Stronghold Digital Mining, Inc.

Good morning and welcome to Stronghold Digital's mining conference call for the first fourth quarter and full year ended December 31st, 2022. My name is Justin and I will be your operator this morning. Before this call, Stronghold issued its results for the fourth quarter and full year 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, Alex Cocton from Gateway Group will make a introductory statement. Mr. Cocton, please proceed.

Great. Thank you, operator. Good morning, 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 www.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 and our earnings release carefully as you consider these metrics. We expect to file our annual report on Form 10-K by the end of the week 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 previously filed quarterly reports on Form 10-Q, filed on May 16, 2022, August 18, 2022, and November 10, 2022, and our to-be-filed annual report on Form 10-K. You may access Stronghold's Securities and Exchange Commission filings for free by visiting the SEC website at www.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 the 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?

Thank you, Alex. Good morning, everyone, and thank you for joining us on our fourth quarter and four-year 2022 earnings call. For today's call, we are going to reference an associated slide presentation that is available through the webcast and on the IR portion of our corporate website. I want to start by thanking our employees for their ongoing hard work and dedication to our mission during a difficult time in our markets. While 2022 was a challenging year for our business and most public Bitcoin mining companies, we believe that we undertook several important steps to survive the downturn in the crypto markets and best position strongholds for long-term success. We responded proactively to challenges in both the crypto and power markets while prioritizing liquidity to endure. Before turning the call over to our CFO, Matt Smith, for a detailed review of our financial results, I would like to touch on some of these highlights from our business transformation over the last year and why we remain excited about the year ahead. Let's start on slide three. As a reminder to everyone on the call, Stronghold owns and operates two waste coal reclamation facilities in Pennsylvania, Scrubgrass and Panther Creek. Over the course of 2022, we removed over 1 million tons of coal refuse from the environment and mined over 2,000 Bitcoin. We are currently at 2.6 exahash of hash rate capacity and have the ability to get to 4 exahash with the already built and ready to use slots at our data centers. Moving to slide four. Back in August, on our second quarter 2022 earnings call, we outlined a strategy to rapidly de-lever our balance sheet, enhance liquidity, improve efficiency, and opportunistically build on mining fleet to better position Stronghold for success and ultimately maximize shareholder value. While there's still work to be done, we have made considerable progress on all fronts and believe that we have a robust platform to grow value for shareholders. First, the vertically integrated business model is working. We are constantly looking at grid prices and Bitcoin mining economics and choosing whether to self-power our Bitcoin mining operations, sell power to the grid, or import power from the grid to power miners when grid pricing is lower than our variable cost of power. As I will further elaborate, just in the last few months, we have realized significant benefits from both selling power to the grid and buying power from the grid. Moving on to our balance sheet, we recently completed a seven-month process of restructuring virtually every piece of material debt on our balance sheet. Since June of 2022, we have reduced our debt by nearly 60% to $60 million, which we believe is a manageable level in the context of our cash flow expectations. We also have no mandatory amortization until July 2024, which has enhanced New York's liquidity and flexibility. With the restructurings behind us, we are now laser focused on scaling and optimizing our Bitcoin mining operations at each of our data centers. We are raising our hash rate guidance back to 4 exahash and believe that we will be there by the end of the year, if not sooner. Through purchasing miners in a distressed oversupplied market, and through entering into hosting agreements, such as the previously executed foundry deal, we think we can grow hash rate in a highly capital-efficient manner. Finally, on the cost side, we have also made progress in maturely reducing expenses across our business. We have done this through a combination of completing several one-time projects and right-sizing our business through insourcing certain functions and improving overall efficiency to adjust to the current market environment. During the fourth quarter of 2022, we began to see the benefits of these initiatives in our financials as our cash G&A expense is now trending below 20 million on a run rate basis. Last quarter, we successfully completed planned outages at both our scrub grass and Panther Creek plants which represented the last of the major planned investment cycle. We expect to see more consistent and reliable power generation moving forward at both facilities and have been pleased with the post outage performance so far. We began to realize the benefits of the investments that were made during the fourth quarter and continue to believe that we will achieve an estimated net cost of power of 40 to 45 to $50 per megawatt hour in the first quarter of 2023 based on our results and performance to date. We've also been able to generate value from selling beneficial use ash, a byproduct of our coal refuse to energy process to offset expenses. In 2022, we realized a benefit of approximately $300,000, of which $200,000 came in the fourth quarter, from a combination of incremental revenue and avoided disposal costs via sales of the beneficial use ash. Ash is an ancillary business revenue stream that we expect to grow further and realize the benefit of at least $1 million during 2023. Moving to slide five, as I mentioned, we believe that the vertically integrated model is working and continues to prove its value. The optionality to sell power to the grid provides a natural hedge for Bitcoin mining economics, which we saw over the summer and during the fourth quarter. Additionally, our model provides the ability to sell to the grid when power prices spike and lower plant output to import from the grid when power prices are below our variable cost of generating power. We have realized benefits doing both in just the last few months. During the fourth quarter, as Bitcoin prices continue to slump, we showcase the benefits of owning our own power plants and how our power market optionality provides us with strategic advantages over our peers. During the quarter, we experienced two extremes, record high PGM power prices in December and a record low Bitcoin hash price in November. And we're able to flexibly shift between selling power to the grid and using our self-generated power to mine Bitcoin. Between December 23rd and December 25th, Winter Storm Elliott dictated that PGM declare a state of emergency. On the morning of the 23rd, We proactively shut down our Bitcoin mining operations and sent power to an extremely supply-constrained grid for the next several days, helping to balance the grid and benefiting consumers. During this period, we realized grid prices in excess of $1,000 per megawatt hour, more than 10 times what we would have made if we converted that power into Bitcoin, because we were able to deliver power when other generators could not. More recently, we have experienced grid prices below $20 per megawatt hour and even negative at times in March, and have lowered plant output to realize savings versus our available cost to generate power. The chart on the right of the slide highlights how we can adjust our operations depending on power prices and hash price to optimize revenues with our vertically integrated model. Let's move to the next slide. As I mentioned earlier, we spent the last seven months taking our debt from nearly 150 million to 60 million through a series of transactions with our lenders and debt holders. First, in August, we completed the extinguishment of approximately 67 million in debt associated with our NYDIG equipment financing via the return of approximately 26,000 Bitcoin miners. Also in August, we eliminated about 11 million of convertible notes by restriking approximately 6 million warrants. In October, we converted our White Hawk equipment financing with a 13-month tenor into a first lien note with a 36-month term and upsized its financing by 23 million. This February, we completed the exchange transaction with our convertible note holders to convert about 18 million of debt and accrued interest into convertible preferred stock. Finally, also in February, we amended our White Hawk Note, postponing mandatory amortization until July 2024 and significantly loosening the financial covenants for 2023 and 2024 to strengthen the company's ability to withstand industry pressure through the habit. As a result of these transactions, we have now successfully restructured nearly our entire balance sheet to make Stronghold more resilient and provide a platform to focus on accretive opportunities. Moving to slide seven, our enhanced liquidity position and improved cost structure gives us the flexibility to manage through this down cycle and be optimistic by discipline in growing our miner fleet without additional leverage. Today, Stronghold's Bitcoin mining fleet totals almost 30,000 miners with hash rate capacity exceeding 2.6 exahash per second. 4,500 of these miners associated with a definitive hosting agreement we signed with Foundry in November. with total hash capacity of approximately 420 petahash per second. Since then, we've expanded our partnership and signed a two-year hosting agreement whereby Foundry will fully participate in our vertically integrated business model. While hosting is not our core focus, this unique agreement is highly beneficial for Stronghold and demonstrates our ability to creatively increase hash rate without significant capital investment. The hosting agreement allows us to quickly plug miners into our Panther Creek data center with no material capex. This hosting deal and potentially other similar hosting deals offer us a natural pathway to fill a small portion of our open slots while we continue to thoughtfully pursue purchasing wholly owned miners. Finally, an update on Minerva. We previously announced that you should expect no additional deliveries from Minerva because of the uncertainty at the time. However, Minerva surprised to the upside, and we recently announced that they have now fulfilled approximately 85% of our initial order from 2021, leaving only 230 petahash per second remaining to be delivered. And after significant effort by our operations and engineering teams, we believe that miners received from Minerva are now performing largely in line with manufacturer expectations. With that, I'd like to pass it over to Matt Smith for a financial update.