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.