Earnings Call Transcript - APLD Q3 2022

Operator, Operator

Good morning and welcome to Applied Blockchain's Fiscal Third Quarter 2022 Conference Call. My name is Doug, and I'll be your operator today. Before this call, Applied Blockchain issued their financial results for the fiscal third quarter ended February 28, 2022, in a press release. A copy of which will be furnished in a report on Form 8-K filed with the SEC and will be available in the Investor Relations section of the company's website. Joining you on today's call are Applied Blockchain's Chairman and CEO, Wes Cummins; and CFO, David Rench. Following their remarks, we will open the call for questions. Before we begin, Jeff Grampp from Gateway Group will make a brief introductory statement. Mr. Grampp, please proceed.

Jeff Grampp, Gateway Group

Thank you. Good morning everyone and welcome. Before management begins their formal remarks, we need to remind everyone that some statements we're making today may be considered forward-looking statements under securities law and involve a number of risks and uncertainties. As a result, we caution you that there are several factors, many of which are beyond our control, that could cause actual results and events to differ materially from those described in the forward-looking statements. For more detailed risks, uncertainties, and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and public filings made with the Securities and Exchange Commission. We disclaim any obligation or undertaking to update for statements to reflect circumstances or events that occur after the date of forward-looking statements are made, except as required by law. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and the reconciliation tables to applicable GAAP measures in our earnings release carefully as you consider these metrics. We refer you to our filings with the Securities and Exchange Commission for detailed disclosures and descriptions of our business, as well as uncertainties and other variables and circumstances which include, but are not limited to, risks and uncertainties identified under the caption Risk Factors in our IPO Prospectus. You may obtain Applied Blockchain's Securities and Exchange Commission filings for free by visiting the SEC website at www.sec.gov. I would like to remind everyone that this call is being recorded and will be made available for replay via a link available in the Investor Relations section of Applied Blockchain's website. Now, I would like to turn the call over to Applied Blockchain's Chairman and CEO, Wes Cummins. Sir, please proceed.

Wes Cummins, Chairman and CEO

Thanks, Jeff, and good morning, everyone. Thank you for joining us for our inaugural earnings call after completing our IPO last month. I'd like to welcome our new and existing shareholders as we appreciate your support. Since many of you are newer to our company, I thought it'd be beneficial to first start with an overview and history of our business. In early 2021, we began building a business focused on crypto assets, starting initially in Ethereum mining. We quickly gained traction by partnering with brand names in the crypto industry such as Bitmain, SparkPool, and GMR to assist in the operation and development of our mining business. In the middle of 2021, we identified a massive opportunity in the data center hosting business and refocused our business and resources on this opportunity. As some of you may recall, China instituted a permanent ban on cryptocurrency mining. At that time, China was the world's leader in cryptocurrency mining, and we saw an opportunity to establish Applied as a leading data center provider for the significant amount of mining capacity that had to find new homes for low-cost reliable power. Concurrent with this development was a significant increase in capital being raised by North American crypto miners, who also needed to find low-cost reliable power. We are now building Applied Blockchain to be a leading provider of next-gen data centers designed to provide massive computing power. With these next-gen data centers, we provide a colocation hosting business model where our customers place their hardware in our facilities, and we provide full operational and maintenance services for a fixed recurring fee. We currently have long-term contracts, mostly five years, with our customers, but we plan to maintain a mix of long-term contracts of three to five years with larger blue chip counterparties and short-term contracts of 18 to 36 months for smaller customers at future facilities to maximize margin while maintaining stability. We expect our hosting business model to provide secure long-term predictable recurring revenue and cash flow given the contractual structures of both our revenue and costs. This unique model and structure will provide investors with differentiated exposure to the crypto industry as our results are not directly correlated to the price of any cryptocurrency, yet we can participate in the expected massive growth of power demand required by these industry participants. The next-generation data centers we're developing are optimized for large computing power and require more power than traditional data centers that are optimized for data retention and retrieval. Next-gen data centers have very different layouts, internet connection requirements, and cooling designs to accommodate different power demands and customer requirements. Therefore, we believe we have developed a core competency with our team that will be difficult to replicate, especially for traditional data center operators. We believe traditional operators will face more challenges moving into our business as they cannot easily convert to next-gen data center facilities like ours, and they are generally geographically disadvantaged because they are usually found in high-cost areas with high-density populations. Initially, our data centers will primarily host Bitcoin miners. However, we also expect to host hardware for other applications such as image processing, graphics rendering, artificial intelligence, machine learning, and other blockchain networks in the future. We also aim to provide White Glove Service for our customers and see margin expansion opportunities over time by providing value-added services. We also expect access to low-cost power to be one of the primary differentiators in our business as power capacity availability for cryptocurrency mining that is scalable to sites with over 100 megawatts of capacity is scarce. The scarcity allows us to realize attractive hosting rates given our ability to provide long-term hosting contracts that can span up to five years. Since the crypto industry is still in its nascent stages, the talent pool is naturally not particularly deep. Fortunately, we have assembled a strong team of dedicated power infrastructure experts with proficiency in the design, building, and operating of next-gen data centers. I will put our team up against anyone in the industry. We believe another competitive advantage for our company is the strength of our partnerships. Bitmain, the leading Bitcoin mining manufacturer, and GMR have both invested in our company and become our hosting customers. These partners also provide us with various additional resources including hardware access, data center design, advisory services for buildout, operational expertise, and maintenance and repair training. With this backdrop, I am pleased to report that we have quickly executed on our business goals. After pivoting to hosting in the middle of 2021, we purchased our first property in August 2021, located in North Dakota, which we refer to as our Jamestown site. We then began construction on our first co-hosting facility in September 2021 with a planned capacity of 100 megawatts. We signed an energy services agreement with a local utility to power this facility, providing us with visibility into our cost structure, as we have stable energy costs. Five-year hosting agreements prefilled 100 megawatts of planned capacity before groundbreaking, and we quickly validated our business model. The first 55 megawatts at Jamestown came online in early February with the remaining being brought online over the next few weeks. Today, we stand at just over 80 megawatts being operational. Lastly, and perhaps most importantly, in January 2022, we and Antpool, an affiliate of Bitmain, entered into a joint venture to develop, operate, and own next-generation data centers with up to 1.5 gigawatts of capacity for hosting blockchain infrastructure. The joint venture is owned 80% by Applied while Antpool will directly own 20% of the assets within the joint venture in the near term. They have an option to convert that ownership into Applied common equity at a premium over our current share price. We believe having an affiliate of Bitmain aligned with our goals and having skin in the game is a tremendous asset for Applied. We look forward to working with them and leveraging their expertise to scale and grow our business. Now I'll turn this over to CFO, David Rench, to walk you through our financials before providing my closing remarks. David?

David Rench, CFO

Thank you, Wes, and good morning, everyone. My comments will be relatively brief as our fiscal third-quarter results, which ended February 28, 2022, reflect only modest contributions from our Jamestown facility that began ramping up operations toward the end of the quarter. We also did not have operations in the year-ago comparable period. Therefore, we will not be providing any year-over-year comparisons. Revenues in the fiscal third quarter were $1 million, attributable entirely to our hosting operations. Hosting revenue excludes upfront payments, which are recorded as deferred revenue. All of our revenues during the quarter were generated from our Jamestown, North Dakota facility. It is important to keep in mind that Jamestown started operations in February, thereby contributing to revenue for less than a full month during the quarter. Cost of revenue in the fiscal third quarter was $2.1 million, consisting primarily of electricity costs, including costs for Jamestown prior to the facility becoming operational. Other costs include personnel costs for employees directly working at the hosting facility and depreciation expense for the equipment and service of the hosting facility. Total operating expenses for the fiscal third quarter were $1.4 million, almost all of which were attributable to selling, general and administrative costs. Adjusted net loss from continuing operations for the fiscal third quarter was a loss of $2 million or a loss of $0.04 per diluted share, based on a weighted average fully diluted share count during the quarter of 53.4 million. We incurred a $4 million loss on discontinued operations in the fiscal third quarter. We realized $1.6 million in proceeds from the sale of equipment and expect to recognize a loss of $2.9 million on that sale. We classified our legacy Ethereum mining business as discontinued operations as we began selling our equipment. On March 9, 2022, we seized all crypto mining operations and completed the sale of all crypto mining equipment in service. The net loss for the first quarter was $6.4 million, or a loss of $0.12 per diluted share based on a weighted average fully diluted share count during the quarter of 53.4 million. Adjusted EBITDA, a non-GAAP measure for the fiscal third quarter, was a loss of $1.7 million. Lastly, on our balance sheet, we ended the fiscal third quarter 2022 with $12 million in cash and equivalents and no debt. Subsequent to the fiscal third quarter, we completed our IPO, issuing 8 million shares of common stock at $5 per share, generating net proceeds of approximately $36 million. Concurrent with this offering, we completed a one-for-six reverse stock split and uplisted our shares to the NASDAQ Stock Exchange. Reflecting these changes in the conversion of all our previously outstanding preferred stock into common stock, our current share count is now approximately 99.2 million. On March 11, 2022, we entered into a term loan agreement with Vantage Bank Texas for a $7.5 million, five-year loan at 5% interest. Proceeds from the loan will be used to fund operations at the Jamestown site. Now, turning to our fiscal fourth-quarter guidance, we expect revenue in the range of $5.7 million to $6.2 million, or $5.95 million at the midpoint. We expect to generate an adjusted EBITDA loss of $4 million to $4.6 million or $4.3 million at the midpoint. That completes my financial summary. Now I turn the call over to Wes for closing remarks.

Wes Cummins, Chairman and CEO

Thank you, David. I want to close our prepared remarks by covering our growth strategy and milestones to look out for over the remainder of calendar 2022 and beyond. We've broken ground on our next facility co-located with a wind farm in West Texas. This location will have a total of 200 megawatts when fully operational. We plan to break ground on another Texas wind site in a few months, which will also be 200 megawatts when fully ramped. In addition to the Texas sites, we expect to be in construction at up to three other sites in three other states, including North Dakota, with a total combined capacity of over 600 megawatts before the end of this calendar year. We've developed a robust pipeline of potential power sources and our experience at our first facility has provided us with a blueprint for a repeatable strategy to significantly scale our operations. We plan to continue scaling our business further with the goal of reaching 800 megawatts by May 2023, 1.8 gigawatts by May 2024, and ultimately five gigawatts over the next five years. We expect this to translate into our company generating $40 million of EBITDA in fiscal 2023, which ends in May, and exiting calendar 2023 at a over $200 million EBITDA run rate. As I mentioned previously, we see almost insatiable demand for hosting capacity for cryptocurrency miners, who lack reliable sources of low-cost power. Our internal estimate is that between 5,000 and 6,000 megawatts of hosting capacity needs to come online over the next 12 months to meet the publicly stated goals of publicly traded mining companies in North America, plus the private companies with whom we have close relationships. In my opinion, hosting capacity is the bottleneck in the industry, and I think this will remain the case for the foreseeable future. Regarding our site selection criteria, you should expect us to focus on states that have low and stable power costs, with favorable laws and regulations for the crypto mining industry while maintaining geographic diversity to reduce risks, particularly in specific regions. We are also conscious of our environmental footprint, so we'll focus on power generating assets with a higher portion of low carbon renewables. We believe our next-generation data centers represent a unique power load, and our demand for renewable energy can increase and accelerate the build-out of renewable energy infrastructure. Lastly, as our co-hosting operations expand, we believe our business model will become conducive to a real estate investment trust or REIT structure. At scale, we expect to have steady and recurring high-margin cash flow streams with relatively low maintenance CapEx needs that can provide a high level of distributable cash flow, similar to several publicly traded traditional data center REITs. We're investigating converting to a REIT structure, which we believe may be more applicable as we transition from a consumer of capital to a positive free cash flow entity over the coming years. We're now happy to take your questions. Operator?

Operator, Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Our first question comes from Lucas Pipes with B. Riley. Please go ahead with your question.

Lucas Pipes, Analyst

Thank you very much, and good morning, everyone, and also congratulations on the NASDAQ listing. Wes, I wanted to kind of try to peel the onion on 2023 a bit. You provided two very helpful data points, fiscal 2023 EBITDA $40 million, and then, end of 2023, a calendar run rate of $200 million. I would assume that the fiscal $40 million is backend weighted. So if I say that the $40 million is generated in the first five months of the calendar year, that's about $8 million a month. And if I say that the $200 million end of 2023 run rate is, if I divide that by 12, that's $16 million, $17 million of monthly EBITDA. So if I average that out, it gets about $12 million of monthly EBITDA, and then times 12, that's about $148 million calendar 2023 EBITDA. So I wondered if that's a reasonable way to go about it; I'd really appreciate your color on calendar 2023 EBITDA just because, of course, investors look to compare valuations across this space. Thank you very much.

Wes Cummins, Chairman and CEO

Yes, thanks, Lucas, and thank you for the question. So the way that I think about and the way I think you should think about the ramp of our business and the EBITDA is kind of the lower end if you think about per 100 megawatts, the lower end of the economics for EBITDA per 100 megawatts that we're targeting is about $18 million. Therefore, per 100 megawatts, you should think about $1.5 million a month of EBITDA, and I walked through in the prepared remarks, kind of the $400 million that we're kicking off, and those should be starting to come online kind of in the fall and then get fully ramped, either at the end of this calendar year or early next calendar year. And so, I think the assumption you should get as those come online, and with those that 400 online, you're running at about $72 million a year of EBITDA and then we continue to bring more online in the first half of that calendar year. And so for the calendar year of 2023, we're thinking about, we should be averaging a little around 800 megawatts for the full year. And, we can walk through individually if you want to how that stage or how we're thinking about where that comes online, and what our schedule is. But I think the average for the full year ends up at around that $818 million per 100 megawatts. Does that make sense?

Lucas Pipes, Analyst

That's super helpful. That's super helpful. Thank you very much for that. Yes, so that's maybe an easier way to get to the same number as what I outlined earlier, but switching topics, the Vantage Bank term loan, great to see access to that sort of capital, and I wondered if you could elaborate on how scalable this sort of financing might be? And are there specific loan-to-value targets you'd have at the asset level? Thank you very much to give a color on that.

Wes Cummins, Chairman and CEO

Yes, absolutely. So that was our first one. And if you just put this in context, right, this was our first facility, no operating history. And so we end up with a loan-to-value of about 25% from Vantage, which I was happy with at a really attractive interest rate for the next 100 megawatts. In fact, on the 100 there, we're looking at an expansion of that. So the first 100, and our next 100, we've already seen term sheets that are 50% loan-to-value and really attractive interest rates, depending on which state you're in. So we're in Texas, for example, seeing kind of 5% to 5.5% rates. And then in North Dakota, we get a subsidized rate with a little bit of help from the bank in North Dakota, that we would look at kind of like 1% for the first 18 months, and then 5% to 5.5% after that. But look, it's looking more around 50 for the next site. But I am really happy with what our finance team has done; they've really done a good job of going out to many banks and kind of priming the pump. We're seeing rates that I don't think you're seeing anywhere in the crypto industry in general.

Lucas Pipes, Analyst

Now that's terrific. Good work on that. Then I'll squeeze in one final question from me. So could you remind us I may have missed it in the prepared remarks, where you stand on hosting agreements, call it leases as of today, and then what would you say timing for additional signups? Thank you very much for that color.

Wes Cummins, Chairman and CEO

Yes, as of today, we stand a little under 200 megawatts for hosting agreements. But I think you'll see another 200 to 300 in the next few weeks, as we've finalized the plans on our sites. Then we sign those concurrently with the PPA or the ESA. I would expect you should see in the next couple of weeks, some of those coming through.

Lucas Pipes, Analyst

Great, all right. Well, thank you very much for all the detail and best of luck.

Wes Cummins, Chairman and CEO

Thanks, Lucas.

Operator, Operator

Your next question comes from the line of John Todaro with Needham. Please proceed with your question.

John Todaro, Analyst

Great. Congrats, everyone on the quarter here, and thanks for taking my question. I have two here, one on the demand side, and then one on the supply side. On the demand side when we're thinking about some of these hosting agreements in your customer makeup, is it fair to say most of this is that Chinese migration, or has there been some integration, some sales pipeline with the current private and public companies in the U.S.? Any commentary there?

Wes Cummins, Chairman and CEO

Yes, I would say most of it's still that migration.

John Todaro, Analyst

Okay, great. Thanks. That's fair. And then on the supply side, it is still a little bit of a capital-intensive business. And the last question, we got into it a little bit, but just broadly speaking, outside of the crypto markets, if we do start to see a little bit of a slowdown here economically speaking, is there anything you guys have been starting to think about on that side? And just kind of capital markets fundraising activity moving forward, if we do see a little bit more of a broader slowdown in the global economy here?

Wes Cummins, Chairman and CEO

I guess maybe to be more specific, do you mean how do we fund the build-out? Do we slow down our build-outs if there's not demand? I’m just trying to drill down exactly what.

John Todaro, Analyst

Yes, exactly. There is insatiable demand on both sides. The question is whether this will continue moving forward. If Bitcoin prices reach 20K in 2024, it appears that breakeven is still around 10K, suggesting there should be some healthy margins. Can you provide any commentary on that? Also, what are your plans for capital fundraising moving forward? Are you considering any factors, even outside of cryptocurrency, in light of a potential general market slowdown?

Wes Cummins, Chairman and CEO

Yes, that’s an important question given the recent developments. You're correct about the figures; we believe that for people to continue operating the machines they already own at our site, Bitcoin would need to be around $9,000 before shutting down becomes a consideration. The question also arises about the viability of purchasing new machines, which we think might be in the range of 2022 to 2024. Market conditions can fluctuate, and equipment pricing adjustments often lag by about a week. However, these adjustments occur quite rapidly and may slightly impact those figures. For us, a key consideration is that we won’t establish a site unless we have long-term contracts in place, specifically take or pay contracts. If we stop seeing these contracts being signed, we'd reconsider our plans. Additionally, we're focused on securing project-level bank debt financing, which currently seems stable. If that were to change, we are actively working on enhancing our finance process to explore additional options. Those are the main points I wanted to convey. I'm open to follow-up questions if needed.

John Todaro, Analyst

No, no, that was actually perfect that answered it pretty clearly. So, those were my main questions. Appreciate your answers on those.

Wes Cummins, Chairman and CEO

Sure. Thanks.

Operator, Operator

Our next question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your question.

Mike Grondahl, Analyst

Thank you, everyone. Could you share one or two of the key lessons you've learned from the North Dakota facility that can be applied to the projects in Texas and other states as you continue to progress? What are one or two significant takeaways you have?

Wes Cummins, Chairman and CEO

Thank you for the question, Mike. We've learned a lot from our experience in North Dakota, and I believe there are many lessons we can apply elsewhere. To highlight the key differences, we now have a more developed team compared to when we began the North Dakota project, which only had about five to seven of us handling multiple roles. Now, we have a strong team in place for these sites. We've brought Jeff on board full-time to manage design, development, and procurement after initially consulting for us. This development allows us to handle multiple projects simultaneously. Additionally, we've gained a better understanding of our supply chain and who our reliable partners are, particularly for items like transformers and switchgear. The initial ramp-up of operations was quite chaotic when we started in February, as we were trying to set up the miners. We relied heavily on local workers for just a short period, which proved challenging in terms of availability, especially in February in North Dakota. However, that experience taught us valuable lessons about hiring part-time staff in different regions. We also adjusted our approach to site management. Initially, we planned to manage everything on-site, but we've now established a network operation center in Dallas, which should enhance efficiency by centralizing our monitoring functions for all locations nationwide.

Mike Grondahl, Analyst

Great. And just one more. Bitmain is a really nice partner to have here. I think you pointed out one of the advantages is Bitmain can refer their customers to you for your hosting in co-location. Demand seems strong. How are you using Bitmain and their customers? How are the customers finding you? Can you walk us through that a little bit?

Wes Cummins, Chairman and CEO

Yes. I mean, that’s a big part of the people that are finding us — has been that route, right. When I think about marketing for our services, having the company that is the dominant maker and seller of the hardware, being one of their preferred hosting providers and then directing customers to us, I don’t know that I could build a better marketing arm than that. But people are also finding us on a daily or weekly basis. There have been a lot of promises made by many participants in the industry, and they haven’t been able to follow through on building out new capacity and plugging machines in. And I think you guys follow this, so there are a lot of machines, I think, sitting in warehouses right now. It’s fairly easy to find customers; it’s really about trying to deliver. We spend a lot more time trying to talk about when we can realistically deliver for a new customer versus going out and proactively marketing and trying to find them because we just don’t have the capacity to sell right now.

Operator, Operator

Our next question comes from the line of Rob Brown with Lake Street Capital. Please proceed with your question.

Rob Brown, Analyst

Hi, good morning, and there’s progress in the last few months. Just wanted to get an update on the pricing environment with the demand relative to the supply so strong. How’s the pricing environment right now? And has it changed more recently with market changes?

Wes Cummins, Chairman and CEO

So pricing, and I think we’ve talked about this, we don’t give specific numbers, but our pricing increased fairly significantly from our first site, the first Jamestown site to what we’re doing now. We haven’t seen that changing. There’s been a lot of volatility in the crypto markets in the last week. But we haven’t seen any change to that yet. I don’t expect there to be any change to that. Like I said, I think there’s even if there were no new machines purchased for the next six months, I think there are so many sitting on the sidelines, and so much capacity that still required that you’ll want to get these plugged in down, even to Bitcoin at 10,000. We’ve seen pricing go up from our first facility pretty significantly, and we haven’t seen any softness in it, just given the volatility in the last week.

Rob Brown, Analyst

Okay, great to hear. And then on the Texas wind facility, could you give us a sense of when you said by the end of the year, but how is that developing? What are the key milestones in getting that open? And how’s the supply chain at this point in terms of getting the materials you need?

Wes Cummins, Chairman and CEO

Yes, that's a great question. So we've broken ground there; when we were in North Dakota, it was about watching the takeout of basically a cornfield and then we’re putting a site up. This one is cotton mostly, I think, and now we’re building the site there. The dirt work is being done. In our experience, it’ll take a few months to get the buildings up; last time, it took us three months to get the buildings up. The last time and still to this point in North Dakota, it was transformers. I think you’ll hear that across the board in the industry is transformers and maybe some switchgear on the electronic side. We were a little more ahead of the game on this one. We actually have transformers being delivered to that site next week, and then all the way through the summer, so I think we’re in really good shape to bring that one online in the early fall timeframe, and it’ll be kind of shortly thereafter the other Texas wind facility. The supply chain for transformers and switchgear is probably the biggest bottleneck, but we’re out ahead of that.

Operator, Operator

Our next question comes from the line of Chris Brendler with D. A. Davidson. Please proceed with your question.

Chris Brendler, Analyst

Hi, thanks. Good morning. Just a quick follow-up on the hosting pricing environment. I heard from one of your competitors last night that’s taking down their projections, not sure about hosting demand, or at least not sure about the ability for hosts to fund both rigs or even fund power infrastructure. Just wanted to ask, like, it sounds like you’re really fully committed for the first 200. So could you cross that bridge, I guess, to get to in fiscal 2023? But has there been a significant fee change, just given the difficulty of financing this? Or is there still a lot of backup demand because things were so tight for so long given the rise in Bitcoin last year?

Wes Cummins, Chairman and CEO

Yes, right now for us on the demand side, we have plenty of demand for these at least these 400. But I think we have significantly more than that that we’re in discussions with. The ones that we’re talking to for these specifically I know have the machines already purchased, and most of them are sitting in the U.S. So it’s not like they need to pay their contract, or they’re going to buy new machines to go and do this. It’s mostly machines that are being moved. I know there’s even some of the publicly traded miners have machines they’re trying to put online as well. But I think that demand is still there. And as far as the financing, so those customers finance the equipment that’s going to go into the facilities; as far as us financing that, when we have the 400 with our IPO proceeds and the debt financing, we think we’re in a really good position to fund the infrastructure build-out ourselves for that. I mean, obviously, this is an extremely volatile industry, and so things can change over time, but that’s where we stand right now.

Chris Brendler, Analyst

Yes, I think some change real quick and hopefully can change the better a little bit positive today. This looks like. How does Bitmain fit into this? I feel like I'm hearing sort of noise that, given the very tight market conditions, equity is out of the question, debt is becoming more difficult; that could be temporary, but at least for now, there’s a rising probability that some of these equipment orders from Bitmain will break and they won’t be able to deliver. Is there any way for Bitmain and/or Applied to take advantage of that, if there’s excess rigs floating around the market?

Wes Cummins, Chairman and CEO

Yes, I think for us, if we find customers that want that, which we still have some customers that want that, then we can take advantage of that. I think the other thing that we think about in the marketplace if you are faced with much tighter capital markets, which has obviously arrived, is maybe it’ll bring opportunities for us for consolidation or kind of just a typical, what you would see in the business model that we’re running with doing some maybe some type of sale leaseback on facilities that are already running and running those for other people. But I think for us, we’re hopeful that there are going to be those kind of opportunities that are really born from a tighter capital markets environment.

Chris Brendler, Analyst

Yes, I was wondering if Bitmain is in a position to take advantage of the situation, such as potentially moving excess machines into your facilities. What does the ramp-up of the Bitmain deal look like?

Wes Cummins, Chairman and CEO

I can't speak for Bitmain as I'm not sure about their specific plans and haven't discussed them with them. Generally, when we host for Bitmain, it's for their customers to purchase their equipment. Therefore, I prefer not to speculate on how Bitmain might capitalize on a decline in the equipment market.

Chris Brendler, Analyst

Yes, that makes sense. I was just trying to put a positive spin on it. A different question: what is your perspective on North Dakota compared to Texas? What did you start in North Dakota? What are the advantages and disadvantages of your next transaction in Texas, your next build-out?

Wes Cummins, Chairman and CEO

Yes. North Dakota was great; it’s been great to us. We had a ribbon-cutting there last week with the Governor. One of the primary reasons we went to North Dakota is we found a really good power partner, that provided us our number one thing we’re looking for, which is low-cost power with a stable price and a long-term contract. So we found that there, and then also the climate, both the business climate, but actually, the actual climate were you want to run these in a colder climate. It’s built for kind of an air-cooled facility. In Texas, we’re finding some interesting opportunities with owners of renewable generation assets out in West Texas, where they’re not being curtailed; they’re not getting all of their power purchased. They can significantly enhance their return by co-locating us with them. Those are just the opportunities we’re seeing, and also Texas is very welcoming of our industry as well. I think you’ll see us do more in both of those states. But there are other states that we’re looking at as well. Texas is interesting; it’s massive as far as the power supply. One of the only issues you run into in North Dakota is it’s a great state; they have a big surplus of power, but even that big surplus, it’s a low population, and it’s just not a huge amount.

Chris Brendler, Analyst

Yes, great. Okay. One last one is, I think as I mentioned at the start of my questions, the market conditions can change pretty fast in this space. Suffice to say, it’s better to be a host in this environment than it is to be a self-miner; is your strategy shift sort of already paying off?

Wes Cummins, Chairman and CEO

Look, as far as hosting, the way I think about our business is we have security from our customers, we have these long-term, can take or pay contracts with security on the equipment. We sit at a much more, I guess, higher level, higher security level in the industry. We still get to generate great margins, we still get good returns on capital. But we also don’t get the upside of Bitcoin at 65,000. So we kind of give that up for more security and more stability. I think this is a much more attractive model in a volatile industry overall. As far as the capital commitment for the return, as far as kind of our security level, as far as the predictability and stability of it. So I think this kind of recent volatility really highlights the benefits of this model versus the self-mining model.

Chris Brendler, Analyst

Yes, seeing the same thing. Congrats, Wes. Thanks.

Wes Cummins, Chairman and CEO

Thanks.

Operator, Operator

There are no further questions in the queue. I would like to hand the call back to management for closing remarks.

Wes Cummins, Chairman and CEO

Great. Thanks everyone for joining our first earnings conference call, and I look forward to more in the future. I also want to thank all of our employees. It’s been a really hard push to get our first facility online and these other facilities lined up, but everyone’s done a great job here. So just want to say thanks, and we’ll talk to you in a few months.

Operator, Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.