Welcome to the second installment of Soluna’s new AMA (Ask Me Anything) series, where you — readers and our followers on Twitter and LinkedIn — can get your questions answered.
(If you missed the first one, click here.)
In this Q&A, John Belizaire, CEO of Soluna Computing, and Michael Toporek, CEO of Soluna Holdings (Nasdaq: SLNH), answer shareholders’ and potential investors’ most asked questions about the recent announcement of our financing and partnership with Spring Lane Capital and other financings, the batchable computing business, geopolitical impacts on the industry, and more.
[01:17] Take us through Soluna’s partnership with Spring Lane Capital.
Michael Toporek: Sure. Spring Lane Capital has made an investment in our project. In exchange for investing in our project, they get some of the cash flows of that project, first, to repay the principal they invested, and second, to give them a certain base level of return. And then a significant portion above that is shared with us. And by us, I mean, Soluna Corporate up top, and accruing benefit to the shareholders. This is not directly dilutive to the shareholders in that it’s not causing issuance of shares, but it is causing a sharing of economic interest in that they get some of the project economics, and we get a little less. From that perspective, there’s no shareholder dilution, but there’s a sharing of economics.
John Belizaire: Yeah, I think that’s great. I mean, it also touches on the fact that we’re implementing what we said we would do, to develop a series of different financing platforms for the growth of our company, such that we’re not only relying on a dilutive approach, right, selling our shares and whatnot to raise capital for those projects. By bringing partners in at the project level, we’re really taking a page out of renewable energy. Remember, that’s where we came from, and in that world, capital comes from all different sources. It primarily is invested at the project level, and the economics of the project itself is used to pay back and generate returns for those investors.
We’re doing that here at Soluna as well, and we hope to do more of these types of deals where we have infrastructure and sustainability investors and large infrastructure players partnering with us on the projects. We’re quite excited by Spring Lane.
Michael Toporek: John, one thing, though, that I would take away as a public company shareholder is that as public company shareholders, you really don’t have an opportunity to dive into the project, and understand the real economics of the project. If I were a public company investor, I would look and say, “Oh, wow. Spring Lane has looked at many projects in the sector, decided this was a real green infrastructure project, and then did a deep dive and said, ‘The economics that these guys are putting out there, and the economics of this project, is economics we want to invest in,’ especially when they compare them and benchmark them, really, against other projects.”
As a public company shareholder, I would say, “Wow. These guys did their homework and ended up investing in Soluna’s projects,” and that’s the big takeaway for me as a public company investor.
John Belizaire: Indeed. In fact, if you want a real window into Spring Lane’s experience with Soluna and the management team and why they selected us versus other players in this space, Rob Day, the founder and partner at Spring Lane, came on our podcast recently to share his experience and insight into decision-making.
We have another question. Folks have been asking us about other financings, not just the Spring Lane deal. Everybody’s excited about the Spring Lane deal, but Boton, one of our community members, asked about the SLNHP, our preferred shares. Boton is a shareholder, and he asked if, in the future, you could consider raising additional funds with subscription rights for current shareholders.
Boton asked: Would you consider raising additional funds with subscription rights for current stakeholders in the future?
Michael Toporek: It’s a great idea, but difficult to implement because we would have to do registered security, a registered offering. It would be another security that we’d have to have trade because imagine, we just start another … It’s very complicated and cumbersome, and just, at this point, I don’t see how it would be feasible. It’s a nice idea that I would theoretically like to implement. I just don’t see how I’m able to get that done practically, given the size of things.
John Belizaire: Caleb is also a shareholder I’m guessing, because this person asked, “Based on Soluna’s potential large earnings over the next few years, will management mainly be using the generated free cash flow to reinvest in the business, or will the company ever pay a one-time dividend or announce a large buyback program?” In essence:
[06:01] Caleb asked: What are you going to do with all the cash you’re going to be generating?
Michael Toporek: Two things. First, we have to balance returning shareholder capital with the opportunity to invest that, grow the business, and earn returns on that capital, because that’s really what you hire us to do. Before I get to the answer to the question, I’ll say that in March of 2019, we dividend out, had a special dividend, it was a very significant cash dividend relative to the share price, about 40% of the share price at the time. So, we have a history of being shareholder-friendly and returning cash.
But I will tell you that sitting here, relative to the other investment opportunities I see, this company, Soluna, has a tremendous opportunity to put to work significant sums of capital and earn outstanding returns. So, I would say that it’s highly likely we continue to invest and grow the business, but at the same time, at some point, we’ll revisit this, probably at the end of next year or the following year, and say, “Hey, maybe a small portion we begin to dividend out,” and we’ll reassess it all the time. But I would tell you, there’s no plan now because I just think that we can really invest that capital at tremendous rates of return.
John Belizaire: Yeah, that makes a tremendous amount of sense that most businesses, and most management teams, as companies grow, they have to decide whether there are investment opportunities inside the company that can continue to grow value and grow shareholder value over time, and whether they’re limited by those opportunities and whether they should return the cash. Every business is making those decisions every day, and I would echo Michael’s perspective that we’ve got lots of investment opportunities here at the company that will build value over time, and that may be our near-term focus. And also as we do these project-level structures as well, some of that cash flow is going to those investors and then being reinvested in future projects. So, it’s an exciting time for us. We’re in a growth mode, and so we’ll see how those investment opportunities take us in the future.
I want to transition now to talking about our future business, batchable computing. Lots of folks are asking us questions, especially with the recent Bitcoin action, where we’re going to take the business next, and how are we planning to transition to the batchable computing space? As you know, our phase one business is focused on Bitcoin mining, and we intend to expand beyond that to help provide these resources to deliver low-cost green computing to the enterprise. We call it the batchable computing space.
[09:20] Daniel asked: What do you see as the biggest obstacles to the mass adoption of your batchable computing data center?
It’s a great question. I’ll jump on that one first, Michael. There are two elements to our business when we start looking at batchable computing, right? There are two customers. You might look at us almost as a two-sided marketplace, to some extent.
On the one hand, we’re taking our facilities, our data centers, and they are a solution to a problem, a big problem, wasted energy. We take those data centers. They’re very flexible. As you know, we place them with renewable power plants, and that flexible computing environment or farm absorbs that wasted energy, and then we convert it into a different form, a new product, which is batchable computing, computing that can be paused, computing that is not real-time in nature. And as we’ve announced in some of our flash reports, we’re building a whole strategy for how we’re going to take that to market.
And the adoption obstacles, if you will, on the one hand, are building up lots and lots of footprint. The more projects we build out, the bigger our footprint becomes, and the more credibility we have to take that into these new markets. If you’re going to go to a large enterprise and say, “Give me 1% to 2% of your large compute load and put it in my batchable computing data centers,” you want to have proven that you can build lots of these things, run them, operate them, and they have the capabilities to deliver that service. And that’s what we’re investing in, some of these software capabilities that we’re building out. We’re investing in making improvements to the actual facilities, but we’re also building a large pipeline with power partners who have this curtailed energy challenge so that we can build out a whole series of these facilities.
And then on the other side, the customer side, it’s getting our brand in front of enterprises. You know, who is Soluna? Is there an opportunity to focus and enterprise this energy on green computing? There are two types of computing loads if you will. There are real-time loads. We won’t be running those in our data centers. Real-time loads are things like that company’s ERP system or their e-commerce system.
But there are a number of non-real-time loads or batchable loads that are contextual in nature, not mission-critical, but very, very large elements of their business. We want to be able to shift those loads to us because we know, or they will know, that those loads will run in green environments. They will be part and parcel of growing the amount of green power in the world. And so, mass adoption is really driven by, on the one hand, growing our power partner base, and on the other hand, bringing our solutions and our brand to the enterprise. Anything you want to add to that, Mike?
Michael Toporek: I think you’ve covered it. I’m just excited to watch it grow and become a significant portion of our business as we transition over to it.
[12:35] Martin asked, “Given the massive current expansion and future build-out of hash rate from competitors, wouldn’t it make sense to switch to the batchable computing business sooner?”
His second question is one more basic question about the batchable compute business, “Can ASIC miners be used for this business, or are GPUs required?”
John Belizaire: I’d be happy to jump into both questions. Number one, given the massive adoption of hash rate from competitors, would it make sense to switch to batchable computing sooner? So, as I said earlier, we will begin the shift to batchable computing as soon as we have the footprint we need to do that, and the software and hardware capabilities to do that. And by the way, that does mean putting more GPUs in the facilities, because that is more of a general-purpose application that we’re going to be targeting, so those facilities do require us to invest in that type of computing architecture.
But in terms of hash rate growth and competitors, that’s not the main driver for us to shift into the new business. Although one might think we should diversify the business early, the reason we chose Bitcoin. This is a big question that people ask us a lot, “Why did you choose Bitcoin to start the business versus batchable computing?”
Bitcoin is a platform that is global. It’s large, it’s energy-dense. It allows us to stand up facilities very, very quickly without having to go build a relationship with an enterprise, build out a whole sales and marketing effort to target that enterprise. And it allows us to return capital around the investment of those facilities very quickly as a result of the design of the network, the way we’re able to monetize it because of our low, low power costs, and so forth, given the relationships with power partners. So, that allows us to put up a lot of facilities, and we’re building very large ones in a diversified set of locations, and so we’re building up a very big footprint.
Once that footprint reaches a certain level, then we can go in and replace some of that equipment with GPUs and point very powerful compute loads to those enterprises. So, Bitcoin for us is a great catalyzer to the ultimate business. Hash rate is certainly a concern for us as we look at its growth, but we’ve modeled a lot of that growth as we determined investment decisions around different projects. Also, our power cost and footprint give us a real advantage and we do have access to the equipment supply chain.
The decision to move into the batchable compute will be part of the implementation of our strategy, which is to bring our brand to the market, start out with some light house customer partners that will be using our facility, prove our model, and then grow and scale it from there.
Michael Toporek: From a financial perspective, imagine you get a business plan that the guy says, “I’m going to build three, five, 10 facilities and get customers, but meanwhile, I’m going to lose money as I’m building it up.” Or you get a guy with a business plan that says, “I’m going to build these facilities and always make money all along the way, and gradually, I’ll bring in customers to replace what I was making money with before.” I like that business plan better.
John Belizaire: All right. I’d like to shift our discussion to geopolitical and macroeconomics. Folks are doing a great job thinking about how those two elements of our society right now, current affairs, might be affecting our business and development plans. And I want to share two questions.
[16:25] James asked: Can you briefly discuss what measures you’ve taken to protect yourselves from the upcoming or growing geopolitical risks? And in general, how exposed is Soluna’s business to these things?
Michael Toporek: I look at it as a sort of direct and indirect exposure, so from the direct exposure, we have a couple of things. We regularly buy infrastructure equipment and miners. So, the infrastructure equipment, the operating team’s done a great job there, making sure we’ve bought a year, year and a half in advance, so any price increases that happen along there aren’t going to affect us. In miners, we tend to buy spots, and the current environment has been great for spot buyers, and we’ve been taking advantage of that. That’s what I call the first order.
The second order is, let’s face it, the world does affect us. Labor markets affect us. Indirectly, fuel costs affect us. All sorts of other indirect variables do affect our business and do affect Bitcoin pricing, capital markets, and things like that. So, there is an effect that’s just not directly traceable. I know it’s not much of an answer, but your thoughts?
John Belizaire: If you break the two up, the geopolitical and the macroeconomic, obviously the geopolitical events, the Russian invasion of Ukraine as we’re taping this, and how well the Ukrainians are doing the fight back, go Ukraine, is certainly affecting everyone. It’s affecting everything from the cost of materials … I know there’s a shortage of grain around the world now. The price of fuel, labor markets, and the ability to leverage what was strong for Ukraine, which is the IT platform over there, that’s going to affect lots of different industries. And it’s also creating a whole host of different economic events that can affect a number of businesses.
When I look at it from the Soluna context, I agree with Michael’s take right there, his first and second order. First-order is sort of, I’d say, direct effects on us to the extent that our equipment is coming from anywhere, close to where the conflict is taking place, that could affect us. As far as we know, none of it is coming from there. Two, to the extent that equipment has to be ordered right now at this moment that we didn’t already have ordered, right? Luckily we had some forethought to invest in the equipment we needed and invest in the equipment we’d think we would need as part of our growing pipeline. That’s allowed us to lock in a cost, if you will, at the time we placed the orders, such that the 20% to 30% increase that’s been happening around some of the infrastructure costs is not affecting us, at least not right now, and probably won’t do so for the next six to 12 months.
I think that on the equipment side if we had placed orders in advance and placed very large orders that some of our competitors have, and some of the other folks in the market have, that would certainly be affecting us right now. Even though you lock in those prices, they do sort of set at a certain point and lock-in. So our exposure to fluctuations, even though it’s risky, has proven beneficial to us, given the recent Bitcoin price action, the geoeconomic effects, and so forth. We’re sort of benefiting from some of that, and we’re going to capitalize on that as much as possible.
We look forward to answering more of your questions in the next AMA installment. For those of you that had energy and compute-specific questions, stay tuned for a chat with the rest of our Soluna’s expert leadership team. We’ll be answering your questions next.
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