Greenidge Generation Holdings Inc. (NASDAQ:GREE) Q2 2022 Earnings Conference Call August 15, 2022 5:00 PM ET
Company Participants
Tom Champion – VP of Investor Relations and Business Development
Jeff Kirt – Chief Executive Officer
Bob Loughran – Chief Financial Officer
Terence Burke – General Counsel
Operator
Good afternoon. I’m Tom Champion from Greenidg Generation Investor Relations, and thank you for joining us. Today, the company issued a press release announcing our second quarter 2022 financial results. A copy of the press release is available on Greenidg Generation’s Web site at ir.greenidg.com.
With me today are Jeff Kirt, Chief Executive Officer; Bob Loughran, Chief Financial Officer; Terence Burke, General Counsel. Jeff will begin by providing a business update and Bob will then discuss our financial results for the quarter. Jeff will then provide closing remarks.
Please note that this call will include forward-looking statements that involve risks and uncertainties. Factors that could cause actual results to differ materially from management’s current expectations are set forth in the company’s earnings release dated August 15, 2022 and in our SEC filings, including the company’s most recent reports on forms 10-K and 10-Q. We encourage you to review the safe harbor statements contained in today’s press release. Copies of our SEC filings maybe obtained by visiting our Web site or the SEC’s Web site at sec.gov.
It is now my pleasure to introduce Jeff Kirt, Chief Executive Officer. Jeff?
Jeff Kirt
Thank you, Tom. And for those of you who have not met Tom, he joined us recently to head up our Investor Relations effort, as well as business development. Tom or Champ, as the name by which many of you know him, has several decades of experience on Wall Street on both the sell side and the buy side, and I hope you all have the opportunity to connect with him in the near future. I’d like to begin on Slide 5 with some opening remarks regarding the quarter. First of all, the team once again delivered strong operational performance in terms of bitcoin production and planned uptime, which we’ll talk about in more detail. Clearly, we were in a challenging earnings environment for our industry, driven by price volatility in both bitcoin and in energy markets. Mining economics have changed significantly this year compared to the previous year or 18 months before the second quarter began. And as a result, we’ve pivoted our strategy for the time being to focus on liquidity in order to weather the storm versus a strategy of more aggressive growth. Therefore, we decided to concentrate our operations at our existing sites in South Carolina and New York where we have infrastructure in place and equipment on hand.
Leveraging the existing infrastructure provides us with a better return on invested capital compared to developing new sites, and presents us with the lowest incremental cost per megawatt built compared to developing new sites. This strategy allows us to preserve liquidity while also allowing us to benefit if and when an uptick occurs in bitcoin pricing. Following this pivot in our strategy, we now expect at least 3.6 exahash of installed mining capacity by the first quarter of 2023 at our two locations. Substantially all the infrastructure equipment has been procured to develop these locations, including the transformers, switchgear, PDUs, as well as the portable mining structure. Our plan is fully funded with less than $7.5 million expected of additional costs associated with the completion of the infrastructure build and minimal cash contributions required as final payment for the miners in our order book. We expect the electrical service in Spartanburg to be upgraded to 50 megawatts by the first quarter of 2023, and expect to have all mining infrastructure at that location in place and miners installed when the service upgrade is complete. It’s important to note that we’ve shared our plan with our lenders and received strong lender support, which has provided us with additional liquidity by flattening our amortization curve as we complete our development plan in the upcoming months. And lastly, in everything that we do, we continue our relentless pursuit of maintaining a superior level of operational performance.
On Slide 6, we show our historical and planned capacity along with our bitcoin production, which Bob will talk about in more detail in his section. Slide 7 shows our footprint, and I’d like to start by talking a bit about our existing facility. Our original site in Dresden, New York is powered by 106 megawatt natural gas power plant. At that site, we plan to develop at least 2.1 exahash of mining capacity powered by approximately 60 megawatts of mining infrastructure, which entails installing approximately 200 petahash of additional mining capacity compared to what we had at the end of the quarter. The uptime at the plant has been exceptional. We had 100% uptime at the plant in the second quarter of this year, and we’ve also had 100% uptime since the end of the quarter. The uptime has been over 98% for both the last 12 month period, as well as since we commenced commercial mining in scale at the location in early 2020. At our site in Spartanburg, South Carolina, we plan to develop at least 1.5 exahash of mining capacity, powered by 50 megawatts of mining and infrastructure by the first quarter of 2023. This represents an increase in mining capacity of approximately 900 petahash compared to the end of the quarter.
And as I mentioned, the electrical service in Spartanburg is being upgraded by utility to 50 megawatts, which is expected by the first quarter of 2023. Our plan to develop these sites to 3.6 exahash is fully funded, substantially all the equipment’s been procured, including the transformers, switchgear, PDUs and portable mining structures as I mentioned, and we expect that the remaining build costs at the two sides will be less than 7.5 million. We had previously disclosed our extensive pipeline of opportunities in the [archive] market. As a result of the prevailing market conditions, we are pausing our plans to develop future sites until market conditions improve. We continue to have the same opportunity set in our pipeline as previously. We do not expect any material cash outflows associated with our pipeline. And we are exploring capital led options for the pipeline sites, including JVs, partnerships and potential monetization.
Slide 8 depicts the mining revenue versus power revenue at our Dresden facility. It shows the revenue per megawatt hour for two classes of miners that we operate S19J Pros and [S17], as well as the merchant price per power in [Zone C] of New York, which is the zone in which we operate. As you can see, at certain periods in both the first quarter and towards the end of the second quarter of 2022, on a weekly basis, the power price in Zone C came quite close to the revenue per megawatt hour for [S17]. On a daily basis or on an hourly basis, these lines did intersect on several occasions. As a result, we opted to curtail certain mining types at the site and instead sell merchant power to the market as opposed to continuing to create bitcoin with those miner types. This ability to curtail presents a floor in terms of revenue per megawatt hour at the Dresden facility compared to mining. And while we’ve curtailed select miners in the first half of ’22, we will continue to do so, although, we hope not to have to, in the event that it is more opportunistic to sell power versus continuing to mine bitcoin with our miner types.
Slide 9 shows our fleet efficiency and how it’s improving over time. We commenced commercial mining in the first quarter of 2020 with largely [S17 and M30] fleet. Since then, our fleet efficiency has been improving largely due to purchasing additional miners with greater efficiency. Recently, in order to be more capital efficient and to take advantage of our existing infrastructure, we are prioritizing mining capacity for newer, more efficient miners versus keeping older less efficient miners in that mining space. In the second quarter, we began reducing our inventory of older, less efficient miners throughout the field and we would expect that asset build trend to continue in the second half of ’22. So with that, I’d like to turn things over to Bob Loughran, our Chief Financial Officer, to go through the financials.
Bob Loughran
Thanks, Jeff. I’ll give a brief overview of some financial highlights of our second quarter results and an update on liquidity. Our total revenue for the second quarter rose over 90% compared to the prior year second quarter. Cryptocurrency mining revenue increased 43% compared to the second quarter of 2021, as the increased number of bitcoins mined were significantly offset by an approximately 30% lower average bitcoin price. We produced 621 bitcoins during the quarter, which was almost 100% more than the prior year quarter. The increase in the bitcoin produced was driven by the expansion of our miner fleet as our quarter average hashrate increased almost 200% versus the prior year quarter average. The higher average hashrate was partially offset by increased average difficulty of over 30%. And we ended June with 2.5 exahash, which was over 210% greater than last year. Our adjusted EBITDA of $2.9 million in the second quarter was down from $8.1 million in the second quarter of 2021 and our adjusted EBITDA margin declined to 9.2% in the second quarter of 2022 compared to 49.9% in the prior year quarter, as the combination of the lower bitcoin price and higher energy costs, which was driven by significant rise in natural gas squeezed margins for the industry.
Turning to Slide 12. This provides a picture of our liquidity at June 30th. We had approximately $67 million of cash and fair value of bitcoin. Additionally, we had $92 million of cash on deposit with Bitmain for future delivery of miners. As you have noted, given our nonfixed price contracts with Bitmain, we anticipate only minimal additional cash contribution for the remainder of our order book. We have approximately $176 million of debt on our balance sheet. This is net of our debt issue costs of approximately $7 million. Our debt is made up of $89 million of debt secured by our miners, $67 million of our 8.5% publicly traded senior unsecured notes, which mature in 2026 and a secured promissory note with B. Riley that had a balance of $20 million at June 30th. When factoring in the $67 million of cash and fair value of bitcoin, we had net debt of $109 million. Last week, we amended the secured promissory note to extend the maturity to June of 2023. The amendment reduced the monthly amortization payments and also reduced certain mandatory prepayments, and the interest rate was revised to 7.5% from 6%. The current principal balance following the amendment is $16.4 million. As Jeff mentioned, this amendment provides us with additional cushion on our liquidity as we complete our development plan.
Our second quarter results included three charges that impacted our GAAP results that I wanted to explain a little further. First, we recorded a nonrecurring non cash $71.5 million charge for the impairment of our long lived assets. Each quarter we are required to review whether an impairment triggering event has occurred under an accounting rule referred to as ASC 360. The significant decline in the price of bitcoin along with the significant increase in power costs were considered a triggering event, causing us to further analyze whether our assets were impaired from an accounting standpoint. The next step of the required analysis caused us to review forecasted future undiscounted cash flows based on prevailing market conditions. This caused us to writedown our long lived assets within property and equipment down as the carrying value exceeded our estimated fair value. Second, we recorded an $11.1 million charge for a change in estimate of our CCR liability as we continue to assess the requirements of the CCR liability at our New York facility. As we continue to analyze the requirements and develop our remediation plan with legal counsel and outside environmental engineers, there maybe additional changes to the liability in the future. And third, we recorded a charge in our income tax line for $15 million. This charge was for a valuation allowance on recorded deferred tax assets, primarily related to the Support.com business. When we acquired Support.com in 2021, we had a significant amount of net operating loss carry forwards, which, based on the prevailing market conditions at the time of the acquisition, we had expected to be able to utilize with future earnings. Given the current conditions, it is less likely that we will be able to benefit from the NOLs.
With that, I will now turn it over to Terry Burke, our General Counsel.
Terence Burke
Thanks, Bob. I’d like to update now on the status of our Title V Air Permit for the Dresden facility. The State Administrative Procedure Act allows us to operate our plant under the existing air permit for four months after final agency action is taken. On June 30th, The New York DEC denied our renewal application, and had we done nothing that would have become final agency action. But because we made a timely filing asking for a hearing on the matter, that decision on June 30th is now nothing more than a statement of the staff’s position, and we’ll move forward with a hearing before state administrative law judge. This slide shows the timeline that we might anticipate going forward. But the very first step is to have a meeting with the judge and to schedule a procedure or conference, and that has not happened at this point. That might happen in September, the judge will put out a notice for public comment possibly late September early October. Then there will be a public comment hearing maybe in October or November. And the issues conference maybe in January. And at that point, we start the timeline shown here, which is that it can take 12 to 14 months starting in January before we have a ruling on the party status and the adjudicable issues.
Now the timeline is not set by law, it’s set by the realities of the hearing, it’s set by the administrative law judge. And it can take anywhere on the short side from 20 months to 54 months beginning in January. Once the administrative law judge has come to a final decision, the judge will make a recommended decision to the New York State Department of Environmental Conservation Commissioner, who then will decide at that point we will have final agency action. The company then has four months in which to appeal. And during those four months, it can continue to operate under the existing air permit that it has today. Now sitting here now, we cannot estimate how long this process will take. But the point of this slide is to say that it’s going to take a few years at a minimum. That said, I’ll hand it back over to Jeff now. Thank you.
Jeff Kirt
Thank you, Terry. In closing, I’d like to begin by stating that the team once again delivered strong operational performance in the second quarter. As a result of changes in the market, we’ve refocused our strategy to maximize liquidity, while building two existing sites to operational scale with combined capacity of at least 3.6 exahash by the first quarter of 2023. The plant is fully funded with less than $7.5 million remaining infrastructure costs expected and minimal cash contributions required as final payment for the miners in our order book. We talked about the pending upgrade to the Spartanburg, South Carolina electrical service expected at first quarter of 2023. It’s important to note that our plan has received strong lender support, which has provided us with additional liquidity as we complete our development plan. And the team will not let up in its continued relentless pursuit of maintaining superior operating results. I’d like to conclude by highlighting some upcoming events on the investor relations calendar. First of all, we expect to participate in a number of fall investor conferences, as well as to continue to provide monthly operational updates. And finally, our third quarter 2023 results will be available in November.
So with that, I’d like to thank you for your attendance and your interest in Greenidge.
Question-and-Answer Session
End of Q&A
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