Stronghold Digital Mining, Inc. (NASDAQ:SDIG) Q1 2023 Earnings Call Transcript May 11, 2023

Stronghold Digital Mining, Inc. beats earnings expectations. Reported EPS is $-0.12, expectations were $-0.14.

Operator: Good morning, and welcome to Stronghold Digital’s Mining Conference Call for the First Quarter ended March 31, 2023. My name is Catherine, and I’ll be your operator this morning. Before this call, Stronghold issued its results for the first quarter of 2023 and a press release, which is available in the Investors section of the company’s website at www.strongedigitalmining.com. You can find a link to the Investors section at the top of the home page. Joining us on today’s call are Stronghold’s Chairman and CEO, Greg Beard; and CFO, Matt Smith. Following their remarks, we will open the call for questions. Before we begin, Alex Kovtun from Gateway Group will make a brief introductory statement. Mr. Kovtun, please proceed.

Alex Kovtun: 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, the 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 May 15, 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 3, 2023 and our to-be filed quarterly report on Form 10-Q.

You may access Strong World’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.stongholddigitalmining.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 Chairman and CEO, Greg Beard. Greg?

Greg Beard: Thank you. Good morning, everyone, and thank you for joining us on our first quarter 2023 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. While the first quarter of 2023 remained a challenging environment for our business and most public bitcoin mining companies, we continue to take proactive steps to execute on our strategic plan and best position Stronghold for long-term success. 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 recent highlights from our business and our confidence in the year ahead. Let’s start on Slide 3.

As a reminder to everyone call, Stronghold owns and operates two waste coal reclamation facilities in Pennsylvania, Scrubgrass and Panther Creek, both of which are low-cost, environmentally beneficial coal refuse power generation facilities. Today, we have 165 megawatts of power generation capacity and current hash rate capacity of 2.8 exahash per second and expect to achieve 4 exahash by the end of Q3 2023 with our already built and ready to use slots at our data centers. Moving to Slide 4. Stronghold today is significantly delevered versus where we were just nine months ago. We accomplished this delevering through five transactions or amendments with six counterparties. Our net debt is now just approximately $50 million. We have no mandatory amortization payments until July 2024, and we have significantly reduced our outstanding payables.

With those efforts behind us, we are very excited to focus on what we believe are accretive and capital-efficient growth initiatives and projects. Since returning 26,000 miners representing 2.5 exahash to our lender in August 2022, we have received or procured approximately 22,000 miners representing 2.2x exahash, nearly refilling the capacity made available by the manner of turn. We have done so while investing only $15 million of incremental capital. As announced last month, we recently acquired 5,000 MicroBT Watt Minor M50 miners or $15.50 per terahash. These are top-line machines, and we believe that the price is as attractive as we have seen in the market. These matters are funded with proceeds from our April 2023 private placement in which I invested personally not only because I continue to have a strong faith in the company, but also because we found an exceptionally compelling and accretive opportunity.

Recent power prices have been $20 to $35 per megawatt hour during the month of April and forward prices for the next 12 months currently average $40 to $45 per megawatt hour. We expect that these M50 miners will generate revenue in excess of $110 per megawatt hour based on an $0.08 hash price with minimal incremental cash operating costs. This represents significant potential uplift to revenue and cash flow that allows us to recover our entire investment in less than one year based on an $0.08 hash price, current forward power prices and a 95% assumed minor uptime. We also recently announced a 2-year capital-efficient Bitcoin mining agreement with leading minor manufacturer Canaan, where Stronghold will operate 4,000 miners by June 15, 2023, with total hash rate capacity of 400 petahash supplied by Canaan.

Stronghold will receive 50% of the bitcoin mined and recover cost plus 10% on half the associated power. We retain all upside from selling power to the grid. Half of the miners are currently on site and ready to be deployed. To reiterate, the fact that we can plug these M50 miners and Canaan miners into our ready-for-use data center slots immediately further highlights the benefits of owning our own power and data center resources that enables us to undertake these types of transactions without the incurrence of any significant expenses. The MicroBT and Canaan transactions have accelerated our Bitcoin mining capabilities and growth. On our last earnings call, we raised our hash rate guidance before exahash and expected to be there by year-end.

Following these recent announcements, we now anticipate that we will reach for 4 exahash by the end of the third quarter. We are evaluating various opportunities that would exceed our current capacity. While we can make no assurances regarding future growth, we will continue to explore various opportunities to grow a hash rate in an accretive and capital-efficient manner. Finally, when we talk about growth, we are primarily talking about cash flow growth, and that includes a diligent focus on expenses and operational efficiency. Consistent with our guidance, we achieved a net cost of power between $45 and $50 per megawatt hour in March, and we believe that certain tailwinds such as reduced fuel costs and personnel expenses to drive our costs lower for the rest of the year.

We are now forecasting a net cost of power of $40 to $50 per megawatt hour on average for the rest of 2023. As we discussed on our last earnings call, low power prices have created the opportunity to be more flexible with how we dispatch our power plant resources versus importing power from the grid. Looking forward, we plan to optimize the use of our power plants, which means that the plants would be expected to run at full capacity in the summer and winter, but idle during the shoulder months when we expect to be able to import power at a lower cost to stronghold. Additionally, as we have disclosed, our plants generally require one to two maintenance outages per year. To that end, we will be taking a 2-week outage at and Panther Creek later this month.

However, we are happy to report that Scrubgrass has already performed most of the maintenance work than an outage would have entailed and we do not currently expect to take a planned outage this spring as exahash. Moving to Slide 5, which lays out our hash rate growth. We have been able to capitalize on some continued pockets of distress in the bitcoin mining space and are actively evaluating incremental opportunities to fill our limited remaining data center capacity. After turning minor to our lender in August 2022, we had a hash rate capacity of 1.4 exahash. At the end of Q1, we had 2.6 exahash. We are currently at 2.8 exahash. We have contracted to receive miners to bring us to 3.8 exahash and believe that we will achieve 4 exahash by the end of Q3.

Importantly, and I can’t emphasize this enough, we are focused on accretive capital efficient growth, and I think that the chart on the right illustrates this well. From inception to the first half of 2022, our CapEx divided by the hash rate contracted during the period was about $60 per terahash. In the second half of 2022, it was $20 per terahash. And in 2023, year-to-date, it has been about $10 per terahash. We believe that these numbers demonstrate that we are getting more revenue potential per dollar spent than we ever had before, and we aim to prudently grow and deploy capital. Let’s move to the next slide. As I mentioned earlier, we recently announced unique agreements with Foundry and Canaan. These are technically hosting agreements in name, but we do not believe that the word hosting does them justice because they were very different than industry standard hosting agreements.

Similar standing hosting agreements, we do not have upfront CapEx, and we are being paid to operate Bitcoin miners. However, a significant difference is that we have exposure to bitcoin mining economics as demonstrated in the chart on this page. We preserve power pricing upside in our relatively unique ability to curtail, which we believe is also differentiated. We believe that these agreements are highly beneficial for Stronghold and demonstrate our ability to creatively increase hash rate without capital investment. Collectively, these agreements are expected to add hash rate capacity of over 0.8 exahash per second. Before turning it over to Matt, I want to thank our Co-Founder and former Co-Chairman, Bill Spence, for his vision, service and leadership.

Bill recently announced his retirement to spend time with his family and focus on his health, but he will continue to consult with us, focusing primarily on supporting our efforts related to environmental reclamation, beneficial use ash and carbon sequestration, areas of key focus for the company. With that, I’d like to pass it over to our CFO, Matt Smith.

Matt Smith: Thanks, Greg. I’m going to start on Slide 7 with a quick recap of our deleveraging since last summer. In summation, Stronghold has reduced total debt plus net current liabilities from $179 million to $71 million, including a 60% reduction in total debt from $146 million to $60 million over the last nine months and our mandatory principal amortization payments have gone from $45 million to zero for the remainder of 2023. Moving to Slide 8 for a review of our Q1 financial results. Revenue for the first quarter was $17.3 million. We mined almost 618 Bitcoin during the first quarter and generated a total mining segment revenue of $13.6 million and total Energy segment revenue of $3.6 million. GAAP net loss was $46.7 million, and adjusted EBITDA was a loss of $3.9 million.

It is important to note that the company’s intense focus on cash cost reductions continue to materialize in the first quarter, and we achieved a net cost of power sub-$50 per megawatt hour in March. During the quarter, we continued to operate in an environmentally beneficial way, removing approximately 259,000 tons of coal refuse from piles and returning approximately 197,000 tons of beneficial use ash to remediate these toxic coal piles. Let’s move to Slide 9. In an effort to broaden the understanding of our business model, we wanted to provide this simple framework on Slide 9. We have about 165 megawatts of power generation capacity. Current data center load is approximately 95 megawatts, and we expect it to increase to 130 megawatts by the end of Q3 based on guidance.

We optimize our operations to maximize gross profit from the following alternatives; one, curtailed miners to sell power to the grid as power prices are more attractive than Bitcoin mining economics; two, power miners and maximized hash rate if bitcoin mining economics are superior to power prices; and three, reduced plant output and purchase power from the grid if power prices are less than our variable fuel costs, net of renewable energy credits. On this slide, we also provide some explicit guidance for our four key cost categories. Moving to Slide 10. We Historically, we have focused on two primary drivers of hash price, which are bitcoin price and network hash rate because transaction fees that we earn have historically been between 1% and 3%.

However, since early April, transaction fees have dramatically increased due to a sharp rise in transactions on the Bitcoin network. Increased transactions have led to increased congestion and time to verify transaction. This has resulted in higher incentives for Bitcoin miners to verify transactions. When the sharp rise in transaction fees is reflected in the hash price calculation, it results in greatly improved bitcoin mining economics. We are not surprised to see increased transaction volume on the Bitcoin blockchain given recent innovations such as ordinal and BRC20-token standard. And we will be watching closely as the trajectory of transactions evolves. It is too early to extrapolate the current trends, and we cannot be sure that there will continue to be increased transactions or the transaction fees will remain higher than in prior periods.

However, we believe that it is important to illustrate the positive impact of transaction fees on our primary revenue driver. I will now turn the call back over to Greg for his closing remarks.

Greg Beard: All right. Thank you, Matt. Just a shout out, thank you to those that need to be recognized. One of the issues that we’re not covering on this call is plant uptime reliability because we have the plant is in a very good place now. It took more than 150 different people, including contractors to get these plants back where they are. These are engineers, electricians, line operators, and then dozens of truckers that move this waste to us and hold you benefit or use ash away. So we’ve made a lot of progress, and I wanted to be thankful for those that work in many cases, seven days a week, including holidays to keep this infrastructure going. I’m also a shout out to our General Counsel, who had a — who just got married a few weeks ago. So thank you, Matt. And again, once again, to thank you to Bill for everything you’ve done for the company. I’ll turn it back over to the operator to close out the call.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Chase White with Compass Point Research. Your line is open.

Operator: Thank you. And one moment for our next question. Our question comes from Lucas Pipes with B. Riley Securities. Your line is open.

Operator: Thank you. And our next question will come from [Michael Donovan] from H.C. W. Your line is open.

Operator: [Operator Instructions] At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Baird for his closing remarks.

Greg Beard: All right. Thanks, Matt. Thank you, shareholders, analysts in the interest of people. I think — and we’re really proud of the progress we made this quarter. And thank you also to those that we have our partners that have contracted with us and some of whom have become shareholders in the company to White Hart our remaining lender. We have very good relationships with every one of those groups. We’ve made a ton of progress, as I said, and it looks like we’re going to have a fantastic rest of 2023. So, we are thankful and look forward to delivering on that promise. Thank you, operator.

Operator: Thank you for joining us today for Stronghold’s earnings call. You may now disconnect.