Stronghold Digital Mining, Inc.

Good evening and welcome to the Stronghold Digital Minings Conference call for the fourth quarter and full year ended December 31st, 2021. My name is Jonathan and I will be your operator this afternoon. Before this call, Stronghold issued its results for the fourth quarter and full year 2021 in a press release, which is available in the investor section of the company's website at www.strongholddigitalmining.com. You can find the link to it in the investor section at the top of the homepage. Joining us on today's call are Stronghold's co-chairman and CEO, Greg Beard, CFO, Ricardo Larrude, and the company's outside investor relations advisor, Jeff Gramp, with Gateway Investor Relations. Following the remarks, we will open the call for your questions. And now I'd like to turn the call over to Mr. Gramp for some introductory comments.

Thank you. Good evening everyone and welcome. Today's slide presentation along with our earnings release and financial disclosures were posted to our website earlier today and can be accessed on our website at strongholddigitalmining.com. Some statements we're making today may be considered forward-looking statements under securities laws and involve a number of risks and uncertainties. As a result, we caution you that there are a number of factors, many of which are beyond our control, which could cause actual results and events to differ materially from those described in the forward-looking statements. For more detailed risks, uncertainties, and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and public filings made with the Securities and Exchange Commission. We disclaim any obligation of undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and the reconciliation tables to applicable GAAP measures in our earnings release carefully as you consider these metrics. We filed today our annual report on Form 10-K with the Securities and Exchange Commission, which sets forth detailed disclosures and descriptions of our business, as well as uncertainties and other variable circumstances, including but not limited to risks and uncertainties identified under the caption Risk Factors in our 10-K. You may get Strongholds Securities and Exchange Commission filings for free by visiting the SEC website at sec.gov or Strongholds Investor Relations website at ir.strongholddigitalmining.com. I would like to remind everyone that this call is being recorded and will be made available for a replay via a link available in the investor relations section of Stronghold's website. Now, I would like to turn the call over to Stronghold's co-chairman and CEO, Greg Beard. Sir, please proceed.

Thank you, Jeff. Good evening, everyone, and thank you for joining us on our fourth quarter and full year 2021 earnings call. For today's call, we're going to reference an associated slide presentation that is available through the webcast, and on the IR portion of our corporate website. We will review the presentation before taking your questions. We'll start first on slide three for a quick overview of who we are at Stronghold. We are the only environmentally beneficial vertically integrated public Bitcoin miner with among the lowest power costs in the industry. We believe our unique power assets not only provide us with a low cost of power, but also provide positive environmental benefits to the areas in which we operate through the reclamation of toxic waste coal piles throughout the Commonwealth of Pennsylvania. In fact, during the fourth quarter alone, we reclaimed approximately 265,000 tons of coal refuse, which we believe makes us highly differentiated relative to our peers. Our current hash rate capacity is approximately 2.3 exahash per second, and we have contracted miners that bring us to a hash rate capacity of approximately 5.5 exahash per second, including all of the Minerva miners. Assuming we do not receive any additional Minerva miners, our hash rate capacity is expected to be 4.3 exahash per second. To date, we have received approximately 3,300 Minerva miners and are in near constant contact on the projected delivery date regarding the remaining miners from Minerva. Minerva has been unreliable in hitting their projected dates thus far, and we are not confident in their ability to deliver the remaining minors on any timeframe or in early 2022 as we previously assumed. Excluding Minerva, we expect to receive a majority of minors from our other partners over the next six months. Now briefly on slide four, I want to highlight our mission statement. Accelerating the remediation of environmentally neglected communities to the mining of digital assets. While Bitcoin mining gets most of the attention, we are proud that our business is driving increased awareness of the environmental hazards that we are in place in some of the most neglected regions in the United States. We were able to provide increased transparency and clarity around our operational activities through a recent congressional inquiry into the operations of Bitcoin miners in the U.S., including Stronghold. We responded thoroughly and directly to the congressional inquiry, and we look forward to continued engagement with policymakers and stakeholders. Our congressional response letter is available on our website. Our mission will remain to use our vertically integrated business model to improve the quality of life within these affected communities while continuing to grow our power generation and digital mining capacity. Moving to slide five, which gives you an important visual as to the impact we have in the communities where we operate. We take an active role in removing coal refuse from the environment through our coal refuse to energy power facilities, which have received bipartisan support in Pennsylvania. While the full extent of the coal refuse problem is unknown, there are potentially billions of tons of coal refuse requiring remediation efforts like ours. So while we have removed a meaningful amount of approximately 265,000 tons of coal waste from the environment in the fourth quarter, there is still significant work ahead for us. Our specialized purpose-built facilities use circulating fluidized bed technology that removes nearly all nitrogen oxide, sulfur dioxide, particulate, and mercury emissions, with the byproduct being beneficial use ash, which is a certified liming agent that can be used to remediate the land where the refuse piles existed. These toxic piles are the leading source of water pollution in Pennsylvania, and many of these piles spontaneously combust or are on fire as we speak. We believe combustion through our facilities is one of the cleanest means of removing these piles. Moving to slide six, where I'd like to cover the value of our vertically integrated model. By owning and operating our own power assets, we believe we maintain operational control to maximize efficiency and reduce costs, putting ourselves in control of our own destiny. We also believe owning our own power assets also provides downside protection and arbitrage opportunities. Additionally, with renewables, which are intermittent by nature, becoming more prevalent, it is widely accepted that the grid is becoming increasingly unstable. The combination of our power and data center assets allows us to redirect energy to the grid on short notice. That improves grid stability and helps to make more carbon-free sources of power possible. This has played out recently on numerous occasions with the grid calling on us to supply power. As a matter of fact, we are currently testing with PJM to qualify for a Reg A payment. The PJM regulation market provides compensation for being able to quickly adjust power output based on real-time supply-demand fluctuations. While we are in the early stages of testing with PJM, if we qualify, Reg A payments would allow us to monetize on these unique capabilities that are inherent to our vertically integrated business model. An additional benefit we have specific to our plants is that the oil and natural gas markets have very little impact on our operations, which has become increasingly apparent in the current macro environment. While there are clear benefits to owning our own power assets, it does not come without challenges. Our scrub grass plant has experienced more downtime due to repair and maintenance than we previously anticipated, and we continue to invest in plant upgrades that we expect will allow scrubgrass to run at its base load with more consistency. We expect these upgrades to cost approximately $5 million over the next several months. We made similar investments at Panther Creek around the time of acquisition, and they have resulted in more reliable plant performance and uptime to date. Additionally, owning, developing, and operating our own data centers allows us to better manage supply chain and counterparty risk. To date, we have manufactured 101 strong boxes representing 101 megawatts of our proprietary strong boxes that we use to house our miners and have been pleased with the cost profile, pace of build-out, and operational results. The value of building and owning our data centers was recently validated when the modular data center pods associated with our joint venture partner were delayed. Rather than putting miners in a warehouse, we quickly pivoted to put these miners in our strong boxes to capture value that others may not have been able to accomplish. In the picture on the slide, which I'll note is a few months dated, the top right depicts the strong boxes put in place on a temporary basis to tap into the power infrastructure for the JV Data Center. And, of course, we will own and operate our Bitcoin miners and look to be a reliable and scalable counterparty to suppliers of miners to ensure the best terms and access to miners. Slide seven reviews some of our recent accomplishments. As we announced on January 6th, we met our 2021 exit rate goal of at least one exahash per second of capacity, despite some strong headwinds in parts of our business, and our current hash rate is approximately 2.3 exahash per second. We also continue to grow our mining capabilities acquiring 21,100 Bitcoin miners in the fourth quarter and 3,675 in the first quarter of 2022, with aggregate hash rate capacity of over 2.4 exahash. On November 2nd, we closed the acquisition of our second power generation asset, Panther Creek, and we've been pleased with the operational performance and integration of the asset. We also continue to make progress on diligencing additional power generation assets to further expand our vertically integrated capabilities. Data center build-out is also progressing with approximately 60 megawatts of data center capacity commissioned. Financially, we continue to successfully leverage our relationships to secure attractive equipment financing arrangements. These include two financings with NYDIG totaling approximately $67 million. We also just amended our financing agreement with White Hawk, upsizing it by $25 million by increasing the collateral basket while removing all Minerva miners from the collateral. This fully eliminates the potential impact from further Minerva delays in regards to financing. Now, moving to slide eight, there are two key factors that have negatively impacted our operations and near-term growth trajectory. We estimate these factors collectively created a $40 million to $45 million reduction in cash flow to date relative to our base case plan. As many of you know, we placed an order for miners with a miner manufacturer called Minerva in 2021. Additionally, Minerva presented a compelling value proposition for the price of roughly $50 per terahash, a significant discount to prevailing market rates. However, to date, we have only received approximately $3,300 out of the 15,000 miners originally ordered from Minerva that were scheduled for delivery by December, as they have continually fallen short of contractual and communicated delivery timelines. Based on what we know today, in our recent communications with Minerva, we cannot provide any definitive guidance as to the timing of future deliveries. We are evaluating all appropriate avenues to extract value from Minerva, and have also proactively removed all Minerva miners from the collateral base supporting our equipment and financing agreements. Additionally, operations with our data center build-out partner have progressed slower than expected. Miner deliveries associated with the build-out were moderately delayed, and commissioning of the data center has progressed slower than expected, largely driven by delayed deliveries of the data center pods, with only four of the 24 pods currently operational relative to plans to have all 24 commissioned by year-end 2021. As I mentioned earlier, we believe that because we are vertically integrated, we have been able to mitigate some of the downtime through installing these miners in our own strong boxes rather than leaving the miners on the sideline. Additionally, we successfully negotiated an amendment and expansion to the data center arrangement. Under the amended terms, our partner will manage miners hashing in our strong boxes and earn a 20% profit share on those miners initially. And the profit share from miners in their containers will temporarily be reduced to 30%. We also agreed to purchase an additional 2,675 miners for $37.50 per terahash and will pay for them five months after delivery. These miners will be installed in strong boxes, managed by our partner, and subject to the respective profit share. Per this amended agreement, these miners and all remaining miners are to be delivered by the end of April, where the JV profit share will be reduced to our partner. Further, if our partner does not complete commissioning the data center by the end of June, their profit share will be eliminated until commissioning is complete. While we are disappointed with this confluence of events and their associated impact on our operations, We have spent considerable time and resources developing a revised growth strategy that we believe can be funded with our existing resources and represents the optimal strategy given the circumstances while setting us up for long-term success. I will now hand the call over to our CFO, Ricardo Wahode, for a financial review.

Thank you, Greg, and good evening, everyone. I will start my comments in slide nine, and similar to our last call, we'll cover the numbers relatively briefly, as our results do not reflect the recent and future-minded deliveries that we believe will allow us to better scale our organization and demonstrate results that we think are more meaningful for investors. Revenue for the fourth quarter of 2021 was 17 million, with adjusted EBITDA of 0.3 million. Our average hash rate during that period was 0.3 exahash per second, and we ended the year with 182 Bitcoin on our balance sheet. Slide 10 demonstrates the rampant miners and hash rate capacity since we began scaling up Bitcoin mining capacity last year. To date, we have received about 25,000 miners with total hash rate capacity of 2.3 exahash per second. For the first quarter of 2022, we expect we'll have average hash rate of 0.9 exahash per second, with growth somewhat constrained due to the issues previously discussed by Brett. The previously discussed issues, combined with a drop in Bitcoin price since our IPO, have negatively impacted our cash position. Therefore, we have revisited our growth plans for 2022. We are no longer targeting organic growth to 8x a hash per second by the end of the year 2022. If we receive and install the remaining miners we have contracted, that would imply a maximum hash rate capacity of 5.5x a hash if all the remaining Minervas are delivered. or 4.3 exahash when excluding any further maneuver deliveries. We are guiding to 4.1 exahash installed by the end of the year based on the capacity of our current power assets, but we are actively engaged with sellers of multiple power assets. Slide 11 details our liquidity and capital resources. We ended 2021 with a total liquidity of about $75 million, including $31.8 million in cash, $7.7 million in unrestricted digital currencies, and approximately $35 million in availability under existing equipment financing agreements. We currently have approximately $30 million of cash on our balance sheet and $344 BTC in our wallets, with approximately $18 million in undrawn equipment financing. We expect this equity and cash flow from operations to fund our capital needs and also have unencumbered assets that we can finance if necessary. I will now turn the call back over to Greg.

Thank you, Ricardo. Slide 12 lays out the remainder of our goals for 2022, including receiving and then installing the remaining minors we have on order pursuant to definitive agreements. Actively working to a satisfactory and beneficial resolution with Minerva, completing the necessary capital investments at Scrubgrass to make the plant fully operational per our expectations, and strategically exploring potentially accretive M&A opportunities. where we have begun to see increased opportunities. We also continue to pursue the acquisition of additional power assets and still have a non-binding letter of intent in place for a third coal refuse reclamation facility with 112 megawatts of power generation capacity. We are also revisiting our minor procurement strategy to put a greater emphasis on spot purchases over forward deliveries. We believe forward deliveries have an elevated risk profile given potential delays to delivery timing and uncertainty related to Bitcoin fundamentals at time of receipt. We believe our spot purchases to date have been successful with most miners hashing at our facilities within weeks of entering into the purchase agreements. We think this provides a much more attractive risk-adjusted return profile. I will wrap up on slide 13 and want to be clear to everyone. Our recent results are not up to the expectations we have at Stronghold and are not representative of the potential we aim to deliver on. We understand the importance of timely execution. I firmly believe Stronghold has the foundational pieces to be a successful and differentiated company. We are focused on improving the environment. Our vertically integrated business model offers low costs. We have significant scale. and our management team is highly aligned with over 50% ownership in the company. We are working tirelessly to deliver on the high expectations we have for ourselves. Thank you, everyone, for taking the time to dial in. We are now ready to take your questions.

Operator? Certainly. Ladies and gentlemen, if you have a question at this time, please press star then 1 on your touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of Lucas Pipes from B Riley Securities. Your question, please.

Hey, good afternoon, everyone. Thanks very much for hosting the call and for taking my question. I wanted to dig a little bit deeper on the Minerva situation and Specifically, when did deliveries fall short of your expectations over the course of this first quarter, I assume? And when was the last delivery of a Minerva Minor made?

Thank you. Hey, Lucas, thank you. So, hey, a Minerva has deeply disappointed us. We've gotten communication from them in writing as to when – like the revised delivery schedule would have the miners all in our hands. Earlier in the year, we were notified that we'd have them all by the end of March. That hasn't happened, given we've only received 3,300. We have been told that we have another batch that has cleared customs in the U.S. and is on its way to us now. That would represent probably hundreds of miners, but not the thousands that we're expecting. The last time we received a larger batch of miners was on February 1st of this year. That being said, I think with regard to Minerva, they're not – we're communicating well, so we probably talked to our Minerva founder, Mark Ma, on an either daily basis by phone or by text. He's been with us on site in Pennsylvania for probably 10 days in the past 30. So he's not hiding. And I think he is doing his best to try to get his side of the deal working well enough to fulfill the order. He tells us he has the chips and the parts to do it. And, in fact, we have received, you know, 3,300, as we said on the call. But they haven't proven reliable. They're in violation of our original delivery schedule that should have had all the miners in our hands by October, November, December of last year. And they've consistently missed on promises made. And so I'm no longer willing to sort of have my reputation depend on on Minerva keeping their promises and their word. They haven't been... I do not think it is a... I do personally believe we're going to get these minors. I would not stake my reputation to the timing of exactly when they're going to arrive. And so I think just for the avoidance of doubt, for analysts like you, Lucas, why don't you just presume we don't get any more in your model? And That way we can begin to beat the estimates and the numbers, you know, hopefully next quarter and the quarter after and eliminate the issue. But I think that would make me more comfortable. So we'll take our lumps on this quarter and tell you that, hey, we're doing everything we can to get the miners out of Minerva. But I think I'm not willing to, and they're showing up for you know, conversations in person. But on that, you know, in spite of that, I'm still not comfortable with making representations as to when the rest of them are going to arrive.

I very much appreciate that detailed answer, Greg. That is very helpful. One quick follow-up before I want to change topics. The performance considerations that you mentioned in the release and just now. Do you have a sense for what is causing that, kind of technically, what's causing lower-than-expected performance?

You know, I'd say, hey, that's – I really don't want to – you know, I think you and I just told everyone, hey, just presume that we don't get any more. I don't want to make it unnerve a call. We have heard every excuse you could hear. as to why they are delayed. So, you know, if you name one, I can probably tell you, yeah, they've said that, you know. And so I think I'm not, and I don't, I think I don't want to really get into, hey, why they're saying they're late. Because then you can say, hey, what makes us believe on this time? And the answer is, hey, I don't, hey, while I'm happy that we're continuing dialogue with them, and I do think they're doing their best, you know, given that they've been so late, I don't want to really contemplate why it's different this time and why am I personally expecting them to deliver even though I'm giving guidance and say, hey, just don't presume it.

Very helpful. Thank you, Greg. I really appreciate your candor on this. On kind of switching topics, You know, you pointed to a plan that is now fully funded, if I understood it correctly. I just thought I'd double-check on that, and, you know, I think that's an incredibly encouraging outlook. So I really appreciate your comments on that. Thank you.

Yeah, you bet. So in terms of right now, we own, obviously, two plants and have two data centers, you know, say, hey, we're fully funded on those two plants, and the exahash limit of the two plants is, what, 4.1 exahash. So I think just for your models, presume that we're fully funded to 4.1 exahash. We have exahash capacity of, what, 5.3? 5.5 we have. 5.5, but we need the third plant in order to get past the 4.1 exahash. So I think that's on slide 10 of the deck that's hopefully posted on our website. So just for clarity, for one, with the two plants, fully funded, 5-5, you know, 5-5 plus, but we'll need additional equity and or debt financing to get to that if we wanted to accelerate and do that this year. Which obviously, hey, we are not... You know, I think what you've heard on this call is that we were, by the way, just for clarity, 5.5, if I'm wrong and all these rare of a minor show up, it's 5.5 is the exahash per second, 5.5 exahash per second is the run rate that we need the third plant and additional financing to close. Obviously, hey, the reason why you do that is to accelerate the the growth plan. So, you know, if you slow the growth rate down, ultimately we're going to end up, you know, right now a lot of our cash flow is going to debt service for equipment financing for the miners that we bought. So, yeah, we will ultimately generate the cash to continue a growth profile, but for us to do that this year, we need external financing, and we'd probably seek equity and or debt to do it, which obviously we want to do if it makes economic sense to do that.

Greg, really appreciate it. Thank you very much, and best of luck.

Thanks, Lucas.

Thank you. Our next question comes from the line of Stephen Galgola from Cowan. Your question, please.

Hi, thanks for the question, Greg and Ricardo. I just want to ask, your hash rate capacity for most of Q1 has been north of, or 1.3 exahash or north, and you're guiding to an average operating hash rate of, I believe, 0.9 exahash. for the quarter, implying, you know, suboptimal utilization rate. So, I just want to unpack, you know, what's driving that and just want to unpack some of the operational challenges you're experiencing at Scrubgrass, you know, delays and sort of these third-party data center deliveries, you know, just providing some more color there and what steps, you know, are you undertaking to sort of rectify, you know, both utilization across your minor fleets and plants. Thanks.

Yeah, that's a great question. So our immediate goal was, you know, I think keep in mind, sort of in our defense a little bit, we built out two data centers in the past, you know, probably six months between Scrubgrass and Panther, and they're big and complicated to build out. We were expecting our JV partner to show up with pods to make the implementation of that data center de-risked. Our goal was to really de-risk the business model by having a data center operator show up with their containers, and that way we could sort of say, hey guys, on data center number one, we're going to be really trusting in someone else's expertise. Unfortunately, the pods weren't ready, and so kind of on an emergency basis, we built I think we built maybe more than 100 of our own proprietary strong boxes to house the container, to house the miners. And our goal was just to, you know, sort of fight for our own electricity capacity and plug these miners in, plug our boxes in, plug our miners in as quickly as we possibly could, recognizing that, hey, this is far from optimal. Our expected case was we'd have, you know, 14,000 JV miners arrive and they would quickly and seamlessly get installed in these, you know, fancy mobile data center boxes that our JV partner had begun to drop off. And instead we found ourselves scrambling to rework our electrical situation, build our own boxes, and in a very herd fashion plug them in. So I think our, you know, hey, well, we apologize that we don't have, you know, a mid-90s uptime, which is where we think we're going to end up. we have, you know, our goal is just to hash as much as we can as quickly as we can, given that we had a much slower deployment from our suppliers and JV partners. So I think, you know, judge us, you know, give us a quarter or two before you judge us on that time. But I think right now it's, you know, it is not where we expect it to end up, but it is inching up I think today our uptime is averaging just over 80%, and I would tell you we'll end up getting to the mid-90s as we optimize the fleet that we just plugged in and configured on sort of an emergency basis.

Does that help answer? That helps, Greg. Thank you very much. And I just had a quick follow-up, too. I noticed in the 10K that the Tier 2 RECs are now valued at $11 a megawatt hour down from $15 last July. And my channel checks earlier with third-party REC brokers earlier in the quarter suggested somewhat north, but then I think recently they've come down. I just wanted to see, can you comment on what has sort of driven the lower REC valuation and what you're seeing there?

Yeah, I think you've got to look at it in aggregate. So if you looked at, you know, just speaking to, you know, as a power business, if you looked at where we were expecting, you know, power pricing when we sell power into the grid at this point, and had you asked me a year ago, I would have said, hey, we're probably averaging, you know, mid-30s per megawatt if we sell into the grid and then add another 20 bucks for RECs at mid-50s. And so what's happened is power prices have come up. Materials from that probably, you know, now we're averaging mid-50s, and RECs are getting us to mid-60s. So on a net basis, we're still, you know, 20% better off than we would have been otherwise. But, hey, this is an open market. So, hey, as the REC, the more expensive RECs are, the more people want to, you know, be in that business. And so I think, you know, it's probably going to be a, it itself is commoditized. And so I think you have to think about it that way. But on an aggregate basis between power and RECs, where I am relieved and happy that we have a source of power that is related to reclamation of waste coal and not related to oil and gas, it's going to improve our margins as a power business. But I think the intricacies of the REC market, I would say expect that market to bounce around but still trend upward. Okay. Thank you very much. Sure.

Thank you. Our next question comes from the line of Mike Rendell from Northland Securities. Your question, please.

Yeah, thanks, guys. Two questions. One is, How do you guys feel kind of your confidence level on the bit main deliveries the rest of the year? And then secondly, you sound, you know, fully funded on the 4.1 exahash. If you're able to get those Minerva miners or other miners up to 5.5 and you need that third plant, roughly what is the capital you need? You know, it doesn't matter if it's equity or debt, but what is that bridge of capital that you would need to get there, roughly?

Yeah, so I think between the... So that's a great question. So I guess first off, only the minervas have vexed us. The other minors generally show up within, you know, one to two months when they're supposed to. And... We're actually, you know, our JV partner is a part of the renegotiating of that JV agreement. They've agreed to send about 6,700 miners by the end of April, which I think was mentioned on the prior part of this call. And I would expect, you know, given that that's in the next 30 days, we're expecting those to show up. If everything shows up, you know, if those miners show up, yeah, then we're fully funded on the sort of the 4.1 exahash to get us through the, you know, that build out. If we want to go beyond that, and we do, we need to acquire the next plant, which we have identified, and we're sort of in the final stages of the LOI to get that done. We already have all the transformers on order to build it out, so that's all known. I think in aggregate, we would say it's probably around $150 million of investment that is required to get the remaining miners, because, you know, right now we have more than an exahash. Like, if we don't get this third plant, we have an exahash of miners that will be, you know, presuming that all the manures are delivered, that will be on the shelf. And, of course, we're not going to live that way. We're either going to find a way to finance the third plant, or we're going to divest of that exahash and live in cash flow and grow again when we can. But obviously, we want to be aggressive and still be financially prudent. And I think the answer there, which we can give you a piece-by-piece breakdown of how that capital is spent, but it's around $150 million, given that we already have the one exahash that the Minerva will represent, presuming they are delivered this year.

Got it. Okay. Thank you.

You're welcome.

Thank you. Our next question comes to the line of Chris Blender from TA Davidson. Your question, please.

Just wanted to understand a little better on the operational issues at Scrubgrass. I thought the Scrubgrass was the first plan, so what's different about Scrubgrass versus Panther Creek, and do you expect to have some of these higher maintenance costs if and when the third facility closes as well. I'd say a little more detail on exactly what the problem is would be great.

Yeah, so on Panther, before we closed it, we did all of our diligence. We had identified probably about $3 million to $5 million of upgrades to do to that plant while we were installing the data center. And so Panther really had the advantage of being sort of a fresh refurb that gives it that baseload uptime that's above 90%. Scrubgrass did not have the benefit of that. We kept sort of running while we were installing the data center, and so we didn't put that capital in. I think we're publishing, say, you know, Scrubgrass may need $5 million. I don't think it's going to be that much. You know, we kind of review... you know, every week the schedule and CapEx items that it needs. But it just is, it spent years as a baseload plant and then spent years essentially as a peaking plant. And now we're asking it to run as a baseload plant again. And so it just has a, you know, it's a laundry list of very solvable issues. that, you know, we are really, that we are very confident that will be done in, you know, months, not quarters, that will get scrubgrass back to the, you know, the 90% uptime, you know, base load performance that we see at Panther. So that's really what's happened. But it's a, you know, there are all sorts of safety measures at the plant, and essentially, you know, probably about, a half a dozen different recurring issues are causing the plant to trip off. It then takes, you know, a couple days, if not a week, to address that issue and restart, you know, one of the boilers again. So it's just a, it is a, I guess I wish that we had done the scrub grass upgrades At the same time we did that data center, we kind of didn't have the luxury, and we're doing it now while we're running. I think we debated whether or not we wanted to take that plant offline altogether, and we don't think we need to do that to get it back to its sort of nameplate capacity and uptime capacity it's designed for. Just to be clear, the plants are not brand new, obviously. They were designed to run, you know, around the clock as baseload facilities in fact, they perform better when they do. You know, because this is a massive amount of steel, and if it's off and on all the time, you're expanding and contracting. That actually is part of what can wear it out. And so by keeping it hot all the time, we're actually, you know, we expect to see a compounding improvement in uptime. So, I mean, I think if you're going to be on the call, you know, late into the evening here, we can give you the sort of the stroke by stroke as to what those items are. We went through it today, and it was actually under a million dollars' worth of estimated updates and upgrades that are needed. And I think just for, you know, hey, in your models, hey, presume it's five. You know, but I think we're trying to, you know, give ourselves one in a row here where we actually hit your estimates.

Male Speaker Okay. That's helpful. This is probably not a good answer, but is there any recourse to Minerva at this point? Can you get any of your money back? Do they still get equity? Is there any sort of way you can recoup any of those losses if they don't deliver?

I'd just say we're evaluating all of our options. They had delivered on $3,300, so they do not owe us the full amount. And I would just say it does, from my view, if we thought there were no chance, you know, if they couldn't answer the phone, if they quit showing up, if they quit being constructive, yeah, we would obviously, you know, litigate to recoup what we can. But at this point, it's not really constructive for us to put them into such dire straits that they can't deliver. So we're trying to be as cooperative as we can be while being as forceful as we can be and still let them stay in business.

Just one final quick one. Is there a time that the LOI on the third site expires, or do you have time to wait? We have time. Okay. Great. Well, best of luck this quarter. I hope things go better.

Great. You bet. Thank you. Thank you. Our next question comes from the line of Chase White from Compass Point. Your question, please.

Thanks. Good evening, guys. So just on the prior question about the resolution for the Minerva situation, you know, if we, you know, assuming that we don't get to the point where they're going to actually deliver the miners, obviously you said that, you know, you're kind of not making that decision at this point. At what point does that become the endgame? I mean, when do we kind of look for that to be the resolution?

You're asking when will we – on which court do they call? We say, hey, you know, we're no longer expecting – you know, we'll no longer even talk to them. It's now all between lawyers and the court system. Is that what you're asking? Yeah. I don't know. I can't – right now we're not – you know, we have not hired litigators to, you know, build the case against them. We're still talking with them and cooperating with them. I think, you know, at some point, if they end up not returning phone calls, not showing up in person, not trying to communicate and collaborate with us, you know, we will absolutely, you know, probably have to put an 8K to that effect and tell the world. But we're not – it's not what's happening right now.

Gotcha. Thanks. And then – On the decision to purchase the third plant, the one you have the LOI on, what do you need to see to make that decision? What is your thought process around making that decision?

It's a mathematical decision, and it'll depend on if we issue additional equity or do a preferred or do some type of financing to buy it. If it's too dear and it's not accretive to do so, then expect us not to do it. But it's purely financial math that will dictate it. But I'd say, hey, the tie is going to go to trying to do it. You know, we still want to, you know, growth. We're still believers that we can, you know, can enter into LOIs, buy plants, and continue to grow our exahash run rate. So that's, if we can do it, that's what we're working to do. But I'm not going to do it if it's massively dilutive to shareholders. You know, growth that is uneconomic isn't helpful. So I think that's part of what I, you know, I'll sort of criticize my peers and competitors. Like, hey, growth for growth's sake, doesn't really make sense. If it economically makes sense, we'll do it. If it doesn't, if it increases risk and decreases earnings potential, expect us not to. I think we can probably share with you our financing thoughts, equity value thoughts as you build your model out, but that's how we're wired.

Gotcha. Thank you.

Sure. Thank you. Our next question comes from the line of Jacob Roberts from Tudor Pickering Holt. Your question, please.

Afternoon, guys.

Hi, Jacob.

I was curious if you could comment on what you guys are seeing in the spot market for miners at the moment and how that evolves maybe over the course of this year. And really what I'm trying to pinpoint is, you know, if you guys are willing to wait because you see a better opportunity maybe in Q3 or Q4 for that market to maybe open up a little bit.

Yeah, I'd say I guess a couple of things. One is, hey, the financing markets for Bitcoin mining, for crypto generally, have cooled, which, you know, I think in a way those that have financing in place and capital available have while it feels worse because everyone's equity values are less than half of what they used to be, those that have access to capital that can execute on their plan are going to be better off because global hash rate won't continue up at a hockey stick level. I think, in fact, we've seen that global hash rate begin to level off and crust. So I think that's beneficial. In terms of the cost to acquire new machines, the spot market is, depending on the machine, probably as little as $50 a terahash, where if you get the latest and greatest, it's closer to $75. And that's down, that's probably down 30% to 40%, you know, from the peak numbers we saw late last year. I think, you know, just to defend the decision that we made when we agreed to buy the Minerva miners, Our purchase price per terahash for those miners was, what, $50 a terahash at a time when the market for those miners and the spot rate was probably, you know, 90-plus, maybe even over 100. And so the, hey, it is damaging, and we are absolutely upset that they're not delivering the miners on the pace that was promised. We also, you know, but by buying them in that way, we didn't spend an additional, you know, $75 million that we would have spent had we bought in the spot market. So that, you know, in terms of like looking backward, what we've done differently, it's tough to say that I would have, you know, obviously would have maybe asked for more protections or had maybe a different payment plan to... to pay more along the way, but I think the decision to pay $50,000 to AirHash when the market was at $100, it's not to regret that.

Thank you. As a second question, I was wondering if you guys could comment on just the general inflationary environment and how that might impact, you know, the upgrades to scrubgrass, and then if we do assume a third plant gets across the finish line, you know, through the back half of this year, you know, kind of how are you seeing that impact there? And then maybe also how it's just impacting the labor market in the near term.

Yeah, the labor market's always been, it's always been tough. Our plants are operating in mostly, you know, rural areas. We're typically like the highest paying, best employer in the neighborhood. So, you know, we have not, while we are constantly hiring, we have not had labor shortages that impact our operations in a mentionable way. I think inflation is going to hit every aspect of everyone's business. I think the way we're seeing it now is through higher, you know, our biggest expense on the operations side is trucking. And I think we're getting like a fuel surcharge right now for trucking, and I'm not sure that's going to be a big determinant in our overall margins. I think actually we're benefiting more from higher power prices than we're being hurt by trucking surcharges. But that's inflationary, obviously. On the biggest component of upgrades, the upgrade for plant number three is the transformers, and they're already bought. And so that won't be a factor. And I think, you know, we'll have a lot of copper to buy. So, you know, I don't know. I think it's going to be fair to presume a slightly more money to build out the third plant, but I'm not expecting it to be an expense that is dramatically different from what we've already, what we already have modeled for, just given that we've already bought the most important pieces.

Thank you. Appreciate your time, guys.

Sure. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Greg Beard for any further remarks.

No, hey, shareholders, thank you for your support. I know it's been a disappointing quarter. I think we are doing our best to turn the story around and deliver what was promised today. In the IPO, I think while it is a challenging environment, we certainly had our fair share of headwinds that seem to be happening, you know, seem to have happened all at once with Minerva delays, you know, JV partner delays, Bitcoin price reductions. I think we firmly believe that the fundamentals of the business are still very much intact. and that what we have here is a delay of performance, not an ultimate reduction in what we can do. So I guess we'll be back on the phone here in about a month, and hopefully with a bit better news in the first quarter. Thank you, Operator.

Thank you, and thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.