Earnings Call Transcript - GREE Q2 2022

Operator, Operator

Good afternoon. I'm Tom Champion from Greenidge Generation Investor Relations, and thank you for joining us. Today, the company issued a press release announcing our second quarter 2022 financial results. A copy of the press release is available on Greenidge Generation’s website at ir.greenidge.com. With me today are Jeff Kirt, Chief Executive Officer; Bob Loughran, Chief Financial Officer; and Terence Burke, General Counsel. Jeff will begin by providing a business update, and Bob will then discuss our financial results for the quarter. Jeff will then provide closing remarks. Please note that this call will include forward-looking statements that involve risks and uncertainties. Factors that could cause actual results to differ materially from management's current expectations are set forth in the company's earnings release dated August 15, 2022, and in our SEC filings, including the company's most recent reports on forms 10-K and 10-Q. We encourage you to review the safe harbor statements contained in today's press release. Copies of our SEC filings may be obtained by visiting our website or the SEC's website at sec.gov. It is now my pleasure to introduce Jeff Kirt, Chief Executive Officer. Jeff?

Jeff Kirt, CEO

Thank you, Tom. And for those of you who have not met Tom, he joined us recently to head up our Investor Relations effort as well as business development. Tom, or Champ, as many of you know him, has several decades of experience on Wall Street on both the sell side and the buy side, and I hope you all have the opportunity to connect with him in the near future. I'd like to begin on Slide 5 with some opening remarks regarding the quarter. First of all, the team once again delivered strong operational performance in terms of bitcoin production and planned uptime, which we'll discuss in more detail. Clearly, we were in a challenging earnings environment for our industry, driven by price volatility in both bitcoin and energy markets. Mining economics have changed significantly this year compared to the previous year or 18 months prior to the second quarter. As a result, we've pivoted our strategy to focus on liquidity to weather the storm instead of pursuing aggressive growth. Therefore, we decided to concentrate our operations at our existing sites in South Carolina and New York, where we have infrastructure in place and equipment on hand. Leveraging the existing infrastructure provides us with a better return on invested capital compared to developing new sites and presents us with the lowest incremental cost per megawatt built. This strategy allows us to preserve liquidity while benefiting from any potential uptick in bitcoin pricing. Following this strategic pivot, we now expect at least 3.6 exahash of installed mining capacity by the first quarter of 2023 at our two locations. Substantially all the necessary infrastructure equipment has been procured for these locations, including transformers, switchgear, and portable mining structures. Our plan is fully funded with less than $7.5 million expected in additional costs related to completing the infrastructure build with minimal cash contributions required as final payments for the miners in our order book. We expect the electrical service in Spartanburg to be upgraded to 50 megawatts by the first quarter of 2023, and we anticipate having all mining infrastructure at that location in place and miners installed when the service upgrade is complete. It's important to note that we've shared our plan with our lenders and received strong support, which has provided us with additional liquidity by flattening our amortization curve as we execute our development plan in the upcoming months. Lastly, in everything we do, we continue our relentless pursuit of maintaining a superior level of operational performance. On Slide 6, we show our historical and planned capacity along with our bitcoin production, which Bob will discuss in more detail in his section. Slide 7 shows our footprint, and I'd like to start by discussing our existing facility. Our original site in Dresden, New York, is powered by a 106-megawatt natural gas power plant. At this site, we plan to develop at least 2.1 exahash of mining capacity powered by approximately 60 megawatts of mining infrastructure, which entails installing roughly 200 petahash of additional mining capacity compared to what we had at the end of the quarter. The uptime at the plant has been exceptional, with 100% uptime recorded in the second quarter of this year, and we've maintained 100% uptime since the end of the quarter. The uptime has been over 98% for both the last 12-month period and since we commenced commercial mining at this location in early 2020. At our site in Spartanburg, South Carolina, we plan to develop at least 1.5 exahash of mining capacity powered by 50 megawatts of mining infrastructure by the first quarter of 2023. This represents an increase in mining capacity of approximately 900 petahash compared to the end of the quarter. As mentioned, the electrical service in Spartanburg is being upgraded by the utility to 50 megawatts, expected by the first quarter of 2023. Our plan to develop these sites to 3.6 exahash is fully funded, and essentially all the equipment has been procured, including transformers, switchgear, PDUs, and portable mining structures. We previously discussed our extensive pipeline of opportunities in the market. Due to prevailing market conditions, we are pausing our plans to develop future sites until market conditions improve. We continue to have the same opportunity set in our pipeline as previously. We do not expect any material cash outflows associated with our pipeline and are exploring capital-led options for those sites, including joint ventures, partnerships, and potential monetization. Slide 8 illustrates the mining revenue versus power revenue at our Dresden facility. It shows the revenue per megawatt hour for the two classes of miners we operate, as well as the merchant price per power in New York. As you can see, at certain periods in both the first quarter and towards the end of the second quarter of 2022, the power price in Zone C came quite close to the revenue per megawatt hour for miners. On a daily and hourly basis, these lines intersected on several occasions. Consequently, we opted to curtail certain mining types at the site and instead sell merchant power to the market rather than continue mining bitcoin with those types. This ability to curtail provides a floor in terms of revenue per megawatt hour at the Dresden facility compared to mining. While we've curtailed select miners in the first half of 2022, we will continue to do so, although we hope not to have to, if it becomes more advantageous to sell power instead of continuing to mine bitcoin. Slide 9 depicts our fleet efficiency and its improvement over time. We commenced commercial mining in the first quarter of 2020 with a largely older fleet. Since then, our fleet efficiency has improved substantially due to purchasing additional miners with greater efficiency. Recently, to be more capital efficient and to leverage our existing infrastructure, we are prioritizing mining capacity for newer, more efficient miners rather than retaining older, less efficient miners in that space. In the second quarter, we began reducing our inventory of older, less efficient miners across the fleet, and we expect that trend to continue in the second half of 2022. Now, with that, I'd like to turn it over to Bob Loughran, our Chief Financial Officer, to discuss the financials.

Bob Loughran, CFO

Thanks, Jeff. I'll give a brief overview of some financial highlights from our second quarter results and an update on liquidity. Our total revenue for the second quarter rose over 90% compared to the second quarter of the prior year. Cryptocurrency mining revenue increased 43% over the second quarter of 2021, as the increased number of bitcoins mined was significantly offset by an approximate 30% drop in average bitcoin price. We produced 621 bitcoins during the quarter, nearly 100% more than during the same quarter last year. The increase in bitcoin production was driven by the expansion of our miner fleet, as our quarterly average hashrate increased by almost 200% compared to the prior year quarter average. However, the higher hashrate was partially offset by a greater than 30% increase in average mining difficulty. We ended June with 2.5 exahash, which was over 210% greater than last year. Our adjusted EBITDA for the second quarter was $2.9 million, a decline from $8.1 million in the second quarter of 2021, with our adjusted EBITDA margin decreasing to 9.2% compared to 49.9% in the prior year quarter. This decline was due to the combination of lower bitcoin prices and higher energy costs, notably from a significant rise in natural gas prices, which compressed margins in the industry. Turning to Slide 12, this illustrates our liquidity as of June 30th. We had approximately $67 million in cash and fair value of bitcoin, alongside $92 million of cash on deposit with Bitmain for future miner deliveries. Due to our non-fixed price contracts with Bitmain, we anticipate only minimal additional cash contributions for the remainder of our order book. Our balance sheet shows approximately $176 million in debt, net of debt issuance costs of around $7 million. This debt comprises $89 million secured by our miners, $67 million in 8.5% publicly traded senior unsecured notes maturing in 2026, and a secured promissory note with B. Riley with a balance of $20 million as of June 30th. Factoring in the $67 million in cash and fair value of bitcoin, we have net debt of $109 million. Last week, we amended the secured promissory note to extend the maturity to June 2023. This amendment reduced our monthly amortization payments and decreased certain mandatory prepayments, while revising the interest rate down to 7.5% from 6%. Currently, the principal balance after the amendment stands at $16.4 million. As Jeff mentioned, this amendment gives us additional liquidity as we work on our development plan. Our second quarter results included three nonrecurring charges that impacted our GAAP results, which I wanted to clarify. First, we recorded a nonrecurring non-cash charge of $71.5 million for the impairment of our long-lived assets. Each quarter, we are required to assess whether any impairment triggering events have occurred under ASC 360 requirements. The significant decrease in bitcoin prices and the considerable increase in power costs were determined to be triggering events, prompting an in-depth review of potential impairments. This analysis revealed that the carrying value of our long-lived assets exceeded our estimated fair value, necessitating a writedown. Second, we recorded an $11.1 million charge related to changes in the estimate of our CCR liability while we assess the requirements of this liability at our New York facility. As we continue to develop our remediation plan with legal counsel and outside environmental engineers, we may see additional changes to this liability in the future. Third, we included a $15 million charge in our income tax line, which was for a valuation allowance on recorded deferred tax assets, primarily associated with the Support.com business. At the time we acquired Support.com in 2021, we expected to benefit from a significant amount of net operating loss carryforwards with future earnings. Given the current market conditions, it appears less likely we will realize these benefits. With that, I will now turn it over to Terry Burke, our General Counsel.

Terence Burke, General Counsel

Thanks, Bob. I'd like to provide an update on the status of our Title V Air Permit for the Dresden facility. The State Administrative Procedure Act allows us to operate our plant under the existing air permit for four months after final agency action is taken. On June 30th, the New York DEC denied our renewal application. Had we taken no further action, this would have become the final agency decision. However, because we filed a timely request for a hearing on the matter, the decision made on June 30th is now merely a statement of the staff’s position. We will proceed with a hearing before a state administrative law judge. This slide outlines the timeline we anticipate going forward. The first step is to have a meeting with the judge to schedule a procedure or conference, which has not yet occurred. This may happen in September, with the judge likely issuing a notice for public comments possibly in late September or early October. Then, there may be a public comment hearing in October or November, with an issues conference possibly in January. At that point, we would begin the timeline indicated here, which may take anywhere from 20 to 54 months starting in January before we reach a ruling on party status and adjudicable issues. It's important to note that this timeline is not established by law, but rather by the practicalities of the hearing set forth by the administrative law judge. Once a decision is made, the judge will recommend to the New York State Department of Environmental Conservation Commissioner, who will then ultimately render final agency action. Following that, we have four months to appeal, during which we can continue to operate under our current air permit. Presently, we cannot estimate how long this entire process will take, but it’s reasonable to expect a few years minimum. That said, I’ll hand it back to Jeff now. Thank you.

Jeff Kirt, CEO

Thank you, Terry. In closing, I want to emphasize that the team has once again delivered strong operational performance in the second quarter. As a result of market changes, we've refocused our strategy to maximize liquidity while getting our two existing sites to operational scale with a combined capacity of at least 3.6 exahash by the first quarter of 2023. The plant is fully funded with less than $7.5 million in remaining infrastructure costs expected and minimal cash contributions required for final payments in our miner order book. We've discussed the pending electrical upgrade in Spartanburg, South Carolina, which we expect by the first quarter of 2023. Our plan has garnered substantial support from lenders, providing us with additional liquidity as we continue our development initiatives. Finally, I would like to highlight some upcoming events on our investor relations calendar. We anticipate participating in a number of fall investor conferences, and we will continue to provide monthly operational updates. Our third quarter 2023 results will be available in November. Thank you all for your attendance and your interest in Greenidge.