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spk01: Good morning and welcome to Stronghold Digital Mining's conference call for the second quarter ended June 30th, 2023. My name is Norma and I'll be your operator this morning. Before this call, Stronghold issued results for the second quarter 2023 in a press release, which will be 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 today on the call are Strongholds Chairman and Chief Executive Officer Greg Beard and Chief Financial Officer Matt Smith. Following their remarks, we will open the call for questions. Before we begin, Alex Cupton from Gateway Group will make a brief introductory statement. Mr. Cupton, please go ahead.
spk05: 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 that differ materially from those described in the forward-looking statements. For more detailed risks, uncertainties, and the assumptions related 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 on or prior to August 11, 2023 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 annual report on Form 10-K, filed on April 3rd, 2023, and our subsequently filed quarterly report on Form 10-Q. 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 has been 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 Chairman and CEO, Greg Beard. Greg?
spk03: Good morning, everyone, and thank you for joining us on our second quarter 2023 earnings call. For today's call, We're going to reference an associated slide presentation that is available through the webcast and on the investor relations section of our corporate website. During the second quarter, Stronghold continued to take proactive steps to execute on our strategic growth plan, expanding our hash rate capacity to approximately 3.6 exahash, with the expectation of reaching our full four exahash of capacity by September 1st, further positioning the company for long-term sustainable success with increased revenue and cash flow. Before turning the call over to our CFO, Matt Smith, for a review of our financial results, I would like to touch on some recent highlights from our business and on our continued confidence in the year ahead. Let's start on slide three. As a reminder to everyone joining us today, Stronghold owns and operates two waste coal reclamation and power generation facilities in Pennsylvania. Scrubgrass, and Panther Creek, with aggregate power capacity of 165 megawatts. Today, we have over 40,000 miners delivered or under contract to be delivered. Additionally, we continue to seek opportunities to expand our capacity by deploying 25 megawatts of owned end-to-end data center equipment at a new site that we expect will be able to support at least one exahash. Moving to slide four. Last year, we announced a strategy to delever, reduce costs, and further build out our mining fleet opportunistically to better position Stronghold for long-term success. Since achieving those targets, we're now focused on execution and resiliency. As we prepare for the next halving, it has become increasingly important for us to make the right moves to improve our operational efficiency and expand our mining fleet in a cost-effective way that maximizes earning potential. Since April, we have added approximately 1.6 exahash of hash rate capacity through purchase and posting agreements with incremental spending of only $15 million, which equates to approximately $10 per terahash for high hash rate, high efficiency miners. These miners include over 6,000 microBT M50 and M50S miners, 4,000 A1346, and 2,000 A1246 miners associated with the Canaan Bitcoin mining agreement, and 2,000 additional purchased A1346 miners. We expect that all of these miners will be installed by September 1st, which puts us on track to reach our data center capacity of 4 exahash, one month earlier than expected. In addition to growing our mining fleet, We also remain focused on improving operational efficiency and lowering expenses associated with our operations. We've eliminated more than a third of our fixed costs over the last year and continue to track a net cost of power between $40 and $50 per megawatt hour. Transitioning to slide five, I'd like to dive a little deeper on our recent miner additions, starting with our purchase of micro-BTE miners on the left. We initially purchased 5,000 M50 miners in April, and then we purchased over 1,000 more M50 and M50S miners in July. The total cost was approximately 12 million. While hash price has pulled back from where it was at the time of these deals, based on a 7 cent hash price and a $45 per megawatt hour cost of power, we would expect 10 million of annual EBITDA uplift from these transactions. and we would expect an internal rate of return exceeding 100%. Even at a $0.06 hash price, we would expect returns well in excess of our cost of capital. Moving to the Canaan Bitcoin mining agreement and the purchase of Canaan miners on the right. We recently entered into a two-year Bitcoin mining agreement with Canaan for 4,000 A1346 and A1246 miners. In July, we subsequently expanded this agreement by 2,000 A1346 miners and simultaneously purchased another 2,000 A1346 miners from Canaan for approximately $3 million. These miners are objectively among our best performers in our air-cooled strongbox containers and provide an attractive value proposition given the combination of high hash rate, energy efficiency, and price point. In aggregate, we would expect $7 million of annual EBITDA uplift from the Canaan transactions, assuming a $0.07 hash price and $45 per megawatt hour cost of power, and similar to the purchases of microBT miners, the forecasted return profile is exceptional. Looking at the Canaan and microBT deals in the aggregate, based on current market pricing, we would expect incremental annual EBITDA of $17 million, with only 15 million of capital invested, demonstrating our continued focus on capital efficiency. As a quick aside, I wanted to highlight that we believe that combination of prevailing hash prices and prevailing mining hardware prices represents the most attractive capital deployment opportunity that we have seen in the space. As shown on this page, current market pricing results in forecasted triple-digit IRRs and paybacks around one year. This forecasted return profile is stronger than any that we have seen historically, even back in 2021 when Bitcoin prices approached $70,000. Moving to slide six. We currently have approximately 3.7 exahash of hash rate capacity and expect to reach our current data center capacity of 4 exahash by September 1st. With a contracted hash rate capacity of 4.2 exahash, we will look to optimize hash rate, energy efficiency, and slots. And we remain focused on a new location for a third site where we plan to utilize the 25 megawatts of end-to-end data center equipment in inventory. We have identified target locations for the new site, and we plan to provide more details by the end of the third quarter. Looking to the chart on the right, and further demonstrating our capital efficiency, we've been able to make investments recently at highly compelling price points, with CapEx of $10 per terahash this year, a significant improvement from $60 per terahash for 2021 and the first half of 2022. We believe this reflects our capacity to strategically and opportunistically expand our mining fleet, maximizing revenue potential per dollar spent more than ever before. With that said, I would like to pass it over to our CFO, Matt Smith, to further discuss our financials and results from the quarter.
spk02: Thanks, Greg. I'd like to go over our results from the quarter and briefly touch on our balance sheet as well. Our total revenue for the second quarter of 2023 was $18.2 million, which included revenue of $13.8 million from cryptocurrency and self-mining, $3.1 million from cryptocurrency hosting, 0.7 million from the sale of energy, and 0.6 million from capacity sales. We mined 626 Bitcoin during the quarter, representing approximately 43% of growth when compared to the fourth quarter of 2022, and 1% sequential growth from the first quarter of 2023, despite Bitcoin network hashrate growth of 39% and 23% during the same periods respectively. GAAP net loss was 11.7 million and adjusted EBITDA was a loss of $2.6 million. The reconciliation for those figures is included in the appendix. On the environmental side, during the quarter, we removed approximately 140,000 tons of coal refuse from piles and returned approximately 81,000 tons of beneficial eustache to remediate these toxic coal piles. This important work continues to underscore one of our core value propositions of being an environmentally friendly Bitcoin miner. Lastly, I'd like to briefly discuss our balance sheet and two related events that impacted it during the quarter. When comparing results from this quarter's end date on June 30, 2023, and August 7, 2023, the company held approximately $5.1 million and $4.6 million in cash and cash equivalents, along with 47 Bitcoin and 35 Bitcoin on our balance sheet, respectively. At both respective dates, Stronghold had approximately 59 million in debt outstanding. Finally, I wanted to briefly discuss two recent items impacting our share count. This May, we announced a one for 10 reverse stock split. The decision to effect a reverse stock split was primarily to increase our per share market price of a company's class A common stock and bring the company into compliance with NASDAQ's minimum bid price requirement. We also put in place a $15 million at-the-market offering, which enables but does not require us to sell shares of our Class A common stock. We're able to use the ATM, optimistically, in funding the company's growth, if it is compelling to do so. You can find more details regarding our latest share count in our capitalization table slide in the appendix. Now, moving to slide eight. We understand that there are a number of ways to value businesses, with cash flow and key drivers of cash flow as metrics being the most useful. Using most of those metrics, Stronghold is undervalued when compared to our public peers. While DCF valuation and multiples on cash flow metrics are generally the best indicators, the range of market assumptions used by equity research, as well as the funding requirements for peers to achieve their growth plans, make comparability quite difficult for such methodologies. Here we show enterprise value, which is the value of equity in debt, less cash, and Bitcoin holdings, divided by current hash rate capacity and Bitcoin production, the primary drivers of revenue in our industry. When looking at these metrics, Stronghold currently trades at close to a 60% discount compared to our peers. This is surprising to us, and we believe our valuation discount will narrow over time as we remain well positioned relative to our peers. I will now turn the call back over to Greg for closing remarks.
spk03: Thank you, Matt. To summarize what we've discussed today, we are executing on the objectives we have communicated to the market. We are on track to reach our current data center capacity of four exahash in the coming weeks, and we have dramatically improved our cost profile and balance sheet. We remain confident in the strength of the business and our growth prospects, and we look forward to sharing additional operational updates in the future. With that, operator, let's open the call up for questions.
spk01: Thank you. As a reminder, to ask your question, you'll need to press star 11 on your telephone. To withdraw your question, please press star 11 again. Please wait for your name to be announced. Please stand by while we compile the Q&A roster. One moment for our first question, please. Next question comes from the line of Chase White with Compass Point Research. Your line is now open.
spk04: Thanks. Morning, guys. So, a couple, if I may. How should we think about the amount and the cadence of CapEx in the second half of this year? Presumably, it would be mostly in 3Q, but just love some color on that.
spk03: Yes, sure. Hey, Chase. Good morning, and thanks for listening. So I think what we want to make sure everyone understands is that we have spent what we need to spend to get to our 4x hash number. And any incremental spending related to minor purchases will just be to upgrade or potentially for our third site where we have the 25 megawatts of equipment. So I think what's important to note is that we may spend additional capital, but it'll be associated with growth. So to the extent you're modeling in a capital spend related to mining, know that you're then modeling a number beyond 4x a hash. Of course, sometimes we make investments in the plants. And so we could have, we've got a plan, outages later this year that will be very short and won't be expensive. So I think you can model in a little bit of capital for that, but it's not overly big numbers. Does that help?
spk04: Yeah, but maybe just to put a finer point on it, like in the third quarter, I think you guys said that you had spent some in July. So I'm just trying to get a sense of, like, for modeling purposes, how much we should think about that's already been spent in the third quarter.
spk02: Chase, it'll be about $3 million for miners specifically. Gotcha. And I think just to drive Greg's point home, that's all that's required to get to four and we've provided guidance that by the end of this quarter or shortly thereafter we're going to share with the market share with the market what what we expect to do with with any next or coming growth project which we refer to as a third site and so currently there's no additional capital expected but if we were to go forth with a third site you know we would definitely have plans on how we're going to creatively fund it, what the growth would represent for a step function in revenue and cash flow, and pay back on anything we would do. But at this point in time, there's no additional capital plan for miners beyond that, unless we high-grade over time, as Greg described. And just a reminder, we've provided guidance previously of $2 to $4 million for outages this year. We did a significant outage of Panther in the second quarter that flowed through operations of agents expense. At this point in time, we don't plan significant outages, as Greg said, and so we're still sticking to our two to four million dollars of guidance for the year. But if we choose to take a plant offline for a few days in September, you know, to give it some TLC, you know, we may still do that, but we still believe our $2 to $4 million of outage guidance is good.
spk04: Got it. That's helpful. And then next question is, are you able to give us any updated thoughts on incremental revenue potential for mash sales?
spk02: Yeah, so I think we, at the beginning of the year, we provided, you know, kind of a million-dollar bogey And we have not updated that. At this point, we don't see a need to update that. I think we feel pretty good about being on track for that. And so we'll look forward to updating you closer to the end of the year to judge how we did against that original hypothesis. Got it. Thanks. I think the year has gone on, and we have done a lot of scientific testing of our ash. I think that we've seen the value of it has gone, our views of the value of it have gone up and not down. And I'll let you think through what that may mean, but I think we look forward to sharing with you additional potential uses of ASH in the near future. So we'll look forward to coming back to you with that.
spk00: Thank you. One moment for our next question, please.
spk01: Our next question comes from the line of Kev Didi with HC Wainwright. Your line is now open.
spk06: Good morning, gentlemen. Thanks so much for having me on the call. Greg, can we sort of peel the onion back a little bit on your specific fleet operation? I'm curious about the I know it's early, but I'm wondering if you can give us any feedback on the operation of the Canaan miners that you've seen so far and how you plan on or how you see your overall fleet efficiency progressing with the inclusion of the new miners you've bought.
spk03: Yeah, hey, that's both great questions. So I think the answer on the Kanaan is that they are, I would say, tied for a best-performing model. We're happy with, hey, they, for one thing, deliver the miners when they say they're going to deliver them, and they work when we plug them in, and they're efficient. So it's tough to, and we have, like, the early read is, the uptime for these miners is in the, and then I think the ones that show up not working are, turn around and send us working ones. So really happy with that. That might be in relationships, which is why you've seen that we've extended with them, you know, already, you know, since we created that relationship a, you know, I guess about six months ago was when we first started. So I think we're, in terms of overall fleet efficiency, we're trending toward 33 joules per terahash. And obviously, hey, with halving coming up, we're hopeful that you and others will recognize that having an in-house, low-cost, efficient fleet will put us in a good position to do well relatively. But I think, yeah, expect that the fleet efficiency you know, trend in the right direction and the more efficient direction over time. You know, I think we're constantly moving and evaluating new JVs and cap efficient ways to improve the efficiency of the fleet, and that will not change. That activity will be accelerating and increasing, we think, over the next, you know, coming quarters.
spk06: Can you offer us a little more detail on how you saw the PGM energy market, noting that energy sales were down significantly sequentially in year over year? I'm just kind of wondering what you saw, how you positioned yourself against what you saw, and what you're expecting.
spk03: Yeah, so hey, we're a blend of being in the power business and the Bitcoin mining business. So the strength of our model is that if power prices are high, we help the grid and turn off the data center and sell power into the grid to take advantage of those high prices. If power prices are below our cost of power, we can do the reverse and buy power from the grid instead of making it ourselves. And so that gives us what we described as a multi-way option. I think going into any summer, on the power production side, you have high hopes for big spikes in power prices where you would cycle the data centers off and take advantage of those spikes. But I think if you were to study where power prices ended up this summer, we really only had three or four days that was above where we would achieve had we It's just a mine. And I think that's probably exponentially lower than what we expected. And I think that's going to roll out probably the curve for the fall and the winter. Our pricing crisis this summer, and I think if there's anything you learn about being in this business is that current expectations do not have really much correlation to future outcomes. And so I think we're still very happy in a macro sense to be in the power business in PJM because of the tens of thousands of megawatts that are coming offline and the thousands of megawatts of intermittent power that's being added that's going to really cause that grid to look more like Texas than what BGM has looked like in the past. So I think we're expecting more volatility and we're expecting our model of being able to help the grid by supplying power when needed and pull power from the grid when it helps as well. And there are pricing signals that are built in that help us do that. We're still happy with the model, but in terms of like the short run, hey, this summer we expected to sell more power at higher prices than what we did. But I think, Matt, we have some data to talk about that as well.
spk02: Yeah, so, Kevin, coming into the summer, I think July and August, blended PJM around-the-clock prices were about $50 a megawatt. That's obviously down substantially versus last year. It was probably one of the tightest markets on the back of Russia and Ukraine. you know, the European gas tightness, et cetera, et cetera, exports. And so when you roll that forward, model the $50 a megawatt, expected the vol that Greg described, because typically you get some, we're probably about, I don't know, a little way through the summer. And so we're still hopeful that, you know, when power prices are above $100 to $120 a megawatt, to mine for Bitcoin, and so we'll curtail our miners and happily sell power and rise that operation. And so August is still mostly ahead of us. Early to mid-September, you can get some serious price dislocations, and so we're optimistic. But I think you've seen with the cost-cutting programs that focus on capital efficiency, we're not betting the business on higher power prices than the forward curve. Importantly, as you look forward to 2024, the winter, the coming winter, summer, future prices are expected to be higher than current prices. And so I think we're looking for this kind of loose natural gas market that has been. But when you go into 2024 and April of 2024, and the halving, a distinct difference between our business and the rest of the Bitcoin miners is that when we wake up in April and you have the halving, our power operations, our ability to sell power and the cash flow we can generate from that business do not halve unlike Bitcoin mining where there's obviously risk around the halving and we've been investing accordingly. So we look forward to our prospects. business model demonstrating its differentiation as we go over the next six to 12 months.
spk06: Last question for me on this, Greg, but you alluded to maybe some dynacism within the PGM grid. And I'm curious, I apologize that I don't know more of this myself, but as you look across that grid and perhaps the advent of any projects. You alluded to ERCOT, and I understand there's some interest in developing peaker plants that could perhaps readily address these market price swings. And I'm wondering if you think the parallels between ERCOT and PGM are close there as well. Is there anything that you can see in your crystal ball that might change the dynamics? from a new construction perspective?
spk03: No, you know what, I'll send you, you know, it's been well reported. I'll send you, I thought my favorite article, the Wall Street Journal put out maybe three or four months ago, where they were talking about, hey, where is all of the power going to come from for PGM given all of the planned shutdowns of the coal infrastructure? I think it said something like 60,000 megawatt grid network that is going to be experiencing more than 10,000 megawatts of shutdowns. And that's just way, way too many megawatts to lose to have solar and wind replaced. And so that was in the form of a question, hey, where is this power going to come? And in a Socratic way, asking, hey, PJM, what are you doing to manage your grid, given that we have all of these announcements and not enough new builds to serve the power needs of the region. So I think in Texas we saw something a little bit different in that there seems to be, that's sort of the biggest renewable market in the country, which means it's the most intermittent service in the country, which I would argue, using data, that says, hey, that's what's causing massive price swings in Texas. Sometimes a power, you know, the sun is shining, the wind is blowing, and there's more power than can be consumed. Power prices can actually sometimes go negative. At the same time, when it's cold or super hot and the wind isn't blowing, people are willing to pay a lot for power if it's in short supply. So I think that's the unintended consequence of having a more renewable, greener grid is more intermittent and more price swings. and probably an overall average higher price than what a base load fossil fuel plant would have. But I'll forward you this Wall Street Journal article. I'll post it on our Twitter account for those who are listening to read as well. But I think the theme in reading it, it'll make you comfortable to be invested in the power business with an environmentally beneficial power source like ours. that should survive and benefit from these swings.
spk06: How would you imagine PGM answers that Socratic question?
spk01: One moment for our next question, please.
spk03: Well, hey, they can't sit idle, all right? That's what you, you know, what can't happen is we can't have a tripling of the power price and a true shortage so in a way the market market forces will answer and if power prices go up then you see plants that were scheduled to shut down they'll decide not to right but then I think then we're not going to get the cleaner you know greener plan that's also been projected by a lot of these power owners and developers so say it's a My expectation is it will see market forcing prevail over like a green push. But, hey, that's really the, you know, like every boardroom is asking, what are we doing to get more carbon out of the air? So it'll be a tough question.
spk06: Thank you so much for entertaining the questions, gentlemen. Appreciate it greatly.
spk01: Hello, one moment for our next question. As a reminder, to ask a question, you'll need to press star 11 on your telephone.
spk00: One moment for our next question.
spk01: Next question comes from Lucas Pipes with B. Riley Securities. Your line is now open.
spk07: Yeah. Hey, good morning, everyone. This is Nick Giles on for Lucas. Congrats on the progress recently here. Last quarter you noted that at Scrubgrass you have 700 acres there, and really only half of the transmission capacity is being used. I think you'd said that maybe the opportunity to increase power gen capacity there would not be really until next year. And just was wondering, is this something that could be before having, after having, or really just independent of the having event altogether? Thank you so much.
spk03: Hey, that's a great question, and thanks for joining the call. I think we've said... I think we made that disclosure and it's known that we have more capacity there at scrub grass and a lot of acreage. They were constantly looking at opportunities to improve our business model, make it more stable asset. And so I think you can expect over the next quarter or two news on how we're going to take advantage of that. And maybe not just on the power side, but I think we've also said, hey, we're studying carbon sequestration. So I think it's a very good thing to have access to both transmission, access potentially to, if you're familiar with what it takes to put new assets online in our network, it's about a three-year wait. So we're studying ways to sort of cut the line and get access, put more power on the grid. in a much shorter timeframe than that. And then I think the infrastructure bill that can pay you between $80 and $160 a ton for carbon credits, that has our attention. So we're very much studying that market and hope to have news, really positive news in the next quarter or two, but we're just not quite ready to talk about it yet. But please ask again every quarter until we come out with the 8K and press release, but we are focused on it.
spk07: Got it. Got it. Well, thanks, Greg. That's really helpful. Maybe just one more from my end. Overclocking and underclocking has been kind of a popular topic among your peers as we approach the halving, and just wanted to get your perspective on this at the minor level and And really, maybe a reminder is if this is kind of less important for Stronghold, just given your optionality on the power side. Thank you very much.
spk03: Yes, I think so far we've done a really poor job at overclocking, underclocking, and we're aware that we can do it. We have the software. But I think that's something that I think you could see in the coming quarters, like upside to our model versus what we've probably guided to. Because we now have this four exahash of miners installed or coming, we're now focused on more than we have in the past, really just focused on, hey, how do we get our efficiency to be maximized? And that will include overclocking, underclocking, and probably adding some new miner control software. It's a little bit more complicated for us because we are interconnected with the grid. But, yeah, I think so far that's just, you know, I'm happy to tell you that, hey, we are, there is upside from here on the way we've been operating our assets.
spk07: Got it. Got it. Well, Greg, really appreciate all the detail today and continue best of luck.
spk03: Thank you very much.
spk01: Thank you. As a reminder, to ask a question, you'll need to press star 1-1.
spk00: And I'm currently showing no further questions at this time.
spk01: I'd like to hand the conference back to Mr. Greg Beard for closing remarks.
spk03: Great. Well, hey, I just want to thank the investors for the interest. And Stronghold, hopefully you've noticed that we have been improving every quarter for this year. And we hope and expect that we'll see continued great execution from our teams, both on the power side and data center side, over the coming quarters. And we look forward to our next meeting. Thanks everyone.
spk01: This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.
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