.
Land teams 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 Atlanta.
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 land PM to 500 megawatts.
We expect this additional capacity will be built out in 2023, and ultimately would result empower.
Support, bringing us up to approximately 20 <unk> per second.
With this power to back our growth in play we continue to look for 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 believed that they coin mining plays a role in that transition.
So a low carbon economy.
We power our facilities with hydro solar wind nuclear and even some natural gas, which we offset with renewable energy credit.
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 act and transition to low carbon energy.
Leading bitcoins transition to low carbon energy is one reason, we partnered with the sustainable Bitcoin standard.
Their mission is to make big coin the most sustainable asset class in the world by using market based incentive.
Bitcoin is district goals without the harmful effects on the environment.
But only when it is sustainably and responsibly mined.
While we believe there is a clear moral directed 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.
Portal as a one stop source for our disclosures and other information that are relevant to rating agencies and ESG minded investors.
Well, we don't support mandate, we do believe that the bitcoin mining industry must lead the adoption of cleaner energy before government mandated for us.
The choices 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 clean spark teams that have made our success is possible.
For those of you who are listening right now.
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 merchant coal facility at Norcross, 100% operational.
I am profoundly grateful to all of you.
Thank you for being part of the clean spark 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 one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the key.
Withdraw from the question queue. Please press Star then two.
We will pause momentarily to assemble our roster.
The first question is from Tyler <unk> of BTG. Please go ahead.
Hi, everybody. Good afternoon, thanks for taking the question.
If I could just go back to the comment you made about owning and operating maybe some other locations. So what would the timeline be there and 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 yes, I can address that at a high level. So we're looking at multiple sites right now.
And we are at a level of evaluation on several of those it would be our attention that we would lean towards emerging cooling at future site I think that is an important part.
Where the industry is going as a whole and if you look at the miners and the importance of keeping them.
Around long term increasingly longevity, increasing their performance it's more.
More likely than not that we really would be leaning into emerging.
Chosen technology for future site.
Okay. Great. So then when we think about may be relocating the coin mint rigs the 11000, there or so or would we kind of just the rigs. We purchase then think about deploying them straight to emerge.
Yes.
Thank you.
We want to keep our options open.
We would look to deploy our miners at the lowest cost areas right.
Our goal is to maximize the value now if minor prices go the direction, we think theyre going to go then we would be adding miners to the fleets and growing our extra hatch from there.
If market conditions change and it makes more sense to relocate minors, 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 but ultimately.
We're here to grow revenue.
And to grow value for the shareholders. So I think the options are bolt possible options on the table, but that's how we're viewing it right now is to really take real time market decisions when when we actually pulled 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 I appreciate it.
Hey, Thanks again Tyler.
Again, if you have a question. Please press Star then one.
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 8-K or the Companys website. Thank you for joining.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.