Terawulf Inc. Q3 FY2023 Earnings Call

Greetings, and welcome to the TeraWulf Inc. 2023 Third Quarter Earnings Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jason Assad, Director of Corporate Communications. Thank you, Mr. Assad. You may begin.

Thank you, operator. Good afternoon, and welcome to TeraWulf's third quarter 2023 earnings call. Thank you for joining us today for our call. With me on today's call are Chairman and Chief Executive Officer, Paul Prager, and our Chief Financial Officer, Patrick Fleury. 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 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 TeraWulf are such forward-looking statements. Investors are cautioned that forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from those anticipated by TeraWulf at this time. In addition, other risks are more fully described in TeraWulf's public filings with the U.S. Securities and Exchange Commission, which may be viewed at sec.gov and in the Investor section of our corporate website at www.terawulf.com. Finally, please note that on today's call, we'll refer to certain non-GAAP financial measures. Please refer to our company's periodic reports on Form 10-K and 10-Q and on our website for the full reconciliation of these non-GAAP performance measures to the most comparable GAAP financial measures. We'll begin today's call with prepared remarks from Paul and Patrick, then we'll proceed to Q&A. It's my pleasure to now turn the call over to TeraWulf's CEO, Paul Prager. Paul?

Thank you, Jason. Good afternoon, everyone, and thank you for joining us on our third quarter 2023 earnings call. During the third quarter, TeraWulf continued to take proactive steps to execute our strategic growth plan with the goal of reaching 7.9 exahash of Bitcoin mining infrastructure capacity by year-end, further positioning the company for long-term sustainable success. Before turning the call over to our CFO, Patrick Fleury, for a review of our financial results, I would like to comment on some recent highlights from our business and on our continued confidence in the year ahead. As a reminder to everyone joining us today, TeraWulf mines Bitcoin utilizing predominantly zero-carbon energy resources at two data centers: our wholly owned and operated Lake Mariner facility in upstate New York, which utilizes 91% zero-carbon grid power, and the jointly owned 100% nuclear powered Nautilus facility in Pennsylvania. As of September 30th this year, these two industrial-scale projects had a combined self-mining hash rate of 5.5 exahash per second with approximately 50,000 miners deployed. That is more than triple where we were during the same period last year. Further, that hash rate, even with difficulty reaching all-time highs, resulted in 994 Bitcoins mined during the third quarter. Importantly, our operations are solidly free cash flow positive, solidly free cash flow positive. During the quarter, there have been many positive headlines for Bitcoin, most notably the anticipation of an imminent approval of the U.S. spot Bitcoin ETF, which has driven a rally in the price of Bitcoin. Concurrently, there has been a steady climb to an all-time high in overall network hash rate, which continues to suppress mining economics. So, what does this mean for how we are approaching the balance of 2023 and approaching the halving next year? As energy infrastructure professionals, managing through cycles is fundamental to our approach, and we remain steadfast in our strategy to leverage our resilient, low-cost infrastructure to maximize profits, repay debt, and return value to our shareholders. In terms of executing our growth initiatives, the Lake Mariner infrastructure expansion is nearing the final stage of construction. The third building is ready for racks to be installed, and we are advancing other preparatory works, so that as miners are delivered, they can be racked and online without delay. Once fully energized, this 43-megawatt expansion will bring the company's total self-mining hash rate capacity to 7.9 exahash per second, or more than 200 megawatts of Bitcoin mining capacity. That translates into a 58% increase in the company's total self-mining hash rate. Importantly, and I cannot emphasize this enough, we will continue to prioritize accretive and capital-efficient infrastructure investment and manage future capital outlays for mining equipment in a responsible manner to remain nimble during challenging markets and avoid unnecessary dilution to our shareholders. To that end, we have strategically structured our miners' purchase agreements in a capital-efficient manner to enable the company the flexibility to monetize deposits and defer payment obligations. Early in the third quarter, we announced the purchase of 18,500 S19j XP Bitcoin mining machines from Bitmain, which are targeted to be delivered next month. To preserve liquidity and avoid excessive dilution, we plan to convert our deposits on this purchase order into roughly 5,500 machines and will host to own the remaining 13,000 machines for Bitmain at a hosting fee of approximately $0.078 per kilowatt hour. The company retains the option to purchase the remaining miners at any time and currently expects to complete the purchase of the balance of all 13,000 machines by the fourth quarter of 2024. We believe this arrangement not only reflects our strategic relationship with Bitmain, but also underscores a strategy to prudently invest in infrastructure while opportunistically expanding our mining fleet, thereby maximizing revenue potential to every dollar spent while avoiding unnecessary dilution at depressed share price levels. To reiterate, the fact that we could plug all 18,500 S19j XP miners into building three immediately highlights the benefits of owning and prioritizing the development of our data center infrastructure, which then enables us to undertake these types of agreements without the incurrence of meaningful upfront CapEx. Once these new machines are fully self-deployed, TeraWulf will have one of the most efficient and profitable mining fleets in the sector by combining a fleet-wide efficiency of 25.7 joules per terahash and a realized average power cost of $0.035 per kilowatt. With that said, I'd like to pass it over to our CFO, Patrick Fleury, to further discuss our financials and results from the quarter.

Thank you, Paul. TeraWulf performed exceptionally well in the third quarter, particularly as the summer months are seasonally the most challenging operating environment. However, the advantageous location of our assets in the northeastern United States means we are blessed with temperate conditions, limited high heat events and curtailments, and less wear and tear on our miners versus our peers located in the southern U.S. The operating teams at Lake Mariner and Nautilus did an outstanding job of optimizing performance of our mining rigs, resulting in positive financial improvements reflected in our Q3 financials. As Paul mentioned, with 5.5 exahash of operating capacity online for the entirety of the third quarter, we realized solid free cash flow generation with a debt repayment of approximately $7 million. Before diving into the numbers for the quarter, a quick reminder, there is a key difference between our GAAP financials and the monthly operating reports and guidance presented in our investor presentation. As a result of our 25% ownership in Nautilus, the revenue, cost of revenue, operating expenses, depreciation and amortization at Nautilus are not consolidated into our GAAP financial statements. Instead, the financial impact of the Nautilus joint venture is reflected in the equity in net income and loss of investee, net of tax line item on the GAAP income statement. In the third quarter of 2023, we mined 624 Bitcoin at Lake Mariner, and our net share of mined Bitcoin at Nautilus was 370 Bitcoin, for a total of 994 Bitcoin, or about 11 Bitcoin per day and a 10% improvement over the 908 Bitcoin mined in Q2 '23. Our GAAP revenues also saw outstanding growth of 23% quarter-over-quarter, reaching $19 million in Q3 '23 from $15.5 million in Q2 '23. Our value per Bitcoin self-mined this quarter, a non-GAAP metric that includes Bitcoin mined at Nautilus, averaged $28,104 per Bitcoin for a total of $27.9 million, as detailed and defined in our monthly operating reports and press release. Looking now at our gross profit, we saw an increase of 3% quarter-over-quarter from $10.3 million in Q2 '23 to $10.6 million in Q3 '23. Our total power cost per Bitcoin mined, a non-GAAP metric that includes Bitcoin mined at Nautilus, was $9,322 in Q3 '23 compared to $7,197 in Q2 '23. As a reminder, in our GAAP financials, unlike our monthly operating reports, the company records proceeds received and to be received for demand response programs as a reduction in cost of revenue. These expected proceeds totaled $1.7 million in Q3 '23. Operating expenses remained stable quarter-over-quarter at approximately $1.2 million. SG&A expenses increased quarter-over-quarter from $8.6 million in Q2 '23 to $10.3 million in Q3 '23. The increase was primarily due to an increase in non-cash stock compensation to related party for achieving a performance milestone. We are on track to achieve approximately $6 million of SG&A savings year-over-year, and I'm confident we can continue to drive down costs. We are committed to achieving savings of $10 million relative to 2022. We have a number of cost-saving initiatives underway and remain steadfast in our objective to achieve these savings as we move into 2024. Depreciation increased modestly quarter-over-quarter from $6.4 million in Q2 '23 to $8.2 million in Q3 '23. The quarter-over-quarter increase was the result of an increase in mining capacity and infrastructure placed into service in the middle of Q2 '23. In Q3 '23, we recorded a loss on disposal of property, plant, and equipment of $0.4 million related to disposals of miners at Lake Mariner. GAAP interest expense in Q3 '23 was $10.3 million, which includes cash interest expense and amortization of debt issuance costs and debt discount related to the term loan financing. However, cash interest paid during the three and nine months ended September 30, 2023, was $4.3 million and $15.5 million, respectively. Notably, cash interest paid during the year-to-date nine-month period actually includes 11 months of interest payments due to accrued interest for the fourth quarter of 2022 paid in January 2023, and eight months of interest payments made in 2023 as interest is paid monthly in arrears as of May 2023. In Q3 '23, we reported $0.9 million in equity in net income of investee, net of tax, as compared to negative $3.3 million in Q2 '23. These amounts represent TeraWulf's proportional share of income or losses of the Nautilus joint venture. Our GAAP net loss for the third quarter was $19.4 million compared to a net loss of $17.8 million in Q2 '23. Our non-GAAP adjusted EBITDA for Q3 '23 was $9 million, an 18.5% improvement over $7.6 million in Q2 '23. And year-to-date 2023 adjusted EBITDA is $14.3 million. Turning our attention now to the balance sheet. As of September 30, we held $6.6 million in cash, with total assets amounting to $312 million and total liabilities of $158 million. With the achievement of our targeted 160 megawatts and 5.5 exahash of operating capacity exiting Q3 '23, we anticipate a consistent and rapid reduction in our long-term debt moving forward. Furthermore, year-to-date, we have reduced our networking capital, excluding the current portion of long-term debt, from approximately negative $60 million at December 31, 2022, to approximately negative $19 million as of September 30, a substantial improvement and one which will continue to normalize in the fourth quarter. As I've mentioned in previous quarters, you may note from our balance sheet that we do not hold our Bitcoin in treasury, but rather execute a monetization strategy, whereby we liquidate Bitcoin to pay operational expenses and capital expenses and overhead as needed, rather than dilute shareholders to fund these costs. Our job as a Bitcoin miner is to continue to mine Bitcoin more efficiently and profitably than any of our peers and return that profit to shareholders in the form of debt pay down, organic growth, or dividends and share buybacks, not by holding. As a 23-year veteran of Wall Street and long-time institutional investor in the energy, power, and commodity sectors, I find the holding strategy to be a simple marketing ploy allowing peer management teams to gamble with shareholders' money. What commodity business in the world? Copper, coal, gold, oil, and gas, mine a commodity and doesn't sell it because they think or speculate that prices will be higher in the future. With Bitcoin ETFs likely available to the masses in 2024, thereby providing exposure to the price of Bitcoin, we believe the holding strategy will soon be antiquated and not in shareholders' best interest. Investors should own WULF equity because number one, they're aligned with management, the Board, and insiders owning roughly 50% of the company's equity; and number two, as an operating mining company, WULF can mine Bitcoin more efficiently and profitably than any of our peers and return that profit to shareholders in the form of debt pay down, organic growth, or dividends and share buybacks, not by holding. My recommendation to the Board will always be to monetize what we mine and distribute profits via dividends, similar to the MLP or Master Limited Partnership model in the energy industry. Lastly, with regard to our ATM and further to Paul's commentary on prioritizing accretive growth, since September 30th, we issued only 4.6 million shares for net proceeds of $5.3 million, as we do not think our current stock price represents fair market value for the company, and with 50% insider ownership have no interest in material dilution at these levels. In conclusion, I hope that during this call today, our financial objectives will make clear and simple: maximize profits, repay debt, and return value to shareholders while providing investors access through transparency and accountability. With that, I'll pass it back to Paul and look forward to answering your questions.

Thanks, Patrick. To summarize what we have discussed today, we are executing on the objectives we have communicated to the market. We remain confident in the strength of the business and our growth prospects, and we look forward to sharing additional operational updates in the future. Before we conclude today's remarks, I want to address our balance sheet and current valuation, as I believe they go hand in hand. With free cash flow generated in the third quarter, we have reduced our debt to approximately $140 million, which I believe is certainly manageable in the context of our cash flow expectations. We also have no mandatory amortization until April 2024 and more likely until maturity of the loan well past the halving if we achieve an incremental $33 million of principal paydown by April. To put this in context, assuming the Bitcoin price of $35,000 and current network difficulty, we expect to sweep an incremental $30 million by the end of the first quarter of 2024. Assuming a Bitcoin price of $40,000, the incremental paydown would be closer to $40 million by the end of the first quarter of 2024. We are fortunate to have a seasoned and constructive lender group that has consistently and continuously demonstrated their support for the company's business by agreeing to modify the terms of the credit agreement to provide more liquidity and flexibility. I expect these collaborative efforts to continue, particularly as our lenders are highly incentivized to see our share price perform, given they own 15% of the fully diluted equity of the company. My executive team has managed through multiple power and credit cycles over the last 20 years. I believe the company has several options with regard to considering our debt. To reiterate, investors should consider the following: One, lenders are incentivized to see our share price perform given their sizable equity ownership stake. Two, our lender group has proven to be supportive and constructive, having agreed to several amendments to increase the company's liquidity and flexibility. Three, free cash flow will likely enable a reduction of close to $40 million of principal by April 2024. Four, Nazar Khan, my COO and Co-Founder, and I own a significant portion of the debt. We are studying the possibility of seeking a waiver from the lenders to convert to equity at a premium to the current stock price. In principle, I am entirely comfortable coming out of a senior secured position to own equity alongside you, our investors, in TeraWulf. Five, debt provides operating leverage and, at 11.5%, our term loan is attractively priced relative to the high yield bond index of around 9.5%. With regard to valuation, in no uncertain terms, I believe TeraWulf is undervalued relative to our peers. We are currently trading at a significant discount. As your fellow shareholder with a material interest in our collective success, this frustrates me entirely. However, I believe our valuation discount will narrow over time as we continue to perform and de-lever. In the meantime, we will remain focused on growing the company accretively, including evaluating public and private M&A. Accretive growth reduces our cost to mine a Bitcoin and increases free cash flow. In closing, I want to personally thank you for your invaluable trust and your investment and your support as we build the leading sustainable Bitcoin mining company. With that, I'm prepared to open the call for questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Josh Siegler with Cantor Fitzgerald. Please proceed with your question.

Yeah. Hi, guys. Good evening. Thanks for taking my call today. I guess first of all I'd like to better understand the unit economics of this hosting agreement. So, I believe in your prepared remarks you mentioned it would be $0.078. Does that include a power cost flow through?

Hey, Josh, it's Patrick, and I have the whole management team here with me as well. No, so that's all in. It's effectively fixed. And as you know, our power clause at Lake Mariner floats. And so, that's how it works.

Okay. Understood on that front. And then when we're thinking about debt paydown as well as the potential option to purchase these rigs, given kind of the free cash flow sweep, I was curious if you expect to purchase any before really the back half of '24 in addition to the 5,500 or so.

So, I think what, Josh, we're trying to message there is we think we're undervalued vis-à-vis the peers, and as we've kind of harped on time and time again, we're focused on accretive growth. And so, I think you can look at various valuation metrics and see kind of where we might see accretion, right? And I guess what we're indicating to you is it's not here at $1 or sub-$1. And so, I think as the market unfolds here, we have the option at any point in time if we think it's accretive to add those machines in and we could add one machine or we could add thousands of machines. And so, I think as we move forward, we'll see kind of what happens with the market and what happens with our valuation.

Okay. Understood that front. And if I could just sneak one more in real fast. I was curious if you could give us an update on how you're thinking about the cost of power at the Lake Mariner site as we head into the winter months here.

Our guidance has been $0.045 at Lake Mariner and $0.02 fixed for five years at Nautilus. However, we're trending below $0.045 at Lake Mariner. As you may have noticed in our monthly operating reports compared to our GAAP financials, we disclose demand response proceeds in the 10-Q and in the GAAP figures, which reduces our cost of revenue. When considering our realized power price along with those demand response revenues, we're generally coming in under $0.045.

Great. I appreciate your answers. Thanks very much.

Thanks, Josh.

Thank you. Our next question comes from the line of Chase White with Compass Point. Please proceed with your question.

Thanks for taking my question, guys. So, how much CapEx do you guys have left in the Lake Mariner expansion in terms of just the infrastructure? And how do you expect that to be split between 4Q and 1Q? And then I have a follow-up. Thanks.

Yeah. Hey, Chase, thanks for your question. So, very minimal remaining on Lake Mariner from an infrastructure perspective. It's really at this point just the minor purchase, which like we said, is deferred into 2024.

Got you. That's helpful. And any updates on the potential 50-megawatt expansion on Nautilus? Like, is there any internal timeframe for making that decision? And where does your JV partner stand on the issue?

Yeah. So, I'm just looking around the management team here and seeing if Nazar wants to comment. But I think in general, nothing as of today. I don't know, Nazar, if you want to add to that.

Hey, Chase, it's Nazar here. That's correct. As of now, we haven't built out a schedule for that. That would be a 50-megawatt expansion at the site. So, in the near term, we see a lot more opportunity at the Lake Mariner site to expand. We've put up building three, which is a 43-megawatt building. Building four is on the drawing board as well, which we could deliver in April or May of next year. So, to the extent that we add another expansion beyond building three, it will likely be at the Lake Mariner facility before Nautilus.

Got it. Thanks.

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

Thank you very much, operator. Good evening, everyone. Good job. Paul, my first question is on the remarks on your prepared comments regarding the debt to equity exchange. You mentioned some details there. I couldn't catch all of them. You mentioned the potential premium. I just wondered if you could maybe go back and revisit that and maybe also quantify how much could be exchanged? Thank you very much for any additional color.

Hi. So, Nazar and I own approximately $10 million worth of the debt. I think that we're very comfortable, and we are exploring the notion of seeking a waiver from our lenders so that we could convert that debt into equity. We would want to do it at a premium to the market, meaning we think our stock is undervalued. I don't think it'd be right for us to come in at the current market price, and we would expect to come in at a meaningful premium. But that's something that the Board has to negotiate, and we'd also have to get approval from our lenders to do that. But I'm inclined. I like that trade a lot in the context of being further invested alongside the other shareholders.

That's very helpful. Thank you, Paul. My second question is a little bit more on the industry, and I wonder kind of with the halving around the corner, you mentioned M&A earlier. Is there a preference for infrastructure over miners? Is it equal? If you had to go long one or the other, which one would you choose or neither? We would appreciate your thoughts on that. Thank you.

Yeah, I think it's important to note that not all exahash is created equal. Power is our main cost. We have very low power costs in our unit economic structure, which makes growth beneficial for us, whether it's through organic or inorganic means, as it helps reduce our unit economic costs. Therefore, expanding at our current sites with low-cost power per terahash is much more appealing than simply acquiring exahash that is not linked to low power, especially as we approach the halving, when costs will effectively double. Nazar, would you like to add anything to that?

Hey, good evening, Lucas. Nazar here. To echo Patrick's comment, infrastructure is the key. And as we look at M&A activity and consolidation, we are very focused on looking at infrastructure that is at the same cost structure that we have on direct costs or lower. To the extent that it would dilute our direct mining costs, it's not of interest to us. We believe we can organically grow. At a site like Mariner, we think over time that site can get up to 500 megawatts of total capacity. And so, it's at that site that could be our benchmark in analyzing any M&A or consolidation type of activity.

Yeah, Lucas, I would just add too, I think Paul is going to jump in too, but, as you know, I think you've been to the site, but we are blessed there with temperate conditions, right? A lot of our competitors based in the South are not. We're not mining with immersion there; we're mining air-cooled because of those temperate conditions. And not only that, but we're 30, 35 miles east of Niagara Falls. So, there's a lot of abundant excess cheap power, and I think you can see that. I mean our results thus far this year are proving that.

The only thing I'd want to add to that is, Josh who had asked earlier, given that winter is coming, winter is coming but we're at the place where it's the source of generation for power, not the end user. So, our facility is very well located up North. The other thing is, I think strategic activity has to be mindful of an important element to everything we do, which is we're environmentally correct. We're focused on zero-carbon Bitcoin mining. So, one should assume that to the extent we're growing, we're growing consistent with that goal, and also we're going to be acquiring things that keep us at the focus of everybody who's interested in zero-carbon Bitcoin mining. I think this is important because when the ETFs are approved, and you see more and more institutions come to the space, this is a big focus for institutions, if it's not a binary determination of who they can invest in. And so, we could look at opportunities from the acquisition of exahash, but it has to be consistent with how we're built as a company, which is very much focused on Bitcoin mining from a zero-carbon perspective.

That's very helpful. Thank you. And I'll try to squeeze one last one in. Patrick, you mentioned additional cost savings opportunities. I wondered if you could maybe share a little bit about where you're looking to squeeze out additional savings here. Thank you so much.

Yeah. I mean, I'll give you an example, Lucas, and this is an example of low-hanging fruit in an industry that's maturing. But, our Directors' and Officers' insurance our first year was over $6 million of premiums, okay? I won't even get into the specific details of what that covered, but last year, we were able to reduce that down to around $4 million to $5 million, and this year, we're going to get another really material reduction in that, right? And that policy renews in December. So, there are those things where again, there are public company costs, and as we sort of have more experience and more track record, there's a lot of juice still to squeeze out of those grapes. And those are, I think, examples of what we're focused on. And right, that's obviously not in the numbers you're seeing today because, like I said, that matures or renews in December. The other thing is we've looked at whether it's candidly like the debt amendments in the past. We've also looked at some strategic transactions. Our third-party legal fees are definitely decreasing. And that again comes with just getting our sea legs on us on things like SEC filings and other things. And also, workforce efficiencies, I mean as we get more experience operating, our teams are getting more experienced and we're able to just squeeze more out of the existing folks that we have. So, I think it's all of those things, but there are some really big ticket items like the D&O, which is a good example, that are going to allow us to keep cutting costs that I can see in the future, and I'm pretty confident, which is why I said that in my remarks.

Thank you so much, Patrick, Paul, Nazar, team. Continue, best of luck.

Lucas, before I let you go, I've been led to believe that you've just recently had another child, a daughter, so congratulations.

Thank you so much.

A girl.

A girl, yeah. Three girls now. Thank you, Paul.

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

Hey guys, thanks. Two questions. One, my takeaway on the operations at Lake Mariner and Nautilus was that it was a pretty clean quarter. Was there anything to call out operationally? And then, secondly for Patrick, it sounds like SG&A and especially interest expense in 4Q kind of revert back closer to the Q2 levels. Just those were a little bit cleaner quarters. Any directional comment on that would be helpful.

Yeah, sure, Mike. So, I think the quarter was pretty clean. I'm looking at Nazar. We did have an outage... In the first week of October.

Okay, yeah. Well, that's for the fourth quarter. We had an outage in October, but in August, we were down. And I think we had a lightning strike or something. Yes, Mike, to your point, it was a fairly smooth quarter operationally. We did experience a couple of scheduled outages. As we worked on building three and prepared the site, we needed to perform some integration work with the rest of the site, which resulted in an outage in August due to those scheduled activities.

Regarding your SG&A question, I examine SG&A in our financials while excluding stock-based compensation. The management team holds a significant stake, so our stock-based compensation is minimal, though there is a small amount included. For Q2, after excluding stock-based compensation, it was around $6.8 million. In Q3, once all stock-based compensation is removed, including a triggered performance incentive, it was closer to $6.3 million. Q4 is expected to be one of our lowest quarters for SG&A. Typically, the first quarter is higher due to the additional work required for filings like the 10-K and 10-Q. So, I believe extrapolating that trend is reasonable.

Got it. Okay. Hey, thank you.

Mike, the one other comment I'd want to just mention in terms of operations is just please recall that we're vertically integrated. We operate our own facilities. So, I think we're a little bit unique relative to a lot of the other folks in the mining space.

Okay. Hey, thanks.

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

Yeah. Hi, guys. Thanks for taking my follow-up here. Just real fast. I saw on your quarterly report that you put down a deposit for potential S21s in the future. I was wondering if you could walk us through kind of that rationale and how you're thinking about the S21 versus the 19j XPs. Thank you.

Hey, Josh, it's Nazar here. The S21 was released with improved efficiency and a lower initial price set by Bitmain. There was a previous question from Lucas regarding miners versus infrastructure. We view infrastructure as unique, especially regarding the ability to secure low-cost power over the long term, while miners are readily available. Currently, we see the S21s available under the structure Bitmain implemented, where 80% is paid before delivery and the remaining 20% a year later. In about 12 months, it's likely there will be an even more efficient machine on the market. Our current fleet efficiency stands at 27.5 joules per terahash, and once we fully integrate the 18,500 j XPs, we expect to reach around 25 joules per terahash. Our long-term aim is to improve our fleet efficiency to the low 20s, which means focusing on S21s, T21s, and similar machines to enhance that incremental efficiency.

Sure. Just to focus on the financial side of things, we have approximately $14.3 million in deposits for the S19j XPs and an additional $1.2 million for the S21s. This totals around $15.5 million, which will be applied to the j XP order. This translates to machines at just under $19 per terahash. We plan to host the rest, which is about 13,000 of the 18,500 in 2024. When the timing is appropriate, we will consider purchasing some or all, if it makes sense. Does that clarify your question?

Yeah, that's very helpful. Really do appreciate the candor. And thanks for taking my follow-up.

Thank you.

Thank you. Our next question comes from the line of Matteo Levy with Parabolic Ventures. Please proceed with your question.

Hey, everybody. First of all, congratulations on your hash rate expansion to 5.5. I'm not aware of another miner who's achieved that as quickly as you, so I just want to applaud that. But meanwhile, my question relates to the short interest. What is the market missing? What are they misunderstanding? And how do you intend to prove them wrong? Because the short interest has grown, meanwhile, all your other metrics are looking amazing. So, I would love to get some feedback from you on this.

Hi, Matteo. This is Paul. Thank you for your question. The short position in the market is part of the situation, but I don't think it's even close to 50%. Some of that short interest seems to involve our lenders, who have been fully supportive and continue to hold onto their stock, willing to help the company surpass its competitors. I believe part of the shorts' misunderstanding comes from their perception of our debt. They see the debt but fail to realize that we have free cash flow until April, and after paying down a certain amount, which we are confident we can achieve, we will manage it sustainably. They also overlook that our facilities can scale quickly and we can do this in-house. Currently, they seem overly focused on debt maturity as a key issue and are being too aggressive in shorting the stock. I believe they are making a poor decision. I've been buying shares consistently and, as I've said before, I am ready to convert my senior secured debt, with the lenders' approval, into stock at a premium to its current price. This situation may create a good opportunity for our investors to challenge the shorts. While it's not typically the CEO's role to focus on stock trading, the market appears thin right now. With rising Bitcoin prices and potential ETF approval, I think we represent the most leveraged investment out there. Many investors may shift away from companies focused on holding strategies and move towards companies that mine at lower costs and generate significant Bitcoin, especially considering the ESG aspect. I believe the shorts are mistaken, and it's our responsibility to demonstrate that. That's our plan moving forward.

All right, Paul. Thank you. That makes sense. I mean, the debt is a function of how you scale so quickly and you're the low-cost producer, so going into the halving, that should resonate. So, is there any other actions that the company intends to take to really put an exclamation point behind TeraWulf as a leader in the space?

We are examining all available options regarding our debt, and we communicate regularly with our lenders. Patrick has an excellent relationship with them. If there are optimal ways to manage our debt for the benefit of the company and our shareholders, we will pursue them. We are consistently looking at strategic acquisition opportunities that align with our ESG focus. Additionally, we are already in the process of scaling up. Building 3 was completed quickly, and Building 4 is underway. Our agreements with Bitmain allow us the flexibility to acquire new machines as needed, rather than our current arrangement where we are both paying for some machines and hosting others. I'm confident in our strategy. I believe that those who are shorting the stock are overly fixated on our debt maturity, which is nine months away, just after the halving. Until then, we are generating free cash flow, and overall, I believe we are in a strong position.

All right, Paul. Thank you very much. Thank you to your whole team.

Thank you. We have reached the end of our question-and-answer session. With that, this will conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.