Gryphon Digital Mining, Inc

Greetings and welcome to the Griffin Digital Mining FY financial year 2023 earnings call. On the call are Rob Chang, Chief Executive Officer of the company and Sim Salzman, Chief Financial Officer of the company. Before I turn the call over to Mr. Chang, please note that statements made on this call that are not historical facts may be forward-looking statements from the company's management made within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities and Exchange Act of 1934 as amended concerning future events. Words such as may, should, projects, expects, intends, plans, believes, anticipates, hopes, estimates, and variations of such words and similar expressions are intended to identify forward-looking statements. These statements are subject to numerous conditions, many of which are beyond the control of the company. including those set forth in the Risk Factor section of the Company's Form 10-K for the year ended December 31, 2023, filed with the SEC. Copies of these documents are available on the SEC's website at www.sec.gov. Actual results may differ materially from those expressed or implied by such forward-looking statements. Any forward-looking statements made on this call are made only as of today's date, and the company does not undertake any obligation to update or supplement any such statements to reflect subsequent developments. Now I would like to turn the call over to Rob Chang, CEO of Griffin Digital Mining. Rob, please proceed.

Thank you, Operator, and thank you everyone for joining us today. At Griffin Digital Mining, our mission is to create a financially nimble, highly profitable, and environmentally responsible Bitcoin mining operation. Currently, we have a self-mining hash rate of 0.9 exahash, but we envision a trajectory where we will propel us to reach 10 exahash, thereby transitioning us from a smaller player to a significant industry presence. As a testament to our operational efficiency and management experience, We had positive net cash flow in 2023 with a breakeven cost per Bitcoin of approximately $18,200. For clarity, we define breakeven as the cost of revenues, excluding depreciation, divided by the total Bitcoin generated and received from the hash rate contributed to a mining pool operator. I will proceed by giving some background information on Griffin Digital Mining, including operational highlights from 2023 and our vision to become a leader in the Bitcoin mining industry. Following that, I will hand it over to Mr. Salzman to discuss the financials, and after a few closing remarks, we will open the floor for questions and answers. First, let me review my background. I was previously a commodities analyst and formerly held the position of managing director, head of metals and mining at Canada Fitzgerald, where my focus was primarily on traditional commodities such as gold, precious metals, and uranium. In the first quarter of 2016, Bloomberg recognized me as a top precious metals analyst. Currently, I serve on the boards of two uranium companies, which has helped in my gaining knowledge and experience in carbon neutral energy. Given my extensive experience, I feel confident in my understanding of the commodities industry and the dynamics of companies operating in these industries. I view Bitcoin as a commodity and believe it should be managed accordingly. Griffin was created with the goal of becoming a leader in the Bitcoin mining industry. We believe that we are developing a business which we hope will be a leader in Bitcoin efficiency, prioritizing downside protection and flexibility within our capital and contract structure. We are beginning to realize the benefits of this approach. During the recent downturn, we navigated through it smoothly, never experiencing a single month of negative operational cash flow. This is an achievement of which we are immensely proud. In contrast, some of our peers have encountered significant challenges, resorting to asset sales or even declaring bankruptcy. We believe we have a strong and experienced team at Griffin Digital Mining. I served as the former CFO of Riot, a pioneering publicly traded Bitcoin miner also listed on the NASDAQ. Our CFO, Sim Salzman, served as the CFO of Marathon Digital Holdings, a leading Bitcoin miner. Our chief technical advisor, Chris Ence, also served as the chief operating officer and interim CEO at Riot and brings valuable expertise to the company. We have built an executive team that has experience in the Bitcoin mining industry at larger companies and which we believe will provide us with the experience needed to grow our business quickly. When evaluating Bitcoin companies, Bitcoin efficiency stands out as the primary operational metric. Defined as the number of Bitcoin generated divided by a miner's deployed hash rate, it is a popular metric to evaluate a company's operational execution. Since we began operations in September 2021, we have claimed or shared the top spot of Bitcoin efficiency for over half of our existence since. In the last 12 months, we secured the number one position in Bitcoin efficiency in six out of 12 months and never falling below the top four. We believe this demonstrates our consistent operational execution, ensuring the machines we have run optimally rather than attempting to get as many machines as possible online without the underlying infrastructure and standards to support the hash rate growth. In April 2021, we made a significant investment by purchasing 7,200 S19J Pros. This purchase garnered attention from Cointelegraph and other industry publications, recognizing us as a top 15 miner immediately after the purchase. Since then, our operations have expanded considerably. Shortly after the purchase, we entered into a hosting agreement that secured 23 megawatts of carbon-neutral energy, and today we have 28 megawatts of power running on approximately 9,000 machines. This agreement ensured that 100% of energy consumption remained renewable. we continue to uphold our commitment to sustainability and renewable energy sources at our current location. In fact, just this past week, Griffin told a bold step in ESG leadership by publishing its carbon emissions data publicly. This release of the full report, which includes two annual carbon emissions assessments undertaken with partner carbon chain, we believe is the first time a Bitcoin mining company has provided a granular accounting of a company's carbon footprint. We use carbon change for third party measurement annually and recently proved that Griffin is using 100% renewable energy. We believe this transparency is what will drive the industry forward as a partner for achievement of climate goals and responsible corporate decision making. As previously reported in fiscal year 2023, we used over 98% renewable energy and started 2024 with 100% renewable operations ahead of our merger with a NASDAQ listed public company. This news follows Griffin's receipt in 2023 of the Sustainable Bitcoin Certification by Energy Web, an independent nonprofit that develops open source software for clean energy solutions. This certification, known as Green Proofs for Bitcoin, is believed by Energy Web, as stated on its website, as the first of its kind initiative to establish an independent standardized energy measurement system for the Bitcoin mining industry and represents over two years of collaborative work between Griffin, Energy Web, and some of the world's largest asset managers and clean energy research organizations. We believe that Griffin's demonstration of renewable energy usage sets a precedent that can encourage industry-wide adoption as Bitcoin gains prominence. Turning to hashrate, at the end of 2023, we operated 0.9 exahash of hashrate, which grew from 0.6 exahash at the end of 2022. We have been adding additional machines in 2024 and look to continue to do so in a cost effective manner. I'll now turn it over to Sim Salzman to report Griffin Digital Mining's audited financial statements for the year ended December 31st, 2023. Thank you, Rob.

I will now highlight our financial results for the year ended December 31st, 2023. Please note that because our business combination closed in February of this year, The financial statements in our annual report on Form 10-K for the years ended December 31, 2023 and 2022 are the financial statements for the company's predecessor business, Akerna Corp. Griffin Digital Mining's audited financial statements for the years ended December 31, 2023 and 2022 are filed with our current report on Form 8K, which was also filed on April 1, 2024, and is available on the SEC's website at www.sec.gov. Griffin mined approximately 739 Bitcoin, generating mining revenues of $21.1 million in 2023 compared to $21.4 million in the prior year. breakeven costs in 2023 were 18,217 compared to 14,964 in 2022. These costs continue to rank among the lowest among publicly traded miners on a per kilowatt basis. This translates into a cost of approximately 6.6 cents for 2023. We wanted to stress our focus on breakeven costs, which we believe is the best measure of what it costs to mine Bitcoin on an operating basis. We believe that a focus on the total cash costs to produce Bitcoin at the mine level offers better transparency, which we believe is required to better understand the operations of Bitcoin mining companies on a comparative basis. We believe that this metric is crucial for investors and analysts because it provides a clearer picture of the operational efficiency and cost effectiveness of a mining company's core operations. By comparing the breakeven costs across different companies or projects, we believe that stakeholders can gauge which operations are more economically viable and have lower production costs, which is particularly important in industries subject to fluctuating commodity prices. Turning to our results of our consolidated statements of operations, our loss from operations in 2023 of $19.2 million included non-cash expenses of $23.4 million, inclusive of impairment of digital assets of $275,000, impairment of our mining fleet pursuant to ASC 360 of $8.3 million, and depreciation expense of $15 million, partially offset by stock-based compensation income of $152,000 related to the voiding of a previous employee's RSU grant. This compares to a loss from operations of 16.6 million in the year ended December 31st, 2022, which included non-cash expenses of 24.5 million, inclusive of stock-based compensation expense of 3.3 million, impairment of digital assets of 8.7 million, and depreciation expense of 12.5 million. Net loss for 2023 of 28.6 million includes non-cash expenses of 36.7 million, which is inclusive of non-cash operating expenses of $23.4 million, as well as non-cash other expenses stemming from the non-cash notional valuation of our BTC loan, which resulted in a change in fair value of notes payable in the amount of $13.3 million and is partially offset by unrealized income losses. on marketable securities of $168,000 and realized gain from use of digital assets of $3.9 million related to the payback of the Bitcoin denominated loan. This compared to a net income position in 2022 of $3.5 million, which included non-cash income items of approximately $21.9 million comprised of net gain on extinguishment of debt of $10.2 million and change in fair value of notes payable of $11.6 million. Those items were offset by the non-cash operating expenses of $24.5 million mentioned previously, consisting of stock-based comp, impairment of digital assets, and depreciation expense. Our adjusted EBITDA, a critical gauge of our operational effectiveness and financial well-being, stood at approximately $4.8 million for the year ended December 31, 2023, compared to $7.4 million for the year ended December 31, 2022. This metric signifies not only our profitability, but also our capacity to produce substantial cash flow while dedicating resources to fuel future expansion. Net loss per basic and diluted share for 2023 was $1.15 based on weighted average shares outstanding, basic and diluted of approximately $25 million. This compares to net income per basic share in 2022 of $0.14 and net income per diluted share of $0.10 based on basic weighted average shares outstanding of approximately 24.9 million, and diluted weighted shares outstanding of approximately 36 million. Our average efficiency for our active fleet of approximately 8,500 Bitcoin mining machines was 29.3 joules per terahash as of December 31st, 2023. Since then, we have deployed a batch of newer generation S19K Pro Bitcoin mining machines and have improved the fleet efficiency to 28.9 joules per terahash. As of December 31, 2023, our balance sheet reports approximately $915,000 of cash and cash equivalents, $2.1 million in Bitcoin, and approximately $14.9 million due for the note dominated in Bitcoin. As of December 31, 2022, our balance sheet reported approximately $267,000 of cash and cash equivalents, $6.7 million in Bitcoin, and $12.6 million due for the loan payable. I'll now turn it back over to Rob to discuss Griffin's 2024 strategy.

Thank you, Tim. We believe that 2024 has started off strongly for Bitcoin, and we're seeing higher prices relative to 2023. In terms of 2024 gross profit guidance, page 15 of the presentation located on our website shows a sensitivity table based on various Bitcoin prices and global hash rates. Based on a $70,000 Bitcoin price and a network hash rate of 550x a hash, we currently expect 2024 gross profit to be approximately $16.6 million. Using this table, readers can estimate what Griffin's 2024 gross profit may be based on their view on Bitcoin prices. We are actively scouting potential targets for acquisition, particularly focusing on several private miners facing challenges. However, we are not currently in any negotiations to acquire other miners. If we are successful in executing our acquisition and machine procurement plans, we believe this will position us to achieve a capacity of 10x hash. This could help us to transition from a smaller player to a prominent industry contender. However, it's crucial to acknowledge that such ambitious goals rely not only on execution, but also on a degree of good timing. We believe that our growth strategy for the upcoming year demonstrates our commitment to transitioning into a legitimate large-scale player within the Bitcoin mining landscape. With our recent business combination bringing our Griffin digital mining business into a NASDAQ-traded public company, we continue to look towards aggressively expanding inorganically through M&A opportunities and organically through purchases of the latest generation mining equipment. With the having expected this month, our strategy is to maintain our focus towards staying on the lower end of the mining operation cost curve. I will now turn the call back to the operator to open up the call for Q&A.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 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. Once again, please press star 1 on your phone at this time if you wish to ask a question.

And please hold while we poll for questions. And once again, it is star 1 if you wish to ask a question on today's call.

First question today is coming from Kevin Deedy from HC Wainwright. Kevin, your line is live.

Good morning, Rob, Sim. Thanks for having me on. And congrats on the Ocarina deal. Could you break down the fleet a little bit more for us? Sim alluded to new machines. So understand the 9x to hash, but not clear how much of that is the, you know, the gross margin share deal. And how much of the new machines are the K-Pro?

Sure, yeah. And thanks, Kevin, and thanks for the congratulations. It was a bit of work getting here, but we're very happy to be a public listing company, and thanks for being with us along the way. To answer your question of the 8,500 machines that we have, they are all under that gross profit share because all of our machines are located in a single location. where we have a direct cost pass-through model where we get the cost and then we share on the gross profits, which ends up being good for us given that in down periods, the costs for us flex as low as three or four cents per kilowatt hour, for example, and certainly helped out from that perspective. But to answer your question, about 100% is subject to the gross profits. The S19Ks, we purchased around 800 and change of those out of that total. Okay, and then, Rob, when did you add them to the fleet? We turned on the first few right before the end of last year, and the rest turned on the first week of January.

Okay, so the .9x to hash includes them or no? Because I guess not. Yeah, okay, okay, great. Then how much of that includes the machines that were under your managed service agreement?

None of those include that. We always separated those out. These are self-reported, self-mining numbers only.

Okay, okay. So when we look at that chart on page 14 that you alluded to in your prepared remarks, that's exclusive Griffin self-mining? Yes, correct. Good. Okay, okay. I appreciate the 10x to hash target. Don't get me wrong. It's just difficult for me to get my arms around it. Could you offer a little bit more color on your approach there and how you're thinking about it? I know you alluded to M&A, and just maybe a little bit more insight on that, please.

Absolutely. So 10xHash certainly is a target of ours, and as you've known from our past, we've always looked to grow more aggressively, I guess, relative to most. Our pathway to it is based off of the M&A targets that we're currently chatting with and I guess dancing with, so to speak, there are ranges anywhere between half an exahash to two exahash. Our plan is to do a roll up of as many of these as possible. So we could see potentially, and of course, given a little bit of luck, that if we were to roll up a few of these, we would get to call it two, three, five exahash relatively quickly if we were able to pull that off. At some point during the future, and I don't think it'll be right now given their share price, we would probably at some point raise capital, but certainly in the future when things are higher. At that point, we foresee us purchasing facilities and machines at large scales. And given the velocity of the price of Bitcoin and how things can really heat up, there is certainly an opportunity for us to get potentially up to 10x a hash using both of those strategies.

Okay, good. Then it's fair to assume that you're not sticking to your asset-light model at some point you'll consider owning facilities being closer to power generation.

That's correct. Our asset light model is based off of really financial management or capital management of the company. When we first started the company in 2021, it was a very hot market and assets were very expensive to build as there was lots of competition. So we adopted a hosting strategy at that time. For us, it's always been a math equation of whatever the best opportunity at any given moment is. So if we can find good hosting contracts that allow us to not buy the facility, so be it. However, we are fully open-minded and have never really been against the idea of purchasing our assets as well. And if that's the best opportunity at that moment, we could do that as well. Given the size that we want to grow at, we think it's likely that the opportunities are probably more going to be on the purchase side, because I think it's highly unlikely to find several exahash waiting of unoccupied space for hosting, although there might be, especially with the having coming up.

Well, that's a perfect segue to my next question for you, Rob. So understand 28 megawatts available to you. You were using 23. Have you maxed out your space with that hosting provider? At this point?

With our current hosting provider, we always have the understanding that as they come into more space, our hands are always up to get it, and that's how we went from 23 to 28. So as our host finds more space or someone leaves or as they grow, I believe we're one of the first calls that they make to take up the space, and we readily take it all up. And so it's an ongoing conversation, and that's where we currently sit at right now.

Okay, so the 28 is fully maxed out? Currently, yes. Okay, okay. This one might be a little tough for you to answer, totally understand, but could you walk through the scenarios, the outcome scenarios, the current legal issue that Griffin's facing with Sphere 3D?

Well, I understand the hedging when you first mentioned it. Given that it's an ongoing legal thing, I think I'll take a punt on that one and let the lawyers handle that instead, instead of providing for guidance on that.

Fair enough. Could you give us a view to when you think you might offer the March quarter, given that would be the first one that would be exclusive, Griffin?

I think that might be more of a SIM question because he's my finest guy.

Hey, Kevin. Nice to hear from you again. We'll be meeting all of our deadlines for a small-based reporting company for March. So we'll have around May, you'll have all of the results. However, stay tuned for production reports as they come due. So you'll see March results shortly.

Okay, fair enough. So May, mid-May is a fair date to assume then, Sim? Correct. Wonderful. Thank you. Thanks for all the insight, gentlemen. Glad you could host the call. Great to talk to you again. Congrats on the business, and I'll turn the floor over. Thanks very much, Kevin. Great to hear from you.

Thank you. And once again, that will be star 1 if there were any other questions.

Star 1 on your phone if you wish to ask a question. And there were no other questions at this time. I would now like to hand the call back to Rob Chang for closing remarks.

Thank you, Operator. Thanks, everyone, for taking the time to be a participant in our first-ever call. It was a bit of a challenge to try to do it so quickly after a merger recently was completed with so many moving targets, but we certainly wanted to continue our history of being very transparent to the industry and being as available as possible to investors. So certainly would like to invite anyone listening on the call or in the future, if they have questions, certainly reach out to us. Our information is on our website at griffindigitalmining.com. And thanks very much for your time. Operator?

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.