TeraWulf Inc.

Ladies and gentlemen, good morning and welcome to the Terra Wolf, Inc. Second Quarter 2023 Audience Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jason Asad, Director of Corporate Communications. Please go ahead.

Thank you, operator.

Good morning and welcome to TerraWolf's second quarter 2023 earnings call. Thank you for joining us today for our call. With me on today's call are Chairman and Chief Executive Officer, Paul Breger, and our Chief Financial Officer, Patrick Fleury. Before we get started, I'd like to remind everyone that our prepared remarks may contain forward-looking statements which are subject to risk and uncertainties and that we may make additional forward-looking statements during the question and answer session. These forward-looking statements are subject to risk and uncertainties and actual results may differ materially. When used in this call, the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project, and similar expressions as they relate to TerraWolf are as such forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially from those anticipated by TerraWolf at this time. In addition, other risks are more fully described in TerraWolf's public filings with the U.S. Securities and Exchange Permission, which may be viewed at www.sdc.gov and in the investor section of our corporate website at www.terrawolf.com. Finally, please note that on today's call, we will refer to certain non-GAAP financial measures. Please refer to our company's periodic reports on Form 10-K and 10-Q and to our website for a full reconciliation of these non-GAAP performance measures to the most comparable GAAP financial measures. We'll begin today's call with prepared remarks from Paul and Patrick, then we'll proceed to Q&A.

It's my pleasure to now turn the call over to TerraWolf CEO, Paul Prager. Paul?

Thank you, Jason, and good morning, everyone. Thank you for joining us on our second quarter 2023 earnings call. We have accomplished quite a lot since our last formal call, and I would like to review a few key milestones that we've achieved during the first half of 2023. One, we successfully executed our rapid growth plans. We launched TerraWolf just over a year and a half ago, and as promised, achieved 5.5x a hash and 160 megawatts of power capacity by the end of Q2 23. This past March, we began the energization and deployment of 50 megawatts of zero carbon mining capacity at our jointly owned 100% nuclear powered Nautilus facility. And in June, we completed building two at our Lake Marina facility, housing an additional 50 megawatts. To exceed the accomplishments of our peers in such an abbreviated period of time, is testament to the excellence, perseverance, and professionalism of the TerraWolf team, and especially our folks on the ground. Two, we assembled one of the most efficient minor fleets in the sector, and as we continue to scale, remain confident our price and efficiency per exahash metrics will prove even more impressive. Our recently announced expansion plan involving 18,500 of the latest generation S19JXP Bitmain miners will only further establish Wolf as one of the most efficient mining fleets in the sector at an efficiency of 25.7 Joules per terahash. You should rest assured our development and operations teams will continue to work to differentiate Wolf as the preeminent miner. We are setting the standard for financial and operational transparency. Our CFO, Patrick Fleury, a former partner, 20-year investor, and lender, you will hear from him in a moment. He has significantly raised the bar on reporting financial metrics. By setting the standard for the industry with our operational and financial transparency, we hope investors will confidently evaluate us alongside the other miners. Four, we've greatly enhanced our investor communications. In April, we were fortunate to welcome Jason Assad on board, a respected 20-year communications veteran to our team. Investors may recognize him as one of the first team members of Marathon Digital Holdings upon their initial pivot into Bitcoin mining. Thanks to this new addition, we have advanced our investor communications by implementing a comprehensive strategy that includes regular updates, increased transparency and enhanced engagement opportunities. In addition, we've released a virtual site tour in June, providing our investors an inside look at our state-of-the-art mining facilities and remarkable operations team. After highlighting some of our accomplishments so far in 2023, I would like to underscore what we believe continues to unquestionably set TerraWolf apart from FDRs. First, we have the best assets. Our mining facilities are arguably the best in class in the industry with unmatched power costs, ideal climate, and significant expansion capability. In energy markets, location is everything, and our facilities are located in robust, well-developed markets where we are able to service the grid and the surrounding communities. As a zero-carbon miner, we are strategically positioned relative to our peers in what we believe will be an increasingly stringent regulatory environment. Second, we have the energy advantage. Our team has been working together in the energy infrastructure sector for decades. Bitcoin is all about energy. and we are experienced in procuring low-cost energy both at term and at scale. Our two-cent power at Nautilus, an abundant low-cost power in upstate New York, translates into a power cost per Bitcoin that is among, if not the lowest in the sector. We are one of only few Bitcoin miners that discloses our true power cost each month. And if you check our monthly production and operations reports, you will find us unrivaled in this metric. Third, we have organic expansion capability. When it comes to Bitcoin mining, size matters. Our two sites were developed with expansion potential as a key element, and everything from our power import capacity to the layout of our warehouses is designed to grow. We're in the process now of expanding our Lake Merida facility by another 43 megawatts. Scalability and adaptability are vital, and our Lake Mariner and Nautilus facilities have both. The time and cost to replicate these facilities is substantial and represent a significant barrier to entry. Fourth, we are uniquely aligned with our investors. As a significant shareholder in Terawolf myself and investor, my goals are in complete alignment with yours. In only the last year, I have personally invested over $12 million of my own money, and collectively, our insiders own approximately 55% of the company's shares. Why does this matter? Because you can bet that if we ever dilute the stock, it will only be accretive, and in the very best interest of the company and its shareholders. In short, we only win if you win. Every move from this point forward is about advancing our mission and pushing the boundaries of what is possible for our vertically integrated business and our shareholders. We remain laser focused on scaling mining operations at our existing sites while opportunistically pursuing strategic opportunities in a financially responsible manner. Importantly, we believe that not all XAH is created equal and that the upcoming halving in April is likely to lead to a changing of the guard. We have positioned ourselves for profitability both now and post-halving. We look forward to taking advantage of what we expect may happen as the fundamental flaws of some of our peers are illuminated and acknowledged by investors. TeraWolf is led by an accomplished diverse management team with 30 plus years of experience in developing and managing energy infrastructure. Our core management team has been together and working side by side with one another for the last 15 plus years. I believe it is this unique experience and perspective that is paying and will continue to pay dividends as we build out our operations focused squarely on building shareholder value. As a fellow shareholder with a material interest in our collective success, I want to thank you for your invaluable trust and support as we focus on building the leading mining company. I will now hand the call over to our CFO, Patrick Fleury, for a more detailed financial review. Patrick?

Thank you, Paul. As Paul highlighted in the beginning of this call, TerraWolf performed exceptionally well in Q2 this year, showcasing consistent growth both year-over-year and quarter-over-quarter. Notably, our production has seen a steady increase in the first half of 2023, resulting in positive operational outcomes reflected in our Q2 financials. These results demonstrate a continued upward trend in revenue, enhanced liquidity, and free cash flow. Positive momentum we're committed to sustaining moving forward. A quick reminder, there is a very key difference between our GAAP financials and the monthly operating reports and guidance presented in our July investor presentation. As a result of our 25% ownership in Nautilus, the revenue cost of revenue, operating expenses, depreciation, and amortization at Nautilus are not consolidated into our GAAP financial statements. Instead, the financial impact of the Nautilus joint venture is reflected in the equity and net loss of investee net of tax line item on the GAAP income statement. Diving into the numbers for the second quarter of 2023, we mined 506 Bitcoin at Lake Mariner and our net share of mined Bitcoin and Nautilus was 403 Bitcoins for a total of 909, or about 10 Bitcoin per day, nearly double our Bitcoin production of 533 Bitcoins in Q1 of this year. Our revenues saw an outstanding growth of over 1,000% compared to the same period last year, reaching $15.55 million, And our revenue from hosting also saw a notable rise. Our revenue per Bitcoin this quarter averaged $27,912 for a self-mining revenue equivalent of $25.3 million, as detailed and defined in our monthly operating reports and press release. Looking now at our gross profit, we saw an increase of over 1,200% to $10.3 million compared to last year's second quarter. as well as an increase in our gross profit margin from 57% to 67%. Our total power cost per Bitcoin mine was approximately $7,200 in 2Q compared to approximately $8,400 in 1Q of this year, a decrease of approximately 15% that can be attributed to the full 2Q contribution of Nautilus' fixed $0.02 power. I want to note, these power costs are fully loaded and include taxes, capacity fees, and transmission costs. Unlike Nautilus, power costs do float at our Lake Mariner facility, where we are confident that we will achieve an average annual power cost of 4.5 cents per kilowatt hour or lower, despite the facility's subjectivity to seasonal power price fluctuations. Operating expenses remained stable year over year at approximately $1.1 million. SG&A expenses increased year over year from $6.8 million in 2Q22 to $8.6 million in 2Q23. This increase was primarily due to increases of $1.3 million and $1.6 million in stock-based compensation and employee compensation and benefits, respectively. offset by decreases of $1.1 million and $500,000 in legal fees and insurance expenses, respectively. We continue to expect to realize SG&A of about $22 to $23 million in 2023, per page 12 of our latest investor presentation, which reflects cost savings of over $10 million compared to 2022's actual SG&A of about $36 million. Depreciation for the three months ended June 30, 2023 and 2022 was $6.4 million and $200,000, respectively, and the increase was primarily due to the increase in mining capacity due to infrastructure constructed and placed into service. Interest expense for the three months ended June 30, 2023 and 2022 was $8.5 million and $4.1 million, respectively, an increase of $4.4 million. The increase in interest expense year over year is primarily due to an increase in the average principal amount outstanding from $123.5 million in June of 2020 to $146 million in June of 2023, and an increase in amortization of debt issuance costs and debt discount related to the term loan financing. Importantly, cash interest paid during the six months ended June 30th, 2023 was $11.3 million, which included eight months of interest payments due to accrued interest for the fourth quarter of 2022 paid in January of 2023 and five months of interest payments made in the first half of 2023 as interest is paid monthly in arrears as of May 2023. Equity in net loss of investee net of tax for the three months ended June 30th, 2023 and 2022 was negative 3.3 million and negative 1.1 million respectively. For 2Q23, this amount includes an impairment loss of 4.6 million on the distribution of miners from Nautilus to the company, whereby the miners were marked to fair value from book value on the date distributed. The impairment loss was the result of a reduction in the price of the miners between initial purchase and distribution. The remaining amounts represent TerraWolf's proportional share of income or losses of Nautilus, which commenced commercial operations in February 2023. Our GAAP loss for the second quarter was $17.8 million compared to $13.9 million in the same quarter of last year. Our non-GAAP adjusted EBITDA for QQ23 was $7.6 million, increasing by $14.7 million this quarter over the same quarter last year due to the ramp up of operating capacity at both of our mining facilities. Turning our attention now to the balance sheet. As of June 30th, we held $8.2 million of cash with total assets amounting to approximately $300 million and total liabilities of approximately $165 million. With the achievement of our targeted 160 megawatts and 5.5 exahash of operating capacity, exiting 2Q23, we anticipate a consistent and rapid reduction in our long-term debt moving forward. Regarding our most recent expansion announcement, I'd like to emphasize for a moment just how significant this announcement is for TerraWolf. The purchase of 18,500 of Bitmain's latest generation S19J XP miners is meaningful, not only because it is the first of its kind worldwide, but also because of the significant operating efficiencies it will drive ahead of next year's halving event. These miners will reduce our unit economic cost to mine Bitcoin by over 17% immediately. Come 2024, we believe that our fleet efficiency will be among the most efficient in the sector at 25.7 joules per terahash, and when coupled with a realized average power cost of 3.5 cents per kilowatt. positions us to maximize profits both before and after the halving. For a more detailed analysis of our unit economic costs, please see page 12 of our latest investor presentation. In conclusion, I hope that during this call today, our financial objectives were made clear and simple. Maximize profits, repay debt, and return value to shareholders while providing investors access through transparency and accountability. With that, I'll pass it back to the operator and I look forward to answering your questions.

Thank you.

Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Our first question comes from the line of Lucas Pipes with B Riley Security. Please go ahead.

Yeah, good morning, everyone. This is Nick Giles on for Lucas. Really, really appreciate all the color. You know, it would be great to just hear an updated view on organic growth opportunities that you have. You know, how should we think about organic growth beyond these next 50 megawatts that you've outlined? Maybe just from a site perspective and timing. Thank you very much.

Hey, Nick. It's Patrick, and I'm here with Paul. So good question. I think, you know, as we mentioned, this expansion, which is about 43 megawatts, and then we'll also be replacing the machines that we are hosting at Lake Mariner, so about 5,000 slots with the new order of the S19JXPs as well. So that's obviously right in front of us and will be, you know, done by year end. We also have an additional 50 megawatts of potential expansion at Nautilus that's shovel ready. And then obviously the Lake Mariner site can be expanded, you know, up to 500 megawatts if and when we want. So I think, you know, we're, as you know, we are very focused at staying at sites where, you know, we know and can control power costs. I mean, that is the number one focus of our team. and these sites are very scalable. There's a lot of economies of scale in this industry, as you know, and so we're pretty pleased with the two sites that we have.

Yeah, the only thing that I'd want to add is, you know, we have the team to do that, right? Our team's been together 15, 20 years, and we've done all sorts of M&A as well in the energy infrastructure space. So, you know, if you look around the public miners, you kind of want to scratch your head sometimes that some of these deals that have been announced and some of the crazy valuations that people have come to on some of these stock for stock deals. You know, that's not going to happen here. Any acquisition we do has got to be a creative, got to be right for the business. And we have the team with the experience to negotiate those deals, value them properly and execute on them.

Thank you both for, for, for that. Um, maybe just on the M&A front, would be great to just maybe get some additional color there. Would you say you're seeing more opportunities come up as we approach the halving? You know, how would you describe the size of some of these opportunities? Thank you very much.

Yeah, sure. If I could start and then Patrick. Again, our focus is going to be on some of the internal organic because it's the low-hanging fruit and it's the one where we don't have to worry about merging teams or other sites that we don't know quite as well as our own. But certainly, there are going to be winners and losers coming into the halving, and it's all going to be about efficiency and the cost to mine. But it's also about the thesis. We're very regulatory sensitive, and therefore, we built our business to be focused on zero carbon mining. So Anything we do has got to be a creative and got to be consistent with our thesis, but go ahead, Patrick.

Yeah, Nick, I would just add, look, I think, you know, there's, as, as we've talked, you know, there's 20 something public companies in this space. I mean, that's just too many. And anybody that's been around commodity markets long enough has seen, you know, consolidation, whether it was in the early two thousands with the independent power producers or the 2010s with oil and gas companies. Right. So I think that's a really natural, you know, as the, as, the sector becomes more mature, there's got to be consolidation and the natural cycle we have in Bitcoin mining, but having every four years, I think will drive that. So, so certainly a lot of discussions on that front, both public private. But I think the there's, as Paul mentioned, there will be very natural winners and losers post having, you know and so I think that will like, our view is we're really getting our house in order and preparing for that event and trying to position the company, as strongly as we can. So that's why there's an emphasis on, you know, we're now free cash flow positive and paying down debt. So you're going to see us chip away at the debt over the next few quarters to put the company in a really strong position, I think, going into the halving. And then I think just one other thing, Paul mentioned it. I mean, given, again, we have such high ownership of the management board of directors and insiders. I mean, we're literally, I think over 55%. There's no other, there's one other peer that has, you know, even double digits ownership. And so we are very aligned with our shareholders. And as Paul points out, anything that we look at, it has to be accretive. So that is the bar is set very high. And I think for us right now, as Paul mentioned, you know, the easiest low hanging accretive fruit is really expansion at our existing sites.

Got it. Got it. Makes sense. Thanks again for those comments, and congrats on the flip to, you know, free cash flow positivity here. Maybe just one last one for me. Do you have any agreement in place with Bitmain for minor procurement beyond what you already have contracted? You know, I know the relationship is strong there, but just want to get a sense for how we should think about minor purchases beyond what you've, already announced.

Yeah, this is Paul. We have a great relationship with Bitmain, and I really value them. I think they think of us in many respects as a partner. They've helped us come to scale here, but we don't have agreements that you don't know about. I mean, obviously, we'd have to report that, but we are constantly evaluating our fleet, and how we continue to scale our mining activities and what are the right machines. But everything that we've contracted for, you're aware of, and anything going forward would be a new contract, and we'd negotiate to the death to make sure we got the best deal for our shareholders.

Got it. Got it. Well, Paul, Patrick, thank you so much for all the color, and to you and the team, continue best of luck.

Thanks, Nick. Thank you.

Our next question comes from the line of Mike Grondahl with Northland Securities. Please go ahead.

Hey, guys. Congratulations on the progress. Three questions for me. I'll just ask them up front here. One, on the power costs with Lake Mariner, is there anything we should think about there sort of late summer, fall time? Secondly, Paul, I'd kind of love to get your thoughts just on the halving in general, kind of if you've got a crystal ball, kind of what you think may happen. And then maybe lastly for Patrick, sort of how are you feeling about the balance sheet, the debt levels, some of the warrants that go with the debt, and kind of overall liquidity now that you're generating free cash. And there was some, some thoughts that maybe you guys were in the market a couple of weeks ago. Um, if you could kind of round that out, um, maybe that would be helpful.

Yeah, sure. So I guess let me, let me take those in reversal or might just, uh, while the last one's precious in our mind. Um, so look, yeah, I think we got a lot of phone calls. There was some speculation. I think that we were contemplating a capital markets transaction. I think what I will say to you, and I think you guys are hearing loud and clear from Paul and I on this call, is we will not do a dilutive transaction, you know, at a big discount to the market. Those days are past us. We are now in a very strong liquidity position. You can see, you know, our cash building on our June 30th balance sheet. We are, now that we have full 160 megawatts and 5.5x, we are generating free cash flow. We've also given that disclosure in our latest presentation so you can see all of our unit economic costs. So we will, you know, obviously the board and the management team will look at certainly opportunistic ways to de-risk the company. But again, that has to be accretive. And we would, like I said, I mean, just to be really clear and Paul can reiterate, we will not do, you know, a discounted deal, capital markets transaction, and a dilutive one. Those days are behind us, thank goodness. And we are in a position of strength. So, you know, and Mike, to your point on liquidity, I mean, we feel really good. I mean, we've come a long way, as those of you that know me have been here now for about a year and a half. And, you know, last year was a very tricky year that we navigated and finally got things kind of squared away in February of this year. So, no, I think now everyone, you know, there's a renewed energy and excitement as we've kind of hit our targets here and are now going on to the next phase and are paying down debt.

If I could just add to that, you know, I think it's Patrick's job as the CFO to constantly evaluate capital markets opportunities. The problem is, you know, if the market misreads the notion of an evaluation as opposed to, you know, doing a deal or not doing a deal, that's just classic retail marketing. gossip and it's unfortunate at times. But the answer is, if it's not a creative, it ain't going to happen here. We're certainly not going to sell our stock at a discount. It's just not what we want to do, especially in the dilutive transaction. Our shareholders have been unbelievably supportive and loyal to us, and I have a fiduciary duty to them. So that's the way we're going to go from here on out.

Mike, your other two questions The second was, I think, on the halving for Paul.

Yeah, right. And then power costs, just late summer, Lake Mariner in the fall. Yeah, sure.

Go ahead, Paul. You know, I don't have a crystal ball. And in fact, I don't want to have one. I think, you know, sometimes some of our peers in the public miner sector think they're investment managers and they want to decide what, you know, the direction is. of Bitcoin is going to be on any given day. I'm in the business of mining Bitcoin. And in that regard, you know, I think I need to be better than everyone else at it by doing it at the lowest possible cost, at the highest possible efficiency, and at the largest possible scale. I think if I do that, this company wins. We go into the halving really strong. We come out of it on the other side. making a ton of money. Naturally, I am very constructive with respect to the long-term price of Bitcoin. But I think that if we just have the most efficient outfit, we'll always make money and we'll be in a position to continue to scale up. And then we went, our shareholders went. So You know, I think you've just got to keep your head to the grindstone and really work at it. You've got to constantly watch your costs, watch your energy costs. You want to, you know, make sure that you're the most efficient guy out there, and that's all we're doing.

Mike, and lastly on your power question, look, I think we're, you know, coming out of, you know, July and August here where we had a little bit of heat in upstate New York, which is rare. So I think for September, October, November, you know, you'll see our costs, I think, there kind of go back to what they were in kind of March, April, May, you know, the shoulder months. That's the beauty of Lake Mariner is, you know, we do get, you know, a couple weeks in the summer that are warm, and so we have elevated power costs, and we get a couple weeks in the winter that are cold. But the beauty, right, is being, you know, 25, 30 miles east of Niagara Falls, I mean, the river's running 24, 365. So I think we're coming actually out of what has been some higher-priced months, and we'll revert kind of back to that shoulder season. So you should think our power price is going to fall meaningfully.

Got it. Hey, thanks, guys.

Mike, I just want to add, you know, we in our other lives as power investors and owners, had this facility for decades. So we're pretty familiar with the pricing up there. And we've seen the range of it. So we're very, very excited about, you know, what we think is our cost profile there for energy at that facility. And it's what makes it really work is Bitcoin mining. And it's what made it not work really as a power supplier because it was right there on the highway with all that green power coming down from Niagara. So

We're pretty bullish on that. Well, that's it for me, guys. Thank you. Thank you.

Our next question comes from the line of Josh Sigler with Cantor Fitzgerald. Please go ahead.

Yeah, hi. Thanks for taking my questions today. A lot of buyer is in the fire right now, so I definitely wanted to follow up on some things. First, I'd love to get some more color on the decision to purchase the latest generation rigs, the F19JXPs. I'm curious if you've had initial tests with these rigs and how they're comparing to older legacy rigs. And also, if you could walk through a little bit around the decision around payback period for these rigs as well, that would be helpful.

Yeah, sure.

So I don't know, Nazar, are you able to answer that first part?

on some technical issues there yeah um so josh let us see if we can get you know nazar uh one of wolf's co-founders coo um to kind of answer that first first one um but yeah on the second one look i think that the short answer is you know every single investment decision we we take you know we're running, you know, return on invested capital calc. And look, that calc, as you know, depends on a couple key items. One is, you know, equipment cost, right? Two is power cost. And then three is Bitcoin price, right, and network cash rate. And so, you know, I would say when we're looking at equipment now, just kind of, I would say, like any of our peers, generally speaking, you know, we want to see an equipment payback term of somewhere, you know, between nine and kind of 18 months. And so, you know, in addition, I mean, even given the newest generation of equipment, I mean, I think, you know, generally speaking, certainly what we use for a gap and otherwise, but, you know, the lives of these equipment is probably, you know, somewhere in the sort of four to six year range, right? And so I think, We feel like the average life of our equipment, given the location in a more temperate zone, and we're not obviously using immersion cooling, will be on the longer end of that spectrum, whereas a lot of, we think, equipment that's used in, you know, hotter with immersion cooling will have a lower average life. I would just say those are the parameters that we look at, and then, Nazir, are you on or able to answer that first part? If not, Josh, we'll get back to you on that.

He is. He was muted. Okay. Nazir? Hello? Hi. Nazir, can you hear us? Yes. Great.

Can you hear me? Good morning. Good morning, Josh. So on your first question on testing of the units, the architecture of the units is similar to the S19 XP. And the S19 XP we've been running now, you know, for quite some time. And the results that we've had at LMD and almost both have been very strong. You know, we've heard in the market that the XPs have been finicky. From what we understand, a lot of that comes from operations kind of in hotter industrial environments. You know, both our facilities in Northeast and moderate. So we've had a very kind of strong performance on the XPs and that the architecture for the JXP is similar. So we are expecting a similar, if not better performance out of the JXPs in terms of how we're thinking about it. And as Patrick said, you know, from a payback perspective, You look at, you know, I think the cost of the kind of the 30 joule per terahash machines, particularly as we're kind of getting closer and closer to halving, as trending, you know, it's kind of been in that, you know, low double digit, high single digit range. And we expect that to kind of continue to trend downwards the closer we get to the halving. And the big part of that is just, again, just, you know, it's almost a 40 to 50% difference on the efficiency and coming into the halving, that's going to be extremely valuable. So as we've thought about, where the market is today. And again, I think Paul said earlier, you know, we don't have a crystal ball and trying to think through, you know, where exactly the market will be next year is tricky. But if, you know, kind of the price of Bitcoin remains in the same range it's been, and we go through having, you know, we're expecting, you know, somewhere in that, you know, 12 to 18 month period payback with next keys, with that pricing. And so to the extent that the market does better than that, that window should be shortened. But as we think about it, you know, we're in a kind of 12, 18-month payback period.

You know, raw uses are halving on that new equipment.

Yeah, absolutely. Appreciate the call there. I'm looking forward to more updates as we start plugging in these rigs. For my follow-up, I'd actually like to switch gears, talk a little bit about the energy demand response programs that you've been testing to provide, you know, load relief moving forward. I was curious if you can give us an update in terms of how that's progressing and potentially what the upside to your energy costs could be.

Nazir, do you want to talk about those programs?

So we're currently participating in two principal programs. And both of those programs depend upon a total capacity of megawatts that we bid into them. And so this has been the first summer that we've been able to bid in a meaningful amount of capacity into those programs. And there's two revenue streams that we get. One is effectively a right to be called. So it's kind of a fixed capacity payment. And the second is we earn effectively an energy payment when we are curtailed. And so the bulk of the revenue comes from those fixed capacity payments. In this year, you know, we're going to recognize, you know, I would say kind of, you know, the way we think about it as an offset to the total energy costs. And that will probably come in somewhere in the, you know, the low kind of single digit per dollar per megawatt hour level. So as we think about, you know, there's energy costs plus our transmission and distribution costs, less the revenue that we earn from the demand response. And so from this summer, we think there'll be an offset kind of in that, you know, low kind of single digit figure in terms of when we think about it on a dollar per megawatt hour basis. As we kind of get into next summer and we're able to bid the entire capacity of the facility, as we've been ramping this summer, that number should be kind of in that mid to high single digits in terms of a dollar per megawatt hour offset to our total energy cost.

Great. Thank you very much for the call. I appreciate it. Thanks, Josh. Thank you. Our next question comes from the line of Bill Papanastasio with Stifel. Please go ahead.

My first question is just hoping to gain a little bit more color on the quality of the infrastructure assets held within the TerraWolf portfolio. Hoping to be able to compare the New York and Pennsylvania kind of location with other areas, other key mining areas in the United States with respect to cost and uptime. We've seen a lot of curtailment in Texas. Hoping to get some more color to that end. We love that question.

The first thing is, I invite you to come visit our sites. I mean, I think you'll walk away with absolute clarity with respect to the Terror Wolf Advantage. Clearly, we believe in regional diversity. Separately, we believe in zero carbon because I think that ultimately you've got far greater volatility in fuel resource pricing when you're dealing with some of the fossil fuels. Third off, Texas is getting kind of crowded. It's really, really hot. And I think you've seen a real extreme range of what happens to the miners when the temperatures become extreme and their inability to really be as responsive to the grid and how that's driving their efficiency and ultimately their pricing. So, you know, we're at two cent power at Nautilus and as Patrick mentioned earlier, you know, in the summer for a very short period of time, and I mean, we're talking about a couple of weeks, We'll see pricing sensitivities due to climate or temperature. But that's it. And so we're steady eddy and we're low cost and we want to continue to be that way.

Great, thank you.

And then my second question is just hoping to get some more color with respect to the plans of the $200 million ATMs. Do you foresee any of the proceeds being used towards paying down the term loan? You know, my understanding is that $40 million will need to be paid down by April next year in order to continue the cash flow sweep. Any call you can provide there, thanks.

Yeah, great question, Bill. So, yeah, so... The term loan has to be reduced by $40 million by April of 2024 for us to kind of keep that free cash flow sweep through the maturity. Like I said, I think given we are now free cash flow positive, you guys will start to see that on a quarterly basis where we sweep that term loan down. So we feel confident that around current economics today that we will achieve that and we'll continue to update you every quarter as we kind of progress on that. And with regards to the ATM, you know, I think those that look at our financials will see we did use the ATM a little bit, you know, and we hadn't used it for quite some time before. So it is a tool that we have, Bill, and, you know, we'll use it when we think it's accretive and our cost of capital is such, again, that it is accretive. But, you know, unlike many of our peers, you will never, ever, ever see us issue, you know, hundreds of millions of dollars on the ATM in a quarter. I mean, that is just not our game. And, you know, we're focused, as Paul mentioned, on profitability and paying down debt, maximizing shareholder value, and then obviously returning capital ultimately to shareholders, whether that's in the form of dividends or share buybacks. I think, you know, we've all been around the energy tower space for a long time and, you know, I've seen models succeed like the MLP model, you know, Master Limited Partnership and Energy. And so I think that's, you know, more interesting of a route for us to kind of go down.

Yeah. And I guess the... The long and fruit of this explanation is Insider Zone, over 55% of this company. I am just not interested in diluting shareholders unless it is for a very legitimate purpose like expansion or an activity that is accretive. And And so I think that you can be sure that we will be responsible and judicious with our use of the ATM, as we have been.

Great. Thank you.

And if I could just tuck in one more question. How's the company looking at kind of, you know, weighing the option of ramping and scaling the Lake Mariner facility to full capacity? I think you said 500 megawatts. versus, you know, being very concentrated in one region, you know, would Terra Wolf potentially consider other areas in the United States or North America for that matter?

Yeah. So, hey, Bill, it's Patrick. So, yeah, look, and again, I think Paul kind of alluded to it in the prior question, and you know, I don't want to pick on any of my peers, but I think, you know, we all come from, you know, personally, I come from, you know, a 20 plus year institutional investor background, right? And so I think Paul mentioned geographic diversity, right? When I think of commodity companies that I invested in, you know, no one, not one company that I ever invested in has all of their assets in one region, right? And that's for, you know, regulatory reasons, pricing reasons, you know, you have to have diverse geographic diversity. And so, Your point, I think, is a very good one. What we see as the best strategy, and look, we may go to Texas ultimately, and we may go to other regions. I think you won't see us in regions of the world where there's not a definitive rule of law and there's regime change all the time. We won't go to those regions, regardless of how cheap the power is. So I think we kind of have found between the sort of 50 megawatts to 300-ish megawatts, it's kind of the right size to where you don't have a bullseye on your back because you're getting tens of millions of dollars in demand response curtailment revenues. You're not enough really to push the grid one way or the other. That's kind of the sweet spot, as we all know, when you become really big and are having a big impact on the grid, that becomes politically untenable, particularly if it's not zero carbon and you're utilizing fossil fuels. So those are the things that we will be very mindful of, Bill, as we look to expand beyond our sites, which is, I think, a very natural, ultimate place to go for the company. But I don't think we'll do that certainly pre-halving. I think we'll kind of wait, see, pick up the pieces. You know, I think there'll be a lot of carnage on the other side.

Yeah. And I would also add to that, you know, but again, it's got to be consistent with their thesis, which is zero carbon mining. And you got to manage the risk or the opportunity, if you will, of geographic diversity with the knowledge of, you know, 10 to 15 years experience in a particular site or region. So, You know, it all goes into our evaluation, but I think going into the halving, we're very comfortable with the sites we have. We have plenty of room to grow on them at really low-cost pricing. And we're scaling not just on the energy side and on the infrastructure side, but on our people side and our experience in building out these facilities. So I think that's what you'll see from us through the halving.

Thank you. I appreciate the detailed responses and congrats again on the impressive margins this quarter. Thank you. Thanks, Bill. Thank you.

Our next question comes from the line of Mateo Lev with Parabolic Ventures Holding. Please go ahead.

Good morning, guys, and congratulations on your scale and growth this quarter. I had a question for you. Would you mind opining on the key differences between what a hodl versus no hodl revenue model is in your sector as it relates to enhancing shareholder value?

Sure, Patel. This is Paul. You know, I want to be thoughtful in response. As an individual investor, right, who believes in Bitcoin, I think you could buy it, put it in your wallet, you could buy into an ETF, you could buy, you know, Mike Sellers, stock. You could buy into a fund where their business is all about holding Bitcoin. But I am chairman and CEO of an operating company, and the business of Wolf is to mine Bitcoin, and we're supposed to mine it at a profit. And I think, unfortunately, this is lost on some of the other public miners who, again, they see themselves as either investment managers, maybe they don't know how to operate, or Maybe they're pioneering wizards of, you know, AI and high tech. It's not what we do. We are an operating company. We are in the business of mining Bitcoin. We make money. Our shareholders make money when we mine at the lowest cost, highest efficiency at scale. That is our mission. We have the people to do it. We have the assets and infrastructure to do it. And since I and I think every member of our management team is right there alongside our investors and shareholders, we are exclusively incentivized to do it. Toddling is, you know, it's an investment strategy. But as a CEO with fiduciary duties to shareholders, you know, I'm obliged to listen to my CFO, Patrick. I take guidance from the board, our advisors. And I always will try and evaluate what are the best alternatives for our Bitcoin. At this time, I'm confident our shareholders are best served by using our Bitcoin to facilitate growth and expansion, pay down debt. And after that, you know, I probably want to look at declaring a dividend or a distribution. I think all of those at this time are more compelling arguments than huddling. And I hope that's a complete response to your question.

No, that was a great response. I especially like the dividend part at the end there. So I hope you guys get there soon. And I appreciate the efforts and efficiency you're putting into this business. So thank you.

Thank you.

Ladies and gentlemen, if you wish to ask a question, please press star and one. Our next question comes from the line of Lucas Pipes with B Riley Securities. Please go ahead.

Thank you very much, operator. Good morning, everyone. Congratulations on all the progress. Sorry I had to toggle some calls earlier, but I caught most of the call. Really appreciate all the color you've provided already. A quick follow-up question for Patrick. Just in terms of your targeted capital structure over time, where do you ultimately... would like to be when it comes to that equity mix. Thank you very much.

Yeah, sure, Lucas. So I think definitely as you're hearing us say, I mean, the number one focus right now is profitability. And then I think we're going to reduce that debt down as much as we can pre-halving. So I think, you know, the target is to get that certainly, you know, well below $100 million. You know, and then I think Beyond that, you know, look, I think the reality is, right, there were a lot of debt providers to this space that were doing secured financing against machines. They're all gone. And I think, you know, the reality is there's just not much debt available out there for the space. That being said, we have pretty attractive financing terms. I mean, with the high-yield market at 8.5% or 300 basis points, behind that at 11.5%, which is pretty good for something deemed crypto. So, you know, I think from a rate perspective and then, you know, having some level of debt on the company kind of in the future, yeah, I think that makes sense. But I think the goal right now is, again, to sort of position us to be playing offense and in a very strong position post-having to take advantage of, you know, either Additional expansion at our sites or, you know, what I think will be more likely is, you know, M&A and particularly distressed competitors, you know, or just specific sites that we find attractive. And so I think you will see a focus over the next few quarters and pre-halving, and we'll update you, obviously, every quarter, but a very, you know, important focus on just reducing that debt down to, you know, well below $100 million.

Thank you very much, Patrick, you and the team. Keep up all the good work. Thank you. Thank you. Thanks. Thank you. As there are no further questions, I will now hand the conference over to Paul Prager for closing comments. Thank you very much.

Again, as stated, Our goal here is to mine Bitcoin at the lowest cost, highest efficiency at scale. Insiders are over 55% of the shareholders in this vehicle. We will not be looking to spend money unless it is accretive. We have no interest in diluting our own holdings unless it's accretive and we see a path for our collective success. I want to thank all of you for your invaluable trust and support. as we focus on building the leading mining company. The entire team and I look forward to speaking to you on a third call in November. And we are always available anytime up until that time. So again, thanks for attending this morning. And we appreciate your loyalty to TerraWolf.

Thank you.

The conference of TerraWolf Inc. has now concluded. Thank you for your participation. You may now disconnect your lines.