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

Good afternoon, everyone. Welcome to the Water Tower Research Fireside Chat Series. My name is Graham Mattison. I'm 1 of the senior analysts here at Water Tower Research in our sustainability and industrials practice. We're excited to have with us today the CEO of Soluna Computing, and incoming CEO of Soluna Holdings, John Belizaire. As a reminder, this call and all of our research is available to everyone. We will be taking questions and those can be submitted via the chat function. However, if we don't have time, we might not get to every question, so our apologies in advance. So with that, John, welcome. A quick background. It's -- you may have seen John is a very successful entrepreneur, who's founded multiple companies, 1 in insurance another in software and e-commerce space, both of which were bought by large corporations, and he started his career as the lead -- earlier with being a lead architect for Intel's digital enterprise group. He's a thought leader in the renewable computing and Bitcoin spaces and has also testified in front of the U.S. Congress. So with that, John, welcome. Perhaps you can start by telling us about your new incoming role.

Graham, thanks for having me back. It's always a pleasure. Pretty excited. I've been focused on the operating level activities for the combined companies for the past -- I guess, it's been about 18 months since the acquisition of our business into MTI. And through the growth and everything that we've been through, the Board has blessed me with the opportunity to ascend to the Holdings' role where I'll be responsible for all of the group activities and subsidiaries, et cetera. So it's pretty exciting and forthcoming here shortly.

Great. It comes at an exciting time. Obviously, the big news is the energization of Project Dorothy. Can you give us just a bit of an update about where things are with that? Maybe the background of how it's being energized and any color there?

Yes. I'm happy to, and I'm sure that some of our listeners have been patiently waiting for us to give this update on Dorothy and the fact that it's getting energized. And I can't tell you how many times on every social network you can think of, people have asked me what the status of Dorothy is. And so I can finally say that ERCOT has approved us to energize the first 50 megawatts of our facility. Right now, we're finalizing all of our safety tests and doing the testing for the first 25 megawatts known as Dorothy 1A. We've also been working on filling Dorothy 1A with hosting customers and I expect the Compass Mining announcement that we made today to be the first of a series of these types of announcements as we look to monetize the Dorothy project. The Project Dorothy has been a bit of a wild ride, as you can say, Graham. Last summer, we had all indications from our parties involved that we would be online, then we were hit with some major shifts in the process. We were told that it was a very simple process, and then we applied to that very simple process and then they changed the process. And that process change created a lot of headwinds for a lot of companies in the space, not just us in Texas. And not to mention the crypto winter that took place toward the late part -- latter part of the summer. And that had us holding 2 very challenging series of activities, right? We had to get our flagship project through a much more protracted regulatory process. And we had to work through the effects of a crypto winter where Bitcoin was sliding. And so it really put the team in sort of a hunkered-down mode, almost, I'd call it a wartime mode. I was a war time CEO at the time. And that allowed us to really get the team just focus on problem solving, which made it very difficult to maintain the same level of communication that we've had in the past with some of our loyal investors. I do want to thank those investors for sticking up for us during that difficult period. And look, we've learned a lot that will influence our execution going forward. But I think the key thing I want to say, Graham, is that our mission hasn't changed. Yes, we've been through some challenging times as many companies in our space have. We are passionate about making renewable energy a global superpower by helping power plant owners like the power plant that sits next to Dorothy sell every megawatt. And we've got a great data center product, software, and business model that really captures the curtailed energy at these plants. And the monetization of that wasted energy has primarily been proprietary Bitcoin mining. That's where we've got at Sophie and some of the other sites. And now we're shifting our focus to more hosting and co-location as it requires less capital and there's strong demand for that right now. Actually, to be honest with you, 1A was an exciting experience. We had lots of folks sort of vying for, how do I take the whole site, how do I get involved. And so we've put together a program to fill that facility. So I think we believe our core principles will really propel us into the future, and regardless of the type of compute we put in those facilities. So we're pretty excited about Dorothy, and it's really the culmination of the vision that we've laid out, and it's our foundational project.

And having been looking at companies for a long time, and everyone goes through these challenging periods at times, the key piece's surviving it, which you have and you've come out and your core pieces are there. So it's an exciting future in front of you. One question I'd like to ask. You talked about the hosting contracts. Can you give a little bit more color about how the hosting contracts, where are the pluses and minuses, pros and cons? You just had one moved, so Sophie over to the hosting and then also just had the announcement for anyone who misses this morning about Compass during the first hosting at Project Dorothy.

Yes. Between those 2 contracts, that's close to 30 megawatts of hosting a 75-megawatt total footprint of projects. We're seeing some very interesting experiences. Number one, there's lots of demand. The actual structure of the hosting contracts are a lot more robust now. I think that has a lot to do with just the experience of hosting customers and the recent bankruptcies. A lot of those agreements have been tested, and the business models have been tested. And so we see a mixture of fixed cost-based structures. We've seen profit share structures, and we've seen a mix of both in terms of the types of models that customers are interested in signing on to. And with the 2 contracts we've signed to date, we have a mixture of all of those. And I think we'll begin to see a mixture of all of them in our portfolio as we fill out the facilities with either hosting or proprietary mining. The nice thing about that is it gives us the ability to have a clearer line of sight on revenue and what that will look like, somewhat of a floor, if you will. And it also allows us to participate on some of the upside of Bitcoin when it happens. And more importantly, it allows us to monetize the infrastructure that we build and generate a return on investment for our investors. So that's kind of what we're seeing. From a proprietary mining and hosting, the market has really shifted. It's not only Bitcoin and cryptocurrency, but also financial markets and supply chain that have sort of put a real wringer on the space and the recent announcement with Sophie is just allowing us to continue to solve the challenges that have been driven by that. So it's going to improve our liquidity through the Sophie deal. It sort of derisks a lot of what we're doing moving forward. And it doesn't preclude us from doing proprietary mining because, again, we still own 100% of the infrastructure and as those contracts expire, we can reevaluate what we have in the facility. Yes, we just announced Compass Mining for IA, as we said, and we're pretty excited about that partnership. We will have more of those announcements coming. I'd say, stay tuned as we build those out. And when we build out our facilities, as we continue to build out those facilities, we're going to evaluate. Should we do proprietary mining, should we do hosting or should we do a mix. And we're really seeing many Bitcoin miners looking for plugs. That has a lot to do with the fact that infrastructure growth -- plug growth has declined or paused due to the several bankruptcies in the space. So there's more demand than supply. And also customers who are leaving those other bankrupt crypto miners are now looking to place their machines in other places. So that's creating a really robust demand out there. And I think 1 more thing that we're seeing in the space is just that we're seeing hosting providers that are really interested in companies that own their infrastructure, that are really focused on building a high-quality customer-oriented service offering, if you will. They are coming in with, honestly, lots of wounds and bad experiences from prior players. And so we're really just hoping to deliver a higher-quality service with a platform that's powered by sustainable energy. And so to be honest, a lot of them are really focused on that. The whole green aspect and they want to see more sustainably focused hosting partners. And so that's creating a very interesting cadre of partners for us, and we're gravitating to the ones that care about them.

And you get cheaper power, so it's a win all around.

Exactly. That's right. That's right.

How are the potential customers look at your data centers, your proprietary data centers? Can you share any feedback you've received from them on how they view that?

Yes. So I think overall, what we've experienced, I mean, you'll see a quote from Thomas Heller at Compass Mining. First thing they look at is just the company and the people. I can't tell you how many potential hosting partners asked me in person to meet myself and the rest of my management team in person to get a sense of who they're going to be doing business with. And so when they meet Soluna and our team, they do see a different company. They see a team that's different than that they've encountered. And I think they finally see how we take energy first as an approach, and it's clear that we're helping to solve a problem that requires innovation. And so that's why we built a proprietary innovative set of data centers that can be co-located with utility scale energy assets like solar and wind in remote locations. These MDCs, as we call them, modular data centers, they are designed to perform Bitcoin mining and other compute, scientific, blockchain, AI and creating unprecedented demand flexibility that matches intermittent power generation in these grid systems that we're focused on. And our architecture, when they dig in, they can see it really enables utility scale energy assets to build larger interconnected systems that can move very quickly and allows them to have a higher capacity factor because now they can monetize more of their energy. Our solutions also include a proprietary set of software that allows us to optimize the energy cost. And so partners that are looking at our platform see a lot of effort focused on implementing, not only a facility that's high quality with really robust thermal management, great service systems and monitoring, but it's powered by a brain of a system that looks at the power plant's output, the grid systems, pricing, Bitcoin price and sort of determines how to size the facility to optimize where we're sourcing the power from to get the lowest possible price for the type of computing that we're doing in the building. So I think what they're seeing is just a whole unique approach to technology, business, et cetera. Now, I think it's important to understand, Graham, that we do believe Bitcoin mining, notwithstanding what people say about it, will help the global transition to clean energy. And that passion bleeds out of us and our hosting partners are attracted to it. And they see that we've invested considerably in technology to make that true.

Definitely makes sense. It takes me to 1 of the questions has come in. Can you talk a little bit about the opportunities that you're seeing out there for additional projects where you might fit in there? And how -- how important is it in having Dorothy up and running now with those conversations?

It's huge. I mean when we first started talking to the partner at Dorothy, it was just a concept, right? We introduced this idea that we were creating a company, a young company that would bring a different solution that provides an alternative to batteries behind the meter. They took a leap to work with us, and I think they're going to reap massive benefits because Dorothy is a great solution to their problem, and it provides a fantastic platform and case study for doing this for others. Now after that conversation and throughout last year, we had a massive series of discussions with other power partners that had similar challenges. And they were inundated with lots of different companies like Soluna talking to them about buying their power and multiple different structures. What we found is that when all the noise dissipated, they returned to what their gut told them was a much better structure and approach to this problem. They have been impressed with our ability to look at this from a holistic perspective and technology. And now what they're going to see is a spinning example that they can come visit. Many of them have asked to do so. And that will provide them a less reduction in their view of risk, if you will, partnering with a company like ours because now we have a spinning solution, they can talk to their colleagues or peers in the space and show that our technology works, the structure works. The energy partners are happy. And so that positive case study will be a driver, we believe, of our growth. We've already had more inbound calls than we had -- this year than we've had all of last year looking to partner with us on our projects and the urgency with which these power partners are talking to us about building projects, is, to some extent, a little perplexing for us because last year, we felt that they were aggressive, somewhat sort of spreadsheeting us. But now they're trying to form a deep partnership with us and look at multiple different projects at once. That's very different. And what that tells me is, it reinforces something I've seen in my experience as an entrepreneur and a technologist. Innovation takes time. It takes time to build. You have to be a missionary and teach people about the value, but ultimately, when people wake up to the potential value, as long as you're there, you're a surviving company, you can reap the benefits, and we're starting to see that happen already. Our brand is synonymous with a company that really knows what they're doing as it relates to this problem space.

And certainly, in the power space, that's the most important thing, the reputation, the quality, because this is an industry where you don't get paid to take risks. You get fired for taking risks if they go wrong. So nobody wants to do anything until there're people who have done it before. And the fact that they can go send their engineers, stop your engineers at their plant, their grid operators and all that. We have seen that with other newer technologies even around mandated pollution technologies. Nobody wants to be the first one. But once it's there, then that kind of opens the flood gates.