Soluna Holdings, Inc. (SLNH) Earnings Call Transcript & Summary

Hi and welcome to the MTI update call. My name is Kim Lloyd. I am the host of the chat today. [Operator Instructions] And now Rick Jones.

Thank you, Kim. And looking at our list of attendees there for our call today, I see a nice mix of familiar faces and some names from the past as well as some folks -- new folks listening in today. By my recollection, this is the first time in nearly 10 years that MTI has actually broadcast a call like this. And we're really excited to share with you some of the recent developments here at MTI as we enter our seventh decade of doing business. Joining me today on the call is Mr. Bill Phelan, who's a member of the MTI Board of Directors and our Special Vice President for Strategic Transactions; as well as Mr. Brian Murphy, who's a partner at Couch White, who provided legal representation throughout this endeavor. So as we previously reported back on January 17, MTI has formed a new business unit initially named EcoChain Inc. The purpose of EcoChain is to develop and monetize cryptocurrency mining facilities that can be powered by renewable energy. Simultaneous with the formation of EcoChain, MTI invested $500,000 in Soluna Technologies Ltd., and MTI also retains the ability to make ongoing investments in Soluna. So why did MTI decide to start a new business unit in cryptocurrency and the blockchain powered by renewable energy? Extensive work has been performed by the MTI management team and Board of Directors over the last 3 years to improve existing operations and to review potential acquisition and investment opportunities that could grow MTI, and most importantly, increase shareholder value. This included a disciplined review with resulting improvements of MTI's core operating business, where critical buy-in from the management team is strong and has been recently supplemented by the addition of a new member to the senior leadership group to focus on optimizing our revenue opportunities with our existing MTI Instruments business. These efforts have resulted in MTI recording 3 consecutive years of profitability for the first time in 24 years. During this time, extensive work was also performed to source high-quality acquisitions that would be accretive to earnings at a reasonable price. Many target opportunities were investigated. Approximately 400 potential targets were identified by MTI management, Board members, Brookstone Partners as well as an investment banking firm specializing in acquisition searches which was retained by MTI. Target opportunities were extensively reviewed by the MTI management team and MTI Board for their synergies. Numerous companies were identified for contact and discussions, and specific companies were further explored for due diligence and valuation discussions. However, MTI was not prepared to part with our disciplined approach by overpaying for a target company that was not accretive to earnings. With no logical acquisition target in sight and with MTI generating capital and accumulating cash on its balance sheet, MTI's Board of Directors declared a special dividend for its shareholders in March 2019. Since that time, MTI through an independent investment committee consisting of MTI Board members began an analysis of potential growing markets we might enter where we could leverage our historic strength in renewable energy and monetize our approximate $50 million in net operating loss carryforwards while not paying a premium for market entry. This led us to review the economics associated with cryptocurrency and cryptocurrency mining. Cryptocurrency is a high-growth industry with many different facets and types of market participants. At a high level, the industry is a distributed network business that is beyond the early nascent stage. Cryptocurrency mining is considered a utility function necessary for the operation of the blockchain network that is used for the mining of cryptocurrencies. Each cryptocurrency miner is considered a node on the network, processing blockchain transactions while earning compensation for these activities through the successful reward of Bitcoins or other alternative cryptocurrencies for those who are the fastest. As this growing market matures and becomes more competitive, early entrants into business give way to enterprise-scale levels of competitors. Enterprise scaling requires access to highly talented management, access to capital, late-generation chip processing technology and consistently priced low-cost power. Crypto mining today is inherently volatile in terms of the pricing for the sale of cryptocurrencies earned in the mining process. Over 40% of the cost of cryptocurrency mining is power. Securing low-cost renewable energy at a stable market price improves the likelihood of profitable cryptocurrency mining, thus improving the likelihood for growth. Historically, renewable energy producers are limited to selling power to local power grids at local market pricing. Many of the best natural locations for renewable energy are in emerging nations and markets, where the low -- the local cost of power prohibits investment in renewable alternatives. Direct monetization in the cryptocurrency mining business opens local renewable energy producers to provide available -- to pricing available from developed nations employing cryptocurrencies in their trading. It is here where we found a big problem worth solving: how to accelerate the adoption of cryptocurrencies by reducing the cost of mining. So how is MTI approaching this opportunity? And who is involved in our efforts? MTI's first step into entering this industry was developing a strategic relationship with Soluna Technologies, a Brookstone Partners portfolio company and the parent company of the Soluna family of entities. Soluna will advise and help manage our new EcoChain subsidiary in exchange for payment of a onetime fee and revenue-based payments. Soluna will deliver an investment operations and management plan, which EcoChain will evaluate, to build out a pilot mine and prove out the business model of renewable energy-powered cryptocurrency mining. Upon approval of an initial budget, EcoChain will fund up to $750,000 for the development of this business unit. Soluna will oversee the pilot mining operation and will also develop optimization approaches to maximize revenue, manage costs, et cetera. Soluna will assist EcoChain with the build-out and ongoing operation of its crypto mine while providing access on a longer-term basis to the low-cost renewable energy Soluna produces. All lessons learned by Soluna in the build-out of its business will benefit EcoChain through the application of Soluna's internal operational improvements as well as their technology buying power applied to EcoChain's operation. Soluna will also advise EcoChain on the geographic location of the pilot mine and assist in the development of all significant technology selection and contractual obligations. As previously mentioned, MTI also invested $500,000 in Soluna Technologies. This investment is consistent with MTI's history of investing in innovative energy technologies. Soluna Technologies is developing a vertically integrated renewable energy cryptocurrency mining business at utility scale. The first project of Soluna is a mining facility developed by Soluna in Morocco on a 37,000-acre tract of land chosen for its proven wind-generating capacity. Soluna plans to develop the project in stages and at full capacity, the project expects to be capable of generating approximately 900 megawatts of renewable energy. Upon Soluna's delivery of the investment operations and management plan to EcoChain, MTI will invest another $250,000 in Soluna. MTI, at our own option, may also invest up to $3.25 million following Soluna consummating a large project finance closing with respect to the first phase of its mining and energy facility being developed in Morocco. Our investment in Soluna also provides MTI with the right, subject to certain conditions, to commit capital directly to the first 100 megawatts of wind turbine assets associated with Soluna's projects as well as to other associated crypto mining assets. The MTI Board believes, relative to other opportunities reviewed by the Board, that this opportunity will provide a strong risk-adjusted return with the ability to monetize MTI's net operating loss carryforwards, which approximate $50 million. Provided the initial stages of EcoChain are successful, MTI will scale our commitment to mining with additional resources. This will depend on a number of factors, including capital availability. MTI's Board of Directors and management team are cautious on where future capital might come from as well as, most importantly, the cost of capital and its impact on total shareholder value. The MTI Board will continue to apply the same disciplined approach in reviewing any future capital needs if and when we are successful in our pilot mine project. What can you expect from MTI and EcoChain? And what is important for you to track? MTI will continue to report our financial results, including updates on our MTI Instruments business, on a quarterly basis. Supplemental calls specifically focused on the development of EcoChain's cryptocurrency business will be scheduled as we have news or developments to report which are worthy of your time. Transparency is extremely important to us. Initially, our communications will center around key milestones in the development plan for the setup and operation of the EcoChain mine. We will then move progressively towards updates on our activity as we build direct operating experience. As we move into the operational phase of the EcoChain business, we plan to report the total number of coins mined and the average revenues per coin as we plan to monetize all coins produced since we will not be in the business of accumulating coins on our balance sheet for speculative gains. We will also be reporting on the key components and total cost of mining as well as our break-even point. The next EcoChain supplemental call will be focused on key decisions regarding the location of the EcoChain pilot mine and associated decisions necessary for its build-out and operation. We currently expect this call to occur before the end of the first quarter 2020. We will soon be releasing a website dedicated to our cryptocurrency activities. But for now, for further updates, please visit our website and sign up for our -- for news updates at www.mechtech.com. Thank you all for your time this morning. I'm now going to turn it back over to Kim and any questions which may have come up.

[Operator Instructions] All right. Well, thank you, Rick, for the update. If you want to sign up for news, please feel free to sign up for the news on the website. So -- oh, getting a question in.

Okay. I can see -- the first question we can see is, is Bitcoin the source of revenue? Or will this eventually expand to other, I'm assuming, blockchain activities? What we'd anticipate -- and that's coming from Mark. Mark, what we'd anticipate is that cryptocurrency mining will be the primary source of revenue. But you are correct that there are other activities we can take on with a data center like this. Everything from image rendering to processing other related blockchain transactions, those decisions will be made based upon the market conditions we expect as we review the portfolio of opportunities. And so we would not rule those out.

And the next question, MTI previously invested in renewable energy and didn't seem to be successful. Why again in renewable energy?