TeraWulf Inc.

Please stand by. We're about to begin. Good afternoon, ladies and gentlemen. Thank you for standing by. My name is Beau, and I will be your conference operator today. At this time, I would like to welcome you to the TerraWolf Q4 and calendar year 2022 results and business update call. At this time, all lines have been placed on mute to prevent any background noise. Should you require any assistance, please press star zero on your telephone keypad, and an operator will call on the line to assist you. Now, at this time, I'll turn things over to Mr. Sandy Harrison, Vice President, Investor Relations. Please go ahead, Mr. Harrison.

Thank you, Beau, and welcome to TerraWolf's Q4 and full year 2022 financial results and operational update call. I am Sandy Harrison, VP of IR, and joining me on today's call are Paul Prager, Co-Founder and Chief Executive Officer, Nazir Khan, Co-Founder and Chief Operating Officer, Patrick Fleury, Chief Financial Officer, Kerry Langlis, Chief Strategy Officer, and Stephanie Fleischman, General Counsel. I want to remind everyone that during today's call, we will be making forward-looking statements. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations, and assumptions regarding the future of our business, plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. Because forward-looking statements relate to the future, They are subject to inherent risks and uncertainties and changes in circumstances that are difficult to predict, many of which are outside of our control. The company's actual results and financial condition may differ significantly from those discussed during this call. Additional factors that could cause actual results that differ from forward-looking statements can be found today in our press release and on TerraWolf's SEC filings. Our comments are as of today, and Tara Wolf does not assume any obligation to publicly update any of these forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law or regulation. With that, I would like to pass the call over to our CEO, Paul Prager, for his opening comments.

Paul? Thank you, Sandy. Good evening, everyone, and thank you for joining us in our fourth quarter and fiscal year 2022 earnings call. There is little doubt that 2022 was a transformational year for TerraWolf and for the crypto industry at whole. During what proved to be an increasingly volatile macro backdrop and resultant turbulent market, TerraWolf successfully transitioned from development and construction to Bitcoin generation by remaining steadfastly focused on achieving our goal of building a scalable, vertically integrated Bitcoin mining company that uses low cost, zero carbon energy. We've accomplished a lot since our last formal call, and I'd like to review a few key milestones achieved during our first full year as a public company. Operationally, we commenced mining in March 2022 at our wholly owned Lake Marana facility in New York. This source is 91% zero carbon power from the grid, primarily from locally produced and abundant hydro and nuclear power. With the completion of our building one, we exited the year with more than 60 megawatts and two hexahash of mining capacity at Lake Mariner. At our jointly owned Nautilus facility in Pennsylvania, which sources 100% nuclear energy from the co-located 2.5 gigawatt Susquehanna nuke, we completed construction of two buildings. The Nautilus facility is home to one of Carol's most valuable assets, 50 megawatts of mining capacity at a fixed power price of two cents per kilowatt hour for five years. Nautilus was recently energized in February, and we have since ramped Terawolf's self-mining capacity at Nautilus to approximately 29 megawatts and 1.2x ash today. Financially, we successfully leveraged key relationships to make efficient use of deployed capital, complete construction of our facilities, and fund the company to free cash flow positive operations. We restructured our miner purchase agreements with Bitmain, unlocking substantial deposits and enabling us to procure miners to fully utilize 160 megawatts of capacity for self-mining, which we expect to be completely deployed in the second quarter of this year. We reached a pivotal agreement with our cooperative lenders to eliminate near-term amortization and in doing so, optimized our financial flexibility through market cycles. Finally, we raised the final capital necessary to bridge TerraWolf to cash flow positive operations, including significant investment from management. Let me be very clear. We do not plan to raise additional capital to achieve 5.5 XS and 160 megawatts of power capacity in the second quarter this year. Now that I've highlighted some of our accomplishments in 2022, I would like to underscore what unquestionably sets Wolf apart from our peers. One, we have the best assets. Our two mining facilities are arguably the best in the industry. With excellent power costs, ideal climate, and meaningful immediate growth capacity, Lake Mariner and Nautilus are far ahead of the pack. In energy markets, Location is everything, and our sites are located in robust, well-developed markets where we can provide an incremental value for the services we provide to the grid. As a zero-carbon miner, we believe we are strategically positioned relative to our peers in what will be an increasingly stringent regulatory environment. Two, we have the energy advantage. Our team has been working together in the energy infrastructure sector for more than 25 years. That is what we have done and that is what we do. We know how to procure and contract low cost power both at term and scale. Just look at what we have. Our two cent power at Nautilus and abundantly low cost power in upstate New York translates into a power cost per Bitcoin produced of approximately $8,000, which is among the lowest in the sector. Three, we have accomplished unparalleled growth. Over the course of 12 months, TerraWolf has built two world-class mining facilities that are expected to achieve 5.5 exahash and 160 megawatts of power capacity in the matter of weeks. I encourage you to compare what we have built in a year relative to what it took any other Bitcoin miners in years to achieve. As a vertically integrated miner, we own our sites and control our destiny. Four, we can expand organically at existing sites. Galeability and adaptability are vital, and our Lake Mariner and Nautilus facilities have both. We have the shovel-ready ability to nearly double our hashing capacity at our existing sites. Everything from our power import capacity to the layout of our warehouses and racks was designed to expand. And while the best growth opportunities may exist within our portfolio, that doesn't preclude us from evaluating opportunities to take our experience and strategy to new projects or places. Regardless of how we do it, we will continue to expand in a financially responsible way. Five. We have prioritized infrastructure. So far, we have invested approximately $260 million to ensure our facilities and mining equipment will lead the pack today and in the future. The time and cost alone to replicate our business is so substantial and represent a significant barrier to entry. Six, we have industry-leading efficiency. As we have continued to scale, Our price per exahash and efficiency per exahash metrics continue to improve. In 2022, we started out with a quarterly average efficiency of more or less 31 joules per terahash. And by year end, we were operating at close to 26 joules per terahash, based on an optimized mix of the most efficient miners. What differentiates TerraWolf is that we own and operate our facilities control our power supply, and utilize 91 plus percent zero carbon energy sources. We believe the strength of these individual components has created a highly defensible moat with significant barriers to entry against new market entrants, as well as less efficient and poorly executing peers. Looking ahead, we have clear and established priorities. One, execution. Achieving our target of deploying 50,000 miners, 160 megawatts, or 5.5x hash, we are nearly there and expect to be fully energized in the second quarter of this year. Two, earnings power. Optimizing our earnings by ramping up our operations efficiently, executing our cost-cutting initiatives, and expanding the suite of grid services that we offer to the market. Three, expansion. When it comes to Bitcoin mining, size matters. We will remain laser focused on scaling mining operations at our existing sites while opportunistically pursuing strategic opportunities in a financially responsible manner. Four, evidence. Continuing to raise the bar on transparency and disclosure in an industry that we believe has a lot of work to do in this regard. Our CFO, Patrick, will touch on this shortly, but I encourage all of you, our investors, to review Terrible's presentations and monthly operating reports and compare the quality and level of disclosure that we provide relative to our peers. Five, education. As I said earlier, we believe mining with zero carbon energy will be a strategic advantage and clear differentiator when it comes to regulation. We will collaborate with regulators and legislators to explain and demonstrate the value that sustainable Bitcoin mining can have on the energy grids and communities where we operate. These priorities reflect the core values of our management team, which we believe is truly aligned with our shareholders. As I previewed earlier in my remarks, Terrell's leadership team is significantly invested in the company, more than any other public Bitcoin miner. We have no interest in pursuing a growth at any cost or huddle strategy like some of our peers at any cost. Our objective is simple, to create substantial and realizable value for our shareholders in the least dilutive way possible. In summary, 2022 was just the beginning. Our vertically integrated build, own, and operate business model had us a bit behind the more immediate gratification host programs followed by many other public miners. But we have now arrived. We are the zero carbon, low cost, right cap structure, sustainable miner we promised we would become. We are not vulnerable to the volatility or regulatory risk of fossil fuel based production. We own our facilities, enabling better and predictable outcomes in all elements of Bitcoin generation. Our team has boatloads of experience in developing, owning and operating both power plants and Bitcoin mining facilities. And most importantly, management is entirely aligned with our investors. with over 50% insider board and management shareholdings. As we move further into 2023, we are poised to play offense. Our commitment is to deliver best-in-class execution at full scale and position TerraWolf as the preeminent Bitcoin miner. I thank you for your continued interest and support. I will now turn the call over to our CFO, Patrick Fleury, for more detailed financial reviews.

Thank you, Paul, and thanks everyone for joining. As a 23-year veteran of Wall Street, the first nine months of my tenure as Chief Financial Officer have been among the most challenging of my career. In these months, we tirelessly worked to better position Terawolf as an industry winner. As I reflect 2022 and early 2023, I'm incredibly proud of what this team of energy, power and finance professionals have accomplished thus far. Number one, we raised over $100 million of new capital from retail and institutional investors, lenders, and insiders. Number two, we restructured our Bitmain contracts to convert all deposits, purchase orders without any further capital commitments. And number three, We restructured the talent JV to better align our infrastructure capacity with funded linear purchases. These achievements continued into early 2023 as we took further actions to solidify our financial standing, including number four, raising over 35 million of transformative equity capital to provide sufficient future liquidity and enable Wolf to satisfy all capital commitments to achieve free cash flow break-even operations. And number five, successfully completing the restructuring of our debt for mandatory amortization of approximately $17 million per quarter to a quarterly free cash flow sweep. These latest two achievements are critical to providing the runway needed to accomplish our objectives in 2023 and beyond. We should now have the financial resources and possess the necessary infrastructure and miners to deliver 160 megawatts and 5.5 exahash of capacity, which we believe installs Terawolf solidly in the upper echelon of the public miner peer group. Speaking of our public miner peer group, as a long time energy power and commodity institutional investor, I've approved my duty as CFO of Terawolf with a responsibility to provide transparency, accountability, and access to institutional and retail investors alike. We believe our February investor presentation provides more helpful detail and transparency than any of our peers. We provide the financial tools and guidance that any successful commodity business should. Annual capacity and full transparency on our cost structure. which enables investors to easily determine our annual EBITDA. I challenge institutional and retail investors, and more directly, all the research analysts on this call, demand the same of our public miner peers. Hold them to the same disclosure standard, please. Because until all public Bitcoin miners provide the same level of disclosure, and institutional and retail investors can compare companies on an apples to apples basis, this sector will likely continue to face a lack of credibility. Wolf is leading by example based on our collective experience in sectors such as oil and gas, power, mining, and renewable energy. And while we might not be perfect, we are transparent, accessible, and open for discussion. If you have a question, or find our disclosures confusing, please contact us. I am focused every day on bringing financial literacy and legitimacy to this nascent business and welcome your input. Lastly, before moving on to our 2020 financial results, we believe the Bitcoin mining sector will benefit from consolidation. The sector theme for 2023 should be M&A. There are approximately 20 public Bitcoin mining companies. all of which are operating at or near subscale, in my opinion. Our team is built with experienced finance and energy and power executives. And now that we are on solid financial footing, you should expect us to be more opportunistic going forward as tremendous cost and operational synergies can be realized. Moving now to our GAAP operating results for calendar year 2022, Terawolf generated revenue of $15 million, mainly from Bitcoin mining operations, and we had a net loss before income tax and equity and net loss of investee of $70.5 million. In 2022, we incurred higher power costs associated with the energization and initial ramp of mining operations at our Lake Mariner facility in March 2022. For calendar year 2022, operating costs increased over the prior year 47.7 million led by this transition from construction in 2021 to the ramp of mining production in 2022. We believe that the previously announced cost reduction actions we have undertaken will continue to help to lower our operating expenses going forward. Specifically, expect to realize sdna of approximately 22 and a half million in 2020-23 page 14 of our february investor presentation which reflects cost savings of over 10 million versus 2020-22 actual sdna of 36 million looking at the balance sheet at the end of 2022 Terawolf had total assets of $318 million and total liabilities of $200 million. As a reminder, these numbers do not reflect the financing activity we completed during the first quarter of 2023 that will be reflected in future operating reports. In particular, at year end, we had negative net working capital of approximately $111 million, which following the restructuring of our debt and completion of the first quarter financing has been reduced to less than $10 million on a cash basis. Let me repeat that. Our net working capital deficit has normalized and the company's financial position has significantly improved. As a result, when we file our 10K as early as tomorrow, you will see the removal of the going concern emphasis that was included previously in the 2021 10-K. We exited current year 22 with approximately 60 megawatts of capacity and self-mining operating hash rate of 1.4 exahash at our Lake Mariner facility. In the first quarter of 2023, we continue to ramp our self-mining capacity at Lake Mariner and energize the first zones of the Nautilus facility, resulting in a combined capacity of 2.6 exahash at the end of February. We continue to ramp at both facilities and expect to achieve our target of 160 megawatts and 5.5 exahash in Q2 23. While we have made significant strides in ramping self-mining production, We believe the current equity markets do not take into account our progress and the anticipated 5.5x hash of capacity expected online in Q2-23, along with the associated earnings power and profitability of our assets. To date, we have spent $100 million on infrastructure and another approximately $160 million on miners with no further capital commitments. Our balance sheet as of December 31, 2022, shows a total asset value of $318 million, or approximately $1.20 per share, based on 267 million fully diluted shares outstanding as of March 30, 2023. These numbers do not recognize or reward Wolf for one of the company's most valuable assets. the five-year contract for 50 megawatts of $0.02 power at Nautilus, which had a recent mark-to-market value of approximately $40 million based on current power prices in the PJM West power market. Comparing these values and our anticipated annual EBITDA run rate at today's BTC prices with our current market cap of approximately $200 million and $146 million of debt with approximately 13 million of cash as of march 30th 2023 we believe there is a significant disconnect in the valuation of our public equity versus our peers as we complete our ramp in the near term and close in on our operational targets of 160 megawatts and 5.5 act dash i would expect the delta between our valuation and our peers to close in summary we have successfully navigated a challenging and transformational time for the company and industry. Key takeaways for participants on this call. Number one, we are among the lowest marginal cost producers in the industry. Anyone who has invested in or analyzed commodity companies through cycles knows the lowest marginal cost producer wins. Number two, We've restructured our debt to allow us the ability to reduce debt when we have the cash. And number three, we have the tightest and most experienced management team to execute on M&A amongst any of our peers. We are finance and energy and power native. And this is the skill set the industry needs to reach the next level. With that, I'll pass it back to Paul and Andy.

Look forward to addressing your questions. Thank you, Patrick.

I appreciate the investors may have questions, and the team stands ready to respond in the most constructive way. So, Sandy, why don't you go ahead and start fielding them, and let's see if we could provide as much information as we can in response. Sure.

Bo, you want to go ahead and kick it off? Certainly, Mr. Harrison. Ladies and gentlemen, at this time, if you do have any questions on the phone, simply press star 1. And if you do find your question has been addressed, you can remove yourself from the queue by pressing the pound key. We'll take our first question this afternoon from Lucas Pipes of B. Reilly.

Yeah, thank you very much. This is Nick asking a question on behalf of Lucas. And guys, thanks for the level of disclosures. These are really extremely helpful. You know, my first question is, when you think about strategic opportunities outside of current sites, would potential consolidation opportunities, would these require rig purchases, or do you have a preference for sites which may be unfinished, you know, obviously with no rigs?

Hi, this is Paul. I think when we think about the space, we want to do everything in the most responsible manner, and key to doing that is going to be the way that is financially efficient, and also least dilutive to our shareholders. We look at consolidation in the space as not limited to the development of additional sites, just simply because it would be very difficult to find growth opportunity that is as competitive as just if we build out the existing site, but also to include consolidation of other miners. As Patrick mentioned in his conversation, You know, we've got a ton of M&A experience in the power space, the energy space. And I think, you know, as we look forward, we're looking for folks that have undervalued assets or regionally in places that provide some level of security from diversity of generation or great rule of law and also consistent with a zero carbon approach. You know, the market downturn has presented, you know, just a ton of opportunities. So our primary focus right now is, again, getting to 5.5x ash. I think that's a big statement. We'll do that in a matter of weeks. And we are looking at strategic opportunities in terms of acquisition of existing miners that have low-cost production and that is zero-carbon.

Paul, thanks so much. Really appreciate all that color. Maybe just one follow-up there. You spoke of regions. Would you prefer to stay in the Northeast, or a lot of your peers are obviously centralized in Texas? Are there any regions in particular that you have a preference for, or really all are open for discussion?

We happen to really love the United States. We like rule of law. I think there's nothing that we would sort of rule out up front. You know, we look where there's excess supply versus demand. And, you know, the unique thing about energy is that it is different on a regional basis, even on state basis. And we're also looking for places that have a predictable regulatory regime. And we think that's critical ultimately to the future of Bitcoin generation.

Very clear. I appreciate that. Maybe just one more for me. You know, as you think about growth beyond the 5.5x hash, apologies if I might have missed this, but, you know, which site makes most sense? I know you have expansion opportunities at both Nautilus and Mariner, but, you know, is there a preference of one over the other?

Sorry, this is Carrie Langless, the Chief Strategy Officer. Tara Wolf, I'll jump in here and address that question. So yes, as you point out, we have sort of shovel-ready organic expansion opportunities at our two sites. We have another 50 megawatts that we can expand into in Pennsylvania at Nautilus. And at Lake Mariner, we have near-term ability to expand that facility by another 80 megawatts. So in total, we can effectively double our hash rate here as quickly as we want to pursue that. I think when we look at where, you know, between the two facilities, what makes the most sense, it really comes down to production cost and the cost of the infrastructure to expand. So I think what we've seen in New York is that our infrastructure cost there is more efficient than our infrastructure cost at Nautilus and that's purely by virtue of Nautilus being co-located with a nuclear power facility that requires security and additional requirements in that regard being part sort of as you would imagine a utility framework. We have access to very low cost power in each location. So I think for us, the benefit of being able to build something at a lower cost in New York is obviously appealing. But for us, it's really whatever is available to us in the immediate term, that's where we'll spend our time.

Got it. Carrie, I really appreciate all that detail. I'll leave it there for now. Congrats on the progress so far, guys. Thank you very much. Thank you.

We go next now to Bill Papagnostasio at Stifle.

Hey guys, thanks for taking my questions. I just want to say big kudos to Patrick and really the entire team for the level of transparency and disclosure. It's a big relief to us as analysts to see this. It just makes our lives easier to model. I plan on making sure that some of your peers also report with the same amount of transparency. Without further ado, I was hoping to gain some outlook on network hash rates and the broader outlook for mining economics. Obviously, this is an important topic with it having about a year out, and TerraWolf is very well positioned with the blended average cost of power of 3.5 cents per kilowatt and 26 joules per terahash, but any broader general commentary that you provide is greatly appreciated.

Sure. Thanks so much. And I'll start. And Patrick, if you have anything to add, please feel free to jump in. You know, I think our view is we expect the hash rate to continue to increase in this part of the year. You know, decisions, investment decisions that were made, there's obviously a time lag between when decisions were made and when that infrastructure actually gets into place. So we think we'll see that sort of play out as we near the halving. I think, you know, historically, Bitcoin prices sort of outweighed the impact of the happening. Now, whether that will pan out in this cycle remains to be seen. But I think, you know, what we've benefited from and I think a terrible, you know, being such a low cost producer is sort of paramount as you enter into these different cycles. And so that's how we're thinking about hash rate growth as we move forward deeper into this year.

Great. I appreciate that.

Go ahead, Patrick. Sorry, Bill. This is Patrick. So I was just going to add, Bill, if you take a look at our February investor deck, page 14 of that deck where we actually get into unit economics and detail our entire cost structure, what we've actually tried to lay out there is a comparison between Terawolf's cost of power and, you know, some other miner, a public miner that's, say, pursuing an asset-light strategy. And the intent of that page is to show you through exactly what Terry just said, network cash rate growth, and then the block having adjustment, which likely occurs in April 24, what mining economics kind of look like through the cycle. And that's why I think we're trying to stress, again, being the lowest cost marginal producer through cycles really matters because As you can see on that page, the cost of Bitcoin, a one cent power price differential, while it's a little bit immaterial today, once you go through that network cash rate plus a block halving adjustment, it becomes incredibly material.

Great. I really appreciate the color. And yes, I've seen that slide in the deck and I encourage everyone else to look at it as well to see the comparisons. My next question is just given the team's experience with energy markets, I was hoping you'd be able to provide a quick and dirty overview of the team's appetite for potentially other zero carbon energy renewable sources. Could we see TerraWolf in the future tap into solar wind energy or will you continue to focus on hydro and nuclear or any commentary on the other types of energy sources?

Sure. This is Carrie again. I'll get started on that. Listen, we focus on hydro and nuclear because they are the most scalable and around the clock renewable resources that exist. We certainly are interested in augmenting our facilities with solar capacity. We actually have a solar development that's in the permitting process now for our Lake Mariner facility, what would be a 125 megawatt co-located solar farm there. We've also looked at different flared gas opportunities. I think that Bitcoin mining is the perfect solution for any stranded excess energy, but not all flared gas is created equal. So we haven't yet identified an opportunity that we think is consistent with our standards here at TerraWolf. But to answer your question, yes, we certainly will look to other sources of clean energy. But obviously, hydro and nuclear are the most appealing from a low-cost, around-the-clock, base-low perspective.

Great. Really appreciate it. That's all the questions I have. Look forward to the next quarter. And Mr. Harrison, it appears we have no further questions over the phone. I'd like to turn the call back to you.

Thank you, Bo. I will now move to questions that we may have gotten from participants on the webcast.

As a reminder, you can answer your questions on the webinar portal, and we will get to as many as we potentially can. I have one here right now to the team. As a shareholder, I love that you and your team have invested millions of your own money in the company. It really aligns our goals in my mind.

Can you speak to the size and financial commitment insiders have made and any reasons or drivers why?

Patrick, do you want to address that? I mean, I think you have the most accurate capital. But as the CEO, I could tell you that we invested a significant amount in 2022 and as recently as 2023. And the bulk of managers and insider shareholding is sitting at the transfer agent. I certainly know that's the case for me, not at a brokerage shop. I haven't sold a share. But Patrick, you want to give the specific numbers? And the reason why, by the way, we invest is because we believe in the mission of TerraWolf. I mean, I truly believe TerraWolf is peerless for all the reasons I enunciated earlier in my remarks. I believe in the team, our agility to respond to increased questions from a regulatory perspective or from a fuel sourcing perspective, and from our own ability to operate both power plants and Bitcoin mining facilities. Patrick?

Yeah, sure. And I don't have all these at my fingertips. So, Kerry, correct me if you think I'm wrong. But I think the management team alone in the last year, including March of this year, has invested, I believe, 15 to 20 million of capital alone. And then if you include management, insiders, the board and friendly investors, That group controls over 50% of the shares of the company, which is unparalleled. When you look at the public miner space, there's only one other public miner that I know of that group has double-digit percentage. So we are truly unparalleled in that regard. And I think that's why, certainly as a CFO, I take it to heart when Paul in his remarks It says, you know, we are done. I mean, we have zero interest in, you know, diluting folks further, and we will run the company for profit and to maximize value and return to shareholders.

So that looks like all the questions I've got on the web, on the, on the webcam. Why don't you go ahead and close us out?

Certainly, Mr. Harrison. Ladies and gentlemen, we'd like to thank you so much for joining the TerraWolf Q4 and calendar year 2022 results and business update call. This will bring us to the conclusion of the call, and we wish you all a great remainder of your day. Goodbye.