TeraWulf Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 14, 2023

There are 9 speakers on the call.

Operator

Ladies and gentlemen, good morning, and welcome to the Terra Wolf, Inc. 2nd Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Operator

It is now my pleasure to introduce your host, Jason Asad, Director of Corporate Communications. Please go ahead.

Speaker 1

Thank you, operator. Good morning, and welcome to Terra Wolf's Q2 2023 earnings call. Thank you for joining us today for our call. With me on today's call are Chairman and Chief Executive Officer, Paul Preger and our Chief Financial Officer, Patrick Flurry. Before we get started, I'd like to remind everyone that our prepared remarks may contain forward looking statements, which are subject to risks and uncertainties and that we may make additional forward looking statements during the question session.

Speaker 1

These forward looking statements are subject to risks and uncertainties and actual results may differ materially. When used in this call, the words anticipate, Could, enable, estimate, intend, expect, believe, potential, will, should, project and similar expressions as they relate to TeraWolff are as such forward looking statement. Investors are cautioned that all forward looking statements involve risks and uncertainties, which may cause actual results to differ materially from those anticipated by Terra Wolf at this time. In addition, other risks are more fully described in Terra Wolf's public filings with the U. S.

Speaker 1

Securities and Exchange Commission, which may be viewed at www.sec.gov and in the Investors section of our corporate website at www.terawolf.com. Finally, please note that on today's call, we will refer to certain non GAAP financial measures. Please refer to our company's periodic reports on Form 10 ks and 10 Q and to our website for a full reconciliation of these non GAAP performance measures to the most comparable GAAP financial measures. We'll begin today's call with prepared remarks from Paul and Patrick, then we'll proceed to Q and A. It's my pleasure to now turn the call over to Terra Wolf's CEO, Paul Prager.

Speaker 1

Paul?

Speaker 2

Thank you, Jason, and good morning, everyone. Thank you for joining us on our Q2 2023 earnings call. We've accomplished quite a lot since our last formal call And I would like to review a few key milestones that we've achieved during the first half of twenty twenty three. 1, we successfully executed our rapid growth plans. We launched Terawolf just over a year and a half ago and as promised, achieved 5.5 exahash and 160 megawatts of power capacity by the end of Q2 2023.

Speaker 2

This past March, we began the energization and deployment of 50 megawatts of 0 carbon mining capacity at our jointly owned 100 percent nuclear powered Nautilus facility. And in June, we completed Building 2 at our Lake Marina facility, housing an additional 50 megawatts. To exceed the accomplishments of our peers in such an abbreviated period of time is testament to the excellence, perseverance and professionalism of the TeraWolff team and especially our folks on the ground. 2, we assembled 1 of the most efficient miner fleets in the sector and as we continue to scale, remain confident our price And efficiency per exahash metrics will prove even more impressive. Our recently announced expansion plan Involving 18,500 of the latest generation S-nineteen JXP Bitmain miners will only further establish Wolf as one of the most efficient mining fleets in the sector at an efficiency of 25.7 joules per terahash.

Speaker 2

You should rest assured our development and operations teams will continue to work to differentiate Wolf as the preeminent miner. 3, we are setting the standard for financial and operational transparency. Our CFO, Patrick Fleury, a former partner, 20 year investor and lender, you will hear from him in a moment. He has significantly raised the bar on reporting financial metrics. By setting the standard for the industry With our operational and financial transparency, we hope investors will confidently evaluate us alongside the other miners.

Speaker 2

4, we've greatly enhanced our investor communications. In April, we were fortunate to welcome Jason Assad on board, A respected 20 year communications veteran to our team. Investors may recognize him as one of the first team members of Marathon Digital Holdings Upon their initial pivot into Bitcoin Mining. Thanks to this new addition, we have advanced our investor communications by implementing a comprehensive strategy that includes regular updates, increased transparency and enhanced engagement opportunities. In addition, we've released a virtual site tour in June, providing our investors an inside look at our state of the art mining facilities and remarkable operations team.

Speaker 2

After highlighting some of our accomplishments so far in 2023, I would like to underscore what we believe continues to unquestionably set TeraWolff apart from our peers. First, we have the best assets. Our mining facilities are arguably the best in class In the industry with unmatched power costs, ideal climate and significant expansion capability. In energy markets, location is everything and our facilities are located in robust, well developed markets where we are able to service the grid and the surrounding communities. As a 0 carbon miner, we are strategically positioned relative to our peers and what we believe will be an increasingly stringent regulatory environment.

Speaker 2

2nd, we have the energy advantage. Our team has been working together in the energy infrastructure sector for decades. Bitcoin is all about energy, And we are experienced in procuring low cost energy both at term and at scale. Our $0.02 power at Nautilus An abundant low cost power in upstate New York translates into a power cost per bitcoin that is among, if not the lowest in the sector. We are one of the only few Bitcoin miners that discloses our true power cost each month.

Speaker 2

3rd, we have organic expansion capability. When it comes to Bitcoin mining, size matters. Our two sites were developed with expansion potential as a key element and everything from our power import capacity To the layout of their warehouses is designed to grow. We're in the process now of expanding our Lake Mariner facility by another 43 megawatts. Scalability and adaptability are vital and our Lake Mariner and Nautilus facilities have both.

Speaker 2

The time and cost to replicate these facilities is substantial and represent a significant barrier to entry. 4th, we are uniquely aligned with our investors. As a significant shareholder in TeraWulf, myself And investor, my goals are in complete alignment with yours. In only the last year, I have personally invested over $12,000,000 of my own money and collectively our insiders own approximately 55% of the company's shares. Why does this matter?

Speaker 2

Because you can bet that if we ever dilute the stock, it will only be Accretive and in the very best interest of the company and its shareholders. In short, we only win if you win. Every move from this point forward is about advancing our mission and pushing the boundaries of what is possible for our vertically integrated business and our shareholders. We remain laser focused on Scaling mining operations at our existing sites, while opportunistically pursuing strategic opportunities in a financially responsible manner. Importantly, we believe that not all exahash is created equal and that the upcoming halving in April is likely to lead to a Changing of the guard.

Speaker 2

We have positioned ourselves for profitability both now and post having. We look forward to taking advantage of what we expect may happen as the fundamental flaws of some of our peers are illuminated and acknowledged by investors. Terra Wolf is led by an accomplished diverse management team With 30 plus years of experience in developing and managing energy infrastructure, our core management team Has been together and working side by side with one another for the last 15 plus years. I believe it is this unique experience and perspective that is paying and will continue to pay dividends as we build out Our operations focused squarely on building shareholder value. As a fellow shareholder with a material interest I will now hand the call over to our CFO, Patrick Fleury, for a more detailed financial review.

Speaker 2

Patrick?

Speaker 3

Thank you, Paul. As Paul highlighted in the beginning of this call, TeraWulf performed exceptionally well in Q2 this here, showcasing consistent growth both year over year and quarter over quarter. Notably, our production has seen a steady increase in the first half of 2023, resulting in positive operational outcomes reflected in our Q2 financials. These results demonstrate a continued upward trend in revenue, enhanced liquidity and free cash flow, Positive momentum we're committed to sustaining moving forward. A quick reminder, there is a very key difference between our GAAP financials and the monthly operating reports and guidance presented in our July investor presentation.

Speaker 3

As a result of our 25 percent ownership in Nautilus, the revenue, cost of revenue, operating expenses, Depreciation and amortization at Nautilus are not consolidated into our GAAP financial statements. Instead, the financial impact of the Nautilus joint venture is reflected in the equity and net loss of investee, net of tax, Line item on the GAAP income statement. Diving into the numbers for the Q2 of 2023, we mined 506 Bitcoin at Lake Mariner and our net share of mined Bitcoin and Nautilus was 403 bitcoins for a total of 909 or about 10 Bitcoin per day, nearly double our Bitcoin production of 5 33 Bitcoins in Q1 of this year. Our revenues saw an outstanding growth of over 1,000 percent compared to the same period last year, reaching $15,500,000 and our revenue from hosting also saw a notable rise. Our revenue per Bitcoin this quarter averaged $27,912 for a self mining revenue equivalent of 25 $300,000 as detailed and defined in our monthly operating reports and press release.

Speaker 3

Looking now at our gross profit, we saw an increase of over 1200 percent to $10,300,000 compared to last year's Q2, as well as an increase in our gross profit margin from 57% to 67%. Our total power cost per bitcoin mine was approximately $7,200 in 2Q compared to approximately 8,400 in 1Q of this year, a decrease of approximately 15% that can be attributed to the full 2Q contribution of Nautilus's fixed $0.02 power. I want to note, these power costs are fully loaded and include taxes, capacity fees and transmission costs. Unlike Nautilus, Power costs do float at our Lake Mariner facility, where we are confident that we will achieve an average annual power cost of $0.045 per kilowatt hour or lower despite the facility's subjectivity to seasonal power price fluctuations. Operating expenses remained stable year over year at approximately 1,100,000 SG and A expenses increased year over year from $6,800,000 in 2Q 'twenty two to $8,600,000 in 2Q 'twenty three.

Speaker 3

This increase was primarily due to increases of $1,300,000 $1,600,000 in stock based compensation and employee compensation and benefits, respectively, offset by decreases of $1,100,000 $500,000 in legal fees and insurance expenses, respectively. We continue to expect to realize SG and A of about $22,000,000 to $23,000,000 in 2023, Pair Page 12 of our latest investor presentation, which reflects cost savings of over $10,000,000 compared to 20 22's actual SG and A of about $36,000,000 Depreciation for the 3 months ended June 30, 20 232022 was $6,400,000 $200,000 respectively, and the increase was primarily due to the increase in mining capacity due to infrastructure constructed and placed into service. Interest expense for the 3 months ended June 30, 20232022 was $8,500,000 $4,100,000 respectively, an increase of $4,400,000 The increase in interest expense year over year is primarily due to an increase in the average principal amount outstanding from $123,500,000 in June of 2020 to $146,000,000 in June of 2023 and an increase in amortization of debt issuance costs and debt discount related to the term loan financing. Importantly, cash interest paid during the 6 months ended June 30, 2023 was $11,300,000 which included 8 months of interest payments due to accrued interest for the Q4 of 2022 paid in January of 2023 and 5 months of interest payments made in the first half of twenty twenty three as interest is paid monthly in arrears as of May 2023.

Speaker 3

Equity and net loss of investee, net of tax, for the 3 months ended June 30, 2023, 2022 was negative $3,300,000 and negative $1,100,000 respectively. For 2Q 'twenty three, this amount includes an impairment loss of $4,600,000 on the distribution of miners from Nautilus to the company, whereby the miners were marked to fair value from book value on the date distributed. The impairment loss was the result of a reduction in the price of the miners between initial purchase and distribution. The remaining amounts represent TeraWulf's proportional share of income or losses of Nautilus, which commenced commercial operations in February 2023. Our GAAP loss for the 2nd quarter was $17,800,000 compared to $13,900,000 in the same quarter of last year.

Speaker 3

Our non GAAP Adjusted EBITDA for 2Q 'twenty three was $7,600,000 increasing by $14,700,000 this quarter over the same quarter last year due to the ramp up of operating capacity at both of our mining facilities. Turning our attention now to the balance sheet. As of June 30, we held $8,200,000 of cash with total assets amounting to approximately $300,000,000 and total liabilities of approximately $165,000,000 With the achievement of our targeted 160 megawatts And 5.5 exahash of operating capacity exiting 2Q 2023, we anticipate a Consistent and rapid reduction in our long term debt moving forward. Regarding our most recent expansion announcement, I'd like to emphasize for a moment just how significant this announcement is for TeraWulf. The purchase of 18,500 of Bitmain's latest generation S19J XP Miners is meaningful, not only because it is the first of its kind worldwide, but also because of the significant Operating efficiencies it will drive ahead of next year's halving event.

Speaker 3

These miners will reduce our unit economic cost mined Bitcoin by over 17% immediately. Come 2024, we believe that our Fleet efficiency will be among the most efficient in the sector at 25.7 joules per terahash and when coupled with a realized average power cost of $0.035 per kilowatt positions us to maximize profits both before and after the having. For a more detailed analysis of our unit economic costs, please see Page 12 of our latest investor presentation. In conclusion, I hope that during this call today, our financial objectives were made clear and simple: Maximize profits, repay debt and return value to shareholders, while providing investors access through transparency and accountability. With that, I'll pass it back to the operator and I look forward to answering your questions.

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. It may be necessary to pick up your handset before pressing the star key. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Our first question comes from the line of Lucas Pipes with B.

Operator

Riley Securities. Please go ahead.

Speaker 4

Yes. Good morning, everyone. This is Nick Giles on for Lucas. Really appreciate all the color. Would be great to just hear an updated view on organic growth opportunities that you have.

Speaker 4

Yes. How should we think about organic growth beyond these next 50 megawatts that you've outlined, maybe just from a site perspective and timing? Thank you very much.

Speaker 3

Hey, Nick. It's Patrick, and I'm here with Paul. So good question. I think as we mentioned, This expansion, which is about 43 megawatts and then we'll also be replacing the machines that we are Hosting at Lake Mariners about 5,000 slots with the new order of the S19JXPs as well. So that's obviously right in front of us and will be done by year end.

Speaker 3

We also have an additional 50 megawatts of Potential expansion at Nautilus that's shovel ready. And then obviously, the Lake Mariner site can be expanded up to 500 megawatts if and when we want. So I think we're as you know, we are very focused at Staying at sites where we know and can control power cost, I mean, that is the number one focus of our team. And these sites are very scalable. There's a lot of economies of scale in this industry, as you know.

Speaker 3

And so we're pretty pleased with the 2 sites

Speaker 2

that we have. Yes. The only thing that I'd want to add is we have the team to do that, right. Our team has been together 15, 20 years and we've done All sorts of M and A as well in the energy infrastructure space. So if you look around the public miners, You kind of want to scratch your head sometimes, some of these deals that have been announced and some of the crazy valuations that people have come to And some of these stock for stock deals, that's not going to happen here.

Speaker 2

Any acquisition we do has got to be accretive, got to be right for the business and we have the team with the experience To negotiate those deals, value them properly and execute on them.

Speaker 4

Thank you both for that. Maybe just on the M and A front, would be great to just maybe get some additional Color there. Would you say you're seeing more opportunities come up as we approach to having? How would you Describe the size of some of these opportunities? Thank you very much.

Speaker 3

Yes, sure.

Operator

If I

Speaker 2

could And then Patrick. Again, our focus is going to be on some of the internal organic because it's the low hanging fruit and it's the one Where we don't have to worry about merging teams or other sites that we don't know quite as well as our own. But certainly, there are going to be winners and losers coming into the having and it's all going to be about efficiency and the cost to mind, but it's also about The thesis, we're very regulatory sensitive and therefore we've built our business to be Focused on 0 carbon mining. So anything we do has got to be accretive and got to be consistent with our thesis, but go ahead, Patrick.

Speaker 3

Yes, Nick, I would just add, look, I think there's as we've talked, there's 20 something public companies in the space. I mean, that's Too many, anybody that's been around commodity markets long enough has seen consolidation, whether it was in the early 2000s with the independent power producers or 2010s with oil and gas companies, right. So I think that's a really natural as The sector becomes more mature. There's got to be consolidation and the natural cycle we have in Bitcoin mining by having every 4 years, I think will drive that. So certainly a lot of discussions on that front, both public, private.

Speaker 3

But I think the there is As Paul mentioned, there will be very natural winners and losers post having. And so I think that will like our view is we're really getting our House and order and preparing for that event and trying to position the company, as strongly as we can. So that's why there's an emphasis We're now free cash flow positive and paying down debt. So you're going to see us chip away at the debt over the next few quarters to put the company in a really strong position, I think, going in to the having. And then I think just one other thing Paul mentioned it.

Speaker 3

I mean given again we have such high ownership Of the management, Board of Directors and insiders, I mean, we're literally, I think, over 55%. There's no other there's one other peer that has even double digits, ownership. And so we are very aligned with our shareholders. And as Paul points out, anything that we look at, it has to be accretive. So that is the bar is set very high.

Speaker 3

And I think for us right now, as Paul mentioned, The easiest low hanging accretive fruit is really expansion at our existing sites.

Speaker 4

Got it. Got it. Makes sense. Thanks again for those comments and congrats on the flip Free cash flow positivity here. Maybe just one last one for me.

Speaker 4

Do you have any agreement In place with Bitmain for minor procurement beyond what you already have contracted, I know the relationship is strong there, but just want to get a sense How we should think about minor purchases beyond what you've already announced?

Speaker 2

Yes. This is Paul. We have a great relationship with Bitmain and I really value them. I think they think of us in many respects as a partner. They've helped us Come to scale here, but we don't have agreements that you don't know about.

Speaker 2

I mean, obviously, we'd have to report that, but we are Constantly evaluating our fleet and how we continue to scale our mining activities and what are the right machines. But everything that we've contracted for, you're aware of. And anything going forward would be a new contract and we negotiate to the depth to make sure we got the best deal for our shareholders.

Speaker 4

Got it. Got it. Well, Paul, Patrick, thank you so much for all the color

Operator

Our next question comes from the line of Mike Grondahl with Northland Securities. Please go ahead.

Speaker 5

Hey, guys. Congratulations on the progress. 3 questions for me. I'll just ask them upfront here. One on the power costs with Lake Mariner, is there anything we should think about there sort of late summer, fall?

Speaker 5

Secondly, Paul, I'd kind of love to get your thoughts just on the having in general, Kind of if you got a crystal ball, kind of what you think may happen? And then maybe lastly for Patrick, Sort of how are you feeling about the balance sheet, the debt levels, some of the warrants that go with the debt And kind of overall liquidity now that you're generating free cash and there was some thoughts that maybe you guys were in the market a couple Weeks ago, if you could kind of round that out, maybe that would be helpful.

Speaker 3

Yes, sure. So I guess, let me take those in reverse or might just while the last one is precious in our mind. So look, yes, I think we got a lot of phone calls. There was some speculation. I think We were contemplating a capital markets transaction.

Speaker 3

I think what I will say to you and I think you guys are hearing loud and clear from Paul and I in this call is, We will not do a dilutive transaction at a big discount to the market. Those days are past us. We are now In a very strong liquidity position, you can see our cash building on our June 30 balance sheet. We are now that we have Full 160 Megawatts and 5.5 ex cash, we are generating free cash flow. We've also given you that disclosure in our latest presentation, so you can see all of our unit economic costs.

Speaker 3

So we will Obviously, the Board and the management team will look at certainly opportunistic ways to derisk the Company, but again, that has to be accretive. And we would like I said, I mean, just to be really clear and Paul can reiterate, we will not do A discounted deal, capital markets transaction, and a dilutive one. Those days are behind Thank goodness. And we are in a position of strength. So, Mike, to your point on liquidity, I mean, we feel really good.

Speaker 3

We've Come a long way as those of you that know me have been here now for about a year and a half. And last year was a very tricky year that we navigated And finally got things kind of squared away in February of this year. So no, I think now everyone there's a renewed energy and excitement as we've kind of Hit our targets here and are now going on to the next phase and are paying down debt.

Operator

If I could just add

Speaker 2

to that. I think it's Patrick's job as the CFO to constantly evaluate capital markets opportunities. Problem is, if the market misreads the notion of an evaluation as opposed to Doing a deal or not doing a deal, that's just classic retail gossip, and it's unfortunate at times. But the answer is, If it's not accretive, it ain't going to happen here. We're certainly not going to sell our stock at a discount.

Speaker 2

It's just not what we want to do, Especially in the dilutive transaction, our shareholders have been unbelievably supportive and loyal to us, and I have a fiduciary duty to them. So that's the way we're going to go from here on out.

Speaker 3

Mike, your other two questions. The second was, I think, on halving for Paul.

Speaker 5

Yes, right. And then power cost just late summer at Lake Mariner in the fall?

Speaker 3

Yes, sure. Go ahead,

Speaker 2

Paul. I don't have Crystal ball. And in fact, I don't want to have one. I think sometimes some of our Peers in the public miner sector think they're investment managers and they want to decide what the direction Bitcoin is going to be on any given day. I'm in the business of mining Bitcoin.

Speaker 2

And in that regard, I think I need to be better And everyone else at it by doing it at the lowest possible cost, at the highest possible efficiency and at the largest possible scale. I think if I do that, this company wins. We go into having really strong. We come out of it on the other side, Making a ton of money. Naturally, I am very constructive with respect to the long term price of Bitcoin.

Speaker 2

But I think that if we just have the most efficient outfit, we'll always make money And we'll be in a position to continue to scale up And then we win, our shareholders win. So I think you just got to keep your head to the grindstone and really work at it. You've got to constantly watch your costs, What's your energy costs? You want to make sure that you're the most efficient guy out there, and

Speaker 3

That's all we're doing. Mike, and lastly on your on power question, look, I think we're coming out of July August here, we had a little bit of heat in upstate New York, which is rare. So I think for September, October, November, You'll see our costs, I think, there kind of go back to what they were in kind of March, April, May, The shoulder months, that's the beauty of Lake Mariner is we do get a couple of weeks in the summer that are warm and so we have elevated power We get a couple of weeks in the winter that are cold, but the beauty, right, is being 25, 30 miles east of Niagara Falls, Right. I mean the river is running 24, 365. So, I think we're coming actually out of what has been some higher priced Months and we'll revert kind of back to that shoulder season.

Speaker 3

So you should see think our power price is going to fall meaningfully.

Speaker 2

Got it. Hey, thanks guys. Mike, I just want to add, we in our other lives as power Investors and owners had this facility for decades. So we're pretty familiar with the pricing up there, and we've seen the range of it. So We're very, very excited about what we think is there is there cost profile there for energy at that facility.

Speaker 2

It's what makes it really work is the Bitcoin mining and it's what made it not work really is power supplier, because it was a mid it was right there on the highway All that green power coming down from Niagara. So we're pretty bullish on that.

Speaker 5

Well, that's it for me guys. Thank you.

Operator

Thank you. Our next question comes from the line of Josh Sigler with Cantor Fitzgerald. Please go ahead.

Speaker 6

Yes. Hi. Thanks for taking my questions today. A lot of iron is in the fire right now. So definitely wanted to follow-up on some things.

Speaker 6

First, I'd love to get some more Caller, on the decision to purchase the latest generation rig, the F-nineteen JXP. I'm curious if you had initial And how they're comparing to older legacy rigs? And also if you could walk through a little bit around the decision around payback period for these rigs As well, that would be

Speaker 3

helpful. Yes, sure. So I don't know if Nazar, are you able to answer that first part?

Speaker 2

Some technical issues there.

Speaker 3

Yes. So Josh, let us see if we can get Nasr, 1 of Wolf's co founders, COO, to kind of answer that first one. But yes, on the second one, look, I think the short answer is Every single investment decision we take, we're running return on invested capital calc. And look, that calc, as you know, Depends on a couple key items. 1 is equipment cost, right, 2 is power cost And then 3 is, Bitcoin price, right, and network cash rate.

Speaker 3

And I would say when we're looking at equipment now, just kind of I would say like any of our peers, Generally speaking, we want to see an equipment payback term of somewhere between 9 and kind of 18 months. And so in addition, I mean, even given the newest generation of equipment, I mean, I think generally speaking, Certainly what we use for GAAP and otherwise, but the lives of these equipment is probably somewhere in the sort of 4 to 6 Year range, right. And so I think we feel like the average life of our equipment given the location in a more Temperate zone and we're not obviously using immersion cooling will be on the longer end of that spectrum, whereas a lot of We think equipment that's used in hotter with the immersion cooling will have a lower average life. So I would just say those are the parameters that we look at. And then, Nazar, are you on or unable to answer that first part?

Speaker 3

If not, Josh, we'll get back to you on

Speaker 2

Hello? Hi, Messer, can you hear us? Yes.

Speaker 7

Can you hear me?

Speaker 2

Good morning.

Speaker 7

Good morning, Josh. So on your first question on testing of the units, The architecture unit is similar to the S19XP. And the S19XP, we've been running now For quite some time and the results that we've had at LMD and Novelist both have been very strong. We've heard The market that the XPs have been finicky. And from what we understand, a lot of that comes from operations kind of in hotter industrial environments, Both our facilities in Northeast and clearly more moderate.

Speaker 7

So we've had a very kind of strong performance on the XPs and that the architecture for the JXP is similar. We are expecting similar, if not better performance out of the JXPs in terms of how we're thinking about it. And as Patrick said, From a payback perspective, if you look at, I think the cost of the kind of the 30 joule per terahash machines, As we're kind of getting closer to having, it's kind of been in that low double digit, high single digit range. And we expect that to kind of continue to trend downwards the closer we get to the half. And the big part of that is just again just the it's almost 40% to 50% difference on the efficiency, and coming into having that's going to be extremely valuable.

Speaker 7

So as we've thought about where the market is today, and again, I think I said earlier, we don't have a crystal ball and trying to think through where exactly the market will be next year is tricky. But if Kind of the price of Bitcoin remain in the same range it's been. And we go through having we're expecting somewhere in that 12 to 18 month period payback With that pricing. And so to the extent that the market does better than that, that window should be shortened. As we think about it, we're in a kind of 12 to 18 month payback period, you're right into the having on that new equipment.

Speaker 6

Yes, absolutely. Appreciate the color and looking forward to more updates as we start plugging in these rigs. For my follow-up, I'd actually like to switch gears, talk a little bit about energy demand response programs that you've been testing to provide load relief moving forward, I was curious if you can give us an update in terms of how that's progressing and potentially what the upside to your energy cost could be?

Speaker 3

Nazzar, do you want to talk about those programs?

Speaker 7

Sure. So we're currently participating in 2 And both of those programs depend upon a total capacity of megawatts that we bid into them. And so this has been the 1st summer that we've been able to bid in a meaningful amount of capacity into those programs. And there's 2 revenue streams that we get. 1 is effectively a right to be called, so it's kind of a fixed capacity payment.

Speaker 7

And the second is, we earn effectively energy payment when we are curtailed. And so the bulk of the revenue comes Most fixed capacity payments in this year, we're going to recognize, I would say, kind of the way we think about it as an offset to total energy cost, and that will probably come in somewhere in the low kind of single digit per dollar per megawatt hour level. So as we think about There's energy cost plus our transmission and distribution cost less the revenue that we earned from the demand response. And so from this summer, we think there'll be an offset kind of in that Low kind of single digit figure in terms of when we think about it on a dollar per megawatt hour basis. As we kind of get into next summer and we're able to bid the entire capacity of the facility, as we've been ramping this summer, That number should be in the kind of in that mid to high single digits in terms of a dollar per megawatt hour offset to our total energy cost.

Speaker 6

Great. Thank you very much for the color. I appreciate it.

Speaker 3

Thanks, Josh.

Operator

Thank you. Our next question comes from the line of Bill Papinostracchio with Stifel, please go ahead.

Speaker 8

The questions. My first question is, just hoping to gain a little bit more color on the quality of the infrastructure assets Held within the Terra Wolf portfolio, hoping you'd be able to compare the New York and Pennsylvania And the location with other areas, other key mining areas in the United States with respect to cost and uptime. Now we've seen a lot of curtailment in Texas. Hoping to get some more color to that end.

Speaker 2

Yes, we love that question. Yes, the first thing is, I invite you to come visit our sites. I mean, I think You will walk away with absolute clarity with respect to the TeraWolff advantage. Clearly, we believe in regional diversity. Separately, we believe in 0 carbon because I think that ultimately you've got far greater fuel resource pricing when you're dealing with some of the fossil fuels.

Speaker 2

3rd off, You know, Texas is getting kind of crowded and it's really, really hot. And I think you've seen a real extreme range of What happens to the miners when the temperatures become extreme and their inability to Relibious responsive to the grid and how that's driving their efficiency and ultimately their pricing. So we're at 2¢ Power at Nautilus. And as Patrick mentioned earlier, In the summer for a very short period of time, and I mean we're talking about a couple of weeks, we'll see pricing sensitivities due to climate or temperature, But that's it. And so we're steady Eddie, and we're low cost and we want to continue to be that way.

Speaker 8

Great. Thank you. And then my second question is just hoping to get some more color With respect to the plans of the $200,000,000 ATM, do you foresee any of the proceeds being used Towards paying down the term loan. My understanding is that $40,000,000 will need to be paid down by April next year In order to continue the cash flow sweep, any color you can provide there? Thanks.

Speaker 3

Yes. Great question, Bill. So yes, so The term loan has to be reduced by $40,000,000 by April of 2024 for us to kind of keep that free cash flow sweep Through the maturity, like I said, I think given we are now free cash flow positive, you guys will start to See that on a quarterly basis where we sweep that term loan down. So we feel confident that around current economics today that we will achieve And we'll continue to update you every quarter as we kind of progress on that. And with regards to the ATM, I think those that look at our financials will see we did use the ATM a little bit And we hadn't used it for quite some time before.

Speaker 3

So it is a tool that we have, Bill, And we'll use it when we think it's accretive and our cost of capital is such again that it is accretive. But unlike many of our peers, you will never ever, ever see us issue 100 of 1,000,000 of dollars on the ATM in a quarter. I mean that is just not our game. And We are focused, as Paul mentioned, on profitability, paying down debt, maximizing shareholder value and then obviously returning Ultimately to shareholders, whether that's in the form of dividends or share buybacks. I think we've all been around the energy Towerspace for a long time and I've seen model succeed like the MLP model, the Master Limited Partnership in Energy.

Speaker 3

And so I think that's More interesting and more out for us to kind of go down.

Speaker 2

Yes. And I guess the long and fruit of this explanation is Insiders own over 55% of this company. I am just not interested in diluting shareholders,

Speaker 7

Unless it is

Speaker 2

for a very legitimate purpose like expansion For an activity that is accretive. And so I think that you can be sure that we will be Responsible and judicious with their use of the ATM as we have been.

Operator

Great. Thank you. And if

Speaker 8

I could just tuck in one more question. How is the company looking at kind of Weighing the option of ramping and scaling the Lake Mariner facility to full capacity, I think You said 500 megawatts versus being very concentrated in one region. Would Terra Wolf Potentially consider other areas in the United States or North America for that matter?

Speaker 3

Yes. So, hey Bill, it's Patrick. So, Yes. Look, and again, I think Paul kind of alluded to it in the prior question. And I don't want to pick on any of my peers, but I think We all come from personally, I come from a 20 plus year institutional investor background, right?

Speaker 3

And so I think Paul mentioned geographic diversity, right? When I think of commodity companies that I invested in, no one, not one company that I ever invested in has all of their assets in one region, Right. And that's for regulatory reasons, pricing reasons, you have to have geographic diversity. And so Your point, I think, is a very good one. What we see as the best strategy and look, we may go To Texas ultimately and we may go to other regions.

Speaker 3

I think you won't see us in regions of the world where there is not A definitive rule of law and there's regime change all the time. We won't go to those regions regardless of how cheap the power is. So I think We kind of have found between the sort of 50 megawatts to 300 ish megawatts, It's kind of the right size to where you don't have a bull's eye on your back because you're getting tens of 1,000,000 of dollars Demand response, curtailment revenues, you're not enough really to push The grid one way or the other, that's kind of the sweet spot as we all know. When you become really big and are having a big impact on the grid that becomes politically untenable, particularly if it's not 0 carbon and you're utilizing fossil fuels. So those are the things that we will Very mindful of Bill as we look to expand beyond our sites, which is, I think, a very natural ultimate Place to go for the company, but I don't think we'll do that certainly pre having.

Speaker 3

I think we'll kind of wait, see, pick up the pieces. I think there'll be a lot of carnage on the other side.

Speaker 2

Yes. And I would also add to that. But it's again, it's got to be consistent with their thesis, Which is 0 carbon mining. And you got to manage the risk or the opportunity, if you will, of geographic diversity with the Knowledge of 10 to 15 years experience in a particular site or region. It all goes into our evaluation, but I think going into the having, we're very comfortable with the sites we have.

Speaker 2

We have plenty of room to grow on them At really low cost pricing and we're scaling not just on the energy side and on the infrastructure side, but on our People side and their experience in building out these facilities. So I think that's what you'll see from us through the having.

Speaker 8

Thank you. I appreciate the detailed responses and congrats again on the impressive margins this quarter.

Speaker 3

Thank you. Thanks, Vince.

Operator

Thank you. Our next question comes from the line of Matteo Leves with Parabolic Ventures Holdings. Please go ahead.

Speaker 6

Good morning, guys, and congratulations on your scale and growth this quarter. Had a question for you. Would you mind opining on the key differences between what a hodl versus no hodl revenue model is In your sector as it relates to enhancing shareholder value?

Speaker 2

Sure, Patel. This is Paul. I want to be thoughtful in response. As an individual investor, right, Who believes in Bitcoin? I think you could buy it, you put it in your wallet, you could buy into an ETF, You can buy Mike Sellers stock.

Speaker 2

You could buy into a fund, where their business is all about holding Bitcoin. But I am Chairman and CEO of an operating company and the business of Wolf is to mine Bitcoin and we're supposed to mine it at a profit. And I think unfortunately this is lost on some of the other public miners, who again, they see themselves as either investment managers, Maybe they don't know how to operate or maybe they're pioneering wizards of AI and high-tech. It's not what we do. We are an operating company.

Speaker 2

We are in the business of mining Bitcoin. We make money, our shareholders make money When we mine at the lowest cost, highest efficiency at scale. That is our mission. We have the people to do it. We have the assets and infrastructure to do it.

Speaker 2

And since I and I think every member of our management team is right there alongside Our investors and shareholders are exclusively incentivized to do it. Toddling is it's an investment strategy. But as a CEO with fiduciary duties to shareholders, I'm obliged to listen to my CFO, Patrick. I take guidance from the Board, our advisors, and I always will Trying to evaluate what are the best alternatives for our Bitcoin. At this time, I'm confident our shareholders are best served By using our Bitcoin to facilitate growth and expansion, pay down debt, and after that, I'd probably want to look at Clearing a dividend during distribution.

Speaker 2

I think all of those at this time are more compelling arguments And hotline. And I hope that's a complete response to your question.

Speaker 6

No, that was a great response. I especially like the dividend part at the end there. So I hope you guys get there soon and I appreciate The efforts and efficiency you're putting into this business. So thank you.

Operator

Thank you. Our next question comes from the line of Lucas Pipes with B. Riley Securities. Please go ahead.

Speaker 7

Thank you very much, operator. Good morning, everyone. Congratulations on all the progress. Sorry, I had to toggle Some calls earlier, but I caught most of the call. Really appreciate all the color you've provided already.

Speaker 7

A quick follow-up question for Patrick, just in terms of the targeted capital structure over time, like where do you ultimately would like to be when it comes to that equity mix? Thank you very

Speaker 3

much. Yes, sure, Lucas. So I think definitely as you're hearing us say, I mean the number one focus right now is Profitability and then I think we're going to reduce that debt down as much as we can pre having. So I think The target is to get that certainly well below 100,000,000 And then I think beyond that, Look, I think there's the reality is, right, there were a lot of debt providers to this space that we're doing secured financing against machines. They're all gone.

Speaker 3

And I think the reality is there's just not much debt available out there for the space. That being said, we have pretty good pretty attractive financing terms. I mean, with the high yield market at 8.5% or 300 basis points behind that at 11 point Which is pretty good for something deemed crypto. So I think from a rate perspective and then having some level of debt on the Company kind of in the future, yes, I think that makes sense. But I think the goal right now is again to sort of position us to be playing offense and in a very strong position post having to take advantage of either Additional expansion at our sites or what I think will be more likely is M and A, and particularly of competitors or just specific sites that we find attractive.

Speaker 3

And so, I think you will see a focus over the next Few quarters and pre having and we'll update you obviously every quarter, but a very important focus on just reducing that debt down to well below $100,000,000

Speaker 7

Thank you very much, Patrick. You and to team keep up all

Speaker 2

the good work. Thank you.

Speaker 3

Thank you. Thanks.

Operator

Thank you. As there are no further questions, I will now hand the conference over to Paul Kreger for closing comments.

Speaker 2

Thank you very much. Again, as stated, Our goal here is to mine Bitcoin at the lowest cost, highest efficiency at scale. Insiders are Over 55% of the shareholders in this vehicle, we will not be looking to spend money unless it is accretive. We have no interest in diluting our own holdings unless it's accretive and we see a path for our collective success. I want to thank all of you for your invaluable trust and support as we focus on building the leading mining company.

Speaker 2

The entire team and I look forward to speaking to you on our Q3 call in November, and we are always available anytime up until those That's time. So again, thanks for attending this morning, and we appreciate your loyalty to Terra Wolf. Thank you.

Operator

The conference of Terawolf Inc. Has now concluded. Thank you for your participation. You may now disconnect your lines.

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Key Takeaways

  • TerraWolff has rapidly scaled its operations to 5.5 exahash of compute power and 160 MW of capacity, including the deployment of 50 MW of zero-carbon mining at its nuclear-powered Nautilus facility and completion of a second 50 MW build at Lake Mariner in Q2 2023.
  • The company has assembled one of the sector’s most efficient fleets and will further improve to 25.7 J/TH by deploying 18,500 latest-generation S19JXP Bitmain miners, targeting sub-18-month payback periods on new equipment.
  • Financially, Q2 2023 delivered over 1,000 percent year-over-year revenue growth to $15.5 million, a 67 percent gross margin, and $7.6 million of non-GAAP Adjusted EBITDA, while achieving free cash flow positivity to accelerate debt reduction.
  • Organic expansion remains a priority, with an additional 43 MW expansion underway at Lake Mariner, 50 MW shovel-ready at Nautilus and up to 500 MW of total capacity possible on its existing sites.
  • With insiders owning about 55 percent of shares and access to $0.02/kWh power, the company emphasizes aligned, accretive capital decisions and 0-carbon mining to sustain low costs and regulatory advantages.
AI Generated. May Contain Errors.
Earnings Conference Call
TeraWulf Q2 2023
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