Earnings Call Transcript - MIGI Q2 2022

Operator, Operator

Greetings. Welcome to Mawson Infrastructure Group, Inc. Second Quarter 2022 Earnings Results Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host Nick Hughes-Jones, Chief Commercial Officer. Thank you. You may begin.

Nick Hughes-Jones, Chief Commercial Officer

Hello everybody, and thank you for taking the time to hear about Mawson Infrastructure Group. My name is Nick Hughes-Jones, Chief Commercial Officer of Mawson. Joining me today is James Manning, our Chief Executive Officer and Founder; and our Chief Financial Officer, Ariel Sivikofsky. We look forward to taking you through the investor presentation today, but first, I need to read you a short disclaimer around forward-looking statements. Please be aware today, we will be making forward-looking statements. These statements are based on current expectations and assumptions and are subject to risks that could cause actual results to differ materially from those expected. We may also make forward-looking statements as part of our Q&A at the conclusion of this presentation. Please be sure to refer to the cautionary text regarding forward-looking statements contained in this presentation on Slide 2, as well as the Risk Factors in our Annual Report on Form 10-K filed March 21, 2022, under the subheading Risks Relating to Our Business, as well as the 10-Q filed today, Monday, August 22. As of last Friday night's close, Mawson has a market capitalization of approximately $60 million, is listed on the NASDAQ under the code MIGI and has five Bitcoin mining sites across the USA and Australia. As of the end of July 2022, our Bitcoin self-mining installed operating capacity was approximately 1.7 exahash, which based on current network we believe produces approximately 7.5 Bitcoin per day. Throughout July, Mawson continued to participate in energy demand response programs, whereby we curtail our energy use in exchange for revenue and reduce the cost of production. Our installed hosting co-location capacity at the end of July was approximately 1.8 exahash, bringing our combined installed self-mining and hosting co-location capacity to 3.5 exahash, one of the largest installed Bitcoin mining operations among our NASDAQ-listed peers. As a reminder, an exahash abbreviated as EH in these slides, is a measure of computing power. The more exahash you have online, the more Bitcoin you produce on a daily basis. We have recently discussed our second Bitcoin mining facility in Pennsylvania and are pleased to report today that we have received a favorable energy load study, meaning that our Sharon, Pennsylvania facility is capable of operating at up to 120 megawatts or 4 exahash. We are today upgrading our total energy capacity available for Bitcoin mining to 590 megawatts, which is one of the largest confirmed infrastructure pipelines among our NASDAQ-listed peers. This is a significant strategic advantage for Mawson given the very high levels of demand for energy infrastructure in the Bitcoin mining industry today. We also recently announced our intention to defer major forward capital expenditures until market conditions normalize. Instead, we will maximize our existing mining fleet, continue to deploy our hosting co-location customers, and we will continue to participate in energy demand response programs, something we will touch on further later in the presentation. As a result, we anticipate our Bitcoin self-mining business to be operating at approximately 2.3 exahash by Q4 of 2022. We expect to have our hosting co-location agreement deployed at approximately 3 exahash by Q4, resulting in total operations across our self-mining and hosting co-location at approximately 5.3 exahash by Q4 2022, again, one of the largest installed Bitcoin mining capacities among our NASDAQ-listed peers. Mawson is also proudly a net zero carbon miner and hosting co-location provider, something we will touch on later in the presentation. With that, I'll hand over to CEO and Founder, James Manning.

James Manning, Chief Executive Officer

Thanks, Nick. Q2 was a solid operational period for the group. Our hosting co-location business expanded materially, growing from 16 megawatts or 0.5 to 54 megawatts or 1.8 exahash over the period with hosting revenue growing sequentially from $550,000 in Q1 to $3.57 million in revenue in Q2, up 536%. Our self-mining operation continued its growth, rising from approximately 1.35 exahash in March and touching an interim all-time high of approximately 1.85 exahash in June and slightly ahead of July's run rate of 1.7 exahash, with our Bitcoin self-mining operations producing 490 Bitcoin, up 286% versus Q2 2021. We also commenced our Energy Demand Response Program late in the quarter, generating additional revenue and reducing overall costs of production as a result. We significantly added to our energy pipeline during the second quarter. We signed a new 120 megawatt or 4 exahash Bitcoin mining capacity facility in Texas as part of the shift with New York Stock Exchange-listed Texas Pacific Land Corporation. We also received variable energy load studies at our second Pennsylvania site, Sharon, for that site also being capable of accommodating 120 megawatts or 4 exahash. Turning our head to the Q2 results, the second quarter was solid operationally for our business. Mawson generated $19.5 million in revenue in Q2, up 236% compared to Q2 2021. Our revenue in Q2 was up slightly versus the previous quarter. The good result considering the Bitcoin price fell approximately over the period. Gross profit came in at $5.4 million flat compared to Q2 2021. Non-GAAP EBITDA came in at $13.7 million, up 756% versus Q2 2021. Turning to operational highlights for Q2, having completed the build-out of our 80 megawatt facility in Georgia in Q1, we commenced work to expand this facility to 130 megawatts in Q2. This, when fully deployed, is capable of operating at 7.5 exahash. We also entered into a transaction where Mawson will become a 33% shareholder in Tasmania Data Infrastructure. We are developing a large-scale hydropower Bitcoin mining facility in Tasmania in the southern half of Australia. Subsequent to the period end, we also raised $10 million in additional capital in July to continue to build out our digital infrastructure for potential strategic transactions and for increased working capital. With that, I will hand over to CFO, Ariel Sivikofsky.

Ariel Sivikofsky, Chief Financial Officer

Thanks, James, and hello, everybody. Turning to Slide 5, I will provide some financial highlights from Q2. Cash and cash equivalents in Q2 2022 were $2.5 million, down from $3.3 million in Q1. As previously mentioned by James, we had subsequent period-end basis $10 million in new capital in July. Total assets grew from $166 million in Q1 to $191.8 million in Q2, reflecting additions in property, plant and equipment from Bitcoin hardware deliveries, and the continued deployment of energy infrastructure across our facilities. We also benefited from a $17.7 million increase in derivative assets, reflecting the favorable valuation of our energy contracts over the period. We continue to pay down our foundry digital debt facility in Q2, reducing debt by approximately $3 million over the period. We will continue to pay this down in Q3 and currently expect that this debt facility to be paid off completely by October 22, increasing our monthly operational cash flow commensurately. Equipment deposits declined to $2.8 million in Q2, down from $41.7 million in Q1 as Bitcoin miners were delivered to our facilities. Our mining fleet is now fully paid for and delivered with no outstanding payments, a unique position to be in among our NASDAQ-listed peers. With that, I'll hand back to James to provide an update on our self-mining and hosting co-location businesses.

James Manning, Chief Executive Officer

Thanks, Ariel. On Slide 6, we illustrate our forward expectations for our Bitcoin mining self-mining business. As of the end of July 2022, Mawson has sold operational capacity of approximately 1.7 exahash, downsized from June's all-time high of 1.85 exahash, reflecting downtime due to deployments during the period. We expect this to rise to 2.3 exahash by Q4 2022, reflecting our decision to defer all major forward capital expenditure until market conditions normalize and instead preferring to maximize and optimize our existing assets. This position may change as market conditions develop, and we're encouraged by the recent moves in Bitcoin energy cost and Bitcoin miner prices combined with network difficulty. As this slide demonstrates, at 2.3 exahash, we expect to be reducing approximately 10.5 Bitcoin per day, and assuming current network difficulty and a Bitcoin price at $25,000, we would expect this to produce $95.8 million of annualized revenue, rising to $223.5 million of annualized revenue and 24.5 Bitcoin per day, assuming a fully deployed fleet of 5.5 exahash in 2023. We also anticipate our megawatt capacity increase from 590 megawatts today to approximately 800 megawatts by the end of Q4 2022 and then to 2000 megawatts in 2023 as we further cement our attractive energy infrastructure pipeline. Our hosting co-location base business, detailed here on Slide 7, has expanded significantly over the course of the second quarter, with revenue from this division rising sequentially from $550,000 in Q1 2022 to $3.5 million in Q2, an increase of 536%. At Mawson, given we had the energy infrastructure capacity surplus to our self-mining requirements, we are able to use this infrastructure to generate additional revenue streams, which are all paid in USD, providing hosting services to third-party customers. We now have approximately 100 megawatts of hosting co-location customer agreements in place, making us one of the largest NASDAQ-listed hosting co-location providers. We expect these to expand further to 120 megawatts by the end of 2022 and then up to 200 megawatts in 2023. As of the end of July, our hosting co-location business was operating at approximately 54 megawatts, over halfway towards our fully contracted deployment of 100 megawatts. Inbound interest and demand for hosting co-location continues to be strong, and we look forward to updating shareholders on this front in due course. Turning to Slide 8, I'd like to spend some time going through the newest business division, Mawson's Energy Demand Response Programs. Given the movements we've seen across the energy markets in 2022, and particularly in quality, Mawson moved swiftly to take advantage of the energy market volatility. By curtailing our energy use over the course of each month, Mawson earned additional revenue and also significantly decreased the cost of our overall energy bill. Results today have been very encouraging, and we look forward to providing investors with more information in due course. By curtailing our energy use, Mawson is also able to support local energy networks and avoid CO2 emissions while receiving an economic benefit for doing so, a win-win for all parties. This process is managed by our partners at Voltus, energy consultants, and Mawson's internal team. We are under no obligation to curtail our energy and participate in demand response programs. However, the results of that have been extremely positive, and we expect this to further reflect in our Q3 results given the program that we initiated late in the second quarter. In Q2, given the importance of energy prices to Mawson's financial performance, we were required under U.S. GAAP accounting processes to recognize the change in value of our energy contracts. This results in an additional $17.7 million asset on our balance sheet. This will be tested each quarter to provide investors with the maximum transparency on this very valuable asset within the Mawson business.

Nick Hughes-Jones, Chief Commercial Officer

Thanks, James. Expanding on our existing and pipeline energy infrastructure from Slide 9, Mawson has developed a large energy infrastructure portfolio. Our current plus potential brownfield and greenfield expansion opportunities leave us with the scale to be operating at approximately 19.85 exahash over time, appropriately between self-mining and hosting co-location operations. Development of these sites will of course be subject to market conditions. Critically, Mawson is committed to being a long-term sustainable Bitcoin miner by targeting carbon-free and sustainable energy at our sites. In Pennsylvania, we're using 100% carbon-free nuclear energy sourced from Energy Harbor to run three of the local nuclear power plants in Ohio and Pennsylvania. The Beaver Valley nuclear power plant is just a mile from our Midland, Pennsylvania facility. In Georgia, we have recently been approved and commenced initial work to expand our facility threefold to 230 megawatts in 2023. There are two brand new nuclear reactors coming online in the next 6 to 12 months, Vogtle 3 and Vogtle 4, two 1100 megawatt Westinghouse pressure water reactors, bringing an additional 2.2 gigawatts of energy into the existing 13-gigawatt Georgia grid. This is one of the major reasons we selected this site, as we expect a lower carbon footprint and potentially lower energy prices as these new reactors come online. We've included Texas in our investor presentation, where we have secured a site capable of operating at up to 4 exahash. As a reminder, for this facility, we have collaborated with JAI Energy and Texas Pacific Land Corporation, one of the largest landowners in Texas with 880,000 acres across their land portfolio, providing us with substantial opportunity to expand into the state of Texas over time. At our second facility in Pennsylvania in the town of Sharon, as previously mentioned, we've received a positive outcome from the energy load study and can confirm the site can accommodate up to 4 exahash or 120 megawatts. The Pennsylvania Energy Group is a deregulated market with a large percentage of energy coming from nuclear or carbon-free sources that we are very excited about the development potential of this state.

James Manning, Chief Executive Officer

Thanks, Nick. For our second last slide, I wanted to highlight just outline Mawson's Board and senior management to our fellow shareholders. Board and management currently own approximately 19% of Mawson, so we all have a huge amount of skin in the game. This is unique among our NASDAQ-listed peers and ensures we are extremely focused on shareholder returns. Lastly from me, before we move on to questions, in summary, why invest in Mawson Infrastructure Group? Well, over the last twelve months, we've grown our self-mining and hosting co-location business 17 times from 0.2 exahash to 3.5 exahash as of July 2022 and anticipate growing this further by an additional 50% in the year-end to 5.3 exahash. We are an infrastructure-first business with a significant amount of energy infrastructure in place, approximately 590 megawatts, a strategic advantage in the current environment. We are one of the most sustainable Bitcoin miners on the NASDAQ with the majority of our energy coming from sustainable sources, predominantly nuclear energy. We have strategic relationships in place with Voltus, Purpose Investments, Canaan, and Texas Pacific Land Corporation. We're one of the most efficient operators, leading in low-cost deployment of infrastructure in the industry. And we have very high insider ownership of approximately 19%, meaning we are incredibly focused on shareholder returns. With the presentation now completed, we want to take this opportunity to thank all our employees, suppliers, and shareholders for their ongoing support in 2022. I'll now hand the floor back for any questions.

Operator, Operator

Thank you. Our first question comes from the line of Josh Siegler with Cantor Fitzgerald. Please proceed with your question.

Josh Siegler, Analyst

Yes, hi. Thank you for taking my question today. I was wondering if you guys can provide some additional color on the demand environment for hosting right now? Thank you.

James Manning, Chief Executive Officer

Hi Josh, James Manning here, thanks for the question. We've had a lot of inbound inquiries for hosting, so we're very comfortable we could build out more hosting than we currently have capacity for at the moment. I think that goes to our view around building out the infrastructure at the same time as we build out our self-mining business. We're still getting a lot of inbound inquiries. Everyone's obviously very price-sensitive and price-focused, but there's a lot of demand there.

Josh Siegler, Analyst

That's great to hear. And then can you help us size the potential benefit from the energy demand response program? Do you expect it to have a material impact on your profit stability in Q3 and potentially beyond? Thank you.

James Manning, Chief Executive Officer

Yes, I'm cautious that I don't want to start providing forward estimates, Josh, but what I can say is the demand response has had really two big benefits for us: it allows us to avoid peak pricing as we curtail during those times, as well as providing that additional revenue stream from responding to market requirements. So it does have a material impact on our cost to produce Bitcoin as well as our overall energy input costs, and I expect in Q3 to have a very positive effect on our overall financials.

Josh Siegler, Analyst

Thank you very much, appreciate the color.

James Manning, Chief Executive Officer

Thank you.

Operator, Operator

Our next question comes from the line of Darren Aftahi with ROTH Capital Partners. Please proceed with your question.

Unidentified Analyst, Analyst

Hi, this is Austin on for Darren. Thanks for taking my question. Just one for you. I'm curious if you can talk about your average cost per megawatt to develop infrastructure currently? And whether you've seen the pricing on that change at all recently and whether that varies from location to location? Thanks.

James Manning, Chief Executive Officer

Hi Darren, thanks for the great question. Look, it does vary – it's not a very high level. It does vary from location to location; depending on which jurisdiction you're in, and which location will affect whether we have to build that substation or leverage existing substations, whether there are upgrades to the poles and wires or whether there are our own upgrades to poles and wires. So it does vary a little bit from site to site. On average, we're coming in at about low to mid $200,000 per megawatt to build out our infrastructure. We've obviously seen that come up since last year; we were lower than that, but I think everyone is aware of the inflationary pressures in the market. But kindly, we have a lot of infrastructure forward orders, and that's helped us manage that infrastructure cost pressure.

Unidentified Analyst, Analyst

Got it, I appreciate that. Thanks.

Operator, Operator

Thank you. Our next question comes from the line of Kevin Dede with H.C. Wainwright. Please proceed with your question.

Kevin Dede, Analyst

Hi James, Nick. Thanks for having me. You folks have announced both Celsius and Foundry, and you didn't really address either one, save to say your overall hosting targets. I was wondering if you might be more specific by customer if that's a luxury afforded to you. Otherwise, maybe you could offer more insight on the hosting targets that you've set. I mean, it's 100 megawatts this year, up almost 2x and then another 2x increase next year?

James Manning, Chief Executive Officer

Yes, so I'd start that, Kevin, with – as previously mentioned, there's a lot of demand for hosting. What you're seeing us do in this period is deliver a large increase in our installed base of what we're hosting today. We have just over 50 megawatts of installed infrastructure for hosting clients, and we continue to build that out; however, we won’t break down by customer hosting contracts as we're not comfortable providing insight there due to our customer concentration and credit risk concerns.

Kevin Dede, Analyst

Yes, thank you. The demand response program, congratulations on implementing that, can you speak to how ubiquitous it is across the Mawson network given, well, I’d say, what two locations in Australia, right, and the U.S. locations?

James Manning, Chief Executive Officer

Yes, look, we can broadly. We curtail all our sites operationally with respect to the demand response. We've got an active program in Pennsylvania, which is part of the PJM market there. We also have some in Australia, and outside there too. So that's a curtailment strategy, and the demand response is slightly different in Australia compared to the traditional U.S. market. In Pennsylvania, we've got Core with Voltus, helping us manage that demand response program.

Kevin Dede, Analyst

Okay, thank you, James. One last one if I may. Could you offer a little more insight on the deployment in Texas, 120 megawatts, and understand it's through a partnership? I guess what's not clear for me, and I apologize, is just how that power would be divided. Does that fall entirely in your lap to use for self-mining or hosting?

James Manning, Chief Executive Officer

So Texas is, it's a partnership with Texas Pacific Land Corporation. It allows us to do both; we can use it for hosting and/or self-mining on the site. The advantage is, it's got a low CapEx due to all the substations already being in place. It's a combination of a series of smaller sites which allows us to avoid any air issues with approvals. When we combine that with current market prices, we are comfortable with our ability to build out Texas at the right time. We're currently focused on finalizing and building out in Pennsylvania where we have a great locked-in energy price before turning our attention to the Texas opportunity.

Kevin Dede, Analyst

Okay great James. Thank you. I'll hop back in the queue.

James Manning, Chief Executive Officer

Thanks, Kevin.

Operator, Operator

Thank you. Our next question is a follow-up from Kevin Dede with H.C. Wainwright. Please proceed with your question.

Kevin Dede, Analyst

Thanks very much for taking this one too, gentlemen. Your power to exahash conversions are based on what type of machine?

James Manning, Chief Executive Officer

Sorry, where are you looking at Kevin?

Kevin Dede, Analyst

Well, just in general that you've offered some really great insight in the slides. And just for instance, right, you've got four exahash at 120 megawatts. And I'm just wondering what your machine basis was - in terms of tariffs, output and tools?

James Manning, Chief Executive Officer

Correct, we usually calculate that at about 3,400 watts per machine. So we'd sort of take the high end of energy consumption on that basis so that we're comfortable around that energy assumption. Obviously, there'll be some efficiencies there, but usually, we're looking at the MicroBT units or a combination of a mix, including the MicroBT units and the Canaan units, reflecting the mix that we're running in our portfolio.

Kevin Dede, Analyst

And what terahash output then to James if you wouldn't mind sharing?

James Manning, Chief Executive Officer

Between 90 and 100.

Kevin Dede, Analyst

Okay, fair enough. Great thanks. Thank you very much gentlemen.

James Manning, Chief Executive Officer

We're assuming that - that equipment that we can readily buy is available today on the market. We're attacking this furthermore.

Kevin Dede, Analyst

Right, right, very good. Thank you very much. Well, James, since I'm still here and you're here, if you wouldn't mind, could you offer insight on immersion plans and strategy tests, anything that you might be able to offer?

James Manning, Chief Executive Officer

We're currently looking at how we roll out immersion as part of that Texas build-out. We have obviously our proprietary design, and we're also assessing current market solutions that are out there. I think when we build out, we will likely do on our design at this point in time.

Kevin Dede, Analyst

Okay, very good. Thank you very much. I appreciate getting a second swing at the plate.

James Manning, Chief Executive Officer

Thanks, Kevin.

Operator, Operator

Thank you. There are no further questions in the audio queue. I will now turn the call over to Nick Hughes-Jones.

Nick Hughes-Jones, Chief Commercial Officer

Thanks, operator. I've got one last question before I go ahead off to the next meeting. It comes through from a pre-submitted question for Matt. Matt, can you please give some detail on the energy contract in Pennsylvania, what's the cost of energy and the term, please?

James Manning, Chief Executive Officer

Thanks, Matt. I can see you're on the call as well. So our energy costs in PA are around $0.04; they are in the mid $0.03. It's a five-year PPA. It's guaranteed to be under the same contract to be carbon-neutral. So it's green energy, and our counterparty there is Energy Harbor. We have the demand responsibility in that contract, and I think that was a significant change for us in the period of June as we realized that contract and converted it into a liquid market contract.

Nick Hughes-Jones, Chief Commercial Officer

Thanks, operator. I'll hand it back to you now.

Operator, Operator

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. This does conclude today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.