CleanSpark Inc. Q2 2023 Earnings Call
In upcoming monthly update.
Speaker 1: on the timelines in an upcoming monthly update.
Speaker 1: 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's volume has reached record highs in the last few weeks. Assigned that more people are turning to this essential commodity as both a 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 tricks and results. We have the hardest working teams and best culture in the industry. Hands down.
Speaker 1: I can't imagine a better group to lead. We are committed to this work because we believe it's transformational.
Speaker 1: That belief powers everything we do. I couldn't be prouder of them.
Speaker 2: Gary.
Speaker 3: Thank you, Zach. As Zach started the call with, we had an excellent second quarter, where we saw growth not only year-of-a-year, but also over our Q1 performance.
Speaker 3: Diving into the numbers for the second quarter of our 2023 fiscal year, this quarter reminds 1,871 big points, which is more than double our Bitcoin production over the same quarter last year.
Speaker 3: 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 hashrate.
Speaker 3: even the slightest increase in Bitcoin prices.
Speaker 3: 22% more Bitcoin this quarter, yet our revenues increased over 50% sequentially. As you're aware, Bitcoin prices saw 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.
Speaker 3: Looking at our growth profit, the changes in Bitcoin price had direct effect on our profitability. Compared to the same quarter last year, we saw a decrease in growth profit of approximately 8 million. However, our growth profit increased over 13 million compared to the immediate preceding
Speaker 3: Our cost per Bitcoin mind 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 4.6 cents a kilowatt hour.
Speaker 3: When compared to the first quarter, our cost to mine decreased by 16 percent, as our first quarter power cost for approximately 5.9 cents due to the extreme cold winter temperatures.
Speaker 3: Please note, these rates include taxes, capacity fees, transmission costs, and margins to the providers.
Speaker 3: While we saw increases in power costs year by year at our wholly owned locations.
Speaker 3: Those power increases were offset by a decrease.
Speaker 3: 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.
Speaker 3: I want to point out that our all-in hosting fee for the second quarter was 5.9 cents, which by itself is a very favorable hosting rate.
Speaker 3: 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 1.6 cents wholesale in the second quarter, while managing our power consumption during peak load times.
Speaker 3: Furthermore, we believe that the cost of power has somewhat normalized and we expect our blended break even price to remain in the range of 11,000 to 13,000 per Bitcoin. With the anticipated energization of the 45,000 XP's in the back half of this calendar year, we would expect the best in-class efficiency.
Speaker 3: of those machines to help keep our price for Bitcoin mind in this range. So as long as domestic energy markets remain stable.
Speaker 3: 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, TENQ.
Speaker 3: These disclosures have additional information regarding our cost to mind a bit coin. For both, our own facilities and co-location facilities.
Speaker 3: and lay out the costs I previously described with additional information regarding the amount and pricing of our energy consumed.
Speaker 3: Moving to the next slide, our gap loss for the second quarter was 18.5 million compared to a slight loss in the same quarter of last year.
Speaker 3: The majority of this difference was due to increased appreciation and amortization of approximately 11 million.
Speaker 3: driven by our significant purchase and deployment of top of the line bit main A6 as well as the assets acquired in the Washington and standardsville transactions
Speaker 3: 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 her discontinued energy business.
Speaker 3: Compared to Q1, our net loss favorably decreased 10.4 million or 36 percent which is primarily driven by significantly lower Bitcoin prices last quarter and consequently lower gross margins.
Speaker 3: Our adjusted EBITDA was 12.7 million, decreasing 7 million this quarter over the same quarter last year, due to much lower Bitcoin prices.
Speaker 3: However, our just EBITDA in Q2 reversed negative adjust EBITDA of approximately 2 million
Speaker 3: in the prior first quarter, again related to the rebound and Bitcoin prices between the periods.
Speaker 3: With respect to a Justin Ibiza, I want to point out that we previously excluded non-cash impairment losses related to Bitcoin.
Speaker 3: and realize 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.
Speaker 3: Turning our attention to the balance sheet, we held 10.3 million of cash on hand at March 31st and 196 Bitcoin that brought our total liquidity over 15 million. Our book value of total assets is over 530 million.
Speaker 3: which includes 5.4 million in assets classified as health resale.
Speaker 3: We continue to pay down our long-term debt rapidly. If we pay down 11% or 1.9 million of our debt in the last quarter, bring the toll down to 17.6 million outstanding.
Speaker 3: 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.
Speaker 3: with the increase in Bitcoin prices.
Speaker 3: and corresponding increased margins, we are expecting to increase our huddle balance. If Bitcoin pricing maintains these levels. So if the Bitcoin price cooperates or even increases, we expect our huddle balance to increase for the remainder of the year as well.
Speaker 3: Lastly, I'd like to emphasize how meaningful or recent purchase of 45,000 XBs is.
Speaker 3: His purchase is important, not just because of the acquisition represents the lowest price of XP's on record.
Speaker 3: But because we have now fixed a large portion of our CAPX equation.
Speaker 3: Historically, ASIC prices have followed trends of Bitcoin, and while we remain optimistic about the price appreciation of Bitcoin, such appreciation has historically come at a cost with higher ASIC-KAP-X.
Speaker 3: Therefore, by fixing the price for these 45,000 miners, we're able to plan our cash flows with greater precision.
Speaker 3: With that, I will turn the callbackover to Isaac.
Speaker 3: Thanks, Gary. Operator, this concludes our prepared remarks. We would now like to open the line for questions from analysts.
Speaker 4: Ladies and gentlemen, at this point, we'll begin the question and answer session. To ask a question, you may press star and then one. To withdraw your question, you simply press star one again to withdraw it. If you're using a speaker phone, we do ask that you please pick up your headset, your handset, prior to pressing the numbers to ensure that the best sound quality.
Speaker 4: Once again, star and then one.
Speaker 3: Our first question comes from the line of Mike Colonies of HC Rain White. Please go ahead with your question. Hi guys, thanks for taking my questions and congratulations on the XD 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...
Speaker 3: we've been primarily driven by the proliferation of these BRC-20 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?
Speaker 1: Hey, Mike. Thanks for joining. Yeah, a few thoughts on this. You know, what is goods for Bitcoin is using the blockchain? And we're seeing use cases, you know, that are different. The ordinals are a great example of something that has led to kind of a rapid increase in usage.
Speaker 1: Something positive, I think, that this brings, is that it will bring, in my opinion, increased investment in layer 2 technologies. And the more layer 2 technologies that get put into use, the more useful the Bitcoin blockchain will continue to be. Now, in the near term, that led to some pretty dramatic shifts in transaction fees associated with blockchain, that has pushed us.
Speaker 1: to nearly 30 bitcoins a day. And it's turned out really well for us. And what I expect though is this in particular instance it corresponds with a bunch of ordinals and a lot of excitement around it. I do expect the
Speaker 1: 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. You know, we're talking one, two, three percent, and we've really seen an increase that's been, you know, significant moving that closer to the teens.
Speaker 1: And although the last three days have been very outsized, which is as much as 76% of the block rewards being, you know, 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.
Speaker 1: 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.
Speaker 1: Although I do think that we will see healthy feeds 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.
Speaker 3: That's great color, appreciate that, Zach. And second one for me, now that you've secured nearly all the minors to get you to the 16X of hash by your end, can you speak to your level of confidence in having all the necessary infrastructure built out to house these minors? Are there any potential risks that investors should be aware of that could delay infrastructure?
Speaker 3: the infrastructure bill is specifically related to supply chain constraints or perhaps energization.
Speaker 1: Yeah, great question. 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.
Speaker 1: So, such as our construction timelines. 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 minors. We have those secured, obviously small delta, which will be pretty easy to fill in the future. So, everything we can control.
Speaker 1: We feel really good about obviously, you know, 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. Please go ahead.
Speaker 5: Hi, James. 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, how are you thinking about funding current operations and then potential growth?
Speaker 1: considering these Bitcoin price levels. Should we assume that you're going to be thinking more debt and equity or yeah just kind of go around there would be super helpful. Hey Will thanks for joining the call. 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 plan to continue to do so at this time.
Speaker 1: And margins, margins create the opportunity for our HODL balance to increase. I think that'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 you know, I'll even talk about the question that Mike just brought up, you know, transaction fees have created an incredible opportunity.
Speaker 1: 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.
Speaker 1: because right for the next call a little less than 12 months, it will be cheaper now than it will be after that forever more once having takes place to pretty step Bitcoin. So now it's the time to start building it and to build it out of margins.
Speaker 5: That's really how we're thinking about the HODL. Great. Thanks for the color. And then also on energy costs, just kind of how those have been trending in Georgia. You provided some good color, but any update on conversations with MIAG or how is your philosophy around ensuring that cheap power at your Georgia sites.
Speaker 1: Yeah, absolutely. So, you know...
Speaker 1: A big part of our strategy has been managing the power. What I can tell you, and we've spoke about it before, when the time is right, we have opportunities to begin to hedge that power and lock it in.
Speaker 1: with the opportunities that we had in the first four months of the year, if we'd taken that, we would have had, on average, power prices that would have been a penny 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.
Speaker 1: So for more full context we have seen power prices Last quarter as we mentioned as low as 1.6 cents and this corner as low as 1.3 cents on a whole cell basis
Speaker 1: So, 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.
Speaker 1: The great opportunity that we have is it's a pretty quick process when it comes, you know, 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%, it may be 70%.
Speaker 1: locks 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.
Speaker 4: Our next question comes from the line of Greg Lewis of BTAG. Please go ahead. Hey, thank you and get good afternoon everybody. I did want to touch real quick on the power question. Gary, you kind of talked about pricing had a little bit lower after winter. Kind of curious, realizing that.
Speaker 6: You know the power use source is nuclear so you know 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 and natural gas prices and the expectation of that over the next you know, I guess in the medium term
Speaker 1: Yeah, Greg, ultimately natural gas is proven to have a very high correlation with power prices just any grid wide. It's really an indexing feature. We've seen as much as a 94% correlation. With that said, I think we're going to move on to the next slide.
Speaker 1: 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.
Speaker 1: 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 they've hedged that risk pretty well Not saying the rick the it doesn't exist But I don't think that the indexing risk that we saw a year ago will be coming forward
Speaker 1: And I think that that will ultimately be helped not only by the utilities, you know, 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. So really a fixed and very low cost.
Speaker 1: 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.
Speaker 6: Yeah, okay great hey to that that was super helpful and then one for me on on Sandersville, you know I guess you know We're in the process of building that out Is there any kind of You know 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 quarters You know the way to think about it is it's really gonna be
Speaker 1: because there are 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 side to be done so we can get ready.
Speaker 1: 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.
Speaker 1: You know, 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.
Speaker 4: Thank you. There are no further questions at this time. I'd like to turn the call back to Isaac Holyoke, 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. Thank you.