Stronghold Digital Mining, Inc. (NASDAQ:SDIG) Q4 2022 Earnings Call Transcript

Stronghold Digital Mining, Inc. (NASDAQ:SDIG) Q4 2022 Earnings Call Transcript March 29, 2023

Operator: Good evening and welcome to Stronghold Digital Mining Conference Call for the Fourth Quarter and Full Year ended December 31, 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 Investors section of the company’s website at www.strongholddigitalmining.com. You can find a 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, Alex Kovtun from Gateway Group will make a introductory statement. Mr. Kovtun, please proceed.

Alex Kovtun: 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 are making today maybe considered forward-looking statements under securities law and involve a number of risks and uncertainties. As a result, we caution you that there are 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 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?

Greg Beard: Thank you, Alex. Good morning, everyone and thank you for joining us on our fourth quarter and full 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 Stronghold 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 3. 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 have moved 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 4. Back in August on our second quarter 2022 earnings call, we outlined the strategy to rapidly delever our balance sheet, enhance liquidity, improve efficiency and opportunistically build our mining fleet to better position Stronghold for success and ultimately maximize shareholder value.

While there is 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 good prices and Bitcoin mining economics and choosing whether to self-power our Bitcoin money 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 7-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 near-term liquidity and flexibility. With the restrictions 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 materially reducing expenses across our business. We have done this through a combination of completing several one-time projects and rightsizing our business through in-sourcing 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 Scrubgrass 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.

Photo by nick chong on Unsplash

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 $45 to $50 per megawatt hour in the first quarter of 2023 based on our results and performance to-date. We have also been able to generate value from selling beneficial use ash, a byproduct of our cold 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 a benefit of at least $1 million during 2023.

Moving to Slide 5. 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 showcased 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 PJM power prices in December and the record low Bitcoin hash price in November and we are able to flexibly shift between selling power to the grid and using our self-generated power to mine Bitcoin. Between December 23 and December 25, Winter Storm Elliott dictated that PJM declare a state of emergency. On the morning of the 23rd, we proactively shutdown our Bitcoin mining operations and send 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 10x 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 has 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 7 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 a 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 the financing by $23 million. This February, we completed the exchange transaction with our convertible note holders to convert about $80 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 happening. As a result of these transactions, we have now successfully restructured nearly our entire balance sheet to make Stronghold more resilient and provide its platform to focus on accretive opportunities.

Moving to Slide 7. 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 minor 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 have expanded our partnership and signed a 2-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 they continue to thoughtfully pursue purchasing wholly owned miners. Finally, an update on MinerVa. We previously announced they should expect no additional deliveries from MinerVa because of the uncertainty at the time. However, MinerVa supplies 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 a 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.

Matt Smith: Thanks, Greg. I will start with a review of our fourth quarter and full year 2022 results. Keep in mind that our fourth quarter results were impacted by two extremes: record high PJM power prices in December and record low Bitcoin hash price in November. Revenue for the fourth quarter was $23 million, a 38% increase compared to $17 million in the same quarter a year ago. During the fourth quarter of 2022, our Energy segment had approximately $15 million of revenue. We also mined almost 450 Bitcoin with total mining segment revenue of approximately $8 million. For the full year, revenue was $106 million, an increase of well over 200% compared to $31 million in the prior year. During the fourth quarter, we began to realize the benefits of the investments and planned maintenance events that were made in our Scrubgrass and Panther Creek plants to improve plant efficiency and reliability.

This was especially true and on display during the period of December 23 through 25 when many plants in PJM were unable to deliver power to the grid when called upon. Adjusted EBITDA during the quarter was approximately $5.2 million compared to approximately $0.3 million in the same quarter a year ago and negative $3 million in the third quarter of 2022. It is important to note that the company’s intense focus on cash cost reductions began to materialize in the fourth quarter. During the quarter, we continued to operate in an environmentally beneficial way, removing approximately 295,000 tons of coal refuse from piles and returning approximately 173,000 tons of beneficial use ash to remediate these toxic coal piles. Moving on to Slide 9 to discuss a fresh look at guidance for the next 12 months, you will find that the drivers of our cash flow have shifted from our prior guidance, and yet our guidance is quite similar to what we previously communicated.

When we last provided guidance, power prices were more attractive than Bitcoin mining economics. Since then, forward power prices have fallen, but hash prices risen, and we now expect to exit the year at 4 exahash instead of 3. This illustrates the strength of our business model. It is important to note that our hash rate guidance does not include 25 megawatts of owned end-to-end data center infrastructure, including 20 of our proprietary strong boxes transformers, breakers and switchgear that are currently in inventory waiting to be deployed. This is almost 1 exahash of upside to our current guidance. I will now turn the call back over to Greg for closing remarks.

Greg Beard: Thank you, Matt. In summary, we believe that we’ve made significant progress on our strategic plan to enhance liquidity, improve operational efficiency opportunistically build our mining fleet and ultimately maximize shareholder value. Our vertical integration and power market optionality continues to provide us with strategic advantages over many of our peers as does our data center infrastructure that is fully built out with additional slots open. With that, operator, let’s open the call up for questions.

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Q&A Session

Operator: Thank you. And our first question comes from Chase White from Compass Point Research & Trading LLC.

Chase White: Thanks. Good morning, guys. So just curious, I mean, your fuel costs were like 60% of what they were in the third quarter and the prior quarter. So just trying to understand what drove that down so much? And was there like a one-time credit or something? And then I have a follow-up.

Matt Smith: Sure. Hey, Chase. Good morning. So there was a combination of things. REC prices moved up considerably over the course of the fall into the winter. Second, annually receive our waste coal tax credits once a year. And so you €“ we earned those over the course of 2021. You received them in the fourth quarter of the next year. And so we received the waste coal tax credits during the course of the fourth quarter. And similarly, in 2023, we will receive the waste coal tax credits, again, kind of towards the fourth quarter. But then additionally, we spend a lot of time on fuel mix and optimizing it as we went through the outages. And as you know, 2022 was rampant with inflation throughout the supply chain, including diesel, ammonia, which drove up most of our input costs that we suffered from over the course of the second quarter.

And as we moved out of the second and third quarter, we started to see some of the normalizing of diesel ammonia other costs flow through, and that led to a pretty meaningful improvement in costs over time over the course of the fall into the early 2023 period. We think that fuel costs will be down considerably in 2023 over 2022, the magnitude of which is yet to be determined, but there will be a mix improvement. We think there will be almost in every line item, we’ve seen costs start to trend in the right direction for us. And so we’re optimistic about fuel costs in €˜23. REC remained elevated. The tax credits, the plants ran much more in €˜22 than 2021. And so our tax credit in 2023 receipt will be up considerably from 2022 and so most things are going in our favor in fuel costs in 2023.

Chase White: Got it. Very helpful. And then with things now moving in the right direction, I mean, do you guys expect to start holding Bitcoin again, building that up on the balance sheet? Or are you still kind of at the point where you need to be selling virtually all of it in order to ensure you can pay the bills.

Greg Beard: Well, every day is an optimization, exercise every hour. You don’t really want to turn the plants on and off rapidly, but we have the ability here to import at very low prices. We’re not locked into a PPA or any sort of power agreement. And so we can either deliver power at our price or we can €“ at our cost, or we can import and it’s an optimization of cost of energy. And right now, obviously, with power prices off, it makes sense to convert as many electrons as we can that we’re making or importing and maximizing our data center consumption of electricity and mining for Bitcoin. We’re converting to Bitcoin. Revenue for Bitcoin is $90 to $100 per megawatt right now, far in excess of where power prices are. So it makes sense to mine optimally.

Chase White: Got it. Thanks. Very helpful