Stronghold Digital Mining, Inc.

Good evening and welcome to Stronghold Digital Mining's conference call for the third quarter ended September 30, 2022. My name is Carmen and I will be your operator this afternoon. Before this call, Stronghold issued its results for the third 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 investors section at the top of the homepage. Joining us on today's call are Stronghold's co-chair 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, Colin. 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 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 our quarterly report on Form 10-Q with the Securities and Exchange Commission by the end of the week, 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 10-Q and annual report on Form 10-K. 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 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. Greg, please proceed.

Thank you, Jeff. Good evening, everyone, and thank you for joining us on our third quarter 2022 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. As I'm sure you are all aware, the entire cryptocurrency industry is experiencing extreme challenges. While no public miners are immune to the downturn, we believe that the current environment has allowed Stronghold to distinguish itself as the first vertically integrated crypto asset mining company with a focus on environmentally beneficial operations. In light of the recent downturn, we have taken steps that we believe will strengthen our balance sheet and liquidity position by transferring a portion of our Bitcoin miners back to the lenders in exchange for the extinguishment of debt. We have mitigated the impact of returning miners through selling power to the grid. With lower Bitcoin margins and higher grid prices, we have been consistently toggling between selling power to the grid and mining. This ability provides some insulation from Bitcoin market weakness without reducing our ability to capture upside in a Bitcoin recovery. Putting ourselves in this position did not come without significant effort from our entire team. And I'm extremely appreciative of all their hard work. The data center teams who aggregated over 20,000 miners in days to return to our lenders, our power plant teams who recently completed the plant upgrades and maintenance during our fall outage and got the plants back online successfully, and the finance team who executed on debt restructuring, cost cuts, and strategic deals. Thank you all. We'll go through all of these items on this call. So turning to slide three, we'll start there. We have been extremely busy the last several months executing on what we discussed during our last call in August. Our overarching goals with these moves were to reduce leverage, improve liquidity, cut costs, and opportunistically build our mining fleet. And we have had a lot of progress to report. First, we have fully extinguished $67 million of debt associated with our NYDIG equipment financing. Since our last call, we delivered back to the lenders approximately 26,000 miners including approximately 19,000 that had been operating at our facilities and 7,000 yet to be delivered. At the time of our last earnings call, we thought we could replace the miners we returned for between $40 and $50 million. Based on recent prices, we think it's closer to $30 to $35 million, and that does not reflect today's move lower. Even when factoring in costs associated with the return of the miners related to the equipment financing, We view the delta between the debt reduction and replacement costs as a material shift in value to our shareholders. Additionally, the day after closing of our debt extinguishment, we closed on our new credit agreement with Whitehawk based on the binding commitment letter disclosed in August. This restructuring with Whitehawk materially pushed out the amortization schedule, approximately tripling the weighted average maturity from 13 months to 36 months. The new credit agreement also provided $21 million of net incremental cash to our balance sheet to help solidify our liquidity position to manage through the industry downturn and opportunistically purchase miners at distressed prices. The principal amount of debt outstanding under WhiteHawk is approximately $58 million. Secondly, on the cost side, We continued to actively execute on material cost reductions across our business that we expect to begin to materialize in our results as soon as the fourth quarter of this year and throughout 2023. We have identified and already completed a majority of the $15 to $20 million of annualized total cost reductions through a combination of completing several one-time projects and right-sizing our business through insourcing certain functions and eliminating inefficiencies. We built a business focused on rapid growth, and much of this infrastructure is no longer needed in the current market conditions. The third point is that the combination of debt extinguishment, increase in Whitehawk's commitment to us, and cost cuts all contribute to maximizing our liquidity position and reducing our leverage, giving us flexibility to manage through this down cycle and be opportunistic but disciplined in growing our miner fleet. Since our last earnings call, we have reduced our total debt significantly, and as of November 7th, we have total cash of approximately $27 million. We will continue to manage our liquidity conservatively. Having said that, we expect to take advantage of this liquidity position as a central part of our strategy we laid out in August to rebuild our mining fleet at seemingly perpetually improving prices. We said we would be patient and opportunistic, a strategy we think has already proven to be quite prudent given the continued deterioration in pricing of mining equipment. However, we have not been stagnant in rebuilding our mining fleet as we aim to take advantage of our fully built-out data center slots. Since our last earnings call, we have procured or received approximately 10,000 Bitcoin miners with hash with a hash rate capacity of nearly an exahash, of which 6,000 are on site. Of the 10,000 machines, 4,500 are associated with a new strategic partnership with Foundry, who is a leader in the Bitcoin ecosystem and operated the largest Bitcoin mining pool in the world. We entered into a definitive hosting agreement with Foundry on November 7th. While hosting is not our core focus, we strive to be opportunistic and creative and we think this deal is highly beneficial for Stronghold. In addition to a $60 per megawatt hosting fee, we will receive half of all the Bitcoin mining profit and still have the option to curtail the miners to sell power to the grid without penalty. The hosting agreement with Foundry allows us to quickly get miners plugged in with no material capex while we work to finalize a new and more complex transaction to purchase the miners in exchange for a limited amount of cash plus stock and a profit share. Fifth, our last update relates to our power plant upgrades and maintenance that were conducted at both Scrub Grass and Panther Creek in late September and into October. Recall that we strategically elected to conduct this outage in late September when power prices were seasonally lower, giving us the opportunity to import power to mine Bitcoin if margins were sufficient. Since the plant maintenance was completed, we have been satisfied with the performance of our plants. Scrubgrass and Panther Creek have both successfully come out of their outages and have run at base load when power pricing from the grid was favorable. With Panther Creek and scrub grass maintenance and upgrades being essentially complete, we expect much more reliable power generation for the remainder of this year and into 2023. Looking ahead into Q1 2023, we expect our net cost of power to be $45 to $60 per megawatt hour, which we anticipate will provide for healthy margins for both Bitcoin mining and grid power sales. Moving to slide four, To bridge you to our current hash rate capacity as a result of recent transactions we have made to increase our Bitcoin mining fleet. Our August 16th hash rate capacity pro forma for miner returns was 1.4 exahash. As I previously mentioned, we've entered into agreements to receive or have received approximately 10,000 Bitcoin miners with hash rate capacity of about an exahash. The most significant of these agreements is our hosting agreement with Foundry. Foundry will supply 4,500 Bitcoin miners with 420 petahash of capacity to Panther Creek. We will charge a hosting fee of $60 per megawatt and will receive half of the Bitcoin mined net of the hosting fee. Importantly, we have also the option to curtail the miners and sell power with no penalty. We view this hosting deal as a short-term placeholder while we work on a definitive deal where we buy these machines using a mix of cash, stock, and profit share. I'd like to note that Foundry approached us, diligence us, and is moving forward to participate in our business model. After today, we expect to receive the remaining approximately 1,500 miners from Foundry, as well as miners under contract from legacy agreements. This brings our total hash rate capacity to 2.8 exahash and we are guiding to three exahash for 2023, which we think is highly achievable in this oversupplied miner market. Turning to slide five, we issued a press release in October related to the mutual termination of the Northern Data Hosting Agreement, and I'd like to walk through why this is a favorable outcome for Stronghold. This termination allows us to take control of the operation gives us access to infrastructure that we can use to hash for ourselves, and most importantly, is materially accretive to our cash flow profile. Had we not terminated the agreement with Northern Data, we would have expected to pay close to $1 million per month in profit share payments, or approximately $14 to $28 million through September 2024. The amount is now zero. Northern Data has also forgiven a payable we owed, of approximately $2.6 million. Additionally, we are leasing their pods, which have an aggregate capacity of approximately 50 megawatts, for two years for $1,000 per year. So we are now using the pods to hash for ourselves with no profit share. At the end of the two-year term, we have the right to purchase the pods for between $2 and $6 million based on the prevailing hash price at the time. We believe that the market value of these pods is at least $15 million. Everything considered, we expect this termination to increase cumulative net cash flow over the next two years by approximately $10 to $22 million. Moving now on to slide six to provide an update on our power plants. Both plants successfully completed their planned fall outage and can operate at base load if power pricing is favorable enough to do so. The fall outage is represented as the last of the major planned investment cycle in Panther Creek and scrubgrass, and we expect to see more consistent and reliable power generation moving forward. Regarding scrubgrass, the focus has shifted to putting redundant systems in place, similar to what Panther Creek currently has, to avoid issues before they arise. We expect these plants to run at base load through the high power price winter months, with estimated net cost of power ranging from $45 to $50 per megawatt by Q1 2023. I'll now hand over the call to our CFO, Matt Smith, to discuss our financials in more detail.