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

I'm happy to have with us John Belizaire, the CEO of Soluna Holdings. We will be taking questions which you can submit via the chat function. Hopefully, we'll get to all of them, but our apologies if time does not allow. And one last reminder, please refer to any disclosures on our website. So with that, John, thank you for joining us again. Welcome back. This is your second time, and we had you on before you were, I think, just about or had just taken over the CEO chair. So actually, I'm sorry, let me give a quick background for John for anyone who -- I apologize -- for anyone who doesn't know, John, he's the CEO. He's been a successful entrepreneurs founded multiple companies, one in insurance software, another in the e-commerce space, both of which were bought out by large corporations. He's a thought leader in the renewable energy and renewable computing in Bitcoin spaces and is testified in front of U.S. Congress. And also, he was just featured, I think, yesterday in a CEO Magazine. So I encourage you to check out that article.

So with that, John, thank you for joining us. As I said, it's been a few months since you've taken over. Can you talk about how things have gone and your strategy from where you are now and where you're going forward?

Graham, thanks for inviting me back. I've really been looking forward to this and the opportunity to share our story. Before we begin, my lawyer has asked me to point out that our discussions here today are subject to the usual caveats and forward-looking statements, which are described in our SEC filings. I think your opening question is a great question. Earlier this year, I put out a letter to our shareholders outlining a 3-pronged strategy for execution this year. The first is focused on energizing and commercializing Dorothy, our flagship project, and Sophie, our project in Kentucky. And I'm proud to say we've made a lot of progress in the last 2 months since I've taken the helm. We signed 2 strategic hosting partnerships, one joint venture at Dorothy. We have fully ramped the hosting customers now, and we've already started ramping the joint venture portion at our current mining. Dorothy is now operating over 30 megawatts now, and we add more megawatt capacity each week as we energize and finalize buildings on the 1B side. MaestroOS, which is our proprietary product and software platform has been performing really well. It's been hot down here, Graham. We were down there, and it was over 108 degrees. I think all of our backcast data analysis showed like the maximum temperature down there has been sort of the 98, 100 range, and it's breaking all the records. And what's exciting is that our system does what it's supposed to do. It senses all of that information, the power crises in the area and optimizes the size of the facility to maximize the price and cost of energy at that location. So that's been great. We've rolled in over 10,000 machines at Dorothy. That's like a full 747 worth of equipment that we've rolled in. I think we did some back-of-the-envelope calculation, it's probably about [ GBP 350,000 ] of equipment or something like that. And to accomplish all of that, we've raised $21.5 million at the project level, project-level equity to accomplish this, and we've done that through our partnership with Spring Lane Capital, a fantastic partner today and our new partner, Navitas Global. Sophie has rolled in a full 25 megawatts as well. And so the earnings power of those 2 sites has grown significantly. We put them in a position to produce great earnings power for us in our earnings presentation that we put out. The combined revenue for those 2 facilities is over 37 megawatts on an annualized basis, and we're talking about on a consolidated basis, about $10 million. And on top of that, the customers are happy. The folks that we're working with, we've been great communicating to them and so forth. So that's -- that's leg 1 of the 3-legged approach to our execution. Like 2 is on, is focusing on operating cash flow, and we have put in a series of initiatives this year to implement cost reductions, execution optimizations, all focused on improving our profitability. We've also focused on, as you can see, building out earnings power. So that really puts us in a stronger cash position at this time this year relative to where we were before. And you'll see that detailed in our 10-Q when it comes out. We have highly profitable projects, every 25 megawatts we roll in at significant project level EBITDA. And by the way, when I reference Graham project level EBITDA, I'm talking about essentially operating cash flow at these SPVs, EBITDA at the SPV level is equivalent to operating cash flow. So every 25 megawatts gets us somewhere around 6 to 7 megawatts of earnings power -- I'm sorry, $6 million to $7 million of earnings power. And so we're pretty excited about the progress that we've made there. So that's leg 1 and leg 2, right? So 3-pronged strategy. Part 3 is measured growth. So we're being very thoughtful about how we turn our pipeline into mature projects at an investable projects. And that has a sort of multi-strategy as well. So our first is Dorothy 2. We aim to develop about 50 megawatts of that. Remember, Dorothy is a 100-megawatt project. And if we can get project-level partnerships to invest in Dorothy 2, that would allow us to build out that footprint. And the nice thing is we can leverage existing infrastructure and equipment we bought last year, and we found ways to optimize the cost of construction for the facility from learnings from Part 1. And so that sets us up pretty well. And the next is just pipeline maturity. We have a pretty sizable pipeline of about 700 megawatts of projects. Our strategy is to advance a number of those projects to a point where we've got signed term sheets, get those projects into the ERCOT process, and push them through that process until they become shovel ready. In June, we announced project Kati. It's a 166-megawatt project that will be built in 2 phases. So that's an example of the maturity process we're talking about, and we want to do more of those in the pipeline. And then the last piece on the measured growth side is just opportunistic opportunities. There are a number of assets out there. There are some projects that are partially developed that are ideal for our model, and we'd like to look at exploring asset acquisitions or public types of structures using project-level capital to enhance the footprint of our earnings power. So that's our approach to execution this year, Graham.

All right. Great. Mentioned capital a couple of times, and I've had this question come in a few times, so help me to squeeze it in here. Can you share where you stand with capitalization structure of Soluna and how you plan to handle the preferred dividends?

Yes. I can discuss that, Graham. Yes, we've had lots of questions about our capitalization and our plans for the preferred dividend. Look, we take our fiduciary responsibility to our common and preferred shareholders very seriously. And we believe the best and most shareholder-friendly way to restructure our cap structure or our cap stack is to really grow our business, grow cash flows and through those cash flows, we can pay our obligations, including preferred share dividends. If -- as our cash flow grows, if you think about it, right, our business operations and opportunities will grow. We'll be able to prove that we can execute. We'll demonstrate how strong of a business that we have inside of Soluna in our model. And that will increase our ability to pursue nondilutive ways to rebuild our capital structure from one that restricts us from growth, to one that provides a solid foundation from which to grow our business and overall shareholder value. We're also exploring other ways and means for restructuring our cap table. And we will consider lots of alternatives that come our way, but we'll focus on the ones that really improve our ability to grow, enhance our growth strategy and can really truly add shareholder value. I want our valued shareholders to consider this simple framework, as I mentioned it a bit earlier when I was talking about our execution. If you think about every 25 megawatts, we add to our business can drive somewhere about $6 million to $7 million in earnings power or operating cash. So let's say, we added Dorothy 2, right? So we own 100% of that project right now. And if we added that to the mix, let's say, that could add considerable earnings power to help us deal with capitalization. If we build out the whole project, do the math, that's $14 million of earning cash flow, right? So we only own half of it, that would be $6 million to $7 million. If we owned 100%, you start to do the math. That allows us to deal with a lot of capitalization-related challenges, including returning to paying dividends. Now let's say, we add Kati. You start to get the picture, right? So divide 166 by 25 megawatts, it gives you the potential earnings power. Once we start to do these types of things, we're beginning to prove that we have a strong business and can execute the way -- the short way to sort of -- is really the sure way to attract investors, right? So if we prove through the execution on Dorothy and Sophie, that these projects can return capital at the speed that we've stated. And if you look at my letter, I've commented on the fact that on average, our projects return their capital in 2 years, that's very attractive to investors looking for yield that looking for asset-based investments. So that's where we're focused right now. We're focused right now on execution, building the business, growing our cash flow capabilities, enhancing our earnings power, using the assets we have, which is our strong pipeline, our business model and technology to generate cash that will allow us to solve a lot of our challenges. I know we've lost some trust with investors, and we're working to build that back, Graham, by executing. We don't have all the answers, but we are certainly sincerely working on it, and I want to thank our investors for their patience and continued support.

It makes sense, and you made it this far, which is more than a lot of other companies in this space can say. Can you talk a little bit more about project Kati? And what the next steps are and what you -- how investors should think about that?

Absolutely. We're really excited about Kati or Katy; however you'd like to pronounce it. The project name is after -- is named after Kati Kariko. She's a badass catalyzer, who was instrumental in the development of mRNA-based protein therapies. Her decades of relentless work have helped form today's modern mRNA vaccine. So if you have seen -- we've all experienced some of us, jabs in the arm of that technology, and she helped to create that. We always name our facilities. For those of you who don't know after incredible women who have shape innovation in a host of different industries. Dorothy was named after Dorothy Vaughan, the famous human computer of the team that was involved in getting the Apollo mission up. We've learned so much at Sophie that we've implemented at Dorothy. And now after energizing Dorothy and standing up a mix of prop and hosted mining, we're learning even more. And we've got a great IPP in the Kati project, very serious player with huge assets in the U.S. and beyond. And that I mentioned that they selected us out of like 25 companies. So they took the process of selecting a partner very seriously, put us through the paces and put a number of other companies to our surprise to the same paces and chose us above -- over and above them. And I'll comment, they came to visit our site at the Dorothy site recently. And I'd love to tell you about some of the things they said. I think that they're just super excited about working with us. We've been collaborating to move things along quickly in our process, and to get agreements in place and interconnection our process started. The site has a potential, as I mentioned earlier, 166 megawatts, and we're going to use Sophie and Dorothy as Blueprint to implement it better and more efficiently. And I want to leave you with, I guess, a couple of just highlights on Kati. The wind farm that we're interconnecting to, so we always build our facilities right on site there. experiences somewhere upwards of 43% curtailment on an annual basis. It's a huge farm, so you can do the math, they're losing millions of dollars. Our 166-megawatt data center will consume over 75% of that curtailment. So we are a direct immediate solution to a pain point that they have, which is a core tenet to our business model. Project development is moving fast, thanks to our previous experience with Dorothy and our relationships with ERCOT and some of the transmission service providers now. And overall cost of energy will be equal to or better than Dorothy. And so these are exciting projects that we have in our pipeline, and so we're looking forward to it.

How important was it having Dorothy when you were competing against the other 24 players? How important was it at Dorothy?

To be honest with you, having Dorothy energized and having a running facility took us from sort of this potential capabilities to actual capabilities. It really does shift the perspective of the partner, right? We're a proven partner now that we have a facility up and running. They came out to see the site and saw our technology in practice. That changes their perspective completely. It essentially makes risk go down, right? So as risk reduces the interest in partnering goes up. And these are large infrastructure players who are used to project finance structures and their model is to build long-running long-valued projects that are low-risk, firm, solid returns on investment. And so they're looking for a partner that has proven technology understands the energy business and can partner with them.

And it's the energy business where there's no [ talent ] for risk, exactly it's employee that people have been worked in this space, like anything other than perfection is a complete fail?

100%.

There's -- it's either your up or not?

Yes. That's why when they're 43% curtailed...

How should investors think about expectations around timing, or I guess I'll leave it at that. Just sort of like how do you want to set investors or what mark should they look for it?

Well, as I said, Kati is moving along fairly quickly, but it's still a development project. So I won't comment right now on timing. But I will say that we will get her shovel ready. And with strong paybacks that we're seeing on our projects, we will be able to formally submit the project to our investors once we reached that notice to precede status, which would include the ERCOT approvals. So our focus is to take a very measured approach, make sure we have everything in place and the project is ready to build, we will pull investors in, and we'll keep our investors and our shareholders posted on the progress. And once she reaches that point, we'll get her ready, ready to go.

Got it. Another question we have here. You talked about having Dorothy there for the potential partners. What type of feedback are you hearing about the Maestro system at that location? And how important was that in terms of getting you this last project?

Yes. It's pretty -- I think the leanest way to give you a sense is -- I kept these notes of what people were saying as they were visiting the site. I was -- I was really interested in sort of what visitors to the site would say. And so some feedback is always helpful. The project level investors came to visit last month, and we had power partners recently come visit. The project level of investors or investors interested in investing in Dorothy 2 and some of our future projects like Kati, and our power partners are the ones that are looking to partner with us on Kati beyond. A visit from a potential investor remark, they said, thanks again for the time yesterday. I came away super-impressed with the team and how much you guys have accomplished. I shared a summary with my partner who was also very positively inclined. And so they're taking back some positive news. One of the power partners came to visit with us. Just read my notes, the MDCs were surprising to me. I think they're very unique design. I've never seen anything like that before. And I've been in a lot of data centers, but never in an open-air data center like this. I'm impressed how well you put that together in the sort of simple way of controlling heat and cooling. So they were remarked on sort of the way we move large volumes of heat, et cetera. My favorite is your controllability was impressive to me. That came from a power partner. And that was a key thing. They didn't understand how powerful the Maestro software is and it's an involvement in just about every aspect of the site. The control and management of power, control of the facility itself, being able to ramp it up and ramp it down, being able to optimize different elements of the site. So that impressed folks. One person called it the price API, they didn't remember the Maestro name. So if I replace the quote, "Maestro for me, that's a significant thing to make note of because the redundancy between your retail service provider in Soluna, really owning the control -- controlling of curtailment is a little bit more peace of mind than I would have originally expected" and that was a significant finding on my side. Again, they were shocked and impressed in terms of that. And the last one, which is my all-time favorite just came from the investor. We sat with them went through the project, it was clear from them this team has had to do construction, build out sites, operation and he said, how you're going to manage this site control, all of that. And so we opened the [ Komono ] show them the MaestroOS platform, the UI, the control system, the dashboards. And he turned to us and says, "This is the kind of software systems that you expect a 5-gigawatt IPP to be running, not a young company that's growing and building out an infrastructure." So they were very impressed. I think we see that implementing and our implementation of our software is working as planned. As I mentioned, the high heat this summer, the software is really being tested, and our site design is running at a super low PUE, so power usage effectiveness for our audience, how much power is being converted to computing, right? So if you -- a number that is close to 1 tells you that most of the energy goes to computing. We are running at a 1.01 level, which is one of our best across our fleet, and our MaestroOS is working as planned. And it's a proprietary platform that we've built ourselves. It's a big differentiator for us. And like I said, with all the crazy weather and droughts, our site also doesn't use any water because we're using this advanced cooling approach. It just uses physics to move large volumes of air at a constant speed to enhance the experience at the site. So we believe this makes us best stewards in the industry, and it just doubles down on our view to make renewable energy a superpower to be a sustainable, sustainability focused company and to use technology to do that.

Great. Well, after you guys have endured over the last few years, it's great to hear those things and makes sense that given the -- what you've done really, you keep those quotes handy in front of you. And just for investors as a reminder, we -- on a fireside chat earlier this year with Dip Patel, the CTO. We did a lot sort of a deep dive talking about the modular data centers. So I'd appoint investors for that. Speaking of the last year, overall, what's the market -- what are you seeing in the market, both in the project invested driving utility side? And how is that different from a year ago, 12 months ago or maybe even 3 months ago?

Yes, we're seeing some interesting things in the market right now. I'd first start by the market is less noisy. A lot of the bad actors, crypto bad actors have been flushed out, and that's been very helpful to us. Our message is clear and straightforward. Just a quick anecdote last year around this time, we were talking to some big IPPs, and we take a very thoughtful approach to how we form partnerships, the data we provide, what we ask for because we do a lot of analytics and do a lot of sort of number crunching to determine whether a project fits our model and whether we can help the IPP, et cetera. And there was one IPP that said to us point blank, I quote, 'Why do you guys ask so many questions." the other guys, they just say, when I say jump, they say how high, and you guys say, why do you want it to jump? And we're saying, well, if you talk to the other guys and they're not asking any questions, you should be worried -- and that's telling you a lot about them, that they're not being thoughtful about the design of the architecture and really value the partnership they're just chasing cheap power, and they don't care what it takes. But as a result, the power partners have a much better decision rubric for selecting partners, and that's really favoring us, right? I talked about being chosen out of 25 participants, our responses to questions are much more thoughtful and it sort of expresses the depth of our knowledge in the energy space and so forth. We're seeing more activity from investors in '23 than we did in 2022. 2022 was a different year, especially the latter half of the year. And there is a willingness to look at crypto again, especially Bitcoin investments and especially sites that could do more than a Bitcoin like AI in the future and the world is moving toward more intensive computing. And our sites are industry-agnostic. And so that gives us a platform to expand into a number of markets. And that's creating some magnetism towards the company. So we've had some interesting strategic discussions around things beyond Bitcoin that can be done in our sites. We have -- we now have our flagship to point to. You touched on it earlier, Graham, that we can do site visits and the feedback is extremely positive and our sites are built for revenue potential now, right? So big current mining and beyond and just long-term revenue opportunities in other compute environments have really created a way for us to be positioned in the space. The other thing I'm finding that's fascinating is how quickly the IRA is affecting the market? You've already seen massive amounts of more capital coming into the space. They've now provided clarity around this concept of moving your tax credits between projects. You can actually move that to...

Safe harbor, it's huge.

That's huge.

Having us worked at a company where we were waiting for IRSA that is game changing.