MARA Holdings, Inc. Q2 FY2022 Earnings Call

Good day, everyone. Welcome to the Marathon Digital Holdings Second Quarter 2022 Earnings Webcast and Conference Call. This conference is being recorded. I will now turn it over to your host, Charlie Schumacher, Vice President of Corporate Communications. Please proceed, Charlie.

Thank you, Vikram. Hello, everyone, and welcome to Marathon Digital Holdings second quarter 2022 earnings call. Joining me on today's call are our Chairman and CEO, Fred Thiel; and our CFO, Hugh Gallagher. 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-and-answer session. 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 Marathon Digital Holdings, Inc. are, as such, a forward-looking statement. Please refer to our earnings release for a full reputation of our forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties, which may cause actual results to differ from those anticipated by Marathon at this time. In addition, other risks are more fully described in Marathon's public filings with the U.S. Securities and Exchange Commission, which can be reviewed at www.sec.gov. Finally, please note that on today's call, we will refer to certain non-GAAP financial measures in which Marathon excludes certain expenses from its GAAP financial results. Please refer to our company's periodic reports on Form 10-K and 10-Q for a full reconciliation of its non-GAAP performance measures to the most comparable GAAP financial measures. We'll begin today's call with prepared remarks from Fred and Hugh. After their comments, we will be going through some of our more popular questions from our investors before transferring to a live Q&A with our covering analysts. And with that covered, I’m going to turn it over to Fred to kick things off. Fred?

Thank you, Charlie, and thank you all for joining us today for our earnings call. The second quarter of 2022 proved to be a challenging time for our industry, the broader market, and for Marathon. But as we'll discuss today, we believe our recent progress proves that Marathon is well positioned relative to its peers to grow as a leader in securing and supporting the bitcoin ecosystem. During the quarter, Bitcoin's price declined approximately 56%. At the same time, energy prices increased in part due to Russia's invasion of Ukraine. The combination of both factors has compressed margins and reduced profits for many in our industry. Miners who are running old equipment or overpaying for electricity have been forced to stop mining. As a result, the global hash rate has grown far slower than many analysts were projecting at the start of this year, and we have even seen the difficulty rate adjust downwards multiple times since the end of May. At Marathon, we tend to be fairly well insulated from the macro environment relative to our peers since we run a lean operation, we are asset-light, and we do not have large capital expenditures for data centers or power assets. However, as our financial results demonstrate, we are far from immune to the impact as we are directly tied to a new but maturing asset. In the second quarter, in addition to the challenging macro environment, we also had to work through several obstacles unique to Marathon that depressed production and negatively impacted our results this past quarter. As we've discussed in our monthly production reports, our bitcoin production was substantially reduced during the second quarter due to downtime and maintenance issues at the power-generating station in Harden, Montana, coupled with an elongated regulatory process that delayed the energization of our installed miners in Texas. For most of the quarter, the power-generating facility in Montana struggled to produce an adequate amount of electricity to supply our miners with power. And in June, it seemed that Murphy's law came into effect when a severe storm passed through the region, damaging the power plant and taking offline all 30,000 of our miners in the area, which represented approximately 75% of our active fleet at the time. The downtime from an inconsistent supply of electricity and the storm caused our miners to produce approximately 45% less bitcoin during the quarter than they theoretically could have if they had been running at 90% uptime, which is more in line with our long-term target. Outside of Montana, the energization of our miners in Texas was repeatedly and frustratingly postponed by the power provider until the tax-exempt dates of the wind farm, where 68,000 of our miners are being installed to be confirmed. While confirmation was pending, we applied pressure where we could to expedite the process, and we continue to have miners installed in preparation of receiving the green light to energize. By the end of Q2, we had approximately 30,000 miners or 3.9 exahashes installed across these new facilities. And as of August 1, that number increased to approximately 49,000 miners or 4.7 exahashes. Fortunately, these delays are finally behind us. Just last week, miners at the wind farm in West Texas started to be energized. However, before discussing the immense progress we've made subsequent to the quarter's end to energize our installed miners, procure hosting for the remainder of our fleet and bolster our financial position, I'm going to turn the call over to Hugh to discuss our second quarter financial results in detail. Hugh?

Thank you, Fred. Today, I will discuss our operating results for the second quarter and provide updates on recent financing activities, such as our withdrawal from the investment fund in June and the new credit facilities established at the end of July. First, regarding our operating results, we reported a net loss of $191.6 million for the quarter, compared to a net loss of $108.9 million in the same period last year. This reflects an increase in loss of $82.7 million, which I will outline by examining revenues and margins. As mentioned, we encountered significant operational challenges this quarter, generating revenues of $24.9 million for the three months ended June 30, 2022, down from $29.3 million during the same period in 2021. The decrease of $4.4 million in revenue was primarily due to a lower revenue per bitcoin mined of $6.8 million, resulting from reduced market prices for Bitcoin compared to the previous year. This was partially offset by an 8% growth in Bitcoin production activity this quarter, contributing approximately $2.4 million to revenues. The cost of revenues, energy, hosting, and other expenses for the three months ended June 30, 2022, totaled $16.7 million, up from $4.1 million in the prior year. This increase of $12.6 million was largely due to accelerated cost recognition from our early exit from Harden, which accounted for about $10.3 million, along with higher costs per bitcoin. Our total margin, defined as revenues minus the cost of revenue for energy, hosting, and other expenses, amounted to $8.2 million compared to $25.2 million in the previous year, marking a decline of $17 million primarily driven by accelerated costs from Harden and lower revenue per bitcoin mined. Additionally, we saw a $21.8 million rise in depreciation expense during the current quarter, included in the cost of revenues caption for depreciation and amortization. Approximately $18 million of this increase was due to accelerated depreciation from our exit from Harden, with the remainder reflecting the impact of a larger fleet year-over-year. The most significant contributor to the higher loss this quarter was the notable decline in the carrying value of our digital currencies, attributed to lower bitcoin prices. We recorded a total impairment expense and fair value decline of $207.3 million this quarter, compared to $125.8 million in the prior year, resulting in an unfavorable earnings variance of $81.5 million quarter-over-quarter. Additionally, we experienced increased income tax expenses of around $10 million, operating expenses of about $6 million, and interest expenses linked to our convertible notes totaling approximately $3.7 million. Partially offsetting these unfavorable variances was a gain of $58.2 million from equipment sales. In December 2021, we contracted to sell certain equipment related to the development of commercial activities at the King Mountain facility. During the three months ended June, we completed two shipments of equipment for cash proceeds of roughly $87 million and realized a total gain of $58 million. Our adjusted EBITDA for this period was a loss of $147.2 million, compared to a loss of $105.2 million in the corresponding quarter last year. This decline of $42.1 million was primarily due to the reduction in the carrying value of our digital assets, alongside lower total margins and was slightly offset by the gain from equipment sales. Now, briefly touching on developments for the third quarter, in July, we completed the final shipment of equipment related to King Mountain, receiving proceeds of $44 million and expecting to realize another gain of $29 million on this sale. We also finalized the accelerated cost recognition associated with our hard exit. In July, we reported $7 million in accelerated costs in cost of revenues and an additional $13 million in depreciation costs. We are now engaged in processes to move or sell Harden miners and will update our monthly production reports as plans for these assets solidify. As for our Bitcoin Holdings, as of June 30, we held around 10,055 bitcoin, with 2,820 used as collateral. The fair market value of the remaining 7,235 unrestricted Bitcoin was approximately $143.1 million, along with unrestricted cash on hand totaling about $86.5 million. We anticipate continuing to grow our Bitcoin holdings over time through mining activities. As our mining operations expand, we may sell a portion of the mined Bitcoin to support monthly operations or for general corporate purposes. On June 13, we withdrew 4,769 bitcoin from our investment fund, transferring them to direct company ownership. Consequently, we will no longer apply mark-to-market accounting for the Bitcoin previously held in the fund, and the 4,769 bitcoin are now classified as digital currencies on our balance sheet. Additionally, we terminated a loan of approximately 600 bitcoin as part of our treasury management strategy to consolidate our Bitcoin holdings in preparation for anticipated financing from Silvergate, which we arranged on July 28. In this financing round, we secured an additional $100 million term loan and refinanced a $100 million revolving credit facility. The term loan involves a $50 million draw at closing, already completed, with an interest rate of 7.25%. There is also a $50 million delayed draw option available for up to 270 days. Both the term loan and revolving credit facility are secured by Bitcoin and are set to mature in August 2024. Looking at our cash flow statements, our total cash position, encompassing cash, cash equivalents, and restricted cash, stands at around $90 million, reflecting a year-to-date decrease of about $179 million. This downturn primarily results from expenditures of $394 million on advances related to Bitcoin server orders, alongside $14 million attributed to capital expenditures and another $14 million linked to equity investments. These cash uses were partially offset by $79 million from asset sales, $161 million from common stock issuances, and $35 million from borrowings under our revolving credit facility, which has since been repaid. As we look ahead for the remainder of the fiscal year, we foresee our cash needs for investment, including shipping costs for previously ordered miners, being substantially lower than past expenditures, estimating between $150 million to $175 million. That concludes my comments. I will now hand it back to Fred.

Thanks, Hugh. The second quarter tested our resilience and our resourcefulness. As a result, even as recent events have demonstrated, we not only weathered the difficult times, but we capitalized on opportunities to improve our operational and financial position subsequent to the quarter's end. At the end of July, we received the much-anticipated news that the exemption the power company has been waiting on has been confirmed and that miners could start to be energized at the wind farm in Texas. Just last week, the energy provider started feeding power to the data center and energizing our miners. Of the 68,000 miners that will eventually come online at this facility, approximately 40,000 are already installed and are now being energized. As of this morning, we had brought approximately 9,700 miners online, which added 0.9 exahashes to our total. Energizing this much capacity is a complex process that will occur in stages. According to the latest schedules, the facility should be constructed and energized by the end of the third quarter of this year. At that time, we should have approximately 68,000 miners online at this facility, working to secure the Bitcoin ledger, process transactions and produce new bitcoin for Marathon and our investors. In addition to energizing miners in Texas, we also recently eliminated the uncertainty surrounding our future hosting capacity by securing new hosting arrangements to achieve our prior hash rate targets. When vetting potential new hosting arrangements, in addition to the quality of the operator, we prioritized speed of deployment, cost of electricity and hosting, geographic diversity and the source of power. With this in mind, we signed a major new agreement with Applied Blockchain securing approximately 200 megawatts worth of hosting capacity, 90 megawatts of which is in Texas, while the other 100 megawatts are at a wind farm in North Dakota. As a part of this arrangement, we have the ability to add an additional 70 megawatts of capacity, bringing the total amount of hosting across all of the applied blockchain facilities to 270 megawatts if we choose to exercise the option. Additionally, we opted to expand our agreement with Compute North to include an additional 42 megawatts of hosting capacity at the facility in Grandbury, Texas, and we're also expanding with several smaller providers in the U.S. In total, we secured enough hosting capacity to support our prior target of 23.3 exahash. Based on construction schedules, it's our understanding from speaking with our hosting providers that we will have enough miners installed to reach that target by the middle of 2023. In addition to substantial operating progress we made to energize previously installed miners and procure hosting arrangements for others, we have taken measures to enhance Marathon's financial position going into the second half of 2022. As listed in our contracts, which were published in December of last year, the S19 XPs we purchased from Bitmain benefit from price protection. For the July and August shipments, we received a price adjustment on our first shipments of S19 XPs that were relatively in line with current market conditions. It is our current belief that we will receive similar adjustments if market conditions persist through the end of the year. These price adjustments materially reduced our potential capital expenditures for 2022. We, as Hugh mentioned, rather than relocate all the miners that we installed in Harden, Montana, we have opted to sell a portion of them. This decision backs the question of how we are still on track to achieve our target of 23.3 ex-hash. At Marathon, we're always looking to reduce our costs and boost performance, especially in current market conditions when Bitcoin's prices declined and energy rates have increased, compressing margins for Bitcoin miners. As part of this strategy, and in anticipation of the potentially industry-wide margin compression, we opted to purchase an additional 30,000 S19Ps from Bitmain in April of this year. We're currently in the process of using these new miners to upgrade our fleet by replacing some of our S-19 Js and S-19 PROs with XP. We are still on target to achieve our prior goal of 23.3 ex-hash, but with the upgrades, approximately 66% of the 23.3 ex-hash will be coming from XPs. The S19 XP is 30% more energy-efficient than the prior generation. And by converting to these machines, we are decreasing our electricity cost on a per terahash basis. As a result, once fully installed, we believe Marathon's fleet will not only be one of the largest but also among the most energy-efficient mining fleets on a per terahash basis. One other update we're mentioning relates to our hosting arrangement with Compute North. Our original agreements with them included the fixed price for energy and hosting as well as a small profit share on a portion of our overall fleet. Given the current market dynamics, we opted to renegotiate these contracts to maximize the potential profitability. We have eliminated the joint venture and profit share. Under our new agreements, we will continue to pay a fixed rate for hosting, and we will have an extremely attractive fixed price on the wind energy at the facility in West Texas. The remaining grid energy we use has pass-through pricing, which gives us the opportunity to benefit from hedging and participating in curtailment programs because we now have the benefit of being able to control when our miners will be curtailed. We can now benefit from selling energy back to the grid when it makes economic sense to do so as some of our peers in the industry have recently demonstrated. There are times when it can be more profitable to sell electricity back to the grid than it is to mine Bitcoin. Under our new arrangements, we now have the ability to participate in this potential upside. In summary, the second quarter was challenging for the industry and for Marathon in particular. Bitcoin mining is a nascent industry, and as I mentioned in our last call, there is no playbook. However, given our progress, we're confident that we remain on track to grow our position as a leader in this space. Miners are coming online in Texas. We have hosting arrangements secured to achieve our target of 23.3 ex-hash by mid-next year. Our mining fleet is state-of-the-art, consisting predominantly of the most efficient bitcoin miners available in the market. We have a strong position in Bitcoin and our liquidity position. Our balance sheet continues to improve. Overall, we have entered the second half of the year with added confidence that we remain on track to grow our position as a leader in supporting and securing the bitcoin ecosystem. With that, I’ll turn it back to Charlie so we can begin taking questions.

Thanks, Fred. At this time, we're going to commence the Q&A section of today's call. We'll start by answering some of the questions submitted by investors on our new Q&A platform. In total, we received about 100 questions, which looks fantastic. We won't have time to tackle all of them today, but we do want to cover some of the most uploaded questions. And also, I'll let you all know how much we appreciate the interest in Marathon and the opportunity to have more of a dialogue with our investor base. So to start, the first question comes from Bill Gee, who asked, can you please give us an update on the rigs and when they will be plugged into full capacity? We got approval from FERC and they were curious about the energization timeline. So I think we've actually covered this a little bit in the prepared remarks and in today's earnings release. But just curious, Fred or Hugh, any color that either of you want to provide on the process of receiving approval and starting to energize.

Well, once the FERC approval was received, the power provider could proceed with beginning to energize the site, which took a certain number of days. They can't turn on 280 megawatts at one time. They turn it on in essentially kind of 20-megawatt chunks. And so while we have 49,000 miners installed at the site, those will be energized 20 megawatts at a time, and we expect to be fully energized with the 68,000 miners installed on-site by the end of September.

Excellent. Our next question comes from Tami Gee, who asks, what are Marathon's plans for any severe downturns that may occur within the crypto market in the coming years? So I guess, any comments around kind of resiliency of the model or how we're prepared to kind of survive a crypto winter?

I can touch on part of this and maybe Hugh will have a comment on the other side of this. But essentially, because of the way we're structuring these power agreements, we do have the ability to curtail our mining operations if mining becomes unprofitable. This is different than other miners who may have PPAs where they’re obliged to take the energy. And so we believe that we have strengthened this strategy, and it will help us going forward. As it relates to the other side of this and how Bitcoin pricing may affect us, Hugh, I’ll let you comment on that.

Again, I think, Fred, the whole point with this is optionality, right? So you want to build flexibility and optionality into your processes. As we said, the financing we completed goes a long way in helping us achieve that goal. And the other thing I think we need to look at is, as we mentioned, as we produce more bitcoin considering using a portion of that production every month to cover your cost where regardless of where Bitcoin is going up or down, you're matching the cost of bitcoin with your cost of production within the same month. That's something we're certainly looking at. But I would say here, in addition to what you mentioned, which is probably the first order issue. The second one is building in financial flexibility, so you can continue to absorb fluctuations that will come in the market.

Thank you. This is probably a good segue actually into our next question, which comes from Noah P, who asked how does Marathon compare or stand out from other miners in the market? So any other additional comments besides what just touched on related to Marathon's differentiators or kind of what makes us unique?

I think as we’ve stated many times in our public disclosures, the earnings calls and presentations, our strategy is different than many of our colleagues in the industry where we operate with an asset-light model, working with third parties to do hosting and provide energy for us, as opposed to being vertically integrated. We think that has certainly given us a lot of flexibility, especially with the delays that we incurred in energizing miners had we been having to make huge CapEx expenditures and investments in infrastructure. I think it would have been a very different financial situation for the company. But our strategy provides us with a great amount of flexibility, and I think, as you can see, we’ve weathered the storm quite well.

Suspension is a little more esoteric, if you will. So maybe I'll pass this over to you. Ivan B was wondering about the Ethereum move to proof of stake. Do you think there may be any sort of impact on Marathon or earnings as a result of that shift?

Yes, I’m not going to directly comment on whether it will impact our earnings. I think just generally in the marketplace, Ethereum and the Ether platform is really a platform for developing decentralized applications and smart contracts where Bitcoin is really all about Bitcoin's cryptocurrency. And I think the two of them will continue to operate very independently of each other. I think there are still going to be different versions of Ethereum classic. You have the current version of Ethereum and there’s people in the news commenting about doing yet another fork here. And I think Bitcoin won’t be really impacted by that much.

Next question comes from Mark B, who asked, is there a future potential of a dividend paid in Bitcoin?

This is something that I think as a management team, we've discussed; it's not in the current plan. It may be an option in the future or not, we don't know, but I think time will tell.

Great. Next question, maybe, Hugh, this might be a good one for you. New DS is Marathon considering adding additional shares, hence, potentially increasing dilution. So Hugh, maybe can you touch on sort of the capital allocation strategy a bit and some of the different levers that we have available?

We have an active at-the-market facility that we are using, which contributed around $161 million in the first six months of this year. We will continue to consider this option as we remain in growth mode. However, we anticipate needing less capital in the next six months compared to the first half of the year. We also ensure that our short-term actions align with our long-term debt-equity balance in our capital structure. This is why we were comfortable increasing our debt capacity this quarter, given our equity fundraising efforts. While we don’t want to overextend ourselves, we also want to maintain optionality and flexibility moving forward. In short, yes, we will continue to access the equity markets as needed to support growth. Importantly, we aim to reach a point where we are no longer relying on capital markets to cover monthly operating expenses, which has been the case until now.

Great. Thank you. I think we'll do one more question before we kind of switch gears here a little bit. So last question, David Jay asked is, Marathon Digital planning on branching out to mining other cryptocurrencies besides Bitcoin. Fred, maybe you want to touch on that one a little?

At this point, Bitcoin is our primary focus and only focus. We may do experimentation just to learn and understand how some different cryptocurrencies operate, but Bitcoin is our focus.

Great. So in the interest of time, I think we'll wrap up the section of the Q&A. Again, we really appreciate the questions and the interest, and I wish we had more time to answer all of them. But for now, I'm going to turn the call back over to our operator to open the line to questions from our covering analysts. So Vikram, the mic is yours.

Thank you very much, sir. We have a first question from Jon Petersen with Jefferies.

Okay. And congrats on all the progress over the last few weeks. Maybe my first question, I guess if we think about the second half deployments and some of the delays that you had in the first half of the year. I mean, I guess, talk us through your confidence level that we're not going to run into energization delays or anything like that with the next level of deployments.

Sure. So the initial site we're deploying in the second half of the year with Applied Blockchain already has capacity running at it. So that site is the expansion that we're doing there; it's really more of a construction issue than anything else. So we don't foresee any energization issues there. The second site, based on their historical operating experience, we feel fairly confident that, that will happen on time. The good thing is, today, with the energization of King Mountain and the additional capacity that we've tied up with other hosting providers, all of the inventory of miners that we have will be fully absorbed here very shortly. And if you look at the second half of this year, it's predominantly the XPs that are yet to be delivered that will be deployed there. So if anything, we believe it's really more deliveries will be the gating item than construction or energization.

Okay. Got it. And then on the deliveries, you mentioned that the July and August deliveries were discounted from the original purchase price. I’m not sure if you can – if you’re able to quantify that for us? I think if I remember right, you guys paid $79 a terahash. I think the market rate, I would imagine is down by more than one-third from that; your final payment is a third. So I’m just curious if the market terahash rate is less than 33% lower than where you paid, are there ways to renegotiate that contract, maybe increase the amount of miners that you’re buying? Or just how should we think about that?

I think you should think about it as we will be deploying 23.3 exahash, and we're benefiting from essentially a decrease in the amount of CapEx we're going to have to pay to get those miners deployed. I think your estimates on kind of market pricing are most probably definitely in the ballpark; you can obviously see those numbers in the secondary market, starting to see the XP prices come down in the secondary market already pretty aggressively. So I think it's about all we're going to comment on that for obvious reasons.

We have next question from the line of Chris Brendler with DA Davidson.

Congratulations on the progress. I'm not sure if this is meant for Fred or Hugh, but I would love to hear your thoughts. It was really impressive that you managed to get through this quarter without selling a significant amount of Bitcoin like many of your competitors did. Could you provide more detail on the sources of cash for the quarter, particularly regarding the Compute North loan? How much of that has been repaid, and are there any changes in payment expectations on some of these orders? Can you quantify that at all?

Sure. There has been no activity on the Compute North loan, so it remains outstanding. Therefore, it was not a source of funds. The two largest sources of funding were the proceeds from the sale of miners, which totaled $87 million, and we also drew from the revolver. Despite it not being a strong quarter in terms of stock price, we continued to utilize our ATM periodically during the period. These were our three main sources of funds. The most significant use of funds was clearly for ongoing payments for miners. It's important to note that a lot of the impact from miner pricing adjustments occurred in late June and July, so it didn't significantly affect the current quarter but will have a more pronounced impact going forward for the rest of the year. Looking at the first six months, our total for advances for miners is around $390 million, and our forecast for the next six months is approximately $150 million to $175 million.

Great. I have a follow-up question and a few more, but I'll return to the queue. Regarding the new facility and your hosting arrangement with Applied Blockchain, as well as other hosting deals that help complete the 23.3 ex-hash, can you discuss the pricing? I was really impressed by the Compute North transaction from December at $0.042 per kilowatt hour; that was very attractive pricing considering the current market. Can you provide any indication of how much higher your new contracts might be, given the changes in energy prices?

Yes. While we haven't sort of announced the exact price, it is a fixed price contract. And I think if you look at the fact that we'll be deploying XPs there and with that energy efficiency, we'll still be relatively in the same ballpark as prior fixed price agreements that we have with Compute North.

So the XP efficiency offsets the increase in power, so your cost for quality is relatively stable?

Yes, that's a great way to look at it.

We have next question from the line of Chase White with Compass Point.

So just curious, what portion of the power purchase agreements have the ability at this point to participate in curtailment programs? I mean, you mentioned that a certain portion, you're able to actually do that and sell power back to the market. So I'm just curious what amount of power is kind of subject to that?

So in relation to the King Mountain site, which is a wind farm, the wind energy that we have has a fixed price, very attractive fixed price. And so for example, if you look at the forward market and ARCO this week, it sudden $400 a megawatt or something like that. We are significantly below that. And so that gives us a very big opportunity to sell the wind energy back. The grid energy we only take it when we need it and want to mine with it. So that's not energy that we sell back. But the wind energy, we have 100% benefit from if we sell it to the grid.

Got you. That’s helpful. And then, I mean, is it safe to say just as a follow-up to the prior question that the kind of the blended average electricity costs go up, but the efficiency comes down, but everything should stay effectively the same? I mean, are you kind of implying, I guess, here that the power price is fixed at something like 30% higher given the efficiency of the XPs?

Yes, I think a good way to look at it is operating with XPs, our costs stay in line with where they've been estimated before.

Thank you. We have next question from the line of Lucas Pipes with B. Riley Securities.

Thank you so much, operator. I wanted to follow up on this last question in May of last year. I think you disclosed the cost per megawatt hour as $0.045 roughly per kilowatt hour. So how should we think about that cost component on the Compute North side of the agreement today? The rate that was changed?

In the original agreement, we had no benefit of curtailment. It was a fixed-price Power Purchase Agreement, and we were obligated to take the energy regardless of our preference unless the grid curtailed the site. We couldn't sell the energy back. Now, we've successfully negotiated a significantly lower price for the wind energy component, with full rights to sell back to the grid and enhance our profit. For the grid energy, we have full pass-through rights, giving us the ability to hedge and manage that energy as we see fit, allowing for optimization. Given the current energy markets, particularly in 2022 and 2023, we expect volatility in grid energy prices and didn't want to be confined to a 5-year fixed-price term based on today's market. We sought the flexibility to hedge through futures and adjust our energy usage as needed to maximize profitability. This restructuring provides us with much more flexibility.

That is very helpful.

Yes. That profit is going to offset any spot market issues with grid pricing as well as to help fund futures and other things like that for hedging.

We have next question from the line of Stephen with Cowen.

Thanks for the question. Fred, can you just discuss the construction timelines on the 270 megawatts of Applied's infrastructure on your new hosting arrangements? Where do they stand today? What's constructed in North Dakota and Texas and what still needs to be done? And I have a follow-up.

The Texas site is an existing facility where we are expanding operations. I'm not going to specify the exact number of miners that will begin operating there each month. The main factor affecting this is our deliveries from Bitmain compared to our construction progress. Currently, we're receiving approximately 15,000 miners each month, with some variation, and we expect to see those numbers increase later this month. This delivery schedule is crucial for the deployment of our Applied Blockchain sites. For the North Dakota site, we will start installing the first miners around December, and the deployment will continue through May of next year.

Okay. And I think the press release highlighted 2,800 Bitcoin utilized as collateral for borrowings roughly. Is there any risk of triggered for sales or liquidation here in the contract with Silvergate and what price is a Bitcoin would that be potentially?

Well, the amount we have outstanding, that's since been repaid. So the issue that you're talking about is if you look at where we are today, we probably have 3,000-some-odd bitcoins outstanding as collateral, and that's of our 10,000. So we're not overly concerned about that. I think once you get down to bitcoin prices of around $12,000, things get pretty rough. But right now, we're watching it closely, and we feel like we've kind of picked the right time to do that financing. And remember, the issue you also have is once you can also choose, if you wish, to sell Bitcoin if you have to and pay off the loan. And since you're over collateralized all the time, you can also do that. So I'm not particularly worried about that, but it is something we have to keep an eye on and we do keep an eye on to make sure that we're not getting out over our skis. The most important thing for me is production ramping, right? Because our view is there's some sort of there's a level of bitcoin holdings that we want to utilize for borrowings. As our Bitcoin holdings increase and as our production ramps up, that becomes less and less of a concern because the amount that could be drawn on your borrowings becomes less and less a percentage of your overall Bitcoin holdings. And that's why it's so important that we got that delayed drawdown feature in the term loan. It gives us an opportunity to grow into that debt as well.

That's helpful. Appreciate it.

We have next question from the line of Greg Lewis with BTIG.

And good afternoon on everybody. I guess I wanted to follow up on the shutting down of Harden. I guess you announced that you're either going to be moving rigs or selling those rigs off. Could you talk a little bit about the drivers of those decisions? What types of rigs are there? And as we think about that, what the market is for potentially selling? And if we were to move rigs, how much it would cost to reposition those rigs and as you look at your existing footprint, where those rigs could even go?

Sure. So let me start by saying the 23.3 exahash, that number does not include any miners from Harden being installed anywhere else. So we have no need to use those miners. They happen to be older S19s that have been in use for 18 to 24 months. And we believe that what we need to do as much as possible is deploy the latest state-of-the-art machines, meaning XPs because of the energy efficiency. We think that that's going to benefit us in the long run, especially in the next 18 months of the market where energy prices are going to be very high, most probably generally around the marketplace. So the miners that are at Harden, if you go back into our filings, you could calculate that our cost to acquire those miners was somewhere in the low 20s per terahash. So essentially, if you look at the current market for used machines, it's around that ballpark. And so essentially, those machines could be sold in their current condition at a small loss or near breakeven kind of number. The cost to move them if we were to relocate them somewhere would be around $1 million to $1.5 million if we were to do that. But I think we're very focused on deploying the latest machines that we are getting in and really just exiting, I mean, kind of a clean break out of Harden, so we can move on.

Okay, super helpful. And then, I did want to talk a little bit about the wind facility. I mean, clearly, there’s going to be opportunities, as you mentioned, Fred, about selling power into the grid. I guess what I would say, realizing that we have to look at each of these locations a little differently. Is there any way that we should think about utilization of the exahash at that facility just given those opportunities, i.e., in the summer when it’s demand for power pricing tends to be most attractive to sell versus, say, most of the other parts of the year when pricing is more stable? Any kind of color you think as we build out our models, how should we should be thinking about the utilization of that exahash? I don’t know if you want on a quarterly or even annual basis. Have you guys – any kind of color there?

That's a great question. We've been collaborating with the power provider and the wind farm operator. Determining the actual capacity is quite complex since it heavily relies on seasonality and wind patterns, not just energy market conditions. The wind's availability varies throughout the year, influenced by seasonal changes. The wind farm operator employs advanced models for this analysis and has been managing this site for almost two decades, giving them substantial experience. We're counting on their expertise for insights. Generally, our approach is straightforward: if mining proves more profitable than selling energy, we will mine; if selling energy is more profitable, we will sell. From a cash flow standpoint, whether it’s Bitcoin or selling energy, our focus is on maximizing profitability. We expect it will take us a few quarters to fully grasp the seasonality and its real effects, but our ultimate aim is to optimize for profit.

Okay. I wanted to follow up because sometimes power prices can be negative, usually when wind is strong during the night. My question is, if power pricing is very favorable across the grid, do you have the capability to draw power to operate those rigs when wind isn't available? Are you connected to the grid?

Absolutely. I mean the wind doesn't blow 24/7, right? So the goal is to optimize the 95% uptime or sell energy back to the grid. So by no means are we only using wind energy. We learned our lessons that Harden that we want redundant energy. And again, part of the difference in our model to some of our competitors who sit and only have grid energy is by having the wind energy, there's a lot of wind energy that's stranded at the wind farm that can't go into the grid because the operator is not buying it. And so we get the benefit of that, tends to be extremely low pricing on that energy. But we also have the benefit of being able to draw off the grid when that's cheaper. The good thing is that we have the same incentives as the power operator does to operate the site for maximum profitability. And so we're very aligned in how we're looking at the energy strategy. And I think one of the unique things here, as we've talked about, gosh, at this point for over a year, is by partnering directly with the power company and really operating a mining business kind of where your incentives are fully aligned with your energy provider, it creates a very unique situation that people operating directly on the grid don't have the ability to do. And so I think, again, our model here is going to be proven to be somewhat better than some of our colleagues in the industry.

Great to hear, Fred. Thank you all for the time. Have a great rest of the day.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. Now I'd like to turn the call back over to Charlie Schumacher for closing remarks. Over to you, sir.

Thank you all for your time today. If you have questions that were not answered during today’s call, please feel free to contact our Investor Relations team at ir@marathondh.com. Thank you, and enjoy the rest of the day.

Thank you very much. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time.