Stronghold Digital Mining, Inc.

Welcome to Stronghold Digital Mining's conference call for the second quarter ended June 30th, 2022. My name is Mandeep and I will be your operator this afternoon. Before this call, Stronghold issued its results for the second quarter 2022 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 the investor section at the top of the homepage. Joining us on today's call are Stronghold's co-chairman and CEO, Greg Beard, and CFO, Matt Smith. Following their remarks, we will open the call for questions. Before we begin, Jeff Gramp from Gateway Group will make a brief introductory statement. Mr. Gramp, please proceed.

Thank you, Mundy. Good afternoon, 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 law 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 or 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 expect to file today our quarterly report on Form 10-Q 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 quarterly reports on Form 10Q, filed on May 16, 2022, and August 16, 2022, and annual report on Form 10K, filed on March 29, 2022. You may get stronghold securities and exchange commission filings for free by visiting the SEC website at sec.gov. or Stronghold's 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 replay via 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 afternoon, everyone. So, once again, apologies that we are a live call today. This is not a recording. I think I'm joined on the table by my team. It's been working hard for weeks and really months on what is a series of transformative transactions for the company. And you'll hear about how we are much better on the other side of it. So excited to walk you through this call today. And apologies that it took us a little longer to get all this news out. But it was quite an achievement with about a half a dozen counterparties They were all co-contingent upon each other to get it signed, but it just took longer than what we had hoped. But then we're happy to be through and done today. So thanks, Evan, for joining us. 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. So I'm going to start on slide three of that presentation. to discuss our vertical integration, which is a foundational piece of our strategy and a source of significant value for Stronghold. This slide provides visibility for how we think about our business and our ability to toggle between Bitcoin mining and selling power to the grid, which is an intrinsic advantage of power asset ownership. We can pull from the grid when grid prices are lower than our variable cost of power. and we can sell power to the grid when grid prices are more attractive than Bitcoin mining economics. Most recently, the latter has materialized, as we have seen very strong power prices over the past few months, with our power pricing averaging over $100 per megawatt over the last month and even higher during on-peak hours. This near-record pricing is expected to continue for at least the next six months. with board prices over $100 a megawatt on average. And we're going to explain how that relates to Bitcoin mining economics as well. So if you see the tables on the top right, they're intended to provide insight as to how to think about Bitcoin prices in dollar per megawatt terms and vice versa for a few recent vintage miners. For Bitcoin prices between $20,000 and $25,000, we would expect a MicroBT M30S to generate revenue between $92 and $115 per megawatt hour. For a more efficient Bitmain S19J Pro, we'd expect this range to increase to $114 to $143 per megawatt hour. On the bottom chart, we are showing the inverse, how grid pricing translates into Bitcoin prices. At $125 a megawatt, which is in line with the average on-peak price over the next six months, you'll see that the implied Bitcoin price ranges from $22,000 to $27,000 across the miner types shown. So we expect to sell power to the grid over mining Bitcoin with frequency during the next several months. Additionally, we have developed a proprietary software that allows us to take advantage of intraday power price movements by turning our data center off within minutes, allowing us to divert that power to be sold. As a reminder, when we went public last year, Bitcoin prices were substantially higher and grid prices substantially lower than where they currently are. So the economics of the power business represented a more theoretical downside protection. We didn't expect the power business to be a meaningful driver of value for at least a couple of years, but it's critical now. At current pricing levels of Bitcoin and the power markets, our power business offers returns that are attractive and oftentimes superior to our Bitcoin mining business. Consequently, there's a high probability that a meaningful portion of our power generation will be allocated to selling power to the grid, irrespective of our hash rate capacity, which brings me to our next slide to discuss the recent agreements we have made in the context of current market dynamics. So now turning to page four, when we initially capitalized the business, we structured it to operate in a $30,000 downside Bitcoin pricing case. We took out equipment-level loans, non-recourse to stronghold, knowing Bitcoin could drop even further. This structure has provided us with significant flexibility in this prolonged downturn. Over the past few weeks, we worked with our lenders to restructure all debt outstanding with NYDIG and WhiteHawk with these ends in mind. We believe this restructuring is transformational for Stronghold in terms of capitalization, liquidity, leverage, and ultimately equity value. We have entered into an agreement to eliminate all debt outstanding with NYDIG, nearly $70 million, in exchange for approximately 2.5x a hash of miners that we believe has a replacement value closer to $50 million. So we view this effectively as an asset sale at a meaningful premium to current market value. We were able to achieve this outcome due to the structural security of the agreements we negotiated, which were with LLCs and were non-recourse to Stonewold Inc. Additionally, we executed a commitment letter with Whitehawk, which will convert our equipment financing into a first lien note more than double tenor to 36 months and provide a $20 million line of credit accordion that is undrawn today. WhiteHawk will receive $2 million warrants as a part of the financing. Lastly, we have extinguished approximately $11 million of principal from the convertible notes by reducing the strike price on the warrants. We will also equitize remaining principal over the next few quarters with a total reduction of cash, interest, and principal payments by $25 million. So to summarize, this is an immediate $79 million reduction in debt and a $113 million reduction in cash principal and interest payments through 2023. In exchange, we will be transferring away approximately 26,000 miners and issuing 2 million warrants. This move is uniquely advantageous to Stronghold as a vertically integrated Bitcoin miner. Since we generate our own power, we can almost instantly toggle from Bitcoin mining to selling power to the grid, allowing us to continue earning revenue and largely offset the divested mining capacity for at least six months. So turning to slide five to further illustrate the continued revenue generation capabilities of our business, which has given our uniquely vertically integrated model that has the ability to toggle between Bitcoin mining and selling power. Accordingly, we estimate a minimal impact on our revenue as a result of our reduction in miner fleet. While our mining fleet has been reduced, our power sales can step up to fill in that revenue gap since there is now more power generation available to sell into the grid. And as we have previously discussed, future power prices through winter 2023 are currently quite high, so the power generation that is being reallocated to the grid can continue to earn attractive returns for us. So in this example on the slide, we are only trading off $9 million of revenue during this period in exchange for the significant debt and interest reduction we previously discussed in a period when cash flow is extremely important. Now compare that to a traditional Bitcoin-only business model that does not have the ability to toggle sales to the grid you can see that Stronghold can generate 95% of the revenue with 15,000 miners than a Bitcoin-only business model could generate with 40,000 miners. Over time, of course, we expect to opportunistically replace the 26,000 empty slots. I will now hand the call over to our CFO, Matt Smith, to discuss in more detail the financial impact of the restructuring and our financial position.